Paying key money

What is ‘key money’ and ‘consideration for goodwill’?

A key money request is where a landlord asks the tenant to make a payment in addition to any rent, bond or payments for services in order to grant, vary, renew or assign the lease or sub-lease the premises. This payment can be in the form of money or a benefit the tenant has to provide.

Consideration for goodwill is where a landlord asks the tenant to make a payment for intangible items like brand recognition, access to skilled labour or customer loyalty, with no genuine consideration given to the tenant in return.

What if a landlord seeks or accepts these payments?

Seeking or accepting key money or any consideration for the goodwill of any business carried out at the retail premises is prohibited under the Retail Leases Act 2003 (the Act).

When a retail lease includes payment of key money or consideration for goodwill, or any reference to these types of benefits, it’s deemed void.

Landlords, prospective landlords and anyone acting on their behalf who breach these provisions of the Act are at risk of being fined 50 penalty units.

Key money scenarios

Scenario 1

A landlord is seeking payment of $10,000 from the tenant before giving the tenant access to the premises at the start of the lease. This payment is likely to be key money and prohibited by the Act.

Scenario 2

A landlord agrees to consent to assign (i.e. transfer) a lease to a new tenant if the existing tenant first pays the landlord $20,000. The existing tenant receives nothing in return other than the landlord’s consent to the assignment. This payment is likely to be key money and prohibited by the Act.

Scenario 3

A tenant who is in arrears asks for their lease to be assigned to a new tenant. The landlord agrees if the new tenant pays the arrears owed by the existing tenant. This payment is almost certainly key money, thought wouldn’t be if the existing tenant was asked to make the payment.

Types of payments landlords can request

The Act recognises the need to balance protecting tenants from being coerced into making key money payments and the commercial reality that in the course of business relations, some payments might be acceptable.

Under the Act, a landlord isn’t prevented from:

  • recovering from the tenant costs that the landlord reasonably incurred in investigating a proposed assignee of the lease or sub-tenant of the premises
  • recovering from the tenant costs that the landlord reasonably incurred in connection with an assignment of the lease or a sub-lease, including obtaining any necessary consents
  • claiming goodwill from the tenant in relation to the sale of a business that the landlord operated from the premises immediately before its sale, if the lease was granted to the tenant during the sale of the business (e.g. a payment for ‘locational goodwill’ for a landmark hotel that attracts a lot of clients)
  • receiving rent in advance
  • helping to ensure the tenant meets their obligations under the lease by requiring a security deposit (bond) or guarantee to be provided by the tenant or any other person (such as a requirement that the directors of a corporation guarantee performance of the corporation’s lease obligations)
  • seeking and accepting payment for plant, equipment, fixtures or fittings that are sold by the landlord to the tenant in connection with the lease being granted (a sale like this should be recorded in the lease)
  • seeking and accepting payment for the grant of a franchise in connection with the lease being granted.

Legal and other expenses

The Act provides that a landlord can’t claim from any person (including the tenant) the landlord’s legal or other expenses relating to:

  • negotiating, preparing or executing the lease
  • obtaining the consent of a mortgagee to the lease or
  • the landlord’s compliance with the Act.

A landlord can claim reasonable legal or other expenses incurred in connection with an assignment of the lease or a sub-lease, including investigating a proposed assignee or sub-tenant and obtaining any necessary consents to the assignment or sub-lease. The landlord can claim these expenses provided the landlord and tenant have agreed that the tenant will pay those expenses.

For example, a landlord engages an agent and a lawyer to undertake work necessary to enable the tenant’s assignment of lease. The landlord and tenant have agreed in the lease that the tenant must pay for the landlord’s reasonable costs. The landlord seeks to pass on fees for the work that are reasonable and calculated at an hourly rate. By contrast, a fee based on a fixed percentage of the rent might be key money.

How to resolve a dispute

If you are in a dispute over key money or consideration for goodwill, you can apply for our help to resolve the matter without needing to go to court.

Help includes assistance early on, often just over the phone, and where disputes can’t be resolved this way, access to mediation. At mediation, an experienced and independent mediator guides both parties in fair negotiations with the aim of reaching an outcome both parties can accept.

If the dispute can’t be resolved at mediation, either party can request a certificate to take the matter to the Victorian Civil and Administrative Tribunal (VCAT). The Act allows a payment or value of a benefit given by a tenant in breach of the key money requirements to be recovered at VCAT or a court. A certificate is not needed to make an application to a court.

Getting started

You can speak to a member of our team by calling 13 8722 or emailing enquiries@vsbc.vic.gov.au.

 

Related information