Make goods: alternatives and how to avoid landlord disputes

July 28, 2020 | Commercial Real Estate

A commercial make good provision is a clause in a lease that requires a tenant to return a property to its original condition before handing back the keys.

As part of the make good, tenants are usually required to remove their property from the space and leave the area clean and tidy. Further obligations may include:

  • Repairing any damage caused while you occupied the property
  • Removing (or reinstating) all partitions, fixtures, joinery, installations, flooring and ceiling finishes
  • Removing installed walls, floor finishes and the ceiling and returning all base building air conditioning, fire and hydraulic services back to an open floor plan.

When can you reduce your costs on make goods

Tenants only have two opportunities to reduce make good costs:

  1. During lease negotiations – if you, the tenant, has leverage at the negotiating table 
  2. At the end of a lease term – however, at this stage, landlords typically won’t budge on the requirements set out in the leasing agreement (why should they?).

When do makegoods cause tension or angst?

Almost always. You may have had the best relationship with the greatest landlord in the world, but there will always be problems because:

You’re essentially breaking up with your landlord

It’s every person for themselves now. So, you need to be ready to take off the gloves. It doesn’t matter how good your prior relationship was, your ex will be bitter. It’s always best to engage a divorce lawyer, in this instance, a Tenant Rep. 

Leases not being negotiated properly

‘Make goods’ are often overlooked during lease negotiations because other immediate cost impositions, such as commercial terms and handover date, take priority. When this happens, a tenant may not understand the extent of their obligations until the end of their leasing agreement. By then it’s too late because you’ve agreed on the provision as part of the lease.

‘Make good’ clauses can be quite vague or ambiguous

This means clause interpretation can go different ways (usually in favour of the Landlord). This can lead to landlord-tenant disputes, which can be expensive and lengthy. To reduce your risk here, be sure to get a condition report before you start fit-out works.

Tenants don’t always consider make goods during the design phase

It’s easy to get caught up in designing a trendy new office. But tenants can’t forget their obligations around returning the space to how it was before they moved in. 

Budget issues

The expense of making good can be, understandably, quite a shock, especially if not factored in beforehand and amortised over the term of the lease. Office tenants should expect to pay between $150-$350 per sqm.

A tenant’s belief in the value of their fit-out 

This is probably the most common cause of angst.

Unless a Landlord already has a replacement tenant who says that they want your fit-out, it’s difficult to argue that your fit-out will be right for the next occupant. Of course, it’s natural to want to avoid sending a fit-out to landfill, but it often costs more to amend a fit-out than build a new one. 

Landlords only care about saving money for their incoming tenant (so they can charge more rent). Tenants have to write their fit-out off, any scope reduction from there is a win.

How to make good

There are two ways to make good at the end of your lease:

  1. Physically making good – that is, carrying out all the works yourself
  2. Cash settlement – negotiating a payment to the Landlord instead of making good.

At Tenant CS, we generally advise our clients to carry out the make good themselves to ensure that their money is put to good use. Carrying out the works yourself could save you up to 50% when compared to Landlord-make-goods because you have more control over the project and providers. 

What’s more, the problem with paying a cash settlement to the Landlord is that the works may never actually be completed once you move out. In this case, the property is rented out in the state in which you left it, and the Landlord pockets your cash. So if you’re going to take the easier route and agree to a cash settlement, make sure you’ve negotiated a better rate based on known costs!

Image of a person working on building plans | Make Good Clause Article

How to avoid make good provision disputes

Prepare or request a dilapidation report

A great way to avoid Landlord-tenant conflicts when it comes to making good is to prepare a dilapidation (condition) report before moving in. When it comes to the end of your lease, you’ll then be able to request a final report to compare to the initial report, which will help quantify your liability.

Unfortunately, some tenants fail to prepare a condition report at the start of their lease. And this means that the Landlord has nothing to compare when enforcing your ‘make good’ obligations.

Agree on the scope of works or settlement amount with your Landlord

Before moving into your new space, agree on a ‘scope of works’ or settlement amount with your Landlord. And ensure that it is appropriately documented in the lease. If you settle on concrete terms before you move in/fit out your space, then there should be no disagreements when it comes to making good at the end of your lease.

Stay on top of general wear and tear

A dilapidation report will make you aware of any existing damage to your space. Try to repair any further damages that you cause as they happen. That way, when it is time to relocate, you’ll only have your agreed scope of works to worry about.  

Give yourself time

When you’re nearing the end of your lease, request at least three quotes from different make good providers. Make sure that they price the full scope. You should also ask for their track history of completing commercial make goods on time and within budget.

Be sure to: 

  • Consider exclusions 
  • Give your preferred provider at least a week to prepare for the job before starting works
  • Monitor the project closely to make sure that project milestones are completed within the specified timeframe. (If the works are not finished in time, you may be required to pay extra rent.) 

Think about what your business really needs

Separate the essentials from the nice-to-haves. Fit-out works may be required to ensure your new space works for your people. Trendy office design is commonly associated with staff productivity and happiness. But keep in mind that what goes up must come down. 

Image of an office at the end of their lease | Make Good Provision Article

Seek the help of a tenant representative when negotiating the make good clause

Make goods can be costly and often breed tenant-landlord conflicts. So, it pays to have a professional tenant representative negotiate the make good provision on your behalf and review other contract terms so that you don’t get caught out.

Is there an alternative to making good?

There might be, particularly post-COVID, and especially if you get a tenant rep on your side to do your bidding.

With national vacancy rates on the rise and competition for quality tenants intensifying, savvy landlords are increasingly undertaking spec fit-outs of vacant space to stay ahead. That’s because more and more tenants have a preference for brand new, ‘plug and play’ type office spaces. Uncertain economic conditions also mean that tenants are demanding more flexibility in their commercial lease.

We initially saw this trend pick up in Brisbane a few years ago, due to the city’s above-average vacancy rates. Here, we saw landlords pouring money into vacant space to entice a broad range of tenants; investing in ‘future proof’ additions like polished concrete floors, exposed services and specialist lighting. And now, the spec fit-out trend is picking up around the nation, allowing landlords to create a point of difference in a tenants market.

How can commercial tenants leverage this trend?

Commercial tenants with a high-quality fit-out in place can take advantage of this trend in one of two ways:

  • Refresh the fit-out and sell it to the landlord for $1 – With office fit-outs costing anything up to $2,000 per sqm, offering to sell your fit-out to your landlord for a novel amount, instead of making-good, could save both parties thousands.
  • Negotiating a cash settlement – Though we usually advise our clients to carry out the make good themselves, if you can negotiate the right rate, a cash settlement may be of benefit. 

Contact Tenant CS

The Tenant CS team are experienced negotiators. We’re familiar with the problems that can arise with commercial make good provisions, leasing documentation and terminology. So we will make recommendations that increase your savings and reduce your risk. 

Read more about why it pays to have a tenant advisor on your side.

Want more information about what to look for when it comes to negotiating your lease? Read our Commercial Leasing Agreement Checklist before signing on the dotted line.

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The Author

Tim is the Managing Director of Tenant CS and is a member of the Tenant CS tenant representation services team based in Sydney.

With a real estate career spanning nearly 30 years, Tim is an expert in lease exit strategies, negotiations, aligning property with business requirements, navigating approval processes and aligning senior executives with corporate strategy.

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