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What to do if the landlord asks me to pay extra money for obtaining the retail lease?

When you see the title of this article, you may be confused – as a tenant, I rent a shop and only have to pay the agreed amount of rent. Why should I pay extra money to the landlord? In the real business world, some shop places are so popular and therefore many potential tenants wish to obtain those leases. Under this situation, the landlord may ask the tenant to pay for a large amount of money to secure the lease. According to Victorian law, the landlord is not allowed to request or accept Key-Money from the tenant in a commercial lease. Now we will discuss what payments made by tenants may constitute Key-Money.

Law

Section 23 of the Retail Leases Act 2003 (Vic) (RLA) specifically prohibits the landlord from requesting or accepting any Key-Money from the tenant in a commercial lease. This rule is not only for landlords, but also for potential landlords or landlords’ agents. Any terms in relation to Key-Money in a commercial lease contract will be invalid and the landlord has no right to demand the tenant to fulfil such obligations. If the tenant has already paid for certain Key-Money, the landlord will not only have to refund it but also be fined.

What is Key-Money?

Section 3 of the RLA provides that Key-Money means money that a tenant is to pay by way of a premium in that there is no real consideration given for the payment and it is in consideration of

  • a lease being granted or an agreement being made to grant a lease; or
  • the variation of a lease; or
  • the renewal of a lease or the granting of an option for the renewal of a lease; or
  • consent being given to the assignment of a lease or to the sub-leasing of the premises to which a lease relates

Example 1

The landlord asked the tenant to pay extra $100,000 before agreeing to give the tenant the key to enter the rental shop after the commencement of the lease. The landlord received the money by issuing an invoice indicating that the money was for purchasing equipment. However, there was no such equipment in the shop or the equipment was worth far less than $100,000, and the landlord clearly expressed that the tenant could only obtain the lease after they have purchased the equipment. The payment in this example is highly like to be considered as Key-Money.

Example 2

If the current tenant owes one-month rent to the landlord but they want to transfer the lease to a new tenant. The landlord proposes that they only agree to the transfer if the new tenant is willing to pay the one-month rent owed by the previous tenant. This payment is also likely to be considered as Key-Money. However, if the landlord insists that the condition for transfer is for the previous tenant to pay the rent owed, then they will not violate the law.

Example 3

If the current tenant voluntarily pays $20,000 to the landlord for obtaining the landlord’s consent to the transfer of lease and the new tenant cannot get any benefit from the landlord except to the landlord’s consent, then the payment may be regarded as Key-Money.

Example 4

The landlord ‘rents’ the property to its related company. Then the related company as the current tenant sells the ‘business’ to the new tenant in the sum of $150,000.  Under this situation, if the business is real, and the business is sold at market price, then the sale of business has no problems. However, if the related company is not operating the business or the business is worth far less than $150,000, then the sale violates the law regarding Key-Money.

Tips

Another point to note about Key-Money is that even if the tenant is willing to pay for this illegal extra money, the landlord cannot accept it as the law stipulates that the landlord has the responsibility to avoid the generation of Key-Money. Therefore, the landlord will be punished for accepting the money even if the tenant is willing to pay that.

What is not Key-Money?

Section 23 of RLA provides some exceptions where the payment from the tenant to the landlord will not be regarded as Key-Money. The landlord is not prevented from

  • recovering from the tenant costs which the landlord reasonably incurred in investigating a proposed assignee of the lease or sub‑tenant of the premises; or
  • recovering from the tenant costs which the landlord reasonably incurred in connection with an assignment of the lease or a sub‑lease; and obtaining any necessary consents to the assignment or sub-lease; or
  • claiming goodwill from the tenant in relation to the sale of a business that the landlord operated from the retail premises immediately before its sale, if the lease was granted to the tenant in the course of the sale of the business; or
  • receiving payment of rent in advance; or
  • securing the performance of the tenant’s obligations under the lease by requiring a bond, security deposit or guarantee to be provided from the tenant or any other person (such as a requirement that the directors of a corporation guarantee performance of the corporation’s lease obligations); or
  • 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; or
  • seeking and accepting payment for the grant of a franchise in connection with the lease being granted.

Legal fees or agency fees

Section 51 of RLA says that the landlord under a retail lease is not able to claim from any person the landlord’s legal or other expenses relating to the negotiation, preparation or execution of the lease, or obtaining the consent of a mortgagee to the lease, or the landlord’s compliance with RLA.

However, the landlord is not prevented from claiming the reasonable legal or other expenses incurred by the landlord 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.

Example 5

The landlord hires lawyers and real estate agents to do the work of transferring commercial lease.  The landlord and the tenant agree that the tenant shall pay the landlord a reasonable cost for transferring the lease. After the transfer, the landlord asks the tenant to reimburse the legal fees and agency fees calculated by hourly rate. In this situation, if the reimbursement is reasonable, it is not likely to be regarded as Key-Money. However, if the reimbursement is calculated by a fixed percentage of the rent, then it is likely to be regarded as Key-Money.

Dispute Resolution

If tenants encounter disputes regarding Key-Money, tenants or landlords both can apply to Victorian Small Business Commissioner for mediation. The mediator will try to help both parties reach an agreement. However, if the disputes cannot be resolved through mediation, they can apply to VCAT for arbitration.

Conclusion

Key-Money is regulated in detail by Victorian legislation. For landlords, they need to ensure that they do not violate the law and avoid being punished. For tenants, they should fully understand the law regarding Key-Money so as to avoid unnecessary expenses and troubles. If you have any commercial lease matters which may involve Key-Money, welcome to consult our experienced lawyers.