Make Good Obligations in Commercial Leases

Make Good Obligations in Commercial Leases

• Make good obligations are primarily contractual but subject to statutory terms in Queensland
• There is no standard meaning — the lease wording is critical
• Reinstatement obligations can be extensive and costly
• Courts will enforce clear drafting, even where outcomes are commercially harsh
• Early planning and proper documentation significantly reduce risk

In Queensland commercial and retail leasing practice, make good obligations refer to contractual duties imposed on a tenant to return leased premises to a specified physical condition upon expiry or earlier termination of a lease, and potential eviction.

These obligations typically operate at the conclusion of the tenancy and form part of the broader system of repair, maintenance, reinstatement and compliance covenants.

At their core, good obligations concern allocating responsibility for the physical condition of the premises at lease exit.

Their commercial purpose is to protect the landlord’s reversionary interest and preserve the premises’ marketability for re-letting, while providing tenants with certainty about the extent of their exit obligations.

Although frequently grouped under a single label, make good obligations are not a standardised legal concept.

Their content, scope, and enforceability depend primarily on the drafting of the lease, construed according to orthodox principles of contractual interpretation.

In Queensland, the Property Law Act 2023 (Qld) includes standard terms in Schedule 1 which may apply to leases, including obligations concerning the condition in which premises must be returned at the end of a tenancy, subject to reasonable wear and tear and any contrary agreement between the parties.

While parties can still negotiate different “make good” terms in their lease, these new statutory standards apply automatically unless the lease explicitly excludes or modifies them.

As the High Court emphasised in Mount Bruce Mining Pty Limited v Wright Prospecting Pty Limited [2015] HCA 37, contractual interpretation is an objective exercise grounded in the text, context, and commercial purpose of the agreement. The Court stated at [46]:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose

This principle is directly applicable to the construction of make good clauses. Courts will examine:

• The precise wording of the clause
• Its interaction with repair, alteration and compliance provisions
• The commercial setting of the lease
• The factual matrix known to both parties at the time of execution

The label make good itself carries no fixed legal meaning. It may encompass obligations ranging from basic cleaning and repair to extensive reinstatement of base building condition, removal of tenant improvements, and rectification of structural alterations.

In this article, our commercial lease disputes lawyers explain the obligations in more detail.

The Commercial Rationale for Make Good Obligations Clauses

Make good clauses serve three key commercial functions.

First, they preserve the landlord’s asset value by requiring premises to be restored to a relettable condition, with the High Court in Tabcorp confirming that reinstatement cost may be the appropriate measure of loss.

Secondly, they allocate risk between landlord and tenant by defining responsibility for removal of fitout, repair of damage, and reinstatement of services.

Thirdly, they facilitate efficient lease transitions by creating certainty at lease expiry, reducing vacancy and dispute risk – although unclear drafting often leads to complex, costly disputes, particularly when the original condition of the premises is not properly documented.

Preservation of asset value

Commercial premises often undergo substantial physical change during a lease term. Fitouts, structural alterations, and changes to building services may significantly alter the landlord’s asset.

Make good clauses operate to restore the premises to a condition suitable for immediate re-letting, thereby preserving capital value.

The High Court’s reasoning in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 underscores the fundamental importance of reinstatement obligations in lease law.

In that case, which concerned unauthorised alterations in breach of a negative covenant, the High Court held that the proper measure of damages was not confined to diminution in value and supported an award based on reinstatement cost in the circumstances of the case. The Court stated at [10]:

the correct basis for damages was the cost of reinstatement, not diminution in value of the land, but he would have allowed the parties to address further on relief.

Although Tabcorp was concerned with damages rather than make good clauses as such, the decision illustrates the centrality of reinstatement principles in lease enforcement, and the judiciary’s recognition of a landlord’s legitimate interest in controlling the physical condition of leased premises.

Risk allocation between landlord and tenant

Make good clauses function as a risk allocation mechanism, defining:

• Who bears the cost of removing fitouts
• Who must repair damage caused by alterations
• Who is responsible for reinstating building services

This allocation is especially significant in long-term commercial leases, where extensive tenant works are anticipated. Clear, well-drafted agreements allow parties to price this risk into rental negotiations, fit-out incentives, and lease premiums.

Facilitation of efficient lease transitions

From a commercial perspective, make good clauses enable predictable lease transitions.

By specifying the physical condition required at expiry, landlords can reduce vacancy periods and avoid disputes that delay re-letting.

Conversely, tenants benefit from certainty regarding their financial exposure at lease exit.

Where make good obligations are ambiguous, disputes frequently arise as to:

• The original condition of the premises
• The scope of permissible alterations
• The standard of reinstatement required

Queensland litigation demonstrates that such disputes can escalate rapidly into complex evidentiary contests, particularly where contemporaneous entry condition records are absent.

Legal Character of Make Good Obligations

At common law, a lease is not merely a conveyance of an interest in land, but also a contractual instrument, governed by orthodox principles of contractual construction.

This characterisation is fundamental to understanding the scope and operation of make good obligations.

In Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, the High Court emphasised that modern commercial leases must be understood as contractual arrangements, stating at [24]:

It is no longer sensible to pretend that a commercial lease, such as the one before this Court, is simply a conveyance and not also a contract.

The Court further observed that leases should be regulated by orthodox contractual doctrine, as stated at [27]:

…it was more appropriate in the light of the essential elements of the bargain, the modern money economy and the modern development of contract law that leases should be regulated by the principles of the law of contract.

This contractual framing is critical for analysing make-good obligations. The tenant’s obligation to reinstate premises at the end of the lease arises primarily from the terms of the lease itself, rather than any general property law principle, subject to any applicable statutory terms.

Accordingly, the scope, content, and enforceability of make good obligations depend primarily on the wording of the relevant covenants and conditions, subject to any applicable statutory terms.

Construction of Lease Covenants and Make Good Obligations Clauses

Because make good obligations are contractual in nature, they are construed in accordance with orthodox principles of contractual interpretation. The courts approach such clauses by examining their text, context, and commercial purpose.

In Shevill v Builders Licensing Board (1982) 149 CLR 620, the High Court reaffirmed that leases are to be construed as contracts and that general contractual principles govern their operation, stating at [5]:

This argument proceeded on the basis that the general principles of the law of contract, so far as they are relevant to the questions that arise in this case, are equally applicable to leases.

The Court accepted that contractual interpretation principles apply, even though leases also involve proprietary interests.

This means that make good clauses must be interpreted by reference to their ordinary and natural meaning, viewed objectively in their contractual context.

The contractual nature of leases also permits the parties to define the strictness of tenant obligations. As Gibbs CJ explained at [7]:

However, the parties to a contract may stipulate that a term will be treated as having a fundamental character although in itself it may seem of little importance, and effect must be given to any such agreement.

Applied to make good obligations, this means that even extensive reinstatement obligations including removal of fixtures, reinstatement of base building condition, and repair of alterations will be enforceable where the lease clearly so provides.

Nature and Scope of Tenant Obligations at Lease Expiry

Make good obligations typically operate upon expiry or earlier termination of the lease. Their purpose is to restore the landlord’s reversionary interest to an agreed condition.

The High Court in Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 highlighted the fundamentally contractual source of tenant obligations, stating at [23]:

…the rights of the parties… are to be determined on the footing that as between them… it brought into existence an equitable term… subject to the conditions which it contained.

This underscores that a tenant’s end-of-term obligations depend on the conditions expressly agreed, together with any applicable statutory terms. Accordingly:

• If the lease requires reinstatement to the original condition, the tenant must comply.
• If the lease requires the removal of all tenants’ fixtures and fittings, that obligation is enforceable.
• If the lease is silent, the tenant’s obligations are more limited, but not necessarily non-existent.

The tenant remains subject to any applicable statutory terms and general obligations concerning damage, waste, and the condition of the premises. There is no general doctrine imposing a full “make good” obligation beyond the lease and applicable law.

Practical Implications for Make Good Drafting and Disputes

The contractual character of make good obligations has significant practical consequences for both landlords and tenants.

First, the precise drafting of the make good clause will determine:

• the scope of reinstatement;
• the standard of repair;
• whether upgrades, improvements, or compliance works are required; and
• whether reinstatement must occur before or after lease expiry.

Secondly, disputes commonly arise where clauses are ambiguous or internally inconsistent. In such circumstances, orthodox principles of contractual interpretation will govern the outcome.

Finally, the courts will not imply onerous make good obligations in the absence of clear drafting. As the High Court observed in Shevill v Builders Licensing Board (1982) 149 CLR 620, contractual consequences of termination and breach must be clearly expressed at [8]:

It would require very clear words to bring about the result… that whenever a lessor could exercise the right… he could also recover damages for the loss resulting from the failure of the lessee to carry out all the covenants of the lease…

This principle reinforces the necessity for precise drafting in make good clauses and careful lease review at both commencement and expiry.

Procedural Enforcement of Lease Covenants

The statutory framework governing the enforcement of lease covenants plays a critical role in shaping the operation of make-good obligations in Queensland.

While the obligation to make good arises contractually, its enforcement is mediated by statutory mechanisms that regulate termination, remedies, and damages.

The High Court in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 emphasised the importance of contractual structure in allocating enforcement consequences, observing that modern commercial leases commonly contain detailed remedial regimes that operate upon breach.

In that case, the Court noted the deliberate contractual elevation of tenant obligations to essential status, stating at [3]:

It shall be a fundamental obligation of the Lessee to ensure that the Lessor shall receive the rental provided for in the Lease during the full term thereof.

Although this statement concerned unpaid rent, the principle applies equally to repair and reinstatement covenants.

Where a lease characterises particular obligations as essential, the contractual consequences of breach may include termination and damages. Whether a make good obligation has that status depends on the terms of the lease.

The Court further explained that where a lease expressly defines covenants as essential, breach of those covenants engages termination and damages regimes:

Each of the covenants by the Lessee which are specified in this clause are essential terms of this Lease.

In Queensland, this contractual classification interacts directly with statutory notice and termination provisions.

Where a landlord seeks to enforce a breach, including failure to comply with make good obligations, statutory requirements governing notice, opportunity to remedy, and termination procedure must be strictly observed before remedies are engaged.

Termination, Damages and Statutory Interaction

Statutory regimes regulating lease enforcement do not displace contractual autonomy but instead regulate how contractual rights may be exercised.

This distinction was central to the High Court’s reasoning in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237.

The Court explained that contractual stipulation of essential terms enables parties to define the consequences of breach, including recovery of loss of bargain damages, as stated at [43]:

It is open to the parties to agree that a particular term is essential, and to agree on the consequences of breach.

This principle is particularly significant in the context of make good obligations, which often impose substantial reinstatement costs at lease expiry.

Where a lease clearly stipulates the essential nature of those obligations, statutory enforcement regimes operate in aid of, rather than in substitution for, contractual intent.

The Court further emphasised that the contractual allocation of risk remains paramount, stated at [58]:

There is no reason in law why general contractual principles do not apply to leases in this respect.

This reinforces the central role of lease drafting in shaping make good exposure.

Statutory Protection and Commercial Certainty

One of the key functions of statutory lease regulation is to balance tenant protection against commercial certainty.

The High Court in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 highlighted the commercial importance of enforceable lease obligations, stating at [64]:

The effect of the Lessee’s submission is to cut down on party autonomy, to increase the chance of disputes and to reduce certainty.

In the context of make good obligations, this principle supports:

• strict enforcement of clearly drafted reinstatement clauses;
• resistance to implied limitations on tenant liability; and
• judicial reluctance to dilute express contractual risk allocation.

Statutory frameworks governing lease enforcement regulate how contractual rights are exercised and may, in some cases, limit or affect the enforceability of particular obligations. They operate to balance commercial certainty with tenant protection.

Interaction with retail leasing regulation

In Queensland retail leasing, statutory intervention is more pronounced. However, even within this regulatory environment, contractual autonomy remains the foundation of make good obligations.

The High Court’s emphasis on certainty and party autonomy in Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237 supports the enforcement of contractual risk allocation in leases, including where parties have clearly defined reinstatement obligations.

The Court’s observation that contractual allocation of risk promotes certainty is directly applicable, further stating at [64]:

If the Lessee is wrong, it is open to parties to agree that a particular term is essential, and to agree on the consequences of breach. That avoids arguments … and reduces uncertainty.

This underscores the importance of clear disclosure and careful drafting of make good clauses, particularly in retail shop leases. In Queensland, a retail lease provision requiring refurbishment or refitting is void unless the lease gives general details of the nature, extent and timing of the work.

Practical statutory risks in make good enforcement

The statutory environment gives rise to several recurring enforcement risks:

• invalid termination due to defective statutory notice;
• unenforceable claims due to procedural non-compliance;
• disputes concerning mitigation of loss following lease termination; and
• disagreement over the scope of recoverable reinstatement costs.

In Gumland Property Holdings Pty Ltd v Duffy Bros Fruit Market (Campbelltown) Pty Ltd (2008) 234 CLR 237, the High Court emphasised the obligation of landlords to mitigate loss following termination, stated at [3]:

The Lessor shall be obliged to take reasonable steps to mitigate his damages and to endeavour to lease the Demised Premises at a reasonable rent and on reasonable terms.

In the make good context, this mitigation obligation may affect the recoverability of damages following breach, including issues such as the timing of works and the extent of recoverable expenditure.

How Queensland Courts Interpret Make Good Obligations

Queensland courts treat make-good obligations as contractual obligations, whose scope and operation depend on the proper construction of the lease, including any statutory terms taken to be included in it.

This reflects the modern judicial understanding that commercial leases are to be interpreted in accordance with orthodox contractual principles.

In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, Mason J articulated the governing approach to contractual interpretation, stating at [22]:

The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning.

This principle governs the interpretation of make good clauses. Where the drafting is ambiguous or capable of multiple meanings, courts may examine the surrounding commercial context to ascertain the parties’ objective intention. Conversely, where the language is clear, its ordinary meaning will prevail.

Objective intention and commercial context

Queensland courts interpret contractual obligations by reference to the parties’ objective intention, rather than their subjective expectations.

This ensures consistency, predictability, and commercial certainty in the enforcement of lease covenants.

In Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, Mason J explained that interpretation is directed toward the meaning that reasonable persons would attribute to the contract, as stated at [20]:

What must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties.

Applied to make good obligations, this means that courts will construe reinstatement clauses by reference to:

• The commercial purpose of the lease,
• The nature of the permitted fitout and alterations, and
• The allocation of commercial risk is objectively reflected in the drafting.

Strict construction of contractual rights and remedies

Queensland courts emphasise that rights arising from contract must be exercised strictly in accordance with their terms.

This principle is particularly significant where make good clauses prescribe procedural requirements, timing mechanisms, or enforcement steps.

In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, Gibbs CJ affirmed the centrality of orthodox contractual damages principles, stating at [3]:

The appellant is in the position of a plaintiff in an ordinary action for damages for breach of contract.

His Honour continued:

It is the actual damage which flowed from the breach which alone can be recovered.

In the make good context, this principle requires that damages be causally connected to the breach, but it does not preclude recovery assessed by reference to reinstatement cost where that is the proper contractual measure.

Proportionality and commercial reasonableness

Courts are cautious to avoid outcomes that impose commercially disproportionate burdens on tenants, unless the lease clearly mandates such consequences.

In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, Gibbs CJ observed at [6] that:

The liability of a party who has broken a contract which contains a penalty clause is to pay the damages that have resulted from the breach.

Although arising in the penalty context, this reasoning reflects a broader judicial concern with proportionality and causal connection.

Applied to make good disputes, it reinforces the principle that tenants should not be saddled with excessive reinstatement costs unless those costs genuinely flow from breach and are clearly contemplated by the lease.

Enforcement discipline and contractual integrity

Queensland courts require strict fidelity to contractual mechanisms, particularly where contracts prescribe structured rights and obligations.

In Concut Pty Ltd v Worrell (2000) 75 ALJR 312, the High Court reaffirmed that contractual rights and obligations must be determined by careful construction of the governing agreement, as stated at [10]:

The relevant findings of fact … concern the identification of the legal consequences of those findings, the construction of the [contract], and its place in the [contractual] relationship between the parties.

Although arising outside the leasing context, this reasoning applies equally to commercial lease disputes involving make good obligations. Courts will focus on:

• the precise drafting adopted;
• the structural logic of the lease; and
• the contractual matrix in which the obligations operate.

Practical Operation of Make Good Obligations

The practical operation of make good obligations depends fundamentally upon identifying the baseline condition of the premises at lease commencement.

In the absence of reliable contemporaneous evidence, courts are often required to resolve factual disputes by inference, increasing litigation risk and uncertainty.

This evidentiary foundation is critical because make good obligations operate by reference to restoring premises to an agreed prior condition, rather than to some abstract or assumed standard.

Where the lease requires reinstatement, the factual inquiry inevitably centres on the condition of the premises at the commencement of the lease and the extent of alterations permitted during the term.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the High Court emphasised the centrality of contractual covenants governing repair, yielding up, and making good. Their Honours noted that the tenant had covenanted at [7]:

to keep the premises in repair; … to yield up the premises on the determination of the lease in good repair; and … to make good any breakage or damage.

This formulation demonstrates how make-good obligations typically operate in tandem with repair and yielding-up covenants, reinforcing the importance of identifying the precise physical state against which compliance is measured.

End-of-lease inspections and dilapidations assessments

In commercial leasing practice, make good obligations are most commonly operationalised through end-of-lease inspections and dilapidations assessments. These processes translate contractual obligations into a practical scope of works or monetary claims.

Disputes frequently arise concerning whether works undertaken by tenants constitute permissible alterations, whether damage exceeds fair wear and tear, and whether reinstatement obligations extend to full reconstruction of pre-existing architectural features.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the High Court described the factual matrix of extensive unauthorised alterations to a premium office foyer and the landlord’s insistence upon full reinstatement. The Court recorded at [5]:

The destruction of the old foyer … and the construction of a new foyer … were carried out in breach of cl 2.13.

This finding illustrates how make good obligations frequently crystallise around physical acts of demolition, alteration and reconstruction, rather than merely cosmetic repairs.

Rectification works versus financial compensation

A central operational question in make good disputes is whether the landlord is entitled to:

• physical reinstatement, or
• financial compensation in lieu of reinstatement.

The High Court’s decision in Bellgrove v Eldridge (1954) 90 CLR 613 remains the leading Australian authority on this issue. Although arising in the building contract context, its reasoning is routinely applied in commercial leasing disputes.

The Court held that reinstatement damages are recoverable where they are both necessary to produce conformity with the contract and reasonable in the circumstances, stating at [9]:

The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach

His Honour further explained that reinstatement may be inappropriate where the cost is unreasonable, observing at [5]:

This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract.

In the make good context, these principles govern whether a landlord is entitled to recover the full cost of reinstatement, or whether damages should instead be assessed by reference to diminution in value or loss of reversionary interest.

The primacy of contractual drafting in operational outcomes

The operational impact of make good obligations depends overwhelmingly on lease drafting.

Courts enforce reinstatement clauses strictly where they are clear, but will not extend them beyond their proper construction where drafting is ambiguous.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the High Court rejected arguments that reinstatement damages should be limited by reference to diminution in value, holding at [26] that:

Damages for breach of a covenant to repair or to yield up in repair are to be assessed by reference to the cost of putting the premises into the state of repair required by the covenant.

This approach illustrates that where a lease clearly mandates reinstatement, courts will ordinarily enforce that outcome, even where the financial burden is substantial.

In practice, these principles translate into several operational realities:

1. First, make good obligations represent a material contingent liability for tenants, often exceeding fitout construction cost.
2. Secondly, landlords face timing risk, as reinstatement disputes can delay reletting and disrupt asset management strategies.
3. Thirdly, both parties benefit from early engagement and structured dilapidations processes, reducing dispute escalation and litigation risk.

The combined effect of contractual clarity, evidentiary certainty, and proportional remedial principles shapes the practical operation of make good obligations in Queensland leasing practice.

Common Risks and Misconceptions in Make Good Obligations

One of the most persistent misconceptions in commercial leasing is that make good obligations automatically require tenants to return premises to their original, base building condition.

In reality, courts do not presume any such obligation. Instead, the tenant’s duty is determined by the construction of the lease, including any statutory terms that apply unless excluded or modified.

Where a lease requires reinstatement to a specified standard, courts will enforce that obligation. Where it does not, no such obligation arises by implication.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the High Court demonstrated the decisive role of contractual drafting.

The tenant was held liable for reinstatement because the lease expressly required it. Their Honours noted that the tenant had covenanted, as stated at [7]:

to keep the premises in repair; … to yield up the premises on the determination of the lease in good repair; and … to make good any breakage or damage.

This formulation illustrates that reinstatement is not automatic. It arises only where the lease imposes express obligations to repair, yield up, and make good.

The absence of such drafting often defeats claims for full strip-out or base building reinstatement, regardless of commercial expectations.

Theoretical loss is not automatically recoverable

Another misconception is that landlords may recover theoretical reinstatement costs, regardless of whether they have suffered a real financial loss.

This approach is incompatible with orthodox principles of contractual damages.

In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, Gibbs CJ emphasised that damages are confined to actual loss, stating at [3]:

It is the actual damage which flowed from the breach which alone can be recovered.

This principle may limit dilapidations claims in some cases. However, where the lease protects the landlord’s interest in the physical condition of the premises, courts may award damages assessed by reference to the cost of reinstatement even if that cost exceeds any diminution in value.

Questions of reasonableness and contractual construction remain critical.

Cosmetic damages necessitate structural reinstatement

Tenants often assume that cosmetic damage or wear will automatically justify extensive reinstatement demands. Courts draw a clear distinction between:

• fair wear and tear,
• cosmetic deterioration, and
• structural or substantive damage.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the High Court dealt with a case involving extensive structural demolition and reconstruction, emphasising the severity of the breach. Their Honours recorded:

The destruction of the old foyer … and the construction of a new foyer … were carried out in breach of cl 2.13.

This illustrates that courts will enforce reinstatement where the lease requires it, particularly in cases of substantial alteration. However, the availability of reinstatement is not confined to structural interference and ultimately depends on the proper construction of the lease.

Minor deterioration, surface wear, and age-related decline will not ordinarily require reinstatement unless the lease expressly imposes that obligation.

These misconceptions give rise to several recurring commercial risks:

1. First, tenants frequently underestimate end-of-lease exposure, leading to inadequate financial provisioning.
2. Secondly, landlords often assume automatic entitlement to full reinstatement cost, leading to inflated claims and protracted disputes.
3. Thirdly, both parties frequently neglect early evidentiary preparation, significantly weakening their respective litigation positions.

Together, these factors explain why make good disputes represent one of the most litigated aspects of commercial leasing.

Case Study: Fitout Removal Dispute

A commercial tenant installs a substantial office fitout, including partitioning, lighting, and air-conditioning modifications.

At lease expiry, the landlord requires full removal and reinstatement to base building condition.

The tenant argues that the works improved the premises and that full strip-out is unnecessary.

The lease, however, requires removal of all tenant installations and reinstatement of the original condition.

The dispute turns on the construction of the make good clause and the condition of the premises at lease commencement.

The tenant ultimately bears significant reinstatement costs due to clear drafting and the absence of any agreed limitation.

Consequences of Non-Compliance with Make Good Obligations

Failure to comply with make good obligations can expose tenants to substantial financial liability, particularly where leases clearly require reinstatement, repair, or restoration of altered premises.

The High Court’s decision in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 confirms that where a tenant breaches covenants concerning repair, yielding up, or reinstatement, damages may be assessed by reference to the cost required to achieve contractual compliance, depending on the terms of the lease and the applicable principles of contractual loss.

In that case, the tenant was held liable for the full cost of restoring extensive unauthorised structural alterations, notwithstanding arguments that the landlord had suffered limited economic loss.

This approach reflects orthodox Australian contract law principles and is routinely applied in Queensland leasing disputes.

Where a lease clearly mandates reinstatement, courts will ordinarily enforce that obligation according to its terms, even where the resulting financial exposure is substantial.

Structural alterations and heightened liability

The risk profile increases significantly where breaches involve structural works or demolition, rather than cosmetic or minor alterations.

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, the tenant had demolished and replaced substantial structural elements of a premium office foyer without appropriate authorisation.

The High Court treated this as a serious contractual breach, justifying full reinstatement damages.

The case demonstrates that where tenants undertake major structural alterations, particularly without landlord consent, courts are far more likely to require complete restoration of the premises, rather than limiting recovery to diminution in value or commercial loss.

For Queensland tenants, this underscores the importance of complying strictly with alteration approval regimes and carefully considering the long-term consequences of any structural modifications undertaken during the lease term.

Proportionality and the avoidance of waste

Although courts frequently award reinstatement damages, they remain mindful of proportionality and economic waste, particularly where reinstatement would yield little practical benefit.

In Bellgrove v Eldridge (1954) 90 CLR 613, the High Court articulated the principle that reinstatement damages should not be awarded where the cost of rectification would be unreasonable or disproportionate to the benefit obtained.

This principle has been consistently applied across Australian jurisdictions and operates in Queensland as an important limitation on dilapidations claims.

In the make good context, this means that courts may restrict recovery where reinstatement would be commercially pointless, such as where the landlord intends to redevelop or substantially refurbish the premises.

In such circumstances, damages may instead be assessed by reference to actual loss, rather than full reinstatement cost.

This proportionality constraint plays a critical role in moderating the potentially harsh consequences of rigid make good enforcement.

Restriction to actual loss

A further important limitation arises from the fundamental principle that damages are confined to loss actually suffered as a result of breach.

In AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, the High Court reaffirmed that contractual damages must correspond to actual loss flowing from breach, rather than theoretical or punitive measures.

This principle operates directly in make good disputes, preventing landlords from recovering reinstatement costs that do not reflect genuine financial detriment.

In practical terms, this means that where reinstatement works are not intended, or where reletting occurs without material delay or expense, courts may limit recovery to reflect real commercial loss, rather than awarding the full theoretical cost of rectification.

Termination risk and security enforcement

Non-compliance with make good obligations can also expose tenants to termination risk, particularly where leases classify reinstatement covenants as essential terms.

Where a lease designates make good obligations as fundamental, breach may entitle the landlord to terminate the lease, call upon bank guarantees, or retain security deposits, in addition to pursuing damages.

This significantly elevates the commercial risk associated with non-compliance.

Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8 illustrates the potentially severe consequences of breaching essential covenants, reinforcing that careful contractual drafting materially influences enforcement outcomes.

Evidentiary and litigation consequences

Make good disputes frequently involve high evidentiary complexity, particularly where reinstatement scope, construction methodology, and cost are contested.

As demonstrated in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, courts are often required to engage in detailed factual analysis involving building works, expert evidence, and competing technical opinions. This significantly increases:

• litigation cost exposure,
• procedural complexity, and
• resolution timeframes.

For both landlords and tenants, early engagement, structured inspection processes, and proactive dispute management are therefore essential in mitigating litigation risk.

Commercial impact on Queensland leasing practice

Taken together, Queensland law demonstrates that failure to comply with make good obligations may result in:

• substantial financial exposure,
• significant business disruption,
• prolonged litigation,
• delayed reletting, and
• capital expenditure uncertainty.

These risks underscore the importance of precise drafting, early planning, and disciplined compliance management throughout the lease lifecycle.

Make Good Obligations Risk Checklist (Tenants)

Before signing a lease, tenants should:

• Review the make good clause in detail
• Confirm whether full reinstatement is required
• Check for any cap on make good costs
• Obtain a detailed entry condition report
• Clarify obligations for services (HVAC, fire, electrical)
• Confirm whether compliance upgrades are required
• Seek legal advice before agreeing to broad obligations

Frequently Asked Questions – Make Good Obligations

These frequently asked questions address the most common legal and practical issues that arise in relation to make good obligations in Queensland commercial and retail leases.

They are intended to clarify how these obligations operate in practice and highlight the key risks for both landlords and tenants.

What does “make good” mean in a commercial lease?

“Make good” refers to a tenant’s obligation at lease expiry to restore the premises to a specified condition, usually involving removal of fitout, repairs, reinstatement of alterations, and rectification of damage. The exact scope depends on the lease wording and any applicable statutory terms. There is no standard definition, and obligations can range from light cosmetic repair to full structural reinstatement.

Is make good legally required in Queensland?

Make good obligations are primarily determined by the terms of the lease, but may also be affected by applicable statutory provisions. In Queensland, certain default terms may apply to leases unless excluded or modified, meaning that end-of-lease obligations are not always purely contractual.

Does make good mean returning the premises to original condition?

Not automatically. Make good only requires what the lease specifically states. Some leases require full base-building reinstatement, while others require only removal of tenant fitout and repair of damage. Courts will not imply a full reinstatement obligation unless the lease clearly requires it.

Who pays for make good obligations at the end of a lease?

The tenant pays if the lease, or any applicable statutory terms, impose that obligation. Costs can be significant, particularly where structural alterations, fire services, air-conditioning, or compliance upgrades are involved. Tenants should budget for make good costs well before lease expiry to avoid financial shock.

Can a landlord claim money instead of reinstatement works?

Courts may allow landlords to recover damages assessed by reference to the cost of reinstatement, depending on the terms of the lease and the nature of the breach.

However, issues of reasonableness, proportionality, and the proper measure of contractual loss remain relevant.

What happens if a tenant does not comply with make good obligations?

Non-compliance can expose tenants to substantial damages claims, forfeiture of security deposits or bank guarantees, and in some cases lease termination. Disputes often involve expert evidence and costly litigation, making early compliance and negotiation critical.

Does fair wear and tear reduce make good liability?

If the lease provides for fair wear and tear, or if the statutory standard terms apply, deterioration caused by ordinary use over time will usually be excluded. However, it does not excuse damage, neglect, unauthorised alterations, or failure to maintain the premises. The lease wording and any applicable statutory terms determine how far fair wear and tear limits liability.

When should tenants start planning for make good obligations?

Ideally 6–12 months before lease expiry. Early planning allows time for inspections, scope negotiations, budgeting, works programming, and dispute resolution. Late engagement often leads to rushed works, inflated costs, and increased legal exposure.

Can make good obligations include compliance upgrades?

Sometimes. If the lease requires compliance with current laws at lease expiry, tenants may be liable for regulatory upgrades. If not clearly stated, courts may limit liability to restoring the premises to its original compliant condition. Drafting clarity is critical.

How can tenants reduce make good obligations risk?

Risk can be reduced by negotiating narrower clauses, limiting reinstatement scope, capping costs, obtaining early landlord sign-off on fitout works, and maintaining detailed condition reports. Strategic drafting at lease entry is the most effective risk control measure.