Make Good Obligations for HVAC in Commercial Leases
What You Need to Know
Make good means returning a tenancy to base building condition at lease end. For HVAC, this covers removing tenant-installed systems, reinstating original ductwork and grilles, and proving the base building air conditioning works. It is one of the most expensive parts of any commercial lease exit.
In Australian CBD offices, total make good costs average around $450 per sqm across all trades (Property Council of Australia). The mechanical services portion alone typically runs $30 to $80 per sqm. A 500 sqm tenancy could spend $15,000 to $40,000 just on HVAC make good.
Most disputes happen because neither party documented the HVAC condition at lease start. A building services engineer's assessment before and after the lease saves thousands in arguments.
The Rules
- Retail Leases Act 1994 (NSW) requires landlords to provide a condition report before lease execution for retail leases. This report is the baseline for make good obligations. Section 25 covers condition reports. Section 36 covers make good at lease end.
- Standard commercial leases (non-retail) are not covered by the Retail Leases Act. Make good obligations are governed entirely by the lease contract. Always review the specific lease clauses on reinstatement, repair, and yielding up.
- Fair wear and tear is generally excluded from make good obligations. A 10-year-old air conditioning system will not perform like a new one. Tenants are not required to upgrade the system beyond its original condition. Conveyancing Act 1919 (NSW) Section 133 provides implied protections for lessees.
- Tenant-installed HVAC equipment (supplementary splits, server room cooling, kitchen exhausts) must be removed unless the landlord agrees in writing to retain it. Removal includes capping refrigerant lines, patching penetrations, and making good ceiling and wall finishes.
- Base building HVAC systems must be returned in working order. This means functional VAV boxes, operational thermostats, intact ductwork, and clean grilles. The landlord can require servicing records as proof of maintenance during the lease term.
- AS/NZS 3666.2 applies to air handling systems serving more than one tenancy. The base building system must meet microbial control requirements at handback. Dirty coils and filters are a legitimate make good item.
- Condition reports are the single most important document. Without a baseline, the landlord's claim defines the scope. Tenants should commission an independent HVAC condition report before signing the lease. Photographs, equipment schedules, and service records form part of the report.
What This Means in Practice
A typical office tenant installs supplementary air conditioning during fitout. Split systems for server rooms. Kitchen exhaust for a break room. Extra fan coil units in meeting rooms. At lease end, all of this must come out unless the landlord wants to keep it.
Removing a split system is not just unbolting the unit. It means recovering refrigerant (licensed technician required), removing pipework, and patching the wall penetration. The ceiling must be reinstated and the base building supply air reconnected to that zone. A single split system removal costs $1,500 to $4,000 depending on access and reinstatement complexity.
The base building system gets attention too. If the tenant modified ductwork to suit their layout (moved grilles, added branches, blocked off zones), those modifications must be reversed. Original grille positions must be reinstated. VAV boxes must be recommissioned to serve the base building layout.
Landlords often engage a quantity surveyor to price the make good works. Tenants should engage their own building services engineer to review the scope. Without independent review, make good claims can be inflated by 30 to 50%. Common overcharges include claiming replacement for items that qualify as fair wear and tear, or including upgrades disguised as reinstatement.
Timing matters. Most leases require make good to be completed before the lease expiry date. Starting 3 months early gives time for assessment, scoping, quoting, and completing the works. Leaving it to the final week creates rush premiums and poor outcomes.
Key Design Decisions
Commission a Condition Report at Lease Start
Document every HVAC component before you move in. Record the make, model, age, and condition of each unit. Photograph ductwork, grilles, controls, and plant equipment. This report is your defence against inflated make good claims at lease end.
Negotiate Retention of Tenant HVAC Improvements
If you install supplementary cooling that improves the tenancy, negotiate with the landlord to retain it at lease end. A well-maintained split system or upgraded exhaust fan benefits the next tenant. Get the agreement in writing as a lease variation.
Maintain Service Records Throughout the Lease
Keep every HVAC service report, filter change receipt, and maintenance log. Most leases require the tenant to maintain the HVAC system. If you cannot prove maintenance was done, the landlord can claim the system deteriorated due to neglect rather than fair wear and tear.
Get an Independent Make Good Assessment Before Lease End
Engage a building services engineer 3 to 6 months before lease expiry. They inspect the HVAC systems, compare them to the condition report, and scope the actual make good works. This gives you a realistic budget and a basis to challenge the landlord's claim if it is excessive.
Who Needs to Know What
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References
- Retail Leases Act 1994 No 46 (NSW), Sections 25 and 36
- Conveyancing Act 1919 (NSW), Section 133, Implied obligations of lessees
- AS/NZS 3666.2, Air-handling and water systems of buildings: Microbial control, Operation and maintenance
- Property Council of Australia, Guide to Office Building Quality
- NSW Small Business Commissioner, Make Good and Retail Leases Fact Sheet
- Queensland Small Business Commissioner, Make Good Fact Sheet