Make Good Disputes in Commercial Leasing

Commercial and retail leases often contain make good clauses which require the tenant to return the premises to their previous condition at the end of the lease.  Make good clauses can often be a cause of disputes when parties have different understandings of what the obligations are.  This can be a serious issue, as fitouts can be very expensive to install and remove.

Parties may be so eager for a lease to commence that they forget to give proper consideration to what will happen when the lease ends.  However, it is important that make good obligations are carefully considered before a lease commences.

Avoiding make good disputes

The key to avoiding make good disputes is to clarify what the make good obligations are, so that each party understands what is required at the end of the lease.  Issues that should be considered include:

  1. What state should the premises be returned to? Depending on the situation, this might be bare shell, the condition of the premises when the tenant took occupation or simply a clean and tidy state.
  2. What was the state of the premises when taken over? This will be especially relevant  where a lease has been assigned.
  3. What fixtures and fittings does the landlord want removed, and which do they want to keep? Factors to consider include who owns the fitout and whether the tenant took over the lease with an existing fit out.

Remedies for a failure to make good

If a tenant fails to make good and leaves the landlord with a costly clean-up bill, the landlord’s only resort may to be take legal action. Courts will rarely make an order for specific performance of a tenant’s make good obligations.  More usually courts will award damages to the landlord, which may not cover the costs of making good the premises.

To simplify the process of litigation, landlords should ensure that the lease clearly sets out a right to recover costs of the landlord undertaking the make good works so those costs can be recovered as a contractual debt, rather than as damages.

In addition, landlords should ensure that the tenant’s bond or bank guarantee covers any breach of make good obligations under the lease.  Even if this does not cover the full cost of the landlord undertaking the make good works, it will ensure that at least some of the costs can be recovered immediately.

An alternative to make good obligations

As an alternative to the potential uncertainties around make good, a lease can provide for a cash payment by the tenant in return for a partial or complete release from their make good obligations.  However, this requires more effort on the part of the landlord and raises its own issues:

  1. What is a fair amount for any cash payment for release from make good obligations? The amount might be fixed in advance, a reimbursement of the landlord’s costs or an amount to be determined by valuation.
  2. At whose election should the option to use a cash payment be available? This will be particularly relevant if any agreed amount differs from the actual costs of making good the premises.
  3. To what extent is the tenant released from their obligations? The tenant might be completely, or only partially, released from their make good obligations.

Conclusion

Make good clauses are a potential minefield for disputes, but most of these problems can be avoided if parties understand the position before entering into a lease, and the lease reflects that understanding.

If you require expert assistance with your commercial leasing, contact us.