For commercial office tenants, reaching the end of a lease isn’t as simple as packing up and moving out. One critical responsibility often overlooked is the reinstatement obligation, which can have major financial implications if not properly addressed.
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For commercial office tenants, reaching the end of a lease isn’t as simple as packing up and moving out. One critical responsibility often overlooked is the reinstatement obligation, which can have major financial implications if not properly addressed. So, what are reinstatement obligations and the potential costs involved? Here are some tips on how to approach this process in a cost-effective way.
What are reinstatement obligations?
Reinstatement, also known as "make good" obligations, are common in office leases. These lease clauses mean that tenants must return the office space to its original state before their lease expiry. This often involves removing any changes made by the tenant, such as removal of the entire fit out, tenant installed ceilings, walls, removing signs, and restoring flooring and lighting. Tenants also usually need to handle repairs or maintenance to make sure the office is left in good condition.
The costs of reinstatement
In major cities like those in Australia's central business districts, reinstatement claims average around $450 per square meter. For example, a tenant occupying 1,500 square meters could face a landlord claim of $675,000.
Tip: Tenants should obtain the landlord’s position on their reinstatement obligations as soon as they know they will be moving. Engaging an independent expert early can help review the landlord's scope and costs, leading to a more cost-effective exit strategy.
What happens if you don’t comply?
Failure to meet your reinstatement obligations can have significant consequences. If the required works are not completed to the landlord's satisfaction before the lease expires, the landlord typically reserves the right to carry out the works as they deem appropriate and charge the tenant for the costs. On top of that, they could also charge you extra rent (called "holdover rent") for the time it takes to complete the job.
Tip: As a tenant, it’s essential to consult with an expert who can help you negotiate against the landlord's scope of work, significantly reducing your potential costs.
Understanding reinstatement clauses
Reinstatement clauses are often vague and written in favour of the landlord's position. Understandably, tenants and their representatives tend to focus on negotiating key financial terms, such as rent, outgoings, increases and reviews, rather than scrutinising the end-of-lease reinstatement clauses. This ambiguity can allow the landlord to impose inflated costs at the end of the lease.
Tip: When negotiating a lease or Heads of Agreement, it is important to engage a specialist to ensure that reinstatement obligations are clearly defined and, where possible, capped or removed entirely.
The end of lease reinstatement challenge
At the end of a lease, reinstatement often proves to be much more costly than the tenant initially anticipated as landlord claims exceed their assumptions. Tenants can face significant expense if they don't take steps to manage these claims effectively.
Tip: All landlords typically engage specialists to represent their interests. Tenants should also hire their own expert to defend their position and ensure a fair and balanced outcome. Doing so could achieve savings of 40% to 70%. For example, on a $675,000 claim, savings could be between $200,000 and $470,000!
Don’t wait until it’s too late
A common mistake tenants make is waiting until the last few months to address reinstatement obligations. Often, tenants are only reminded by the landlord as the lease expiry approaches, leaving them with little time to negotiate or contest the claim.
Tip: To avoid this, tenants should seek independent advice well before the lease ends. An early review of obligations will help uncover opportunities to challenge the landlord’s claims and save on costs.
Misconception: "My builder will handle it"
Some tenants assume that having their builder price the reinstatement work, will provide enough leverage to negotiate the best outcome with the landlord. However, this approach may not be effective, as the tenant is working with the landlord’s scope of work—without questioning its accuracy.
Tip: Each lease can be interpreted differently when it comes to the tenant's actual obligations. Hiring an independent specialist can significantly reduce both the scope of the work and the associated costs. Independent experts know how to review the landlord's claims to identify essential details and savings that a builder might overlook. It’s also important to consider that certain states have legislation in place to protect tenants.
Are you accruing enough for reinstatement?
Tenants must accrue adequate funds to cover the cost of reinstatement throughout the period of their lease. However, many underestimate the final cost, leaving them underfunded when the time comes to pay and settle their obligations.
Tip: An independent expert can help accurately define reinstatement obligations, ensuring that tenants set aside enough funds to cover the real costs. Specialists will interpret clauses differently than landlords, helping tenants save money by avoiding unnecessary work.
Stay or go? How reinstatement costs affect your ‘big’ decision
When evaluating whether to stay in your current office or relocate, it’s essential to consider the cost of reinstatement in addition to rent and other key financial lease terms. Advisors and finance teams may overlook reinstatement costs in their assessments, leading tenants to make decisions without the full financial picture.
Tip: A thorough technical assessment of your reinstatement obligations—both for your current space and any potential new premises—can shift the decision-making process and may even justify a move that seemed financially unfeasible at first.
Conclusion: Protect your interests with an independent expert
End-of-lease reinstatement obligations can be daunting, confusing and costly, but tenants who engage specialists early can significantly reduce their financial burden. By planning ahead, being on the forefront of landlord's claims, and getting expert advice, tenants can navigate this process with confidence and achieve substantial savings.
Final tip: Whether you're negotiating a new lease or approaching the end of your current one, don’t underestimate the importance of consulting a specialist to review your reinstatement obligations and minimise costs. If you're nearing the end of your lease, now is the time to act. Start preparing for a smooth and cost-effective exit!
If you are coming towards the end of your lease in Australia, get in touch with our in-house expert, and founder of Navigate Property Consulting, Paul Mead, for a complimentary consultation - Paul@navigatepropertyconsulting.com.au
