Judge Temporarily Blocks State Guidance Barring Brokers' Fees

Recently, a New York State judge temporarily blocked the state’s guidance that had effectively barred tenants from having to pay a broker fee. The judge’s order prevents legal action against brokers who collect a fee, until both sides can present their case on March 13, 2020.

On Feb. 4, the Department of State issued an updated memorandum of guidance on the Statewide Housing Security and Tenant Protection Act of 2019. The memorandum of guidance is formatted as a FAQ document, and Question 5 asked whether an owner’s agent could collect a broker’s fee from a prospective tenant.

The Department of State cites NY Real Property Law §238-a(1)(a), which states “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 Department of State interpreted this language to mean that an owner’s brokers couldn’t collect a broker’s fee from a prospective tenant, and could be subject to discipline if they did so.

The Real Estate Board of New York (REBNY), among other real estate groups and firms, are challenging the Department of State’s guidance in court. They’re arguing that although the Department of State memorandum claims that it’s merely meant to be used as guidance, the Department of State has effectively published a new rule. If the court finds that the Department of State created a new rule, Section 202 of the State Administrative Procedure Act, which governs administrative rule-making, generally requires notice, public comment, and compliance with other procedures.