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When setting up a business in Thailand, you may consider to rent a property in a  prestigious location anticipating that this helps to guarantee high rate of return on your investment.

In such case, you might be asked by the owner of the property to pay a premium on top of the rent which is usually called „key money“.

You may wonder why you shall make such additional payment to your future landlord and for what these monies will be used.  Usually, such key money is a gratuity paid by a prospective tenant to a landlord on signing of a lease.  It is important to understand that such payment will not be used as a security deposit and usually not refunded on expiration of the lease.  Ultimately, it is nothing else than an additional payment, a premium, on top of the rent.  Landlords justify their demand for such payment often by referring to the location of the premises for rent which is often advertised as a guarantee for a successful business.

The actual amount of the key money to be paid may vary and typically depends on the location of the building. It further depends on the amount of rent to be paid. The lower the rent, the higher the key money and vice versa. This means that key money could also be seen as a rental advance payment which needs to be paid up when signing the lease. Therefore, when verifying whether the rent to be paid reflects the actual market value of such rental property, the amount key money to be paid can be divided by the amount of months rental period, in order to determine the actual rental amount to be spent per month. Having understood this and in addition knowing that any such key money payment is obviously subject to negotiation, you may agree with your landlord that a reasonably higher rent shall be paid instead of payment of key money in case you do not have sufficient funds available to arrange a one time off payment.

However, it needs to be understood that a landlord has no statutory right to demand payment of such premium, however, it can be contractually agreed between landlord and tenant.

Whenever paying such key money it is advisable to request issuance of a proper receipt as in case of a business resale such receipt can be shown to your buyer when trying to recover these monies.

Addionally, it is recommended to actually report such payment to the relevant authorties as expense in order to demonstrate that you do not intend to take part in any attempt of money laundering or tax evasion.

In summary, payment of premiums such as key money „on top“ of the agreed terms of payment are subject to negotiation and should only be requested and subsequently paid when it can be commercially justified by high demand for space or existing goodwill in a business.

This article is written by International Law Office Patong Beach Co., Ltd. For enquiries, contact Michael Greth, Consultant, by email (michael@ilo-phuket.com) or phone (+66- (0) 76-222 191-5).