Broker fee ban an “error,” court rules

Judge called the state’s guidance to ban tenants from paying landlords’ broker fees “an abuse of discretion”

BHS CEO Bess Friedman, Sotheby’s CEO Philip White REBNY head James Whelan, Douglas Elliman executive chairman Howard Lorber and Corcoran CEO Pamela Liebman (Getty, iStock)
BHS CEO Bess Freedman, Sotheby’s CEO Philip White, REBNY head James Whelan, Douglas Elliman executive chairman Howard Lorber and Corcoran CEO Pamela Liebman (Getty, iStock)

UPDATED April 12, 2021, 11:28 a.m.: An Albany judge sided with the real estate industry Friday, declaring New York state regulators’ attempt to ban tenants from paying landlords’ broker fees an “error of law.”

The decision comes more than a year after the Department of State issued guidance banning the practice. That guidance offered regulators’ interpretation of the Housing Stability and Tenant Protection Act, which became law in June 2019.

In response, prominent real estate trade groups and residential brokerages filed for a temporary injunction against state regulators and sought to overturn the guidance, which they said wreaked “havoc and confusion” on agents and renters.

After lengthy delays and several postponed hearings, Albany Supreme Court Judge Susan Kushner issued her decision on Friday.

“The guidance was issued in error of law and represents an unlawful intrusion upon the power of the Legislature and constitutes an abuse of discretion,” Kushner wrote in her court order.

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In addition to dismissing state regulators’ guidance, the court order bans the DOS from applying or enforcing any rule that would prevent a real estate licensee from receiving payment from a prospective tenant for “bringing about the meeting of the minds” between a landlord and tenant. It also permanently prevents state regulators from imposing any disciplinary action against licensees who do collect broker fees from tenants.

Broker fees in New York City are typically about 15 percent of the annual rent, which when combined with first month’s rent and a security deposit can mean tenants must come up with a five-figure sum just to move in. The broker fee for a Manhattan apartment asking the borough’s median rent of nearly $3,100 would be about $5,580.

While counterintuitive for those who have never rented in the city, it’s common for a renter to pay the broker fee for the landlord’s agent whether or not that agent did any work on the tenant’s behalf. Before the pandemic, the city’s rental market was so notoriously tight that if a tenant refused to pay the broker fee, landlords and their agents often had plenty of other options. (That dynamic has since changed as vacancies across the city skyrocketed and listings touting no broker fee have proliferated.)

The DOS guidance last year shook the real estate industry. Many called it a “death knell” that would jeopardize rental firms and agents’ businesses .

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Meanwhile, housing advocates and many New Yorkers applauded the move.

“Fees, historically, just defined who had access to the rental market and who didn’t,” Paulette Soltani, political director at the activist group VOCAL New York, said at the time. “This is just going to allow people to equally be able to find housing and not have to pay these exorbitant fees to get access.”

When asked last year whether the guidance was in line with the spirit of the 2019 rent laws, state Sen. Julia Salazar said “our intent is to eliminate barriers that currently prevent low-income and vulnerable people from obtaining housing.”

Within days of regulators’ guidance being issued, the real estate industry headed to court. The Real Estate Board of New York and the New York State Association of Realtors filed for the injunction, along with brokerages Corcoran Group, Douglas Elliman, Bond New York, Brown Harris Stevens, Sotheby’s International Realty, Bohemia Realty Group, R New York, Kian Realty NYC, Level Group, City Connections and Regina Wierbowski Real Estate.

The injunction was granted and broker fees were back, though the pandemic dealt a swift blow to market activity soon after. Many landlords began forgoing the practice of charging tenants broker fees in order to fill apartments as the city emptied out.

Now, the industry is extolling its ability to charge the broker fee without state regulators stopping them.

“This decision ensures that thousands of hardworking, honest real estate agents across New York state can earn commissions without fear of unwarranted discipline by the Department of State based on its erroneous interpretation of the Housing Stability and Tenant Protection Act,” said REBNY president James Whelan in a statement.

But the industry’s celebration may be premature: The DOS could appeal Friday’s decision. It’s also possible state lawmakers could introduce legislation that explicitly bans the practice of forcing tenants to pay broker commissions.

The judge’s decision deferred to lawmakers and was based on the fact the 2019 rent law made no reference to “broker’s commissions” and did not specifically mention real estate agents.

“Where the term is intentionally included in one section of the Act and omitted in another, it is further evidence that the Legislature must have intended to omit it,” Kushner wrote.

In a statement issued on Monday, a spokesperson said the DOS was “reviewing the Judge’s order and contemplating next steps.”