Understanding 'make good' obligations - some common traps
At Coleman Greig we have seen many disputes in relation to make good that could have been avoided if the parties had seriously contemplated their make good obligations before entering into the lease.
Is the tenant required to strip the premises back to an empty shell? Is the tenant required to simply repaint and replace floor coverings? If painting, how many coats and is it the inside or the outside surfaces? If racking is removed, are bolts shaved to ground level or are they to be grinded down and holes filled? What will be the reference point to establish condition and how will contamination be addressed? Will the landlord accept a sum of money in lieu of make good and if so, how much? There are many more questions along a similar theme.
While some of these questions may seem trivial, in our experience costly disputes can arise because a lease does not adequately address parties’ responsibilities at the end of the tenancy. So our advice to a landlord or a tenant when negotiating a lease is to clarify and document precisely what they understand and agree to be their make good obligations, so that there are no arguments over interpretation at the time of making good the premises.
Some common themes that keep emerging in this regard are:
1. When a tenant attempts to complete the make good themselves, there may be a dispute with their landlord as to the quality and standard of that work. This is particularly so if they have not consulted with the landlord before doing that work. We suggest that if a tenant wishes to do their own make good, they have clearly articulated with the landlord as to what those works are, tradespeople to be engaged, materials to be used, number of coats of paint etc. We have acted on behalf of clients in a number of disputes where the tenant has carried out works which are not accepted by the landlord in accordance with the lease. In such cases, a tenant leaves themselves exposed to not only the additional costs the landlord incurs in completing the works in accordance with the lease, but potentially rent for the period during completion of the make good.
2. Given 1, we have found that parties increasingly are reaching an agreement on a payment in lieu of the tenant actually attending to the make good works themselves. If so, in our experience it is important to begin the discussions about make good as early as possible in order for the parties to reach agreement on this settlement figure. This is because the parties will have to come up with a common methodology of calculating this figure (eg based on quotations for each task, if so how many and from whom, etc).
3. Often disputes arise between a landlord and tenant where the landlord relies on a clause which says the tenant must return the premises to the condition it was in at the commencement date. However, what is that condition? The best way to address this is for the parties to record the condition of the premises at the commencement date of the lease.
Regardless of whether you are a landlord or a tenant, it is wise to obtain legal advice in relation to clarifying your make good obligations before entering into a lease.
For more information on ‘make good’ obligations please contact our experienced property lawyer:
Dean Claughton, Lawyer
Phone: +61 2 9895 9276