Make good issues

Disputes over make good on the termination or expiration of a lease can be costly and time consuming and can result in unnecessary tension between the parties.

Make good is often an issue which is overlooked by parties at the commencement of a lease.  At the start of a lease the parties often focus on resolving the more contentious issues which arise during lease negotiations, such as agreeing the commercial terms, indemnities and the execution of the documents.  The make good clauses, which are generally accepted as “standard” clauses in a lease, are usually not given due consideration until the lease nears expiry or has already ended.

The parties to a lease usually accept that the tenant is obliged to return the leased premises to the condition they were in at the commencement of the tenant’s occupation.  However, often the parties do not keep a record of the condition of the premises as at that date.  Consequently, when the lease nears expiry or had expired and the landlord is seeking to enforce the tenant’s make good obligations under the lease, the landlord has no point of reference against which it can enforce those obligations.

It is prudent for the parties to keep a record of the state of the premises as at the commencement of the lease.  This is most effectively done by obtaining a property inspection report, to be prepared by an independent third party, or at least by taking photographs of the condition of the premises for future reference.  The photographs, or the report which is prepared, should detail any defects in the premises and should be signed by both parties to the lease by way of acknowledgement.

When the lease is terminated or expires, a final property condition report should be prepared.  This final report can then be used in conjunction with the property condition report prepared on commencement of the lease to determine and quantify the extent of the tenant’s make good liability during the term of the lease.

Make good and assignment of leases

In an assignment situation, it is not practical for the Landlord to require the outgoing tenant (Assignor) to make good the premises.  The incoming tenant (Assignee) usually wants to move in immediately and take the premises as they are.  In circumstances where the Assignee wants to redo the fitout, the Landlord can follow the procedure recommended above by obtaining a property condition report.  However, these circumstances are not common.

Often an assignment will proceed and will be free of problems until the end of the term approaches and the landlord requests the Assignee to make good the premises.  As make good issues are not usually considered by the parties when assigning a lease, the Assignee will generally find (to its dismay) that it has agreed to make good the premises to the state and condition they were in at the start of the lease, and not from the assignment date.  

It is in the interests of the Assignee to protect itself from considerable financial outlay arising from the acceptance of the original make good provisions in the assigned lease.  This is particularly so if the Assignor is being released on the assignment or if the Assignee suspects that the Assignor may not have the financial resources at a later date to meet any claim by the Assignee for compensation.

It is also in the landlord’s interest to avoid being drawn into the inevitable dispute between the Assignor and Assignee as to the extent of each party’s liability for make good.  The landlord can theoretically enforce the make good obligations against either the Assignor or the Assignee (depending on the wording of the lease and whether or not the Assignor is released on assignment).  However, the Landlord may not succeed, particularly if the Assignor has limited resources or has become insolvent following the assignment.

The best way to address this issue is at the time of the assignment of the lease.  The parties should determine the extent of their respective liabilities for the make good.  For example, should the Assignor be responsible for the cost of the make good if it had to be effected at the date of assignment.  If so, the Assignor could pay that estimated cost to the landlord.  The landlord would then offset that money against the Assignee’s cost of effecting the make good at the end of the lease.

In these circumstances, a record of the condition of the premises should be taken as at the assignment date, either by taking photographs or commissioning an independent report. 

Make good and extensions of lease

An extension of lease is actually a new lease.  This is a very important point in the context of make good.

Usually, the make good clause requires the tenant to return the premises to their condition as at the commencement date of the lease.  Unless very clearly drafted, this can mean that the tenant is required to return the premises to their condition as at the commencement of the extended terms under the extension of the lease.  This would be an obvious concern to the Landlord.

Therefore:

  • the terms of the lease granting the extension of the term must carefully address the make good issue; and

  • the extension of lease document must also carefully document the make good obligations.

Lavan Legal comment

As this update indicates, make good can be expensive.  However, the position is made more difficult if the parties do not clearly know what their respective responsibilities are.  A little careful thought and planning at the right time can save pain, anguish and money later.