ALBANY, N.Y. (CN) — Hours after leading trade groups and developers filed suit, a judge hit pause on efforts to end the longstanding New York City real estate tradition of new tenants paying a brokerage fee before they can move in.
The New York Department of State had issued its guidance a week earlier regarding 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.
A dozen real estate companies and two major trade groups brought a petition Monday to have the rule nullified, alleging conflict with 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.
Justice Michael Mackey in Albany followed through later that day with an injunction that prohibits the state from applying its new guidance or issuing any related discipline against landlord agents and brokers.
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 representative for the Department of State did not immediately respond to an email seeking comment.
State officials have until March 13 to respond to the petition.