A commercial property lease is the fundamental contract that will determine whether a Landlord achieves a healthy ROI (return on investment) or not. It is not just essential to get this right when a Tenant starts their Lease, but perhaps even moreso, when they are ending it.
The “make good” provisions in a commercial property lease will determine the condition that the Tenant is required to leave the property in upon exit. A good lease will address what the Tenant must do with movable items of plant and equipment; how the property must be reinstated after any fixed items are removed and generally whether a redecoration process is required to be undertaken.
A Landlord will always be concerned to ensure that their own costs are minimised during this process, and that the Tenant is required to leave the property in a condition which will ensure the property can be easily re-let to a new tenant.
As Asset Managers, our job is to advocate for the best outcome for our Landlords. We play a vital role in ensuring that the make good provisions are adhered to, or, where a better, more mutually beneficial outcome can be negotiated, ensuring that this outcome is achieved.
A Case Study on Make Good Provisions
RWC Western Sydney manages a large multi-story office building in the Parramatta CBD. Faced with the planned exit of the largest multi-floor tenant in this building, we knew that the manner in which the Tenant conducted the make good would have enormous financial implications for our client.
Lease interpretation – Simple clauses are not simple!
In this case, the Lease contained what appeared to be a simple make good clause, stating that the tenant “may elect to remove its Fittings and Tenant Alterations from the premises.” The clause seemed to suggest that the tenant could simply ‘elect’ to walk out and leave the Premises in whatever condition they deemed fit. The Tenant indicated that this was their intention, and that they would only be removing ‘paperwork’ when they left.
Upon review, RWC Western Sydney quickly identified potential ambiguity within this deceptively simple clause. While it explicitly addressed the removal of ‘tenant alterations and fixtures’, it did not address the issue of whether the Tenant was also obliged to remove their ‘non-fixed’ items such as chairs, desks and associated office items.
To address this, our team conducted a thorough review of the lease agreement, examining definitions, the repair clause, and relevant regulations governing abandoned goods. Based on our findings, we asserted that the tenant’s responsibilities, as outlined in the lease terms and at law, required them to at least remove their ‘non-fixed items’. We emphasized that the make good clause exclusively pertained to fixtures and alterations, and it did not address what was to be done with non-fixed items. As the matter had not been expressly addressed in the Lease, we were able to draw on case law and legislation surrounding the treatment of abandoned goods as well as other clauses in the Lease, to argue that the responsibility to remove the non-fixed items sat squarely with the Tenant.
While this apparently slight delineation between fixed and non-fixed items might seem trivial, when the cost of removing/disposing of these items is spread over a large multi-storey office building, it quickly adds up to a substantial dollar amount.
Engagement with the Tenant
It is testament to our Asset Management team here at RWC Western Sydney that rather than taking the ‘easy’ option and acquiescing to the Tenant’s interpretation of the Lease, instead we went into bat for our Landlord to make sure this expense didn’t fall on their shoulders.
Supported by our research, our years of training, and a determination to ensure the Landlord was not unfairly disadvantaged, our team was able to persist in our viewpoint. Negotiations, including multiple on-site meetings, extended over nine months before a mutually agreeable resolution was reached.
Negotiation and Achieving a Positive Resolution
In the end, the Tenant agreed that it did indeed have an obligation to remove ‘non-fixed items’ upon exit. Rather than undertake the costly exercise itself, the Tenant proposed instead to pay a cash settlement to our Landlord.
To quantify the amount of the cash settlement we ensured that the costs of removal, disposal and potential damage arising during removal, were all considered. We collaborated closely with contractors and industry professionals to ensure accurate cost projections and comprehensive quotes were relied upon to support our quantification of the proposed settlement amount.
The Best Outcome
Ultimately, RWC Western Sydney’s Asset Management team were able to achieve a cash settlement for their Landlord in the hundreds of thousands. The negotiated cash settlement not only ensured the tenant’s compliance with the Lease upon exit but also eliminated unnecessary expenses on all sides, benefiting both parties involved in this complex process.
To say that our Landlord was pleased would be an understatement. Having resigned themselves initially to the Tenant’s interpretation of the Lease, they had expressed quite a bit of doubt that we would prevail in our negotiations.
Choose an Asset Manager that will do the hard work for you.
We believe this case demonstrates our underlying and unwavering insistence on achieving best practice in the Asset Management industry. Our team’s attention to detail, dedication to due process of the Leasing contract, and a focus on fairness led to a highly successful outcome for our client.
RWC Western Sydney’s Asset Management team prides themselves on their ability to safeguard and enhance the value of all the properties we manage. We know that our Landlords’ place their trust in us to advocate on their behalf to ensure the best outcome possible. We do not take the responsibility lightly.