When an investor buys a tenanted commercial building, the lease is the asset. Most buyers focus on the headline rent, the term remaining and the covenant of the tenant. Far fewer read the make-good clause with the same care, yet it can quietly add value to a holding or quietly erode it. Make-good (also called reinstatement) governs the condition the premises must be returned to when a tenant vacates, and it sits at the intersection of the lease, the fit-out, the incentive that funded that fit-out, and the building's future re-leasing prospects.
For a landlord, a make-good obligation is best understood as a contingent financial asset: a future right that, if drafted and enforced well, transfers the cost of restoring the premises onto the departing tenant. For a buyer doing pre-purchase analysis, the same clause is a line item to be tested, not assumed. A poorly worded or commercially unrealistic make-good provision can leave the new owner carrying refurbishment costs the vendor implied the tenant would bear.
This guide explains what make-good actually requires, how the standards differ, why these clauses are among the most disputed in commercial leasing, and the specific points a buyer's advocate tests during due diligence across office, retail, industrial and medical assets.
Make-good is rarely about handing back a pristine building. In practice it is a negotiation over money, settled at the end of a tenancy when the tenant has the least leverage and the landlord the least patience.
What make-good means in an Australian commercial lease
A make-good clause obliges the tenant, at or before the end of the term, to restore the leased premises to a defined condition. Depending on the wording, that can include some or all of the following: removing the tenant's fit-out, partitions, signage and cabling; reinstating ceilings, floor coverings and services; repainting; repairing damage beyond fair wear and tear; and removing any alterations made during the term, including those the landlord earlier approved. The obligation is contractual, so the precise standard is whatever the lease says it is, which is exactly why the drafting matters.
Make-good interacts directly with the broader repair and maintenance regime in the lease, the ongoing management and outgoings arrangements, and the rent review profile. Understanding it properly requires reading it alongside the rest of the document rather than in isolation, which is one reason it pays to understand the underlying commercial lease types before assessing any single clause.
1 The standards: base building, as-handed-over, or cosmetic
The single most important variable in any make-good clause is the standard the tenant must achieve. Three broad benchmarks appear in Australian leases, and the difference between them can run to tens or hundreds of thousands of dollars on a single tenancy.
Base building (warm shell or cold shell)
A base-building make-good requires the tenant to strip the premises back to the developer's original base condition, often described as a warm shell or cold shell. This is the most onerous standard for a tenant and the most valuable for a landlord, because the premises are returned in a state ready to be re-let or re-fitted from scratch. It is common where a tenant took raw space and fitted it out entirely at their own cost.
As-handed-over
An as-handed-over standard requires the tenant to return the premises in the same condition as at the lease commencement date, fair wear and tear excepted. This is only meaningful if the original condition was properly documented in a condition report or schedule of condition at the start of the lease. Without that baseline, the standard is effectively unenforceable, which is a recurring source of disputes.
Cosmetic or no make-good
At the lighter end, some leases require only cosmetic make-good (repaint, professional clean, remove signage) or, increasingly in markets where landlords want to retain quality fit-out, contain no make-good obligation at all because the fit-out is intended to stay. A landlord who wants to keep a tenant's fit-out for the next occupant will sometimes waive make-good in exchange.
| Make-good standard | What the tenant must do | Who it favours |
|---|---|---|
| Base building / shell | Strip fit-out, reinstate to original developer condition | Landlord |
| As-handed-over | Return to documented commencement condition, fair wear and tear excepted | Balanced (if baseline documented) |
| Cosmetic only | Repaint, clean, remove signage and tenant branding | Tenant |
| No make-good | Nothing; fit-out remains for the next tenant | Depends on fit-out quality |
2 Why make-good clauses are so heavily disputed
Make-good is one of the most litigated areas of commercial leasing in Australia, and the reasons are structural rather than incidental.
- Timing and leverage. The obligation crystallises at lease end, precisely when the tenant is least motivated and the landlord wants the space back quickly to re-let. Both sides are negotiating under time pressure.
- Vague drafting. Terms like "good and tenantable repair" or "to the landlord's reasonable satisfaction" invite argument. Where the original condition was never documented, an as-handed-over clause has no fixed reference point.
- Fair wear and tear. Almost every lease excepts fair wear and tear, but what counts as fair wear and tear over a five or ten year term is genuinely contestable.
- Betterment. A landlord cannot use make-good to obtain an improvement at the tenant's expense. If the works restore the premises beyond their proper condition, the tenant may resist paying for the uplift.
- Approved alterations. Disputes arise over whether a tenant must remove alterations the landlord previously approved, particularly if the approval was silent on reinstatement.
Because of this, many make-good obligations are ultimately settled in cash rather than performed physically, a point that has direct consequences for how a buyer should value the obligation.
3 Make-good as a financial asset and liability
From an ownership perspective, make-good has two faces. Where the tenant is leaving, a well-drafted clause is a recoverable cost or a cash settlement in the landlord's favour. Where the landlord has given a tenant a fit-out contribution or an incentive, the position can reverse: the landlord may have funded works it now wants removed, or may face a future refurbishment cost the make-good clause does not fully cover.
Cash settlement versus physical works
In practice, landlords and tenants frequently negotiate a cash payment in lieu of the tenant carrying out the works, often informed by a quantity surveyor's or building consultant's costing. Cash settlement suits a landlord who intends to refurbish or reconfigure anyway, since paying a contractor to strip out and immediately re-fit is wasteful. It suits a tenant who would otherwise pay retail rates for trades under time pressure. The risk for a landlord is settling for less than the true cost; the risk for a tenant is paying for works the landlord never intends to do.
The incentive and depreciation link
Make-good cannot be read apart from the incentive that funded the fit-out. A tenant who received a generous fit-out contribution may have a correspondingly heavier make-good obligation, or the lease may treat the fit-out as the landlord's property from the outset. The depreciation treatment of fit-out also matters: tenant-owned fit-out is typically depreciated by the tenant, while landlord-owned fit-out and capital works follow the owner's depreciation schedule. For a buyer, the question is who owns what at handback, and what that means for both the make-good entitlement and the depreciable base going forward.
4 How make-good differs by asset class
The practical weight of a make-good clause varies sharply with the type of property and the nature of the fit-out.
Office
Office make-good is usually the most expensive and the most negotiated, because office fit-outs are extensive: partitions, ceilings, supplementary air-conditioning, data cabling and finishes. In softer office markets, where re-leasing is harder, some owners prefer to retain a quality fit-out rather than enforce a strip-out, which feeds directly into office vacancy and incentive trends.
Retail
Retail make-good is shaped by the relevant state retail tenancy legislation as well as the lease. Shopfronts, signage and specialised trade fit-outs (a cafe, a salon, a medical retailer) can be costly to reinstate, and disclosure of make-good obligations is required under several state Retail Leases Acts, which buyers should confirm at due diligence.
Industrial
Industrial make-good is often lighter because warehouses are closer to generic shells, but specialised tenants can change that: a tenant who installed racking, mezzanines, coolrooms, hardstand or specialised power may face a substantial reinstatement bill, and contamination or environmental reinstatement can become a separate and serious obligation.
Medical and other specialised uses
Medical, dental and allied-health premises carry highly specific fit-outs (plumbing, lead-lined rooms, specialised waste and gas services) that are expensive to install and expensive to remove. Make-good in these tenancies is genuinely material, and the value of a sitting fit-out is often a reason a landlord and incoming tenant prefer to retain rather than strip it.
5 Dilapidation reports and documenting condition
The enforceability of almost every make-good clause depends on evidence of the premises' condition. A dilapidation report or schedule of condition, ideally prepared at lease commencement and again near lease end, provides the factual baseline against which the make-good standard is measured. Without it, an as-handed-over clause floats free of any reference point and a landlord's claim becomes far harder to substantiate.
For a buyer acquiring a tenanted building, the existence and quality of condition documentation is itself a due-diligence item, and it sits naturally alongside a broader building inspection of the asset. If the vendor's tenancy schedule implies recoverable make-good entitlements, those entitlements are only as good as the documentation supporting them.
6 What a buyer should test at due diligence
Make-good should be assessed as part of acquiring the lease, not treated as a settlement-day afterthought. The points below are where a buyer's advocate concentrates.
- Read the actual clause. Identify the standard (base building, as-handed-over, cosmetic, none) and whether it is realistic given the fit-out and the market.
- Find the baseline. Ask for the commencement condition report. No baseline usually means a weak as-handed-over obligation.
- Test the incentive link. Establish who funded and who owns the fit-out, and whether make-good and incentive provisions are internally consistent.
- Reconcile against the IM. If the information memorandum or tenancy schedule treats make-good as a recoverable cost or future cash inflow, verify that the lease and documentation actually support it.
- Consider re-leasing reality. Decide whether enforcing a strip-out genuinely adds value or whether retaining the fit-out better serves the next tenant, since this affects WALE and ongoing income durability.
- Factor in lease-end timing. Tenancies expiring soon after settlement turn make-good from a theoretical clause into a near-term cash and refurbishment question.
Handled well, a make-good clause is a small but real component of the lease's value. Handled carelessly, it is a cost the new owner discovers only when the tenant hands back the keys. Because it interacts with the fit-out, the incentive, the legislation and the building's future, it rewards the same adversarial, evidence-led reading that a buyer should bring to tenant due diligence and the lease as a whole.
Frequently Asked Questions
What is a make-good clause in a commercial lease?
A make-good clause requires a tenant to return the leased premises to a defined condition at the end of the lease, which can include removing their fit-out, repainting, reinstating services and repairing damage beyond fair wear and tear. The exact standard is set by the lease wording, so two leases can impose very different obligations. It is a contractual obligation, not a fixed legal default.
Can make-good be settled with a cash payment instead of physical works?
Yes. In practice, landlords and tenants often negotiate a cash payment in lieu of the tenant carrying out the works, frequently informed by a building consultant's or quantity surveyor's costing. Cash settlement suits a landlord who plans to refurbish or reconfigure anyway, since stripping out and immediately re-fitting is wasteful. The risk is settling for less than the true cost, so the figure should be tested.
Why are make-good obligations so often disputed?
Disputes arise because the obligation crystallises at lease end when both sides are under pressure, because drafting is often vague, and because there is frequently no documented record of the premises' original condition. Arguments over fair wear and tear, betterment, and whether previously approved alterations must be removed are all common. This is why a dilapidation report taken at lease commencement is so valuable.
Why should a buyer of a tenanted building care about make-good?
Because the lease is the asset being acquired, and make-good can be either a future entitlement in the owner's favour or an unfunded liability. If the seller's information memorandum implies recoverable make-good costs, a buyer should confirm the lease wording and condition documentation actually support that claim. Make-good also interacts with fit-out ownership, incentives and re-leasing strategy, all of which affect value.