If you are planning to lease an industrial property you will come across the words “make good” in your lease contract and it is important to get a good hold on what that means before signing on the dotted line. If you are in the process of relocating your business you will need to “make good” the premises before you end your lease.

As a tenant leasing warehouse space, navigating the intricacies of commercial leases can be tricky. Understanding what a Make Good Clause entails and how to approach it can save you time, money, and headaches down the road.

In this article, we uncover exactly what obligations the Make Good Clause refers to and what it means for industrial tenants and landlords.

What is a Make Good Clause and what does it mean?

The Make Good Clause is one of the standard inclusions in an industrial property lease. A Make Good Clause outlines the condition in which you, the tenant, must return the leased space at the end of your lease term. It essentially dictates what needs to be "made good" to satisfy the landlord and avoid potential disputes. The extent of these requirements can vary significantly.

Make Good clauses are generally seen in industrial property lease agreements where the tenant leases the property as a shell or intends to change an existing fit-out. These clauses can often be quite vague and worded ambiguously. uTenant has come across many cases where Make Good obligations are not properly understood by tenants, causing the potential for issues when vacating an industrial property at the end of the lease term.

It's helpful to know, non-retail commercial leasing (office and industrial leases) is subject to less regulation than residential leasing in Australia, meaning industrial tenants and landlords are left to agree arrangements such as make good provisions between themselves.

Important things to know about a Make Good Clause

• Levels of Make Good: There's a spectrum of make-good expectations. Some clauses might require just a basic clean and tidy space, while others might demand a complete restoration to the pre-lease condition, including removing any installed fixtures or partitions.

• Clarity is key: Ambiguity in the make-good clause can be a recipe for trouble. Ensure the clause clearly defines the expected condition, including details like paint color, floor coverings, and the responsibility for dismantling any built-in features.

• Baseline condition: When you sign the lease, have a detailed inspection conducted, documenting the space's existing condition with photos and a written report. This serves as a crucial reference point when you vacate the premises.

What is included in a Make Good Clause?

The specifics of a Make Good Clause can vary from lease to lease, but there are some common elements to look out for:

• Condition of premises: The clause should clearly state the condition the premises should be returned in. This may include requirements such as repairing any damages, removing fixtures or modifications, and ensuring cleanliness.

• Timeline: It's crucial to understand the timeline for completing the make good obligations. This typically occurs either at the end of the lease term or upon early termination, but the specifics should be clearly defined to avoid any confusion.

• Cost responsibility: The Make Good Clause should specify who is responsible for covering the costs associated with restoring the premises. This may include labor, materials, and any other expenses incurred.

• Scope of work: Detailing the scope of work required for the make good is essential for both parties to have a clear understanding of what needs to be done. This may involve providing a checklist or specific instructions to follow.

• Inspections: It's common for landlords to conduct inspections before the lease term ends to assess the condition of the premises. Understanding this process and addressing any issues beforehand can help avoid disputes later on.

How to avoid issues at the end of your lease

Now that we've outlined what a Make Good Clause entails, here are some helpful tips to ensure a smooth process:

• Negotiate wisely: Don't wait until the lease ends to address the make-good clause. During lease negotiations, discuss and clarify expectations with your landlord. Don't overlook the importance of negotiating the terms of the Make Good Clause before signing the lease. Work with legal counsel to ensure the clause is fair and reasonable, and aligns with your planned use of the space.

• Document everything: Keep detailed records throughout the lease term, including photos of the premises before and after any modifications, repair invoices, and communications with the landlord regarding maintenance issues. This documentation can be invaluable during the final move-out inspection

• Plan ahead: Be proactive. Start planning for the make good process well in advance of the lease expiration date. This allows sufficient time to complete any necessary repairs or renovations and ensures compliance with the lease agreement. Factor potential make-good costs into your overall budget when selecting a warehouse space. If extensive restoration is required, consider opting for removable or modular fixtures instead of permanent installations.

• Communicate effectively: Maintain open communication with the landlord throughout the lease term, especially regarding any maintenance or repair issues that may arise. Promptly address concerns to prevent them from escalating.

• Seek professional assistance: For complex make-good requirements, consult a contractor experienced in commercial lease restorations. They can assess the scope of work, provide an accurate cost estimate, and ensure the work adheres to the make-good clause specifications. If you're unsure about any aspect of the Make Good Clause or the make good process, don't hesitate to seek advice from professionals with experience in commercial leases, such as uTenant.

What happens if a tenant doesn’t "make good"?

Failing to meet make good obligations can lead to financial penalties. Landlords can withhold a tenant's security deposit or even sue for additional costs or any loss they have suffered as a result of the tenant’s failure to make good at the end of the lease. This can include keeping the tenant’s security deposit or bank guarantee. The tenant may also receive a negative reference, making it difficult to secure future warehouse space. By understanding your make-good clause and planning ahead, you can ensure a smooth and cost-effective lease termination.

How to Make Good at the end of your lease

If you are a tenant who is about to finish up your lease the first thing you need to do is check your lease agreement. You should do this, minimally 6 months before the end of your lease term.

Making good on your lease at the end of your term involves fulfilling the requirements outlined in the Make Good Clause of your lease agreement. Here's a breakdown of the key steps:

• Review the Clause: First and foremost, thoroughly examine the make-good clause in your lease. This will detail the specific condition you need to leave the space in, including aspects like painting, flooring, and any modifications made during your tenancy.

• Compare to baseline: Ideally, you should have a detailed move-in inspection report with photos documenting the space's initial condition. Compare this with the current state to identify areas requiring attention.

• Address discrepancies: Focus on repairs or restorations that are your responsibility according to the clause. For example, if the clause specifies returning the walls to their original white paint color, you'll need to repaint if you painted them a different color during your lease.

• Cleaning and maintenance: Regardless of the specific make-good requirements, a thorough cleaning is always expected. This entails removing all trash, debris, and any personal belongings from the space. Depending on the clause, you might also be responsible for professional cleaning services.

• Professional help (optional): For complex make-good situations involving extensive renovations or restorations, consider consulting a contractor experienced in commercial lease restorations. They can assess the work required, provide accurate cost estimates, and ensure it aligns with the make-good clause.

With most industrial leases lasting five years or more, the tenant is usually required to repaint the walls and replace floor coverings. No matter what your lease agreement states you should make sure that the property is clean and tidy, and that your have repaired any damage caused when you hand back the keys.

The Make Good Clause commonly covers items such as:

• the removal and repair of partitions, fixtures or fittings such as shelves, joinery, and installations

• the removal of racking and floor bolts

• the removal of plant and equipment

• powerpoints and lighting

• floor and ceiling finishes/coverings

• computer room/data centre

• curtains/blinds

• painted walls

• signage

• air conditioning/heating systems

• removal of site rubbish

• any specific tenant engaged alterations to the property

It’s a good idea to make a list of the changes you have made to the property first by doing a walk-through of the property and taking note of everything you have changed or damaged. You should have photos (which you took when you first began the lease) or a formal ‘Condition Report’ which you can use to compare the current state of the property to the condition it was originally in.

Once you have made your list speak to your landlord before doing any work on the property. In some cases the landlord may be happy for changes that you have made to the property to remain. Some landlords may request a cash settlement in lieu of make good. You should put together a budget for the make good works yourself, that way you will know if the landlord’s make good settlement figure is appropriate.

Make Good obligations need to be clear right from the start

For both tenants and landlords it is important that make good arrangements are agreed upon prior to the commencement of the lease and that items in the make good clause are documented and photographed in order to minimise any disagreements and cost when the lease comes to an end.

At uTenant, we recommend procuring an independent condition report prior to commencement which is provided to and agreed on by both landlord and tenant.

Conclusion

By understanding your Make Good Clause and taking proactive steps, you can ensure a smooth and cost-effective lease termination process. Remember, clear communication with your landlord throughout your tenancy is key to avoiding any surprises at the end.

It’s important that both tenants and landlords seek professional advice before entering into a lease agreement so misunderstandings are avoided when the lease expires. It is a good idea to have a lawyer review the terms of your industrial property lease prior to signing the agreement. For more advice on industrial property leasing contact our helpful team.

Updated: 11 May 2024