In a largely expected response, the real estate industry on Friday announced plans to sue the Department of State for calling for an end to tenant-paid commissions. The lawsuit, which will be filed on Monday, will be spearheaded by the Real Estate Board of New York (REBNY), the industry's powerful lobbying arm, several brokerages, and the New York Association of Realtors.
The policy change, which was posted on the state's website Wednesday, stunned the real estate industry, which has relied on the practice of tenant-paid commissions for decades. It does not prohibit brokers from collecting commissions from landlords, nor does it prevent brokers from charging fees when they are hired voluntarily by apartment hunters.
“We are asking the court to recognize that the Department of State illegally overstepped its role in issuing its new Guidance on rental brokerage commissions,” said James Whelan, REBNY's president, in a statement. “The announcement of this new rule without warning has caused widespread confusion and havoc among dedicated real estate agents and the clients they serve. The sudden decision and the way it was made public was harmful to thousands of hardworking New Yorkers.”
The joint press release from REBNY and the NY Association of Realtors said that the lawsuit will charge that the DOS "usurped its role by engaging in improper rulemaking rather than following the necessary and required legal procedures for implementing a new regulation."
A spokesperson for DOS said she could not comment on pending litigation.
It added that the announcement "created widespread disruption for property owners, rental agents, and prospective tenants themselves – resulting in losses for brokers and landlords alike."
It was not immediately clear what prompted the guidance from DOS, which was an interpretation of last year's rent reforms. Adding to the confusion, the DOS on Thursday said that the end to tenant-paid commissions would commence immediately as opposed to June 14th, when the new rent laws were passed. Several housing and rent law experts told Gothamist that DOS guidance could not overrule the rent laws and their effective dates, and that tenants who paid such fees since June 14th are eligible for refunds.
Sam Himmelstein, a prominent tenant attorney, said tenants could very well challenge the DOS's interpretation on the effective date of the policy and the issue would then ultimately be resolved in court.
Although two brokerages, Compass and Warburg Realty, told Gothamist they were instructing their agents to comply with the new guidance from the state and not collect commissions from tenants, some city brokers appeared to be unaware of or ignoring the new rule.
This is not the first time the real estate industry has been challenged on brokers fees. The City Council is currently weighing a package of bills that would limit the high upfront costs of renting an apartment, including brokers' fees, application fees, security deposits, and other hidden fees. In June, hundreds of brokers turned out to protest the legislation at City Hall.
Brokers have long argued that commissions are negotiable and that their work is under-appreciated. They have also warned that landlords will now simply pass on the cost of hiring brokers to tenants by raising rents.
"At a time when many complain that the rents are too damn high, we've just made them higher," said Jason Haber, a broker with Warburg Realty.