Potential consequences of a Make Good clause in leasing contracts

Director of GM Law, Mark McAvoy shares his thoughts on this matter:

1. What types of Make Good obligations exist?

Many tenants think that spending money on a fit-out enhances the landlord’s premises. They are often surprised to find that the Make Good clause requires them to remove these improvements at the end of the lease, restore the premises to their original condition and make good any damage caused to the premises by such removal.

To avoid misunderstandings, it is crucial to discuss the terms of Make Good before signing the lease. Different types of Make Good clauses exist, and depending on the situation, the landlord can specify either softer or more stringent Make Good obligations in the lease.

There are typically four types of Make Good Obligations:

Removal of Detachable Property Only. This is the simplest obligation and easily understood. It requires you to remove only your detachable property, such as computer desks, filing cabinets, and free-standing bookcases.
Removal of All Property and Basic Repairs and redecoration. This obligation requires more work but is still straightforward. You must remove all property, including detachable and fixed items. When removing attached property, you must ensure that all surfaces, like walls, are restored to their original condition as specified in the entry condition report. The lease may require painting and replacement of floor coverings.
Return the Premises to the Standard Shown in a Condition Report. This clause requires returning the premises to the condition specified in the condition report, which often catches tenants off guard, especially after fit-outs. It’s essential to discuss any fit-out plans with your landlord during negotiations to ensure both parties understand the requirements. Conducting condition reports at the most opportune time is also advisable.
Base Building Standard. Common in retail shopping centres, this clause requires returning the premises to its original state prior to any fit-out works being undertaken by the tenant (and possibly even the landlord). This is because the landlord may not know the next tenant’s business type. You may have to not only return the finishes to their original condition (including removal of existing floor coverings or false ceilings), but restore the original wiring, plumbing, windows, doors etc. A base building standard clause can be costly as it essentially requires the tenant to bring the premises back to a bare or vacant shell ready for the next occupant, so it’s crucial to budget accordingly if your lease includes this obligation.

For a Return the Premises to the Standard Shown and Base Building Standard obligations, it is advisable to prepare a detailed Condition Report and consult with a solicitor before signing the lease. This type of clause contains numerous nuances, and overlooking them can result in dispite.

2. How to properly prepare a Condition Report?

Before signing a lease, it is common for a a Condition Report to be prepared (usually this is arranged via the landlord’s managing agent). This report often includes photographs of the premises (including any fixtures, fittings, plant or equipment for the tenant’s benefit) and records all existing defects. Both parties should sign this report to avoid future disputes over its contents. It is also important for both parties to retain a copy of the fully signed report especially where the report does not form part of the lease.

If the report is conducted by a third-party specialist, you can request that the landlord cover the cost.

An alternative to a Condition Report is to have an independent third party inspect the property and document its condition, including any defects. Both tenant and landlord should sign this record. At the end of the tenancy, a re-inspection and new condition report can be arranged. This is often called an “Exit” Condition Report. Comparing the “Entry” Condition Report and “Exit” Condition Report will help both parties determine if the tenant has fulfilled their obligations. This is important as in some cases the landlord will not return any security it holds (such as a cash bond or bank guarantee) until after it has satisfied itself that the tenant has fully complied with its make good obligations under the lease

3. When does a Tenant need to Make Good its Premises?

Make good obligations typically must be fulfilled by the end of the lease period. However, the tenant and landlord can agree on specific conditions and terms for the restoration work. The Make Good clause is negotiable and should be discussed in detail prior to entry into the lease.

4. Does the Make Good clause prohibit changes to the condition of the premises?

In general, yes. Commercial leases can last from for a lengthy period and a business owner may need to make changes during this time. It is important to involve the landlord in any modification process. Some leases may prohibit certain modifications or additions to fixtures or structural installations. Always check with your landlord before making any changes. Even if you know you can remove the modifications later, keeping your landlord informed will help ensure you meet your Make Good obligations at the end of the tenancy.

5. How does compensation for damages occur in case of breach of the Make Good clause?

Typically, compensation for damages occurs in two ways: either the landlord restores the premises to its previous condition at their own expense and then seeks to recover same from the tenant, or they request financial compensation equivalent to the cost of the restoration.

Many landlords prefer a cash payment instead of the tenant performing the make good. This option is preferrable for a tenant as it provides certainty. If you are a tenant thinking about pursuing this option, you should obtain multiple quotes (independent from any quotes obtained by the landlord) for the agreed make good works from reputable demolition and restoration companies, and then negotiate the final payout amount with the landlord.

6. Can Make Good obligations be transferred to a new tenant?

Yes, Make Good obligations can be transferred to a new tenant if agreed upon by all parties and documented in the lease agreement. This process, known as assignment, means the new tenant takes over the lease and the original tenant’s property . Consequently, the new tenant inherits the original tenant’s obligations and may be held responsible for any damage caused by previous tenants. Therefore, it is crucial that all parties fully understand what they are inheriting. It is also crucial for the original tenant to make sure that they do not remain liable under the lease notwithstanding the assignment.

7. When is landlord liable for damages?

In most commercial leases, the tenant is responsible for maintaining the leased premises, including walls, floors, fixtures, and inclusions. The landlord typically requires the tenant to repair and maintain these areas during the lease term. However, the landlord is generally responsible for repairing and maintaining the major structural aspects of the building, such as the roof and building systems, including common areas and elevators.

Responsibility for repairs depends on the nature of the damage—whether it is structural, cosmetic, or superficial. Therefore, it is advisable for business owners to review their insurance options before entering into a commercial lease.

8. Are there any other issues with a Make Good clause for a tenant?

Yes, it is often that the Make Good obligation sets out other rights of the landlord in relation to the tenant’s property. For example, a tenant may in fact be precluded from removing certain items of its property if so directed by the landlord (because it was previously agreed or a condition included in the lease agreement). A landlord may also be entitled to retain a tenant’s property if it fails to remove its property by the date specified in the lease.

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