What does key money mean in a commercial lease?

The term "key money" is controversial.

In a residential setting it's sometimes applied to an illegal payment that a landlord might demand from a tenant before he's allowed to move into a property. A commercial lease can legally contain a clause stipulating a key money payment, but there are often restrictions and potential tenants should beware.

Usually the rent for a commercial premises covers the four walls and nothing else. In the case of a property where there is existing infrastructure such as built-in furniture, speciality plumbing or electrical work, the landlord might reasonably ask for a one-time payment that covers the extra facilities. This is commonly termed key money. In a hot real estate market, some landlords may also charge key money just as a premium for you to secure the lease.

Key money is considered distinct from a security deposit. The latter is a refundable sum held in case of damages to the property, that should be returned to you at the end of the lease, providing the property is surrendered in reasonable repair. Key money is understood to cover some particular service and is generally non-refundable.

If you are asked for key money when renting a commercial premises be sure that this particular part of the transaction is properly documented in the lease. There should be a clause that describes exactly what services are covered by the key money, and how much you will pay.

Commercial leases are governed under state law, so you should check your own state's statutes on what your landlord may legally charge for, and how any key money charges will be handled. In some states it is illegal to charge key money without a service being specified, and it is generally illegal to charge key money if it is not documented in the lease.