Make Good Clauses in Commercial Leases Explained

Commercial leases often require tenants to alter or fit out premises to suit their business operations. Retail shops, restaurants, offices and warehouses frequently involve significant installations such as partitioning, signage, equipment or specialised fittings.

When the lease ends, however, the landlord will usually require the tenant to return the premises to a particular condition. This obligation is typically governed by what is known as a make good clause.

Make good clauses can have substantial financial implications for tenants and are often a source of disputes when a lease terminates.

What Is a Make Good Clause?

A make good clause is a provision in a commercial lease that requires the tenant to restore the premises to a specified condition when the lease ends.

This usually means the tenant must remove any installations or alterations made during the lease and repair any damage caused by their occupation. In many leases the tenant must return the premises to the same condition as when the lease commenced, subject to reasonable wear and tear.

The purpose of the clause is to ensure that the landlord can re-let the premises without incurring restoration costs.

Typical Make Good Obligations

The exact obligations depend on the wording of the lease, but common requirements include:

• removing shop fittings, partitions and fixtures installed by the tenant

• repairing damage to walls, floors or ceilings

• removing signage and branding

• reinstating electrical or plumbing changes

• repainting the premises

• restoring the premises to their original layout

In some cases the tenant may also be required to remove specialised equipment or structural modifications.

Why Make Good Clauses Are Important

Make good obligations can become significant at the end of a lease, particularly where extensive alterations have been made to the premises.

For example, retail tenants may spend considerable amounts on shop fit-outs. When the lease expires they may be required to dismantle these installations and restore the premises to their original state.

This process can be costly and time consuming. Because of this, tenants should consider the potential make good costs when entering into a long term lease.

How Make Good Clauses Are Drafted

Make good clauses vary widely depending on the type of property and the landlord’s requirements.

Some leases simply require the tenant to return the premises in good and tenantable condition. Others contain detailed provisions describing exactly what must be removed or restored.

Certain leases require the tenant to comply with the landlord’s written instructions regarding reinstatement before the lease expires.

In other cases the landlord may elect to carry out the restoration work and recover the costs from the tenant.

Common Disputes Around Make Good Obligations

Make good clauses are one of the most common sources of disagreement between landlords and tenants at the end of a lease.

Typical disputes include:

• The Condition of the Premises at the Start of the Lease

If the original condition of the premises was not properly recorded, disagreements may arise about what the tenant must restore.

• Scope of Alterations

The parties may dispute whether certain installations or improvements must be removed.

• Reasonable Wear and Tear

Tenants are usually not responsible for ordinary wear and tear, but the parties may disagree about what constitutes normal deterioration.

• Timing of Restoration

Some leases require restoration work to be completed before the lease expires, which can create logistical challenges.

These issues often arise where the lease terms are unclear or where no proper condition report exists.

Reducing Make Good Risks

Both landlords and tenants can reduce the risk of disputes by addressing make good obligations carefully at the beginning of the lease.

Key steps include:

• preparing a detailed condition report when the tenant takes occupation

• clearly recording which alterations the landlord approves

• specifying what must be removed or retained at the end of the lease

• documenting the landlord’s requirements regarding reinstatement

Clear documentation can significantly reduce uncertainty when the lease ends.

Negotiating Make Good Provisions

Make good obligations are often negotiable, particularly where the tenant is investing significantly in the premises.

Tenants may seek to negotiate provisions that:

• limit restoration obligations

• allow certain improvements to remain in place

• provide clarity on the condition required at the end of the lease

• permit the landlord to retain useful installations

Landlords on the other hand will generally seek to ensure the premises can be re-let without additional expense.

The Importance of Legal Review

Make good clauses may appear to be routine provisions in commercial leases, but they can create substantial obligations for tenants when the lease ends.

A legal review of the lease can help ensure that:

• the restoration obligations are clearly defined

• the tenant understands the potential costs involved

• the clause fairly reflects the parties’ commercial intentions

Addressing these issues at the outset can prevent costly disputes later.

Need Assistance With Commercial Lease Agreements?

Make good clauses can have significant financial implications for tenants and landlords when a commercial lease comes to an end.

The attorneys at Barter McKellar can assist with reviewing, negotiating and drafting commercial lease agreements to ensure that your interests are properly protected. If you require advice on a lease agreement or make good obligations, our team can provide practical legal guidance tailored to your business.