Make good obligations NSW commercial leases are a perennial source of dispute in commercial leasing. In New South Wales, these obligations arise when a tenant must return leased premises in an agreed condition. This occurs at the end of the lease term. Lessee fit outs are increasingly becoming more costly and many commercial space fit outs can cost millions of dollars. Understanding how make good obligations operate — legally and practically — is critical for both landlords and tenants across NSW.
Reinstatement vs Repair
Australian and NSW case law historically distinguishes between:
- Reinstatement obligations (returning premises to a specified condition), and
- Repair obligations (fixing damage beyond fair wear and tear).
Section 133A – Conveyancing Act 1919 (NSW)
A critical statutory control for all commercial leases in NSW is also section 133A of the Conveyancing Act 1919. This provision limits what a landlord can recover for breach of repair or related obligations. This includes make-good obligations. The diminution in value of the landlord’s interest caused by the breach limits the recovery. In other words:
- A landlord cannot recover the full cost of make-good works unless the failure to make-good actually reduces the value of the landlord’s interest,
- If the breach causes no diminution in value, the landlord may recover nil damages. This can occur if the landlord plans to redevelop or demolish the property.
What Is a Make-Good Obligation?
A make-good clause in a commercial lease sets out what the tenant must do on termination of the lease. Historically, it has required the tenant to:
- Repair damage caused during the tenancy (excluding fair wear and tear),
- Remove tenant-installed fixtures, fittings, signage, and partitions if required,
- Reinstate the premises to the condition at the start of the lease — or to a defined base building or bare shell condition where agreed,
- Clean and prepare the premises for the landlord or next tenant.
The exact scope of the obligation depends on the lease wording. A recent NSW SUprme Court decision may have important and long lasting impacts about the interpretation of make good clauses and how parties approach lease drafting and negotiation.
Allied Pinnacle Pty Ltd v G R Mailman & Associates Pty Ltd [2026] NSWSC 87
In 2015, Allied leased property in Huntingwood from Liberty Drive Pty Ltd. The lease was for a ten year term with two options for after five years each. In late 2015 and early 2016, Allied undertook fit out of the property with Liberty Drive’s consent. The fit out cost Allied approximately $2 million.
In 2017, Liberty sold the property to GR Mailman. GR Mailman became the lessor and inherited the rights and obligations under the lease. By 2024, it became apparent that Allied would not take up the option. Allied vacated the premises and left the fit out works substantially intact. Allied commenced proceedings and GR Mailman filed a cross claim seeking damages from Allied for the value of the work required to remove the fit out.
The make good clause was commercially standard. It provided: “A2.1 THAT during the term, the Lessee shall keep the demised premises and the Lessor’s fixtures and chattels situated in the leased premises in good repair and working conditions throughout this Lease and shall on expiry or termination of this Lease yield up the demised premises to the Lessor in the state of repair and condition as is specified in this clause and consistent with the condition of the demised premises at the commencement of this Lease.”
However the general make good clause as tempered by an additional clause 24:
“A24.1 THE Lessee shall redecorate the demised premises during each period specified in Item 6 of the Reference Schedule and also immediately following serious damage to the demised premises, which cannot be adequately rectified by repair and redecoration of only the damaged surfaces, and provided that at all times the damage to the demised premises was caused by the Lessee or by the Lessee’s occupation of the demised premises …. A24.5 THIS Clause A24 does not give rise to any obligations upon the Lessee to bring the demised premises into a better condition or state of repair than the demised premises were in at the date of this Lease. This Clause A24 does not give rise to any obligations upon the Lessee to redecorate, replace or conduct any works as concerning the Lessee’s Fitout other than to repair any damage to the Lessee’s Fitout, fair wear and tear expected.”
Allied also sought to rely on extraneous documents, namely a leasing proposal and a heads of agreement which referred to the fit out works. In considering all of the issues, Muston J held:
- The leasing proposal and heads of agreement did not supersede or impact the construction of the lease (following the decision in Westfield Management);
- Properly constructed, a specific clause takes precedence over a general clause and as such clause 24 takes precedence over clause 2.1;
- In light of the above and the textual context and construction of the lease, the approach to condition in 2.1 should be construed as a reference to the standard of the premises and not their configuration;
- It would be an inconsistent reading of the lease to give the lessee an option to keep or remove ‘Tenant Fittings’ (under clause B1(22)) and to also mandate that such fittings were removed at the termination of the lease;
Allied was responsible for external painting and redecoration. Allied was not required to remove the 2015 fit out. The court referred the matter to a referee. The referee will determine the quantum of the redecoration works.
Impact of the decision
The decision is extremely important for how lessors and lessees should treat make good obligations and their interplay with fitout.
It reiterates that a leasing proposal or heads of agreement should generally not be considered in interpreting a lease. However, it also holds a principle about approved fitout works. If a lessor approves fitout works, the lease may allow flexibility. If so, the lessor may not compel removal at the end of the lease.
That may have a long standing impact on how the lease is drafted. It may also affect how lessors grant consent to fitout works. This requires consideration that such works may be permanent, not temporary.
Practical Implications and Risk Areas
Condition Reports and Documentation
Both landlords and tenants should prepare a comprehensive condition report at the start of the lease, ideally with dated photographs and agreed benchmarks. This “schedule of condition” helps assess whether the tenant has fulfilled make-good obligations. It also helps identify what work is required.
Ambiguous Wording
Vague or broad wording in make-good clauses (“good repair and condition”) often leads to disputes about the nature and extent of obligations. Courts often interpret ambiguous provisions narrowly. This can make it difficult for landlords to enforce works beyond what the lease states.
Assignment and Subleases
When a party assigns or sublets a lease, the original tenant or the assignee may remain liable for make-good obligations. This applies unless the lease expressly provides otherwise. Careful drafting is essential to allocate obligations between parties.
Concluding Thoughts
Make-good obligations in NSW commercial leases combine contractual freedom with statutory safeguards. While parties can tailor make-good clauses to their commercial needs, they should understand limits imposed by s 133A. Clear drafting also matters. Early documentation can significantly reduce end-of-lease disputes. Well-negotiated clauses remain the best defence against costly disagreements at lease expiry. Condition reports and mutual clarity about obligations support this.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article written by Jackson McKinley, Senior Associate
