Makegoods are back! And they’re more relevant than ever!
For a long time, and especially so until recently, makegoods were the clause most tenants barely acknowledged, Landlord's didn't dare draw much attention to, and all parties willingly moved on to focusing on more exciting numbers like face rent, incentive and annual increases.
They sat quietly at the back of the lease, not considered a priority when compared to the pressing need for more warehouse capacity and the need to solve immediate operational issues.
Considered at best a 'future problem', or at worst an issue for whomever in the company would be handed the responsibility of dealing with it in 5, 7, or even 10 years, makegood obligations are now arriving with a very uncomfortable price tag in a post-Covid world.
With building and contractor costs rising across Australia, makegood obligations are firmly back in focus. And in today’s environment they’ve become one of the most powerful, and misunderstood, opportunities for tenants to materially reduce long‑term occupancy costs and preserve operating capital.
The cost reality has changed
As detailed in Cushman & Wakefield’s National Logistics Market Overview, warehouse construction costs have moderated from their 2022 peaks, however they remain structurally elevated, with renewed upward pressure expected from the global shocks affecting fuel, materials and trade inputs. As a result, construction and reinstatement costs bear little resemblance to where they were when many leases were first executed. This means that even what are considered modest makegood obligations can translate into significant dollars when multiplied across large industrial facilities.
What used to be a “standard” makegood can now comfortably run into the high hundreds of thousands, and in some cases, into the millions.
That alone makes deferring and avoiding the conversation a risky strategy.
Landlord’s love a rushed signing
The rise in construction costs aside, one of the biggest issues with makegoods is at an organisational level, not legal.
The Executive/MD/Stakeholder signing the lease is rarely familiar with overreaching makegood clauses Landlord’s may seek to impose. Facilities managers, finance teams and operations leaders are often laned with a scope that is broader, vaguer and more expensive than anyone expected.
'Full decoration of all office spaces?' That seemed pretty reasonable when you needed the lease signed yesterday and access last week 7 years ago. Now the repainting of all painted services and recarpeting of the office is seeming a bit excessive, especially in that boardroom no one has used the entirety of the lease.
'Reinstatement of base building shell regardless of Landlord approved Tenant works?' Hold on, the Landlord said we could cut into the slab and we could discuss it later?
That disconnect is where value leaks out of any leasing deal over time, and the rush to sign all those years ago begins to look more expensive as contractor quote after contractor quote roll in.
Why conditions are finally favouring tenants
While Cushman & Wakefield’s National Logistics Market Overview pointed to structurally evaluated construction costs, it also points to stabilising vacancy in some markets, elevated incentive levels and a more cautious development pipeline across many markets. So while supply is moderating, availability, particularly in secondary and speculative stock, has reopened negotiation windows that simply did not exist a few years ago.
In practical terms, this gives tenants the ability to push harder on non‑rental outcomes, including makegoods, without breaking the deal.
The hidden balance‑sheet benefit
There’s another angle when it comes to makegoods that rarely gets enough attention, the balance sheet carry. Sophisticated occupiers don’t just worry about makegoods at expiry, they carry ongoing provisions for them. Uncapped or poorly defined obligations force businesses to quarantine capital “just in case”, taking valuable operating capital off the balance sheet.
Successfully defining and negotiating makegood obligations removes that uncertainty. Over a long WALE lease, that can free up substantial cash that would otherwise sit idle. This capital can then instead be deployed into operations, automation, labour or growth initiatives.
The details are between the lines
By critically enforcing the actual wording, rather than conceding to a landlord’s preferred interpretation, makegood scopes and costs can often be materially reduced well before expiry.
Additionally, if a site is working for a tenant, and it makes sense to extend the current term it’s often the case that makegood obligations can be renegotiated to reflect the extended tenure of the lease. It doesn’t make sense to enforce makegood obligations that were intended for a 5 year term on a term that may now stretch to 10, possibly even 15 years.
This is where experience matters.
Cushman & Wakefield Tenant Advisory spends a significant amount of time analysing makegood clauses. We stress‑test what is genuinely required versus what is convenient for a landlord, while also recognising areas of opportunity for renegotiation.
In many cases, that process alone has delivered six‑ and seven‑figure savings without any confrontation, just proper interpretation of makegood clauses and obligations and disciplined execution.
If you would like to discuss how our team might be able to assist your operations with a looming makegood, the negotiation of a further term, or the establishment of a new lease reach out for an informal and confidential chat.
