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Are you a tenant in a commercial or retail premises and your lease is coming to an end? In that case, it is very likely that you will have to ‘make good’ the premises before returning your keys to your landlord. A make good obligation requires the tenant to return the premises to their landlord in a similar condition to when they moved in. Make good obligations are one of the most contentious issues for landlords and tenants and can often lead to disputes. It is important as a tenant that you are fully aware of the make good obligations under your lease. This article will outline:

  • what a make good clause is;
  • the types of make good obligations;
  • items the landlord might be able to keep;
  • what happens if the tenant fails to make good; and
  • how you can negotiate a make good clause.

What is a Make Good Clause? 

A make good obligation requires you, as the tenant, to leave your business premises at the end of the lease in the same condition you found it. Most commercial and retail leases will contain this obligation. Typically, a make good clause will require you to remove your shop fitout and any property when the lease is over, and leave the space clean and tidy. In some cases, there will be further obligations which may include: 

  • repairing any damage caused to the premises whilst you occupied it;
  • removing fixtures, installations and flooring from the premises; and
  • removing walls, ceilings and returning all fire and hydraulic services back to an open floor plan.

Making good of a premise at the end of your lease can be a very costly process, and you can be required to return the premises back to its original condition regardless of any improvements that may have been made to the space. 

Where Can I Find My Make Good Obligations?

Your make good obligations will be detailed in your retail or commercial lease. A make good clause will either be included in a: 

  • standalone section of the lease, known as a clause; or
  • clause containing other repair and maintenance obligations. 

It is important to note that make good only relates to your obligations at the end of the lease. Your lease may include other obligations to redecorate the premises at certain points during the term of the lease. This is often the case for leases with a long term. Make good obligations must be completed once the lease ends through either: 

  • termination;
  • surrender; or
  • expiry. 

Even though make good relates to the end of your lease, you should think about it at the start. You may have the option to negotiate your make good obligations in the lease offer stage. A well-negotiated make good obligation can prevent unnecessary disputes, expense and stress when your lease comes to an end. All future expenses are important to think about and negotiate early. 

Types of Make Good Obligations

The make good provision in a commercial or retail lease is often the most contentious part of any contract. It should therefore be carefully reviewed, and it should be clearly set out in lease what the make good requirement will be. There are different types of make good obligations that could be in your lease. These generally all exclude reasonable wear and tear but the nature and extent of make good required will depend on what is set out in your lease. Below are four common make good obligations that might be found in your commercial or retail lease.

1. Removal of Detachable Property Only 

This obligation is usually minimal and is an easy make good obligation to comply with. If your lease specifies this obligation to make good then you will only be required to remove any of your property from the premises that are detachable (i.e. not attached to the floors or walls). This will include things like: 

  • desks; 
  • computers; 
  • filing cabinets; and 
  • other storage units. 

2. Removal of All Property and Basic Repairs 

This make good obligation requires slightly more work than the one above. Typically, you will need to remove all property, including:

  • detachable property; and 
  • property that you have attached to the premises (i.e. shelving or decor).

When removing detached property, you will need to repair any damage that is caused by removing the property. This might involve repainting or sanding the surfaces of walls. 

3. Return Premises to the Standard Shown in the Condition Report 

Returning the premises to the standard shown in the condition report is another common make good clause. A condition report is a document that is given to tenants at the beginning of the lease that records the state and condition of the property at that time. This is done on a room by room basis and includes fittings and fixtures. 

The condition report should contain photos of the premises and notes made at the start of the lease as to the condition of the premises. It will also include details and photos showing: 

  • what the flooring looks like; 
  • whether the walls have been recently painted; 
  • what fixtures or installations are owned by the landlord; and 
  • any defects with the premises. 

It is very important to have a condition report in place so that it is clear from the outset exactly what the condition of the premises was at the start of the lease. This is specifically important for you as a tenant to know to avoid any extra costs or disputes at the end of the lease. This could occur if the landlord disagrees with you on the state of the premises at the start of your lease. The condition report will allow you to return to this document and determine the condition of the premises at the time your lease began. 

4. Return the Premises to a Base Building Standard 

Returning the premises to a base building standard means that you must leave the premises in the state that it was in when they were first constructed. This is a common make good obligation in retail leases such as a shopping centre, as the landlord does not know what type of business their next tenant will be. 

In this instance, you may need to remove all of the:

  • plumbing;
  • wiring;
  • installations; and 
  • fitout.

This type of make good obligation can be very expensive. Therefore, if this type of make good cannot be negotiated when entering into your lease, it is important that you consider this cost in your budget. 

Items the Landlord May Be Allowed to Keep

At the end of your lease and make good obligations, if you do not remove all fixtures and fittings from the premises, the landlord may claim ownership of those items, by way of abandonment. The lease will need to be checked to determine if and when the right will arise if you do not remove all your property at the end of your lease. 

The landlord can choose to keep or throw these items away and if they incur a cost for doing so, you may be held liable to pay those costs back to the landlord. 

What if the Tenant Fails to Make Good?

In some circumstances, the landlord may see the changes you have made to the premises as an improvement and will be happy for those to remain, i.e. you will not have to make good. You will need to get the landlord’s approval before you can consider your obligations complete under the make good clause of your lease. However, in many cases, damages will be payable to the landlord if you breach the make good clause in your lease. 

In some cases, the landlord may require the tenant to make a lump sum payment to them in lieu of carrying out any make good works. This gives the landlord flexibility around what works to do, and when to do those works. Additionally, the landlord can take possession of the premises back quicker and the tenant does not need to worry about having to do the work themselves. This option can remove uncertainty and lower the risk of disputes that might arise. 

Negotiating a Make Good Obligation 

You may be able to negotiate a more favourable make good obligation at the start of your lease. How, and to what extent, you are able to do this depends on: 

  • the type of business;
  • the location and length of the lease; and 
  • the extent of the fitout you plan to install at the premises. 

During negotiations, you may wish to consider the following questions.

How Complicated is My Fit Out?

The type of fit out you plan to install will affect how much work you need to do to make good at the end of the lease. If your fit out is minor, you could agree to a stricter make good clause in exchange for more favourable terms elsewhere in the lease. However, if your business requires a complicated fit out, you may wish to negotiate a more lenient make good clause. 

For example, if you plan to use the premises as an office, returning the premises to an earlier condition may not be expensive and you may choose to focus your negotiations elsewhere. However, if you plan to open a children’s play centre, you may wish to carefully negotiate your make good obligation.

Do I Know What My Obligations Are?

You should avoid a make good clause that is confusing or unclear about what you must do at the end of the lease. 

For example, the words ‘at the start of the lease’ appear to be clear, but in practicality, they may not provide enough guidance. ‘The start of the lease’ could be taken to mean:

  • when you begin paying rent; or 
  • when you first occupy the premises for fitout. 

The two meanings would result in very different make good obligations.

Another way to add clarity to make good is to agree on a scope of works with the landlord. A scope of works outlines exactly what must be done at the end of the lease. You may be able to rely on this document if a make good clause does not clearly explain the extent of the works you must complete at the end of your lease. 

Key Takeaways 

Before entering into the lease it is important you consider whether you need to make good on the premises and what type of make good obligation it is. What fit out work you undertake may be influenced by the cost associated with having to make good of the premises and remove the fitout at the end of the lease. It is also important to have a condition report which should include you taking photos and noting down any defects in the property before you commence the lease. This means that at the end of the lease, you do not have to make good the defects that were already there. Both parties should sign the condition report and this should minimise disputes when it is time to make good of the premises.

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

Frequently Asked Questions

What is a make good obligation?

A make good obligation requires you, the tenant, to leave your business premises at the end of your lease in the same condition that you found it.

What are the types of make good obligations?

Common types include the removal of detachable property and removal of all property and basic repairs. Also, the return of premises to the standard shown in the condition report and return of the premises to a base building standard.

Can the landlord keep my items?

If you do not remove all fixtures and fittings from the premises, the landlord may claim ownership of those items, by way of abandonment. As a result, they will be able to choose to keep or throw these items away.

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