Real estate industry to sue NYS over rental commission ban

State’s surprise decision bars some tenant-paid rental commissions

From left: Douglas Elliman's Howard Lorber, Brown Harris Stevens' Bess Freedman, REBNY's James Whelan, Bohemia Realty's Sara Saltzberg and Corcoran's Pam Liebman
From left: Douglas Elliman's Howard Lorber, Brown Harris Stevens' Bess Freedman, REBNY's James Whelan, Bohemia Realty's Sara Saltzberg and Corcoran's Pam Liebman

Faced with the prospect of losing millions of dollars in commissions, the real estate industry plans to sue state regulators to block a new policy that would end some tenant-paid rental fees.

The Real Estate Board of New York and the New York Association of Realtors, in conjunction with several major New York residential brokerage firms, plan to file an Article 78 proceeding on Monday to stop enforcement of the guidance, sources told The Real Deal.

“We are asking the court to recognize that the Department of State illegally overstepped its role in issuing new guidance on rental brokerage commissions,” James Whelan, REBNY’s president, said in a statement. “The announcement of this new rule without warning has caused widespread confusion and havoc among dedicated real estate agents and the clients they serve. The sudden decision and the way it was made public was harmful to thousands of hardworking New Yorkers.”

Earlier this week, the DOS unexpectedly issued guidance that ends tenant-pays rental commissions when an agent is retained by a landlord. (Tenants would still pay agents who represent them in a deal.) Dated Jan. 31, the guidance is based on DOS’ interpretation of last June’s rent law, which seeks to protect tenants.

But the industry at large lambasted the ruling, saying it would not only hurt rental agents but consumers, because landlords were likely to jack up rents to cover the extra cost of paying agents.

“This is not going to help tenants — it will hurt them,” predicated the head of one brokerage, who spoke on the condition of anonymity. “The landlords will raise the rent.”

Agents have already cited instances of landlords instructing them to remove the fee from their StreetEasy listings and hike the rent.

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Some of the firms that signed onto the legal challenge, known as an Article 78, include the Corcoran Group, Douglas Elliman, Bond New York, Bohemia Realty, Citi Connections, Sotheby’s International Realty and Brown Harris Stevens.

Chaos ensued across brokerages this week as agents and firm leaders struggled to understand what the guidance meant.

In a statement, Jennifer Stevenson, president of NYSAR, said it was “unconscionable” that the state agency perpetrated “serious disruption of the marketplace” without seeking industry input or review. “We will use every resource available to us to fight against these unreasonable and punitive regulations.”

Despite their shared opposition to the guidance, residential firms initially were split on how to handle pending transactions and deals. Some — including Corcoran and Elliman — questioned whether the guidance was actually law.

“This Guidance is not the law, but rather a position taken by the DOS as it relates to licensed real estate agents and brokers,” Kenneth Haber, Elliman’s general counsel, wrote in an email to agents on Thursday obtained by TRD. “We do not believe that this Guidance is consistent with the law and, accordingly, DE together with REBNY and other real estate brokerage firms are commencing an Article 78 Proceeding against the DOS.”

In an email earlier this week to his staff, Gary Malin, the COO of Corcoran, advised agents “to push back on this harmful and haphazard interpretation of the Tenant Protection Act.” Until further notice, he said, “we recommend continuing to conduct your business in accordance with the law and all applicable regulations, not advisory opinions promulgated in haste.”

But a source at the firm said executives held a conference call Friday morning for 1,600 agents and instructed them to follow the Jan. 31 ruling.

Read more of our coverage on New Yorku2019s broker fee upheaval