NYC renters can be asked to pay fees for brokers hired by landlords, a judge decides
Regardless of the decision, many landlords are likely to continue covering the broker fee as a concession to entice renters to sign leases.
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A judge has ended months of dispute over who can be asked to pay the fee for a New York broker hired by a landlord with a decision that says it can be the renter's responsibility—meaning the status quo remains in effect.
Putting the burden for paying the fee for the landlord's broker on the renter has long been criticized as unfair and even absurd (the dispute did not include fees for brokers hired directly by renters). In effect, in the New York rental market, brokers who are hired to represent the landlord's interests are being paid by the renter—and the fee can be one month's rent or up to 15 percent of the year's total rent, a hefty sum when combined with the security deposit and the first month's rent.
It all stems from the wording of the Housing Stability and Tenant Protection Act, passed in 2019. One goal of the law was to reduce the upfront costs for tenants. Late fees and the security deposit were capped and an application fee could be no more than $20. Some saw the prohibitions on the fees and charges included in the law as applicable to the broker fee and said tenants should not be paying them unless they specifically entered into a contract with the broker.
Within several months, this was confirmed in guidance issued by the Department of State. But then the guidance was suspended while lawyers argued tenants should be responsible for the cost, regardless of whether or not they were represented by the broker.
That guidance has now been deemed "null and void" by State Supreme Court Judge Susan Kushner. In her decision, she points out "no reference is made to 'broker's commissions' in the statute," and because the terms broker and agent are not included in this section of the law, it means the ban on tenants paying additional fees was only intended to apply to "application fees, background check fees, credit check fees, and any other fees imposed as a pre-condition to negotiations for entry into a lease agreement," but not the broker fees.
Her analysis concludes that State Senator Brian Kavanagh, one of the sponsors of the law, never intended to include broker fees but wanted to restrict charges "related to pre-negotiation fees only." She goes on to state the Department of State guidance was issued "in error of law" and was "an abuse of discretion."
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The decision has been welcomed by the Real Estate Board of New York, which was one of the groups challenging the Department of State's guidance. James Whelan, REBNY's president, says the decision allows real estate agents across the state to "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."
It's possible the Department of State will appeal the decision. They say they are "reviewing the judge’s order and contemplating next steps." Senator Kavanagh also plans to review the judge's decision and discuss it with colleagues.
The decision leaves many tenant activists frustrated and angry. Michael McKee, the treasurer of Tenants Political Action Committee, says excessive broker fees are a "giant scam" and "nothing short of extortion." He says if landlords want the help of brokers in finding new tenants, then landlords should pay them.
"Forcing new tenants to pay these fees should be prohibited. If the judge is correct that the Department of State exceeded its authority, then the solution is for the state senate and assembly to clarify the law," he says.
The judge's decision may be a blow to renters but the impact is significantly lessened by the current state of the market. When lots of apartments are empty—like they are now as a result of the pandemic—landlords try to sweeten the deal for tenants by covering the broker fee. About a third of all new Manhattan and Brooklyn leases in March came with a landlord concession such as owner-paid broker fees, according to the Elliman Report.
So in spite of the judge's decision, it's possible landlords will still be shouldering the broker fee burden for many months to come.
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