Make-Good Clauses in Childcare Leases: What You Need to Know

Three numbers sit at the end of every childcare lease and they almost never appear in the headline rent: the cost to remove the fit-out, the cost to reinstate the building, and the cost to defend the dispute that follows. A childcare make-good obligation can run anywhere from $80,000 to well over $300,000, depending on how the clause was written ten years earlier. Most operators and a fair number of landlords have not read the clause since the lease was signed.

This article explains what make-good actually means in a childcare context, why the wording matters more than the rent at exit, how the law treats damages when something goes wrong, and how to negotiate the clause at signing, renewal, or assignment.

What a Make-Good Clause Actually Does

A make-good clause is the end-of-lease handback obligation. It tells the tenant what condition the premises must be in when the keys are returned. In Australian commercial leases, there are three broad standards a clause can specify, and they sit on very different cost lines.

The first is repair only — leave the premises in good repair, fair wear and tear excepted. This is the lightest obligation. The tenant fixes what is broken and walks away. The fit-out can stay if the landlord wants it.

The second is reinstatement to base building — strip the fit-out, remove partitions, restore floor coverings, repaint, cap services, and hand back what amounts to an empty shell. This is the standard that most childcare landlords write into their leases. It is also where the dollars live.

The third is reinstatement to a specified condition — match a schedule of condition or photographic record taken at the start of the lease. This sounds reasonable on paper. In practice, if the schedule of condition was never properly prepared and signed, the clause becomes either toothless or open-ended, depending on who is enforcing it. The Sprintlaw commercial leasing guidance is direct on this point: in any make-good dispute, the entry condition report is the document that decides the argument.

The wording of which standard applies is buried in the lease — usually in the “yielding up” clause and a separate clause that deals with alterations and fit-out. Both have to be read together. Reading only one of them is the most common drafting failure ChildcareLink sees on resale due diligence.

For the full framework on how childcare leases are structured, see our Childcare Centre Lease Explained guide.

Why Childcare Make-Good Costs Are Higher Than a Typical Commercial Lease

A childcare centre is not an office. The fit-out is regulated, fixed to the building, and difficult to reverse. Under the Education and Care Services National Regulations 2011, the licensed premises must meet specific physical requirements — minimum indoor and outdoor space per child, hygiene facilities sized for each room, secure fencing, shade structures, soft-fall surfaces, kitchen separation, and child-height fixtures across the building. Every one of those items becomes a make-good item at exit.

Industry strip-out benchmarks for general commercial premises run in the order of $80 to $350 per square metre, according to Australian commercial leasing commentary cited by Sprintlaw and similar legal publishers. A childcare centre is rarely at the low end of that range. The reasons are structural:

• Outdoor play surfaces. Rubber soft-fall, synthetic turf, sandpits, and concrete play areas were installed to meet the National Quality Framework requirements. Removing them and reinstating a flat surface is a civil works job, not a clean-up.
• Built-in joinery and fixtures. Child-height sinks, low toilets, nappy change tables, secure storage, and reading nooks are typically fixed to the structure. Removal damages the wall and floor finishes behind them.
• Kitchens. A centre kitchen built to commercial food safety standards has commercial plumbing, ventilation, and electrical that has to be either certified for the next use or fully stripped.
• Fencing and gates. Compliant childcare fencing — height, latch placement, climb-proof spacing — is not a fence the next tenant of a non-childcare use will want.
• Air-conditioning and ventilation. Capacity was sized for child occupancy density. It often cannot simply be left in place for another use.

Across ChildcareLink-advised transactions, full reinstatement cost on a 60- to 90-place centre commonly lands between $80,000 and $300,000, with outliers above that when fit-out was extensive or the outdoor area was heavily landscaped. Operators who saw the lease only as a rent number find the make-good number the most expensive surprise of their tenure.

What the Law Says About Damages

A poorly performed make-good is one of the most litigated points in Australian commercial leasing. The case law, as Bartier Perry summarises, draws an important distinction between two kinds of breach.

If the tenant breaches a repair obligation, the common law starting point is that the landlord can recover the cost of the repair works. In New South Wales, section 133A of the Conveyancing Act 1919 modifies this. The landlord cannot recover more than the reduction in the value of the premises caused by the disrepair. If the failure to repair did not actually reduce the property’s value — for example because the landlord was going to demolish or refurbish anyway — there is no recoverable damage.

If the tenant breaches a reinstatement obligation, the same principle applies under general common law: damages are measured by the reduction in value, not the notional cost of works. The NSW Supreme Court in 167 Prospect Highway Pty Ltd v Polyaire Pty Ltd [2025] NSWSC 1144 worked through this in detail in the context of catastrophic damage, but the underlying point holds in routine end-of-lease disputes too. A landlord cannot send the outgoing tenant a $250,000 strip-out invoice and assume the court will award it. The court will ask: did the failure to reinstate actually reduce what this property was worth?

This is a critical practical point for both sides.

For operators, it means the landlord’s first quote is not the legal ceiling. If the centre is being re-let to another childcare operator, who values the fit-out, the actual loss to the landlord may be small or zero. Operators who go to defend a make-good claim with this in mind frequently settle for a fraction of the original demand.

For landlords, it means a make-good clause written to extract a maximum dollar number is not enforceable that way. Drafting a clear, scope-limited reinstatement obligation and pricing the actual loss is a stronger commercial and legal position than threatening a six-figure strip-out invoice and watching the operator walk to court.

For more on how end-of-lease costs flow through to commercial value, see our Childcare Centre Lease Explained pillar and Outgoings in Childcare Leases for the related question of who pays what during the term.

The Schedule of Condition: The Document That Decides the Dispute

Every commercial leasing lawyer ChildcareLink works with says the same thing: the make-good fight is won or lost in the schedule of condition, not in the make-good clause itself. A schedule of condition is a dated, photographic, signed record of the state of the premises at lease commencement.

If it exists and is properly prepared, the standard the tenant has to reinstate to is the standard in those photographs. If it does not exist, the clause defaults to whatever the lease wording can be made to mean — and that wording is usually drafted by the landlord’s solicitor.

Across ChildcareLink due diligence on incoming buyers taking lease assignments, a properly executed schedule of condition is present in fewer than half of childcare leases reviewed. In the rest, the operator is exposed to whatever the landlord asserts the original condition was. This is a fixable problem, but it has to be fixed before lease commencement, not after.

If your centre’s lease did not include a schedule of condition at the start, the next opportunity to fix the exposure is at renewal or at the next assignment. See our Childcare Centre Lease Renewal guide for how this fits into a renewal negotiation.

Make-Good and Assignment: The Hidden Liability in a Business Sale

Most childcare sales involve a transfer of the existing lease from the seller to the buyer through a deed of assignment. This is where make-good obligations get complicated, and where ChildcareLink frequently sees value destroyed in transactions that were otherwise sound.

Under general Australian leasing law, summarised in the NSW Small Business Commissioner’s lease transfer guidance and similar state resources, the assignee — the incoming buyer — inherits the make-good obligation in its full accumulated form. That means the make-good clause applies to the cumulative state of the premises across all tenants since the lease (or the schedule of condition) began, not just the changes made by the current operator.

A buyer who takes assignment of a lease in year eight of a ten-year term, without negotiating a reset, is signing up to reinstate fit-out work done by every prior tenant — including work the seller may have inherited from an earlier operator.

The outgoing seller is not entirely free either. Under common law, the original tenant and any guarantors remain secondarily liable for the obligations of the lease for the balance of the term, unless the landlord grants a formal release. If the assignee defaults on the make-good at end of term, the landlord can pursue the original assignor years later. This is one of the strongest commercial reasons for a seller to push for a formal release at the point of assignment.

In ChildcareLink-advised assignments, three negotiation points have the biggest effect on this risk:

• A schedule of condition reset at the point of assignment, signed by all three parties, so the incoming operator’s reinstatement obligation runs only from the date they take possession.
• A formal release of the outgoing tenant by the landlord, in exchange for whatever consideration is required (assignment fee, security deposit top-up, or a clean condition assessment).
• A make-good scope clarification, where the parties agree in writing what items will be reinstated, what items will be left as part of the going concern, and what the cap on reinstatement cost will be.

This last point is the most undervalued. A make-good obligation that is uncapped looks fine on paper for a buyer who intends to operate the centre for ten years. It looks very different on the day they decide to sell to the next operator. Uncapped make-good drags down the resale value of the business — a buyer pricing the business in year nine has to assume the worst-case strip-out cost as a liability.

For the full picture of how lease structure affects what a centre is worth to sell, see our Childcare Centre Valuation pillar and Leasehold vs Freehold Childcare.

How to Negotiate the Clause: A Practical Checklist

The make-good clause is most negotiable at three moments — when the lease is first signed, at renewal, and at assignment. Outside those moments, the wording is locked in and the tenant is exposed to whatever it says.

For operators at any of those three negotiation moments, the following positions are realistic:

• Limit reinstatement to childcare-tenant-ready condition. If the landlord’s most probable next tenant is another childcare operator (which is almost always true for a purpose-built or DA-approved childcare site), full strip-out is destroying value the landlord would otherwise have kept.
• Cap the reinstatement cost in dollar terms. A fixed dollar cap, indexed to CPI, removes the open-ended liability that makes a centre unsellable at year eight or nine.
• Insist on a schedule of condition. Photographic, dated, signed by both parties, attached to the lease as an annexure. This is the single highest-leverage point in the negotiation.
• Exclude landlord-installed items from reinstatement. Anything the landlord built into the premises before the tenant arrived should never be part of the tenant’s make-good obligation. This sounds obvious. In poorly drafted leases it often is not.
• Negotiate fair wear and tear out of the clause as a tenant carve-out, not a landlord defence. The lease should clearly state that the tenant is not responsible for fair wear and tear, not leave it to interpretation.

For landlords, particularly those holding childcare property as an investment asset, three positions are worth holding:

• Decide before drafting whether the fit-out adds value or detracts from it. For most childcare premises with another childcare operator in the queue, the fit-out adds value. Requiring its removal is self-defeating.
• Write the clause to the actual scope of the building. A blanket “reinstate to base building” applied to a centre with extensive outdoor works will produce a number neither side can defend, and a court will likely refuse to enforce in full.
• Maintain a current schedule of condition. If the landlord intends to enforce reinstatement to a specified standard, that standard has to be documented before the lease commences.

Key Takeaway

Make-good is the clause that decides whether a childcare centre is sellable, and whether the operator’s exit is profitable or expensive. It is not a paperwork point. It is the single most underweighted clause in most childcare leases, and it is most negotiable at three moments — signing, renewal, and assignment. Negotiate it from a scope and value position, not a fear position. And if your lease did not include a properly executed schedule of condition, fix that exposure at the next available opportunity.

Negotiating a new lease, renewal, or business sale with a complex make-good clause? Talk to ChildcareLink for specialist commercial advice grounded in childcare transaction experience. Visit childcarelink.com.au or contact our team directly.

Sources

• Bartier Perry Lawyers — “Are lease make-good provisions enforceable? Costs of repair or reinstatement”
• Stonegate Legal — “Make Good Obligations in Commercial Leases”
• Sprintlaw — “Make Good Clauses in Commercial Leases: What Australian Businesses Need to Know”
• Thornton + King Lawyers — “What Are Make Good Obligations in Commercial Leases?”
• Jake McKinley Lawyers — “Make Good Obligations in NSW Commercial Leases”
• Conveyancing Act 1919 (NSW), section 133A
• NSW Supreme Court — 167 Prospect Highway Pty Ltd v Polyaire Pty Ltd [2025] NSWSC 1144
• NSW Small Business Commissioner — “Transferring your lease”
• Education and Care Services National Regulations 2011 (ACECQA)
• Mollard Property Group — childcare fit-out cost commentary
• ChildcareLink transaction and advisory experience

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.