To make good or not to make good? What are the options?

Introduction

One of the standard inclusions in an offer to lease, after the commercial terms such as rent and term, is a vague requirement for the tenant to make good the premises at the end of the term.  This is translated into the lease and usually at least requires the tenant to return the premises to the condition it was in at the commencement of the lease, remove its property and leave the premises clean and tidy.

If a lease does not contain any provision, 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.

So, the question is this: if there already is an obligation on the tenant at common law with regard to make good, why is there an obligation in the lease?  The answer is twofold.

First, a make good obligation in a lease allows a landlord to require 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.

Second, it allows the landlord to 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.

Issues with make good clauses in leases

Therefore, make good clauses are included in leases to give the parties more flexibility to negotiate the make good works at the end of the lease and provide more accessible remedies.  Make good clauses also allow the parties to be clear about what make good works the tenant will be required to undertake, or not.  However, parties often seem to be in dispute about the make good clauses in their leases.

The main complaints about make good clauses are that they are too uncertain, too vague, ambiguous or irrelevant to the specific premises.  The reason for this is that as with everything, it is only as good as the information you put in it.  Usually with make good clauses, the issue is not enough information is put in it.  There are two main causes for insufficient information: the parties themselves, and lawyers.

First, agents, landlords and tenants are often keen to sign up to an offer to lease so they do not lose an opportunity.  This means that parties negotiate the details of the lease which are immediately relevant to them, such as rent, term and possession and do not consider fully their obligations at the end of the lease.  As a result, parties often agree to a general or pro forma make good provision in the offer to lease which may be vague or irrelevant to the premises.  Once the tenant is then provided with the draft lease, which contains a much more extensive make good provision, they are often either shocked at what they are being asked to do at the end of the lease, or perhaps think they will ‘cross that bridge’ at the end of the lease.

In essence, the parties have not sufficiently turned their minds to what will be required at the end of the lease.  At the commencement of the lease, most landlords and tenants usually rely on the ‘what’s mine is mine, and what’s yours is yours’ argument, which often becomes blurred by the end of the lease, for example where the tenant has installed something as part of its fit out, to which the landlord has made a financial contribution.

Second, lawyers who are drafting leases usually have a standard make good clauses which are often quite complex or lengthy and include obligations which seem reasonable to the drafting lawyer for a tenant to undertake.  In addition, lawyers often have an incomplete understanding of the premises and therefore do not have the expertise to appropriately draft a make good clause to suit the premises.  The offer to lease does not often provide the lawyer with any guidance as it is usually either contains general statements about the make good required, is a ‘pro forma’ or any specific provisions are not sufficiently detailed for a lawyer to draft a clear clause.  Finally, lawyers will generally pass the responsibility for an accurate make good clause to their client with a statement such as ‘please satisfy yourself that the make good clause contained in the lease is acceptable’.

Solutions

The solution to the issue of deficient make good clauses is simple: Do it once, do it right.

All parties and lawyers need to think harder at the beginning as to what will be involved at the end and parties need to prioritise a discussion about make good during the offer to lease period.  From a cost/value perspective, this is best done by the parties (rather than incurring legal fees).  However, lawyers should be ensuring that their parties have given them sufficiently clear and accurate instructions and that their clients are putting sufficient thought into the parties make good obligations.

Better drafted make good clauses

One way of doing this is to ensure that leases are drafted better.  This will require input from all involved to ensure that the parties are clear on what the make good obligations will be.  Make good clauses should be adapted to each premises and the parties’ requirements.  However, this is not to say that precedent clauses cannot be used.

For example, a general make good clause may be included in the lease which requires the tenant to remove its loose property and leave the premises in a good condition, clean and tidy, excluding fair wear and tear.  However, the clause could refer to a schedule which contains more specific make good obligations.  The schedule could look like this:

This approach allows parties to specify how particular items are dealt with at the end of the lease and by breaking down the make good into particular items, it ensures that the parties have widely considered the make good.  A good time to discuss this would be when the tenant provides its proposed fit out to the landlord as most of the items it will install will be specified in the supporting fit out documents.  This approach also assists parties to determine ownership of items where, for example, the landlord has made a contribution to the tenant’s fit out, or the tenant’s fit out combines either with something existing on the premises or with any landlord’s works.

Make good side deed

If the parties have insufficient time during the lease negotiation to properly consider make good or if a very significant make good will be required, make good can be dealt with outside the lease arrangement in a separate deed.

This approach may have more risks associated with it and certainly more cost implications and is therefore unlikely to be a practical approach for most leases.  However, it is an option which parties may consider.  The side deed should include extensive details regarding the make good by including condition reports, consultants’ reports and a dispute resolution provision.

Cash settlements in lieu of make good

One final solution to deficient make good clauses is to get rid of them altogether.

It seems that cash settlements are being used increasingly instead of requiring tenants to undertake their contractual make good works.  There are a number of reasons for this.

The most common reason for a cash settlement is likely to be because the tenant has failed to consider or commence its make good in time and therefore a cash settlement allows the tenant to ‘comply’ with its make good obligations before the lease ends.

Further, a tenant may not be able to accurately forecast its business requirements early in the lease and by the end of the lease, the make good provision may no longer be relevant.  Perhaps the cost of the make good in the lease is more than the tenant had anticipated or maybe now tenant may not want to remove its fit out as it no longer has any use for it, but the tenant’s fit out can be used again by a landlord to entice a new tenant to lease the premises.

The benefit of a cash settlement to the tenant is that it is only required to vacate the premises and leave them in a clean and tidy condition (generally speaking).  Consequently, the tenant can simply walk out of the building (providing it has been left clean and tidy) at the end of the lease and is not required to spend any money removing its fit out and repairing any consequential damage.  Also, being able to leave its fit out may be more cost efficient for a tenant who has depreciated the value of its fit out over time.

For a landlord, this may mean that they can access or relet the premises sooner than they may otherwise have been able to and they or an incoming tenant can enjoy cost benefit of using the outgoing tenant’s fit out.

While not strictly necessary, a clause in the lease which expressly allows the parties to make a cash settlement in lieu of make good obligations should be inserted into the lease in addition to the usual make good provision.  This means that, if the parties do not agree a cash settlement, the tenant will still be required to undertake some specified make good works, rather than the reasonably low level make good works the tenant would be required to do at common law.

In addition, if a cash settlement clause is included in the lease and a dispute arises between the parties regarding the cash settlement, the parties can access any dispute resolution clauses in the lease to assist to provide the parties with an outcome.

However, even with a cash settlement provision in the lease, the parties need to consider carefully what obligations of the tenant are satisfied by the cash settlement – is it a full release from all make good obligations or is the tenant still required to remove its property and leave the premises clean and tidy?  As with any of these options, the parties must consider what property can be left and what must be taken, and what the tenant is required to do and will be released from doing and of course, what the parties have agreed should be clearly and accurately stated in writing.

Summary

The main reason that make good clauses are deficient is because not enough thought has gone into drafting them in the first place.  The solutions are simple: draft make good clauses better, or allow the parties to agree a cash settlement in lieu of make good obligations.  However, even when agreeing to a cash settlement, it is essential that the parties are clear as to exactly what obligations are being satisfied by the cash payment.

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