Make good obligations are said to be the most important terms in a commercial lease. A make good clause determines what a tenant has to do with the leased property before it’s handed back over to the landlord when the lease expires. But if a tenant doesn’t have a clear understanding of their make good obligations, they can cause serious problems at the end of the commercial lease term.
Author: Farrah Motley, Director of Prosper Law and a commercial contract lawyer.
A make good clause is typically found in a commercial lease
A make good clause is typically found in a commercial lease. It requires the tenant to restore the property to its original state at the end of the lease. The make good clause may also require the tenant to revert the property to the condition it was in after fit-out was completed.
The purpose of a make-good clause is to protect the landlord from having to pay for repairs that were caused by tenant negligence or use of the property. A make good clause is also intended to ensure that the tenant pays to reinstate the premises to its former glory so that a new tenant can be found more easily.
The make good obligation begins at the end of the lease term
The make good obligation usually begins at the end of the lease term. In other words, you will only return your space to its original condition or as described in the lease. Therefore, you are responsible for any repairs and/or replacements required to bring it back to that standard.
If a landlord has signed an agreement with a tenant to vacate by a certain date, a tenant’s make good obligations may be in the form of a cash payment or credit note from the landlord. If the existing tenant wants to stay longer than agreed upon or if they want an extension on the lease (which is called “renegotiation”), then this may affect how much money will be owed as part of the make good obligations.
Reinstating the premises may involve returning to their original state before the lease started
Reinstatement of the premises will involve returning them to their original state before the lease started. If you are a tenant and have made changes, you must remove those changes when you move out.
It is equally important for landlords to understand what they can or cannot do with regard to reinstatement of the premises after a commercial lease expires or is terminated by either party. For example, if a landlord wants to make major modifications (e.g., replacing carpeting with hardwood floors), he or she should consult with a commercial contract lawyer. This should be done before carrying out the modifications as doing so without first obtaining permission from the tenant may constitute conversion (i.e., depriving someone of his or her property).
There may be some instances where reinstating a premise means something different between landlords and tenants
There may be some instances where reinstating a premise means something different between landlords and tenants. For example, if the tenant has damaged the premises and a portion of it needs to be repaired or replaced. In this case, it is up to the landlord to repair or replace that damaged portion (and then bill the tenant for their costs).
On the other hand, if the tenant moves out and leaves behind damaged property in place of their old space, then the tenant would be responsible for repairing those damages before handing over control of that space back over to the landlord.
In any event, both parties must ensure they read the commercial lease agreement carefully so that there’s no ambiguity about what happens when the tenant moves out. This is especially important since there’s nothing worse than being stuck with an unexpected bill because someone else didn’t hold up their end of the bargain!
Established clear make good expectations in the terms of the commercial lease
Make good clauses are common in commercial leases. They provide a way for the landlord to recoup losses from any tenant. They can also help landlords find a new tenant if the tenant is no longer able to meet their financial obligations.
In many cases, make good clauses are negotiated at the time of signing a lease agreement. If not, they may be written into one of several standard forms used by landlords and tenants alike. However, individual landowners may have their own unique expectations regarding these obligations as well.
Agreement for lease
It is recommended that the intended make good obligations are (at least at a high level) described in an agreement for lease. If make good obligations are described in an agreement for lease, then regardless of whether the agreement for lease is legally binding, both parties know what must be recorded in the following formal lease documents.
Formal lease
A formal lease agreement will describe the make good obligations. If an agreement for lease has been signed, the formal lease should reflect what was described in the agreement for lease.
But, in case you didn’t, here are six things every tenant should know before signing a commercial lease:
Here are six things every tenant should know before signing a commercial lease when it comes to made good clauses:
- The make good clause should very clearly describe what the tenant is required to do at the end of the lease
- If improvements have been made or a fit-out installed (either before or after the commencement of the commercial lease), the parties should consider whether the fit-out needs to be removed as part of the make good obligations
- The tenant should consider whether they would prefer the landlord to carry out the make good obligations and the tenant instead pay a cash amount
- The tenant must consider whether they would still be happy to pay a cash amount under the make good clause, even if the landlord chooses not to proceed to change the premises
- If there is anything in the lease that is unclear or confusing, ask for clarification before signing it
- Do not sign if something in the commercial lease says something different than what was discussed between you and the landlord; get legal advice from a commercial contract lawyer first!
Making sure your lease is properly understood is essential before signing anything
It is essential to get a commercial lease agreement in writing when you are leasing commercial property.
Make sure that all terms and conditions are clearly spelled out before signing any documents with your tenant. This will help prevent misunderstandings, costly legal fees and potential lawsuits later on.
As you can see, understanding your make good obligations is crucial for protecting your rights and ensuring a smooth end to your lease. If this article shows us anything, it’s the importance of both knowing make good obligations and being prepared to deal with them. Make sure that all relevant details in the lease have been considered carefully beforehand. This will ensure that you don’t run into any surprises at the end of its term—especially since some leases might not even have an explicit make good clause!
How can Prosper Law help?
Prosper Law is Australia’s online law firm. We provide legal advice to businesses and individuals across Australia. Our areas of legal practice include contracts, eCommerce, publishing, legal counsel and employment law.
If you need to talk to a commercial contract lawyer, get in touch today.
Contact the team at Prosper Law today to discuss how we can provide you with commercial legal advice for a fixed fee or at affordable hourly rates.
Farrah Motley | Director
PROSPER LAW – Australia’s Online Law Firm
M: 1300 003 077
A: Suite No. 99, Level 18, 324 Queen Street, Brisbane, Queensland Australia 4000
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