WhatIsaMakeGoodClauseinaCommercialLease?

What is a make good clause? Learn how lease restoration duties work, who pays, what to negotiate and how Sydney tenants can manage exit risk with clarity.

A lease can look attractive at the rent offered, then become very expensive on the day the tenant hands back the keys. That is why asking what is a make good clause before signing is not a legal technicality. It is a practical business question that can affect your fitout budget, cash flow, bond and exit strategy.

For a café operator leaving a restaurant-ready site, make good may involve removing a commercial kitchen, exhaust canopy and grease trap connections. For an office tenant, it may mean demolishing meeting rooms, removing signage and returning the space to a bare shell. In an industrial property, it might extend to repairing roller doors, removing racking or dealing with alterations to power, drainage or flooring.

The clause needs to be read with the whole lease, the disclosure material and any condition report. A short sentence can carry a large financial obligation.

What is a make good clause?

A make good clause sets out what a tenant must do to the premises at the end of a lease. Its purpose is to define the condition in which the landlord expects to receive the property back.

Usually, the obligation falls somewhere between two positions. At the lighter end, the tenant may only need to remove its own goods, rubbish and signage, then repair damage caused by that removal. At the tougher end, the tenant may need to strip out all alterations, reinstate the premises to its original condition and repair any defects, even where the works improved the space.

The phrase “make good” is not one fixed legal formula. Its meaning comes from the particular wording of the lease. It can include cleaning, repairs, repainting, removal of fitout, reinstatement of walls or ceilings, replacement of damaged items and restoration of building services. It may also require the tenant to meet the landlord’s reasonable costs if the work is not completed properly or on time.

That difference matters. A tenant that has spent heavily creating a polished showroom or specialist medical suite may assume the landlord will welcome the improvement. Unless the lease says so, the landlord can still require its removal.

Why make good clauses cause disputes

Most disputes arise because everyone focuses on getting the deal done at the start, while the exit is years away. By the time the lease ends, key staff may have changed, the original premises condition is forgotten and the cost of construction has moved significantly.

Ambiguous wording creates room for disagreement. For example, “return the premises to original condition” sounds straightforward until the parties need to establish what original condition actually was. Was the tenancy handed over with old carpet, damaged ceiling tiles or an existing air-conditioning fault? Did the landlord approve the tenant’s works on the basis that they would stay, or was there always an expectation of removal?

A landlord also has a legitimate interest in being able to re-let the premises promptly. A partially removed fitout, exposed cabling or unapproved penetrations can delay the next lease and create safety issues. From the owner’s perspective, a clear make good obligation protects the asset and avoids being left with a costly problem.

For tenants, the risk is paying twice: first for the fitout that supports the business, then again to remove it. Good negotiation is about agreeing on a fair outcome while the parties have commercial goodwill and bargaining power.

The wording that deserves close attention

A make good clause should never be considered in isolation. Look closely at the definition of the premises, the permitted use, the fitout provisions, landlord consent letters and any incentive deed. A contribution from the landlord towards fitout does not automatically mean the tenant can leave it in place.

The central question is whether the obligation is to repair, remove or reinstate. Repair means fixing damage. Removal means taking out the tenant’s items. Reinstatement usually goes further, requiring the premises to be restored to a stated earlier condition.

Pay particular attention to these issues:

• The baseline condition. A dated entry condition report, photographs and a detailed schedule of condition are far more useful than relying on memory. They should record existing wear, defects, fixtures and services at handover.

• Alterations and landlord approvals. Each approval should say whether the works must be removed at lease expiry. If the landlord wants to retain an alteration, that should be recorded clearly.

• Fair wear and tear. Many leases exclude fair wear and tear from repair obligations, but the wording and scope matter. Wear caused by ordinary use is different from damage, neglect or a failure to maintain.

• Services and compliance. Electrical work, plumbing, fire services, grease arrestors, exhaust systems and structural changes can create costly reinstatement and certification requirements.

• Timing and access. Check whether make good must be completed before the final day, and whether the tenant can access the property after trading ceases to do the work.

• Landlord remedies. The lease may allow the landlord to complete the works, draw on the bank guarantee or bond, and recover its costs from the tenant.

A tenant should also check whether the make good standard is reasonable. Phrases such as “as new”, “to the landlord’s absolute satisfaction” or “in pristine condition” can be commercially harsh, particularly in an older building. A better position is an objective standard connected to the documented condition at the commencement date.

Commercial, retail and industrial premises are different

The practical scope of make good changes with the property and the business operating from it.

In a standard office lease, disputes often centre on partitions, cabling, joinery, floor coverings and signage. The tenant may negotiate a schedule identifying which elements can remain. That can save money and make the premises more attractive to the next office user.

Retail leases often involve highly tailored fitouts. Food premises are the clearest example. Removing cooking equipment is not simply a matter of taking it out the door. There may be roof penetrations, gas and hydraulic works, grease management systems, fire protection interfaces and council-related requirements. A restaurant operator needs to understand these obligations before accepting an incentive that encourages a large fitout investment.

Industrial occupiers need to examine racking, heavy plant, loading equipment, mezzanines, three-phase power, trade waste arrangements and concrete slab damage. Where equipment is fixed to the structure, removal can create a major repair bill. A tenant should not assume that an incoming occupier will purchase or retain the installation.

How to negotiate a fair make good position

The best time to negotiate is before the lease is signed. Once fitout works begin, the tenant’s leverage reduces sharply.

Start by asking the landlord what result they actually want at the end of the term. Some owners want a blank canvas. Others would prefer a quality fitout to remain, particularly where it suits the likely next tenant. If the answer is unclear, turn the discussion into written terms rather than leaving it as an informal understanding.

A practical compromise may be to list the specific items the tenant must remove and state that other approved improvements can remain. Another approach is for the landlord to give written notice six months before expiry identifying which alterations must be removed. This avoids stripping out useful works unnecessarily, while preserving the landlord’s choice.

Tenants can also seek to cap the obligation by referring to a schedule of condition, excluding pre-existing defects and limiting reinstatement to alterations made by the tenant. Where a landlord-funded fitout is involved, the incentive documentation should be consistent with the make good clause.

For landlords, clarity protects the relationship and the property. An overreaching clause may deter strong tenants or lead to an expensive argument later. A well-drafted clause gives the owner a defined handback standard without relying on vague demands at the end of the term.

Plan for make good before the final year

Make good should be a line item in every tenant’s occupancy budget, not an unwelcome surprise after a decision to relocate. Six to twelve months before expiry, inspect the premises against the entry condition report and identify likely work. Obtain quotes early, particularly for specialist trades and compliance work.

If you are assigning a lease or negotiating a renewal, make good is still relevant. An outgoing tenant may remain exposed if the assignment documents do not deal with liability properly. A renewal can also be an opportunity to reset the clause, especially where the tenant has invested in improvements the landlord wishes to keep.

At William Properties, we see the strongest property decisions made when commercial terms, operational requirements and legal risk are considered together. A make good clause is a small part of the lease document, but it can materially change the real cost of occupying a site.

Before committing to your next premises, ask for the exit obligation in plain language, document the starting condition and price the likely work. The best lease is not merely one that gets your business through the front door. It is one that lets you leave on fair, certain terms when the time is right.