Who pays for make good: the tenant or the landlord?

In most commercial leases, the tenant pays for the make good. That is because make good is a promise in the lease, not a rule made by government: when you sign, you agree to hand the premises back in a certain condition.

This page explains how the cost is usually split, when the landlord pays and what happens if you disagree. It is general information about Victoria and NSW, not legal advice. If a lot of money is at stake or the wording is unclear, talk to a commercial leasing lawyer or your state's Small Business Commission.

Why does the tenant usually pay?

Because the lease says so. We searched the Victorian Retail Leases Act 2003 and found no "make good" or "reinstatement" provision; the obligation comes from the lease. The NSW Small Business Commission describes make good as the lessee's obligation at the end of the lease to return the premises to the condition when first built, the condition at the start of the lease, "or some other condition as specified in the lease".

So the first question is "what did I agree to?" Look for three clauses:

• The make-good or yield-up clause. What condition the premises must be in when you leave.
• The alterations clause. Whether the landlord's consent to your fit-out came with a condition that you remove it.
• The repair clause. What you must keep in repair during the lease, and whether fair wear and tear is excluded.

If you are not sure what your clause means, start with what is make good.

What does the tenant usually pay for, and what does the landlord pay for?

This is the common split. Your lease can move any line from one column to the other.

When does the landlord pay?

Fair wear and tear

Many make-good clauses exclude fair wear and tear: the gradual, normal ageing of carpet, paint and fittings from ordinary use. The Victorian Small Business Commission says retail make good typically involves removing the fit-out and repairing damage "above fair wear and tear". Where the lease excludes it, that ageing is the landlord's cost.

But the Commission also notes that a repainting clause can require a repaint to new condition even if the walls were poor at the start, if the tenant agreed to that. See how to read your make-good clause.

Structure and the landlord's own plant (Victorian retail leases)

In a Victorian retail lease, the landlord must maintain the structure of the premises, and the fixtures, plant and equipment it provided, in a condition consistent with their condition when the lease was entered into (Retail Leases Act 2003 (Vic) s 52). That duty does not apply where the repair is needed because of the tenant's misuse, or where the tenant is entitled or required to remove the item at the end of the lease.

The same Act also makes void any lease term that requires a retail tenant to indemnify the landlord for a liability the landlord would otherwise bear (s 93), and any term inconsistent with the Act (s 94). Whether a lease is a retail lease depends on how the premises are used and other tests. For example, in Victoria premises are excluded if occupancy costs exceed $1,000,000 a year excluding GST (Retail Leases Regulations 2023 (Vic) reg 6). Many offices and most warehouses are not retail premises, so for them the lease and general law decide.

Things the lease does not mention

If the lease does not make you responsible for something, the cost generally stays with the landlord. So check any landlord make-good schedule against the clause rather than accepting it as written.

Who pays when you took over an existing fit-out?

This can come as a surprise. If your lease requires the premises to be returned to base building, shell or an "empty and neutral" state, you may have to remove a fit-out that a previous tenant installed and you simply moved into.

The NSW Retail Tenancy Guide says make-good provisions typically require the premises to be returned "in an empty and neutral state", which is not necessarily how they looked when you moved in. The Victorian Small Business Commission says a tenant who buys a business and takes over an existing lease still has make-good obligations.

If you have a side letter, assignment deed or email agreeing that some items can stay, find it now. If not, ask the landlord to confirm in writing what must be removed.

What happens if the tenant does not do the make good?

The landlord will usually do the work and claim the cost from you. The NSW Retail Tenancy Guide says that if lessees don't carry out the make good, they will normally be liable to pay the lessor's costs.

In practice the landlord often turns to the security first:

• Bank guarantee (NSW). The NSW guide says the lessor should release it within two months of the lessee leaving unless money is owed, and is usually not required to tell the lessee before drawing on it.
• Cash bond (NSW retail). The lessor must lodge it with NSW Fair Trading within 20 business days of receiving it.
• Security deposit (Victoria, retail). It must be returned within 30 days after the lease ends if the tenant has performed all its obligations (Retail Leases Act 2003 (Vic) s 24).

See getting your bank guarantee back.

Courts can award the cost of putting things back. In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, a tenant rebuilt a foyer without the consent the lease required, and the High Court held the landlord could recover the cost of reinstating it, not just the drop in the property's value.

Can the amount the landlord claims be limited?

Sometimes, but this is where you need legal advice.

• In NSW, section 133A of the Conveyancing Act 1919 (NSW) has long limited damages for breach of a covenant to keep or leave premises in repair to the amount by which the value of the landlord's interest is reduced. As quoted by the High Court in Graham v The Markets Hotel (1943), it also says no damages are recoverable for failing to leave premises in repair if they are to be pulled down, or structurally altered so the repairs would be valueless, at or shortly after the lease ends. We could only confirm the wording as quoted in 1943, so check the current section with a lawyer before relying on it.
• In Victoria, we did not find an equivalent provision in the Property Law Act 1958.
• Some retail leases include a clause for a quantity surveyor to make a binding decision on make-good costs if the parties disagree, as the NSW Retail Tenancy Guide notes.

Either way, get independent quotes for the scope the lease requires and compare them line by line with the landlord's figure. See the make good cost guide for what drives the numbers.

Can I pay the landlord instead of doing the works?

Often, if you both agree. The NSW Retail Tenancy Guide says lessees often agree to a payment to the lessor in lieu of doing the make good, leaving the landlord to do the work as needed. It can save time and help you avoid holding over, but you lose control of how the money is spent. See make-good payment in lieu.

What if we can't agree who pays?

Put your position in writing, with the lease clause, your condition report and photos, and any quotes. If it is a retail lease:

• Victoria. Either party can refer the dispute to the Victorian Small Business Commission for mediation (Retail Leases Act 2003 (Vic) s 86). Mediation costs are shared as agreed, or equally. The Commission lists its fee as $300 per party for a half day and $600 per party for a full day, including GST, for most commercial disputes. VCAT can generally hear the dispute only once the Commission certifies that mediation has failed or is unlikely to resolve it (s 87).
• NSW. NCAT says mediation is compulsory for most retail lease claims before applying to it. NCAT can hear claims up to $750,000 for leases entered into on or after 1 July 2017 ($400,000 for earlier leases), and you must apply within three years of the liability arising.

For non-retail leases, the dispute is decided under the lease and general law. In Victoria the Small Business Commission can also mediate general commercial disputes. A commercial leasing lawyer is a sensible first call. For more, see make good disputes, make good in Victoria and make good in NSW.

How to avoid paying more than you should

• Read the make-good, alterations and repair clauses before you plan anything
• Find the start-of-lease condition report and photos (both Small Business Commissions recommend one)
• Find any landlord consent, side letter or email about the fit-out, and ask for the landlord's requirements in writing
• Check each item against the clause, then get quotes on the same written scope
• Agree the final scope in writing before work starts
• Take dated photos at handover and get written sign-off from the landlord, not just the agent
• Ask in writing when your bond or bank guarantee will be returned

For the full list, see the office make good checklist and the lease exit timeline.

How MAKE GREAT can help

MAKE GREAT is a technology marketplace. We are not a law firm and we do not give legal advice or decide who is responsible for what.

• Analyse my lease. Upload your lease and our lease check pulls out the make-good, alterations, repair and security clauses with page references, and flags wording that is unclear. It separates what the lease clearly requires from what needs clarifying. Its output is a preliminary assessment, not legal advice, and a person reviews anything unclear. For a legal view, take it to a lawyer.
• Get my make-good quotes. We turn your agreed scope into one brief and invite up to three independent commercial contractors who cover your area to inspect and quote, so you can compare their figures with any landlord claim. You choose, and you contract directly with the contractor.

How we are paid: Free for tenants. If you hire a contractor through us, they pay us a referral fee. Nobody can pay to rank higher. We do not promise that you will save money. See how our referral fee works.

This page is general information, not legal advice. Your lease decides what you must do and pay for. For advice on your situation, speak to a commercial leasing lawyer, the Victorian Small Business Commission or the NSW Small Business Commission.