Make-Good rights and obligations are an important aspect of 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 ends.
The Make-Good provisions should clearly define the condition in which the premises must be returned to by the Tenant at the end of the Lease.
Typically this means that the premises must be returned to the same condition that the premises was in at the commencement of the Lease, excluding fair wear and tear.
The Make Good provisions may also require re-painting / carpeting / re-decorating.
This article provides a refresher as to some of the key considerations for Landlords, Tenants and leasing agents, when dealing with Make-Good obligations.
Key Considerations in Make Good Obligations
There are several important factors to consider when drafting and negotiating Make-Good clauses in both retail and commercial Lease agreements.
1. Removal of Tenant’s Property
A Make-Good clause, requires Tenants to remove their personal property, fixtures and fittings, from the leased premises at the end of the Lease, particularly items that were not part of the original fit-out of the premises before it was leased to the Tenant.
This ensures that any additions or alterations made to the premises during the Lease, do not remain at the end of the Lease term, unless otherwise agreed to by the Landlord.
Tenants who have made significant alterations or improvements to the premises may be reluctant to incur the costs of removing these items and returning the premises to its original condition.
It is essential for both parties to negotiate and understand these obligations to avoid potential disputes.
2. Condition Report
Some lease agreements may require a Condition Report be prepared at the commencement of the Lease.
This report specifies the condition of the premises at the start of the Lease, including photographs, and provides a reference for both parties to determine what make good works are required at the end of the Lease.
It is an invaluable tool for both Landlords and Tenants in avoiding disputes and assessing the level of make-good, reinstatement and restoration works required.
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, this term may or may not be preferred as they may prefer that some of the Tenant’s fit out remain for future use.
Determining the Make Good rights and obligations should include an option for the Landlord to agree to a lesser Make-Good obligation being imposed on the Tenant.
4. Cash Settlement
In some cases, Landlords and Tenants may agree on a cash settlement in place of the Tenant having to comply with the Make-Good obligations for the premises.
Such negotiations can include an agreed expert providing a report on the reasonable costs of compliance with the required Make-Good Lease term.
These negotiations can offer a more simplified resolution of the Make-Good issues.
Case Law Review – Tenant requirement to Make-Good
In T & L Alexandria Pty Ltd v Sharvain Facades Pty Ltd [2023] NSWSC 947 at 255, the Court held that a Landlord’s termination of the Lease, by exercising its right of re-entry, would in effect remove the Tenant’s obligation under the Lease to Make Good the premises prior to the end of term or sooner determination of the Lease.
In this case, the Lease was terminated (determined) by the Landlord exercising its right of re-entry, removing the ability of the Tenant to Make Good the premises at the end of the Lease term, which included re-decorating the premises, as no notice was provided prior to the re-entry and possession of the premises by the Landlord.
The Landlord would have a claim for loss of bargain damages against the Tenant for any loss it could prove, incurred as a result of the premises not being re-decorated / returned to the condition it was in at the commencement of the Lease, however that loss would need to be proved by the Landlord.
For instance, if the Landlord intended to re-develop / demolish the premises, the Landlord could not make any claim against the Tenant for failure to Make-Good the premises at the end of the Lease.
Conclusion
Make-Good obligations are a critical aspect of leasing and are often an area of dispute, which arises when Landlords seek to not refund the deposit to the Tenant, for failure to Make-Good the premises.
The scope and impact of make-good clauses should be carefully considered and negotiated prior to the Lease being signed.
Advice for Landlord and Tenants
If you are a prospective Tenant, it is essential to seek legal advice before signing a Lease.
For Landlords, ensuring that the Make Good provisions are clear and easy to understand, will safeguard your investment and minimise disputes at the end of the Lease.
At Matthews Folbigg Lawyers, our experienced property law team is ready to assist with all aspects of leasing, including make good rights and obligations for both Landlords and Tenants.
For further information or advice, contact our Property Team on (02) 9635 7966 or email us at info@matthewsfolbigg.com.au.
