If you are a landlord for a commercial property, there are a number of different clauses that you will need to consider carefully in your commercial lease agreement. One of the key clauses in your commercial lease agreement is the ‘make good’ clause. But, 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 in a lease that set out how a tenant should leave a property when the lease comes to an end, whether by the expiry of the term or earlier termination. Make good is one of the most commonly disputed provisions of a lease. Therefore, it is important to consider the make good clause at all stages of your leasing arrangement to ensure that the:

  • make good process is as smooth as possible when the lease comes to an end; and 
  • tenant hands back the premises in the condition that you require.

Before You Enter Into the Lease

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

For example, do you simply require the tenant to hand back the premises in a clean and tidy condition and will they need to remove all of their property? Alternatively, you might require a more extensive make good so that the tenant leaves the premises as an empty shell. 

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 you and the tenant both understand each other’s obligations. This will help to avoid any unpleasant surprises at the end of the lease term.

Condition Report

In addition to being clear on the make good clause in the lease, you should consider obtaining  a detailed condition report at the commencement of the lease. You can pass on the cost of this report to the tenant. This would include: 

  • taking photos; and 
  • noting down details of any defects in the property. 

Having a condition report removes any uncertainty when determining what the condition of the premises was at the start of the lease. This is especially the case if it is a brand new premises. 

It is good practice for both parties to agree on the condition report by signing off on it. Both you and the tenant should then keep a copy of it.

An alternative to a condition report is to have an independent third party carry out a property inspection and record the condition of the premises. This record should thoroughly detail any defects of the property. Both you and the tenant should sign it. At the end of the lease, you can arrange for a second inspection to take place and the preparation of a condition report. By comparing both condition reports, you determine whether the tenant has fulfilled their make good responsibilities.

Assignment

So far, this article has discussed a new lease between a landlord and a tenant. In some cases, however, an original tenant will assign an existing lease to a new tenant. In these circumstances, the new tenant generally takes the property in the state it is in when the original tenant assigns the lease. Therefore, the new tenant inherits the original tenant’s make good obligations. As a landlord, you want to make sure the new tenant makes good all aspects of the premises (including any alterations and additions undertaken by the original tenant). 

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

You should cover these issues during your negotiations around the assignment of the lease. You should ensure that:

  • all parties consider make good in any assignment of the lease; and
  • the original tenant fixes any damage they might have done.

Cash in Lieu of Make Good

As a landlord, another option to consider is requiring the tenant to make a cash payment to you in lieu of carrying out the make good works. This gives you some flexibility around what works you decide to do or not do. It also means that you will not have to wait for the tenant to complete make good before you can take back possession of the premises. Lastly, this can remove uncertainty and lower the risk of disputes that might arise when determining what works are necessary.  

Key Takeaways

When considering a tenant’s request to assign a lease, make good obligations should be at the forefront of your mind. Therefore, it is a good idea to:

  • ensure the commercial terms in the lease surrounding make good are clear and understood by all parties;
  • consider obtaining a condition report at the start of the lease and again at the end of the lease; and
  • consider having an option to seek a cash payment from the tenant in lieu of make good.

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

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Tuhina Mukhraiya
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