Rental broker fees are unequivocally legal in NYC and New York State. This topic was the subject of much confusion and controversy in 2020. Here’s why:
Following the passage of the Housing Stability and Tenant Protection Act of 2019 (HSTPA) on 6/14/19, the New York Department of State issued a memorandum on 1/31/20 as guidance on how to interpret the sweeping set of HSTPA regulations, which included a limitation on security deposits, caps on application fees and other changes to market-rate, rent-stabilized and rent-controlled apartments.
To everyone’s surprise, the DOS memo included language which effectively banned traditional rental broker fees in NYC by prohibiting landlords’ agents from collecting commissions from tenants.
While it was generally understood that the new law imposed limits on other types of rental fees (i.e. application fees), broker commissions specifically weren’t being targeted by lawmakers at the time.
Therefore, it appeared that the Department of State may have overstepped in its interpretation of the new law.
In response, the Real Estate Board of New York (along with several prominent brokerage firms) promptly filed a lawsuit on 2/10/20. The judge issued a Temporary Restraining Order which barred the Department of State from enforcing its interpretation of the law. In other words, rental broker commissions remained legal pending the resolution of the litigation.
The Department of State ultimately lost in court on 4/9/21. In her court order, Albany Supreme Court Judge Susan Kushner concluded that “The guidance was issued in error of law and represents an unlawful intrusion upon the power of the Legislature and constitutes an abuse of discretion.”
As a result, the Department of State was forced to issue revised guidance on 5/25/21 which made it abundantly clear that it is legal for a landlord’s agent to collect a broker fee from a prospective tenant.
Despite the court’s ruling and subsequent revised guidance issued by DOS, the possibility remains that the DOS could appeal the decision. It’s also possible that New York’s increasingly left-leaning lawmakers could introduce new legislation which explicitly bans brokers from collecting rental broker commissions from tenants.
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No. Rental brokers in NYC will not disappear even if the law changes to prohibit agents from collecting a broker fee from tenants. Should this happen, the burden of paying commission will simply be transferred to landlords.
There is a possibility that such a change will result in some landlords opting to advertise apartments directly to tenants, without the involvement of a broker. Over time, this could reduce the number of rental brokers in NYC.
However, rental brokers will never disappear completely for two reasons.
First and foremost, many landlords in the city simply don’t want the headache of dealing directly with prospective tenants, regardless of the potential for saving money on broker fees.
While many tenants think that rental brokers simply ‘open the door’ and collect a broker fee, the truth is that some landlords are not willing to get involved in any capacity in the day-to-day process of showing apartments to prospective tenants. ‘Opening the door’ is actually a very valuable convenience from the perspective of many landlords.
The second reason is that there are thousands of landlords who don’t reside in NYC. These individuals are unlikely to fly into town to market and show their properties to prospective tenants just to save a few thousand dollars in broker fees. In other words, having a rental broker to provide access to prospective tenants will always be a necessity for out-of-town landlords.
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The long-term implication of the recent rental broker fee ban in NYC will be a reduction in new real estate agents looking to enter the rental industry over the next few years. In addition, new real estate agents may attempt to start their careers directly in sales versus initially focusing on rentals, which has always been the customary starting point for new brokers in NYC.
The recent court decision on rental broker fees in NYC does not directly impact or restrict the ability of sale brokers to continue charging 5% to 6% in commission on resales. This is because the original DOS memo in question only broached the topic of rental broker fees. After all, the legislation being interpreted by the DOS was specific to the rental market only.
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If rental broker fees were to be banned in the future, it will likely have the indirect effect of reducing broker commissions for resales over the long term.
This is because any prohibition on rental broker fees in NYC will likely result in a reduction in the number of real estate agents who operate in the rental space. While many of these agents will leave the industry completely or transition more to being part-time agents, a fair number of these displaced rental agents will invariably attempt to find more traditional buyer and seller clients.
An increasing supply of agents working on resales may force down commission rates over time.
As consumers become accustomed to not having to pay rental broker fees over time, they’ll also likely become more resistant to forking out a 5% or 6% commission when it comes time to sell. This could create more demand for reduced-commission methods for selling in NYC, including Assisted FSBO and 1% Full Service.
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Will Rental Broker Fee Regulation Contribute to Rising Rents in NYC?
Yes. If rental broker fees for tenants are ever prohibited by law, it’s highly likely that landlords will raise rents over time to help cushion them against the extra costs associated with paying broker fees on behalf of tenants.
Moreover, the supply of apartments for rent may decrease over the long-term due to the recent spike in tenant-friendly regulations, such as caps on security deposits and further hurdles for eviction and non-payment proceedings. These reforms make it more expensive and riskier to rent out properties in NYC.
Individual owners who are debating between renting out their property for a few years or selling may simply opt to sell immediately in part due to the plethora of anti-landlord legislation in NYC. This will reduce the supply of homes for rent and ultimately contribute further to rising rents.
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Can I Still Hire a Broker to Help Me with My NYC Apartment Search?
Yes. You’re still allowed to hire a dedicated real estate agent to help you with your apartment rental search in NYC. There is no restriction against retaining your own dedicated representation during the rental search. Not to mention, rental broker fees remain completely legal in NYC.
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While most New Yorkers are accustomed to searching for rentals on their own, it can be valuable to hire a dedicated tenant’s agent if you’re moving to NYC or if you’re simply too busy with your career or other projects to manage the apartment rental search directly.
Many large rental buildings in NYC are open to paying a one-month broker fee to a tenant’s agent, so you might not even have to pay a broker fee directly if you choose to work with a dedicated tenant’s agent during your search.
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Disclosure: Hauseit® and its affiliates do not provide tax, legal, financial or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. No representation, guarantee or warranty of any kind is made regarding the completeness or accuracy of information provided.
