Make Good

‘Make Good’ Planning Makes Good Sense For Leased Property

Fortunately, only a few Make Good disputes end up in the Courts. However, the potential for protracted arguments is on the rise.

Some of the drivers include:

  • Changing conditions in the resources sector seeing engineering firms and the like, downsize;
  • Large corporates relocating to new developments;
  • An increasing demand for smaller spaces generally, through improved efficiencies and flexible work environments.

When it comes to handing back tenancy space the Lessee will need to comply with obligations to ‘yield up’. This is typically where the arguments start. Differences of opinion in who owns what; what work needs to be done to return the property to a condition ‘as at commencement’; whether current condition falls under the exception of ‘fair wear and tear’; and whether the extent of partial repair requires full replacement – to mention a few.

Disputes that run beyond the lease term are settled by ‘damages’ – a financial settlement following a claim. These not only include the costs associated with the physical works (typically $200 – $300/sqm for offices) but also legal costs, loss of rent and outgoings.

The good news is that such arguments (and additional costs) can be avoided – through good planning. Continue reading

Lease Make Good – The Break Up

4 images joined upHeadaches and protracted negotiations at lease expiry could be avoided by well drafted Make Good clauses and thought out strategy (see Lease Make Good – The Pre Nup).

However, more often than not, the end of term Make Good obligations require negotiation between Landlord and Tenant.  This may be in the form of Lease incentives or other commercial considerations negotiated between the Property Manager, Asset Manager and the Tenant directly.

Alternatively, specialist Make Good advice can obtained from Napier & Blakeley.

What We Do – End of Term Claims:

We will discuss the overall asset strategy for the premises. This will consider what the owner ultimately wants from the Make Good process, i.e. a financial settlement, the Tenant to undertake the Make Good works or to use the Make Good figure part of their Lease renewal negotiations.

Undertake a review of the Lease and other tenure documentation prior to inspection, in order to determine and provide advice on the likely Tenant responsibilities. Continue reading

Lease Make Good – Pre Nup

4 photos joinedHeadaches and protracted negotiations at lease expiry could be avoided by well drafted Make Good clauses and thought out strategies prior to lease commencement.

Building owners and tenants can be poles apart in their understanding and interpretation of repair, maintenance and other make good related clauses. This in turn can lead to significant unforeseen costs, disputes and delayed income. 

Attention to the lease definitions and obligations together with some good asset management strategies can help to avoid such situations. 

Your lease and make good check list in this regard could include some thought around the following:

Premises

  • What are the physical elements and spaces under the obligation of each party?

Commencement Date

  • Does the obligation for repair, maintenance and make good extend to any previous terms of occupation perhaps under an earlier lease or option? 

Condition as at Commencement

  • If the tenant is expected to return the property back to a condition ‘as at commencement’ – can anyone recall what this looked and felt like?
  • Is it well defined and recorded in a schedule of condition with plans and photographs?  Continue reading

Taking the ‘Sting out of the Tail’ at Lease Expiry

Disruption, potential unplanned costs and conflict at the end of a lease due to make good obligations can sour what has been a solid commercial relationship between landlord and tenant. This can complicate the tenant’s move or the re-letting of the premises. The pressures of a poorly set up lease in terms of documentation, understanding of the consequences of the relevant clauses from a technical perspective and agreement as to the condition at occupation, or of future alterations, are self evident for both parties.  

Properly qualified building consultants should be actively utilised in such processes due to their knowledge and understanding of leasing and legal aspects combined with their expertise in building conditioning and rectification. The proactive stance is to bring all parties together prior to the signing of the lease to agree not only the terms of occupation, lease and physical condition but also to the process at lease expiry.  

If this process has not been followed, the building consultant plays a key role in interpreting the relevant lease clauses and evaluating the property’s condition so to effectively define the make good obligations, the cost and the best method of rectification. Continue reading

Benchmark Data to ‘Make good’ Informed Decisions

Are you a corporate occupier or property portfolio owner faced with budgeting ‘make good’ costs and financial reporting compliance?

Napier & Blakeley have assessed, negotiated and managed ‘make good’ costs for many years, including benchmark data to help inform future strategy.

To manage large portfolios, property and lease profiles are reviewed and sampled to quickly determine ‘make good’ obligations and the cost for returning the property to the required condition.

Costs and square metre rates from the sample are risk adjusted against Napier & Blakeley’s independent bench mark data and applied to the leased portfolio. Continue reading

Protecting Your Assets by Making Good

Under typical lease arrangements the tenant is responsible for repairs and maintenance to a specified condition during the lease term and for returning the property to a defined condition at expiry.

This should not be underestimated. In terms of commercial office property, lease end Make Good can equate to 75 to 120% of the rent per square metre and more under certain circumstances.

If left to the uninitiated a lack of repairs and maintenance will lead to reduced life expectancies of the building’s elements, plant and equipment – and in turn, premature capital expenditure for the replacement of such items.

This often leads to conflict and disputes which can complicate the tenant’s relocation or the landlord’s re-letting of the premises. In some instances this can also legitimately allow the landlord to claim loss of rent, rates and other associated losses which can be significant. Continue reading

What is the condition of your Schedule of Condition?

With the recent downturn in commercial property activity now is not a time to lose sight of good property management, especially in relation to the Schedule of Condition in the terms of your lease.

 

A crucial component of a good leasing strategy understands the importance and purpose of a Schedule of Condition.  All too often Make Good negotiations are made more complicated and protracted, not to mention more expensive, because there is no record of the condition of the premises at lease commencement.

 

Whilst the general purpose of a Schedule of Condition is acknowledged in the market place, their value as an effective tool in preventing disputes and removing ambiguity during the negotiation process is less understood and appreciated.

 

The level of protection a Schedule of Condition provides depends on a number of factors, namely the accuracy and detail of the schedule, the length of the lease and the lease obligations.  At worst a poorly prepared Schedule will offer little or no protection to the tenant if it fails to properly record the property’s condition in the context of the lease obligations,  is too ambiguous or, simply, is improperly or poorly referenced to the lease.   

 

Recently N&B were instructed by a tenant of a large dilapidated warehouse after they were served with a Final Schedule of Make Good totalling more than $1,000,000.

 

The lease term was for 5 years and did not have the protection of a Schedule of Condition.  Constructed in the early 1970’s, poorly maintained for longer than the preceding 5 years, the yield up clause in the lease required the tenant to deliver the property to the landlord in the condition which the lease stated as being “Good”, which would certainly have not been the case.

 

Fortunately for our client, we were able to reduce the claim to circa $200,000.  If a Schedule of Condition was prepared at lease commencement, however, the agreed settlement would have been negligible.

Make Good Makes the Difference

Whether you are a landlord or tenant, prior to signing a lease, during a lease or at lease end, accurate and timely Make Good advice can potentially save you a considerable amount of money and anxiety.

 

Steve Di Leo, Principal of WHK Horwath, one of the largest accounting groups in Australia, agrees and says of their clients “Corporates with the best Leasing Strategy make sure they understand how their Make Good component affects their bottom line” and sound Make Good agreements can significantly affect not only the Tax, but also the financial health of the signatories. 

 

Now, more than ever, landlords and tenants need to make sure that they fully understand the commitments in their Make Good agreements to ensure “that they don’t find themselves in a situation where they have spent a million dollars on a fit out only to find that they’re not eligible to receive the best tax outcomes they may have hoped for.” Di Leo advises.   While many larger corporates may have the Tax component under control, they may not have made provision for the new International Financial Reporting Standards (IFRS) accounting standards nor understand that a Future Make Good Obligation is an actual liability and not a contingent liability.

 

For example, if the estimated cost of your Future Make Good Liability at the end of your lease is $60,000 and the lease term is 5 years, then this appears as a $1,000 expense item on your monthly Profit & Loss and a $12,000 expense item on your annual P&L.

 

IFRS dictates that each year this estimated liability must be reviewed and updated to ensure continuing accuracy.  This review should take into account market price fluctuations and any additions or reductions to your liability due to any works that may have taken place during the preceding year.

 

Further, a well managed Make Good that accounts for tenant departure and temporary vacancies can benefit landlords with Reversionary Depreciation rights that may accrue to them when a tenant departs.  An example of this would be if a tenant incurred $20,000 on a fit out in 2000 and left the premises in 2005, they would have claimed a total of $2,500 in 5 years.  After the lease terminates, the construction expenditure pool of $17,500 would revert to the landlord affording them a additional $500pa claim on building allowance, assuming there is new tenancy.

 

So the advice from Di Leo and WHK Horwath is “to make sure that, when you enter into lease arrangements, you are clear of the Tax and Accounting implications of the agreement because it’s not something you need to think about at the end of your lease, it’s got ongoing implications now for both landlords and tenants.”