Key Money in NYC: What Every Renter and Seller Should Know

Key Money in NYC: A Legal Breakdown for Renters and Owners

Key Money in NYC: What Every Renter and Seller Should Know

In New York City’s hyper-competitive real estate market, securing a desirable apartment can feel like winning the lottery. Historically, this fierce competition led to a practice known as Key Money—a shady transaction where desperate renters paid a cash bonus simply for the privilege of signing a lease.

But is this practice still legal?

The Short Answer: Yes, Key Money is definitively illegal in New York State for residential rentals.

The illegality of Key Money has been reinforced and clarified by the landmark Housing Stability and Tenant Protection Act (HSTPA) of 2019, which capped and restricted nearly all fees landlords can charge prospective residential tenants. Paying or receiving Key Money for a residential unit is a serious violation of tenant protection laws.

This guide, brought to you by the real estate experts at Yeo Real Estate, breaks down what Key Money is, where the practice is illegal (and where it is permitted), and how buyers, sellers, and renters can navigate fees in NYC legally and confidently.

What Exactly is "Key Money" in Real Estate?

The term "Key Money" can be confusing because it is sometimes used generically, but legally, it has a precise meaning:

In the residential context, Key Money is an attempt to skirt legal limits on what a landlord or owner can collect upfront. It’s often demanded as a non-refundable "good faith deposit" or a "reservation fee" before a lease is signed.

The Definitive Law: Is Key Money Illegal? (FAQ)

The definitive legal answer for residential properties rests in the Housing Stability and Tenant Protection Act of 2019 (HSTPA) and subsequent amendments to the New York Real Property Law (RPL).

Which Law Prohibits Key Money?

The primary law governing upfront fees is New York Real Property Law § 238-a, specifically subdivision 1(a), which strictly limits a landlord, lessor, or sub-lessor from demanding any payment, fee, or charge before or at the beginning of the tenancy, except those specifically allowed by statute.

Since Key Money is not an explicitly permitted statutory fee, it is prohibited.

What are the ONLY Legal Upfront Fees in a Residential Rental?

The HSTPA of 2019 drastically limited the fees a prospective residential tenant must pay before or at lease signing. This is one of the clearest ways the law ensures Key Money cannot be disguised as a fee.

Crucial Takeaway: If a residential landlord or their agent asks you for a "deposit to hold the unit," a "processing fee" over $20, or a cash bonus, they are almost certainly demanding illegal Key Money.

Does the Law Apply to All NYC Apartments?

For the most part, yes. RPL § 238-a applies to nearly all residential landlord-tenant relationships across New York State. The spirit of the law, which prohibits excessive pre-tenancy charges, is universally enforced by the state’s enforcement agencies, including the Department of Housing and Community Renewal (DHCR) and the Attorney General’s Office.

The Fine Line: Key Money vs. Legitimate Transactions

While paying a landlord a bonus is illegal, the lines can blur when a tenant is asked to purchase certain items or take over a lease from a departing tenant.

1. The "Fixture Fee" or Buying Furniture from a Prior Tenant

This is the most common and subtle way illegal Key Money is disguised.

A landlord or outgoing tenant may pressure a prospective tenant to buy the unit’s non-essential belongings (like custom shelving, light fixtures, or furniture) at an inflated price in exchange for getting the lease. This is often referred to as a "Fixture Fee" or "furniture purchase requirement."

• When it's Legal: If the purchase is genuinely for valuable, non-essential property, and is made between the incoming and outgoing tenant (not the landlord), it might be permissible, provided the price is a fair market value and the purchase is truly voluntary.

• When it's Illegal Key Money: If the "sale" price is exorbitantly inflated far beyond the item’s actual worth (e.g., paying $10,000 for a used couch) and the transaction is required by the landlord or managing agent, it is a clear violation. The courts view such transactions as a transparent end-run around the Key Money ban.

2. Commercial Real Estate: The Legal Exception

The restrictions on Key Money found in RPL § 238-a apply specifically to residential tenancies.

In commercial real estate, Key Money—more accurately called a Lease Premium or Assignment Fee—is a common and perfectly legal practice.

When a tenant wishes to assign or sell their commercial lease to a new business, they can legally charge the incoming tenant a premium if the original lease is highly valuable (e.g., a below-market rent, a long term, or a highly coveted retail location). This transaction is typically recorded in the assignment or sublease agreement and is an above-board business transaction.

3. Co-op and Condo Sales/Rentals: Higher Processing Fees

Cooperative and Condominium buildings are slightly different because the relationship is not always purely landlord-tenant, but involves a buyer becoming a shareholder (Co-op) or owner (Condo).

While co-op/condo boards are generally exempt from the ultra-strict $20 application fee cap, they must still follow certain rules:

• Application Fees: Co-op and Condo boards can charge higher application and background processing fees, but these fees must be reasonable and directly tied to compensating the managing agent and transfer agent for the cost of the process. They cannot be used as a backdoor way to collect Key Money.

• Move-In/Move-Out Fees: Buildings may charge standard, non-refundable fees related to elevator padding and administrative costs.

If you are buying a co-op, you are purchasing shares of stock and the right to a proprietary lease, not simply renting. The fees you pay are for the closing and application process, which are far more complex and legally permissible than a simple rental application.

Penalties and Recourse for Key Money Violations

For a landlord or agent, demanding or collecting illegal Key Money is not just a breach of contract; it can result in serious financial and professional penalties.

Tenant Recourse (Overcharge Claim)

If a tenant is charged illegal Key Money, they can file an administrative complaint with the DHCR or pursue a civil claim in court. This is treated as a form of rent overcharge.

• Recovery: The tenant is entitled to have the illegal fee returned.

• Treble Damages: Under the HSTPA, if the overcharge (i.e., the Key Money) is found to be willful, the court or DHCR must impose treble damages (three times the amount of the overcharge) for a period up to six years.

• Legal Fees: Landlords are required to pay the tenant's attorney fees and costs if a willful overcharge is found.

Regulatory Penalties

Any licensed real estate broker or agent involved in soliciting or collecting Key Money can be reported to the New York Department of State (DOS). This practice is considered illegal and dishonest conduct, which can lead to hefty fines and the revocation of their real estate license.

Tips & Takeaways

Whether you are a renter, a buyer, or an owner/seller in NYC, understanding the law around unauthorized fees is essential to protect your rights and avoid illegal activity.

🏡 For Renters: Know Your Rights

• Never Pay for Preference: If a broker, super, or landlord asks for a cash payment or a "deposit to hold the unit" beyond the $20 application fee, it is likely illegal.

• Get Everything in Writing: Do not make any large payments (especially cash) that are not accounted for on the official lease and deposit forms.

• Challenge Excessive Sales: If you are forced to buy furniture or fixtures at a wildly inflated price from an outgoing tenant, document the demand and the supposed value of the items.

🏠 For Buyers (Co-ops/Condos): Expect Higher Fees

• Understand that application fees for co-op and condo boards are generally higher than the $20 rental cap because they cover complex underwriting and board review costs.

• Ensure these fees are disclosed upfront by the managing agent and are reasonable relative to the work required.

💼 For Property Owners & Sellers: Stay Compliant

• Train Your Agents: Ensure your listing brokers and property managers are fully aware of RPL § 238-a and are not soliciting or accepting "good faith" deposits or inflated application fees.

• Separate Residential & Commercial: Clearly delineate legal lease premiums in commercial transactions from illegal Key Money in residential transactions.

The Yeo Real Estate Advantage: Navigating NYC’s Complex Laws

The real estate laws in New York City are constantly evolving, complex, and designed to protect consumers. Working with a seasoned, knowledgeable professional is the best way to ensure you are compliant, protected, and making sound financial decisions.

At Yeo Real Estate, we stay ahead of every legal change, from the HSTPA to the latest local guidelines, to ensure a smooth, transparent, and legal transaction—whether you are leasing a studio or purchasing a multi-million dollar co-op.

Don’t risk your investment or your license by engaging in shady practices. Work with a firm you can trust.

📞 Ready to navigate the NYC market without the guesswork? Contact a Yeo Real Estate expert today for a confidential consultation.