Can a Make-Good Demand Trigger Your Guarantee and Cancel Your QBCC Licence?
- John Merlo
- 16 hours ago
- 16 min read
Key Takeaways
The true limit of make-good claims: Landlord demands for physical reinstatement costs can often be challenged, as statutory frameworks typically cap recoverable damages to the actual reduction in the property's market value.
The corporate veil may not protect you: Exorbitant, unmanaged lease demands may threaten the company's balance sheet, potentially exposing sole directors who have signed personal guarantees to individual recovery actions.
Licence jeopardy follows insolvency: A failure to manage a crippling make-good demand may render the company unable to pay its debts as and when they fall due — constituting insolvency under section 95A of the Corporations Act 2001 — which is likely to result in the cancellation of the director's Queensland Building and Construction Commission (QBCC) nominee supervisor licence.
Evidence is your strongest shield: Thorough entry condition reports are highly critical to defending against landlords attempting to shift the cost of pre-existing structural wear and tear onto exiting building companies.
You have just handed back the keys to the industrial yard your building company leased for the past five years, expecting to move your plant and equipment to the new site without issue. Instead, the landlord serves a $250,000 make-good demand, insisting on a full warehouse strip-out, replacement of the cracked concrete slab, and complete repainting of the exterior. Reviewing the company's aged payables and upcoming project cash flows, you realise the business cannot absorb a hit of that magnitude. Worse, you distinctly remember signing a one-page document five years ago to secure the premises—a personal guarantee. What started as a standard end-of-lease disagreement is now a direct threat to your personal assets and, by extension, your ability to continue operating as a licensed builder in Queensland.
The Threat Timeline: From Lease Expiry to Personal Insolvency
The immediate question is not how much the repair works will cost, but how fast this liability will crystallise against your personal assets. This section breaks down the exact sequence of how a commercial lease dispute escalates into a direct threat against your corporate directorship and licensing status, allowing you to intercept the chain reaction.
Separating Corporate Lease Liability from Personal Guarantee Exposure
When a commercial lease expires, the primary contractual liability for the make-good obligations rests with the building company as the registered tenant. The corporate entity is the party bound by the lease's "yield up" provisions. However, landlords frequently require a personal guarantee director builder as a condition of granting the lease. This creates a completely separate exposure channel that bypasses the corporate structure.
Personal guarantees are intended to provide landlords with a secondary avenue for financial recovery if the corporate tenant defaults on its lease obligations. However, the enforceability of this clause depends heavily on the legitimacy of the underlying debt. If the company successfully defends or reduces the make-good claim at the corporate level, the landlord's ability to pursue the director personally is proportionally diminished. Consequently, aggressively challenging the landlord's assessment of the corporate lease liability is your primary barrier against individual financial exposure. This principle holds where the guarantee is structured to secure the tenant's actual lease obligations, as the majority of commercial lease guarantees are — however, some guarantee instruments are drafted as stand-alone indemnities on demand, which may operate independently of the underlying liability. The specific wording of your guarantee document should be reviewed by a solicitor at the earliest opportunity.
If you have signed a personal guarantee on a commercial lease and your building company has received a make-good demand it cannot absorb, instruct our team for an urgent guarantee exposure assessment before the landlord's next step crystallizes your personal liability.
How an Unmanaged Make-Good Demand Triggers Balance Sheet Insolvency
If an exorbitant make-good demand is ignored or poorly managed, the landlord may formalise the claim, potentially crystallising it as an immediate, uncontested liability on the building company's books. Once this debt is recognised, it can severely alter the company's financial position, potentially rendering the company unable to meet its debts as and when they fall due. Whilst a position where total liabilities exceed total assets is not the legal test for insolvency under the Corporations Act — which applies a cash flow test under section 95A rather than a balance sheet test — such a deteriorating balance sheet is a recognised indicator that courts consider when assessing whether insolvency existed or was reasonably suspected. If the company is unable to pay this debt as and when it falls due alongside its ongoing operational costs, it may face insolvency within the meaning of section 95A of the Corporations Act — that is, an inability to pay all debts as and when they become due and payable.
Operating a building company in this state creates severe legal risks for the director. Continuing to incur new debts—such as signing new subcontractor agreements or ordering materials—while the company is arguably insolvent enlivens the director's duty to prevent insolvent trading under the Corporations Act. Specifically, section 588G of the Corporations Act 2001 (Cth) provides that a director contravenes the section — and may be held personally liable for debts incurred — where the company was insolvent at the time it incurred a debt (or became insolvent by incurring it), and either: (a) the director was actually aware at that time that there were reasonable grounds for suspecting the company was insolvent or would become insolvent; or (b) a reasonable person in a like position in a company in the company's circumstances would have been so aware.
In practical terms, this means a director cannot avoid personal liability simply by choosing to remain uninformed — the objective limb of the section catches directors who ought to have recognised the signs of insolvency, regardless of their subjective knowledge. An unmanaged lease demand that crystallises as an uncontested liability can therefore be the precise trigger that satisfies both the factual insolvency threshold — measured on a cash flow basis under section 95A — and the director's awareness threshold simultaneously. It is worth noting that whilst a deteriorating balance sheet position (where liabilities exceed assets) is not itself the legal test for insolvency, it is a recognised indicium that courts consider when assessing whether a director ought to have suspected insolvency, and an uncontested make-good liability of significant magnitude will weigh heavily in that analysis. An unmanaged lease demand can therefore act as the specific trigger that exposes the director to a liquidator's recovery action.
Merlo Law regularly acts for QLD and NSW building company directors who discover—often too late—that an uncontested lease liability has already crossed the insolvency threshold. Our construction law team works alongside your accountant to quantify the real-time cash flow impact of the demand, structure a dispute response that prevents the debt from crystallizing unchallenged and preserve your capacity to continue trading lawfully while the claim is resolved.
The QBCC Nominee Supervisor Cancellation Domino Effect
Example: Consider a sole director operating a residential construction firm who receives a $200,000 make-good demand for their leased display centre and fails to contest the quantum. The landlord may secure a court judgment against the company, and upon non-payment, apply to wind the company up in insolvency. Once the company enters liquidation, the landlord can activate the personal guarantee, demanding the $200,000 directly from the director. If the director cannot pay, they may be forced into personal bankruptcy. Under Queensland law, a personal insolvency event typically triggers immediate regulatory enforcement, which can lead to a QBCC licence cancellation builder outcome. Without a valid nominated supervisor QBCC, the company's ability to legally perform building work ceases, immediately halting all current projects.
One important qualification applies to the two-event scenario described above: where a director's personal bankruptcy arises directly from the same set of circumstances as the company's liquidation — for example, where the director is bankrupted solely as a result of a personal guarantee given to the company's creditors — the Queensland Building and Construction Commission Act 1991 provides that the second event does not count as a separate insolvency event for the purposes of the exclusion provisions. This means the director would not automatically face lifetime exclusion solely because the guarantee call and the company liquidation arose from the same underlying make-good dispute. However, the three-year exclusion from the first event would still apply, and independent financial advice should be obtained to assess how the specific sequence of events will be treated by the QBCC in any given case.
Defeating Exaggerated Demands: The Statutory Capping Framework
The landlord's initial demand for full strip-out and reinstatement costs is often a negotiating posture, not a legally binding figure. While you might feel trapped by the lease contract's strict "yield up" wording, the law does not leave you at the mercy of the landlord's preferred builder's quote. This section outlines the statutory liability pathway that overrides aggressive commercial lease clauses and acts to strictly cap the financial bleeding.
Capping Make-Good Damages to the Diminution of Reversionary Value
The physical cost to repair or reinstate a commercial premises is not the definitive legal measure of the landlord's financial entitlement. Under section 112(1) of the Property Law Act 1974 (Qld), a landlord's claim for damages for a commercial tenant's failure to make good or repair premises is strictly capped by statute to the reduction in the property's reversionary value caused by the breach. While commercial lease agreements contain make-good clauses intended to force a tenant to return the property to its original condition, this contractual protection may be limited by section 112(1), which overrides aggressive "yield up" wording.
Under Queensland law, a landlord's claim for commercial make-good damages is statutorily capped at the reduction in the property's overall market value, regardless of the quoted cost of the repair works.
If a landlord demands $250,000 for physical repairs, but the uncompleted repairs only reduce the overall value of the property by $50,000, their recoverable damages are typically capped at the $50,000 figure. Navigating this discrepancy and enforcing the statutory cap on damages is a core reason why seeking early construction law advice is highly critical.
Do not concede the landlord's headline figure. Request an urgent review of your make-good demand against the statutory diminution cap—our team routinely reduces six-figure claims to a fraction of the original demand.
The Diminution of Reversion Trap for Planned Demolitions
Expert insight: Landlords often serve exorbitant make-good claims based on the raw cost of building works required to strip out and reinstate the premises to their former state. However, this demand can be challenged as legally unenforceable if the landlord plans to demolish, redevelop, or fundamentally alter the building for a new incoming tenant. In scenarios where the property is slated for a major overhaul, the actual diminution of reversion value may be assessed at zero, because the tenant's failure to repair the existing structure is unlikely to negatively affect the site's future market value. Successfully relying on this evidentiary factor may depend on uncovering the landlord's true commercial intentions through council development applications or leasing agent correspondence.
In practice, landlords rarely volunteer this information — and why would they? What you are looking for is any evidence that the landlord's plans for the site make the repairs you are being asked to fund commercially pointless. A development application lodged with the local council is the most powerful piece of that evidence, but it is not always on the public record at the point the demand lands on your desk. Instructing a solicitor to issue a formal pre-litigation request for disclosure of any leasing or development intentions, or commissioning a title and planning search, can surface this material quickly.
Where a signed agreement for lease with a new tenant or a building approval for demolition or significant structural alteration already exists, the landlord's ability to sustain the full quantum of their make-good claim becomes very difficult to defend. It is also worth examining agent marketing materials and any correspondence the company received during the final months of the tenancy — an offhand email suggesting the landlord intends to reconfigure the tenancy for a different use has, in practice, been used to undermine a landlord's claimed quantum before proceedings are even commenced.
Merlo Law has acted for building companies across Queensland and NSW where a targeted planning search or a single piece of leasing agent correspondence has collapsed a landlord's six-figure make-good claim entirely. We know precisely what to look for, where to find it, and how to deploy it—whether that is at the negotiating table or in filed submissions—to secure your commercial position before the dispute escalates further.
Applying the Reasonable Wear and Tear Exception for Industrial Yards
Even when a lease contract explicitly requires a building company to yield up premises in good repair, Queensland statute mandates an essential limitation on that duty. Section 105(1)(b) of the Property Law Act 1974 implies an obligation on lessees to keep and, at the termination of the lease, yield up the demised premises in good and tenantable repair. Critically, this obligation is assessed having regard to the condition of the premises at the commencement of the lease — not some idealised original state — and is expressly subject to a mandatory exception for damage caused by fire, flood, lightning, storm and tempest, and for reasonable wear and tear.
It is also important to note that this implied obligation does not arise at all in the case of a lease for a term of three years or less where the premises are used principally for human habitation, though this limitation will rarely be relevant to building companies occupying industrial yards under longer commercial terms. This exception acts as a crucial trigger for defending claims against building companies operating out of industrial yards, where the daily movement of heavy machinery, excavators, and loaded trucks will naturally degrade the site over a five-year term.
The Queensland Government's guidance on commercial lease premises and making good reinforces the expectation that general deterioration from ordinary business use does not constitute a breach of the repair covenant. Consequently, landlords generally cannot legally compel you to replace a functional but weathered concrete slab simply to secure a pristine yard for their next tenant.
Assembling Your Defence: Evidentiary and Procedural Tools
Asserting a statutory defence requires concrete proof to substantiate your position. You now know the landlord cannot simply claim full replacement costs on a whim, but to push back effectively, you need the right documentation and procedural mechanisms. This section outlines the specific documentary evidence and tribunal pathways you must secure to actively dispute an inflated demand and shift the evidentiary burden back onto the landlord.
Defending Historic Damage Using Entry Condition Reports
When vacating a commercial yard, landlords frequently attempt to shift the cost of repairing pre-existing structural wear and tear—such as old subsidence or inherited cracked concrete slabs—onto the exiting tenant under the guise of the make-good clause. Defending against these claims requires robust documentary evidence. To protect your company during the lease dispute resolution process — whether that proceeds through negotiation, Queensland Civil and Administrative Tribunal (QCAT), or the courts — ensure you have:
A comprehensively detailed Entry Condition Report: This document must be dated at the exact commencement of the lease and explicitly note all pre-existing defects.
High-resolution photographic evidence: Photos taken on day one are often the only conclusive method for proving a crack existed before your heavy machinery arrived on site.
Written correspondence confirming the baseline state: Any emails sent to the landlord early in the tenancy identifying inherited damage can be relied on as evidence to limit your end-of-term liability.
Securing Relief Against Unreasonable Decorative Repair Notices
If the landlord issues a notice demanding extensive internal decorative repairs—such as requiring a complete repaint of an office space that remains in highly serviceable condition—you are not necessarily bound to comply. Engaging a Queensland Building and Construction Commission lawyer early can help you navigate the specific procedural mechanism available to challenge these demands.
Under section 127(1) of the Property Law Act 1974, after a notice is served on a lessee relating to internal decorative repairs to a house or other building, the lessee may apply to the court for relief. If the court is satisfied, having regard to all the circumstances of the case — including the length of the lessee's remaining term — that the notice is unreasonable, it may by order wholly or partially relieve the lessee from liability for those repairs. By escalating the matter to the relevant court or tribunal — which may include the Queensland Civil and Administrative Tribunal (QCAT) for disputes within its monetary jurisdiction, or the District or Supreme Court for larger claims — you may therefore secure an order that formally reduces or extinguishes the company's obligation to undertake unnecessary aesthetic works, directly reducing the financial exposure that could threaten your personal guarantee. The appropriate forum will depend on the quantum of the claim and the specific circumstances of the dispute, and legal advice should be obtained to determine the correct venue before commencing any proceedings.
However, there is a critical limitation that every building company tenant must understand before relying on this provision. Section 127(2)(d) expressly excludes from the section's protection any covenant or stipulation to yield up the house or other building in a specified state of repair at the end of the term. This means that if your commercial lease contains a specific make-good or yield-up clause — as the overwhelming majority of industrial and commercial leases do — section 127(1) may provide no relief at all in respect of that clause, regardless of how unreasonable the landlord's demands appear. The section's practical utility in a commercial lease dispute is therefore confined to standalone decorative repair notices that are separate from, and not governed by, the lease's express yield-up obligations. You should obtain specific legal advice as to whether your lease's yield-up clause falls within this exclusion before relying on section 127(1) as a defence.
The Impact of the Property Law Act 2023 on Repair Obligations
It is important to note the transition in the underlying legislative framework governing these procedural mechanisms. The Property Law Act 2023 (Qld) replaced the 1974 Act on 1 August 2025. Crucially for commercial tenants, Section 178 of the 2023 Act carries forward the limitations on damages for breach of an obligation to repair. This ensures the statutory cap framework—specifically limiting damages to the diminution of the reversionary value—remains firmly in place for future leasing disputes.
Resolving the Dispute: Negotiating Without Triggering Regulator Action
The ultimate goal in a commercial lease dispute is securing an executed deed of surrender and a clean release from your guarantee, rather than engaging in a protracted court battle over concrete repairs. You are ready to negotiate an exit, but the settlement must be structured carefully to sever your liability without unexpectedly triggering a QBCC financial failure. This section outlines the procedural mechanisms for negotiating a cash settlement safely.
Tax and Accounting Implications of Negotiated Cash Settlements
Expert insight: Building companies frequently prefer to negotiate a cash settlement to the landlord in lieu of physically performing the make-good works, as this strategy frees up their own construction crews for billable client projects. However, the structure of this negotiated cash settlement may create exposure under taxation laws if not handled correctly.
The trap is this: if your building company had actually sent its own trades through the door and performed the repair works, those costs would ordinarily be deductible as a revenue expense under section 8-1 of the Income Tax Assessment Act 1997— a straightforward repair to premises used in generating assessable income. The moment you convert that obligation into a lump-sum cash payment to the landlord, the character of the outgoing changes. The ATO is likely to treat that payment as a cost of surrendering or terminating the lease — a capital expense associated with the disposal of a capital asset, being the leasehold interest — rather than a deductible repair cost. In practical terms, that means the payment is of a capital nature and is not immediately deductible in full under section 8-1. Depending on the circumstances, the company may be able to access a deduction under section 25-110 of the ITAA 1997, which allows capital expenditure incurred in carrying on a business to terminate a lease to be deducted at a rate of 20% per income year over five years.
If section 25-110 is unavailable, the deduction may be further restricted or spread over a considerably longer period, rather than being claimed in full against income in the year of payment. For a building company already managing tight cash flows, the difference between a full revenue deduction and a restricted capital deduction in the year the payment goes out can be significant enough to materially affect the company's tax position and, by extension, its QBCC minimum financial requirements compliance for that reporting period. Before agreeing to a cash settlement figure, the total after-tax cost of that figure — compared to the after-tax cost of physically performing the works — should be modelled by the company's accountant. In many cases, building companies are surprised to find that the headline settlement figure looks cheaper than the repair quote, but the net after-tax position tells a different story. Securing specific commercial law and tax advice before finalising the settlement figure is highly advisable.
Containing Corporate Exposure to Protect Your QBCC Licence
Properly documenting the end of the tenancy is a critical procedural mechanism for protecting your personal assets. A commercial lease surrender must be formalized through a deed that explicitly and legally extinguishes the director's personal guarantee in full. When negotiating the final cash settlement amount within this deed, you must carefully monitor the outgoing payment's impact on the company's balance sheet.
If the settlement payment reduces the company's net tangible assets below the threshold required by the QBCC minimum financial requirements, it is likely to trigger an MFR failure, exposing the company to immediate licence suspension. Furthermore, failing to account for this regulatory consequence when agreeing to a settlement figure may be construed as a breach of your overarching director duties building company obligations. A poorly structured settlement can solve the immediate lease dispute but ultimately destroy the business's capacity to trade.
Conclusion
That $250,000 make-good demand for your industrial yard initially appeared as an insurmountable threat to your company's survival and your personal assets. However, as demonstrated, the initial demand is rarely the final word. You now know that a landlord's claim for physical reinstatement costs is legally capped by statute to the actual diminution in the property's reversionary value, overriding aggressive contractual "yield up" clauses. Furthermore, the law mandates a reasonable wear and tear exception, providing a strong defence against landlords attempting to upgrade their property at your expense.
Most crucially, you understand the severe domino effect: an unmanaged corporate lease liability can render your building company unable to pay its debts as and when they fall due, constituting insolvency under section 95A of the Corporations Act, enlivening your duty to prevent insolvent trading and exposing your personal guarantee. This personal insolvency risk is what directly threatens the automatic cancellation of your QBCC nominee supervisor licence.
The immediate next step is to locate and secure your original entry condition report and all early tenancy correspondence regarding pre-existing damage. With that evidence in hand, you can begin structuring a robust defence to challenge the landlord's valuation, protecting both your personal assets and your ability to continue trading in Queensland.
FAQs
Can a landlord force my building company to pay the full cost of replacing a cracked concrete slab in our leased yard?
The landlord generally cannot force full replacement costs if the demand exceeds the statutory cap. Under Queensland law, damages for a breach of a repair obligation are strictly capped to the amount by which the property's overall reversionary value is diminished. If a cracked slab does not significantly reduce the market value of an industrial yard, the landlord's recoverable damages are likely to be substantially lower than the quoted repair cost.
Does an entry condition report actually protect me from a make-good claim?
Yes, a detailed entry condition report is often the most critical piece of evidence in defending a make-good claim. It serves to establish the baseline condition of the premises, preventing the landlord from successfully shifting the cost of repairing historic, pre-existing damage onto your company. Without this dated, photographic proof, you may struggle to prove the damage was inherited rather than caused by your operations.
If the building company cannot afford the make-good demand, will I be personally liable?
You may face personal liability if you signed a personal guarantee when securing the lease. Additionally, if the make-good demand renders the company unable to pay its debts as and when they fall due — constituting insolvency under section 95A of the Corporations Act — and you continue to incur new debts, you may be pursued personally by a liquidator for breaching your director duties to prevent insolvent trading under section 588G of the Corporations Act.
Can a commercial lease dispute result in the cancellation of my QBCC licence?
Yes, a poorly managed lease dispute can directly trigger regulatory action against your licence. If the company is unable to pay a crystallised make-good debt and enters liquidation, and you subsequently face personal bankruptcy due to a called personal guarantee, this insolvency event is likely to result in the cancellation of your QBCC nominee supervisor licence.
Are commercial tenants required to fix reasonable wear and tear at the end of a lease?
No, Queensland statute mandates an exception for reasonable wear and tear. Section 105(1)(b) of the Property Law Act dictates that commercial tenants have an implied statutory obligation to yield up the premises in good repair, but this is expressly subject to a mandatory exception for reasonable wear and tear caused by ordinary business use.
How does a negotiated cash settlement for a make-good dispute affect my QBCC minimum financial requirements?
A negotiated cash settlement paid directly to the landlord reduces the building company's net tangible assets. If the settlement amount is large enough, it may push the company's financial position below the mandatory thresholds required by the QBCC, potentially triggering an MFR failure and exposing the company to immediate licence suspension.
This guide is for informational purposes only and does not constitute legal advice. For advice tailored to your specific circumstances, please contact Merlo Law
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