Fitout and make-good: budgeting premises costs from start to finish
Fitout and make-good make up the biggest “hidden” cost of a lease
When people think about premises costs, they think about the monthly rent. But two other costs often add up to far more than many people expect:
Fitout — the cost of turning empty premises (or premises left by a previous tenant) into a space that suits your business.
Make-good — the obligation at the end of the lease to return the premises to the condition they were in when you moved in.
Both must be built into the lease’s total budget — not just the rent.
Fitout: the cost going in
What is fitout: Everything that needs doing to get the premises ready for your business to operate — building work, painting and repairs, electrical and plumbing installation, IT and telecommunications systems, furniture, signage, kitchen equipment (if it is a restaurant) and so on.
Who pays for the fitout? This is an important point to negotiate:
- Tenant pays in full: Common in many leases. You take the premises as a “shell” (an empty frame) and renovate it yourself to suit your needs.
- Landlord contributes (fitout allowance or rent-free period): The landlord may provide a sum to help with the fitout, or grant a rent-free period of a few months so you can renovate without paying rent. This is something you can negotiate — especially when the commercial property market is weak and the landlord needs tenants.
- Landlord carries out the fitout to your specification: Some landlords agree to do the fitout themselves to your spec — then build it into the rent or amortise it over the lease term.
Never start the fitout before you have the landlord’s written approval — even after the lease is signed. Many leases require the landlord to approve the fitout plans before construction begins.
Plan the fitout before signing the lease: If you do not yet know how much the fitout will cost, ask a builder or interior designer to estimate before you commit to the lease. Discovering that the fitout costs twice your estimate after you have signed is too late.
Make-good: the obligation going out
What is make-good: When the lease ends, the make-good clause requires you to return the premises to the condition they were in when you took them. This usually means:
- Removing all the fixtures and fitout you installed
- Repainting and repairing back to the original condition
- A professional clean
How much make-good is required? It depends on the clause in the lease. Some leases require everything; some allow you to leave certain things behind. Make-good disputes are among the most common lease disputes.
A “pay out” clause instead of doing the work yourself: Sometimes you can negotiate to pay cash instead of carrying out the make-good yourself — the landlord then engages contractors with that money. This is sometimes simpler and sometimes cheaper, if you negotiate well.
Schedule of Condition — protecting you from day one
One of the most common mistakes when starting a new lease is failing to prepare a Schedule of Condition (a record of the condition) the moment you take the premises.
A Schedule of Condition is a document that describes in detail (ideally with photos) the state of the premises on the day you take them. At the end of the lease, this is the basis for working out how much make-good you have to do and which defects were already there before you moved in.
Without a Schedule of Condition, the landlord can ask you to pay for damage that existed before you leased the premises — and you have no evidence to push back.
Prepare a Schedule of Condition on the very first day you get the keys, and ask the landlord to sign to confirm it.
Building a realistic total budget
When assessing the true cost of a property, include:
Going in: First month’s rent + deposit (per the lease terms — check with the landlord), fitout cost, tools and equipment, signage, IT/internet connection
Monthly: Rent + outgoings + utilities + business insurance (the insurer needs the address of the premises)
End of lease: Estimated make-good + removal of fittings
The true total cost is usually considerably higher than “rent × time”. Work it out carefully before you sign.