Make-Good Obligations in Commercial Leases

Most commercial leases in Australia end with a make-good obligation. The clause requires the tenant to return the premises in a defined condition when the lease expires or is terminated early. It is one of the most commonly disputed provisions in commercial leasing, partly because it is often drafted loosely and partly because nobody reads it closely until the final months of the term. For a property buyer the clause matters twice. It shapes what the sitting tenants owe at expiry, and it shapes the capital works bill the new owner faces when a tenancy turns over.

This guide covers what make-good clauses typically require, how they are negotiated at commencement, why disputes arise at lease end, and what an incoming purchaser inherits when buying a tenanted asset.

What a Make-Good Clause Requires

A make-good clause sets the condition the tenant must hand the premises back in. The drafting varies widely between leases, and the differences carry real money. Four broad standards appear in Australian commercial leases.

Reinstatement to base building

This is the strictest standard. The tenant removes all fit-out, partitions, cabling, signage and fixtures it installed, and returns the space to an open shell with services capped off, ceilings and floor coverings reinstated, and walls patched and repainted. In office leases this is often described as returning the premises to base building or open plan condition. It is the most expensive standard for a tenant to satisfy and the most useful for a landlord re-letting the space.

Return to original condition

The tenant returns the premises to the condition they were in at lease commencement, fair wear and tear excepted. This standard only works if the commencement condition was actually recorded. Where no condition report exists, the parties end up arguing about what the space looked like years earlier, and that argument is one of the most common sources of make-good disputes.

Defined scope of works

Better drafted leases list the specific works. The tenant must remove the fit-out described in an annexed schedule, repaint in a nominated colour, recarpet, service the air conditioning and return keys, passes and access cards. A defined scope trades away some flexibility for both parties and removes most of the room for argument at expiry.

Cash settlement in lieu

Many make-good obligations are settled in money rather than performed. The landlord often prefers a payment, particularly where the next tenant will strip the space anyway or the owner plans to refurbish. Some leases provide for cash settlement expressly, and in other cases the parties negotiate it at expiry. The amount is usually quantified from contractor quotes for the required works, which is why competing quotes become the battleground when the relationship is strained.

Fair Wear and Tear

Most make-good clauses except fair wear and tear, and most make-good arguments involve a disagreement about where that exception ends. Deterioration from ordinary, reasonable use of the premises over the term, such as worn carpet in walkways, minor scuffing and faded paint, generally falls within the exception. Damage, unauthorised alterations and deterioration caused by neglect generally fall outside it. The boundary is judged on the facts of each case, which is another reason a dated condition report with photographs is so valuable. A clause that defines the standard by reference to recorded commencement condition, with fair wear and tear excepted, gives both sides something objective to measure against.

Negotiating the Clause at Lease Commencement

Make-good is cheapest to fix before the lease is signed. At that point both parties have leverage and goodwill, and adding precision to the clause only takes a few extra pages. At expiry the positions are adversarial and the evidence has often gone missing.

For a landlord, and for a buyer who will become the landlord, the aim is a clause that is enforceable and quantifiable. In practice that means four things.

• A defined standard, set by reference to an annexed condition report or scope of works, so the obligation does not rest on anyone's memory.
• Express treatment of the fit-out, stating which items the tenant must remove, which items become the landlord's property at expiry, and what happens to structural alterations made during the term.
• A mechanism for cash settlement, so the landlord can take a payment and control the works where that suits the re-letting strategy.
• Security sized with make-good in mind. Bank guarantees and security deposits are usually set against rent, yet the make-good liability for a heavily fitted tenancy can exceed several months of rent.

Tenants push in the other direction. They seek a capped liability, a broad fair wear and tear exception, and the right to leave approved fit-out in place. Where a tenant has taken over a previous occupant's fit-out, the lease should record whether the make-good obligation covers that inherited fit-out or only what the current tenant installs. Leases that stay silent on inherited fit-out produce some of the ugliest expiry arguments in the market.

Lease structure matters here as well. Under a net lease the tenant carries most repair and maintenance obligations through the term, so the end-of-lease argument tends to centre on reinstatement of alterations. Under a gross lease the repair history is more mixed and the commencement record carries more weight. Our guide to commercial lease types explains how those structures allocate obligations through the term.

Documenting Condition at Entry

The single most useful document in any make-good discussion is a condition report prepared at lease commencement, signed by both parties and annexed to the lease. A good report includes a dated photographic record of every room and surface, a written description of finishes, floor coverings, ceilings and services, an inventory of any landlord fixtures and existing fit-out, and a note of any pre-existing damage. Where the tenant is fitting out, the approved fit-out plans should also be annexed, because they define what must later be removed.

The record should then be maintained through the term. Landlord consents to alterations, incentive deeds that fund fit-out, and any agreed variations to the make-good scope all change what happens at expiry. A landlord who keeps a tidy tenancy file for each lease holds most of the evidence a make-good claim needs. A landlord who cannot produce the commencement report is negotiating from weakness regardless of what the clause says.

End-of-Lease Disputes

Why disputes happen

Make-good disputes cluster around a handful of recurring causes.

• Vague drafting, where the clause requires the premises to be returned in good condition without defining the benchmark.
• No commencement record, so an original condition standard has nothing to bite on.
• The fair wear and tear boundary, argued surface by surface.
• Quantification, where the landlord's quote and the tenant's quote for the same works sit far apart.
• Timing, where works are unfinished at expiry and the landlord claims holding-over rent while the tenant completes them.
• The landlord's own plans, where the space is due to be stripped or refurbished regardless of what the tenant does.

The landlord's intentions matter

Where the owner plans to demolish the fit-out or fully refurbish, the tenant will argue that unperformed make-good caused the landlord no real loss. Legislation in some states limits damages for breach of repair obligations to the reduction in the value of the landlord's interest, and tribunals look closely at whether claimed works will ever be done. The outcome turns on the drafting and the facts, because some clauses are framed so that an agreed payment stands regardless of the landlord's plans. A buyer pricing a future make-good receipt should treat it as a negotiation position rather than a guaranteed sum.

How disputes resolve

Most make-good disputes settle commercially, usually as a cash figure negotiated against competing quotes. Where the lease provides for expert determination, that route is faster and cheaper than litigation. Retail premises sit under state and territory retail leasing legislation, which commonly channels disputes through mediation and specialist tribunals, and the rules differ from state to state. The security also does practical work here. A landlord holding a bank guarantee negotiates from a stronger position than one relying on a promise to pay, which is why guarantee amount and expiry terms deserve attention long before the lease ends.

What a Buyer Inherits

When you buy a tenanted commercial property you take the leases with the land, and the make-good clauses come with them. The incoming owner generally takes the benefit of the tenant's lease obligations and enforces make-good at expiry as landlord. Depending on the drafting and the evidence behind it, that inheritance is either a genuine asset or a gap in the underwriting.

Due diligence on make-good sits inside the wider lease review, and it is detailed work.

• Read the make-good clause in every lease in full. Information memoranda summarise lease terms briefly and rarely capture reinstatement detail.
• Ask for the commencement condition reports and photographs for each tenancy. If they do not exist, assume an original condition standard will be hard to enforce and price accordingly.
• Review side deeds, incentive deeds and consents. Fit-out contributions often change who owns the fit-out, and a previous owner may have varied or waived reinstatement obligations in writing.
• Check the security. Bank guarantees are issued in favour of the named landlord, so the contract of sale needs to deal with replacement or reissue in the buyer's name at settlement.
• Map the expiry profile against your capital plan. Several leases expiring together can mean simultaneous make-good negotiations, vacancy and refurbishment costs in the same year.

This work belongs alongside the broader review of the rent roll covered in our guide to tenant due diligence, and the expiry mapping connects directly to WALE analysis. The settlement mechanics, including guarantees and lease assignments, should be raised early in the contract of sale review.

In the purchase numbers, treat make-good conservatively. A strong, well-evidenced clause reduces the re-letting capital you need at expiry. A weak clause means the refurbishment budget is yours. In softer leasing markets the practical value of make-good also falls, because incoming tenants expect contributions towards new fit-out and the landlord often reworks the space to win the deal, whatever condition it came back in.

Getting the Practical Basics Right

Most make-good outcomes are decided by paperwork created years before expiry. The practical steps are straightforward.

1. At lease commencement, annex a signed and dated condition report with photographs, and define the make-good standard against it.
2. During the term, keep a tenancy file for each lease holding consents, alteration approvals, incentive deeds and variations.
3. Before buying a tenanted asset, read every make-good clause, confirm the condition evidence exists, and confirm the security can be reissued at settlement.
4. Around twelve months before each expiry, inspect the premises, price the likely works, and open the conversation with the tenant while renewal terms are still in play.

Handled this way, make-good becomes a planned line item in the asset strategy instead of an argument in the final month of the lease.