Do I Need a Condition Report for My Retail or Commercial Lease?

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Table of Contents

• What Should a Condition Report Include?
• Maintenance and Repairs
• Make Good Obligation
• Transfer of Lease
• Key Takeaways

Before you enter into a retail or commercial lease, it is important that you and the landlord thoroughly inspect the premises and prepare a condition report. Having a condition report is beneficial as it sets the standard for how you need to:

• maintain the premises during the term of the lease; and
• return the premises to the landlord when the lease comes to an end.

Further, if you decide to transfer the lease, this report will ensure that the incoming tenant is also aware of this standard. In this article, we explain why a condition report is beneficial when entering into a retail or commercial lease.

What Should a Condition Report Include?

The condition report should describe the condition of the premises at the commencement date of the lease, including details about:

• what the flooring looks like;
• whether the walls have been recently painted;
• what fixtures, fittings or installations are owned by the landlord. For example, an existing air conditioning or hot water system; and
• any defects or problems with the premises, preferably together photos.

Once the report is prepared, two copies should be signed and kept by you and the landlord.

Maintenance and Repairs

Many leases include an obligation stating that you, as the tenant, must keep the premises in good condition, having regard to the condition of the premises at the commencement of the lease.

In practice, this usually means that the landlord cannot expect you to carry out any repairs or improvements to parts of the premises that were damaged before you entered into the lease.

This differs, however, when you have contributed to the damage while using the premises. In this case, it may be your responsibility to complete the repairs. For this reason, it is crucial that you document the condition of the premises. Otherwise, you could be required to carry out and pay for repairs you were not responsible for, with no way of proving that the premises were already damaged.

Make Good Obligation

Many leases also include a make good obligation. Essentially, this is an obligation on the tenant to return or ‘make good’ the premises to the condition they were in at the commencement of the lease. Making good may be as simple as:

• removing your property; and
• leaving the premises in a clean condition.

However, depending on the extent of your fit-out works and installations in the premises, it could involve returning the premises to a“bare shell by removing:

• all dividing walls;
• floor coverings;
• ceilings; and
• fixtures and fittings.

Complying with your make good obligations can be expensive. To ensure that you do not have to carry out additional works on the property, having a condition report to refer to when the lease comes to an end is vital. The condition report will also prevent disputes with your landlord over what works should or should not be completed by you.

Transfer of Lease

You may decide to transfer your lease before it ends. As part of this transfer, the incoming tenant is usually required to sign a deed of assignment. As part of the deed, the incoming tenant agrees to comply with the terms of the lease as though they were the original tenant who signed the lease.

This means that all obligations are transferred to the incoming tenant, including:

• maintenance;
• repair; and
• make good.

Here, a condition report is essential. Without a condition report, the incoming tenant would not be aware of what the premises looked like when you entered the lease and will, therefore, be unaware of how to properly maintain, repair and make good the premises.

While this is ultimately an issue for the incoming tenant, it may also affect you as the outgoing tenant or guarantor. This is particularly true if you have not been legally released from your obligations as a tenant.

Key Takeaways

A condition report may be a simple document. However, it can be instrumental in establishing a standard for how:

• the premises must be maintained,
• repairs must be completed; and
• made good work should be done.

Having a condition report can reduce the risk of any disputes with your landlord during the term of the lease or when the lease comes to an end. If you have any questions, contact LegalVision’s leasing lawyers on 1300 744 555 or fill out the form on this page.