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 specified condition.
It may sound simple: “return the premises to the condition they were in at the start of the lease.” However, in practice, make-good obligations often create disputes, delay re-leasing, and increase costs. Understanding the legal framework, standard clauses, and practical steps can help both parties avoid these issues.
What “Make Good” Really Means
“Make good” describes what a tenant must do when handing back 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 premises safe, secure, and compliant with regulations
Some leases require tenants to reinstate the premises to their original condition. Others only require tenants to leave the premises in good repair. This difference is significant. Full reinstatement can require complete removal of a fit-out, while a repair obligation may be much less extensive.
Because these obligations can create major cost differences, clear drafting in the lease is essential.
The Legal Framework in NSW
1. The Conveyancing Act 1919 (NSW)
Section 133A of the Conveyancing Act 1919 (NSW) allows landlords to recover damages for breach of repair or make-good obligations. However, it limits recovery to the diminution in value of the property, not the full cost of repairs.
This means the landlord can only claim the loss in value caused by disrepair. In some cases, if redevelopment or demolition is planned, landlords may not recover make-good costs at all.
This rule often surprises landlords. Even where repair quotes are high, recoverable damages may be significantly lower depending on the property’s value and future use.
2. The Retail Leases Act 1994 (NSW)
If the premises fall under the Retail Leases Act 1994 (NSW), tenants receive additional protections.
The Act:
- Requires clear disclosure of lease obligations before signing
- Requires mediation through the NSW Small Business Commissioner before court action
- Prevents landlords from claiming undisclosed costs
Landlords must ensure make-good obligations appear clearly in both the lease and disclosure statement. Otherwise, disputes may arise later.
3. Common Law Principles (Australia-wide)
Under common law, tenants only need to follow the exact wording of the lease. If the clause is vague, courts interpret it narrowly.
As a result, landlords who use unclear wording such as “good condition” may reduce their ability to recover costs.
What the Law Society Lease Says
Most NSW commercial leases follow the Law Society of NSW standard form.
Typically, tenants must:
- Keep the premises in good repair (fair wear and tear excepted)
- Remove fittings, fixtures, and signage at the end of the lease
- Repair damage caused by removal
- Leave the premises clean and tidy
The standard form also encourages a Schedule of Condition with photos at the start of the lease. This document sets the benchmark for make-good obligations and helps reduce disputes.
Why Make-Good Disputes Happen
Make-good disputes usually arise due to:
- No condition report at lease commencement
- Ambiguous lease wording
- Different expectations about reinstatement requirements
- Landlord refurbishment or demolition plans
- Time pressure at lease expiry
- Unexpected reinstatement costs
These issues often escalate when parties do not plan ahead.
How to Avoid End-of-Lease Disputes
At Lease Commencement
- Attach a detailed Schedule of Condition with photos
- Clearly define what must stay and what must be removed
- Set out precise make-good obligations in the lease
- Agree on security (bond or bank guarantee)
During the Lease
- Record all alterations and approvals
- Conduct regular inspections
- Address maintenance issues early
- Start make-good discussions well before expiry
At Lease End
- Conduct a pre-vacate inspection
- Compare the premises to the original condition report
- Agree on scope of works early
- Schedule sufficient time for make-good works
Retail leases may also require mediation through the NSW Small Business Commissioner if disputes arise.
Drafting Better Make-Good Clauses
Clear drafting reduces disputes. Consider:
- Defining the required condition clearly
- Specifying inclusions and exclusions (carpet, partitions, HVAC, etc.)
- Allowing a cash settlement option instead of works
- Referencing Section 133A where relevant
- Attaching photos or floor plans as benchmarks
A well-drafted clause reduces ambiguity and limits disputes at lease end.
When Disputes Still Arise
If disputes occur:
- Refer to the lease dispute resolution clause
- Use mediation (mandatory for retail leases)
- Engage expert valuers or building consultants if needed
- Avoid litigation where possible due to cost and uncertainty
Pre-Vacate Checklist
- Compare the premises against the condition report
- Remove tenant-installed fixtures
- Complete final cleaning and waste removal
- Arrange compliance inspections
- Confirm handover inspection date
Conclusion
Make-good obligations do not need to result in disputes. Clear lease drafting, early planning, and open communication help both landlords and tenants avoid unnecessary cost and delay.
If you are approaching the end of a lease or negotiating a new one, review your make-good clause early and seek legal advice where needed.
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) 9191 9293 or [email protected] for advice or assistance with any leasing matter.