Tips to avoid disputes on the issue of make good at the end of a lease

Tips to avoid disputes on the issue of make good at the end of a leaseThe issue of make good is often not given much consideration at the time a lease is being negotiated, but rather only considered as the expiry date of the lease approaches or when the lease has already ended. Piper Alderman Partner, Tony Britten-Jones, and Associate, Adam Rinaldi provide an overview of make good considerations that should be addressed by landlords and tenants when negotiating a lease to avoid unexpected surprises. The scope of a tenant’s obligation to make good at the expiry or earlier termination of a lease term is often a source of dispute between a landlord and tenant. Disputes regarding make good can be costly and time consuming for both the landlord and tenant. The issue of make good is not always given sufficient consideration at the time of entering into the lease. At this stage, the parties’ attention is usually directed to negotiating the more contentious issues such as the commercial terms of the lease (i.e. rent, security and term) and the scope of the indemnities. The issue of make good is often not given priority until the expiry date approaches or the lease has already ended. The current trend in most leases is for there to be a covenant requiring the premises to be reinstated to “open plan presentation” which requires the tenant to remove all plant and equipment irrespective of whether it has been installed by the landlord or tenant. It is also common for a lease to state that the tenant is required to make good the premises to their condition at the commencement date of the lease subject to fair wear and tear. Where this is the case, a condition report (usually containing photographs of the premises at the date of occupation) should be prepared evidencing the agreed state of the premises at the time the tenant takes occupation to avoid dispute as to the tenant’s reinstatement obligations. The landlord may want to vary the default position where the landlord does not require the tenant to remove its fitout. The landlord may require the tenant’s fitout to remain where a fitout is particularly suited to a specific use and substantial capital works are required to change that use. Examples include restaurants, medical centres, food outlets, fitness centres, bars and other purpose built facilities. In these circumstances, the landlord may prefer the tenant to leave all or part of its fitout in the premises as this may benefit a future tenant. The cost of removing a fitout can in some cases exceed the value of using or on-selling the fitout. This is common with office fitouts. In these circumstances, the landlord may prefer to have the tenant remove the fitout so as to reinstate the premises to an open plan presentation. However, especially in the cases of restaurants and bars, the fitout may have value and be capable of being sold. For example, there is a secondary market for large items of equipment such as fridges, ovens, fryers and other similar items. In these circumstances, the tenant may prefer to carry out an extensive make good of the premises so as to be able to re-use or sell such valuable items. It is therefore important that the terms of the lease clearly define the scope of the tenant’s make good obligations as there will invariably be competing interests on the issue.