If you are a landlord in the process of renting out a commercial property or signing up as a tenant to rent commercial premises, there are a number of different clauses that you will need to consider carefully in your commercial lease agreement. One of these clauses is a “make good” clause. However, what is a make good clause and who benefits from it? This article explains what a make good clause in a lease means and how to deal with the make good of a premises when the lease ends.

What is a Make Good Clause?

Make good refers to the clause/s in a lease that set out how a tenant should leave a property at the end of the lease term. This is after the tenant has moved out and handed the keys back to the landlord.

Make good is one of the most stipulated areas in leasing disputes. Therefore, it is important to consider the make good clause at all stages of your leasing arrangement.

Before You Enter Into the Lease

When drafting the lease, you should give careful consideration to the make good requirement.  

For example, does it simply require the tenant to hand back the premises in the same condition they received it in, except for fair wear and tear? Or, is the clause a lot more extensive and requires the tenant to re-decorate, re-paint and re-carpet the premises?

The extent of the make good is a matter for you to negotiate before you enter into the lease agreement. Furthermore, it is important that both parties understand the obligations of the other party so that there are no nasty surprises at the end of the lease term.

Condition Report

In addition to being clear on the make good clauses in the lease, you should complete a detailed condition report at the commencement of the lease. This includes taking photos and noting down details on any defects in the property. If you don’t have a condition report, the:

  • landlord has no point of comparison when seeking to enforce the make good clauses during the final inspection; and
  • tenant has no evidence that items in the premises were faulty at the start of the lease.

A condition report removes that grey area.

It is good practice for both parties to agree on the condition report by signing off on it and then both keeping a copy of it.

An alternative to a condition report is to have an independent third party carry out a property inspection report to record the condition of the premises. This record should thoroughly detail any defects of the property and both the tenant and landlord should sign it. At the end of the lease, a second (and final) inspection can take place and a condition report prepared again. By comparing both condition reports, the landlord can examine if the tenant has fulfilled their make good responsibility.

Assignment

The above paragraphs refer to a new lease between a landlord and a tenant.  However, there are times where an existing lease is assigned from the original tenant to a new tenant. In these circumstances, the new tenant generally takes the property in its state when the original tenant assigns the lease to the new tenant. Subsequently, they inherit the make good obligations of the original tenant.

This can be a real problem for the new tenant when the lease ends. Often, when a commercial lease is assigned, the business itself and terms of the lease are also transferred. This means that some terms, including make good clauses, can be forgotten about in the transaction. However, when it comes time to make good, the new tenant must pay for any of the destruction of the property that the original tenant committed.

For example, the original tenant might have put holes in the wall to make a new passageway or done other major work on the property. Subsequently, the new tenant must fix those issues and return the premises to the condition that it was in at the start of the lease between the original tenant and the landlord.

You should cover these issues during the negotiations surrounding the assignment of the lease. You should ensure that make good has been considered in any assignment of the lease and that the original tenant fixes any damages that they might have committed.

Key Takeaways

When entering into or assigning a lease, make good obligations should be at the forefront of your mind, whether you are a landlord or a tenant. Therefore, it is a good idea to:

  • ensure the commercial terms in the lease surrounding make good are agreed by all parties;
  • obtain a condition report at the start of the lease and again at the end of the lease; and
  • consider these issues again with respect to any proposed assignment of the lease between the tenant and any prospective new tenant.

Make good obligations can be costly. To ensure that the make good clause on your lease agreement is fair and reasonable, contact LegalVision’s leasing lawyers on 1300 544 755 or fill out the form on this page.

Emma Heuston
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