Understanding your make good obligations.
Simon Fonteyn, Managing Director of Leasing Information Services explains the impact of make good obligations on your bottom line. Leasing Information Services provides retailers with the critical decision support you need to select, acquire and negotiate the best possible lease terms.
1 Understanding your lease obligations
Every lease will include a make good obligation and preparing for it is a critical part of leasing for QSRs. A typical make good clause will usually require the lessee to make the premises good to the condition that they received it in at the start of the contract, allowing for fair wear and tear.
So by way of example, if you leased the premises without a ceiling or lights and you as the tenant installed this, then you are required to remove the fittings when you end your lease.
2. How much is involved?
Make good obligations are extremely critical; particularly for QSR’s where there is a high cost of tenants fit out and can cost the business significant amount of money to make good as in the lease. Make goods can range in value from a few thousand dollars into the hundreds of thousands.
3. How to do your homework?
One of the most common traps is to recall what state the premises was handed over in, as the contract may have been entered into five or more years ago.
Always complete a dilapidation report including date stamped photos and detailed notes of the inspection, any defects or cracks noted and sign it and get it witnessed. Therefore there is a record of the condition of the premises at the time of lease entry.
Another suggestion is to get your Fitout contractor to provide you with an estimate of make good and discuss potential issues on how to reduce your make good obligations.
4. How not to fall into a trap?
One of the biggest traps is what is the definition of when the lease was entered into? For example, if you have renewed a lease (s) do you make it good to the last renewal or to the original lease. Make sure you document your make good obligations so that it is at the point of the latest lease renewal.
Another trap is where the lease has been assigned to a new tenant and the new tenant is responsible for the make good provisions of the previous tenant. This should be negotiated at the time the lease.
5. How can you save money?
It may be possible to negotiate with the Lessor to leave part or all of the Fitout in situ, as it could be valuable to the new tenant. You may also be able to negotiate or cash settlement with the Lessor or cap your make good obligations.
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