Some of the most striking clauses in the ADLS Lease (Sixth Edition 2012 (5) that our landlord clients’ can face are those pertaining to and surrounding the obligation to make good.
During the negotiation and preparation of a lease, most lawyers, tenants and landlords read over the unassuming provisions and the expiration of the lease is not given a great deal of thought. Although in theory a simple concept – the ADLS Lease provides that a tenant is to make good the premises prior to the expiry of the lease, it is in practice anything but.
There are several clauses in the second schedule of the lease which reference the tenant’s make good obligations.
Clause 8.1(a) places an obligation on the tenant to maintain the premises, and yield up the premises at the end of the term, in the same condition that it was handed over.
Clause 20.1 provides that any additions and alterations made by a tenant must be removed prior to the expiry of the lease, otherwise ownership shall pass to the landlord, and the landlord may recover costs of reinstatement from the tenant.
Clauses 20.3 and 20.4 state that the tenant must remove their chattels from the premises prior to the end of the lease, and any chattels not removed will become the property of the landlord, and any costs of disposal will be the responsibility of the landlord but the costs can then be recovered from the tenant.
“No later than the end or earlier termination”
This wording in particular has the potential to catch tenants out, in clauses 20.1 and 20.3.
This means that before the tenancy comes to an end, the tenant must remove their staff, furniture, fixtures and fittings. They are required to remove any fit out they installed, such as partitions, doors, or carpet, and repair any damage to the premises.
Often this can impact air conditioning systems – if the tenant has made alterations to the landlord’s fittings, lighting layouts, and more. In the case of a medium size commercial office premises, this easily constitutes several weeks of work involving furniture movers, electricians, builders, painters, air-conditioning specialists and more.
During this time that the make good works are occurring, the tenant is required to continue paying rent and outgoings.
On the day the tenancy expires, the premises must be restored to the same condition in which it was handed over to the tenant, subject to fair wear and tear.
Further issues encountered first hand by some of our landlord clients include:
- Tenants moving out and failing to have completed their make good requirements on time.
- In this case, the landlord was able to claim the costs of remediation from the tenant. This included loss of rental income, outgoings, specific costs to the premises – such as power – as well as the costs of project managers and tradesmen to remediate.
- Tenant and Landlord had failed to complete a Premises Condition Report at the commencement of the tenancy.
- This resulted in confusion as to which obligations lay with whom. A compromise was reached and make good was achieved by looking at the chattels and fit-out mentioned in the lease, however it highlighted the need to ensure a comprehensive Premises Condition Report is completed.
- The Tenant was not aware of the extent of their obligation to make good.
- In this case the Tenant was a medium size company and had failed to understand the extent of the make good clause, and lacked the know-how to arrange and manage the works at short notice. An agreement was reached wherein the Tenant handed the premises over in “as is” condition, with a sum of money in lieu of making good. The value was for the estimated cost of repair and labour. This was documented in a simple agreement between the parties’ lawyers and the term of the tenancy wrapped up smoothly.
The above issues highlight how easy it can be to overlook or fail to give proper consideration to a tenant’s make good obligations when entering into a lease. The costs and process involved in making good can often be significant, and it is important that both landlord and tenant are aware of their rights and obligations in the lease agreement.