Key Money
Key money is an upfront payment to secure a lease in competitive markets. Discover where key money is common and legal considerations.
Definition
Key money is an upfront payment made by a tenant to a landlord or existing tenant to secure a lease, typically in markets with high demand and limited inventory. It is prevalent in commercial leases and some residential markets, particularly in cities like New York or Tokyo. Key money may compensate a current tenant for transferring a below‑market lease or pay the landlord for granting access. Its legality varies by jurisdiction: some areas regulate or prohibit key money to prevent exploitation. Prospective tenants should understand local laws and factor key money into their leasing budgets.
Why It Matters
Most American homebuyers never meet this, but anyone leasing retail or restaurant space will. Key money pays for the location itself, on top of rent, and it leaves you with nothing recoverable if the lease ends badly. In residential settings it often shows up dressed as a nonrefundable move-in or administrative fee, which Washington requires to be stated in the written lease and labeled nonrefundable.
Examples
A restaurateur pays the outgoing tenant of a Capitol Hill storefront $85,000 for the buildout, the license transfer, and six remaining years of a below-market lease.
A Manhattan applicant is asked for $5,000 in cash "for the keys" outside the lease, a payment that is illegal there and unrecoverable if the landlord denies taking it.
A Seattle renter pays a $900 move-in fee disclosed in the lease as nonrefundable, which makes it a fee rather than a deposit, so none of it comes back at move-out.
Tips
Put every dollar into the lease or the assignment agreement. Money paid outside the written document is money you cannot recover in court.
When key money is really a lease assignment, value it against the rent you inherit. A lease $4 per square foot under market on 2,000 square feet is $8,000 a year, so $40,000 only pays back if the remaining term runs past five years.
Check local law before paying anything beyond deposit and first month on a residential unit. Several jurisdictions treat key money as an illegal charge and expose the landlord to multiple damages.
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