This week, a law barring “forced broker fees” will go into effect despite the Real Estate Board of New York’s attempts to stop it in its tracks.
Judge Ronnie Abrams denied the Real Estate Board of New York’s request for a preliminary injunction, which would have prevented the Fairness in Apartment Rental Expenses Act, or FARE Act, from going into effect while the trade group’s lawsuit challenging the law makes its way through the court.
The law goes into effect Wednesday.
The judge also dismissed the trade group’s claims that the lawsuit violates the First Amendment and is preempted by state law.
“Although Plaintiffs frame their claims in constitutional terms, they fundamentally ask the Court to enjoin the enforcement of legislation that they view as bad policy,” Abrams wrote. “The ‘judicial function,’ however, ‘is not to second-guess the policy decisions of the legislature, no matter how appealing we may find contrary rationales.’”
REBNY’s allegation that the law flies in the face of the Contract Clause can move forward, though the judge cast doubt on the claim outweighing the law’s “significant and legitimate public purpose.”
The trade group filed a motion seeking a preliminary injunction in January. At the time, REBNY warned that allowing the law to go into effect while its lawsuit was active would force brokers, in the meantime, to spend “potentially unrecoverable sums to adapt to the new regime.”
REBNY President Jim Whelan said he was disappointed in the judge’s decision.
“New Yorkers will soon realize the negative impacts of the FARE Act when listings become scarce, and rents rise,” he said in a statement. “We will continue to litigate this case as well as explore our avenues for appeal.”
The City Council approved the FARE Act in November with a veto-proof majority. The measure’s provisions were slated to go into effect 180 days later. The law requires landlords to pay the commission for rental brokers they hire. Typically, tenants must pay the fee, which in many cases is 15 percent of the first year’s rent.
A month later, REBNY filed a lawsuit alleging that the law violates the First Amendment because it discourages the publishing of rental listings and specifically targets “disfavored speakers,” in this case, brokers. Under the FARE Act, a broker who advertises a rental is assumed to have been hired by the landlord.
The lawsuit also claims that the FARE Act flouts the Contract Clause because it wrongfully interferes in private contracts and pre-empts state law. Abrams disagreed, saying that the state law relates primarily to broker licensing and conduct, and has “no bearing on the amount of fees brokers may charge or to whom they may charge them.”
REBNY argues that the law will raise rents, as owners will pass the cost of broker commissions onto tenants. The trade group says this unfairly denies tenants the choice to pay these fees upfront, rather than across an entire lease, and also precludes deals between tenants and landlords where the latter agrees to pay part of the fee or all of the fee.
The lawsuit also alleges that the law doesn’t actually bar brokers from seeking compensation from tenants — they just can’t advertise a landlord’s listing and then go after the tenant for the fee.
The city filed a motion to dismiss the lawsuit in February, countering that the FARE Act does not interfere with protected speech. Abrams agreed, finding the restrictions on listings to be “content neutral” and applied equally to all brokers.
The law, according to the city’s motion, properly aligns the “principal-agent relationship” and “encourages the parties with negotiating power to agree upon and pay the broker’s fees.” Given the lack of rental supply, “the negotiating power of prospective tenants is severely limited,” the motion states.
The judge, however, agreed with REBNY that the FARE Act undermines existing contracts in cases where a landlord has agreed to work exclusively with a broker, with the expectation that the tenant will pay the commission.
“After all, brokers who have existing tenant-pays exclusive listing agreements cannot be expected to work for free,” Abrams wrote.
Still, the judge concluded that while the law impairs existing contracts, it does so in service of “a significant and legitimate public purpose.” Abrams found that REBNY failed to show that its lawsuit was likely to succeed, that it could prove that the “FARE Act’s impairment of existing tenant-pays exclusive listing agreements is not a reasonable and appropriate means of improving housing mobility.”
“Landlords can—and in many circumstances do—pay brokers’ fees. When they instead choose to enter tenant-pays exclusive listing agreements, they impose an upfront cost on prospective tenants that the City Council found increases housing immobility and contributes to the ongoing housing emergency,” Abrams wrote. “The City Council’s decision to allocate the full economic burden of brokers’ fees to landlords is therefore not unreasonable.
The bill’s sponsor, Council member Chi Ossé, has called REBNY’s lawsuit a “desperate attempt by the real estate lobby to undermine the voices of city residents.”
During a hearing in May, Abrams didn’t reveal much about where she was likely to fall on REBNY’s motion — though there were a few moments that hinted at her being sympathetic to the city’s case. At one point, she questioned REBNY’s argument that the FARE Act limited tenants’ choice to pay commissions upfront or negotiate with the landlord.
“Don’t tenants have less choice?” she asked, referring to the current system of renting in New York City. “They are not choosing to have a broker.”
She then said something that elicited an audible groan from one attendee in the courtroom.
”What about a situation where the broker doesn’t do anything?”
Broker fees have long been a target of reform. City Council members have previously pitched capping or freeing tenants from having to pay commissions. After the passage of the 2019 rent laws, the Department of State issued guidance interpreting the part of the law as a ban on tenants being forced to pay broker fees. REBNY filed a lawsuit alleging that the state had overstepped its authority, and in April 2021, a judge tossed the guidance as an “unlawful intrusion.”
This story has been updated with additional context from Judge Abrams’ ruling.
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