If you are a tenant, disputes can arise over the extent of your make good obligation – especially when the lease has changed hands over the course of a long lease term. A make good obligation refers to the state the tenant is required to leave the premises at the end of the lease term. Among other things, the tenant is required to remove their belongings and leave the premises in a clean and tidy state. Failure to do so can result in damages. We set out how you can avoid common disputes when it comes to make good obligations, including ownership of items in the premises and who installed certain fixtures and fittings.
Removal of Fit-outs
A make good clause often contains a general provision which states that tenant must remove all of its fixtures and fittings. They must also make good any damage caused by the removal and reinstate the premises back to the condition as at the commencement date.
The ambiguity often relates to which fixtures and fittings the landlord requires the tenant to remove and often arises if:
- Both the landlord and tenant have collectively installed items on the premises during the initial fit-out; or
- The landlord had made a financial contribution to the fit-out; or
- If the tenant took over the lease with existing fit-outs.
It may not seem a priority at the beginning of lease negotiations to talk about the end term obligations. However, doing so may be prudent in the long run. This discussion is particularly important if the lease contains a general provision which requires you to bring the premises back to “base state.” Base state refers to removing all partition walls and suspended ceilings and leaving behind nothing more than a bare shell.
Another approach may be to offer a cash sum instead of carrying out your make good obligation. However, you should take care to address the following issues:
- Who can instigate a cash payment – is this solely the tenant’s right or can the landlord refuse?
- How will the scope of the works be determined (including the timeframe to carry out the works) and at whose cost?
- If there is a dispute as to the scope or the expense of the works, how will this be resolved?
- Is the landlord permitted to take the money and not carry out the works?
Assessing Damage for Breach of a Make Good Obligation
If you fail to comply with your make good obligation, the court has taken the following approaches to assessing damages.
In Gimtak Pty Ltd v Cathie  VSC 88, the tenant vacated the premises without adhering to their make good obligation. The lease permitted the landlord to carry out the tenant’s make good obligations at the tenant’s cost.
The landlord subsequently sold the building for a value less than what it could have received if the tenant had made good the premises. There was evidence before the court that the landlord had difficulty re-letting the premises due to the state of the premises.
In assessing the scope of damages, the court ruled in favour of the landlord. The court determined the costs using the following principles:
- The court based their assessment of the damages on the cost of carrying out the works. This evaluation disregarded the fact that the landlord did not complete the work themselves, nor that they subsequently sold the property.
- The value of the property had the tenant complied with their make good obligation was relevant to the assessment of damages as the value of the sold building would have been higher.
- The court should award the landlord damages so far as the money could put the landlord back in the position they would have been had the tenant performed their make good obligation.
The landlord was therefore awarded damages to cover the cost of carrying out the make good works, the rental forgone and outgoings paid during the period.
Before entering into a commercial premises lease, you should make sure that you understand what the lease expects of you at its end. In particular, you are aware of your make good obligations.
Ensure that your pre-lease due diligence includes a condition report to verify the state of repairs as well as a physical inspection to have an idea of what is already on the premises before carrying out any fit-out works. You should also agree with what the landlord includes in your make good obligation and to exclude any items that you find unfavourable.
Finally, be aware of the consequences of not complying with the make good provision and have an understanding of what the lease states about the landlord’s right to recover damages.
If you have any questions or need assistance reviewing your lease documents or advice concerning your lease terms, get in touch with our experienced If you would like assistance in reviewing your lease documents or advice concerning your lease terms, get in touch with our experienced commercial leasing team on 1300 544 755.
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