Make good is the tenant’s obligation to return a leased premises to an agreed condition at the end of the lease. In New Zealand it is not implied by law. If it is not expressly written into the lease it does not exist, and where it is written in, the exact wording determines whether the bill at expiry is modest or substantial. It is routinely the most under budgeted line item in a tenant’s occupancy cost.
What does make good actually mean?
Make good, also called reinstatement or defit, requires the tenant to remove their fitout and restore the premises to the condition specified in the lease. LegalVision New Zealand confirms that make good obligations are not implied into New Zealand commercial leases and must be expressly drafted. The Law Association deed of lease, formerly the ADLS lease, is the most common base document and contains reinstatement provisions that are frequently amended in negotiation.
The critical question is always: restored to what standard? The wording varies enormously and the differences are worth real money.
The four common standards, and what each costs you
| Standard | What the tenant must do | Relative cost |
|---|---|---|
| Bare shell | Strip back to base structure, remove all services and finishes | Highest |
| Cat A condition | Return to landlord’s original base fitout standard | High |
| Original condition, fair wear and tear excepted | Restore to condition at lease commencement | Moderate to high |
| Remove tenant alterations only | Take out partitions and tenant works, leave the rest | Moderate |
| No make good | Hand back as is | None |
A clause requiring return to “bare shell” on a floor that was handed over as Cat A means the tenant pays to remove the landlord’s own base build. That sounds absurd, and it happens, because nobody read the clause carefully at signing six or ten years earlier.
What a defit typically involves
- Removal of partitions, ceilings and floor coverings installed by the tenant
- Removal of joinery, kitchens, tea points and built in furniture
- Decommissioning and removal of tenant installed data, audio visual and security
- Reinstatement of mechanical services to the original configuration and capacity
- Reinstatement of fire detection, sprinkler heads and emergency lighting to base build layout
- Patching, making good and repainting of walls, columns and core
- Ceiling grid and tile reinstatement or replacement
- Floor covering replacement to base build standard
- Waste disposal and recycling, which is a significant and rising cost
- Post work clean and certification where a consent was required
What make good costs in New Zealand
Make good is priced per square metre and varies with the standard required and the complexity of what is being removed. The main cost drivers are the volume of joinery and partitions, the extent of services reinstatement, waste disposal charges, and whether the work must be done after hours in a live building.
Because the drivers vary so widely, make good is priced against a specific scope rather than a rate card. Two tenancies of identical size can differ by a factor of three depending on how much joinery and services reinstatement is involved.
Three factors reliably push the number up. Services reinstatement is the most commonly underestimated, because returning mechanical and fire systems to a documented original configuration requires design, commissioning and often consent. Waste disposal costs have risen materially and a full strip out generates a lot of it. After hours work in an occupied building carries a labour premium and slows the programme.
When make good is triggered
Make good obligations crystallise at lease expiry, but also on early termination, on assignment or subletting in some leases, and sometimes on exercise of a renewal where the lease requires reinstatement of unapproved works. Some leases also require reinstatement of any alteration the landlord did not formally approve, which is why written landlord consent for every fitout change matters years later.
Timing is critical. Most leases require the work to be complete by the expiry date, not started by it. If the tenant is still on site after expiry they can be liable for holding over rent, which is frequently at a penalty rate, plus the landlord’s losses if a new tenant cannot take occupation.
How tenants reduce make good exposure
Negotiate the clause at heads of terms, not at expiry. This is the only moment the tenant has leverage. The standard should be defined precisely, ideally by reference to a photographic schedule of condition taken at handover.
Get a schedule of condition at lease commencement. Dated photographs and a written record of the premises as handed over. Without it, arguments at expiry come down to competing recollections and the tenant usually loses.
Cap the obligation. A monetary cap or an agreed lump sum settlement figure converts an unknown liability into a budgeted one.
Ask for the fitout to be accepted. Where a fitout is good quality, generic and likely to suit an incoming tenant, landlords will often agree the tenant can leave it in place. This is easier to negotiate in a softer leasing market with elevated vacancy.
Keep written landlord approvals for every alteration. Approved works are usually treated differently from unapproved ones.
Provision for it properly. Make good is an accounting provision, not a surprise. Get a defit estimate at least 18 months before expiry so the number is in the budget and in the exit strategy.
Price the exit before you commit to the entry. A cheap rent with an onerous reinstatement clause is not always cheaper over the term.
The landlord perspective
Landlords should be equally deliberate. A rigid bare shell make good clause maximises the theoretical recovery but can be counterproductive if the incoming tenant would have kept the fitout. Accepting a good fitout in lieu of make good can reduce the landlord’s own re letting cost and shorten downtime, which in a market with elevated vacancy is often worth more than the reinstatement claim.
Where make good is enforced, the claim needs to be evidenced. A documented schedule of condition, clear approval records for tenant alterations, and a properly priced scope will hold up far better than an estimate produced after the tenant has left.
Frequently asked questions
Is make good compulsory in New Zealand? No. Make good is not implied into New Zealand commercial leases. It applies only where the lease expressly requires it. Read the reinstatement clause carefully, because the standard it specifies determines the cost.
Can a landlord claim make good in cash instead of requiring the work? In many cases yes, either by agreement or as a damages claim for the cost of reinstatement. A negotiated cash settlement is common and often suits both parties, because it gives the landlord certainty and lets the tenant avoid managing a project after they have vacated.
Does fair wear and tear cover carpet and paint? Usually only partially. Fair wear and tear generally covers deterioration from normal use over time, not damage, alteration or the consequences of the tenant’s own fitout. Whether worn carpet falls inside or outside the exception is a common point of dispute, which is exactly why a schedule of condition matters.
Does a defit need building consent? Sometimes. Removal work affecting fire systems, egress, structure or specified systems on the compliance schedule can require consent, as can the reinstatement work that follows. Assess this early, because it affects the programme against a fixed expiry date.
How far in advance should we plan a defit? Begin scoping 12 to 18 months before expiry. This allows time to negotiate with the landlord, obtain competitive pricing, secure any consent, and complete the work before the expiry date rather than in holdover.
Related reading
- Cat A vs Cat B Fitout: What NZ Landlords and Tenants Need to Know
- Fitout Depreciation and Tax in New Zealand: What Landlords and Tenants Can Claim
- The Hidden Carbon Cost of Fitout Churn
Sources
- LegalVision New Zealand, guidance on make good clauses in commercial leases
- The Law Association (formerly ADLS) deed of lease
- Property Law Act 2007
- Building Act 2004
This article is general information, not legal advice. Make good obligations depend entirely on the wording of your specific lease. Obtain legal advice before relying on any position described here.