What Is Key Money?
Key money is a fee paid to a manager, landlord, or even a current tenant to secure a lease on a residential rental property. The term can sometimes be used interchangeably with a security deposit. However, in some competitive housing markets, key money acts solely as a gratuity or even a bribe.
Charging key money may be legally permissible in some commercial real estate agreements as long as it is clearly stipulated in the lease contract.
Understanding Key Money
The interpretation of ‘key money’ varies across different regions.
Key Takeaways
- Key money can sometimes be synonymous with a security deposit but in others, it functions as a bribe.
- It can be an informal payment made to secure an apartment lease in competitive rental markets.
- Payment of key money is lawful and acceptable in certain commercial lease transactions if documented appropriately.
In some areas, key money is the equivalent of a security deposit – generally showing as a payment worth one or two months of rent when the lease is signed. State laws often require this security deposit to be held in escrow and mandate it be returned to the tenant - with interest – once the lease term concludes unless rightful claims to it arise, such as unpaid rent or property damages by the tenant.
When Key Money Is a Bribe
In certain urban locations, key money is paid by a hopeful tenant to a property owner, a management entity, a building superintendent, or even the current tenant in hopes of securing a rental contract. Here, the key money acts as a bribe to ensure the prospective tenant’s application is chosen over others.
This practice is common in cities with low apartment vacancy rates and high rental prices, especially where price-controlled rentals exist and are highly sought-after.
Historical demands for key money in exchange for apartment leases were frequently noted in New York City. Though these practices were illegal, the city’s intricate rent stabilization laws created a dualized market of high-cost units versus less available, rent-stabilized ones. While rent stabilization laws persist, the use of key money is allegedly less prevalent.
Key Money for Commercial Property
Payment of key money remains frequent in New York City’s commercial real estate market and is often above board. A tenant holding an attractively priced, long-tenured commercial lease may delegate it to another tenant in exchange for key money. This scenario is particularly typical when a former tenant transfers a fully equipped business like a restaurant.
Internationally, in places such as Japan and Mexico, it is conventional to give key money as a gift to the landlord.
Related Terms: security deposit, rental agreement, commercial leasing, lease transfer.
