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Is “key money” legal in California?

On Behalf of | Dec 2, 2022 | Commercial Leases

You operate a pretty tight commercial real estate business, and you fully understand how competitive the market can be in your location. Vacancies are low and rents are high.

You’d like to weed out the bad tenants in a prospective group as quickly as possible. Is it acceptable, then, to ask for “key money” in exchange for a lease?

It depends. Here are a few things you need to keep in mind:

You can’t ask for key money as a bribe

It used to be fairly common for landlords to demand a certain amount of cash from a tenant in exchange for a lease. This lump-sum payment is neither a security deposit nor part of their rent, but a bribe. Even long-term tenants were sometimes expected to pay key money to renew their leases.

Typically, these payments were made “under the table” – meaning they were kept off the landlord’s books. This is illegal both under California law and under federal tax laws.

If you want to demand additional money from a commercial tenant aside from the actual rent, you can, but only under certain conditions. This means:

  1. You must include the amount of the payment (however it is described) in the recorded rental agreement with your tenant.
  2. You cannot make the payment of key money a prerequisite for taking someone’s application, initiating their lease or continuing it.

You do have the right to charge tenants a reasonable fee for the steps you go through while vetting them, and that may include attorney fees.

Staying on the right side of the law when you’re a commercial landlord can be trickier than it seems. Experienced legal guidance can help you avoid serious problems.