Key money / Goodwill in retail real estate

With the term ‘key money’ we are normally referring to a sum of money that a Brand, interested in a particular location, gives to the tenant in order to withdraw from an existing lease agreement.

This agreement foresees that such payment only takes place when the new tenant has stipulated a lease agreement. Therefore, the normal practice for operators in this line of business, is the preparation of contracts with cross condition precedents (for example, key money is paid subject to proof of termination and acceptance of the same by the landlord as well as the delivery of the property / building to the new tenant).

A particular reference must be made to the “High Street”, in particular cities, where all the iconic brands want to have a presence with their flagship stores.

For obvious reasons, in such streets, it is exceptionally rare that a contract ex-novo is stipulated with a landlord. It is almost always the tenant of the store location who decides to abandon the point of sale by obtaining a “key money” payment from the interested Brand.

In the realm of market strategies, it is interesting to note how, at times, a landlord who finds his property / building vacant, will increase the rent because of the absence of a “key money” payment.

The amount of “key money” can depend on various factors: (1) the location of the property / building especially if it is an area of particular interest to the tenant, (2) the rent amount is substantially lower than the market value of the interested area, (3) the residual length of the present lease agreement, (4) the square footage of the store in question.

There are other times when the landlord asks the tenant for payments other than the stipulated rent amount. For example, in front of a waiver to make use of the faculty of refusal to renew the contract after the first deadline or the request for particular authorizations (such as the permission for particular renovations / restructuring and the waiver by the landlord for the restoration in pristine condition at the end of the lease agreement).

The anticipation of further payments to the landlord at the signing of the lease agreement can be described as hidden “key money/Goodwill”; the agreements that take these fees into consideration are generally prohibited by the Italian legislation regulating leases and rents, given that they attribute an ulterior monetary advantage to the landlord, above the established rent. This ban has two exceptions:

  • When these additional sums of money in favor of the landlord are justified by an objective and meaningful interest of the tenant, which, therefore, justifies these additional payments;
  • Concerning lease contracts whose annual rent surpasses 250,000 Euro (not in reference to locations having historical significance).

It must be kept in mind that when the sums referenced in the aforementioned contracts are not subject to IVA or the contract foresees a down payment, one must evaluate the formalization by means of commercial correspondence in order to avoid the payment of the Italian registration fee.

If the disbursement of sums of money is in favor of an individual rather than a company, the subject making the payment must also apply withholding tax.

 

Written by:

Maria Adele De Luca, partner at FDL Studio legale e tributario

Massimo Chiarella, legal specialistat at Revedi

Susanna Antonielli, retail development consultant at Ibs Consultants