After years of trying to reform the way end of lease “make good” occurs in the Australian property market, it looks like the message is finally getting through to top end tenants. But less informed tenants are still paying more than they should for office fit out.
According to John Goddard, chair of The Royal Institution of Chartered Surveyors’ Make Good Guide committee, “Make good is one of the most misunderstood processes in the Australian property industry and the costliest issue for uninformed or unprepared landlords or tenants.”
The latest guide from RICS, updated from the 2017 edition, the term defines the contractual requirement for tenants to return premises back to the condition when they were first leased.
The term is “often shrouded in mystery despite thousands of commercial, office, and industrial leases ending each year”, and when done badly, leads to disputes and court action, the guide says.
It covers commercial and industrial premises and advises lessors and lessees regarding their legal obligations to repair, decorate or reinstate leased premises, what to look for and how and when to act.
“While the guide hasn’t changed hugely, we wanted to bring in more about waste and behaviour,” says Goddard who is the lead author of the publication.
“We very rarely get tenants asking for sustainability commitments. Tenants also don’t get a lot of choice. It all has to be gone by the end of their lease – it’s very much driven by the landlord.
“That’s the trouble with make good. There is so much pressure on tenants to scramble around and meet their compliance, to make good, move to a new premise, the financial pressure is huge.
“While bigger landlords have better recycling and waste options and track their waste stream, there are smaller building owners who do fantastic things in sustainability – it’s more of a mindset than about size.”
But things are getting better
According to Goddard, things are improving, especially among higher end landlords who are incorporating reuse and recycle of fit-outs in their policy.
“Grosvenor Place at 225 George Street is giving it a shot as part of their net zero target,” Goddard says.
If landlords were to reuse fit-outs, they could save hundreds of thousands of dollars and be able to move in immediately instead of waiting 10-15 weeks or more for the fit-out to be redone.
“My general advice is to have a schedule of conditions at the commencement of the lease and take a bit of time to see what parts can be reused.
“My advice for tenants is to be more flexible on how they use fit out rather than be adamant that they need a board of certain size.
“Some landlords just don’t get it.
“Uninformed tenants tend to get hit by a bigger bill than they thought because of a big fit out, whereas better tenants think about make good and are more careful about what they sign.
Stages of best practice outlined in the guide include:
- taking instructions and clarifying terms of engagement
- determining the different types of schedules
- understanding the different roles required of the property professional
- preparing the layout and content of a schedule to make good
- quantifying the claim and preparing an assessment of costs
- providing advice regarding the preferred timetable for serving notices and ongoing dialogue, responses, and meetings
Greening “make good”
The RIC guide points out that the average lease term of five years means that tenants and landlords are generating three times more waste at lease end than they need to.
This sentiment is echoed by Wotso, a flex space company that has been rescuing and recycling office fit-outs generated by the wasteful process.
“About 20 per cent of office fit-outs are churned, demolished, and refitted every year. In Australia, this represents up to 5 million square metres of office space per year,” the guide states.
It says make good generates waste when:
- the outgoing lessee throws out their fit-out to comply with lease obligations
- the lessor refurbishes the space to bring it to modern standards, throwing away more materials
- the incoming lessee fits out the office, throwing away some fixtures and finishes
With careful thought and planning, both lessee and lessor could reduce waste, save materials, and avoid costs. This includes assessing the premise before signing a lease to establish where some finishes or services may be altered.
Impacts on the building can be minimised by:
- avoiding replacing the base lessor equipment
- making fit-out open plan
- a wireless data system
- a lease-integrated fit-out where the lessee installs the ceiling and carpet to suit their needs in exchange for less rent
- using materials that can mounted or installed over the top of the base building finish
- using carpet tiles from companies committed to taking back their products
- lightweight workstations that can be relocated within the office
- allowing appropriate time to complete make good
- using part or all of the pre-existing fit-out
The idea of “green leasing” had been on the agenda on and off, and while leading landlords are including green clauses in leases, the tenants have been slow to respond.
- Read about green leasing in The Tenants & Landlords Guide to Happiness