The end of a commercial lease often costs tenants far more than they expected, and make-good obligations are usually why.
When a business takes on commercial premises, the focus is naturally on getting in: the fit-out, the rent, the lease term. What receives far less attention is the obligation to restore those premises to their original condition when the lease ends. This obligation, commonly called the ‘make-good’ clause, is one of the more misunderstood corners of commercial law. It can result in significant unexpected costs, disputes with landlords, and pressure at exactly the wrong moment in a business’s life.
The problem is not that make-good clauses are hidden. They appear in almost every commercial lease. The problem is that tenants often do not understand what they have agreed to until they are preparing to vacate, at which point the landlord presents a make-good schedule and the options have narrowed considerably.
This article explains what make-good clauses require, the disputes that commonly arise, and what tenants should negotiate before signing a lease.
Key takeaways
- Make-good clauses require tenants to restore leased premises to their original condition at the end of a lease, often at significant cost.
- The scope of make-good obligations varies widely between leases and must be understood before signing.
- Tenants can negotiate make-good terms at the start of a lease. After signing, options are limited.
- A make-good report at the start of a lease is essential protection against disputes about the original condition of the premises.
- Cash settlements in lieu of physical make-good work are common but must be agreed in writing.
What a make-good clause requires
A make-good clause requires the tenant to restore the leased premises to a specified condition at the end of the lease. The exact scope depends on what the clause says, but the most common obligations include:
- Removing all tenant fit-out, fixtures, signage, and improvements installed during the tenancy
- Repairing any damage caused to the premises, including damage caused by removal of the fit-out
- Repainting walls and ceilings in the original colour or a colour approved by the landlord
- Reinstating the premises to the configuration that existed at the commencement of the lease
- Ensuring all plant, equipment, and services are in good working order
The cost of carrying out these obligations can be substantial. A commercial fit-out that cost $200,000 to install may cost $80,000 or more to remove and make good, not including reinstatement of flooring, ceilings, and services. Tenants who have not budgeted for this frequently find themselves in dispute with their landlord at the point of vacating.
Why disputes arise
Make-good disputes are common in commercial leasing for several consistent reasons:
1. No condition report at the start of the lease: If the original condition of the premises is not documented at the start of the tenancy, there is no agreed baseline against which to measure what needs to be restored. Landlords and tenants frequently disagree about what the premises looked like before the fit-out.
2. Ambiguous drafting: Make-good clauses often use language such as ‘good order and condition’, ‘original condition’, or ‘as at the commencement date’. These terms are open to different interpretations and can lead to significant disagreement about what work is actually required.
3. Landlord’s refurbishment plans override the make-good: A landlord who plans to redevelop or significantly refurbish the premises may present a make-good schedule that exceeds what the lease actually requires, seeking to have the tenant fund works the landlord would have undertaken regardless.
4. Timing pressure: Tenants vacating at the end of a lease are often under pressure to complete the make-good quickly, because rent continues to accrue until the landlord accepts the premises back. This pressure can lead tenants to agree to work or payment they are not legally required to provide.
5. Negotiated fit-out allowances: Some leases include landlord contributions to the tenant’s fit-out. These arrangements can create additional complexity at the end of the lease if it is unclear whether the funded elements are required to be removed or retained.
What tenants should negotiate before signing
The most effective time to address make-good risk is before the lease is signed. Once a tenant is bound by the terms, the scope for renegotiation is limited. Key points to negotiate include:
A detailed condition report at commencement. The lease should require a condition report, signed by both parties, to be completed at the start of the tenancy. This establishes the agreed baseline and protects both parties from disputes at the end. Without it, the tenant is relying on whatever the landlord says the premises looked like years earlier.
A defined scope of make-good works. Vague language such as ‘good repair and condition’ should be replaced with a specific schedule of what the tenant is and is not required to reinstate. If a fit-out is being installed, the lease should specify which elements must be removed at the end of the term and which may be left for the incoming tenant or landlord.
Fair wear and tear exclusion. All commercial leases should exclude fair wear and tear from the tenant’s obligations. ‘Fair wear and tear’ covers normal deterioration from ordinary use over time. Without this exclusion, a tenant can be required to restore the premises to a condition better than it was at the start of the lease.
A cash settlement option. Many landlords prefer a cash payment in lieu of physical make-good work. This can suit both parties: the landlord receives funds to apply toward refurbishment on their own terms, and the tenant avoids the cost and disruption of managing the work themselves. Where this is likely, the mechanism for agreeing a cash payment should be addressed in the lease at the outset.
A landlord’s works clause. If the landlord intends to refurbish or redevelop the premises at the end of the lease, the tenant should not be required to fund works that the landlord would have carried out regardless. A well-drafted lease will address this by limiting make-good obligations where the landlord’s planned works make them unnecessary.
Cash settlements: what you need to know
Cash settlements in lieu of make-good work are increasingly common. Rather than requiring the tenant to carry out physical works, the landlord and tenant agree on a lump sum payment. This is often practical. Landlords frequently have their own contractors and preferences, and tenants are rarely best placed to manage construction works at the end of a lease.
However, a cash settlement must be formalised in writing. A verbal agreement between a tenant and a property manager will not protect the tenant if a dispute arises later. The written agreement should specify:
- The amount agreed and the basis on which it was calculated
- Whether the payment discharges all make-good obligations under the lease
- The timeline for payment
- Whether there are any remaining obligations the cash settlement does not cover
Tenants who agree a cash settlement verbally and then vacate without a signed deed of release are exposed to claims that additional works were also required. Ensure the agreement is documented before handing back the keys.
A provision for cash settlement should also be incorporated in the lease so that the Landlord’s succesors in title and assigns are bound by it.
Working with & Legal
Our commercial law and leasing team reviews make-good clauses as part of every lease transaction. We advise tenants on what they are agreeing to before they sign, negotiate the scope of obligations where possible, and assist with make-good disputes at the end of a lease. We also act for landlords in enforcing make-good obligations and negotiating cash settlements.
If you are entering into a new commercial lease or approaching the end of an existing one, contact us at andlegal.com.au/contact before making any commitments. We also recommend reading our Contract Review article for further guidance on what your lawyer will examine when reviewing a commercial agreement.
Frequently asked questions
Am I required to remove my fit-out at the end of the lease?
This depends entirely on what your lease says. Some leases require the removal of all tenants works; others allow the tenant to leave the fit-out in place at the landlord’s discretion. You should check your lease before committing to any approach and confirm the position in writing with the landlord before vacating.
Can I negotiate the make-good clause mid-lease?
Yes, but it requires the landlord’s agreement and should be formalised as a written variation to the lease. Landlords are not obliged to renegotiate, but many will discuss practical arrangements, particularly where they have plans for the premises after the tenancy ends. The earlier you raise it, the more room there is to negotiate.
What is ‘fair wear and tear’ and does it apply to my lease?
Fair wear and tear refers to the gradual deterioration that results from ordinary use of the premises over time. Whether it applies to your make-good obligations depends on whether your lease includes a fair wear and tear exclusion. If it does not, you may be required to restore the premises to a condition better than it was when you took possession. Your lawyer can confirm the position based on your specific lease.
The landlord says the original condition was different from what I remember. What can I do?
Without a condition report signed at the start of the lease, this becomes a factual dispute. Photographs taken at the commencement of the tenancy, correspondence with the landlord or agent from that time, and fit-out plans or building approvals can all assist in establishing what the original condition was. Your lawyer can advise on the evidence available and whether the landlord’s position is correct.
How long does make-good work typically take?
This varies with the size and complexity of the tenancy, but for an average commercial office or retail space, make-good works commonly take between two and six weeks. Rent continues to accrue until the premises are accepted back by the landlord, so it is important to plan for this period and avoid disputes that extend the handover timeline unnecessarily.
This article is general information only and does not constitute legal advice. Commercial lease obligations vary depending on the specific terms of your lease and your circumstances. You should seek independent legal advice before entering into or ending a commercial lease.