Avoiding Disputes Over ‘Make Good’ In Commercial Leases

By Nasiya Goldberg, Lawyer, MST Lawyers

Commercial leases generally contain ‘make good’ provisions requiring tenants to ensure that the premises are left in a certain condition at the end of the lease.  Problems can arise when these provisions lack clarity as to the scope of the make good obligations.  Make good disputes can be prolonged, costly and cause irreparable damage to relationships between landlords and tenants.  This article provides landlords and tenants with tools to navigate this contentious issue.

Tip 1: Benchmark the condition of the premises before the tenant takes possession

Although there are no statutory obligations in Victoria requiring landlords to undertake a condition/inspection report of commercial premises, it is highly recommended that landlords and tenants protect themselves against unnecessary future disputes by doing so before the execution of a new lease.  A condition report including photographic evidence of the premises will provide a point of comparison when tenants remove their fit-out.  This could circumvent disputes regarding any alleged verbal representations regarding the premises’ condition.  While undertaking a full report can seem costly at the outset, it will be well worth the expense if a prolonged make good dispute, which can hinder a landlord’s ability to re-let the premises to a future incoming tenant, is avoided.

Tip 2: Tailor the make good provisions to the specific circumstances

Problems can arise when leases adopt boilerplate make good provisions, requiring the tenant to reinstate the premises to its original condition, regardless of any subsequent improvements to the premises.  The make good provisions in each lease should be carefully negotiated and drafted to take into consideration the parties’ individual needs and commercial objectives.  Consider the following case studies:

• A landlord of a suburban retail shopping strip enters a short-term retail lease with a tenant operating a fish and chip shop. The parties agree that the tenant will alter the premises by installing professional cooking equipment.  The landlord’s intentions at the lease expiry are to secure a long-term lease with an anchor tenant, perhaps a major pharmacy or post office to increase foot traffic to the shopping strip.  In this instance, the make good provisions should be drafted to require the fish and chip shop tenant to return the premises to a bare shell – it is unlikely that a pharmacy will benefit from professional cooking equipment. 
• A tenant operating a shoe shop enters a long-term retail lease in a shopping centre for premises containing an existing fit-out including countertops and display shelving, which would be attractive to a wide range of potential retail tenants. Over the term of the lease, the existing fit-out sustains damage over and above wear-and-tear: the countertops are damaged beyond repair, and the display shelving has become detached from the wall.  In this instance, the landlord would benefit from make good provisions requiring the tenant to return the premises to its original condition, by replacing the countertops and display shelving.
• A landlord of a small office building has entered a commercial lease with a corporate tenant who operates a prestigious accounting firm from the premises. With the landlord’s approval, this tenant has added significant value to the premises by removing old inter-tenancy walls and installing a generic open-plan fit-out with improvements such as the installation of toilets and a secure data room.  This fit-out may be attractive to a broad range of future tenants, especially with the rise of tenants operating shared workspaces.  The commercial reality for the landlord is that it may be preferable for the tenant’s make good obligations to be limited to simply returning the premises in a safe and tidy condition.

Tip 3: Discuss the specific make good requirements well before the lease expiry

It is highly recommended that landlords and tenants engage in collaborative discussions regarding the timing and execution of the make good works well before the lease expiry.  Tenants would be wise to discuss any minor scratches on walls or lightly scuffed carpeting, as these may well be considered fair wear and tear, and therefore excused from make good works.  Open discussions can identify any areas of concern and facilitate the speedy resolution of any disagreements. The aim here is to avoid unnaturally extending the lease term which may hinder a landlord’s ability to provide a new tenant with vacant possession and the tenant’s entitlement to the return of the security deposit.

In summary, landlords and tenants can reduce the likelihood of a future make good dispute by ensuring that their lease documentation unambiguously defines the tenant’s obligations, using tailored drafting and supporting evidence of the premises’ condition at the commencement of a lease.  These sound foundations can be further supported by collaborative discussions during the term of the lease to iron out any specific issues well before the parties incur any unnecessary costs. 

Landlords and tenants are encouraged to seek advice from the expert team of leasing lawyers at MST Lawyers in the drafting and review of all commercial leases. For more information please contact our Property & Leasing team by email or by telephone +61 3 8540 0200.