Who Pays: Make Good, Dilapidations and Net Leases

Australian commercial leases range from gross to net, with tenants contributing to outgoings such as rates, insurance and operating costs depending on the lease. The line between recoverable outgoings and capital is drawn by the lease and, for retail premises, by state retail leasing legislation, which in several states restricts what can be recovered from retail tenants.

At lease end, make-good clauses require tenants to return premises to a specified condition, often removing fit-out and repairing damage. Make good can fund some reinstatement, but it rarely funds base-building renewal, and negotiated settlements often replace physical works.

British single-let commercial buildings are often held on full repairing and insuring leases, placing repair obligations broadly on the tenant. In multi-let buildings, landlords typically carry out common works and recover costs through a service charge, guided by professional codes. The distinction between repair, which may be recoverable, and improvement, which often is not, can decide who pays for major replacements.

At lease end, dilapidations claims address breaches of repairing and reinstatement obligations. The law limits damages in various ways, which is one reason dilapidations rarely deliver a building in the condition the schedule describes.

Lease structure can move a capital line between parties. It cannot make the building need less.

In England and Wales the landlord’s claim at lease end is capped by statute. Section 18(1) of the Landlord and Tenant Act 1927 limits damages for breach of a repairing covenant to the reduction in the value of the landlord’s interest caused by the breach. If the landlord intends to redevelop or substantially alter the building, the cap can reduce the claim to nothing, because the repairs would be superseded.

Practice is set by the Pre-Action Protocol for dilapidations claims and by the RICS professional standard on dilapidations, now in its seventh edition. Claims are expected to be quantified, supported and reasonable, and the courts take account of parties who ignore the Protocol.

The consequence for a register is that lease end is a capital event whose value depends on the owner’s own plans. A landlord intending to refurbish gets less from a dilapidations claim than one intending to relet as is, and a register that knows the plan can show which.

American leases run from full-service gross, where the landlord carries operating costs, through modified gross, to triple net, where tenants pay taxes, insurance and maintenance. Common area maintenance charges recover shared costs in multi-tenant assets. Even in net leases, roof, structure and major system replacements often remain with the landlord, sometimes recovered over time through amortisation where leases allow.

The practical exercise is to lay the lease calendar over the register’s three horizons. Where do expiries, breaks, reviews and make-good or dilapidations events fall against the one-year, two-to-five-year and six-to-ten-year columns? A plant replacement due in year four in a single-let building with a lease expiry in year three is a different decision from the same replacement under a lease that runs to year nine. A facade programme may be timed to coincide with vacancy. An energy upgrade that benefits re-letting may be hard to recover from a sitting tenant and easy to fund at expiry.

The register does not decide these questions. It makes them visible, line by line, so that the conversation with lease advisers starts from the building’s actual position rather than from a general allowance.

Reading the register through the leases is the practical exercise. Which lines fall on the owner, which on tenants, which are shared, and which are uncertain? When do lease expiries, reviews and make-good or dilapidations events fall against the register’s horizons? A large replacement just before a major lease expiry is a different decision from the same replacement just after a new long lease.

This is one of the clearest places where the owner’s intentions reshape a strategy. The building is the same. Who carries it, and when, is not. Recoverability is best settled with lease advisers; the register’s job is to make the physical position clear enough for that conversation to be precise.