Often, one of the most contested clauses of any commercial lease is the clause that determines what condition the premises must be in when returned to the lessor. Generally speaking, these types of clauses are called “make good” or “redecoration” clauses, and an example provision is extracted below.

The Tenant must upon the expiry or earlier determination of this Lease make good and yield up the Premises in good and substantial repair and condition, structural defects and damage from acts of god excepted.

The lessor is often concerned that they are going to receive dilapidated premises, and conversely, the tenant is concerned they are going to be overcharged for the reinstatement works.

What does it mean to make good?

Permutations of the words “make good”, “yield up”, “deliver up” or “keep” in “good and substantial repair and condition”, “good and tenantable repair”, “good and habitable repair” or “good repair” all have the effect of imposing on the tenant an obligation to give the premises back to the lessor in the condition they were received.[1]

Appropriate scope of a make good clauses

There is a misconception in commercial leasing that the vaguer a clause is, the more advantageous it will be for the lessor because by virtue of the vagueness, the lessor can unilaterally decide their meaning. This is not the position at law and lessors who believe in it lead themselves into error. Unless an intention to the contrary is expressly written into the lease, the position at law is that the party who created the agreement (both, usually the lessor) will have the agreement construed against them, in favour of the other party (usually the tenant).[2]

It is far more certain and cost effective for lessors to specifically set out the end of lease obligations, which may, for example, include obligations of the tenant to:

1. recarpet all previously carpeted surfaces;
2. repaint all previously painted internal and external surfaces;
3. pressure wash and apply degreaser to all concrete hardstands/floor surfaces;

to a standard or quality at least equivalent to the original specifications for the works and only after approval of the standard or quality of materials and proposed contractor by the lessor in their discretion, which must be exercised reasonably.

Spending in anticipation of recovery

Another concern for lessors claiming upon a make good clause is the risk that they do not recover monies they spend in anticipation of recovery. This is a particularly dangerous trap in Queensland and New South Wales (which has similar legislation in this respect) because of section 112(1) of the Property Law Act 1974 (Qld), extracted below.

Damages for a breach of a covenant, obligation or agreement to keep or put premises in repair during the currency of a lease, or to leave or put premises in repair at the termination of a lease, whether such covenant, obligation or agreement is expressed or implied, and whether general or specific, shall in no case exceed the amount (if any) by which the value of the reversion (whether immediate or not) in the premises is diminished owing to the breach of such covenant, obligation, or agreement …

Accordingly, notwithstanding that a lessor may actually spend money on repairs which were required to rectify a tenant’s breach, the Property Law Act caps the damages recoverable by the lessor at the “diminution”, or decrease, in the value of the premises which was caused by the tenant’s breaches (insofar as those were breaches of the make good provisions).

To avoid the consequences of being caught by the Property Law Act, lessors should be careful not to overspend in anticipation of recovery (perhaps only undertaking truly necessary works until resolution of the dispute) or otherwise attempt to characterise the end of lease obligations as “redecoration” obligations, which may not be within the ambit of the Property Law Act’s reach.

The warning for lessors and tenants

Ensure your end of lease rights (for lessors) and obligations (for tenants) are clearly set out in the lease so there are no misunderstandings as to what is and is not required upon the tenant’s departure and prepare a proper entry and exit report which includes photos. Where the lease is for high value premises, you may even consider commissioning an entry and exit report by a quantity surveyor or other qualified professional.

[1] Graham v Markets Hotel Pty Ltd (1943) 67 CLR 567.

[2] Referred to as the contra proferentem rule.