Australia: Exploring standard lease terminology: What is base building condition?
Landlord and Tenant Alert

In recent times, the trend for landlords and tenants in negotiating commercial and retail lease arrangements has been to move towards a lease document which contains relatively plain language and is easy to understand. There has been a move away from verbose paragraph-long sentences with various sub-conditions and exceptions, towards the use of short sharp statements and a simpler structure. Much of the detail is fleshed out in the definition section of the agreement.

There is also a trend away from landlords producing a document which is heavily weighted in their own favour, to a starting document which forms a reasonable base upon which to give effect to the parties' commercial agreement. This more commercial approach means that there are a number of key terms and phrases which are frequently used in lease documents on the basis that both the landlord and tenant recognise them as 'common' lease terms and, accordingly, accept them as an industry standard. Even though there is an implied acknowledgement that those terms would attract a commonly accepted meaning, be it a legal definition or an industry accepted characterisation, the parties should still consider whether that standard terminology is, in fact, understood by both parties in the same way.

One such term is 'base building condition', being the term commonly used to describe the standard to which the tenant must make good the premises at the end of the lease term. Although more commonly used for office premises, this term can also be used in an industrial or retail context.

The past

After a period where protracted and costly make good disputes were common, the industry seems to have moved away from the concept of requiring the tenant to make good the premises to their condition as at lease commencement, to requiring the tenant to "make good back to a base building condition". The theory is that in five or ten years' time when the lease comes to an end, it is easier to have a make good obligation that requires the tenant to remove all fitout, rather than requiring that the parties try and recall what the premises actually looked like when the lease commenced, and what specific works the tenant would be required to undertake to get them back to that condition (or close to that condition, allowing for reasonable deterioration over time).

Although this standard seems to impose a more onerous requirement on tenants, it certainly appears to be the way that the industry is moving and, in any event, the tenant will usually be in a position at the outset of the lease negotiations to bargain for a more limited make good. The preference will always be for any limited make good (which refers to the condition of the premises as at lease commencement) to be accompanied by a condition report prepared by a specialist consultant. In the interests of saving costs and given the progress in technology, some parties simply rely upon taking a series of digital photos to record the condition of the premises as at the time the keys are handed over, but this may not always be sufficient in the event of any future dispute.

Base building condition: As a current legal term

Where the lease requires a full make good back to a base building condition, the question which arises is, what exactly constitutes 'base building condition'? The first step would be to determine whether there is a legal definition.

1. Legislation: there is no specific legislative definition of "base building" or "base building condition" in any federal or state legislation in Australia.
2. Case law: surprisingly, case law which addresses this specific issue is limited. This may be because make good disputes are predisposed to negotiation and settlement prior to judicial determination, or perhaps it is because this is a relatively new concept and there are yet to be significant disputes about the scope of what is meant by 'base building condition'. There is very general commentary in cases around this term, but it is not really anything more detailed than an acknowledgement that a base building condition would be a building completed but without fitout, and there do not appear to be any leading judicial decisions which turn on that specific term.
3. Technical definition: given the comments above, it is not surprising that there is no technical legal definition or explanation of this phrase.

Base building condition: The prevailing industry interpretation

So what does the industry say about a 'base building condition'? Certainly there would be any number of fitout/demolition contractors, quantity surveyors and property industry professionals who would be willing (and qualified) to provide an interpretation of what the industry accepts (or requires) as constituting base building condition. The majority of those would, in varying degrees of detail, probably refer to the existing shell of premises or a building prior to the tenant installing any fitout or improvements, the premises/building having nothing more than a standard floor slab, standard ceiling grid and connections for essential services.

However, even that relatively uncontroversial last sentence used the terms "standard" and "essential". Without specifically setting out the parameters of the base building condition in the document, in the event of a dispute, the parties may very well end up in mediation, or even in Court, having to put forward evidence which addresses and supports their understanding of what is "standard" and "essential" in relation to base building condition.

Lessons for the future

The lesson here is that both landlords and tenants should carefully consider any proposed use of the term 'base building condition' in the lease agreement and agree upon a full and proper definition which sets out the specific scope and understanding of that term.

The parties may use technical terminology such as "the building's primary structure", "building envelope", "primary mechanical, supply and services systems", "reticulation and even distribution of services" and "alignment of ceiling grid and services to a typical open floor plan". Prudent landlords may even refer to a separate make good specification guide that sets out the technical details and provides illustrations of a standard base building condition for the subject premises or building. While there will be a cost to producing such a guide, it may save many thousands of dollars in avoiding potential future disputes.

Landlords need to be aware that the older cases on the issue of make good generally provide that any requirement imposed on a tenant to remove the tenant's fixtures and fitout must be relatively certain. If not express, then it must at least be easily inferred from the terms of the lease agreement. Courts will not approach the lease agreement with a general assumption that a tenant has an obligation to remove its fitout.

So, even though the preference is to move towards more straightforward and plain language lease documents, some frequently used and highly specific terms will still require sufficient explanation and, if required, technical terminology, to ensure that the parties have adequately set out the scope of what they each understand is meant by those terms. This is not to say that parties should avoid using the term 'back to base building'; it is simply a caution to parties to consider (and articulate) precisely what they contemplate when using that term.

In the next instalment of this three-part article series examining standard lease terminology, we continue with a make good theme and look at the term 'fair wear and tear', to examine how that has been dealt with in a legal context.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.