NYC landlords can no longer make tenants pay broker fees, says state
A war has been pitched against the state and real estate gatekeepers in the nation’s largest city regarding the old habit of landlords passing on broker fees to tenants.
UPDATE (2/11/20): An Albany County Supreme Court judge has temporarily blocked the New York State Department of State’s guidance on broker’s fees from taking effect. The lawsuit, filed on behalf of the Real Estate Board of New York, argues that the guidance exceeded the intentions of the legislature and was an exercise in “unlawful rulemaking,” due to the law not mentioning brokers or agents specifically. The injunction is expected to hold until the lawsuit heads to court in March.
It can be hard finding affordable housing in New York City. One of the most in-demand markets in the country, the median rent for a one-bedroom apartment in the Big Apple is $3,150, as of 2019. This is more than twice the national median of $1,216.
With so many tenants looking for an apartment, vetting and selecting can be a chore. For many landlords, this unpleasant job is passed on to apartment brokers. The landlord would then charge the new tenant the broker fee — that is, he or she would have had the New York Department of State not changed the rules. As of Jan. 31, landlords may not pass on the cost of a broker to a tenant under any circumstance.
“When a landlord selects a broker to find a tenant and to negotiate a lease, for a fee, that obligation to pay the broker cannot be shifted to the tenant because it would be a ‘payment, fee or charge before or at the beginning of the tenancy’ other than a background or credit check as provided in that section,” states the new law, which was passed in September 2019. Implementation of the law was delayed to accommodate the drafting of updated guidance.
Usually, the broker’s job amounts to facilitating walkthroughs of the property and processing applications. For this service, broker fees can be as much as 15 percent of an apartment’s annual lease. The DOS has made it clear that the new rule will not be applied retroactively to existing arrangements and will not affect renters that solicit apartment brokers directly. Despite this, there is fear that the ruling will force many brokers out of business.
“We are aggressively pushing back on the Department of State’s misguided interpretation that will have a devastating impact on hard-working real estate agents, owners and renters throughout New York State,” noted the Real Estate Board of New York in a statement published by WABC 7 New York City.
“If enforced, this guidance would result in higher prices for New Yorkers as building owners include commissions into rents and dramatically cut the incomes of tens of thousands of agents who provide a valued service in helping people find their new homes.”
A changing world
Many landlords and brokers were unaware of the law, so lawsuits are being planned to push back against the changes. Gothamist has reported that some brokers are actively ignoring the law, with some brokers refusing to acknowledge it when asked, while others are urging tenants to sign affidavits stating that the tenant was the one to hire the broker. In one case, prospective tenants must sign these forms before being allowed to see the apartment.
As with most markets, a switch from the tenants paying brokers to landlords paying brokers will mean landlords avoiding brokers altogether, with landlords posting their own properties online and possibly using a property management service to facilitate walkthroughs and vetting.
“With technology and the ubiquity of platforms such as Zillow and StreetEasy, the frictions to search for a rental apartment have greatly reduced in the past decade,” Stijn Van Nieuwerburgh, a real estate and finance professor at Columbia University’s Graduate School of Business, told Gothamist. “This may be an efficient reallocation of labor for the New York economy, but of course not a fun one for the real estate sector.”
A key consideration in limiting the brokers is deed fraud. While most brokers are not fraudulent, some are. A report issued in December found that it is uncomfortably easy to commit deed fraud in New York City. A broker claiming to represent a property may be able to extort broker fees or may even transact a false sale on unoccupied or abandoned properties or on properties belonging to the recently deceased or owners facing liens.
“In case after case, a Manhattan grand jury uncovered heartbreaking frauds in which small properties representing the whole of a family’s accumulated wealth and heritage over 50 years was brazenly snatched by criminal fraudsters,” Manhattan (County of New York) District Attorney Cy Vance Jr. said in a statement.
Another large question mark on the effectiveness of this new law will be the state’s willingness to enforce it. If the law is not rigorously enforced, the broker industry will push back against it, rendering it moot.