Arguing the toss at the end of a lease

Arguing the toss at the end of a leaseThis is my second blog about the new building surveyor profession in New Zealand. It is having a significant impact on the way building owners are managing commercial leases.

I’ve written before about how easy it is for a business to get caught out at the end of a lease by the ‘make good‘ provisions that require a property to be reinstated to how it was at the beginning of a lease.

This can be a very challenging area of negotiation. Many businesses that have made fit-outs and changes to a building might consider them improvements.

But the building owner may see things differently.

I worked with a client recently who had leased premises that were not much more than a concrete shell at commencement. They had added office partitions, meeting rooms, toilets and a number of alterations to suit their business.

At the end of the lease a rational executive would think these would be viewed as valuable improvements by the building owner. Unfortunately not.

The building owner demanded it be returned to its original state – at great cost.

The challenge for my client’s CFO was that the original lease had been drawn up by his predecessor and he was unaware of the level of changes that had been made to the property, or the full details regarding the ‘make good’ aspect of the lease.

Building owners are now having building surveyors carry out the assessments regarding reinstatement or ‘make good’ at the end of a lease.

The NZ Institute of Building Surveyors says it’s membership provides the following services…

Dilapidation Reports
A schedule of the condition of a property or premises upon termination of a lease confirming the details of repairs or items requiring reinstatement under the terms of the lease.

Dispute Resolution
Within the institute you will find members with significant experience as arbitrators, mediators and “expert witnesses” in construction disputes. These 3 roles all require the member to be impartial and independent, in contrast to a lawyer who is generally engaged to be the client’s advocate.

The assessments made are often debatable, as in many legal situations.

Commercial tenants are now having to hire their own building surveyors to make a counter assessment.

I know of a case where the building owner’s surveyors came back with a ‘make good’ figure of $1.3 million at the end of a lease, and the business tenant’s surveyor put the assessment at $800,000.

Significant sums, and a significant difference of $500,000 dollars.

In the past the tenant might have simply written the cheque or completed the required work without question.

The whole area of reinstatement is now becoming hotly contested with the introduction of professional building surveyors into the equation.

While finance directors and lawyers keep a reasonably good check on the terms and conditions in commercial leases, there are levels of detail that can easily be overlooked if a property lease specialist is not involved.

2 thoughts on “Arguing the toss at the end of a lease”

  1. Even between building surveyors there is considerable scope for interpretation to “making good” under the traditional UK “put and keep” repairing clause. LL will often cite replacement when repair & repaint will meet criteria. Given NZ’s greater accommodation of fair wear and tear it looks like we are entering a new era of property litigation until a new datum is established. Probably overdue given the general lax attitudes of both sides to significant transactions. At the end of the day the claim was usually limited by diminution of value to the reversion and again this leaves wonderful scope for negotiation.

  2. Thanks for your comments Nigel. Yes, I think this could be the new frontier in Property, with tenants being astonished with their landlord’s claim for reinstatement, especially if they hadn’t put funds aside.

    To other subscribers to The Parallelogramme: I invite you to tell us your Make Good story. Pretty much anyone who has been in Property will have a bagful of such stories! Come on – share with us…..

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