Understanding Make Good Obligations
One of the most confusing and contentious lease conditions is the tenants obligation to make good the premises at the end of a lease.
Tenants who are moving on to new premises due to expansion, contraction or business closure face many logistical issues and often making good the premises they are vacating is the furthest thing from their minds.
In general terms, the make good provisions of a lease stipulate that the tenant must remove all of their chattels, make good any damage and leave the premises in the same condition as it was at the start of their lease.
It is important to note here that if the lease has been assigned, the tenancy will need to be returned to the condition at the start of the initial lease, and the current tenant may be obliged to make good damage and remove chattels installed by a previous tenant.
CP Pro Tip: Savvy business owners should make allowances for this when they purchase a business. If you are purchasing a business with a lease already in place, make sure you understand the make good obligations and adjust your purchase price accordingly.
Assessing the Make Good
Once the Landlord has been advised that a tenant is vacating, the Property Manager should arrange an inspection of the premises and prepare a make good assessment.
This assessment should include the following:
- A copy of the premises condition report from the start of the lease.
- Photographs of the current condition of the premises.
- Disclaimers and exclusions
- Details of any tenant fixtures that the landlord may want to retain and if there will be any compensation offered for them.
- Handover instructions for return of keys, tags and security codes
- Reminders disconnect power, gas or other services
Some of the items that may be detailed in the make good report are;
- Building Signage
- Floor Coverings
- Bathrooms
- Internal Walls and Doors
- Glass Signage and Frosting
- Kitchenette
- Lighting and Electrical
- Suspended Ceiling
- Partitions
- Alterations
- Cleaning
CP Pro tip: It is always a good idea for Property Managers to list the relevant lease clauses in the make good assessment to support their findings.
Negotiating the Make Good
Once the assessment is complete and forwarded to the tenant, they will need to review it and it is likely there will be items that they do not agree with. Leases can last for many years and the original condition or the landlords chattels may not have been clearly documented in the lease. The property or the business could have changed hands more than once during the lease and variations may have been entered into. Settling these negotiations is not difficult if both parties are able to compromise.
CP Pro tip: When presenting a tenant with a make good assessment, Property Managers should invite feedback or questions from the tenant. In most cases there is some grey area around what the tenant is obliged to do or what constitutes fair wear and tear.
Completing the Works
Unless the tenant is a construction company, often the make good works are not easy for them to arrange. In many cases it is acceptable to both parties for the tenant to pay the landlord instead of completing the make good works themselves. In this case, the tenant would normally remove all of their equipment, furniture and chattels and leave the premises clean and tidy, and pay a sum of money to the landlord. This figure could be calculated by having the make good assessment priced by a construction company. The landlord can then carry out the works at their discretion and any chattels the tenant leaves behind reverts to the ownership of the landlord.
If the tenant does complete their own make good works, they must be completed before the lease end date. If the parties can negotiate a cash settlement it also benefits the tenant as they can continue to operate their business from the premises for longer.
Whether you are a tenant or a landlord, make good negotiations can be difficult and time consuming. If you need help assessing, negotiating or completing a make good, contact me on kirstin@cpp.nz. My initial consultation is always free.
The Commercial Property Knowledge Library is a free resource to help Tenants and Landlords achieve the best results for their businesses. If there is a topic you would like me to add to the library, please email your question to kirstin@cpp.nz.
