Understanding Make Good Obligations

In this week’s blog we will be looking a little more in-depth at one of the key clauses of a commercial lease, helping you to get a better understanding of make good obligations.

What is a make good obligation under a lease?

A make good clause sets out the requirements of the tenant upon the expiry, termination or surrender of the lease. Typically, a make good clause will involve the Lessee making the premises good to the condition in which it was received at the start of the contract (although there will often be an allowance for fair wear and tear). As an example, if you leased the premises without a ceiling or lights and you as the tenant installed this, it will be required that these fittings are removed when you end your lease. Note that a make good obligation under a lease is not the same as a refurbishment clause which requires redecoration of the premises at certain given times.

The cost of a make good obligation can range in value from a few thousand dollars into the hundreds of thousands, making it an important obligation to understand.

Do your homework

Preparing for a make good obligation is a critical part of leasing.

One of the most common traps which a tenant will fall into is to not document what state and level of fitout the premises was handed over in. The contract may have been entered five, ten, or many more years beforehand.

It is therefore extremely important to always complete a dilapidation report upon commencement of the lease as this is a record of the condition of the premises at the time of the lease entry. The report should include date stamped photos as well as detailed notes of the inspection. Any defects or cracks should be noted, and the dilapidation report should be signed and witnessed by both parties.

Understand the make good definition

A make good definition will vary from lease to lease, but it is important to understand how the provision has been defined in your situation. Examples of items to consider include:

• If you have renewed a lease, do you make it good to the last renewal or to the original lease?
• If the lease has been assigned to a new tenant, is the make good provision a requirement of the new or previous tenant?
• To what standard must the make good be completed to?

These considerations should be negotiated and understood by both parties at the time of the lease to remove later uncertainty.

Additionally, ensure the make good clause is clear and there is no ambiguity. The clause should articulate the exact expectations of the Lessee within a precise definition to assist both parties in clearly knowing what their obligations will be when the lease comes to an end.

Can you save money?

It is important to understand your make good clause not only at the end of a lease when the obligation arises, but also before entrance into the lease, as it may be possible to negotiate with the Lessor to come to a cost-reducing mutually beneficial agreement.

It may be valuable for a new tenant if the fitout remains installed, saving you removal costs. Or there may be items which the Lessor agrees do not have to be removed. Alternatively, you may be able to negotiate a cash settlement with the Lessor or instead cap your make good obligations.

These conversations are imperative as mutual satisfaction can be easily found and agreed upon.

What is the difference between make good and redecoration?

Although make good clauses and redecoration clauses may seem quite similar, it is important to acknowledge the key differences which distinguish the two in order to wholly recognise your obligations as a Lessee.

A redecoration clause will outline the intervals at which the refurbishment must occur (e.g. at least once every 5 years) as well as setting out the exact work which is required of the Lessee (e.g. internal and external painting, replace floor coverings, replace window coverings). Unlike a make good clause, a redecoration clause aims to ensure the property maintains a satisfactory appearance during the lease term. Redecoration obligations are also therefore likely be far less expensive than make good.

As aforementioned, the making good of property will only be required at the end of a lease and tends to be a much more extensive undertaking, making them quite distinct obligations.

Author

This post was authored by Simon Fonteyn. Simon is one of Australia’s leading experts in retail, childcare and medical leasing and rental valuations. He holds a Degree in Accounting & Finance, a Diploma of Valuation, a Masters of Management and is an Associate of the Australian Property Institute. With over 25 years experience in the commercial property industry, Simon founded LeaseInfo® as a way to provide more transparency to the industry.