This article will outline what a make-good clause is, how they are often drafted, some specific considerations regarding such clauses, and how this may impact you when renting a premises or when you might need such a clause when renting your premises to a business.
What is a make-good clause?
A “make good” clause outlines a lessee’s obligations to return the premises (or other rented property) to whatever condition (as outlined in the lease) at the end of the lease period. Often the clause includes details about the following:
- alterations,
- removing fixtures,
- removing items,
- repainting,
- restoring other services or removing agreed-installed services.
These types of clauses are essential not only to protect the landlord from any changes made to the premises but also to protect the tenant. A well-drafted clause will fully encapsulate what they will have to do when leaving the premises, allowing them to calculate such costs in their business plans.
Make good clauses should also:
- Ensure they provide adequate detail concerning the restoration works;
- Provide a timeframe for when the works must be completed before the termination of the lease or the tenant vacates the lease.
- Have a system for allowing the landlord to approve works. This ensures that any changes made to the property are within acceptable parameters, minimising potential conflicts with the landlord in the future.
Based on the above, make-good clauses require careful drafting and planning. Here at Eleven Legal, we have experience drafting and reviewing these kinds of clauses to ensure that, whether you are a tenant or a landlord, the lease is drafted in a fair and reasonable manner, and the clause operates properly to outline all obligations as agreed between the parties.
Importance of heads of agreement in setting up make-good clauses
A heads of agreement (“HOA”) is the initial starting point for all lease negotiations. Typically, this document is prepared by an agent and incorporates the basic agreed terms of the lease, including rent, lease period, security/guarantee, legal costs, outgoings and any special conditions.
The basis of the wording of the make-good clause usually comes from obligations outlined in the HOA. Therefore, it is important that when the HOA is negotiated, there is a concerted effort to not only focus on the common terms but also ensure that any make-good obligations are properly outlined and defined in the HOA.
It is also usually a good idea for the tenant to ensure that adequate condition reports are prepared (including photographic evidence) so that these can be relied upon later during any later dispute. These are usually prepared by the agent. However, this can also be done by the tenant as they enter the property for any inspections as part of the initial negotiations before moving into the premises.
“Bare shell” make-good clauses
A “Bare shell” make good clause requires the tenant to strip the premises back to its original condition (this is often referred to as a “bare shell condition”) on termination of the lease. This usually involves the removal of all fixtures, fittings, and improvements made by the tenant (or any previous tenant), leaving behind only the essential structure of the building, such as walls and ceilings, without any internal installations or customizations. It is also often a stipulation that floors are also removed (especially any carpet).
These clauses are often used in businesses where the tenant will need to significantly customise the leased space to suit very specific functions related to that business. The clause can operate to prevent disputes related to the property’s condition upon handover, providing certainty for tenants regarding the condition of the premises at the end of the lease. Tenants should be wary of such clauses in some scenarios as the costs associated with returning the property to its “original condition” are often onerous and need to be budgeted accordingly by the tenant when entering into the lease.
Here at Eleven Legal, we have specific experience dealing with “bare shell” clauses, and we will ensure that no one unfairly attempts to disadvantage a party by drafting an onerous clause during any negotiations between parties.
Specific costs for works
The financial implications of “make good” clauses for tenants in commercial leases can be significant, encompassing multiple costs that require careful consideration and planning from the tenant. These obligations often entail not just the removal of any fixtures and fittings but also repairs to damages and general restoration to meet the agreed-upon condition specified in the lease.
Costs can include hiring contractors for demolition and removal, professional cleaners, painters, and other specialists to restore the space to its original state or as defined by the lease. Given these potential expenses, tenants should budget for these costs early to avoid unexpected financial burdens at the end of their lease term, ensuring a smoother transition and compliance with their lease obligations.
We’re here to help
Given the above, it is clear that “make-good” clauses can be complex, drafted poorly or otherwise onerous for both tenants and landlords. These clauses ensure that premises are returned in a condition that maintains the property’s value and marketability, yet they also impose considerable responsibilities and potential costs on tenants. Understanding and negotiating these clauses with precision and foresight is essential for both parties to safeguard their interests and mitigate the risks of disputes or unforeseen financial costs.
Please contact us here at Eleven Legal to assist you in either reviewing a lease with such clauses or to help you draft a lease with clauses specific to your needs. We can provide a range of advice related to leases to suit your premises or your business needs related to your lease.
