Key Money in Retail Leases
Property + Commercial Lawyer, Sarah Ward, unlocks the intricacies surrounding ‘key money’ to help tenants and landlords understand the rules, explore exceptions and learn about the potential consequences.
Embarking on a new commercial lease can be an exciting venture, but prospective tenants and landlords alike must tread carefully in the complex landscape of retail leasing. In particular, parties to a retail lease should ensure they are familiar with the detail of the Retail Leases Act 2003 (RLA) surrounding the payment of key money.
Key money is defined in section 3 of the RLA to mean a premium paid or benefit (or something similar) where the person paying gets no real or true consideration for the payment. Under the Act (s3) (s23), the payment of key money is prohibited.
There are exceptions - section s23 (3) (b) of the RLA does not prevent the landlord from recovering costs which the landlord reasonably incurred in connection with investigating a proposed assignee of a lease or sub-tenant, an assignment or sublease or obtaining the associated consents.
Is the payment or consideration ‘key money’?
Where a payment has been requested or made, the first step is to determine if that payment fits within the definition under section 3. The following things may indicate that the payment is key money:
It is something over and above the true or lawful rental;
There is no real consideration for the payment;
The consideration is so out of proportion to the benefit that it can’t be true consideration.
Some examples of what might be considered key money:
The landlord requires a tenant to pay $15,000 in addition to the rent before access to the tenant is provided on the lease commencement date.
The landlord will only provide consent to a sub-lease if the tenant pays $10,000 to the landlord. There may need to be a right to sub-lease or a requirement on the landlord to act reasonably for this to be key money.
The landlord requires a payment to be made for to consent to an assignment of lease.
The landlord (new tenant) requires an assignee to pay the arrears of the original tenant.
The landlord refuses to offer to renew a lease unless a payment is made to it.
Consequences:
A tenant who has paid key money to a landlord can recover any amount paid, or the value of any benefit conferred, as a debt from the landlord under s23 (4), specifically:
Section 23 (1) is a penal provision and if found guilty up to 50 penalty units.
Section 23 (2) a provision is void to the extent that requires payment of key money or consideration for ‘goodwill’.
Section 23 (4) the tenant can recover the payment in Court as a debt due or under Part 10 of the RLA through dispute resolution.
If you are a commercial tenant or landlord keen to improve your knowledge of key money or need help navigating the complexities of retail leasing, please reach out to Sarah and our Commercial team here.