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New York's real estate groups to challenge ban on broker fees for renters

They seek the court to recognise Department of State illegally overstepped its role in issuing its new rule

The US Department of State is accused of not consulting the real estate industry for its input and views before changing the rules.

New York

REAL estate agents in New York are racing to make sense of a new, far-reaching rule declaring that tenants no longer have to pay a broker's fee.

Last Friday, two of the state's most influential industry groups said they would challenge the rule in court.

The Real Estate Board of New York, a powerful lobbying organisation, said it would file a lawsuit on Monday accusing the New York Department of State, which issued the legal guidance, of abusing its authority and failing to follow proper steps before adopting the rule.

"We are asking the court to recognise that the Department of State illegally overstepped its role in issuing its new guidance on rental brokerage commissions," said James Whelan, the group's president.

"The announcement of this new rule without warning has caused widespread confusion and havoc among dedicated real estate agents and the clients they serve."

Last week, the agency said the legal guidance was an appropriate interpretation of the rent laws that went into effect last year, which ushered in expansive protections for tenants, including limits on other fees like those paid to file an application.

The Real Estate Board, which represents major developers, property owners and brokers in New York City, will be joined in the lawsuit by the New York State Association of Realtors, an organisation with nearly 60,000 brokers.

In the lawsuit, the groups are expected to accuse the Department of State of failing to follow a state act that spells out how agencies are expected to issue rules and regulations.

The two groups said the Department of State, before issuing the guidance, should have sought input from the real estate industry and presented it for review before the state's Board of Real Estate.

"These regulations will severely and wrongly impact the incomes of hardworking real estate professionals," said Jennifer Stevenson, president of the New York State Association of Realtors. "It is unconscionable that a serious disruption of the marketplace has occurred without any industry input or even proper review by the state Board of Real Estate."

But tenant advocates, who have cheered the fee rule, said that the state's guidance was valid and predicted that the lawsuit would fail. "The state issues interpretive guidance all the time on laws, and this is within their right to do that," said Judith Goldiner, who oversees the Legal Aid Society's civil law reform unit.

The state published the legal guidance last Tuesday, stunning the real estate industry by saying that last year's sweeping rent laws, which do not explicitly mention broker commissions, barred tenants from having to pay a broker's fee.

It also surprised lawmakers in the Legislature who had approved the laws.

In New York City's competitive rental market, tenants are often required to pay a fee, sometimes up to 15 per cent of the annual rent, to a broker even if they found the apartment on their own by using websites like StreetEasy and Craigslist. For a US$2,000-per-month apartment, a broker's fee could reach US$3,600, which would have to be handed over when a lease was signed.

Few cities in the US have a similar network of brokers who collect fees from renters and control everything from listings to appointments to leases. Elsewhere, landlords either handle the marketing and leasing of units, or pay a broker to provide that service.

The Department of State said that a broker can still collect a fee but it must be paid by the landlord unless the tenant hired the broker to help find a unit.

In recent days, brokerage firms have scrambled to interpret the legal guidance. Some brokers have told tenants that they are representing them and having them sign disclosures saying so, allowing them to still collect fees from renters. Others, whether they are confused or being deceptive, have told renters that the rule is a suggestion, not the law.

Brokers have also warned tenants that if a landlord pays the fee, the cost would likely be passed on to them in the form of higher monthly rents.

Ms Goldiner said the Legal Aid Society was advising tenants that, if a broker demands a fee to get an apartment, to pay it if they can and then take legal action in small-claims court or file a complaint with the Department of State.

"I have been hearing that brokers are saying that this doesn't apply," she said. "That's a pretty legally risky position when you have the state licensing agency saying it does." NYTIMES