When a tenant gets to the end of their lease in any commercial investment property, it is time to think about the make good requirements within the premises and when those works should be done.
In the lead up time to the end of the lease (usually the last 6 months), it is wise to review the provisions of the make good as it applies to the tenant; you can then start talking to the tenant about the things that will have to be done before the property is vacated. Essentially all of the remedial works should be done before the end of the lease (not after).
Many tenants will seek to ‘cut corners and costs’ when it comes to remediating the premises. They will try to save money in the premises ‘make good’ hoping that the landlord will not have a focus on the condition or quality of the premises in final handover. That is why you need a checklist and a questioning mindset to move through all of the many issues that are involved in make good. Document what you see and the issues of presentation that are obviously out of context with the standards that are required.
Things to Watch in Making Good Leased Premises
Here are some ideas to help you get this important part of lease management under control:
- Lease terms and conditions – You must read the lease before you start the process. Understand the requirements imposed on the tenant through the lease document. There will be critical terms of the lease that relate to make good.
- Landlord base building – At the start of property occupancy by the tenant, the base building or the condition of the premises should have been documented and recorded. The tenant may very well have to return the property to open plan configuration at lease end. Find the tenant and premises records relative to the start of occupancy. See how those factors relate to the final make good.
- Tenant improvements – Generally speaking the landlord will want all tenant improvements removed from the premises prior to lease end. If that is not the case then the landlord may choose to negotiate a financial agreement with the tenant for the improvements to be left in the premises. The tenant should pay the landlord an amount of money to compensate for the fit out complexity and cost of removal. That assumes that the fitout will be a burden in ongoing leasing and fitout configuration.
- Air conditioning – When the fitout is removed from the premises, the air conditioning ducting and layout will need to be reinstated to open plan configuration. You will need an air conditioning consultant to give advice on that process.
- Cables and communications systems – Don’t forget about all of the cables and communication systems installed by the tenant. It is quite costly to remove that computer network cabling and the telephone communication configuration after the tenant has left the premises. Normally speaking the tenant should be responsible for the removal process. The removal of all cabling should have occurred prior to the end of the lease as part of the make good. In a building with many tenants, cable management can be a critical issue of property maintenance. Over time the number of tenants leasing space within the building will create complexities and pressures on the building risers and cabling systems. On that basis, all of the cables need to be removed at the expiry of the lease.
- Walls – The walls and paint finishes should be checked for penetrations, quality, and damage. Many leases provide for the tenant to repaint the premises to a particular quality and standard prior to lease termination.
- Floor coverings – If the tenant has been in occupancy for some time, it is quite likely that the floor coverings will have been damaged and require replacement. That will normally be a tenant cost of providing the lease stipulates the process.
- Lighting – When petitions are change relative to fit out installation and layout, the lighting configurations will also change. That lighting should be returned to open plan placement within the premises.
- Partitioning and Fit out – Some of the petitions and walls within the premises will be tenant installed. The petitions should be removed and also the appropriate remediation should occur to the lighting systems, floor coverings, and wall treatments.
- Signage – Look at the factors of signage that apply to occupancy. The signs should be removed and any structures or wall anchorage points be restored.
- Locks and Doors – Always ask for the return of keys as they apply to the fit out, the floor of the building, and the access to the site. Document the return of keys so you know exactly what you have been given and what may still be missing.
- Bond or Bank Guarantee – The bond or bank guarantee wood not normally be returned to the tenant until such time as the fit out has been completely and successfully make good. Any disagreements relating to the quality of the make good can take some weeks to resolve. The bank guarantee or bond should be retained by the landlord until complete agreement has been reached on the quality of the final make good.
- Condition report – Condition reports should occur prior to tenant entry and at the end of the lease. Full photographic records should be retained by the landlord or property manager to support any future negotiation problems when the tenant hands back the premises.
So there are plenty of things here to think about when it comes to ending a tenant’s lease and ensuring that the required make good is undertaken. That is why you need a checklist and a system to approach the issue.