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Make-good clauses protect both parties

Innovative commercial solutions that suit both tenant and landlord should be the goal of any make-good agreement.

Make-good provisions are found in most New Zealand commercial property leases and supported by legislation and case law.

David Guy, director Bayleys building consultancy team says when a tenancy ends, the make-good provisions oblige tenants to reinstate the landlord’s property to the condition that it was in when the lease began.

This means either undertaking physical works or compensating the landlord with a financial settlement.

“The purpose of a make-good clause is to protect the landlord from having to pay for repairs that were caused by tenant negligence or use of the property.

“In the current market, commercial landlords generally prefer financial settlements as this allows them to decide on the scope and extent of works best suited to maximise future rental returns on their property.

“Tenants, meanwhile, are keen to minimise their financial exposure to make-good claims, and in some cases are looking to reduce their residual leasehold repair costs by assigning or sub-leasing surplus space.”

Make-good provisions are important for the property to be rented out to another tenant. Guy says occupiers and landlords need to fully understand the extent of their obligations under the lease agreement and should ensure that any make good-clauses are clear and unambiguous to reduce risk at lease end.

“In our experience, landlords who haven’t sought professional advice often either don’t know about make-good or have little appetite to enforce it. Consequently, they may find themselves financing a much larger share of construction costs necessary to re-let their buildings.

“Experienced landlords tend to be highly aware of the value of make-good within their lease portfolio and major corporate occupiers, some of which have dedicated property teams, are well-advised and highly aware of the full extent of their leasehold repair exposure.

“However, smaller businesses are all too often blissfully unaware of the sting in the tail that waits at the end of their property lease.”

Occupiers should get a detailed Premises Condition Report before signing a lease as this time and date stamps the state of the building for reference at lease end – hopefully avoiding conflict.

“Our experience is that ‘reasonable’ make-good claims settle relatively quickly. However, when either side takes an ‘unreasonable’ stance, the matter becomes unduly lengthy and expensive,” explains Guy.

“Property leases generally include provisions for dispute resolution, but our view is that these are often the wrong tools to resolve make-good disputes. They are expensive to implement and take a long time to reach conclusion.

“With the right advice, fair and reasonable make-good settlements can be agreed in good faith. These should include innovative commercial solutions that fit the needs of both parties.”

Tenants are generally obligated to remove all property belonging to them on exit, and to leave the space tidy and clean. Beyond this, they would likely be expected to repair any damage caused while in occupation, and reinstate fixtures, flooring, partitions etc that may have been removed by them at the start of the lease.

Matt Lamb, Bayleys national director office leasing says the trend towards occupiers wanting turn-key, fully-fitted office space is largely negating make-good obligations as the fitout belongs to the landlord.

“Naturally, fair wear and tear provisions still apply with any make-good generally around patch and paint to blemished walls.

“The cost of fitout to an occupier is really driving demand for plug and play space that is fully kitted-out and is seamlessly transferrable to a new tenant.”

In the industrial leasing market, Scott Campbell says the capital outlay involved in racking and office fitout means that increasingly, landlords are tending towards cash-out settlements with outgoing tenants to make the property more attractive to a new tenant.

“Ordinarily, all racking, plant and machinery would be removed, flooring returned to original, and any office space associated with warehousing reinstated to the condition it was in at lease commencement.

“But we are seeing more landlords prepared to enter into negotiations for cash-out settlements with tenants instead of make-good requirements.

“This does rely on a tenant being fully across costings and for some, freeing themselves of any physical make-good works is worth it solely for the time saved.”

Chris Beasleigh, Bayleys national director retail says the level of make-good in the retail leasing market generally depends on the type of retail business involved and the degree of fitout specialisation.

“For more bespoke retailers, a lease is likely to contain a detailed make-good provision as any fitout installed may be of no use to another occupier, and would limit the retail tenancy’s appeal in the rental market.

“However, for hospitality venues like restaurants, an allowance may be made to leave the extraction, kitchen and bathroom fitout in place as they could be used for the next tenant.

“Likewise if a tenant puts in air conditioning, that may be agreed to be left in after the tenant leaves.

“So there’s no set rule in the retail space, however any fitout that benefits both parties seems to be a negotiable point on exit.”

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