Australia: How can landlords and tenants avoid Make Good disputes?

Last Updated: 1 September 2017
Article by Kerri-Ann Martinus
Services: Real Estate & Construction
Industry Focus: Real Estate & Construction

What you need to know

  • Leases frequently contain 'make good' provisions which specify what a tenant must do before vacating the premises, which might include taking steps to return the premises in good repair and condition.
  • When make good provisions are not properly considered at the beginning of a lease, disputes can arise down the track when landlords and tenants discover they had different ideas about what would constitute compliance.
  • By asking several key questions during the negotiation stage, landlords and tenants can ensure expectations are clear from the outset which will help reduce the risk of delayed conflict.

When a lease is being negotiated, landlords and tenants often pay little attention to the 'make good' provisions in the lease. As these clauses relate to what the tenant must do at the expiry or earlier termination of the lease, they are often glossed over as something that can be dealt with later.

But upon expiration or termination of a lease, disputes between the landlord and tenant commonly arise because:

  • each party has interpreted the make good obligations differently, or
  • the parties have not considered the actual impact that the agreed clause will have on their business at the end of the lease.

It is important for both landlords and tenants to ensure they understand what a make good clause means in their particular circumstances, what consequences will follow if the tenant does not comply with its obligations, and what steps the parties can take to reduce the risk of disputes arising.

What does 'make good' really mean?

Make good refers to the condition in which a tenant must leave the premises when it vacates them. Such provisions commonly require a tenant to:

  • reinstate the premises to a 'base building condition' or a 'basic shell'
  • reinstate the premises to the condition they were in on the date the tenant first took occupation, with fair wear and tear often excluded
  • return the premises in good repair and condition with any approved structural alterations left in place.

Unless the make good requirements are clearly defined, disputes will almost certainly arise. This is because a landlord will want the tenant to do as much as possible in making the premises fit for the next tenant, whereas the tenant will want to do as little as possible.

What happens when the tenant does not make good?

Courts are generally reluctant to make orders requiring specific performance of covenants to repair. The remedies granted are usually in the form of damages.

At common law the measure of damages for failure to make good at the end of a lease is the cost of putting the premises into the state of repair in which the tenant was bound to leave them. However, the measure of damages for failure to repair during the currency of a lease term has been held to be the diminution in the value of the reversion, i.e. the amount by which the value of the freehold reduces. This is an important distinction because, while the cost of the repair works might be substantial, there will be no reduction in the value of the freehold if the landlord's intention is to demolish the premises as soon as the lease is at an end.

It was to remedy these differences of approach that legislation was enacted in New South Wales (see section 133A Conveyancing Act 1919) and Queensland (see section 112 Property Law Act 1974). There is no corresponding provision in Victoria.1

Furthermore, it may be argued that where a landlord has an express right under the lease to enter the premises to effect repairs at the expense of the tenant, then the landlord's claim will be for payment of a debt due under the lease. In those circumstances the rules relating to a damages claim will not apply.

Where a tenant fails to comply with its make good obligations, the landlord will often seek to negotiate a cash sum in settlement or enter and carry out work on the premises with a view to recovering the cost from the tenant at a later stage. The alternative to be followed will often depend upon the landlord's future plans for the premises which may include those of any prospective new tenant. Before making any decision, the landlord should ensure it understands the legal position that applies in the circumstances.

How can landlords and tenants reduce the risk of disputes?

The best way for landlords and tenants to avoid disputes in relation to make good clauses is to ensure they are properly considered early on, during the negotiation of the lease. There are several key questions that landlords and tenants should ask themselves.

Key questions for both parties

  • Have relevant terms been clearly defined?

    Parties should carefully consider what is intended and this should be clearly reflected in the lease. For example, if terms such as 'base building condition', 'basic shell' or 'good repair' are used, has the meaning of those terms been clearly defined within the lease? If it is intended that particular items or fitout are to be removed or are to remain within the premises, has this been clearly documented?

  • What is the reference point for make good and maintenance clauses?

    Are the make good and maintenance clauses drafted with reference to the condition of the premises on the date the tenant first took occupation of the premises, or to some other fixed date such as the commencement date? The latter approach can be problematic when a lease goes through a series of renewals, because the landlord might argue that 'commencement date' refers to the very beginning of the tenant's occupation, whereas the tenant might argue that it only needs to return the premises to the condition they were in at the commencement date of the most recent renewal.

    Parties may also want to arrange an appropriate consultant to prepare a detailed report which includes photographic evidence, showing the condition of the premises as at the date the tenant first took occupation.

  • Are the tenant's make good obligations to be settled by a payment to the landlord at the end of the lease?

    If so, will such payment result in a partial or complete release of the tenant? For example, does the tenant still need to remove its items from the premises and leave the premises in a clean and tidy condition or can the tenant simply walk away from the premises and leave these items in place? Does the lease include a mechanism for the determination of the cash payment and the agreed scope of works?

Key questions for landlords

  • Does the lease expressly entitle the landlord to recover its costs in respect of carrying out make good on behalf of a tenant?
  • Does the lease impose an obligation on the tenant to continue paying rent until it has complied with its make good obligations?
  • Does the lease require the tenant to provide the landlord with a bank guarantee?

    If so, such a bank guarantee preferably should not have an expiry date and should be security for all breaches of the lease, including the obligation to make good, and not just the non-payment of rent.

Key question for tenants

  • If a tenant is permitted to sublease the premises, will the sublease expire shortly before the headlease?

    If so, has the tenant ensured the make good obligations under the sublease mirror those under the headlease? If not and the tenant is willing for the subtenant to carry out a reduced make good to that which exists under the headlease, will the tenant have a sufficient period of time to comply with the make good obligations under the headlease after the sublease ends?

Key takeaways

When landlords and tenants are negotiating leases within tight timeframes, it can be tempting to gloss over or rush through the issues that have no immediate consequences. In these circumstances, make good clauses are often casualties in the negotiation process, but they can cause problems down the track where the parties have different expectations that have not previously come to light.

By properly considering make good clauses during the negotiation of a lease, landlords and tenants can work together in clarifying their expectations and reducing the risk of delayed conflict.

Footnotes

1 See our Landlord & Tenant Alert dated 25 June 2014, Assessing damages for breach of make good obligations which includes commentary on the approach taken by the Victorian Supreme Court in the case of Gimtak Pty Ltd v Cathie.

This article is intended to provide commentary and general information. It should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this article. Authors listed may not be admitted in all states and territories

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Carroll & O'Dea
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Carroll & O'Dea
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions