“Make good” refers to the provision in a commercial lease that stipulates how a property should be left at the end of the lease term, i.e. the state it should be left in when the keys are handed back to the landlord. Disputes surrounding these clauses can be expensive and lengthy and will often lead to unnecessary landlord-tenant conflicts.
When the parties are negotiating their commercial lease, a make good clause can sometime become a last priority. This is because more impending issues take the spotlight, such as the commercial terms, indemnities and execution, and determining when the property will be ready for handover. Make good clauses are considered by some to be “standard”, and therefore secondary in terms of importance. The parties to a commercial lease might not consider the make good clause until the term of the agreement has nearly expired. By then it’s too late, as the clause has been agreed and is already part of the lease.
While it is usually accepted by the tenant that the premises be returned in the state it was given, some tenants (and landlords) fail to make a condition report at the commencement date. This means the landlord has no point of comparison when seeking to enforce the make good provisions during the final inspection.
Both parties should agree, initial and keep a copy of the condition report as at the commencement date to avoid this problem. Another option is to have an independent third party carry out a property inspection report or photograph the premises at the start of the lease as a record of its condition. This record should thoroughly detail any defects in the property and be signed by both tenant and landlord.
Upon termination or expiration of the lease, the final inspection can take place and condition report prepared. By comparing both condition reports, the make good liability of the tenant can be quantified.
Assignment: To make good, or not to make good?
When assigning a commercial lease, the incoming tenant, also known as the Assignee, will typically receive the property as is, and the landlord will not require the departing tenant, also known as the Assignor, to satisfy its make good obligations at the time of assignment.
Problems with assignments usually only arise as the expiry of the term nears closer. This is because the Assignee may not have considered its make good obligations until this point. It is usually the case that the Assignee has agreed to make good the premises to its original state and not the state in which it was received from the Assignor, but often this aspect can be missed in the commercial negotiations of the assignment.
Instead of accepting the terms of the make good provisions in their original state, the Assignee should seek legal advice to protect itself from inheriting any unnecessary costs. If you believe that the Assignor will not be able to meet a claim for compensation or the Assignor’s obligations will cease upon assignment, you should speak with a commercial lawyer about negotiating the make good provisions.
There are a number of ways this could be negotiated. Perhaps the Assignor could pay an estimate of the make good upon assignment, which could then be off set against any outstanding amount to effect the make good provision at the end of the Assignee’s lease. For this to be effective, photographs of the premises ought to be taken prior to assignment. Alternatively, an independent report should be prepared.
When it comes to make good obligations, the landlord would be wise to avoid becoming involved in a dispute between the Assignor and Assignee. The landlord usually retains rights to enforce make good against either party, depending on how the assignment arrangement is drafted, as well as whether or not the Assignor has been released. Often, the landlord may prefer to pursue the Assignee, particularly if the Assignor has become insolvent.
It is best practice to discuss these concerns with your leasing lawyer prior to either signing a new lease or taking an assignment of an existing one, and to establish each party’s respective make good liability.
Lease extensions and make good
Remember, a lease extension may constitute a fresh lease, which makes a difference when it comes to make good obligations. Typically, the make good terms will provide for the restoration of the premises to its original state by the tenant at the lease commencement date. The landlord should seek the assistance of a leasing lawyer in drafting the terms of the lease extension to avoid a situation where the commencement date refers to the extension date and not commencement date of the original lease term.
Make good obligations can be costly. It is worth having a leasing lawyer review the terms of your commercial lease prior to signing. To ensure you are not agreeing to more than you believe is fair and reasonable, contact LegalVision’s team of commercial leasing lawyers today.