When entering into a commercial or retail lease, tenants often focus on the rent, lease term and permitted use of the premises. However, one of the most important provisions to understand before signing a lease is the make good clause.
A make good clause sets out what the tenant must do to the premises at the end of the lease. Depending on the wording of the lease, this can involve anything from simply cleaning the premises and removing the tenant’s belongings to undertaking substantial building works and reinstating the premises to its original condition.
For a business, failing to understand these obligations at the beginning of a lease can result in significant and unexpected costs when the lease ends.
What does “make good” mean?
A make good clause generally requires the tenant to return the leased premises in a specified condition at the end of the lease.
The precise obligation depends on the terms of the lease. For example, a tenant may be required to:
- Remove furniture, equipment, signage and other property;
- Remove partitions, walls or other alterations installed during the tenancy;
- Remove floor coverings or other fixtures installed by the tenant;
- Repair damage caused during the tenancy;
- Repaint walls or other surfaces;
- Repair or reinstate ceilings, floors, doors and other parts of the premises;
- Remove cabling and other services installed by the tenant;
- Reinstate the premises to their original configuration; and
- Clean the premises and leave them in an agreed condition.
The important point is that “make good” does not have one standard meaning. The tenant’s actual obligations will depend upon the wording of the particular lease.
Why is the make good clause important?
A tenant may spend considerable money fitting out a premises to suit their business.
For example, a retail tenant may install:
- Shopfront signage;
- Display shelving;
- Lighting;
- Flooring;
- Partitions;
- Offices;
- Counters;
- Plumbing;
- Electrical works; or
- Specialised equipment.
The tenant may assume that these improvements can simply remain at the end of the lease. However, the landlord may require some or all of them to be removed.
This is why the make good provisions should be considered before the lease is signed and before the fit-out takes place.
A clause that appears relatively straightforward at the beginning of a lease can potentially result in substantial costs several years later.
Does the tenant always have to return the premises to their original condition?
Not necessarily.
This is one of the most important matters to clarify when negotiating a commercial lease.
Some leases require the tenant to return the premises to the condition they were in at the commencement of the lease. Other leases may contain more specific requirements about particular alterations, fixtures or improvements.
For example, a lease might provide that certain approved fit-out works can remain at the end of the lease, while other alterations must be removed.
The tenant should therefore avoid assuming that the landlord will simply accept the premises as they are.
What about the original condition of the premises?
It is important to establish what condition the premises were in when the tenant took possession.
A detailed condition report, together with photographs, can be extremely useful.
Without clear evidence of the condition of the premises at the commencement of the lease, disagreements can arise about whether particular damage or alterations were caused by the tenant or were already present.
Tenants should consider retaining:
- The original condition report;
- Photographs of the premises;
- Plans and drawings;
- Details of the agreed fit-out;
- Landlord approvals for alterations; and
- Records of repairs and maintenance.
These records may become important when the lease comes to an end.
Fit-out and make good obligations
Make good obligations are particularly important where the tenant has undertaken a significant fit-out.
Before carrying out works, the tenant should establish:
- What works are permitted under the lease;
- Whether the landlord’s written consent is required;
- Who owns the fixtures and improvements;
- Whether the items must be removed at the end of the lease;
- Whether the premises must be reinstated; and
- Who will pay the cost of reinstatement.
It is often much easier and less expensive to negotiate these matters before the fit-out begins rather than attempting to resolve them at the end of the lease.
Can the landlord require the tenant to pay money instead?
Some leases provide the landlord with an option to require the tenant to pay an amount representing the cost of carrying out make good works.
The lease should be carefully reviewed to determine exactly what rights the landlord has and how any amount payable is calculated.
A tenant should not assume that paying a fixed amount will automatically satisfy all make good obligations. The specific wording of the lease is critical.
What happens if the tenant does not make good the premises?
If a tenant does not comply with its make good obligations, the landlord may have rights under the lease to recover the costs associated with carrying out the required works.
Depending on the circumstances and the terms of the lease, this could potentially involve:
- A claim for the cost of reinstatement;
- Recovery of other losses permitted under the lease or applicable law;
- Disputes about the tenant’s bond or other security; or
- Disputes about whether the tenant has properly complied with the lease.
The precise rights of the landlord and tenant will depend on the lease and the circumstances.
Make good clauses should be negotiated before signing
A common mistake is to treat the make good clause as something to worry about when the business leaves the premises.
By that stage, it may be too late to negotiate the tenant’s obligations.
Before signing a commercial or retail lease, a tenant should consider whether the proposed make good requirements are commercially reasonable and whether they are consistent with the tenant’s intended fit-out and use of the premises.
Potential areas for negotiation may include:
- Limiting the items that must be removed;
- Agreeing that certain improvements can remain;
- Clearly identifying which alterations must be reinstated;
- Agreeing on the standard of repair;
- Clarifying cleaning and maintenance requirements;
- Recording the condition of the premises at commencement; and
- Clarifying whether a monetary payment can be made instead of undertaking works.
Get legal advice before signing your lease
A make good clause can create a significant financial obligation for a business.
The cost may not become apparent until the end of the lease, when the tenant is already dealing with the costs of relocating, purchasing or fitting out new premises.
For that reason, a commercial or retail lease should be reviewed carefully before it is signed, including the provisions dealing with make good, repairs, maintenance, alterations, fit-out and security.
At Appius Lawyers, we can assist businesses in Western Australia with reviewing and negotiating commercial and retail leases and identifying potential obligations before you commit to the lease.
If you are considering entering into a commercial lease, obtaining legal advice at the beginning can help you understand your obligations and avoid unexpected issues when the lease comes to an end.
Don’t Let a Make Good Clause Become an Unexpected Expense
Make good obligations can leave businesses facing substantial costs when a commercial lease ends. Understanding and negotiating these requirements before signing can help protect your business from unexpected financial commitments and disputes.
At Appius Lawyers, our Perth commercial leasing team assists landlords and tenants with lease reviews, negotiations and advice on make good obligations.
Before you sign your next commercial or retail lease, speak with Appius Lawyers. Book a consultation with our Perth legal team today.
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