LEASE MAKE GOOD CLAUSES

Posted on 10th March 2017 by Chris Grieve

The recent cooling in the WA economy coupled with the increased availability of commercial space has seen many of our clients considering relocating their businesses to take advantage of the favourable market conditions.  One of the multitude of things to consider when exiting and negotiating a new lease is the implications of what is commonly referred to as the “Make Good Clause”.

“Make Good” refers to the provision in a commercial lease that stipulates how a property should be left at the end of the lease term.  When negotiating a lease many other issues tend to take the precedent such as lease term, rent reviews, incentives, etc leaving make good clauses as an often forgotten generic, poorly worded afterthought.

Even if a make good clause doesn’t appear in the lease agreement, a landlord may be able to take common law action against you if you don’t return the premises in line with its original condition (except for fair wear and tear).

While it is usually accepted by the tenant that the premises be returned in the state it was given, some tenants (and landlords) fail to include adequate detail on the condition and quality of the property at the commencement of the tenancy.  This can leave an area of dispute and surprise costs at the end of a lease, consider the following:

• A business signs a lease agreement, substantially fitouts the premises and moves in.  The make good clause is a generic clause devoid of detail.  At the exit of the lease the landlord requests a refurbishment using different or superior products than was the case at the commencement of the lease. As none of this detail was included in the lease the new business owners have no point of reference to question the landlord’s request.
• Similar to the above a landlord may have purchased a property with the lease intact and have no point of comparison when undertaking final inspection.
•  Under an assignment of lease arrangement the new tenant inherits the conditions of the existing lease which can include the make good clause.  A prudent assignee can make provision for this in negotiating the assignment so that it doesn’t get burdened with any surprise make good costs.  Equally a landlord may seek to recover some of the make good prior to assignment from the assignor as part of it’s negotiations.

Cash settlements in lieu of make good are a popular way of satisfying the make good requirement at the end of the lease.  This allows a tenant to vacate the building (providing it is left clean and tidy) and not have to organise the removal of the fitout.  From a landlords point of view it gives them the option to find a tenant willing to take on the existing fitout or use the money to fit it out to the incoming tenant specifications.

With the current market place in WA being one favourable to tenants, we are seeing many incentives being offered by landlords including, but not limited to, a “no make good” clause, effectively allowing the tenant to vacate without any obligation to return it to original condition.

It is therefore important  for both parties to ensure that they agree on a detailed make good arrangement at the commencement of the lease which is well documented (including photographs) to minimise any disagreement and expense when it comes time to move on.

Should you have any questions or concerns about make good clauses in your lease agreements, please contact our office on (08) 9316 7000 and we can put you in touch with a legal expert in our network who can assist.