Make good obligations: how to avoid end-of-lease cost shocks

Most retail tenants focus on rent, outgoings and fit-out costs when they sign a lease. The make good clause is usually skimmed, if it’s read at all. Yet when the lease ends, that single clause can trigger a bill that wipes out months of profit. The good news is that make good obligations are negotiable, and early planning can cut the final cost by half or more.

What ‘make good’ actually means

In simple terms, make good is the tenant’s obligation to return the premises to the condition required by the lease. The Retail Leases Act 2003 (Vic) implies a basic make good standard, but landlords almost always add extra requirements in the lease document. These can include:

• Removing all tenant-installed fixtures, fittings and equipment (FF&E).
• Repairing any damage caused during the tenancy.
• Repainting walls to a specified standard or colour.
• Reinstating original floor coverings or replacing them with landlord-approved materials.
• Removing all signage, including internal and external branding.
• Cleaning the premises to a commercial standard.

Crucially, the lease may require the premises to be returned to its original condition, not just a ‘reasonable’ state. If the original condition was a bare shell, the tenant could be on the hook for a full strip-out, even if the landlord plans to demolish the space immediately after handover.

When make good obligations kick in

Make good is triggered at lease expiry, but it also applies if the tenant breaks the lease early or assigns it to a new tenant. Some leases include a ‘yield-up’ clause that requires the tenant to offer the premises back in a make-good state before the landlord will consent to an assignment. This can delay the sale of a business or force the outgoing tenant to fund the make good before they’ve received any assignment proceeds.

Key dates to watch

• Lease expiry: The most common trigger. The tenant must complete the make good before the last day of the lease.
• Early termination: If the tenant exercises a break clause or negotiates an early exit, the make good is usually due at the same time.
• Assignment: The lease may require the outgoing tenant to make good before the landlord consents to the assignment, or it may allow the new tenant to take on the obligation.
• Option exercise: Some leases reset the make good obligation when a tenant exercises an option, requiring the premises to be returned to the condition at the start of the new term.

How landlords use make good to extract extra value

Landlords often treat make good as a profit centre. Common tactics include:

• Over-specifying the standard: Requiring premium materials or finishes that exceed the original condition of the premises.
• Broad definitions of damage: Classifying normal wear and tear as damage that must be repaired at the tenant’s cost.
• Retention of bond or bank guarantee: Withholding funds until the landlord’s contractor certifies the make good is complete, which can take weeks or months.
• Charging for landlord works: If the tenant doesn’t complete the make good on time, the landlord may do the work and charge the tenant at inflated rates.

In shopping centres, landlords sometimes require tenants to use the centre’s preferred contractors for make good works. These contractors often charge a premium, and the landlord may receive a referral fee or kickback. Always check the lease for any mandatory contractor clauses and negotiate them out if possible.

How to negotiate make good before you sign

The best time to reduce make good costs is before the lease is signed. Once the document is executed, the tenant’s bargaining power drops sharply. Focus on these areas:

Define the standard

Push for a make good standard that reflects the actual condition of the premises at the start of the lease. If the premises were handed over as a bare shell, the tenant should only be required to return it as a bare shell. If the premises had existing fit-out, the tenant should only be required to remove their own additions and repair damage caused during their tenancy.

Limit the scope

• Exclude ‘fair wear and tear’ from the make good obligation.
• Cap the cost of repainting or floor repairs to a reasonable amount per square metre.
• Exclude structural repairs, which should be the landlord’s responsibility.
• Allow the tenant to leave behind fixtures or fittings that could be reused by the next tenant, with the landlord’s consent.

Shift the timing

Negotiate a clause that allows the tenant to complete the make good after the lease ends, provided the premises are handed back in a clean and safe condition. This gives the tenant more time to arrange cost-effective contractors and avoid landlord penalties for late handover.

Add a cash settlement option

Some leases allow the tenant to pay a fixed amount in lieu of completing the make good. This can be a good option if the tenant wants to exit quickly or if the make good works are minor. The fixed amount should be agreed upfront and based on a realistic estimate of the cost of works.

How to reduce make good costs at lease end

Even with a well-negotiated lease, make good can still be expensive. These steps can help keep costs down:

Start planning early

Begin planning the make good at least 12 months before the lease ends. This gives time to:

• Obtain quotes from multiple contractors.
• Schedule works during a quiet trading period to minimise disruption.
• Negotiate with the landlord to leave behind fixtures or fittings that could be reused.

Document the condition

Take detailed photos and videos of the premises at the start of the lease and again before the make good begins. This evidence can be used to dispute landlord claims for damage or excessive repair costs. Include close-ups of walls, floors, ceilings, fixtures and any existing damage.

Get multiple quotes

Landlords often suggest using their preferred contractors, but these quotes can be inflated. Obtain at least three quotes from independent contractors and compare them. Look for contractors with experience in retail make good works, as they will understand the specific requirements of shopping centres and strip retail.

Negotiate with the landlord

Even at lease end, there is often room to negotiate. Common compromises include:

• Leaving behind fixtures or fittings that could be reused by the next tenant.
• Agreeing to a partial make good, where the tenant completes only the essential works and the landlord takes responsibility for the rest.
• Paying a fixed amount in lieu of completing the make good, if the landlord is open to it.

Consider a make good bond

Some tenants choose to set aside a make good bond in a separate account, funded by regular contributions over the life of the lease. This ensures the funds are available at lease end and can reduce the financial shock of a large make good bill.

What happens if you don’t comply

Failing to meet make good obligations can have serious consequences:

• Financial penalties: The landlord may charge the tenant for the cost of completing the make good, often at inflated rates. They may also withhold the bond or bank guarantee until the works are complete.
• Legal action: The landlord may take the tenant to VCAT or court to recover the cost of the make good. This can result in additional legal fees and damages.
• Reputation damage: Landlords share information about difficult tenants, and a history of make good disputes can make it harder to secure future leases.
• Assignment delays: If the lease requires the premises to be handed back in a make-good state before the landlord consents to an assignment, the tenant may be unable to sell their business until the works are complete.

If the tenant believes the landlord’s make good demands are unreasonable, they should seek advice from their solicitor. The Retail Leases Act 2003 (Vic) provides some protections for tenants, but disputes can be time-consuming and costly to resolve.

Frequently asked questions

Talk to a Melbourne retail leasing consultant

Elite Retail Leasing acts for retail tenants across Australia on new sites, renewals, lease negotiations, surrenders and expansion planning. If any of the above applies to your business, get in touch.

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