LEGAL CORNER: TRO Issued by Court Stays DOS Guidance Prohibiting Tenants from Paying ‘Broker Fees

On Jan. 31, the New York State Department of State issued further guidance with respect to the Statewide Housing Security and Tenant Protection Act of 2019 and the Housing Stability and Tenant Protection Act of 2019 (the “2019 Acts”) [see https://bit.ly/2xA6lth] passed on June 14, 2019. The publication, entitled “The Guidance for Real Estate Professionals Concerning the Statewide Housing Security & Tenant Protection Act of 2019 and the Housing Stability and Tenant Protection Act of 2019” (the “DOS Guidance”) [see https://on.ny.gov/38fcL1N], provides additional FAQs and guidance supplementing the previous publication issued by the DOS on Sept. 13, 2019 (“Initial DOS Guidance”) [see https://on.ny.gov/2Sd9TwA].

The DOS, without engaging in any formal rule making process, attempted to overturn the long-standing practice in New York City, Westchester, Rockland and Orange counties, among other areas, whereby tenants are required to pay the “broker fee” (i.e., commission) in connection with real estate rentals. The DOS’s actions caused widespread chaos, and caused NYSAR, REBNY and several brokerage firms to file an Article 78 proceeding in Albany on Feb. 10, seeking an injunction against the DOS relating to the ban on the payment of commissions by tenants [see The Real Deal at https://bit.ly/39kutB1].

The Controversial DOS Guidance: FAQ #5

On the afternoon of Feb. 10, a New York State Supreme Court Judge in Albany quickly ruled and issued a temporary restraining order against the DOS restricting its enforcement and implementation of FAQ #5, which attempted to bar landlords from requiring tenants to pay commissions (i.e., broker fees) in connection with a rental, which has been the custom in many areas. The other parts of the DOS Guidance were not affected by the TRO.

HGAR’s Real Estate In-Depth [see https://bit.ly/2UIcVuG], quoted NYSAR President, Jennifer Stevenson, who pointed out that NYSAR “…is deeply concerned with the regulation’s content and the manner in which it was developed and promulgated.” Stevenson stated that “Itt 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. We will use every resource available to us to fight against these unreasonable and punitive regulations.” The court has stayed the DOS Guidance until March 13, when the parties are scheduled to appear in court for a hearing on the matter.

FAQ #5 basically interprets New York Real Property Law § 238-a(1)(a) to mean that any commission or “broker fee” required to be paid by the tenant on any rental would be prohibited and specified that any landlord’s agent collecting such fee on behalf of a landlord would be subject to DOS discipline. FAQ #5 reads as follows:

“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.”

When a new law is enacted by the legislature or a new rule is being introduced by the DOS, the State and/or DOS usually provide the public with advance notice, public hearings, public comment periods, as well as critical guidance (after legislation is enacted), so that all of those affected are aware of what the requirements are with regard to any such new legislation or rules.

This was not the case with the initial enactment of the 2019 Acts nor with the issuance of this latest DOS Guidance. The 2019 Acts were passed in the dead of the night with little to no involvement of the public or the opposition. After enactment of the 2019 Acts, the only guidance provided to the public was issued nearly three months later, and left many questions unanswered.

Over the past several months, many in the industry reached out to the DOS and provided countless issues and concerns regarding the ambiguity and confusion caused by the 2019 Acts. Several lawsuits were commenced to overturn the new legislation soon after its enactment. Now, more than four months after the Initial DOS Guidance was issued, the DOS provided its latest guidance and in doing so, simply decided to prohibit a customary practice engaged in by many agents. The issue of prohibiting the payment of commission by tenants was never directly addressed in the 2019 Acts, nor was it ever meant to be their focus.

According to HGAR’s Real Estate In-Depth [see https://bit.ly/2UIcVuG], the litigation filed by the petitioners against the DOS alleges 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.”

The ‘Rule Making Process’

The DOS’s Division of Administrative Rules explains that the “rule making process” consists of “…procedures that are followed by state agencies when adopting rules…. This process is designed to ensure that the public has an opportunity to comment on, and participate in, the adoption of such rules.” [see https://on.ny.gov/2OJMVLD]. Clearly, there was no “rule making process” followed by the DOS in issuing this latest DOS Guidance. The DOS unilaterally determined that “[t]he 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…” and that this would subject a licensee to discipline.

The DOS is aware that it is customary in many areas that tenants pay the broker’s commission or fee on rentals. Yet, rather than attempt to bring the issue to light and discuss it with the real estate industry, it seemingly promulgated a new “rule” and prohibiting the practice altogether. Whether or not this was permissible will eventually be determined as part of the lawsuit, but needless to say, there was no attempt made to engage those most directly affected by such a decision, nor was any advance announcement made to the public.

Irreparable Harm Caused to the Industry

As a result of the DOS Guidance, the real estate industry was sent into a tailspin last week. On Friday, Feb. 7, both HGAR and NYSAR issued alerts to their members advising them to refrain from collecting any commissions or broker fees from tenants. Similarly, many brokerage firms did the same and informed their landlord clients that they would now be required to pay the commissions. Tenants were now informed that they no longer were required to pay commissions which, prior to the DOS Guidance, they had agreed to pay. The entire commission landscape was changed overnight.

While tenant advocate groups lauded the DOS Guidance as a huge win for tenants, those on the opposite end were blindsided, with no opportunity to be heard or to defend their position and livelihood. It was reported that landlords had already begun to instruct their agents to increase rents so they could recoup the increased expenses. Although the real estate rental market was only temporarily upended, in light of the TRO offering temporary injunctive relief, the DOS’s action has already caused irreparable harm. It has been reported that tenants are already refusing to pay commissions they were required to pay immediately prior to issuance of the DOS Guidance. It may be difficult to put the genie back in the bottle even if the DOS Guidance is ultimately invalidated by the courts.

The Rest of the DOS Guidance and Important NYSAR Advisory

It is important for real estate agents and brokers to note that the remaining parts of the DOS Guidance have not been affected by the lawsuit and should be followed. NYSAR has also provided an important Advisory [see https://bit.ly/2OLzE4X] on the DOS Guidance. Below are some of the important points highlighted in the new DOS Guidance, which could subject licensees to discipline:

No landlord’s agent or landlord may request or accept any security deposit or advance payment of rent greater than one month’s rent under any such lease or rental agreement. However, if the lease was signed prior to June 14, 2019, then the landlord or agent may continue to hold the same security deposit even if it exceeds one month.

No additional security deposits are allowed for pets or move in expenses. However, NYSAR does point out that a landlord is permitted to charge higher rent where there is a pet, but agents should note there are legal requirements and restrictions relating to service animals, etc.

If there is more than one tenant applying for an apartment, a landlord, broker or agent may charge up to $20.00 per applicant for each background or credit check.

Late fees are limited to 5% of the monthly rent amount up to a maximum of $50.00, only for payments not made within five days of the due date.

If a landlord or landlord’s agent conducts a background or credit check, the landlord or landlord’s agent must provide the tenant with a copy of same before collecting the $20.00 fee from the tenant.

A landlord or landlord’s agent can also require that a tenant use a specific company to conduct the background or credit check provided it adheres to new requirements of the law.

An agent may request a list of references from a tenant; however, the agent may not ask about any past or pending landlord-tenant actions in which the tenant is or was involved. NY RPL Section 227-f(1) provides that “There shall be a rebuttable presumption that a person is in violation of this section if it is established that the person requested information from a tenant screening bureau relating to a potential tenant or otherwise inspected court records relating to a potential tenant and the person subsequently refuses to rent or offer a lease to the potential tenant.”

Where Does the NY Rental Market Go from Here?

The changes in the law and the newly issued DOS Guidance have certainly caused an upheaval of the real estate rental market in New York. These changes will have lasting effects from both the landlord and tenant sides, but ultimately, it will be left up to the courts to determine whether the 2019 Acts and the DOS Guidance will be allowed to survive.

Needless to say, the roll out of both has caused widespread chaos and uncertainty, but regardless of whether you are an advocate of tenants or landlords, the rights of all individuals need to be taken into account, and one group’s rights should not be any less important than another’s rights. While this is all being sorted out in the courts, all individuals affected must seek the advice of counsel before embarking on a path that could lead to potential violations.