Key Money: Meaning, How It Works, and When It’s Legal

What is key money?

Key money can refer to different things depending on context:

• A synonym for a security deposit — typically one or two months’ rent paid when signing a lease.
• An extra payment (sometimes an under‑the‑table payment or “bribe”) paid to a landlord, building manager, superintendent, or current tenant to secure a desirable lease in a competitive market.
• A negotiated payment in commercial lease transactions when an existing long‑term lease or fitted-out business is transferred to a new tenant.

Types and how they function

Security deposit meaning
* Treated like a deposit: often held in escrow, sometimes required to earn interest, and usually refundable at lease end minus amounts withheld for unpaid rent or property damage.
* Rules vary by jurisdiction (state and local laws differ on how deposits must be handled).

Under‑the‑table/bribe meaning
* Paid to gain an advantage in a low‑vacancy, high‑demand market.
* May be given to the landlord, building staff, or current tenant to ensure a lease offer is accepted over others.
* Often illegal and risky for both payer and recipient where local law prohibits such payments.

Commercial lease meaning
* Common in some commercial markets: the current tenant transfers (assigns or sublets) a favorable lease to a newcomer and receives payment in return.
* This is typically documented and legal when included in written lease agreements or approved by the landlord.
* Especially common where a business space is already fitted out (e.g., restaurants).

Legal considerations

• Legality depends on jurisdiction and context:
• Security‑deposit style key money follows deposit laws and is typically regulated.
• Demands for extra payments to secure a residential unit may be illegal in some places; in others they are tolerated or unregulated.
• Requiring or accepting key money for commercial leases is often legal when disclosed and written into the lease or when a lawful assignment occurs.
• Always check local rental and landlord–tenant laws before paying or accepting key money.
• Undocumented payments carry legal, tax, and eviction risks.

Regional practices and examples

• In some cities with rent controls and scarce rental stock, illicit key money payments have occurred historically (e.g., past practices in New York City), though enforcement and prevalence vary over time.
• In commercial real estate (notably in large cities), key money for lease assignments remains common and legitimate when properly handled in writing.
• In certain countries cultural norms treat a payment to secure a rental as customary or a gift (examples include Japan and Mexico), but the exact legal and tax treatment differs by country.

Practical advice

• Tenants: insist on written receipts and lease language that documents any payment; verify whether the payment is treated as a refundable deposit or a nonrefundable premium.
• Landlords and sellers of leaseholds: document any transfer or payment in the lease or assignment agreement and comply with local disclosure and tax rules.
• Consult a local attorney or tenant‑landlord agency when unsure about the legality or proper handling of key money.

Key takeaways

• “Key money” can mean either a legitimate security deposit, a potentially illegal bribe to secure housing, or a lawful payment in commercial lease transfers.
• Legal status varies by type (residential vs commercial) and by jurisdiction—check local laws.
• Always get payments and terms in writing and seek legal advice if the arrangement is unclear.