Finding the right premises can be one of the biggest milestones (and biggest expenses) when you’re growing your business. But once you start negotiating a commercial lease, you might hear unfamiliar terms thrown around - including key money.
Key money can look like “just another fee” to get the deal done. In reality, it can raise serious legal and commercial issues, particularly for retail shops, hospitality venues, health providers and other small businesses leasing in shopping centres or high-demand strips.
In this guide, we’ll break down what key money is, when it comes up, what the risks are, and what you can do to protect your business before you hand over any extra payment. This article is general information only and isn’t legal advice - because the rules and definitions can vary depending on the state or territory, the type of premises, and how the payment is structured.
What Is Key Money?
Key money is an upfront payment made by a tenant (you) to secure a lease, separate from the usual costs like rent, bond, and outgoings. It is often described as money paid “for the key” - essentially, to get access to the premises or to persuade a landlord to grant you the lease.
Depending on the situation, key money might be framed as:
- a “premium” paid to secure the space
- a “goodwill payment” to the landlord
- a “fit-out contribution” that you’re expected to pay (but which doesn’t clearly relate to actual works)
- an “incentive” to be accepted as the tenant
- a payment to a current tenant to take over their lease (this is closer to buying a business or buying goodwill, but the label matters less than the substance)
Key money can also be confused with legitimate payments that often happen at the start of a lease, including:
- bond/security deposit (held as security for your obligations)
- rent in advance
- fit-out costs you pay to your builder or contractors
- legal fees (sometimes payable depending on the lease and the relevant state rules)
- assignment purchase price if you’re buying an existing business and taking over its lease
The tricky part is that key money is often presented informally, and sometimes bundled into other line items. This is why it’s important to look beyond the label and focus on what the payment is actually for.
Is Key Money Legal In Australia?
Key money is a legal “hot spot” in Australia because many states and territories restrict or prohibit landlords (and their agents) from demanding or accepting key money for retail leases.
Whether it’s legal will depend on:
- whether the lease is a retail lease (as defined by the relevant state or territory legislation)
- who is receiving the payment (landlord, landlord’s agent, outgoing tenant, third party)
- what the payment is for (and whether it’s genuinely for something permissible)
- which state or territory the premises are in
Retail Leases Are Often Where The Restrictions Apply
In many cases, the laws that deal with key money sit inside retail leasing legislation. If your premises are in a shopping centre, retail strip, arcade, or similar setting, there’s a real chance your arrangement is a retail lease (even if your business isn’t “retail” in the everyday sense).
This matters because retail lease laws are designed to protect tenants - especially small businesses - from unfair bargaining power and hidden costs. A request for key money can be a red flag that the deal isn’t being handled properly.
It’s also important not to assume the rules are the same Australia-wide. Each state and territory has its own retail leasing regime (and its own definitions, exclusions and enforcement approach). As a general guide:
- in most jurisdictions, the core concern is a landlord (or the landlord’s agent) requiring or accepting an upfront “premium” as a condition of granting, renewing or extending a retail lease
- payments to an outgoing tenant as part of buying a business, paying for a fit-out, equipment or goodwill can be legitimate - but still need to be structured and documented properly
- some costs can be allowed if they are genuine, properly disclosed, and permitted under the applicable retail leasing laws (for example, certain fit-out works, relocation arrangements, or other items expressly allowed by legislation)
Key Money Can Create Serious Risk Even If Everyone “Agrees”
It’s understandable to think: “If I’m happy to pay it, what’s the problem?” The issue is that some payments are restricted by law, and structuring the deal in the wrong way can expose both parties to disputes later.
From a practical perspective, even where a key money-style payment isn’t clearly unlawful, it can still be risky if:
- it isn’t documented properly
- it’s paid without conditions (for example, before the lease is signed)
- it’s non-refundable even if the lease falls through
- it’s linked to promises that aren’t in the lease
If you’re at the negotiation stage, a Commercial Lease Review can help you understand what you’re actually committing to - including any “extra payments” that sit outside the usual rent and bond structure.
When Do Small Businesses Usually Encounter Key Money?
In real life, key money usually comes up when demand for the premises is high, or when the landlord has leverage. Here are some common scenarios where small businesses encounter key money (or something that looks like it):
1. High-Demand Locations
If you’re leasing in a popular shopping strip, near public transport, inside a busy centre, or in an area with limited vacancy, a landlord may try to extract extra value upfront.
Sometimes key money appears as an “upfront contribution” that isn’t clearly rent, bond, or fit-out. In a centre environment, there may also be additional documentation and rules (for example, fit-out guidelines or centre rules), which can blur the lines between legitimate costs and a prohibited premium.
3. Taking Over An Existing Lease (Assignment)
If you’re taking over someone else’s lease, you might pay the outgoing tenant for things like:
- their fit-out
- equipment or stock
- goodwill (if you’re also buying the business)
That’s not automatically “key money” in the problematic sense - but it needs to be structured carefully and documented properly, especially if the landlord is involved in the transaction or the payment is really just to “get approved”.
Key money risks increase when arrangements are made informally. If you’re leasing without a clear, signed lease (or you’re being asked to pay money before documents are finalised), it’s worth pausing and getting advice. Operating under No Lease Agreement conditions can create uncertainty about what you’re actually entitled to - and what you’ve paid for.
Why Key Money Can Be Risky (And What To Watch Out For)
Even if you’re keen to secure the premises quickly, paying key money without safeguards can leave your business exposed. Here are the main risks to keep on your radar.
You Might Pay For Something That Isn’t Enforceable
If a key money payment is made based on verbal assurances (for example, “we’ll definitely renew your lease later” or “you’ll get exclusivity in the centre”), you could end up paying for promises that never eventuate.
If it matters to your business, it should generally be documented in the lease or in a formal side deed.
You Could Lose The Money If The Deal Falls Over
A common problem is being asked to pay a “holding deposit” or “premium” before you’ve signed the lease, before approvals are finalised, or before you’ve confirmed council requirements.
If negotiations break down, you may struggle to recover the payment - particularly if the payment terms were vague or informal.
It Can Mask Other Unfavourable Lease Terms
Sometimes key money is a sign that the lease itself is not competitive. For example, the landlord may be demanding key money because they won’t offer:
- reasonable rent-free periods
- a fit-out contribution
- a fair market rent review method
- clear make-good obligations
In other words, the extra upfront payment isn’t the only issue - it can be a symptom of a broader imbalance in the lease.
It Can Complicate Your Exit Strategy
If you overpay upfront, you may feel “stuck” later, even if the location doesn’t perform. Before committing, it’s worth understanding how the lease deals with:
- assignment (selling your business and passing on the lease)
- subleasing
- break clauses (if any)
- early termination consequences
In some situations, you might later need advice on Breaking A Commercial Lease Agreement - but it’s much better to anticipate these issues during negotiations, rather than when you’re under pressure.
How To Negotiate Key Money (Without Losing The Site)
If you’re being asked to pay key money, the goal isn’t always to “walk away immediately” - it’s to slow down, clarify what’s being requested, and negotiate from a position of information.
Here are practical steps you can take.
1. Ask “What Exactly Is This Payment For?”
Request a written breakdown. You’re looking for clarity on:
- who receives the payment
- when it must be paid
- whether it’s refundable (and under what circumstances)
- what you receive in exchange
If the answer is vague (“it’s just what we need to proceed”), treat that as a warning sign.
2. Push For Lease Incentives Instead Of Key Money
In many commercial negotiations, it’s more standard (and usually safer) to negotiate incentives like:
- rent-free periods
- reduced rent for the first few months
- a landlord fit-out contribution
- staged increases while you ramp up trade
These can be documented clearly in the lease and tied to performance milestones or a fixed timeframe.
3. Don’t Pay Until The Documents Are Ready (Or At Least Conditional)
If any payment is being made before lease signing, consider making it conditional on key outcomes, such as:
- lease execution by both parties
- satisfactory due diligence
- any required landlord approvals
- any required council approvals
This is where having a lawyer involved early can save you from costly “upfront payment” mistakes. If you need support through negotiations, a Commercial Lease Lawyer can help you push back firmly (and professionally), while keeping the deal moving.
4. Confirm Whether You’re Actually In A Retail Lease Regime
Key money restrictions are often strongest under retail leasing laws. If you’re not sure whether your premises falls into that category, it’s worth checking early - because it can change what the landlord is allowed to ask for, what must be disclosed, and what remedies may be available if something has been demanded or paid improperly.
For example, if your premises are in NSW, the Retail Leases Act NSW issues can be particularly important in understanding what’s permitted and what’s not.
5. Make Sure All “Special Deals” Are Written Into The Lease
If you pay any kind of premium (or agree to higher rent) because you’re relying on certain benefits, ensure the lease reflects those benefits, such as:
- exclusivity clauses (preventing the landlord from leasing to a direct competitor)
- signage rights
- permitted use broad enough for your business model
- options to renew (and clear process for exercising them)
If these are left as informal promises, they may not protect you when problems arise.
What Other Legal Documents Should You Have In Place?
Key money is just one part of the bigger picture. When you’re securing premises, you’re often also:
- investing in fit-out
- hiring staff
- signing suppliers
- launching marketing and opening to customers
That’s why it’s worth thinking about your legal foundation at the same time, not as an afterthought - particularly because if you’ve paid significant upfront costs to secure a location, you’ll usually want your customer, staff, and operational documents to be equally clear and enforceable.
Depending on your business, you may want to consider:
- Employment Contract for staff you bring on to operate the premises, especially if you’re hiring before opening day (for example, for training and set-up): Employment Contract
- Privacy Policy if you collect customer information through bookings, loyalty programs, enquiries, or Wi-Fi sign-ins: Privacy Policy
- Website Terms & Conditions if you take online bookings, sell online, or run promotions through your website: Website Terms & Conditions
- Property Licence Agreement if your arrangement is a licence rather than a traditional lease (this can happen in shared spaces or short-term occupancies): Property Licence Agreement
These documents won’t eliminate every risk, but they help you operate with clearer rules - which is especially important when you’ve paid significant upfront costs to secure a location.
Key Takeaways
- Key money is an upfront payment to secure a lease that sits outside rent, bond and normal fit-out costs, and it can create legal and commercial risks for small businesses.
- Key money issues most commonly arise in high-demand locations and retail-style premises, where state and territory retail leasing laws may restrict what landlords and agents can request.
- Before you pay anything, clarify what the payment is for, who receives it, whether it’s refundable, and ensure the arrangement is documented properly.
- Where possible, negotiate lease incentives (like rent-free periods or landlord contributions) instead of an informal premium paid upfront.
- Key money can be a warning sign of broader problems in the lease, so it’s worth reviewing the full agreement (including exit, renewal and assignment terms) before committing.
If you’d like help negotiating key money or reviewing your commercial lease before you sign, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat. This article is general information only and isn’t legal advice - if you’re unsure whether a payment is permitted (or how to document it safely), it’s worth getting advice on your specific situation.
