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Court Battle Brewing in NY Over Broker-Fee Upheaval

New York’s real estate industry is fighting back against new state regulations that prohibit landlords from passing brokerage-fee costs on to their tenants. 

ALBANY, N.Y. (CN) — New York’s leading real estate trade groups and developers went to court Monday to protect their commissions on the heels of a regulatory shake-up over brokerage fees — a tradition seen as arcane in the digital landscape.

Filed in Albany County Supreme Court, the petition comes a week after the New York Department of State issued guidance about new tenancy protections that were passed last summer. One addendum in particular rattled the industry, saying renters no longer have to cover the fees landlords owe brokerages that list their units.

Demanding that the provision be nullified, a dozen real estate companies and two major trade groups say it actually contravenes the Statewide Housing Security and Tenant Protection Act of 2019. In addition to claiming that the legislation makes no mention of real estate brokers, the petitioners point to an earlier legal memo by the department’s general counsel that says the responsibility for paying brokerage commissions falls to tenants.

Brokerage fees are seldom seen outside the New York rental market where landlords traditionally hire brokers to market and advertise vacant properties and then bake those fees into the first month’s rent, even for tenants who found the unit online.

Monday’s petition says the abrupt change in the tenant policy “was immediate and devastating” for the New York real estate brokerage community.”

“Prospective tenants started backing out of their agreements to pay the procuring brokers their commissions, tenants who had already paid broker fees began demanding the return of already paid commissions, and brokers feared they would be the subject of complaint and discipline from the [department] unless they stopped accepting commissions, despite having procured the transaction and duly earning the commissions,” the petition states.

The developers also blame the media for exacerbating the panic, saying recent articles have falsely insinuated that all brokerage fees on rentals were illegal.

According to the statutory language under Section 238-A of New York’s consolidated law, landlords are not allowed to demand tenants pay any fee for processing an application except those related to background checks and credit checks.

The state clarified in the Question No. 5 of the guidance last week that brokerage commissions would count as a fee other than a background or credit check, and thus would be prohibited under the new law.

The industry insists, however, that the fees are permissible since the statutory language makes no specific reference to “brokers” or “real estate salespeople.”

“If the Legislature had intended to have RPL 238-a(1)(a) apply to real estate brokers or agents, it certainly could have included that language in the new provision,” the petition states.

A spokesperson for the Department of State did not immediately respond to an email seeking comment.

Trade groups representing landlords and brokers have gone on a media blitz over the last week calling out the new guidance. The Real Estate Board of New York, one of the petitioners, has asked its members to sign a petition decrying the decision and asked its members to contact the department’s licensing division.

In a statement, REBNY President James Whelan said the department “illegally overstepped its role” and “caused widespread confusion and havoc among dedicated real estate agents and the clients they serve.”

Others, however, might see the situation in New York as a model. Boston Mayor Martin Walsh announced last week that the city would be putting together a working group to study the impact of broker fees on renters in the city. “The housing crisis in our city requires a comprehensive, and multi-pronged approach to achieve our goal of creating and preserving new housing, while also ensuring that our housing is accessible to all residents,” Walsh said in a statement last week following the announcement.

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