An Informal Legal Opinion: Why I think that DOS Might be Wrong About the New “Broker Fee” Rule Barring Tenants from Paying Landlord Agents

The entire New York real estate industry got thrown a curveball this week when the Department of State released on Wednesday an advisory providing guidance about the Statewide Housing Security & Tenant Protection Act of 2019 and the Housing Stability & Tenant Protection Act of 2019, legislation signed last summer dramatically revised landlord-tenant law.

 

The new legislation significantly increased tenant protections in a number of ways, putting significant new obligations on landlords, but did not specifically address the responsibilities of brokers and real estate agents in the process.  The new DOS guidance was designed to clarify that, explaining how DOS expected licensed professionals to ensure compliance with those rules. Most of the guidance essentially said something like “brokers can’t be a party to landlords who violate these rules.” Which is fine.

 

 

But in the midst of all that, DOS slipped in a major change to the way that the industry has operated for years:

5. CAN A LANDLORD’S AGENT COLLECT A “BROKER FEE” FROM THE PROSPECTIVE TENANT?
No, a landlord’s agent cannot be compensated by the prospective tenant for bringing about the meeting of the minds. NY RPL § 238-a(1)(a) provides, in part, “no landlord, lessor, sub-lessor or grantor may demand any payment, fee, or charge for the processing, review or acceptance of an application, or demand any other payment, fee or charge before or at the beginning of the tenancy, except background checks and credit checks….” The fee to bring about the meeting of the minds 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 this section. Accordingly, a landlord’s agent that collects a fee for bringing about the meeting of the minds between the landlord and tenant (i.e., the broker fee) from the tenant can be subject to discipline.

Essentially, DOS specifically forbid real estate brokers working for a landlord from collecting a fee paid by the tenant.

 

To be clear, the new regulatory guidance did not bar broker’s fees in rental transactions. Rather, the guidance simply says that a broker for the landlord cannot collect a fee from the tenant. A broker working for the landlord can still collect a fee from the landlord  (which presumably would be passed through in the rent). And a broker working for the tenant can collect a fee from the tenant  (or from the landlord, for that matter).  But the broker working for the landlord can’t get paid by the tenant.

 

This isn’t such a big deal in many parts of the state. For example, in Westchester, it’s customary for the landlord to pay the full commission, and for the tenant to pay nothing to either her agent or the landlord’s agent. So in places like that, this change won’t have much of an impact.

 

But it’s a very, very big deal in Manhattan, where rental prices and brokerage fees are significantly higher than to the rest of the state, and where the common practice was to require the tenant to pay the full thing.   And, of course, Manhattan happens to be the media capital of the world, pretty much every journalist in Manhattan has probably rented an apartment and complained about the broker fees. That’s why this news got so much coverage.

 

Now, let’s make full disclosure: I’m a real estate broker (and an attorney). So I have a financial interest in all this, and everything I say from here on in should be be taken in that context. Okay? Just so that’s clear.

 

So here’s my opinion: I think it’s a bad rule, and that it won’t accomplish much of anything for consumers. For the most part, landlords will just build the brokers fee into the monthly rent, so tenants won’t have any real savings.

Even worse, I don’t like a rule that encourages consumers to avoid hiring their own agent in order to save on paying an upfront out-of-pocket tenant’s agent fee. On other words, tenants will understand that they don’t need to pay a fee if they go direct to the landlord, but will have to pay a fee if they hire their own agent  So they’ll start going directly to the listing broker  And that’s a terrible idea  It’s like buying a car from  a car dealer — everyone works for the seller,  no one works for you, and you have a massive informational disadvantage  Like, how will you find out what other similar apartments have actually rented for?  That’s the kind of info your own agent digs up; a listing agent isn’t going to be a reliable source of that

Generally, I think that everyone in a real estate transaction should have representation from an agent, just like every litigant should have their own attorney  It makes for a fairer process

That said, if we have to, we’ll all adjust to this new rule. If the DOS is going to require landlord brokers to get paid only by the landlord, then we’ll figure out how to work within the system. We can still get paid on the tenant side by the tenant, which means that landlords don’t have to pay both sides of the transaction unless they want to market their listings as “no fee” (which can be a good marketing angle).  After all, in residential sales, the compensation for real estate sales is generally paid by the seller — who is in the position of the landlord. It’s not a big adjustment. We’ll be okay, probably, and I expect that most other brokers will as well.

That said, I do have two issues with the new guidance that I wanted to get out there: (1) the way it was announced, and (2) the legal foundation for the brokerage compensation rule.

 

1.  The Announcement

I really think that the DOS could have done a better job promulgating this new guidance:

First, as far as I know, they never consulted with industry people to get our opinion while they were forming the rule.  Or at least, they never talked to me, and I’m like one of maybe 5 attorney/brokers in the state who specializes in brokerage law, and I co-own one of the biggest brokerages. I’m not saying they needed to listen to us, but they could have at least gotten our opinion.

Second, they announced the new guidance without any warning to the industry to be prepared for this change.  Again, as far as I know, none of us saw this coming, and we were all blindsided.  Many of us found out in media reports.  That’s not right.

Third, they didn’t give us any formal way to ask questions about the new guidance, or get clarification.  Would it have killed them to have a conference call with, say, the NYSAR legal department, or an open call with brokers and agents to take questions?  They put a phone number on the guidance itself to call for help. I called it. The person who answered said they didn’t know anything except what was in the guidance itself.  So not particularly helpful.

Finally, and this is the biggest problem, they didn’t clarify when the new rule was effective. We’re assuming it was effective immediately, and that’s the way we’ve treated it, but it would have been really helpful for DOS to announce that the rule was effective in, say, a week. Give us time to close out the transactions in the pipeline, which were agreed-to under the old rules.  Honestly, if a landlord and tenant reached an agreement that included the tenant paying a fee to the broker, and then the rule changes and we can’t charge the tenant, and then the landlord refuses to pay because our contract doesn’t provide for it — is that really fair?  That could have been avoided with a clear effective date.

Again, adopting the rule is one thing, but the way it was adopted is another. Simply put, it was really hard adjusting on the fly like we had to this week. It didn’t need to be that confusing and difficult.

 

2.  Whether the New Rule is Correct

 

Moreover, I do think that the DOS interpretation of the legislation is a little questionable.

 

Essentially, I think that DOS is wrong that the legislation itself prevents the landlord from requiring the tenant to pay a brokerage fee. The purpose of the legislation was to limit the fees collected and kept BY THE LANDLORD to the equivalent of one-month’s rent. That’s why, for example, the legislature also limited application fees to $20 — because they figured that the $20 was a passthrough to a third party, not payment to the landlord, and anything more than $20 would essentially be an upcharge.

 

But the legislature didn’t restrict fees to third parties. Landlords sometimes collect for a cable bill, or water bill, or utilities, stuff like that.  None of that was mentioned, because the custom is that those are simply pass-through fees to third parties.

 

Well, so is a broker fee.  A broker fee is not (generally) shared with the landlord, it’s paid to a third party.  Moreover, the legislature never specifically mentioned broker’s fees, and they certainly could have given how prominent a broker’s fee is in a transaction, and how much money is often involved.  And, generally speaking, if the legislature doesn’t specifically mention something in the legislation, there was a reason.

 

So why did DOS stretch to make an interpretation that a brokerage fee paid to the landlord agent, but not the landlord itself, is unacceptable?  I don’t know. But their reading is inconsistent with the exception they made to the $20 limit in cases where the condo or coop board has a separate fee.  In this case, DOS followed what I think is a fair reading of the law — they didn’t limit the board fee because that fee is legitimately collected by a third party, or at worst collected by the landlord to be passed through to the third party. So why treat board application fees different from broker fees?  They’re both collected by third parties for a service provided as part of the overall transaction.

 

Moreover, the DOS had a number of far less intrusive ways of adhering to the purpose of the legislation without completely unending a pretty well-established and unchallenged industry practice. For example, if the actual purpose of the legislation was to prevent the landlord from collecting more than the equivalent of one month’s rent, why not simply prohibit a broker from SHARING a broker’s fee with the landlord, or kicking it back to the landlord. Or prevent brokers from collecting a fee if there is cross-ownership between the broker and the landlord (which comes up a lot).

 

The point of the legislation was to limit the LANDLORD to the equivalent of one month’s rent. Nothing in the legislation is written to limit legitimate THIRD PARTIES from collecting fees from the tenant for services rendered.

 

Now, maybe I’m missing something. I’ve spent a lot of time parsing the 2019 landlord tenant act, and I know it pretty well. But I’m not writing a brief or a law review article here — this is just an informal opinion.  So if I’m missing something, and someone points out to me clear indications of legislative intent showing that the legislature meant to bar landlord brokers from collecting fees from tenants, then I’ll revise and update this post accordingly. Indeed, I welcome corrections if I’ve made a mistake.

 

Conclusion

Again, if this is the new rule, we will adjust. I wish they’d given us a little warning, and put an effective date on the guidance, but that ship has sailed.

 

To be clear, I’m not against the legislation as a whole. I think the legislature out in some needed protections for tenants, even though I think some of the provisions are going to hurt good landlords more than bad ones. I think the law could use some tweaking, but I know what they were trying to do, and they were well-intentioned.

 

Moreover, I’m not anti-regulation. I’m a lawyer. I like rules, particularly clear ones. I have had a good working relationship with DOS over a long period of time. I respect what they do, and I value the work DOS does to regulate this industry and protect consumers.  But I’m just puzzled why the DOS came to this particular conclusion, and announced in this peculiar way, when I don’t think they had to.

 

Posted on February 8, 2020 at 8:46 pm
Joseph Rand | Category: Landlord-Tenant Law, Law | Tagged , , , ,

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