Did you know…

And through our further success in negotiating Make Good settlements we have found that most of the errors we see in Make Good assessments by the opposing party relate to the building services.

Napier & Blakeley directly employ building services engineers as part of our Make Good assessment team to provide accurate and defensible cost estimates.

If you would like to talk to us further about Make Good assessments, or if you have any questions on this topic, please contact:

NATIONAL Rob Howells National Director o.  03 9915 6300 m. 0437 649 082 e.  rhowells@napierblakeley.com	BRISBANE Gavin Peach Associate Director o.  07 3221 8255 m. 0412 225 781 e.  gpeach@napierblakeley.com
.
MELBOURNE Ian Gardner Associate Director o.  03 9915 6300 m. 0488 225 569 e.  igardner@napierblakeley.com	SYDNEY Stephen Cooke Associate Director o.  02 9299 1899 m. 0409 228 552 e.  scooke@napierblakeley.com
.
MELBOURNE Coco Williams Senior Building Consultant o.  03 9915 6300 m. 0418 348 712 e.  cowilliams@napierblakeley.com	PERTH Graham Rigby Associate Director o.  08 6244 1877 m. 0419 847 998 e.  grigby@napierblakeley.com
.

But we’re open for business, and we’re here to help!

With the sudden amount of business closures and surrendering of commercial leases, there are many things Landlords need to address and co-ordinate to manage costs, risks, and maximise return.

For example:-

Independent Make Good Assessments

‘Make Good’ obligations are unlikely to be met by Lessees where leases are surrendered or determined due to financial distress, however engagement of independent assessments by Landlords are recommended to provide a basis for Landlord insurance claims and / or claims against receivers and managers of a distressed Tenant.

Maintenance of Systems required in Fire and Emergency

Maintenance of fire safety systems is required to be carried out regardless of whether property is occupied or vacant.  While the Tenant may have been managing these services during occupation, where assets have been abandoned and / or surrendered, Landlords need to ensure maintenance continues in accordance with regulatory requirements which vary by State.  Failure to meet these obligations could result in a disaster and significant loss. It may also impact on a Landlord’s ability to claim against their insurance policies.

Routine Maintenance and Energy

It may seem logical to shut down base building plant during unoccupied periods, however in certain circumstances, continued operation and routine maintenance of non-essential base building plant can be a less costly option.  Independent cost-benefit assessments are recommended to help identify potential cost savings through risk prevention in these circumstances.  If your building is partially occupied there are ways to minimise your central plant energy consumption servicing unoccupied areas.

Issues surrounding maintenance of structures and fabric during vacant periods is equally important as maintaining building plant.

Ongoing inspections and early attendance to defects associated with structures and fabric is paramount, particularly in the wetter months where water and wind related damage can be prevalent.  If left unattended initial minor issues can result in serious and costly damage not only to the building structure and fabric, but also indoor air quality, making the asset unfit for occupation.

To manage risk and reduce costs associated with unattended damage, monthly inspections of vacant areas is recommended.

Independent Condition Assessments

In preparation of lease renewal, Independent Condition Assessments are essential to provide the basis for condition to mitigate future disputes regarding make good obligations.  The independent document can be signed by both parties and attached to the Lease.

Refurbishment Opportunities

Unplanned vacancies provide the opportunity to carry out base building upgrade works that are typically disruptive and / or impossible during occupation.  These works include, for example, removal of hazardous materials, lobby and amenity upgrades, HVAC and lift upgrades, common area painting, etc.

Base building upgrades during vacant periods provides many cost benefits through improved accessibility, and of course the risk of rent abatement and health and safety claims by tenants is removed.

Tax Write Offs

Where tenant fitout has been abandoned, and of no value to the Landlord, assessments to enable disposal / write off of the assets may apply.

Biocleaning

Where positive cases of COVID-19 have been reported by Occupants of commercial tenancies, biocleaning may be required.  Given the rapid changes in the strategies and management of the virus, it is important that Landlords ensure that their cleaning strategies are in line with current guidelines.

If you would like further advice on any of the above, please contact:

Coco Williams o.  03 9915 6361 m. 0418 348 712 e.  cwilliams@napierblakeley.com

Or any of the following:

MELBOURNE Rob Howells National Director o.  03 9915 6300 m. 0437 649 082 e.  rhowells@napierblakeley.com	BRISBANE Gavin Peach Associate Director o.  07 3221 8255 m. 0412 225 781 e.  gpeach@napierblakeley.com
.
SYDNEY Stephen Cooke Associate Director o.  02 9299 1899 m. 0409 228 552 e.  scooke@napierblakeley.com	PERTH Graham Rigby Associate Director o.  03 9915 6300 m. 0419 847 998 e.  grigby@napierblakeley.com

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.

The professional body for surveyors, RICS, publishes guidance to help Parties, and their advisors, navigate the lease cycle.

Its important to:

• Draft clear lease clauses to avoid ambiguity;
• Prepare condition reports at commencement with plans and asset registers;
• Obtain lessor’s consent for any alterations made during the term and record whether these works fall in or outside of Make Good;
• Prior to lease expiry agree what physical works will either be carried out or alternatively, be met by a cash payment – and by when.

Good planning together with an extensive knowledge of property and the costs associated with Make Good, provide the clarity necessary to avoid costly arguments at lease end.

Here are some recent examples:

Our Transaction Advisory team is able to provide the following services for your projects:

• Land transaction technical due diligence
• Project / development monitoring
• Property transaction technical due diligence and benchmarking
• Property condition assessments
• Capital and maintenance expenditure forecasts
• Operational performance reviews and expenditure analysis
• Energy efficiency assessments
• Building improvement reports
• Environmental and hazardous materials assessments
• Regulatory compliance reports, BCA, OHS/WHS, ESM
• Town planning reports
• Land and lease surveys
• Indicative property depreciation schedules
• Replacement cost estimates
• Landlord and tenant dilapidations
• Make good assessments and negotiations

We have extensive cost data relating to Make Good projects and settlements and can provide quick benchmark comparisons. We have developed a number of strategies to protect Landlords and Tenants against the risks of the Make Good cycle.  Please access this link and down a copy of our Make Good Cycle Datacard.

Alternatively do not hesitate to call us to discuss your project.

ROB HOWELLS
National Director
o.   03 9915 6300
m. 0437 649 082
e.    rhowells@napierblakeley.com

GAVIN PEACH
Associate Director – Brisbane
o.  07 3221 8255
m. 0412 225 781
e.  gpeach@napierblakeley.com

SIMON GOULD
Associate – Sydney
o.   02 9299 1899
m. 0409 228 552
e.   sgould@napierblakeley.com

GRAHAM RIGBY
Senior Associate – Perth
o.   08 9489 4895
m. 0419 847 998
e.   grigby@napierblakeley.com

Headaches and protracted negotiations at lease expiry could be avoided by well drafted Make Good clauses and thought out strategy (see

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.

Complete a detailed inspection of the Premises to determine the level of Make Good works which fall under the Tenant’s responsibility. Typically this would include the removal of their additions and alterations, reconfiguration of building services, renewal/repair of damaged elements and redecoration.

Finalise a comprehensive Make Good report, including outlining the Tenant’s obligations under the Lease. A fully costed schedule of works will be provided, in collaboration with our QS team, to provide current and accurate cost estimates for the required Make Good works.

Strategic claim progression advice will be provided, which is linked back to the overall Asset Management discussion at the outset.

We also have extensive negotiation experience and can help with the direct negotiations with the Tenant if so required.

When:

We regularly become involved in the Make Good process up to 18 months in advance of a Lease expiry. Our Make Good advice can be used in future budget planning and to open early discussions with the Tenant.

If the Tenant indicates they will undertake the Make Good works during the term, we can assume the role of Development/Project Monitor in order to ensure a fully compliant space is provided at Lease expiry. It can be difficult to claim for “poor workmanship” against the Tenant after the Lease has expired, therefore regular monitoring can be very useful.

At Lease expiry, we will inspect in order to determine the Final Schedule of Make Good following any repair or strip out works undertaken by the Tenant.

We can carry out pre- and post-Lease expiry negotiations directly with the Tenant in order to maximise any final settlement or scope of works.

Additional Services:

In addition to the “Standard” end of term Make Good claims, we also undertake the following services:

• Portfolio Make Good estimates
• Claim assessments and negotiations for Tenants
• Project Management/Development Monitoring of the works, for both the Landlord and Tenant
• Pre-lease schedules of condition
• Lease reviews
• Tenant alteration approvals
• Strategic claim progression and negotiations

We have a broad range of experience on both sides of a Make Good claim. This, coupled with our extensive cost data, allows us to provide tailored, expert advice for Landlord or Tenants on any Make Good claim, so contact us now.

Contacts

Transaction & Asset Advisory
Rob Howells – 03 9915 6300 – rhowells@napierblakeley.com
Alastair Walker – 02 9299 1899 – awalker@napierblakeley.com
Gavin Peach - 02 9299 1899 – gpeach@napierblakeley.com
Paul Mazoletti – 07 3221 8255 – pmazoletti@napierblakeley.com

Development Advisory & Quantity Surveying
Craig Smith – 03 9915 6300 – csmith@napierblakeley.com
Peter Hammond – 02 9299 1899 – phammond@napierblakeley.com
Paul Cosker – 07 3221 8255 – pcosker@napierblakeley.com
Adam Greene – 07 3221 8255 – agreene@napierblakeley.com

Property Depreciation & Insurance
John Mathew – 03 9915 6300 – jmathew@napierblakeley.com
Peter Guerra – 02 9299 1899 – pguerra@napierblakeley.com
Peter Osborn – 02 9299 1899 – psoborn@napierblakeley.com

Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com
Craig Ryan – 03 9915 6300 – cryan@napierblakeley.com
Stuart Winton – 03 9915 6300 – swinton@napierblakeley.com

Headaches 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? 

Base Building 

• Which building elements, fabric, finishes and building services comprise of the base building and in what condition and configuration?

Above the Ceiling Line

• Who is responsible for fit out services ducts and fixings, cables and cable trays etc and the reinstatement of any relocated base building plant?
• What about services that pass through the ceiling line, such as sprinklers and sprinkler heads? 

Services Risers

• Who is responsible for cables and services within the risers and back to source?

Tenant Alterations

• Who did what work and when?
• The lease will typically have provisions for alterations but should the design, specification, methodology, timing and approval process be defined?
• Should this include the make good works of such at expiry?
• Should the option for contracting out of make good be considered for significant building improvements?
• Are any incentives or fit out contributions understood?
• Does the building owner own any of the fit out?    
• Were the tenant alterations undertaken under a previous lease for the same tenant – who has the responsibility to make good at the end of the new term? 

Express Covenant

• If an owner has certain expectations then they should be clearly stated. For example, if an owner expects that carpets are to be replaced prior to lease expiry then such a provision should not be muddied with ‘fair wear and tear’ clauses or other limitations.

Building Restrictions

• Should reference be made to ‘building rules’ or ‘tenancy guidelines’ which may include certain restrictions on hours of work, use of the goods lift or loading dock?

In collaboration with our client’s lawyers we have developed a number of strategies to protect Landlords and Tenants against the risks of the Make Good cycle. We also have extensive cost data relating to Make Good projects and settlements which can provide a quick benchmark comparison, so contact us now.

Contacts

Transaction & Asset Advisory
Rob Howells – 03 9915 6300 – rhowells@napierblakeley.com
Alastair Walker – 02 9299 1899 – awalker@napierblakeley.com
Gavin Peach - 02 9299 1899 – gpeach@napierblakeley.com
Paul Mazoletti – 07 3221 8255 – pmazoletti@napierblakeley.com

Development Advisory & Quantity Surveying
Craig Smith – 03 9915 6300 – csmith@napierblakeley.com
Peter Hammond – 02 9299 1899 – phammond@napierblakeley.com
Paul Cosker – 07 3221 8255 – pcosker@napierblakeley.com
Adam Greene – 07 3221 8255 – agreene@napierblakeley.com

Property Depreciation & Insurance
John Mathew – 03 9915 6300 – jmathew@napierblakeley.com
Peter Guerra – 02 9299 1899 – pguerra@napierblakeley.com
Peter Osborn – 02 9299 1899 – psoborn@napierblakeley.com

Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com
Craig Ryan – 03 9915 6300 – cryan@napierblakeley.com
Stuart Winton – 03 9915 6300 – swinton@napierblakeley.com

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.

Proactive Tenancy Management  

Good management, both at lease commencement and during the tenancy, will help significantly in dealing with make good issues at the end of the lease. When the condition of the property at the commencement of the lease is identified, a schedule of condition (both photographic and descriptive) should be undertaken and specifically attached to the lease in agreement with both parties.  

Almost all leases provide a mechanism for the landlord to control alterations to the premises by requiring the landlord to approve alterations before they are carried out and requiring reinstatement at the end of the term. The agreement process, whether by letter or by licence, should be fully recorded. This enables accurate determination of who did what and when and again simplifies the unpicking process at lease expiry. The key to resolving make good issues is to begin the process early. The landlord should provide a summary of their understanding of the make good requirements contained in the lease one year to six months prior to the expiry of the term depending upon the length of the lease and the size of the property. 

Conflict Resolution 

When both parties cannot agree to the extent of the repairs and make good, what is the process to reach settlement? 

Generally, this is initiated by the landlord, although tenants may take separate initial advice when making long-term strategic decisions in large occupancies. The landlord should appoint a consultant to prepare a schedule of dilapidations and wants of repair setting out: 

a. Which covenant of the lease has been breached for each item of disrepair of make good
b. Location and description for each breach, eg. damaged walls
c. The remedy or repair required
d. The costs and quantity

The schedule should also include a separate summary of financial claim, which may include fees and loss of rent and property charges borne by the landlord for the make good program. This is traditionally forwarded to the landlord’s solicitor for checking and serving to the tenant. The tenant responds either directly or through a consultant and negotiation proceeds to either settlement or to two financial positions. A settlement is reached on, or shortly after, the joint inspection 95% of the time. If the parties cannot agree, they may decide to proceed further through mediation and, if necessary, the courts. 

Key issues to be considered by the landlord: 

• Schedule the condition of the property on commencement
• Track and approve tenant works and retain details
• Review lease covenants and obtain advice as necessary
• Identify make good issue early (6-12 months prior to lease expiry)
• Gauge the tenant response and undertake a schedule of dilapidations  

Key issues to be considered by the tenant: 

• Schedule the condition of the property on commencement
• Retain details of alterations
• Respond to landlord advice
• Retain a consultant to review the landlords claims 

Napier & Blakeley’s national team of Chartered Building Surveyors, Building Consultants, Services Engineers and Cost Planners prepare cost effective, defensible reports to quantify the risks of ‘make good’ to maximise return on investment.

For further information and a copy of our Make Good Cycle data card, please contact any of the Transaction & Asset Advisory Consultants below.

If you would like information on any of our other Napier & Blakeley services please contact us at any of our offices.

Contacts

Transaction & Asset Advisory
Rob Howells – 03 9915 6300 – rhowells@napierblakeley.com
Alastair Walker – 02 9299 1899 – awalker@napierblakeley.com
Gavin Peach - 02 9299 1899 – gpeach@napierblakeley.com

Property Depreciation & Insurance
John Mathew – 03 9915 6300 – jmathew@napierblakeley.com
Peter Guerra – 02 9299 1899 – pguerra@napierblakeley.com
Peter Osborn – 02 9299 1899 – psoborn@napierblakeley.com
Paul Mazoletti – 07 3221 8255 – pmazoletti@napierblakeley.com

Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com

Development Advisory & Quantity Surveying
Craig Smith – 03 9915 6300 – csmith@napierblakeley.com
Peter Hammond – 02 9299 1899 – phammond@napierblakeley.com
Paul Cosker – 07 3221 8255 – pcosker@napierblakeley.com

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.

Features and benefits :

• Quick and cost effective assessment
• Detailed samples to test assumptions
• Independent benchmark data from hundreds of actual ‘make good’ scenarios
• Confidence in forecasting budgets for physical works or negotiated cash settlements
• Meets accounting needs and compliance with financial reporting standards
• Costs can be provided at a tenancy, property, regional and portfolio level

See the pie charts for a breakdown of ‘make good’ costs across the sectors.

Napier & Blakeley’s national team of Chartered Building Surveyors, Building Consultants, Services Engineers and Cost Planners prepare cost effective, defensible reports to quantify the risks of ‘make good’ to maximise return on investment.

For further information and a copy of our Make Good Cycle data card, please contact any of the Transaction & Asset Advisory Consultants below.

If you would like information on any of our other Napier & Blakeley services please contact us at any of our offices.

Contacts

Transaction & Asset Advisory
Rob Howells – 03 9915 6300 – rhowells@napierblakeley.com
Alastair Walker – 02 9299 1899 - awalker@napierblakeley.com
Gavin Peach - 02 9299 1899 – gpeach@napierblakeley.com

Property Depreciation & Insurance
John Mathew – 03 9915 6300 – jmathew@napierblakeley.com
Peter Guerra – 02 9299 1899 – pguerra@napierblakeley.com
Peter Osborn – 02 9299 1899 – psoborn@napierblakeley.com
Paul Mazoletti – 07 3221 8255 – pmazoletti@napierblakeley.com

Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com

Development Advisory & Quantity Surveying
Craig Smith – 03 9915 6300 – csmith@napierblakeley.com
Peter Hammond – 02 9299 1899 – phammond@napierblakeley.com
Paul Cosker – 07 3221 8255 – pcosker@napierblakeley.com

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.

Proactive Strategy

There are a number of strategies available to protect your assets and avoid costly and timely disputes.

For the Landlord 

• Review lease covenants and seek advice
• Schedule the condition of the property at lease commencement
• Track and approve tenant works and retain details on file
• Monitor tenant’s repair and maintenance obligations and flag any shortfalls (via an interim schedule of make good or repair notice)
• Consider lease end Make Good early – 6 to 12 months prior to expiry
• Schedule and cost the Make Good works
• Gauge tenant’s response to physically undertaking the works
• Consider physical works versus cash settlement and appropriately account for risk
• Consider any tax implications of inherited fit out and write off for demolition
• Consider the tax implications of any incentives and ownership of fit out going forward 

For the Tenant 

• Review lease covenants and seek advice
• Schedule the condition of the property at lease commencement
• Plan and coordinate fit out works around the base building to reduce the Make Good
• Schedule and cost the Make Good obligation and account for such in line with Financial Accounting Standards
• Obtain written landlord approval to alterations throughout the lease term
• Repair and maintain the premises in accordance with the lease
• Consider future property needs and timing; weigh up benefit of cash settlement versus physical works

At Napier & Blakeley, we provide independent, professional advice in relation to repairs, maintenance and Make Good obligations throughout the lease cycle.

Our national team of Chartered Building Surveyors, Building Consultants, Services Engineers and Quantity Surveyors prepare cost effective, defensible reports to quantify the risks of Make Good and to maximise return on investment.

From over 25 years of business we have extensive data on Make Good costs which provide a quick benchmark comparison.

Please contact us at news@napierblakely.com for a copy of our Make Good Cycle data card.

For further information contact:

Melbourne - Rob Howells            03 9915 6300             rhowells@napierblakeley.com
Sydney – Gavin Peach                02 9299 1899              gpeach@napierblakeley.com

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.

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.”