Make good obligations at lease termination
If you are a landlord who owns a commercial property, or a tenant who occupies one, you may not be clear what a tenant’s obligations are at the end of the lease.
The first step is always to refer to your specific deed of lease, as different leases have different requirements. In this article, we discuss the requirements under the seventh edition of The Law Association form of Deed of Lease. Your specific lease, however, may have different requirements.
Reinstatement
At the end of a lease, a tenant has an obligation to return the premises in the same order, repair and condition as they were at the commencement date of the initial term of the lease. This obligation does not extend to repairing fair wear and tear arising from reasonable use. A tenant must also remove any signage they have installed and make good any damage caused.
Often a tenant will install fixtures, fittings or chattels into the premises; these remain the property of the tenant. At the end of a lease, a tenant may choose to remove all of their fixtures, fittings and chattels, and make good any resulting damage.
If a tenant does not remove the fixtures, fittings and chattels before the end of the lease, the landlord may elect for ownership of these to pass to themselves. A landlord may also require their tenant to remove its fixtures, fittings and chattels, and make good any damage.
Assignment of the lease
If a lease is assigned during the term of the lease, the assignee takes assignment of the original lease. This includes all of a tenant’s rights and obligations under the lease, including the obligation to reinstate the premises to the same repair and condition as they were at the commencement of the lease.
If you are considering taking on an assignment of a lease, it is very important that you are fully aware of the condition of the premises at the commencement date of the initial term of the lease, as you may be required to remove chattels and make good damage caused by a previous tenant.
Occasionally, instead of assigning the existing lease, a landlord and a new tenant will elect to enter into a new lease and the old tenant will surrender the existing lease. Often, the new tenant will buy assets (including the premises fit out) from the old tenant and the existing fit out will remain in place.
If a new lease is entered into, unless you modify the standard terms of the lease, the make good obligations will re-set to the condition of the premises as at the date of the new lease, and the new tenant will not need to reinstate the premises to the condition as at the date of the original lease.
As a landlord, you must consider the current condition of the premises and the fitout at the time a new lease is entered into. If there are particular items you require removed at the end of the lease, or if you require the premises to be returned to you in a similar condition to the condition as at the commencement of the original lease, this should be clearly documented in the new lease. This can be either done by incorporating photos of the original condition or by specifying actions the new tenant will need to take (such as painting walls or reinstating flooring).
Reducing disagreement
One of the most common disputes with make good obligations is a disagreement around the condition of the premises at the commencement of the lease. The key way to reduce the chances of disagreement is a well-documented premises condition report. The landlord and the tenant should inspect the premises together (or instruct an independent third party to inspect it) and document the condition of every part of the premises, preferably alongside high-quality photos. While this may take time and money, it is likely to be significantly cheaper and less time-consuming than a dispute at the end of the lease.
If the landlord and tenant reach agreement regarding fitout during the term of the lease (for example, that a particular item will be the landlord’s property, or that an item can remain in place at the end of the lease), that agreement should be clearly documented in writing between the parties.
We can help
Make good obligations at the end of a lease are a common point of contention in a landlord/tenant relationship. We can work with both landlords and tenants in understanding these obligations, and with negotiations at the end of a lease.
