When a commercial lease ends, one of the most common and contentious issues between landlords and tenants is the make good clause – the obligation to return the premises to a particular condition.
It sounds simple enough: “return the premises to the condition they were in at the start of the lease.” But in practice, make-good disputes can become expensive, delay re-leasing, and even lead to litigation. Understanding the legal framework, the standard clauses, and some practical steps can help both parties avoid these headaches.
Keep reading for a Free copy of our “Pre-Vacate Inspection Checklist”.
What “make good” really means
“Make good” describes what a tenant must do to hand back the premises at the end of a lease. It often includes:
- Repairing damage beyond fair wear and tear
- Removing tenant-installed fittings, partitions, or signage
- Reinstating original finishes such as flooring or ceiling tiles
- Cleaning and leaving the space safe, secure, and compliant with current regulations.
Some leases require the tenant to reinstate the premises to their original condition, while others specify that the tenant must leave the premises in good repair. The difference between these two phrases can be significant — one might require full removal of a fit-out, while the other might simply require ensuring everything is in working order.
Because these obligations can have major cost implications, clarity in the lease document is critical.
The legal framework in NSW
1. The Conveyancing Act 1919 (NSW)
Section 133A of the Conveyancing Act 1919 (NSW) governs a landlord’s ability to recover damages when a tenant breaches a repair or make-good obligation. It limits recovery to the diminution in value of the landlord’s interest – that is, the loss in value of the property due to the disrepair – rather than the full cost of repairs.
Importantly, if the landlord is planning substantial works or demolition that would make any repairs valueless, they may not be able to recover make-good costs at all.
This section often catches landlords unaware. Even if they have a quote for reinstatement, their recoverable loss may be much less if the property’s overall value is unaffected or if redevelopment makes the repairs redundant.
2. The Retail Leases Act 1994 (NSW)
If the premises fall under the Retail Leases Act 1994 (NSW) (for example, a shop in a retail centre or high street), tenants enjoy additional statutory protections.
While the Act doesn’t prescribe specific make-good wording, it:
- Requires clear disclosure of obligations before the lease is signed.
- Mandates that disputes be referred to the NSW Small Business Commissioner for mediation before litigation.
- Restricts landlords from claiming costs not properly disclosed in the lease or disclosure statement.
Retail landlords must ensure their make-good clauses are transparent and consistent with the disclosure statement, or risk disputes later.
3. Common Law Principles (Australia-wide)
Across Australia, the general principle is that a tenant is only required to comply with the specific wording of their lease. If the clause is vague (“return to good condition”), the courts will likely interpret it narrowly. Landlords who rely on generalised wording may find their ability to claim costs significantly reduced.
What the Law Society lease says
Most NSW commercial and retail leases use – or are at least influenced by – the Law Society of NSW standard form lease.
Typical Law Society wording requires tenants to:
- Keep the premises in good repair and condition (excluding fair wear and tear)
- Remove their fittings, fixtures, and signage at the end of the lease.
- Reinstate any damage caused by that removal.
- Leave the premises clean and tidy.
The Law Society form also encourages the inclusion of a Schedule of Condition or photographic annexure showing the property’s state at the start of the lease. This schedule becomes the benchmark for the tenant’s make-good obligations and can drastically reduce end-of-lease disputes.
Why make-good disputes happen
Even with clear legal structures, disputes often arise because of:
- Unclear baseline condition: No condition report or photographs at lease commencement.
- Ambiguous wording: Phrases like “good repair” or “original condition” are interpreted differently.
- Landlord’s renovation plans: A landlord planning a substantial refurbishment or demolition may not be entitled to full reinstatement costs.
- Timing and access issues: Tenants running out of time to complete make-good works before lease expiry.
- Costs exceeding expectations: Without a pre-vacate inspection, tenants can be shocked by reinstatement quotes.
Because of these common pitfalls, proactive planning is key.
How to avoid end-of-lease disputes
Here are practical steps for both landlords and tenants to prevent make-good headaches:
At lease commencement
- Attach a detailed Schedule of Condition – include dated photos, note all pre-existing defects, and ensure both parties sign it.
- Agree what can stay and what must go. Clarify which tenant works become landlord property (“fixtures”) and which must be removed.
- Insert a clear make-good clause. Spell out whether reinstatement, repair, or payment in lieu applies, and note any exceptions.
- Hold adequate security. Bonds or bank guarantees should cover potential make-good liabilities.
During the lease
- Keep records of all alterations and landlord consents.
- Undertake mid-term inspections. This allows both sides to monitor the property’s condition and flag early maintenance issues.
- Plan early. Around 6 months before expiry, the parties should meet to discuss the handover process.
At lease end
- Conduct a pre-vacate inspection. Compare the current condition against the original schedule.
- Agree on the scope of works. Landlord and tenant can jointly agree on what’s needed – or even agree on a cash settlement.
- Allow sufficient time. If make-good works run past the lease expiry, the tenant may be liable for holding-over rent.
For retail leases, any unresolved issues can be referred to the NSW Small Business Commissioner for mediation – a mandatory step before court or tribunal action.
Drafting better make-good clauses
The best protection is in the drafting. Here are key tips:
- Define the standard of condition clearly (“as at the commencement date, fair wear and tear excepted”).
- Be specific about inclusions and exclusions – e.g., carpets, partitions, signage, HVAC equipment.
- Include an option to pay an agreed sum in lieu of doing works (for example, a pre-agreed “make-good fee”).
- Reference section 133A of the Conveyancing Act where appropriate to reflect that damages may be capped at the diminution in value.
- Attach a floor plan or photo schedule to visually define the expected reinstatement standard.
For landlords using the Law Society standard lease, ensure the annexures (Schedules 1 and 2) are properly completed, and that any special conditions dealing with fit-outs or alterations are cross-referenced in the make-good clause.
When disputes still arise
Despite best efforts, disagreements can still happen. In those cases:
- Refer to the lease. The dispute resolution clause may require expert determination or mediation.
- Retail tenants must go through mediation with the Small Business Commissioner before litigation.
- Non-retail leases can use expert valuers or building surveyors to assess condition and cost of reinstatement.
- Legal action should be a last resort, particularly since section 133A can restrict recovery to the property’s loss in value — not the full rectification cost.
Pre-vacate checklist:
- Have you compared the property against the condition report?
- Have you removed all tenant-installed fixtures?
- Have you arranged final cleaning and waste removal?
- Have you booked final compliance checks (e.g. fire safety)?
- Have you agreed on a handover inspection date with the landlord?
Conclusion
Make-good obligations don’t have to end in conflict. Clear documentation, open communication, and a solid understanding of your legal rights under NSW law can help both parties save time, money, and stress.
Whether you’re a landlord protecting your asset or a tenant handing back a premises, the best approach is proactive planning – not last-minute panic. If you’re negotiating a new lease or approaching the end of one, take the time to review your make-good clause, schedule a pre-vacate inspection, and seek advice early. A little clarity upfront can prevent a costly dispute later.
RN LEGAL has assisted many clients with leasing matters. RN LEGAL has the experience, expertise and resources to help you with your leasing matter.
Contact RN LEGAL on [02] 91 91 92 93 or [email protected] if you, or someone you know, requires advice or assistance in relation to any aspect of leasing matter.