Tenants beware of make good obligations
By MST Lawyers
When acting for a tenant, it is important to ensure the tenant understands its obligations as to how the premises are to be delivered to the landlord at the end of the lease term. This is known as the “make good” obligations of the tenant and will be governed by the provisions in the lease. The make good obligations can be particularly onerous in Victoria because of cases such as Joyner v Weeks  2 QB 31 (“Joyner”). The rule in Joyner has been applied as a prima facie rule in Victoria.
In Joyner the landlord sued the tenant pursuant to a covenant in the lease which required the tenant to leave the leased premises in repair at the end of the lease. At the end of the lease term, the premises were out of repair. The landlord proved that the cost of putting the premises into repair was £70. The tenant claimed that the landlord was entitled only to nominal damages because the landlord had re-leased the premises to a third party who had covenanted to pull down and rebuild the premises and also to pay a higher rent than the tenant had paid. The tenant argued that there was no loss to the landlord as a result of the tenant failing to comply with its make good obligations. The official referee awarded the tenant all the costs of the action. The matter was appealed and the Court of Appeal held that the measure of damages was the amount which the landlord proved to be the fair and reasonable sum necessary to put the premises into the state of repair in which he was entitled to have them left, being £70. The fact that the premises were going to be pulled down and rebuilt did not relieve the tenant of its make good obligations.
The recent case of Fenridge Pty Ltd v Retirement Care Australia (Preston) Pty Ltd  VSC 464, dealt with a tenant who failed to comply with the make good obligations which required it to maintain the premises in good repair during the term of the lease and to deliver the premises to the landlord at the end of the lease in as good condition as at the commencement of the lease, fair wear and tear excepted. The tenant breached its make good obligations. The landlord conducted a complete refurbishment of the premises, including both internal and external reconfiguration and extensions. The tenant argued that the landlord’s refurbishment rendered its make good obligations theoretical or irrelevant and that the landlord had suffered no loss as a result of the tenant’s failure to comply with its make good obligations. The Court held that the landlord was entitled to recover the cost of performing the specific works which were reasonably necessary to bring the premises up to the state they would have been in had the tenant complied with its make good obligations. As with the Joyner case, the fact that the premises were refurbished at the end of the lease did not relieve the tenant of its make good obligations.
It is advisable for the parties to obtain a condition report at the commencement of the lease which records the exact condition of the premises as at the commencement date. This way, there is no confusion as to what works will be required for the tenant to return the premises to the condition they were in as at the commencement date (fair, wear and tear excepted).
Where a lease provides for a tenant to fit out the premises prior to the commencement of the lease, it is important to ensure that the tenant understands how the landlord expects the premises to be returned to the landlord at the end of the lease. That is, the lease should clearly state whether the tenant is required to remove its fit out at the end of the lease, or alternatively whether the fit out will become the property of the landlord at the end of the lease.
For further information, contact our Property and Leasing team on +61 3 8540 0200.