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

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

Summer time is a great time to take stock of your business and a great time to think about and diarise some property housekeeping issues that quite often get overlooked in the bustle of normal day to day business.

However if you consider this now, you can plan to carry out some crucial housekeeping duties in January when business is traditionally quieter.

Some of the not so sexy but absolutely essential items to consider to maximise your return and minimise your cost and risk are as follows:

Property Replacement Insurance: given the sizeable increases in construction costs in recent times, have you considered whether your properties are correctly insured? Do you know what you are insuring: base building and / or fit out?

Capital Expenditure Planning: what items have you planned over the next calendar year? How will they be managed?

Maintenance: are your maintenance contracts up to date and appropriate? Are there any routine maintenance items that can be efficiently attended to in this quiet time?

Tax and asset updates: Is your base schedule correct? Have you carried out any upgrade works during the financial year to date for which you can claim either a tax write off or a future tax deduction?

Condition Audits: Do you need to create or update any condition surveys of your tenanted properties?

Tenancy Make Good: Do you have a schedule of lease expiries that will occur during the year? Are there any “repairing and make good” obligations that need to be planned with the tenant?

N&B can assist with all of the above to help you really enjoy your summer holiday.

If during the current financial year you owned an investment property and earned an assessable income from it then you are entitled to tax deductions for wear and tear or depreciation as it is more commonly known.

Over the last 22 years Napier & Blakeley has analysed many thousands of properties, preparing depreciation schedules for owners of virtually every type of property ranging in value from a few hundred thousand dollars to in excess of one billion dollars in value.

There are well in excess of one million property investors within Australia and we suspect that the majority of property owners in Australia do not fully maximise the deductions which can significantly affect and increase their after tax yields.

In a recent analysis of a five year old commercial office building with a purchase price of $5m, a land value of $1m and an income of $500,000 we found the following.

If you claimed no depreciation and building allowances, your after tax income at the following rates would be:

                45 per cent = (highest individual tax rate)                       =$275,000  

30 per cent = (company tax rate)                                      =$350,000

15 per cent = (superannuation fund tax rate)                 =$425,000

However, if you did claim the available deductions, your after tax income would be greatly increased as follows:

45 per cent =$365,000       giving a 33% increase in after tax return         

30 per cent =$409,000       giving a 17% increase in after tax return         

15 per cent =$455,000       giving a   7% increase in after tax return         

As with lifes two certainties, death and taxes, we can guarantee you that if you don’t claim these available allowances, the ATO wont go out of their way to let you know what you’re missing out on!

Below are some questions you should ask yourself to see if you have passed the yearly Tax Depreciation rego:

o         Have you acquired an investment property of any age, type or state of repair?

o         Have you completed any construction works ?

o         Have you completed a fit out ?

o         Has a tenant left your property and you have inherited their fit out ?

o         Has a tenant left your property and you have removed their fit out and made good ?

o         Have you paid any $ towards a tenant fit out

If you have answered yes to any of the items in the tax depreciation rego form and have not considered that there could be tax deductions available to you. N&B can assist with getting your Tax Depreciation rego certified and in order for the last financial year.

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.”