By John Goddard
29 June 2010 – As the Green Wave swept through the property industry, new practices and standards saw increased energy and water efficiency in buildings, leading to lower environmental impacts and healthier workplaces. However, as an industry we tend to overlook one area, which by definition produces a significant amount of waste produced in property – The Make Good.
“At the expiration or sooner determination of the lease the tenant shall deliver up the premises in a condition similar to the condition it was in at the commencement of the lease…,” so say most leases (or words to that effect). Most chartered building surveyors and property managers are used to these clauses, inferring that the fit out is to be removed and the tenancy put into the state of repair that the lease requires.
In 2009 the Royal Institution of Chartered Surveyors sustainability committee published “Greening Make Good”, the first guide published by an industry body to highlight the problem of waste caused by Make Good, referring to the typical waste left at the end of a lease as “triple waste”.
In short the triple waste process starts when the tenant makes good in accordance with the terms of their Make Good obligations, which typically include an allowance for “fair wear and tear”. The owner then takes possession of the space, and despite an allowance for the fit out to be fairly worn and torn, the tenant meets their obligations and can move on. The building owner then believes that he or she can’t re-let the tenancy in its current state and replaces the fairly worn and torn fixtures and surfaces, typically carpet and ceiling, to create a well presented space for re-leasing.
After a leasing period the new tenant comes in. They don’t want to have an “ordinary” fit out, it will not project the “right” image for them, so they change parts of the floor covering and replace the ceiling in the reception and board rooms with paneling.
So the Triple Waste consists of:
- 1st Waste: When the partitions were torn out and the premises Made Good by the vacating tenant.
- 2nd Waste: When the owner took out the “fairly worn and torn” finishes the tenant quite justifiably left.
- 3rd Waste: When the new tenant took out the new fittings and equipment the owner had installed.
The waste of materials when tenancies are made good is horrendous. The embodied energy, such as the energy it took to manufacture, transport and install the fittings, which probably outweighs the energy that can be saved by running the tenancy efficiently by several hundred times. This is usually overlooked, with the biggest concern being the generation of waste and more importantly, what to do with it.
If we truly care about the environmental impact of buildings we have to improve the Make Good process. Greener Make Good has to be the way to go.
A couple more “did you knows?”
- Did you know the average life of a commercial office fit out is about 4.5 to 5 years?
- Did you know this means that about a fifth of the approximately 28 million square metres of commercial office fit out in Australia is being dumped each year? That’s about 5 to 6 million square metres of space a year.
RICS Greening Make Good guide doesn’t set out to answer all the issues, but if it can at the least alert the industry to the unacceptable amount of waste generated by Make Good and spur them to work out a better alternative, then it will have succeeded.
The Guide makes suggestions on how the process of Make Good can be improved.
They include Guidance to the Tenant – assess the premises before signing a lease:
- When you assess the premises prior to signing a lease establish if there are finishes or services that you would wish to alter when you carry out your fitout.
- Discuss proposed changes with the owner; you may be able to reach agreement to share some costs, particularly if the equipment you wish to have in the premises would be seen as an improvement.
- Seek to agree that these improvements will be excluded from Make Good claims. Even if they do not agree, they may not be able to claim them if they can be proved to be improvements.
- Guidance to the Tenant – when planning your fit out:
- Minimise the impact of your fitout on the base building, (you will have to be firm with your consulting team):
- Try to avoid removing or replacing base owner’s equipment such as flooring and ceilings.
- Use systems that are free standing where possible so that their fixings do not damage the base building.
- The more open plan, the less changes to the building services
- Consider wireless data systems can be unplugged and moved when you move or churn, they dramatically reduce the cabling waste and you can take them with you.
- Lease shell and core, where the tenant installs the ceiling and carpet to suit their needs. Rents should be adjusted accordingly to factor in the lower costs to the owner. There should be an agreement that if a suitable quality of ceiling is installed that it will not need to be removed at the lease end. The tenant will only install the finishes where they need them.
- If you propose to use materials that require the removal of owner finishes, such as stone wall panelling, consider mounting the materials on panels that can be installed over the top of the base building finishes without damaging them and later removed. You will also find that if you need to refurbish or revamp during the term of your lease that you can simply lift them off and drop the new ones in place giving a new look simply and cheaply.
- Consider carpet tiles that can be mixed and matched to suit a changing office, define reception and break out spaces, etc, through colour or pattern changes. Worn tiles can be replaced without major furniture disruption. Some carpet tile companies also commit to take back their product at the end of a lease – perfect if your fit out was shell and core.
- Always seek owner permission for alteration works and bear in mind your liability for making good.
- Remember that if you have a Make Good you need to allow an appropriate amount of time to complete the works.
- Agreement of Make Good at Lease Commencement
A principle of Make Good is that neither the owner nor the tenant should profit.
Make Good can be an uncertain process and the claim, negotiation and management of the works can cause the tenant unnecessary distraction when they are relocating their business. Tenants need to be on their guard for unscrupulous owners and their “professional” advisors who may try to take advantage, even unwittingly. In many instances tenants will not have made provision for the cost of Make Good and in most cases they are not used to running building projects to precise time and quality requirements.
Owners too are not always as confident as they might appear about the likely result of a Make Good claim, or they may be confident, but misinformed or ill-advised. Often they want to upgrade the premises after leases expire. A well informed tenant should challenge the part of the claim that refers to the areas the owner is likely to replace as they would not to be liable for the cost to repair those areas.
Owners may therefore reduce the value of their claim, as there is no actual loss if all they can claim from the tenant is the cost of repairing the old finishes – they cannot claim more than the loss of reversionary value (reversionary value being the value of the premises determined by the conditions of the lease at the point at which the premises revert back to the owner.)
So there is always uncertainty on both sides.
The likely cost of Make Good works can generally be assessed at lease commencement. The tenant usually knows the extent of work they will be carrying out and the term of the lease is known (although there may be options to extend).
A sum of money can be agreed and made as either a payment in addition to the rent through the first term of the lease. It can be calculated based on a discounted cash flow basis to arrive at the cost at the end of the lease.
The scope could be based on:
- Alternative 1: The tenant will relocate office equipment such as: computers, printers, copiers, filing cabinets (not built in), furniture (not built in) and chairs, for example
- Alternative 2: The tenant will only relocate computers, printers, copiers
Advantages for the owner:
- The owner will then have the responsibility of removing the fittings or furniture. The owner should be better placed to carry out the works and any disposal to good environmental standards. Most major owners have sustainability policies that govern their building works.
- The owner will have the option of releasing the premises with some of the partitions and furniture in place, therefore saving waste.
- There is certainty for the owner on what they will have to do. Owners are not always provided with the best advice and may be left guessing if they will or will not receive money from the tenant to cover the Make Good. There are plenty of subtle twists and turns in Make Good, particularly if the owner intends carrying out improvements to the tenancy after the tenant has vacated. This can be a protracted process that only benefits the building surveyors and lawyers.
- Advantages for the tenant
- A major advantage for the tenant is the knowledge that they will not be required to pay an uncertain amount for Make Good as they leave.
- They can concentrate on moving to their new premises and reestablishing their business in their new home.
- The tenant can occupy the premises right up to the last day of the lease, avoiding the need to allow time to carry out Make Good works.
- Advantages for both owner and tenant
- Agreeing to the cost of a Make Good at the commencement of the lease will give both parties certainty and be less disruptive to their respective businesses.
Advantages for Environment
If the tenancy fit out is to be removed; it should be removed by the party that has the greatest commitment to handle the works and disposal as sustainably as possible, and this is most likely to be the owner.
A Request to Owners
Please owners, if you are instructing builders or project managers to run a Make Good job where the tenancy partitioning is to be removed and discarded, please run it to good standards. Ask your team to run the job as if it was a mini Green Star job. Insist that they set up the site and run it is accordance with the management section of the Green Star Design and As-Built tool.
Make it part of your requirements, and of their certification to you on completion and before final payment, that they have achieved the required recycling requirements and can prove to you that the work has been carried out to the high standards required.
Don’t be backward in coming forward, it will not happen if you don’t ask, and once you ask and require it, it will simply happen; after all you are the boss. The industry is well aware of these requirements; some players are just a bit reluctant to conform.
Make Good Deed
Greening Make Good introduces the concept of a Make Good Deed. The purpose of the Deed is to give the owner the opportunity to see if the space can be released with part or all of the fit out in place without reducing the owner’s rights.
In preparing information for the Deed, the costs to Make Good the premises in accordance with the tenant’s repairing obligations are assessed and agreed. This is also referred to as an assessment of the loss of reversionary value caused by the tenant’s use of the premises. The tenant then lodges a bond equal to the assessment of the Make Good and the Deed is signed.
The Deed prescribes a time during which the owner must try to lease the space with the fit out in place. If the tenancy is re-let with part or all of the fit out in place, part or all of the bond is returned to the tenant. If it cannot be released in this manner, the bond passes to the owner. Neither party looses in this way, but there is the likelihood that the waste will be reduced.
Clearly the process of a Make Good Deed requires an environmentally aware owner. The Make Good Deed process may not yet be perfect, but it is a step along the way to reducing Make Good waste.
The traditional Make Good system cannot and will not change overnight, but the RICS Oceania publication Greening Make Good is raising awareness about the horrendous waste caused by the process. It might just lead to change, waste reduction and an increase in environmental consciousness by recognising that there may be a greener form of Make Good.
John Goddard is director of building and sustainability consultantancy J Goddard & Co