The end of a commercial lease is rarely as simple as handing back the keys. The makegood phase, especially the strip-out stage, can carry significant risks if not managed with care. Beyond the visible costs of labour and materials, tenants face potential financial exposure from damage, safety incidents, or contractual disputes.
Insurance is a crucial safeguard in this process. It protects tenants and contractors against the unexpected, from property damage to personal injury claims. Without the right coverage, a single incident can result in major out-of-pocket costs that fall directly on the tenant.
At Makegoods.com.au, we place strong emphasis on compliance, documentation, and risk management at every stage of a project. By ensuring all parties are fully insured and all obligations are met, we help protect our clients from unnecessary liability and keep their makegood process on track.
The core challenge: shifting risk during the project
A make good project fundamentally changes the risk profile of the leased premises. During a normal tenancy, the main risks are those related to standard business operations, which the tenant’s Public Liability and Contents policies cover. However, the moment demolition, plumbing, and electrical strip out work begins, the risk shifts dramatically to construction hazards: fire, water damage, structural issues, and third-party injury.
The core challenge for the tenant is understanding where their liability ends and where the landlord’s or the contractor’s begins. The lease agreement always makes the tenant contractually responsible for ensuring the works are carried out safely and compliantly. Therefore, the tenant must use insurance requirements to successfully shift the operational risk onto the specialist contractors performing the dangerous tasks.
Tenant’s baseline insurance obligations
Even after engaging contractors, the tenant retains primary contractual responsibility to the landlord until the premises are formally handed back. This means the tenant must maintain their own foundational insurance.
Public liability insurance (PL): the non-negotiable minimum
The tenant’s existing Public Liability (PL) insurance must remain active for the entire duration of the make good works, even if the tenant is no longer trading from the premises. This policy acts as the ultimate backstop.
Typically required to be held at $20 million, PL covers:
- Third-Party Injury: An injury sustained by a building manager, another tenant, or a visitor in a common area due to the make good process (e.g., a contractor leaves debris in a hallway).
- Property Damage to Third Parties: Damage to surrounding areas or adjacent tenancies caused by the works, such as excessive dust ingress or vibration damage.
The tenant must verify that their PL policy explicitly covers the activities involved in non-structural demolition or defit work, as some standard business policies exclude construction activities.
Material damage and property cover: defining the coverage gap
Once the strip out commences, the tenant’s Contents or Material Damage policy essentially ceases to be relevant, as the items being removed no longer hold value. However, two critical gaps remain:
- Base Building Damage: The landlord’s insurance covers the base building structure, but if the tenant’s contractor causes damage, the landlord’s insurer will seek to recover the costs from the party at fault, which is contractually the tenant. The tenant’s PL policy must cover this liability.
- Landlord’s Loss of Rent: If the make good works cause significant damage or a delay that prevents the landlord from re-letting the space, the landlord may claim for Loss of Rent. While this is not strictly an insurance matter, ensuring the works are completed on time mitigates this financial risk.
Addressing landlord requirements and policy endorsements
Landlords nearly always impose specific, written insurance conditions within the make good or handover protocols. These typically demand:
- Minimum Limits: Specifying a minimum PL coverage limit (e.g., $20 million) for all parties.
- Noting Interest: Requiring the tenant’s and the contractors’ PL policies to “Note the Landlord’s Interest”. This simple endorsement ensures the landlord is notified if the policy lapses, and confirms they have a direct line to the insurer in the event of a claim related to the works.
Failure to provide a valid Certificate of Currency that meets all landlord specifications will result in the refusal of site access, causing costly delays and potential holding over penalties.
Essential insurance requirements for contractors
The tenant must implement a robust system to ensure that every contractor working on site is adequately insured. This is the primary method for legally transferring operational risk away from the tenant.
The critical role of the contractor’s public liability policy
The contractor’s own PL policy is the first line of defence. The tenant must treat the contractor’s PL as mandatory and ensure it is validly issued in Australia with an adequate limit.
A professional defit company, particularly one specialising in make good strip out, will already have this in place. The tenant must collect the Certificate of Currency from the contractor before issuing a Purchase Order and before they step onto the site. This document serves as proof of insurance.
Mandatory workers’ compensation
In Australia, Workers’ Compensation insurance is a statutory requirement for any business employing staff. This insurance covers contractors’ staff for any injury sustained while on the job, shielding the tenant from liability if a contractor’s employee is hurt during the demolition process.
The tenant should demand proof of a current Workers’ Compensation policy for all contractors. If a contractor sub-contracts any part of the strip out, the tenant must ensure the sub-contractor also has valid Workers’ Compensation.
Contract works insurance (CWI) and when it applies
Contract Works Insurance (CWI), also known as Builders Risk, covers the physical property damage to the ongoing works themselves.
- Demolition Only: For a straight strip out where the goal is only to remove items, CWI is usually not required, as there is no work of value to be protected.
- Reinstatement Included: CWI becomes necessary if the make good involves substantial reinstatement or construction elements, such as rebuilding walls, installing new ceilings, or laying new carpets. CWI covers the new materials and labour against loss from perils like fire, theft, or storm damage while the project is underway.
The responsibility for holding the CWI typically falls to the head contractor overseeing the combined strip-out and reinstatement.
Specific risks for office make good projects
Office strip out projects carry unique risks compared to industrial make good, largely due to their high-density location within multi-tenanted buildings.
Mitigation for multi-tenancy damage and access issues
In an office tower, the risks of water, noise, dust, and vibration damage to adjacent tenancies are high. A simple plumbing disconnection error during an office strip out can cause thousands of dollars of water damage to the tenant below.
Mitigation strategies include:
- Risk Assessment: The contractor must perform a site-specific risk assessment addressing dust and noise controls.
- Explicit Coverage: Ensure the contractor’s PL policy clearly does not exclude claims related to vibration, removal of support, or noise pollution, which are common exclusions in generic policies.
Indemnity chains and licensing for integrated services
The strip out involves disconnecting integrated services, including electrical wiring, air conditioning ducting, and data cabling. This work must be performed by licensed tradespeople.
- Licensing: The tenant must verify the electrical and plumbing contractors hold current, valid trade licences. Unlicensed work can invalidate insurance claims and lead to regulatory fines.
- Indemnity Chains: The most robust protection involves a strong indemnity chain. The contract between the tenant and the head contractor, and the contracts between the head contractor and sub-contractors, must contain clear indemnity clauses. These clauses legally require the lower-tier party to cover the loss before the liability travels up to the tenant.
The risk of underinsurance and liability traps
The true cost of poor insurance management only becomes apparent when an incident occurs. Underinsurance or non-compliance exposes the tenant to several severe liability traps:
- Voided Policies: If the contractor’s licence is invalid or they breached safety regulations, their own insurer may void the policy. This leaves the tenant’s PL as the primary recourse, effectively making the tenant responsible for the contractor’s mistake.
- Uncovered Gaps: The make good works may accidentally trigger an exclusion in a standard policy, such as ‘consequential loss’ or ‘contamination’.
- Landlord Litigation: If an incident occurs, the landlord will sue the tenant directly for breach of the lease. The tenant then has to fight a legal battle against the landlord while simultaneously pursuing the contractor’s insurer, a costly and protracted process.
This is why engaging a specialist to manage the make good is the most effective form of risk mitigation. They ensure all contractors are correctly licensed, insured, and compliant with all landlord and regulatory requirements.
Securing your project: checklist for a protected handover
For a clean, insured commercial exit, follow this critical checklist:
- Maintain Tenant PL: Keep your own Public Liability insurance active until the premises are formally handed back.
- Verify Contractor Credentials: Before granting site access, obtain current Certificates of Currency for PL and Workers’ Compensation from all contractors.
- Note Landlord Interest: Ensure all relevant contractor PL policies note the landlord’s interest as required by the lease.
- Check Scope for CWI: Determine if any reinstatement is required and mandate CWI for the relevant builder if it is.
- Validate Licences: Demand proof of current trade licences (electrical, plumbing, etc.) for all specialist sub-contractors involved in the strip out.
By treating insurance compliance as seriously as the construction itself, your business protects its balance sheet and ensures a secure, compliant conclusion to the commercial lease. Make good works are complex, but the risk can be managed with professional rigour.