Understanding Make Good Obligations

In this blog post, we take a closer look at one of the key clauses in a commercial lease—make good obligations—helping you better understand what they entail and how they may affect you as a tenant or landlord.

What Is a Make Good Obligation Under a Lease?

A make good clause outlines the tenant’s responsibilities when the lease expires, terminates, or is surrendered. In most cases, the tenant is required to return the premises to the condition it was in at the beginning of the lease, taking into account normal wear and tear. For instance, if you installed lights or a ceiling as part of your fitout, you would likely need to remove these additions when you leave.

It’s important to note that make good obligations are distinct from refurbishment clauses, which require periodic redecoration or updates to the premises during the lease term.

The costs associated with make good obligations can vary significantly, from a few thousand dollars to hundreds of thousands, making it a key consideration when entering or exiting a lease.

Do your homework

Preparing for make good obligations should be part of your leasing strategy from the outset. A common pitfall tenants face is not documenting the condition of the premises when they first take possession. Over the course of a lease, which can last five, ten, or even more years, details may be forgotten.

To avoid disputes, it’s critical to complete a dilapidation report at the start of the lease. This report serves as a record of the premises’ condition, including any existing defects, and should include date-stamped photographs, detailed notes, or even video recordings, which are valid forms of evidence. Both parties should sign and witness the report to ensure its validity.

Additionally, if you’ve acquired a business, it’s important to request the vendor’s dilapidation report. Even if you weren’t the original tenant, you may still be responsible for making good on the premises to its original condition, so it’s crucial to have a clear understanding of its previous state.

Understand the Definition of Make Good

The specifics of a make good obligation can vary from lease to lease, so it’s crucial to clarify how the term is defined in your lease agreement. Questions to consider include:

• If you’ve renewed the lease, do you restore the premises to the condition at the time of renewal, or at the original lease commencement?
• If the lease has been assigned to a new tenant, which party is responsible for the make good obligations?
• What standard of work is required to meet the make good obligation?

These details should be clearly defined and understood by both parties when entering into the lease to avoid future disputes.

Can You Save Money on Make Good?

Understanding your make good obligations before entering a lease can save you money when the time comes to fulfil them. You may be able to negotiate with the landlord to reduce costs. For instance:

• The landlord may agree to retain part of the tenant’s fitout, saving you the expense of removing it.
• You may negotiate a cash settlement or agree to a cap on make good costs.

Having these discussions early in the lease process can lead to a mutually beneficial agreement and reduce uncertainty when the lease ends.

What Happens If You Fail to Make Good?

Failing to meet your make good obligations can lead to significant consequences. If you do not fulfil the make good requirements at the end of the lease, the Lessor may take action to recover the costs. This can include:

• Accessing your bank guarantee or security deposit to cover the cost of restoring the premises.
• Selling or taking possession of your fitout to offset costs.
• Seeking damages against you, which can affect your ability to lease other premises in the future.

These consequences underline the importance of fully understanding and complying with your make good obligations to avoid financial and legal repercussions.

Make Good vs. Redecoration: What’s the Difference?

It’s important to distinguish between make good and redecoration obligations, as they involve different responsibilities.

A redecoration clause typically requires the tenant to update the property at regular intervals (e.g., every five years), covering tasks such as painting, replacing floor coverings, and updating window treatments. This ensures the premises maintain an acceptable appearance during the lease term.

Make good obligations, on the other hand, are only triggered at the end of the lease and often involve a more extensive and costly process, such as removing fitouts and restoring the premises to its original condition. While redecoration is aimed at ongoing maintenance, make good is about returning the property to its original state at the lease’s end. Both obligations, though distinct, are important to understand for proper lease management.