Clients are always asking us “What is a make good obligation?” Below we will explain it in as much detail as we can, in this climate if you are thinking about ending your lease or possibly downsizing your office then you really need to be aware of your obligations as a tenant likewise if you are thinking about signing a lease you need to be aware of this lease feature.
If you need further clarification then please don’t hesitate to get in contact with us.
If you are a retail tenant, you may have come across the term make good. A make good obligation requires you, the tenant, to leave your business premises in a certain condition at the end of the lease. Most commercial leases contain this obligation. Typically, make good will require you to remove your shop fit out when the lease is over, but it can reach much further than that. It can also become much more expensive than tenants expect. This article will outline the different types of make good obligations and how you can negotiate a make good obligation.
Where Can I Find My Make Good Obligations?
Your make good obligations will be detailed in your retail lease. Make good will either be included in:
- a standalone section of the lease, known as a clause; or
- a clause containing other repair and maintenance obligations.
It is important to note that make good only relates to your obligations at the end of the lease. Your lease may include other obligations to redecorate the premises at certain points during the term of the lease. This is often the case for leases with a long term. Make good obligations must be completed once the lease ends through either:
- surrender; or
Even though make good relates to the end of your lease, you should think about it at the start. You may have the option to negotiate your make good obligations in the lease offer stage. A well-negotiated make good obligation can prevent unnecessary disputes, expense and stress when your lease comes to an end. All future expenses are important to think about and negotiate early.
What Types of Make Good Obligations Exist?
The amount of time and money you spend meeting your make good obligation at the end of your lease will depend on the type of obligation in your lease. There are four types of make good obligations:
1. Removal of Detachable Property Only
This is an unusually lenient make good obligation. If your lease specifies this obligation, you will only be required to remove the property in your premises that is detached (i.e. not attached to the floor or walls). This might include removing:
- computers; or
- storage units.
You may not need to remove fixed property or complete repairs to the premises other than cleaning. However, the lease may have separate obligations for repainting and resurfacing. As the tenant, this may sound like an excellent option for you, but these clauses are rare. They typically apply to premises that are leased as offices.
2. Removal of All Property and Basic Repairs
This make good obligation requires slightly more work. Typically, you will need to remove all property, including:
- detachable property; and
- property that you have attached to the premises (i.e. shelving or decor).
You will need to repair any damage that removing this property causes. You may also be obligated to repaint or resurface the premises.
3. Return the Premises to the Standard Shown in a Condition Report
Many make good obligations will refer to:
- a specific condition report; or
- the condition of the premises at the start of the lease more generally.
This obligation requires you to return the premises to whatever condition is set out in the report or what the premises looked like at the start of the lease. A condition report is a simple document containing photos of the premises and notes made at the start of the lease. It is a good idea to have a condition report that shows exactly what condition the premises were in at the start of the lease. This can avoid extra costs or disputes if you disagree with the landlord about the state of the premises at the start of your lease.
4. Base Building Standard
A base building standard means that you must leave the premises in the state that it was in when they were first constructed. This make good obligation is common in retail shopping centre leases, because the landlord does not know what type of business the next tenant will be. You may need to remove all of the:
- installations; and
- fit out.
This can be an expensive obligation. It may be difficult to negotiate a lease in a shopping centre, but you should still look out for this obligation and budget accordingly.
Negotiating a Make Good Obligation
You may be able to negotiate a more favourable make good obligation at the start of your lease. How, and to what extent, you are able to do this depends on:
- the type of business;
- the location and length of the lease; and
- the extent of the fit out you plan to install at the premises.
During negotiations, you may wish to consider the following questions.
How Complicated is My Fit Out?
The type of fit out you plan to install will affect how much work you need to do to make good at the end of the lease. If your fit out is minor, you could agree to a stricter make good clause in exchange for more favourable terms elsewhere in the lease. However, if your business requires a complicated fit out, you may wish to negotiate a more lenient make good clause.
For example, if you plan to use the premises as an office,returning the premises to an earlier condition may not be expensive and you may choose to focus your negotiations elsewhere. However, if you plan to open a children’s play centre, you may wish to carefully negotiate your make good obligation.
Do I Know What My Obligations Are?
You should avoid a make good clause that is confusing or unclear about what you must do at the end of the lease.
For example, the words ‘at the start of the lease’ appear to be clear, but in practicality they may not provide enough guidance.‘The start of the lease’ could be taken to mean:
- when you begin paying rent; or
- when you first occupy the premises for fit out.
The two meanings would result in very different make good obligations.
Another way to add clarity to make good is to agree on a scope of works with the landlord. A scope of works outlines exactly what must be done at the end of the lease. You may be able to rely on this document if a make good clause does not clearly explain the extent of the works you must complete at the end of your lease.
The make good clause is an important part of your retail lease. You should think about it at the start of the lease and try to negotiate a favourable clause. Your make good obligations will typically be one of four types. You should consider which type is best suited to your situation during negotiations. A rushed make good negotiation can mean significant expenses down the track.
If you already have a lease in place, make sure you understand your obligations and budget accordingly for the end of the lease.Try to agree on a scope of works so that both you and the landlord know what to expect.