Make Good Clauses in NZ Commercial Leases

As a landlord for commercial premises, you will want to ensure that your tenancy agreement, and the provisions within it, are carefully considered and evaluated. One such provision that you may wish to include is a make good clause. This article will detail:

• what a make good clause is;
• some issues you should consider when including such a provision in your lease; and
• an alternative to a make good clause. 

What Is a Make Good Clause?

A make good clause is a term of a commercial lease that requires the tenant to return the premises to the condition that it was in when the lease began. This provision places an obligation on the tenant to undo any renovations made or repair any damage done to the premises before the lease term ends. 

Things to Consider for a Make Good Clause

In commercial leases in New Zealand, there is no implication of make good clauses. If you wish to include a make good clause in your lease agreement, you must expressly draft it in. 

What this make good clause requires is determined by negotiations between you and your potential tenants. Therefore, as the landlord, you should be specific and clear as to what expectations you have as to the extent of the make good. This ensures that the tenant hands back the premises in the appropriate condition. 

However, a make good provision does not require the tenant to put the premises into any better condition than when the term of the lease began. If, for example, there were marks on the floors or scratches in the paint on the walls when the tenant first took over the lease, they are not obligated to repair these issues. Furthermore, there are certain changes to a property that are considered fair wear. An example of fair wear is a carpet deteriorating from hundreds of customers walking through the premises. Changes to fair wear are not required under make good clauses. 

Condition Report 

A condition report is a document that accounts for the state that the property was in before the tenant took over the lease and moved in. This report will usually include:

• photos of the property; and
• notes on any defects in the premises. 

A detailed condition report is useful as it provides clear evidence to both you and the incoming tenant of the premises’ original condition. You should ensure that the tenant has agreed to the condition of the premises before signing the report. 

Before the lease ends, you should carry out a second condition report or a make good assessment. This assessment will compare the current state of the premises to the original condition report and account for any damage or changes made to the property. It is these issues that the tenant should make good before the expiration of the lease. 

Assignment and Subletting 

Throughout the tenancy, your tenant may have sublet or assigned their lease. If they have, this may affect who is responsible to make good the premises. 

Under an assignment, the original tenant transfers their rights and obligations under a lease agreement to a new tenant. Therefore, the new tenant is assigned the responsibility to make good the property. If you have assigned your lease, you should ensure that the new tenant retains the premises to their original condition, even if the original tenant undertook the changes. 

If your tenant has sublet their premises, they will remain obligated to make good the premises before the lease ends. 

Alternatives to a Make Good Clause

You may wish to include an alternative to the make good clause. Instead, you could include a provision in the lease agreement that requires the tenant to pay you the cost of fixing any alterations or damage made during the tenancy. The tenant would need to pay this amount before they stop paying rent. The amount you ask for will depend on how much it will cost to return the premises to their original condition.

What provision you include in the final lease depends on what best suits you and what you believe will give rise to the least amount of conflict with your tenants. However, all parties to the tenancy must agree to any term you decide to include. 

Key Takeaways 

When you are drafting a lease for your commercial property, you may wish to include a make good clause. Alternatively, you may want to ask that your tenants compensate you directly for any changes made to the property throughout the tenancy. Regardless, you should ensure that you communicate your expectations in clear and express terms. Furthermore, it is best practice to conduct a comprehensive condition report before the tenancy begins to ensure that there is clear documentation of the premises’ state before the commencement of the lease. 

If you are interested in including a make good clause in a commercial lease agreement or are having any other legal issues, LegalVision’s leasing lawyers can help. Contact us by calling 0800 005 570 or complete the form on this page.

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