What is the difference in make-good obligations in a retail and non-retail lease?

Introduction

A make-good obligation forms part of every lease. Whether the lease has ended due to the end of the lease term or an early surrender of the lease, the tenant must carry out its make-good obligations as set out in the lease.

What is a make-good obligation?

Making-good on the premises obligates the tenant to return the premises to the landlord in the same condition it was originally provided to the tenant. Generally, a tenant is required to remove their fit-out, fixtures, installations and any property when the lease is over. Making-good may also obligate the tenant to repair any damage to the premises that was caused throughout the duration of the lease.

Importantly, both retail and non-retail leases require the tenant to make-good prior to exiting the lease. However, the level to which a tenant is required to make good can differ greatly between retail and non-retail leases.

Make-good obligation in a Retail Lease

Whilst a well-written make-good provision can determine the tenant's make-good obligations, it is important to ensure that the lease provisions align with the Retail Leases Act ("The Act").

A retail lease requires the landlord to repair and maintain the premises, pursuant to Section 52 of the Act. In particular, the landlord “is responsible for maintaining the premises in a condition consistent with the conditions of the premises when the retail premises lease was entered into.”

The landlord's repair and maintenance obligations include the repair and maintenance of

(a)  The structure of, and fixtures in, the retail premises; and

(b)  Plant and equipment at the retail premises; and

(c)   The appliances, fittings and fixtures provided under the lease by the landlord relating to gas, electricity, water, drainage or other services.

For example, taking into consideration point (b), if the air conditioner at the premises no longer works, it is the landlord's responsibility to repair and maintain it as it forms part of the premises' equipment.

However, there are limitations as to what the landlord is required to repair and maintain. Section 52 of the Act states that the tenant is responsible for the repair and maintenance of the premises if the need for the repair arises out of the misuse by the tenant or the tenant is entitled or required to remove the item at the end of the lease.

Therefore, whilst the make-good obligations in a retail lease require the tenant to reinstate the premises as at the date the tenant received the premises, it is the landlord's obligation to repair damage to the premises (within limitations).

Therefore, prior to entering the lease, both landlords and tenants should carefully consider and negotiate make-good clauses to ensure that the lease aligns with the Retail Leases Act. The Act will always override the lease provisions and the lease may be considered an unfair lease term, which may cause the landlord to be in breach of the Act.

Non-Retail Leases

A non-retail lease also has make-good obligations, however, the responsibilities of the tenant and landlord can be quite different from retail leases. As non-retail leases are governed only by general contract laws, the parties have the ability to negotiate their obligations to a greater degree, compared to a retail lease.

Similar to a retail lease, the non-retail make good-obligations require the tenant to return the premises to its original state prior to the commencement of the lease. The provisions in a non-retail lease will specify the tenant’s make-good obligations, which may include the usual obligations of removing fixtures, fittings and property, but can also require the tenant to repair and maintain the property, even if the repair does not result out of misuse by the tenant. For example, if the air conditioner breaks, which is usually plant or equipment, it is the tenant's responsibility to repair and make-good prior to the expiry of the lease.

Considerations of make-good provisions

As most make-good provisions generally require the tenant to reinstate the premises to its original condition, it is important to obtain a condition report prior to the commencement date of the lease, to ensure that the make good obligations are clearly understood. The condition report should document the condition of the premises when the premises was handed over to the tenant, and also establish how the premises must be returned at the end of the lease.

It is always important to carefully consider your make-good obligation clauses whether you are a tenant or a landlord, otherwise there can be significant expenses to either party at the end of the lease. Both landlords and the tenants are able to negotiate the make good-obligations. Negotiations may depend on the use of the premises, the location, the length of the lease and the type of fit-out that the tenant plans on installing at the premises.

How Sharrock Pitman Legal can assist

As no two premises are the same, lease agreements should be drafted to suit the features and purpose of the property that is the subject of the lease. A well-drafted lease agreement is essential to protect, not only, the interests of the landlord, but also, of the tenant.

Effort spent drafting a detailed, comprehensive lease agreement reduces the risk of a dispute arising between the parties at a future date.

Our Accredited Specialist Property Law team is experienced advising both landlords and tenants on lease arrangements. The team has particular expertise in relation to industrial and manufacturing sites, retail premises and office leasing.

Please do not hesitate to contact us on 1300 205 506 or property@sharrockpitman.com.au.

Further Reading

For more information on retail and non-retail leases.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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