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How Broker Fee Caps May Change The Business Of Landlord Representation

Real estate agent Sales manager holding filing keys to customer after signing rental lease contract of sale purchase agreement, concerning mortgage loan offer for and house insurance.

In early February, the New York brokerage community was stunned by a clarification issued by the Attorney General’s office that would destroy the apartment rental process in New York. It banned fees paid by the tenant for brokers representing the landlord. An injunction issued five days later stayed this regulation until it can be adjudicated this month. If upheld, these laws may effectively destroy my business. Approximately 70% of my business comes from tenant-paid commissions. Landlord representatives would have to collect fees from landlords, many of whom would be reticent to pay.

A vast majority of established New York landlords only pay broker commissions if they must, such as during a market downturn. This latest development is not necessarily a new law; rather, it is a correction to a law passed in June. That law stated that a tenant could not be charged more than $20 in fees by landlords. However, it remained unclear if such legislation applied to brokers representing landlords. Unfortunately, the clarification that was issued in early February made it very clear that it does in fact apply to this group of brokers.

The real estate community asked for an injunction, which was subsequently granted. However, it’s still unclear how the state defines a landlord representative. Many attorneys have been advising brokers who represent landlords that this latest development represents a clarification to a previous law, not an actual law in and of itself. Thus, it does not need to be followed to the letter. I must note that this so-called clarification is a drastic departure from the previous law and was not passed by the legislature nor signed by the government.

This month, REBNY will adjudicate this law against the state. However, the process is likely to take several months. We are allowed to continue business as usual for now. The major question will be whether this addition was a proper interpretation of the existing law or if the existing law was even constitutional in the first place. The consequences of an unfavorable ruling will prove devastating for the real estate community.

It’s likely that many property owners will be forced to raise their rents considerably to off set the broker fee. They try to rent the apartments themselves, which will likely expose many smaller landlords to problems without brokers advising them on procedures. Landlords may face lawsuits as a result of easily preventable errors.

There is also a possibility that both brokers and property owners will find various loopholes. A broker could say that that they don’t have the exclusive so that they can still be paid the fee. Even if the law were to pass, it wouldn’t be particularly effective, except for rent-stabilized apartments. In these cases, brokers would be representing owners who could not build the cost of the broker fee into the rent. The property owner would be forced to eat the cost.

This case could go to the state Supreme Court or even the federal Supreme Court. The most prominent issue would be whether a state agency has the right to impose a wage and price control outside of an emergency. Recently, politicians in Albany and the city government have been known to promote a fairly anti-landlord attitude. They argue that this is in the name of affordable housing. Instead, fees will be baked into the rent (causing increases) or there will just be fewer brokers in the industry. The result: fewer people who are incentivized to work for tenants who want quality apartments.

Even if these laws don’t stand up, the resentment they spread may cause irreparable harm to the industry. If you cripple one particular industry by capping income this severely, you set a precedent for doing it to other industries. Only time will tell how this will affect the New York real estate community and other industries.

Adam Frisch
Lee & Associates Residential
845 Third Avenue, 4th floor
New York, NY 10022
afrisch@lee-associates.com
917-279-5308