TL;DR (what’s this ?)
- A make-good clause sets out what condition a tenant must return the premises in at lease end, and how disputes get resolved.
- The wording can make a six-figure difference at exit, and lenders read it carefully because it affects cash flow during changeover and the property’s value at sale.
- Common wordings include full strip-out to base building, reinstatement to commencement condition, cash payout in lieu, and fit-out left in place.
- Lenders, valuers and future buyers all read the make-good clause, so strong wording supports better loan terms today and a stronger sale price at exit.
Most first-time commercial investors focus on the rent, the term and the tenant covenant when reviewing a lease. The make-good clause usually gets a quick read and a tick. Years later, at lease expiry, that same clause can mean the difference between a clean handover and a six-figure dispute.
Make-good clauses determine what condition the tenant has to return the property in, what the landlord can claim if they don’t, and how disputes get resolved. They directly affect the asset’s value, the financeability of the property at sale, and your cash flow at the end of every lease cycle.
As a finance broker in Melbourne, we walk through make-good clauses with every investor before they sign a contract on a commercial property, because lenders read them too.
What a Make-Good Clause Actually Does
A make-good clause is the part of a commercial lease that sets out what the tenant has to do to the premises before handing them back at the end of the lease. Here is what the wording typically determines the tenant must do:
- Return the premises to their original (base building) condition, stripping out all fit-out, partitions, signage and services.
- Return the premises in their current condition at lease commencement, fair wear and tear excepted.
- Leave the fit-out in place for the next tenant or the landlord.
- Pay the landlord a cash sum in lieu of physically restoring the premises.
The four scenarios produce very different outcomes. A full make-good back to base building on a 1,500 square metre office fit-out can run to several hundred thousand dollars.
A leave-in-place clause on the same fit-out costs the tenant nothing at exit and may even add value for the next tenant. The clause wording is what decides which it is.
Why Lenders Care About Make-Good
Lenders read the make-good clause as part of their underwriting on a commercial investment property. Here are the three things they specifically focus on:
Cash flow during the changeover period
If the lease ends and the tenant carries out a significant make-good, the property is often vacant during the works. That’s months of no rent, plus outgoings still being paid by the landlord. Lenders model this gap and expect you to have buffer in place.
Capital cost to the landlord
If the tenant pays out a cash sum in lieu, you receive cash but the premises still need to be made ready for the next tenant. The economics depend on whether the cash payout exceeds the actual restoration cost. Lenders look at this carefully on properties where re-tenanting is likely to require new fit-out.
Property value at sale
A property with strong make-good obligations on tenants often values higher than one without, because future cash flows are more predictable. When you eventually sell or refinance, the make-good clauses in your tenant leases form part of the asset’s underwriting.
The Common Make-Good Wordings (and What They Cost You)
The four make-good wordings below cover the vast majority of commercial leases in Australia. Here is how each one tends to play out for landlord and tenant:
Full strip-out to base building
The strongest position for a landlord. Tenant must remove all fit-out, services, partitions and floor coverings, and return the premises to a clean base building condition. Common in older office leases and where the landlord wants flexibility for the next tenant.
Reinstatement to commencement condition
Tenant must return the premises in the condition they took them, fair wear and tear excepted. If the tenant added fit-out during the lease, they must remove it. If they took the premises with existing fit-out, they leave that fit-out in place. Negotiation often centres on what fair wear and tear means in practice.
Cash payout in lieu
Tenant pays the landlord an agreed sum at lease end instead of physically restoring the premises. The amount is usually based on a quantity surveyor’s estimate of the restoration cost. Cleaner administratively, but the landlord then carries the risk of actual restoration costs exceeding the payout.
Leave fit-out in place
Tenant leaves the existing fit-out for the next occupant or the landlord. Often used where the fit-out is valuable, generic, or where re-tenanting is expected to be quick. Reduces tenant exit costs to near zero.
What Investors Should Negotiate For
On a property you’re acquiring, you usually inherit the existing lease and its make-good clause. There’s limited room to renegotiate mid-lease unless the tenant is up for a renewal or extension. On new leases you’re putting in place after acquisition, here are the things worth pushing for:
- Clear definition of original condition or base building condition with a written specification, ideally photos taken at handover.
- A specified make-good period (typically 30 to 60 days after lease end) so the tenant doesn’t drag the works out indefinitely.
- A right to do the works yourself and recover the cost from the bond or guarantee, if the tenant fails to perform.
- A clear mechanism for resolving disputes about scope, cost or quality, ideally with a nominated quantity surveyor.
- Where possible, a cash-in-lieu option triggered at the landlord’s election rather than the tenant’s, so you keep flexibility.
Strong make-good wording does more than protect you at exit. It also strengthens the property’s lending profile, because lenders see the lease as more predictable from a cash flow perspective.
Common Make-Good Disputes (and How They Get Resolved)
The two most common disputes at lease end come down to how the lease was originally drafted. Here are the two issues that turn up most often:
Disputes over scope of works
Scope disputes usually arise where the make-good clause is vague or where the original condition wasn’t documented. If the lease says return the premises to the condition they were in at commencement but no one has photos from commencement, the dispute often ends in negotiation or quantity-surveyor mediation.
Disputes over quality of works
Quality disputes arise where the tenant carries out the works but the landlord considers them sub-standard. The lease wording determines whether the landlord can reject the works and require redoing, accept them with a deduction, or claim damages.
In Victoria, retail leases are governed by the Retail Leases Act 2003, which provides additional consumer-style protections affecting make-good obligations. Industrial and office leases sit outside that Act and rely on general contract law and the lease wording itself.
How Make-Good Affects Your Loan Application
When we lodge a commercial property investment loan application, the lender’s credit team will read the lease in full, including the make-good clause. A weak or vague make-good clause on a property with significant fit-out can affect the loan-to-value ratio (LVR), the term offered, or the lender’s appetite for the deal.
On the other side, well-drafted make-good clauses can support stronger loan terms because the lender sees the asset as more financeable at exit. This is one of the small lease details that doesn’t make the headline numbers but quietly shapes the deal.
Avoid a Six-Figure Surprise at Lease End
A vague or poorly drafted make-good clause is one of the more common ways commercial investors get hit with an unexpected bill at lease end, sometimes well into six figures. And make-good is just one of several lease clauses that quietly shape your exit. Rent review mechanisms, options to renew, outgoings recovery and tenant covenant strength each affect how the property is financed and what you walk away with at sale.
If you’re considering a commercial investment property, sending the contract and the lease through to a finance broker in Melbourne before you commit lets us flag the financing and exit implications across the full document, not just the make-good clause. Call Loanworx on 1300 562 696 to talk it through.
This article is general information only and does not constitute financial, legal or tax advice. Please obtain independent advice before signing or enforcing a commercial lease.
Frequently Asked Questions (FAQs)
1. Who pays the make-good cost on a commercial lease?
The tenant carries the make-good cost in almost all commercial leases. The exact obligation depends on the lease wording: full strip-out to base building, reinstatement to commencement condition, a cash payout in lieu, or leaving the fit-out in place. If the tenant fails to comply, the landlord can usually claim against the bond, the bank guarantee or pursue damages, depending on the lease.
2. Can a make-good clause be renegotiated mid-lease?
Mid-lease changes are uncommon unless both parties agree, typically at a lease renewal, extension or option exercise. The most useful time to negotiate make-good wording is at the start of the lease or as part of a renewal negotiation, when the parties have something to trade.
3. Does a make-good clause affect my commercial property’s resale value?
It can. A property with clear, well-drafted make-good clauses across its leases is generally easier to value and finance, which supports resale. Vague or weak make-good clauses can introduce uncertainty into a buyer’s underwriting and may be reflected in the offer price.
4. How long does a tenant typically have to complete make-good works?
Standard practice is somewhere between 30 and 60 days after lease end, though the exact period depends on the lease wording. Without a specified make-good period, disputes can drag on for months while the property sits idle, which is why a clear timeframe in the lease is one of the more useful things to negotiate at lease drafting.
5. Can a tenant negotiate out of a make-good clause entirely?
Sometimes, particularly where the tenant is strong and the market is soft. Tenants with leverage may negotiate a leave-fit-out-in-place clause, a capped cash payout, or an explicit list of items that don’t need to be removed. From a landlord’s perspective, agreeing to weak make-good wording usually means accepting that re-tenanting costs are your problem at exit, so the trade-off should be reflected in the rent or other lease terms.
6. What happens if the tenant goes into administration before lease end?
Make-good obligations become much harder to enforce against an insolvent tenant. The landlord typically becomes an unsecured creditor for any unpaid make-good amount, and recovery rates in those scenarios are usually low. This is one reason lenders look closely at tenant covenant strength alongside the lease wording, and why bank guarantees or strong personal guarantees from directors of corporate tenants are often required on commercial leases.
