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 license, 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
Stewart Cavin – 07 3221 8255 – scavin@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
Derek Linton – 07 3221 8255 – dlinton@napierblakeley.com
Sustainable Property Solutions
Peter Frith – 03 9915 6300 – pfrith@napierblakeley.com
Simon Fox – 02 9299 1899 – sfox@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
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