What Is Key Money?

Key money is a fee paid to a manager, a landlord, or even a current tenant to secure a lease on a residential rental property. The term is sometimes used to refer to a security deposit. However, in some competitive rental markets, key money is simply a gratuity or a bribe. Charging key money may be legal in some cases for commercial real estate agreements as long as it is written into the lease for the property.

Understanding Key Money

The term key money has different meanings in various parts of the world and in the U.S. In some places, key money is synonymous with a security deposit. It is a payment of the equivalent of one or two months' rent, payable when the lease is signed. Laws vary from state to state, but generally, this money is required to be held in escrow and is to be returned to the leaseholder, with interest, after the lease expires. The landlord may withhold payment of some or all of the security deposit only if the tenant damages the property or fails to pay the rent.

When Key Money Is a Bribe

In some cities, key money is paid by a prospective tenant to a property owner or manager, a building superintendent, or even the current tenant in the hopes of securing a rental contract. In such cases, the key money is a bribe to ensure that the prospective tenant's application is selected over others. This practice is limited to cities with low vacancy rates and high prices, particularly if some rentals are subject to price controls that make them all the more desirable. Demands for key money in exchange for apartment leases were once common, although illegal, in New York City. The city's complex rent stabilization regulations resulted in a two-tiered system of extremely expensive market-rate units and rarely available rent-stabilized units. The city's rent stabilization laws still exist, but the practice of paying key money apparently is no longer common.

Key Money for Commercial Property

According to the real estate website brickunderground.com, payment of key money for commercial real estate is still common in New York City, and in this case, it's perfectly above-board. The holder of an attractively-priced long-term commercial lease may sign over the lease to a new tenant in return for a payment of key money. It is particularly common when the previous tenant is signing over a business that has already been equipped for use as a restaurant, for example. The legal site LegalEagle notes that requiring key money may be legal if it is specifically written into the lease for the property. Giving key money to a landlord as a gift is common practice in some countries, notably Japan and Mexico.