Make good under a lease – important considerations for landlords and tenants

“Make good” is a crucial part of any lease, with disputes regarding make good are common. Ensuring make good obligations reflect the intentions of the parties is critical.

What is make good?

A tenant is generally obliged to undertake works at the end of the term of lease to restore the condition of the premises. The extent of the works varies depending upon what has been negotiated. 

The works can range from removing the tenant’s fitout and property and restoring the premises to the condition it was in prior to the tenant commencing occupation through to simply leaving the premises in a tidy and safe condition. These obligations are over and above the maintenance and repair obligations imposed upon the tenant throughout the term of the lease and can comprise a significant additional cost.

Given the broad range of potential obligations it is essential for parties to understand those obligations:

(a) when negotiating a lease; and

(b) when the lease ends.

Qualifications upon the extent of the make good

The wording of a make good clause is very important.

There is generally no exception for “fair wear and tear” that has occurred throughout the term of the lease unless the lease (or applicable legislation) expressly says so.

The reference point for the make good clause is highly relevant. A typical clause may require the tenant to restore the premises to “the condition the premises were in at the commencement of the lease”. Where the lease did not commence until after the tenant completed its fitout, the above phrase may mean the tenant is not required to remove its fitout. Further, where the lease has been renewed, unless the lease and renewals have been worded carefully, it is possible that the above phrase can invite reference to the condition of the premises at the commencement of the most recent term, not the original term.

When must make good be carried out?

Most leases provide for a tenant to undertake make good prior to the end of the term. Where a tenant fails to do so, the consequences may include:

(a) the tenant being obliged to pay rent until the make good works are complete;

(b) the landlord can undertake the works at the tenant’s cost;

(c) the landlord can keep or store or dispose of the tenant’s property at the tenant’s cost; and/or

(d) the landlord can pursue the tenant for damages.

Where a landlord holds security from the tenant, the landlord is in a good position to enforce compliance with the make good provisions.

Enforcement of obligations – strategic considerations

Much of the time, the make good obligations will be used as leverage in discussions arising towards the end of the lease. 

Irrespective of the fact that enforcing an extensive make good clause may seem unreasonable in particular circumstances (eg, if the premises is to be demolished), at common law a landlord is generally entitled to insist upon strict compliance (NSW and Queensland legislation softens this position). Thereafter, a landlord can:

(a) offer the premises as a “blank canvas” to potential new tenants; or

(b) negotiate a payment in lieu of (some or all of) the works being carried out, and then decide whether or not to carry out those works.

Tenants need to keep in mind that at the end of the lease make good obligations will likely be enforced as there is no future opportunity for give and take as part of any ongoing relationship.

Recommendations

Both parties

The parties should carefully consider when negotiating the lease what is intended in relation to make good, and ensure those intentions are captured in the relevant provisions.

It can be useful for the parties to agree the condition of the premises at the relevant date, by taking a photographic or even videographic record, supplemented by plans and specifications of any tenant’s works.  This is particularly the case in longer term leases, where there is potential for significant changes to occur over the life of the lease and any renewals.  Where a lease is assigned, such a record may be particularly important to the assignee.

For landlords

A broad make good clause gives a landlord an ability to waive requirements of that clause where it may be advantageous to do so.  While works undertaken by a tenant may be seen to have value at the commencement of the lease, any value will depend upon future tenants’ wants and needs.

Landlords should ensure that the reference point for the make good reflects the landlord’s intentions.  This may be:

(a) prior to the landlord undertaking works to make the premises suitable for a specific tenant;

(b) prior to the tenant commencing fitout; or

(c) the commencement of the first term of the lease.

It may be preferable for a landlord to accept a payment in lieu of the tenant undertaking the make good works since the landlord may be in a position to undertake the works more cheaply than the tenant and the landlord can better control the quality of the make good work.

For tenants

Tenants should, prior to entry into any lease, aim to exclude from make good obligations:

(a) fair wear and tear;

(b) any significant works they propose to undertake that add value to the premises;

(c) works which are an unreasonable burden;

(d) any works which would require the tenant to return the premises to the landlord in a condition better that existed when the tenant was first provided the premises;

(e) any existing fitout of the premises left by a previous tenant; and

(f) subsequent works upon the premises undertaken by the tenant, unless the landlord confirms at the time those works must be removed;

As the end of the term of a lease approaches, a tenant may wish to engage early with the landlord, in an effort to avoid undertaking make good works that a landlord is willing to waive, and to ensure there is general agreement in relation to the extent of the works required.

A tenant may be willing for the landlord to take on aspects of the make good works on the basis the landlord may be able to do so more cheaply and it prevents a landlord from arguing that the completed works are unacceptable. However, proposed amounts should be carefully reviewed. A tenant should avoid writing the landlord “an open cheque” by agreeing to bear the landlord’s unquantified costs of making good.

Conclusion

If you are negotiating a new lease, we urge you to carefully consider the appropriate make good provisions for inclusion in the lease.

We recommend parties revisit the make good obligations under their lease as it comes towards a conclusion, to understand how best to proceed.