Has ‘key money’ returned?

Recent changes in rental property regulations, including a ban on open bidding above the asking price, have raised concerns about the resurgence of ‘key money’—unofficial cash payments made to secure tenancies. This practice, once common in the 1960s and 1970s, may be re-emerging due to high demand and limited supply in the UK rental market, potentially undermining transparency and fairness for landlords, agents, and prospective tenants alike.

The Return of ‘Key Money’ in Today’s Rental Market

‘Key money’ refers to unofficial, often cash, payments made to landlords or letting agents to secure a rental property, typically outside of formal rent agreements. Historically prevalent in mid-20th century UK lettings, this practice had largely diminished due to tighter regulations and increased market transparency. However, recent shifts in legislation, particularly the prohibition of open bidding above the asking rent, combined with a shortage of available rental properties, appear to have created conditions conducive to its return.

With many prospective tenants offering the asking rent, some may resort to untraceable cash payments to gain an advantage. This underground bidding effectively circumvents the legal restrictions on rent increases during the letting process and introduces risks of unfairness and potential illegality. For landlords and agents, this raises ethical and compliance challenges, as accepting such payments could expose them to reputational damage and legal scrutiny.

Legislative Changes and Their Unintended Consequences

The recent ban on open bidding above the asking price aims to protect tenants from escalating rents and promote fairness in the lettings process. While well-intentioned, this measure may inadvertently encourage off-the-record payments as a way to outbid other applicants. Since these cash payments are unregulated and unrecorded, they evade taxation and legal oversight, creating a shadow market that is difficult to monitor or control.

Moreover, the reliance of landlords on agents to recommend tenants can create vulnerabilities. Agents may face conflicts of interest if they receive undisclosed payments from applicants, potentially influencing tenant selection unfairly. This situation undermines trust in the lettings process and complicates compliance with landlord obligations under the Renters’ Rights Act and other housing legislation.

Challenges in Detecting and Addressing ‘Key Money’ Payments

One of the primary difficulties in tackling ‘key money’ is the lack of tangible evidence. Cash payments leave no formal trail, and disputes often boil down to conflicting accounts between landlords, agents, and tenants. Without clear proof, enforcement agencies and regulators may find it challenging to investigate or sanction such practices effectively.

Additionally, the high demand for rental properties means that landlords and agents may be tempted to accept these payments to secure tenants quickly, especially in competitive markets. This can perpetuate a cycle where ‘key money’ becomes an expected part of the rental process, disadvantaging those unable or unwilling to make such payments and potentially breaching fair housing principles.

Market Dynamics Driving the Practice

The imbalance between rental supply and demand remains a key factor behind the resurgence of ‘key money’. In many UK regions, limited housing stock and increased competition among tenants create pressure to offer incentives beyond the advertised rent. Where multiple applicants meet the asking price, some may seek to differentiate themselves through additional payments, effectively creating a parallel bidding system outside formal channels.

This dynamic not only inflates the true cost of renting but also complicates the landlord’s role in maintaining transparent and compliant lettings. It may also contribute to tenant dissatisfaction and mistrust, as those unable to participate in such unofficial payments may lose out on properties despite meeting all formal criteria.

What This Means for Landlords

Landlords should be aware that while the ban on open bidding aims to create a fairer rental market, it may also increase the risk of ‘key money’ payments occurring beneath the surface. Accepting or soliciting such payments can expose landlords to legal and reputational risks, including potential breaches of tenancy laws and tax regulations.

It is important for landlords to maintain clear, documented processes for tenant selection and rent setting, working closely with reputable letting agents who adhere to professional standards. Transparency and compliance with the Renters’ Rights Act and other relevant legislation should remain priorities to avoid inadvertently encouraging or participating in unlawful practices.

What TLA Members Should Consider

• Establish and communicate a clear, transparent tenant selection process that complies with current legislation and discourages unofficial payments.
• Work only with letting agents who demonstrate ethical practices and provide documented evidence of all transactions and tenant offers.
• Maintain detailed records of all communications and financial exchanges related to tenancy agreements to support compliance and dispute resolution.
• Educate prospective tenants about their rights and the illegality of ‘key money’ to discourage participation in such practices.
• Regularly review tenancy agreements and letting procedures to ensure alignment with the Renters’ Rights Act and other regulatory requirements.
• Seek professional advice or support from TLA resources or legal experts if suspicious activity or requests for unofficial payments arise.

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TLA update

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