To make good or not to make good...that is the question?
What is a make good clause? - ‘make good’ refers to the clause/s in a lease that set out how a tenant should leave a property at the end of the lease term. Basically, when the day comes to hand back the keys to the landlord, the property should be in the condition that is stipulated in the lease.
Tenants consider make good clause a money grab by the landlord, a final attempt to make the most of an exiting tenant. Whereas landlords consider a make good clause as a necessary clause that will ensure the tenant has a legal obligation to return the property in a similar condition as when they started the tenancy.
If a lease does not contain any make good clause, a tenant would be required to comply with its common law obligations, which require a tenant to return the premises to a similar state as it was in at the commencement of the lease, except for fair wear and tear. If a tenant breaches this common law obligation, the landlord can sue the tenant at common law (rather than contract) for any loss it has suffered as a result of the tenant’s failure.
Therefore landlords insist on inserting make good clause/s in the lease, so that the landlord requires the tenant to undertake a more substantial make good, such as repainting or returning the premises to base building, which it may not be required to do at common law. Moreover, a typical make good clause will specify what happens if the tenant breaches its make good obligations and gives the landlord a contractual right (usually in addition to its common law rights) to recover its costs from the tenant without being required to pursue the tenant in court, eg the landlord can rely on a contractual indemnity.
The tension arises when the lease agreement (whether commercial, industrial or retail) has been worded in such a way that allows for misinterpretation, or worse still, in a way vague enough to trip the tenant up financially when trying to do the right thing.
Long term business success comes from mitigating risks and making yourself less vulnerable. It is therefore, very important that tenants get the proper initial legal advice to ensure that the commercial terms of the lease are negotiated well and are afforded the protections during the term and on the expiry of the lease term. Speak to Manookian Solicitors to get the right advice from the start and mitigate your risk and liability.
There are plenty of horror stories around tenants who have been held accountable to a make good clause that has left them extensively out of pocket. Our advice is to pursue legal help before entering the negotiation on your lease.
There Are Typically Four Types of ‘Make Good’ Obligations.
Removal of Detachable Property Only - This obligation is minimal and easily understood. It requires the tenant to remove their property that is detachable; such as computer desks, filing cabinets, free-standing bookcases etc. and remove them from the premises.
Removal of All Property and Basic Repairs - This make good obligation requires more work but is still pretty straightforward. The tenant must remove all property including detachable property as well as any property that the tenant has fixed to the premises. When removing the attached property the tenant is required to ensure that all walls, windows, ceilings etc. are in the same condition as the entry condition report. This may mean painting or sanding surfaces and repairing any minor damage.
Return the Premises to the Standard Shown in a Condition Report - Return the premises to the standard shown in a condition report is another straightforward make good clause, but one that trips up a lot of tenants, especially in the case of fit-outs. This obligation asks you to return the leased premises to the condition that was set out in the condition report. It’s a great idea to discuss any fit-out plans with your landlord when in the negotiation phase to ensure that both parties are aware of what will be required, and that condition reports are conducted at the most opportune time.
Base Building Standard - This type of make good is more common in retail shopping centres where the landlord will request that the premises be returned in the state that they were in when they were first constructed. This is mainly because the landlord will not know what type of business the next tenant will be conducting from the premises. Depending on the specifics you may need to remove all plumbing, wiring, installations and fit-outs, partitions, sprinklers, air-conditioning ducts, and walls/shopfront. A base building standard clause can be a really expensive obligation.
If your lease agreement requires a make good, regardless of the type, then it is imperative that you budget accordingly. Most importantly, speak to your lawyer to explain to you the obligations when entering into the lease as your lawyer will suggest ways of watering down the make good clause prior to the signing of the lease. It is essential that you understand the obligations of your make good clause, and how these obligations will affect your business if you decide to terminate or not to renew the lease. If your lease is already in place it may be time to review the existing make good clause and budget accordingly.
If you’re entering into a new lease, remember that hurried or pressured negotiations can lead to disaster with potentially severe financial ramifications and obligations and liabilities at the end of the lease term.
Manookian Solicitors works with both landlords and tenants and business owners to reduce the risks inherent with leasing, and to ensure you receive the right advice. Contact Rostom Manookian on 0416 716 960 or email rostom@manookiansolicitors.com to discuss how we can assist you with your lease and other business related matters.
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