Make-good obligations are a very important aspect of commercial leasing for both landlords and tenants. Landlords are often entitled to enforce their rights by requiring tenants to comply with the make-good provisions when the lease is about to end. These provisions, when drafted carefully in the lease, should clearly define the conditions in which the premises must be returned. The provisions should ensure the protection of the landlords’ investments and set out the extent of the tenant’s obligations in that regard noting that these works can be very costly for either (or both) parties.
This article provides a refresher as to some of the key considerations for landlords, tenants and leasing professionals when dealing with these make-good obligations.
Key Considerations in Make Good Obligations
There are several important factors to consider when drafting or negotiating make-good clauses in commercial lease agreements:
1. Removal of Tenant’s Property
The most basic form of make-good requires tenants to remove their personal property and items from the leased premises particularly items that were not part of the original fit-out and conditions of the premises before it was leased to the tenant. This ensures that any additions or alterations made during the lease term do not remain at the end of the tenancy unless otherwise agreed.
That said, tenants who have made significant alterations or improvements to the premises may be reluctant to incur the costs of removing these items and to reinstate the premises to its original conditions. They may also view these as a “benefit” to the landlord. Or alternatively, the tenants may sometimes wish to remove these for their future use. Therefore, it is essential for both parties to negotiate and understand these obligations clearly as far as is practical (and early) in the leasing process to avoid potential disputes.
2. Condition Report
Some lease agreements may mandate a condition report at the commencement of the lease. This report documents the state and condition of the premises and provides a reference for both parties to determine what repairs, alterations, or fit-outs occurred during the lease. It is an invaluable tool for both landlords and tenants in assessing the level of make-good, reinstatement and restoration works required. Landlords may insist on varying degrees of restoration depending on their plans and intentions for the premises and the condition report can help clarify these expectations.
3. Base Building or Empty Shell
“Base building condition” or “empty shell” refers to a standard where tenants must restore the premises to its original and unaltered state. This can involve the removal of all fit-outs, fixtures, and improvements down to its concrete slabs and reinstatement of ceiling and service grids with essential service connections reinstated to an open floor plan layout. For tenants, this can be a very costly and time-consuming obligation. For landlords, these may or may not be preferred as sometimes, landlords may prefer a lesser extent of a make-good requirement especially if the items are acceptable or desirable for future use.
Determining what should constitute as the agreed standard can also present challenges, requiring clear and precise definitions in the lease agreement.
4. Cash Settlement
In some cases, landlords and tenants may agree on a cash settlement in lieu of the tenant physically attending and completing the making good obligations for the premises. This should be negotiated at the outset or as appropriate during the lease term (especially if works are being proposed by the tenant and are intending to commence). These negotiations can offer a more simplified resolution of the make good issues.
Conclusions
Make-good obligations are a critical aspect of commercial leasing and can be extremely costly. We have seen make-good dispute reports in hundreds of pages and the claims can be in hundreds of thousands of dollars. Clearly defining and negotiating these obligations and especially when the works are being proposed or when landlord’s consent are being sought can greatly assist in mitigating potential disputes and financial uncertainties for both landlords and tenants.
The scope and impact of make-good clauses should be carefully considered and negotiated in a manner as clear as is practical with professional legal advice.
Advice for prospective tenants
If you are a prospective tenant, it is essential to seek legal advice before the entering of a lease. For landlords, ensuring that the make good provisions are sufficiently detailed will safeguard your investment and also minimise the potential washups after the lease ends.
At Matthews Folbigg Lawyers, our experienced property law team is ready to assist with all aspects of commercial leasing including these make good obligations and issues. For further information or advice, contact our Property Team on (02) 9635 7966 or email us at info@matthewsfolbigg.com.au.
