Common Leasing Disputes: Fit-Out Issues 

Fit-out and make good issues are two sides of the same coin. At the beginning of a lease, most premises will require some degree of construction or installation works to make it ‘business ready’ for the tenant. At the end of a lease, most landlords will require the tenant to return that the premises to a certain state and in good condition. You can negotiate the nature and extent of these obligations on a case by case basis. However, parties should carefully consider those obligations so that they can avoid a dispute over the physical status of the premises, particularly at the end of the lease term. This article will explore issues that may arise regarding fit-out and make good obligations, and ways to avoid disputes.  

Fit-Out 

A leased business premises will often need some work before you can trade from it. It is commonplace for a business to refurbish or upgrade the premises by painting and installing signage, partitions and other fixtures, fittings, and equipment. This process is known as fitting out the premises. In some cases, landlords will require that the tenant undertake specified fit-out tasks, and the lease will include these if so.

The extent of your fit-out needs will vary depending on your particular business and the status of the particular premises. The fit-out process will usually be a key item in the initial lease negotiations. It is common practice to negotiate a rent-free period to accommodate the estimated fit-out timeline. Doing so means that you do not have to pay rent before you are able to trade. This will typically be documented in the lease itself, so there is little room for misunderstanding. 

Make Good Obligations

The flipside of fitting out a premises is ‘making good’ the premises before a tenant leaves at the end of a lease. Most commercial and retail leases will include very specific ‘make good’ obligations, requiring the tenant to return the premises to a particular state at the end of the lease term. The nature and extent of the make good obligations will vary from lease to lease. There is no universal standard. In some instances, this could be simply be repainting the premises. In others, it could involve gutting the entire fit-out. 

The make good obligations can be easy for a tenant to overlook because they are agreed upon at the beginning of the lease term but are not relevant until the end. However, often the tenant’s obligations will be significant. Further, arranging construction works against a hard deadline of a lease term ending, can be difficult to manage from an operational perspective. Sometimes, the landlord may request different make good obligations than those set out in the lease, and this can be a matter for the parties to negotiate if so.

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Disputes Over Make Good Obligations

A dispute over a make good obligation can be quite difficult from the tenant’s perspective. Landlords will typically retain a security deposit or bank guarantee, which they can draw down on if the make good is not done to an appropriate standard. This gives landlord’s a lot of leverage and allows them to enforce the make good obligations strictly. Although, a tenant will still have an option to seek recourse at a court or tribunal if they wish.

Furthermore, leases often have provisions that allow the landlord to: 

• incur costs of their own to address any unresolved make good issues; and 
• pass these costs on to the tenant. 

Ways to Avoid a Make Good Dispute 

There are a number of steps a tenant can take to try and avoid, or at least reduce the scope of,  a dispute over make good obligations. These are:

• obtain a condition report and take a lot of photos at the beginning of the lease. This is so that you can demonstrate if particular problems pre-existed the lease or amount to fair wear and tear;
• when first negotiating the lease, you could seek to include a provision that requires an independent certified quantity surveyor to be engaged to determine make good costs;
• if there are any repair and maintenance issues during the lease term, check whether they are your responsibility to repair. If they are not, notify the landlord about them and keep a written record of this;
• make sure you understand your make good obligations well in advance of your lease term expiring. Also, provide time to engage third parties to assist with make good works as required; and
• before the end of the lease, ask the landlord to confirm in writing any make-good obligations. This can avoid any dispute over conflicting interpretations of make good clauses in a lease.

Inheriting Make Good Obligations

Finally, it is also worth understanding that if you take over a lease from another party halfway through its term, then in many cases, you will inherit the make good obligations. This might seem unfair if you did not install the fit-out. However, if the rights and obligations are all assigned to you, you will be taking on the make good responsibility.

Key Takeaways

Fit-out and make good are two critical areas of a commercial or retail lease agreement that can lead to disputes, particularly if the tenant misunderstands its obligations and the end of the lease term. If you need help with a fit-out or make good dispute, LegalVision’s experienced dispute resolution lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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