Key money is a certain amount of money that has to be paid before renting immovable property.
Key money is a term used to refer to a payment that is usually made to a landlord, manager, or a tenant in order to secure a lease on a rental unit. Key money doesn't have to be returned to the landlord after the termination of the lease.
The terms “key money” and “security deposit” are synonyms. If not used synonymously, key money is considered a bribe.
In a tough market key money can sometimes be used as a bribe for an apartment.
In some commercial property transactions, key money payment is considered legal and acceptable. Usually key money is paid after signing the lease. Key money often is equal to the rental deposit amount. It can also be the equivalent of six months’ bill for rental property or even more, however, in most cases it is the equivalent of one to three months of rent payment.
Usually, key money is required to be held in an escrow account, however, laws regarding this money vary from state to state. In case if the tenant refuses to pay rent or damages the property of the landlord, the latter can withhold payment of the security deposit.
The meaning of the term key money may be different in various countries of the world.
When key money is a bribe
Key money is paid by a potential tenant to a landlord, a manager, a property owner or current tenants. In this respect, the key money is a bribe to ensure that the application of the potential tenant is selected over others.
In towns where vacancy rates are low and the rental property prices are high, the practice of key money is limited. Especially if some of the rental housing is a subject of price control.
If the information about the key money is written into the lease, the key money is considered to be legal.
Some instances when key money payment has to be made
- remuneration for signing the lease
- non-reciept of rent from tenants
- normal wear and tear of rental property
Key money in different countries
Key money payments are made in the name of the property owner as gratuity. It is still common in such countries as Mexico and Japan. The key money payments are a common requirement in some leases, however, there are countries where asking for these payments is illegal.
The United States. In New York City, for example, key money payments are no longer common because the rent stabilisation regulations there are way too complex. In practice, key money payments still exist in NYC, although rarely available to the prospective tenants.
Japan. In Tokyo the key money payment is mandatory. Standard key money payment is usually an equivalent of two months’ rent.
Sweden. In Sweden asking for a key money payment is considered illegal, however paying key money is not a crime. If the fact of making such a payment is discovered, the lease gets terminated immediately.
Mexico. In Mexico key money payments are a common practice. Large amounts of such payments are usually made to pay for retail space.
Key money for commercial property
In case if there is already something of value in the space, for example a restaurant kitchen, the landlord can ask for key money.
In New York City key money payment for commercial real estate is legal and still common. Landlords can sign over the lease to a new leaser for a key money payment. Often commercial property is signed over to a business if the rental unit has been equipped for use as professional offices, different types of stores or a restaurant beforehand, for example.
The subject of key money should always be discussed. The best way to deal with it is to sit down at the negotiating table and discuss all the details with the property owner. Key money has to be paid in his name. Key money can be an extremely attractive deal in comparison with starting a business from scratch. It can save the new tenant money and hustle.