If you lease commercial premises for your business, your lease may require you to repair, remove or restore certain parts of the property when you move out. These requirements are commonly referred to as your “make good” obligations.
The financial burden of “make good” obligations is often not fully understood or considered until a commercial lease is close to expiry.
In our experience, disputes commonly arise when commercial tenants have not considered the cost of complying with the make good clause before signing the lease, or where the lease does not clearly state what must happen at the end of the tenancy.
A well-drafted “make good” clause in your commercial lease document should clearly state whether you are required to:
- remove your fit-out, fixtures, signage, cabling or equipment;
- repair damage;
- repaint or replace flooring;
- clean the premises;
- reinstate the premises to an agreed condition; and/or
- pay the landlord an agreed cash amount instead of completing the work.
Unclear or financially onerous “make good” clauses may lead to a costly dispute with your landlord, negatively affect your cash flow, and even delay your exit from the premises.
Understanding these obligations before signing your lease gives you an opportunity to negotiate the terms, document the original condition of the premises and better understand the potential cost of eventually leaving the property.
If you are unsure about your “make good” obligations, speak with one of our experienced commercial leasing lawyers before signing so you can understand what you are agreeing to and the potential costs involved.
Is Your Commercial Lease Retail or Non-Retail?
Before considering your “make good” obligations, you need to identify whether your lease is a retail lease or a non-retail commercial lease.
The distinction matters because eligible retail tenants may have statutory rights and protections in addition to the terms contained in their lease.
Whether a particular lease is covered by retail leasing legislation depends on factors including the location of the premises, how the premises are used and the applicable legislation in that state or territory.
“Make Good” Obligations in a Retail Lease
If premises are used, or will be used, for an eligible retail business, the relevant retail leasing legislation in that state or territory may apply.
Retail leasing laws may give tenants’ rights beyond the wording of the lease itself, including disclosure rights relating to matters such as costs, fit-out and other obligations associated with the premises.
Before signing a retail lease, you should review the:
- permitted use clause;
- description of the premises;
- landlord’s disclosure statement;
- fit-out requirements;
- repair and maintenance provisions;
- “make good” clause; and
- applicable retail leasing legislation in your state or territory.
These documents should be considered together. For example, a “make good” clause should not be reviewed in isolation if the disclosure statement or fit-out documentation contains further information about what you have agreed to install, remove, repair or reinstate.
Why the Disclosure Statement Matters
Depending on the applicable legislation, a landlord may be required to provide a prospective retail tenant with a disclosure statement before the lease is entered into.
The disclosure statement can contain important information about the proposed tenancy and should be reviewed alongside the lease before you commit to the premises.
The timing and requirements vary between jurisdictions. For example, New South Wales and Queensland generally require disclosure at least 7 days before entry into the lease, while Victoria and the ACT generally require disclosure at least 14 days before entry into the lease.
Relevant retail leasing legislation includes:
- New South Wales: Retail Leases Act 1994 (NSW) – see generally disclosure obligations under sections 11 and 11A.
- Victoria: Retail Leases Act 2003 (Vic) – see generally disclosure obligations under section 17.
- Queensland: Retail Shop Leases Act 1994 (Qld) – see generally disclosure obligations under s 21B, s 22 and s 22A.
- Western Australia: Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) – see generally disclosure rights under s 6.
- South Australia: Retail and Commercial Leases Act 1995 (SA) – see generally disclosure obligations under s 12.
- Australian Capital Territory: Leases (Commercial and Retail) Act 2001 (ACT) – see generally disclosure obligations under s 30.
- Tasmania: Retail Leases Act 2022 (Tas) – see generally disclosure obligations under s 23–s 26.
- Northern Territory: Business Tenancies (Fair Dealings) Act 2003 (NT) – see generally disclosure obligations under s 19 and s 21.
Case Study: Conflicting Outgoings in the Heads of Agreement
In one matter, a prospective commercial tenant was preparing to execute a heads of agreement for new premises. There was a significant problem within the document: two provisions directly contradicted each other about outgoings.
One provision indicated that no additional outgoings were payable, suggesting the agreed rent was effectively a gross or flat rent. Another provision stated that the tenant was required to pay outgoings in addition to the base rent.
This was not a minor drafting issue. Whether a lease is negotiated on a gross or net basis can materially affect the true occupancy cost of the premises and the tenant’s cash-flow forecasts.
A pre-signing legal review identified the inconsistency before the formal lease and disclosure documentation were finalised, allowing the issue to be addressed before the tenant became bound to unclear financial obligations.
The practical lesson: heads of agreement and preliminary leasing documents should not be treated as mere administrative paperwork. Depending on their terms and the circumstances, they may create legal obligations or establish commercial positions that are then carried into the formal lease.
Contradictions concerning rent, outgoings, fit-out responsibilities and make good obligations should therefore be identified before documents are signed.
This type of issue is one reason we recommend reviewing the disclosure documentation and lease together rather than waiting until the end of the tenancy to determine what needs to be removed or reinstated.
“Make Good” Obligations in a Non-Retail Commercial Lease
Where retail lease protections do not apply, the “make good” clause becomes even more important because any dispute will usually depend on the lease terms, general contract law and the evidence showing the condition of the premises when you first moved in.
Depending on the premises, use and relevant legislation, non-retail commercial leases may include premises such as warehouses, factories, industrial premises, storage facilities, distribution centres, and certain office or other commercial premises.
Under those circumstances, tenants should not assume that general retail leasing protections will limit what the landlord can claim at the end of the lease. The wording of the make good clause will usually be the starting point for determining what must be repaired, removed, reinstated or paid for.
Your “make good” obligations will generally depend heavily on the lease terms, general contract law and the available evidence showing the condition of the premises when you took possession.
This means you should pay particular attention to whether your lease establishes:
- the benchmark condition in which the premises must be returned;
- what constitutes fair wear and tear;
- what must be removed;
- what may remain;
- what damage must be repaired;
- whether improvements must be removed;
- whether particular capital or structural works are excluded; and
- whether a cash settlement can be required instead of you undertaking the work.
A broad “make good” clause can potentially expose a tenant to significant costs at the end of a lease.
For example, there can be a considerable financial difference between agreeing to leave the premises clean and in good repair and agreeing to reinstate the premises to their original condition, particularly where substantial fit-out works have been completed during the tenancy.
Case Study: The $500,000 Make Good Cash Payment
One office tenancy we encountered illustrates how significant this distinction can become.
The non-retail office lease contained a make good provision under which the cost of returning the premises to base-building condition was approximately $500,000.
The tenant had installed a high-quality fit-out during the lease. Far from reducing the value of the premises, the fit-out had substantially improved their presentation and potential lettable value.
However, the make good clause gave the landlord a contractual choice. The landlord could either:
- require the tenant to physically undertake the make good works; or
- obtain valuation or quotation evidence under the mechanism in the lease and require the tenant to pay the calculated cash equivalent of the make good works.
The landlord elected to take the cash payment. That meant the landlord could retain both the approximately $500,000 settlement and the tenant-funded fit-out, rather than requiring the fit-out to be demolished. The improved premises could then be offered to another tenant without the landlord first removing the valuable improvements.
The case demonstrates why tenants should pay close attention to cash-settlement and betterment risks in make good clauses.
A tenant may assume that the worst-case scenario is paying contractors to strip out its fit-out. Depending on the drafting, however, the lease may permit a landlord to demand the monetary equivalent while retaining improvements that remain commercially valuable.
Before signing, tenants should consider negotiating matters such as:
- a cap on make good liability;
- an agreed method for calculating any cash settlement;
- a requirement for genuinely independent quotations or valuations;
- a right for the tenant to undertake the works itself;
- a mechanism for disputing the landlord’s proposed scope or costing;
- exclusions for improvements the landlord requests or elects to retain; and
- an agreed treatment of valuable fit-out that provides a benefit to the landlord.
For a non-retail commercial lease, obtaining advice from a commercial leasing lawyer before signing helps you understand exactly what you are agreeing to and identify “make good” provisions that may expose your business to substantial costs later.
What Should You Check in a Commercial Lease “Make Good” Clause?
Whether you are entering into a retail or non-retail commercial lease, the “make good” clause should make it clear what you will be expected to do when the lease ends.
- The condition the premises must be returned in: Avoid uncertainty about terms such as “original condition”, “good condition”, “tenantable repair” or “base-building condition”.
- Fair wear and tear: Check whether normal deterioration arising from reasonable use is excluded from your repair obligations and whether there are specific exceptions.
- Fit-out and alterations: Determine whether you must remove partitions, signage, cabling, plant, equipment or other alterations installed during the tenancy.
- Fixtures and improvements that can remain: Establish whether any fixtures, improvements or equipment may remain when you leave and who owns them.
- Improvements made during the lease: Check whether the landlord can require you to remove improvements even where those improvements add value to the premises.
- Structural and capital works: Determine whether structural works, base-building upgrades, major plant replacements or other capital works are expressly excluded from your obligations.
- Cash settlements: If the landlord can request money instead of requiring you to complete the work, examine how that amount is calculated and whether quotations, invoices or an independent assessment are required.
- Security for make good liabilities: Consider whether the landlord can use a cash bond, bank guarantee or other security to meet claimed make good costs.
Clarifying these matters before signing can significantly reduce uncertainty when the lease eventually ends.
If you are considering taking over an existing business together with its premises, you may also find our guide on 10 things to consider before buying a business helpful.
Fair Wear and Tear Does Not Mean Every Type of Deterioration
Many commercial leases distinguish between repair obligations and deterioration caused by “fair wear and tear”. However, the existence of a fair-wear-and-tear exception does not necessarily mean that every deterioration arising during normal business operations will fall within it.
The nature of the premises, the tenant’s permitted use, the wording of the lease and the cause and extent of the damage all matter.
Case Study: The Commercial Car Yard Abandonment
In one substantial commercial leasing dispute, a tenant operating a large vehicle dealership and sales yard exercised an option to renew its lease for a further term. Approximately 11 months into that renewed period, during the COVID-19 period, the tenant abruptly vacated.
The tenant raised complaints about repair and plumbing matters, although the reported defects had been addressed by the landlord. The tenant then left without completing its make good obligations.
A significant issue concerned deterioration to the yard’s bitumen surfaces. The condition went beyond what the landlord considered ordinary fair wear and tear and required substantial remediation.
With a multi-year lease term remaining, the landlord’s claim was approximately $1.5 million, comprising alleged lost rent, make good losses and interest.
Independent expert evidence was required to assess the effect of the failure to make good, including valuation evidence concerning the diminution in the property’s value.
The matter was further complicated by formal communications concerning termination and the tenancy, which raised issues about whether and how the lease may have been surrendered or brought to an end.
The dispute ultimately settled for $725,000.
Several practical points arise from this matter, including:
- exercising an option can have binding consequences even where the parties have not yet signed a fresh formal renewal deed, depending on the option clause and whether the option was validly exercised;
- tenants should not assume that “fair wear and tear” automatically protects them from liability for substantial deterioration associated with a specialised commercial use; and
- an abandoned commercial lease can create significant exposure on both sides. The dispute may extend beyond make good costs to questions involving rent for the remaining term, mitigation of loss, surrender, repair obligations, security and valuation evidence.
A poorly managed exit can therefore become considerably more expensive than the physical cost of repairing the premises.
Maintenance Versus Capital Repairs
Make good disputes are often connected with another important leasing question: where does routine tenant maintenance end and landlord capital responsibility begin?
A lease might require a tenant to service, clean and maintain equipment throughout the tenancy. That does not necessarily answer whether the tenant must fund major replacement works or rectify a defect that existed before the tenant moved in.
Case Study: The Cafe Grease Trap Dispute
In a commercial leasing matter involving a cafe tenancy, the lease required the tenant to periodically clean and maintain an on-site grease trap.
At the end of the lease, the landlord issued an invoice of approximately $20,000 for substantial repairs and remediation relating to the grease trap. The tenant disputed the charge because the grease trap had already been blocked and in poor condition when the tenancy commenced.
The dispute illustrates an important distinction between:
- ongoing maintenance and make good obligations, such as servicing, cleaning and maintaining equipment during the tenancy or yielding up the premises in the contractually required condition; and
- capital repairs or pre-existing defects, such as major replacement, structural work or rectification of an underlying problem that was already present when the tenant took possession.
The precise allocation of responsibility always depends on the lease, the applicable law and the evidence. However, without careful drafting and evidence of the property’s starting condition, a tenant may find itself facing a demand to return an item in substantially better condition than it was in when the tenancy began.
Similar issues can arise with:
- commercial air-conditioning systems;
- exhaust and ventilation equipment;
- plumbing infrastructure;
- electrical systems;
- cool rooms and refrigeration equipment;
- lifts;
- roofs and waterproofing; and
- other building services.
This is one reason a detailed entry condition report can be so important.
Document the Condition of the Premises Before You Move In
One of the most important pieces of evidence in a “make good” dispute can be the condition of the premises when you first took possession.
If your lease requires you to return the property to a particular condition, you need reliable evidence of what that starting condition was.
Before occupying the premises, consider creating and retaining:
- a detailed condition report;
- dated photographs and video;
- records of existing damage;
- photographs of existing flooring, walls, ceilings and services;
- records showing the working condition of existing plant and equipment;
- details of existing fixtures and fit-out;
- plans and specifications; and
- written correspondence recording any defects, works or agreed exclusions.
These records should be retained for the duration of the lease.
Without clear evidence of the starting condition, disagreements can arise years later about whether damage occurred during your tenancy or was already present when you moved in.
The practical lesson is simple: do not wait until you are leaving the premises to establish what they looked like when you moved in.
Make Good Is About More Than the End of the Lease
A common mistake is to treat make good as an issue that only needs to be considered when the lease is about to expire.
In practice, a commercial lease can create property-related expenditure throughout its lifecycle.
A tenant’s potential costs may include:
- initial fit-out costs;
- maintenance throughout the tenancy;
- repair obligations;
- mandatory refurbishment or franchise upgrades;
- compliance works;
- removal of alterations;
- make good works at expiry;
- cash payments instead of physical reinstatement; and
- loss of a bond or exposure under a bank guarantee.
These liabilities should form part of the commercial assessment of a lease before it is signed.
Case Study: The Five-Year Franchise Refit That Was Not Budgeted For
Make good obligations are not the only fit-out costs tenants need to consider. In another matter, a franchise tenant was subject to lease and franchise requirements that required a complete refurbishment of the premises every five years.
The tenant had focused on the cost of the original fit-out and its eventual make good obligations, but had not adequately budgeted for a substantial mid-term refurbishment.
The financial impact extended beyond construction costs. The business also had to account for the interruption caused by closing or restricting operations while refurbishment works were completed, including lost trading revenue.
The result was significant and unexpected cash-flow pressure during the lease term.
The practical lesson: when reviewing a commercial lease (particularly where a franchise agreement also applies) consider the entire fit-out lifecycle. The true cost of occupying commercial premises is not necessarily captured by rent and outgoings alone.
When Should a Lawyer Review Your Commercial Lease “Make Good” Obligations?
You do not have to wait until a landlord dispute arises to obtain legal advice about “make good” obligations.
There are three important stages when legal advice may help.
1. Before You Sign the Commercial Lease
Your “make good” obligations can have a significant financial impact on your business long after the original lease negotiations have finished.
As the examples above demonstrate, the potential exposure is not limited to repainting walls or removing signage. A commercial tenant may face:
- hundreds of thousands of dollars in reinstatement costs;
- a contractual cash payment even where the landlord retains a valuable fit-out;
- liability for damage that exceeds fair wear and tear;
- unexpected mid-term refurbishment expenses;
- disputes about pre-existing defects; or
- claims against a bond or bank guarantee.
For landlords, an apparently strong make good clause may offer limited protection if there is inadequate security and the tenant becomes insolvent.
The key is to understand those obligations before you sign, not when you are preparing to hand back the keys.
Whether you are entering into a retail or non-retail commercial lease, carefully consider what you will be required to remove, repair, restore or pay for at the end of the tenancy and ensure the condition of the premises is properly documented from the beginning.
If you are considering entering a commercial lease, approaching the end of your lease or are already involved in a “make good” dispute with your landlord, contact Prosper Law to discuss your lease and understand your legal position.
2. Before Your Commercial Lease Expires
Do not leave your review until the final days of the tenancy.
Reviewing your make good obligations well before expiry can give you time to:
- establish what work is actually required;
- inspect the premises with the landlord;
- obtain quotations;
- locate the original condition report;
- clarify which fit-out the landlord wants retained;
- negotiate a cash settlement if appropriate; and
- resolve disagreements before they interfere with your exit.
This can also help avoid spending money removing improvements that the landlord would prefer to retain.
3. If a “Make Good” Dispute Has Already Started
You should consider obtaining legal advice promptly if your landlord:
- claims you have not properly reinstated the premises;
- demands substantial repair or fit-out removal costs;
- proposes a cash settlement you dispute;
- seeks to retain your security bond;
- seeks to call on a bank guarantee; or
- claims that additional work must be completed before the lease can be finalised.
Similarly, landlords should seek advice where a tenant has abandoned premises, disputes liability for damage or appears unlikely to have sufficient assets to meet its obligations.
Once a dispute has commenced, issues such as expert evidence, valuation evidence, mitigation of loss, termination or surrender and the precise contractual wording may become significant.
Frequently Asked Questions
What does “make good” mean in a commercial lease?
“Make good” refers to the obligations a tenant may have when leaving commercial premises, such as removing fit-out, repairing damage, reinstating the property or paying agreed costs.
Depending on the lease, this may include removing fit-out, repairing damage, cleaning the premises, reinstating alterations or paying an amount of money instead of physically carrying out the works. Your specific obligations depend on the terms of your lease and the circumstances.
You should also establish the lease-end process. For example:
- When must the landlord identify the required make good works?
- Do you have an opportunity to complete the work yourself?
- Does the landlord have to provide a scope of works?
- What happens if you disagree about the required work or its cost?
- Can the landlord access your security bond or bank guarantee?
- Is an independent expert involved if the parties cannot agree?
Do I have to remove my fit-out when my commercial lease ends?
Not necessarily. Whether you must remove your fit-out depends on the wording of your lease and, where applicable, other relevant documents. Some leases allow the landlord to require removal, while others permit certain fixtures or improvements to remain. This should be checked before signing and reviewed again well before the lease expires.
Does “fair wear and tear” mean I am not responsible for deterioration during the lease?
Not always. Fair wear and tear generally concerns deterioration occurring through reasonable use over time, but the scope of any exception depends on the lease and circumstances. Significant damage or deterioration associated with a specialised use of the premises may still result in a repair or make good claim.
Can a landlord use my bank guarantee for “make good” costs?
Depending on the lease terms and circumstances, a landlord may seek to access a bank guarantee or security for outstanding “make good” obligations. If you dispute the amount or the landlord’s entitlement, consider obtaining legal advice promptly.
What happens if I disagree with my landlord about “make good” costs?
Start by reviewing the lease, disclosure documents and evidence of the property’s original condition. Contact our commercial leasing lawyer, who can help determine what you agreed to and whether the landlord’s claimed costs are consistent with your obligations.
About the Author
Farrah Motley
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