Contextualizing the Ongoing Controversy Over Tenant Broker’s Fees in New York

Posted on Apr 12, 2020
Jordan Schiff

Entering into and negotiating a real estate lease is an experience familiar to lawyers and laypeople. Real estate brokers facilitate these agreements between the landlord-lessor and tenant-lessee in exchange for a commission paid upon the signing of a new retail agreement. Whereas broker’s fees in the commercial real estate space are commonly borne at least in part by landlords, the norm in New York’s residential real estate market has unequivocally been for tenants to bear these fees[1]—until now.[2]

Last summer, New York passed the Housing Stability and Tenant Protection Act of 2019[3] with the stated aim of “[p]rovid[ing] permanent rent regulation protections to covered buildings [and] extend[ing] tenant protections statewide.”[4] A provision of this law, the Statewide Housing Security and Tenant Protection Act of 2019, innocuously added a new section 238-A to existing New York Real Property Law stipulating that “no landlord, lessor, sub-lessor or grantor may demand . . . any other payment, fee or charge before or at the beginning of the tenancy, except background checks and credit checks.”[5] To the surprise of tenants and real estate professionals alike, a guidance letter issued by the New York State Department of State on January 31, 2020 (“Guidance Letter”) controversially interpreted this provision to imply that “a landlord’s agent [who] collects a fee for bringing about the meeting of the minds between [a] landlord and tenant (i.e., the broker fee) from the tenant can be subject to discipline.”[6] This guidance effectively outlaws the collection of residential tenant broker’s fees at peril of discretionary discipline allegedly ranging from fines to suspension of practice privileges.[7] The fallout from the Guidance Letter has quickly triggered numerous practical consequences, including a conflict of statutory and regulatory interpretation, an ongoing court battle, rental market uncertainty, and a storm of debates as to the merits and costs of tenant broker’s fees more broadly. 

Statutory and Regulatory Ambiguity

In the immediate wake of the Guidance Letter, a swarm of headlines excitedly, and inaccurately, heralded the total demise of residential tenant broker’s fees in New York and the instant havoc it threatened upon regional real estate brokerage firms.[8] This impassioned—albeit misguided—public response bespeaks not only the controversial nature of the State’s position and the relevance of its subject matter, but also the extent to which this position hinges on points of interpretative ambiguity. At both the statutory and regulatory level, unclear drafting contributes to continuing uncertainty and demands definitive clarification.

At the statutory level, the relevant meaning of “payment, fee, or charge” under New York Real Property Law Section 238-A is unclear in context of established industry custom. In spite of dramatization by media coverage, the plain language of law itself only indicates that landlords may not demand such payments from tenants, but says nothing as to whether brokers may do so.[9] Picking up on this ambiguity, the Guidance Letter says that “a landlord’s agent cannot be compensated by the prospective tenant for bringing about the meeting of the minds,” but does not clarify under what circumstances brokers ought to be considered the agents of landlords as opposed to the agents of the tenants or independent actors entirely.[10] Noting this, the Real Estate Board of New York insists that “a tenant’s agent can [still] collect a brokerage commission from a tenant” and that “media headlines on this guidance . . . do not accurately reflect the law or its narrow focus,” but has nonetheless advised against the collection of tenant broker fees for the time being “until further clarity is provided.”[11]

Litigation and Judicial Treatment

New York real estate professionals did not take long to challenge the State’s interpretative position. In a petition filed in Albany County Supreme Court on February 10, 2020, the Real Estate Board of New York and New York State Association of Realtors initiated a lawsuit against the New York State Department of State, claiming that the Guidance Letter circumvents state administrative procedure requirements and presents an untenable legal interpretation contrary to both established law and industry custom.[12] In response to plaintiffs’ motion, New York State Judge Michael Mackey issued a temporary restraining order suspending the implementation of the Guidance Letter until the conclusion of the pending litigation,[13] leaving potential tenants, brokers, and landlords in limbo.[14] Pursuant to the court’s grant of an extension to respond, this indeterminate state of affairs projects to continue until at least June 2020 when court proceedings are scheduled to resume.[15]

Projected Market Impact

New York’s new ban and the disquietude surrounding its temporary suspension have already impacted the state’s residential real estate market and threaten to cause an industry ripple effect if made permanent.[16] In the short term, uncertainty over which transactional parties will have to shoulder the burden of paying broker’s fees has already coincided with a spike in New York State residential property rental rates, plausibly suggesting that regional lessors are raising rates in anticipation of having to absorb additional costs previously borne by lessees.[17] Additionally, many current renters whose leases commenced since the Housing Stability and Tenant Protection Act was passed are left wondering whether they are entitled to a refund of fees paid which have retroactively been determined to be illegal,[18] and it is likely that some of these parties will challenge landlords and brokers through either formal litigation or informal withholding of payments.[19] Unsurprisingly, residential real estate brokerage firms are especially concerned about the prospect of having to depart from their established fee model and possibly lose out on revenue in the process.[20]

In the long term, if the Guidance Letter stands and residential tenant broker’s fees are affirmed as illegal in New York, residential property rental rates should be expected to rise considerably so as to enable landlords-lessors to recoup the additional expense they are now required by law to absorb.[21] Moreover, this restriction would likely influence more residential landlords to forgo the intermediate step of using real estate brokers entirely and list more ‘no fee’ unit rentals where possible.[22] This latter consequence is particularly worrying for residential real estate brokers and brokerage firms, who stand to lose a great deal of their regular business or be ruined entirely by virtue of such a change.[23]

Is the Benefit Even Worth It?

While it is unclear where the legal battle over New York’s residential tenant broker’s fee restrictions will lead, it is apparent upon stepping back that the gain this ban attempts to achieve is outweighed, if not totally thwarted, by the cost it entails. Above and aside from the business impact of this law, the simple economic reality that increased supplier cost will lead naturally to increased consumer cost suggests that the ban is counterproductive to the prominent concerns presented by the contemporary New York rental market which this law was otherwise intended to address.[24] Ultimately, the strong likelihood that tenants will be indirectly compelled to pay for the costs absorbed by landlords as a result of this restriction vitiates the primary goals of the Housing Stability and Tenant Protection Act, which include solidifying New York’s system of rent control, better ensuring the affordability of rental housing, and providing for greater tenant protections generally.[25] In light of these fundamental concerns, one wonders whether New York State’s legislature will allow restrictions on residential tenant broker’s fees to stand as presently construed even if its courts do.

 

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[1] Real Estate Brokerage Laws & Customs: New York, Practical Law State Q&A w-000-1821.
[2] Practice of Collecting Broker Fees from Prospective Tenants in New York Is Unsettled, Practical Law Legal Update w-023-9726.
[3] See Legal Services of the Hudson Valley, New Rights for Tenants: Housing Stability and Tenant Protection Act of 2019, NYSenate.Gov (Sept. 19, 2019), https://www.nysenate.gov/newsroom/articles/2019/new-rights-tenants-housing-stability-and-tenant-protection-act-2019-1; National Low Income Housing Coalition, From the Field: New York State Legislators Pass ‘Housing Stability and Tenant Protection Act of 2019’, NLIHC.Org (Jul. 1, 2019), https://nlihc.org/resource/field-new-york-state-legislators-pass-housing-stability-and-tenant-protection-act-2019.
[4] N.Y. State Senate, Senate Bill S6458, NYSenate.Gov (Jun. 20, 2019), https://www.nysenate.gov/legislation/bills/2019/s6458.
[5] N.Y. Real Prop. Law § 238-a(1)(a) (McKinney).
[6] N.Y. State Dept. of State, Guidance for Real Estate Professionals Concerning the Statewide Housing Security & Tenant Protection Act of 2019 and the Housing Stability and Tenant Protection Act of 2019, DOS.Gov, 4 (Jan. 31, 2020) https://www.dos.ny.gov/licensing/pdfs/DOS-Guidance-Tenant-Protection-Act-Rev.1.31.20.pdf.
[7] Linda O’Flanagan, What Do You See? Banning Brokers Fees Ain’t Law, Experts Argue, Real Estate Weekly (Feb. 7, 2020, 7:22 PM EST), https://rew-online.com/what-do-you-see-banning-brokers-fees-aint-law-experts-argue/.
[8] See, e.g., Matthew Haag & Luis Ferré-Sadurní, Surprise for New York Renters: No More Broker Fees, N.Y. Times (Feb. 5, 2020, 11:15 PM EST), https://www.nytimes.com/2020/02/05/nyregion/nyc-landlord-rental-broker-fees.html. See also Verified Petition at 3, Real Estate Board of New York, Inc. v. New York State Dept. of State, No. 901586-20 (N.Y. Sup. Ct. Feb. 10, 2020), https://rebny.com/content/dam/rebny/Documents/PDF/News/In_The_News/Brokerage_Commissions_Guidance/REBNY%20%20v.%20%20NYS%20-%20Doc%201%20-%20Filed%20Verified%20Petition.pdf.
[9] N.Y. Real Prop. Law § 238-a(1)(a) (McKinney).
[10] N.Y. State Dept. of State, supra note 8, at 4; Staff, New Broker Fee Laws in NYC - 2020, RentHop (Feb. 12, 2020, 4:10 PM EST), https://www.renthop.com/blog/2020/02/new-yorks-new-broker-fee-regulations/.
[11] Linda O’Flanagan, supra note 7.
[12] Verified Petition, supra note 10, at 4–5.
[13] Order to Show Cause and Temporary Restraining Order at 1–3, Real Estate Board of New York, Inc. v. New York State Dept. of State, No. 901586-20 (N.Y. Sup. Ct. Feb. 10, 2020), https://rebny.com/content/dam/rebny/Documents/PDF/News/In_The_News/Brokerage_Commissions_Guidance/OSC_TRO%20Feb%2010%202020.pdf.
[14] Erin Hudson et al., What the Broker Fee Limbo Means for Agents, Firms, Landlords and Renters, Real Deal: N.Y. Real Estate News (Mar. 12, 2020 7:30 AM EDT), https://therealdeal.com/2020/03/12/what-the-broker-fee-limbo-means-for-agents-firms-landlords-and-renters/amp/.
[15] See Erin Hudson, Three More Months in Limbo: Broker-Fee Ban Lawsuit Delayed, Real Deal: N.Y. Real Estate News(Mar. 6, 2020, 5:15 PM EST), https://therealdeal.com/2020/03/06/three-more-months-in-limbo-broker-fee-ban-lawsuit-delayed/; Caroline Spivack, New York’s Broker Fee Ban is On Hold Until the Summer, Curbed: N.Y. (Mar. 9, 2020, 8:50 AM EDT), https://ny.curbed.com/2020/2/10/21131862/nyc-real-estate-broker-fee-lawsuit-rebny-brokerage.
[16] See, e.g., Michael Gold & Luis Ferré-Sadurní, Brokers’ Fees Ban: Renters are Jubilant, but Agents are Reeling, N.Y. Times(Feb. 6, 2020, 10:03 PM EST), https://www.nytimes.com/2020/02/06/nyregion/nyc-brokers-fees-ban.html; Staff, New York Broker Fees Reinstated — For Now, Law360 (Feb. 10, 2020, 6:48 PM EST), https://www.law360.com/articles/1242689/new-york-broker-fees-reinstated-for-now.
[17] Dima Williams, Rent in New York City Spikes as Controversial Broker Fee Ban Faces Legal Challenges, Forbes (Feb. 14, 2020, 12:09 PM EST), https://www.forbes.com/sites/dimawilliams/2020/02/14/rent-in-new-york-city-spikes-as-controversial-broker-fee-ban-faces-legal-challenges/#699d110c3cbc; Hudson et al., supra note 14.
[18] Cf., O’Flanagan, supra note 7 (reporting that the New York State Department of State confirmed that it did not intend its guidance to “to apply retroactively,” but instead only to “future transactions”).
[19] See Luis Ferré-Sadurní, Does Your Real Estate Broker Owe You a Refund?, N.Y. Times (Sep. 22, 2019, 4:30 PM EDT), https://www.nytimes.com/2019/09/22/nyregion/broker-refunds-nyc-renters.html.
[20] See O’Flanagan, supra note 7 (“It looks like they are trying to wipe out an entire occupation. They have no way to make money . . . Thousands of jobs will be lost both by brokers and staff.”).
[21] See Gold & Ferré-Sadurní, supra note 16.
[22] It is worth noting that in this respect, a preeminent impact of New York’s restriction on residential tenant broker fees may be to accelerate a preexisting and ongoing industry trend away from traditional broker arrangements and toward online ‘do-it-yourself’ listings. See, e.g., Meenal Vamburkar, “They Are Pimping You Out”: Brokerage Execs Talk Streeteasy, Compass and Broker Poaching At NYRAC’S Inaugural Event, Real Deal (April 4, 2019, 5:12 PM EST), https://therealdeal.com/2019/04/04/they-are-pimping-you-out-brokerage-execs-talk-streeteasy-compass-and-broker-poaching-at-nyracs-inaugural-event/.
[23] See O’Flanagan, supra note 7 (“It looks like they are trying to wipe out an entire occupation . . . . Thousands of jobs will be lost both by brokers and staff.”).
[24] See National Low Income Housing Coalition, supra note 3 (celebrating the Housing Stability and Tenant Protection Act for “[e]stablish[ing] stronger tenant protections statewide”); Verified Petition, supra note 8, at 3–5 (characterizing the New York State Department of State’s guidance determination as “contrary to . . . [and] divorced from the language of the Act” as well as “contrary to established law”).
[25] N.Y. State Dept. of State, supra note 6, at 1.