REBNY Challenges Department of State’s Memo Prohibiting Broker’s Fees

Screen Shot of Department of State’s Rent Law Memorandum. Click the image to view the full memorandum.

Real estate community in state of confusion over 2019 Rent laws. On February 10, 2020, the Real Estate Board of New York Inc. (“REBNY’”), the New York State Associations of Realtors (“NYSAR”) and a host of residential real estate brokerages were granted a temporary restraining order, blocking the New York State Department of State’s guidance on broker commissions. The TRO comes in conjunction with their Article 78 filing seeking to invalidate the memorandum’s entire section prohibiting landlord’s brokers from collecting commissions from prospective tenants.

On February 4, 2020, the Department of State issued an updated memorandum of guidance on the Statewide Housing Security and Tenant Protection Act of 2019. The act was signed into law on June 14, 2019, by Governor Andrew Cuomo. Read CityLand’s prior coverage of the rent reform law here. The act itself provides statewide changes to New York’s residential rent laws. The new laws have been generally understood to provide more protections for residential tenants. Protections include $20 maximum application fees per person, the return of security deposits within fourteen days of vacating the premises, restrictions on late rent fees and preventing landlords from collecting more than one month’s rent as an advance or security deposit. Also codified, is a provision that landlords can no longer refuse to rent or offer leases to potential tenants based on past or pending landlord-tenant actions.

The Department of State memorandum of guidance essentially serves as a FAQ document. Question 5 of the document asked whether a landlord’s agent could collect a broker’s fee from a prospective tenant. The Department of State cited NY RPL §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 a landlord’s brokers could not collect a broker’s fee from a prospective tenant, and could be subject to discipline if they did so.  Upon the issuance of the memorandum, with the guidance that broker’s fees cannot be collected by a landlord’s agent, REBNY reports “widespread confusion and massive disruptions across New York’s rental markets.” The filings cite public uncertainty about the law and inconsistencies with landlords and prospective tenants paying all or no broker’s fees. Based on the confusion and potential for job loss and economic harm to those in the real estate and brokerage communities, REBNY filed an Article 78 petition and requested a temporary restraining order. Hon. L Michael Mackey of the Albany County Supreme Court, granted the temporary restraining order. The order prevents legal action against brokers who collect a fee, until the petitioners full injunction can be argued on March 13, 2020.

Article 78

REBNY is challenging the Department of State’s guidance in Question 5 of the memorandum. REBNY’s Article 78 petition hinges on two key causes of action. First, that the Department of State was in violation of the State Administrative Procedure Act (“SAPA”) when they issued the Question 5 determination. Second, the determination is on its face contrary to the law.

1. SAPA Violation

The Department of State memorandum claims it is merely meant to be used as guidance, but REBNY claims it was in effect publishing a new rule.  By promulgating a new rule, REBNY asserts that the Department of State “usurped the role of the Legislature and that its actions constitute an illegal exercise of legislative power.” 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 stringent procedures. The Department of State completed none of which when publishing the memorandum.

In support of this contention, REBNY points out that the enactment of the new law did not itself change the longstanding business practice of tenants paying brokers fees. The issuance of the Department of State memorandum, nearly 7 months after the law went into effect, actually created the change.  REBNY cites a further language in Question 5 that provides a threat of discipline for collecting a broker’s fee. REBNY claims that a threat of discipline, not included in the text of the statute, effectively create a new rule.

2. Contrary to the Law

Even if the court finds that the Department of State did not create a new rule, the Department of State’s interpretation of the law is incorrect and therefore invalid. On its face, NY Real Property Law §238(a)(1), provides “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.” REBNY points out that neither the plain language of the statute nor the statute’s legislative history make reference to a landlord’s agent, a real estate broker or a real estate broker’s fee. Only landlord, lessor, sub-lessor or grantor are mentioned in the text. Therefore, REBNY argues that the Department of State’s interpretation is incorrect and in violation of the law. If the legislature intended to include a broker or agent of the lessor, REBNY claims the legislature would have included it, as they included “or any agent of the lessor” in the immediate preceding section of the statute.

In support that Question 5 was contrary to the law, REBNY cites another memorandum that was currently posted on the Department of State’s General Counsel’s office website. The second memorandum provides “It is important to understand that, even if the broker is representing the landlord, in most transactions the tenant is responsible for paying the broker’s commission.” REBNY purports that language clearly contradicts the February 4th, 2020 memoranda and evinces Question 5’s deviation from the law and accepted practices in the industry. REBNY argues the conflicting message highlights why the DOS memo is erroneous and arbitrary, and further why Question 5 should be nullified and voided.

In a joint statement by REBY President James Whelan and NYSAR President Jennifer Stevenson “The entry today by the Court in Albany of an order temporarily halting the implementation of new York State Department of State’s (DOS) interpretation of the Statewide Housing Stability and Tenant Protection Act means that thousands of hardworking, honest real estate agents across New York State can do business in the way they did prior to last week’s DOS memo without fear of discipline by the DOS. We look forward to ultimately resolving this matter in Court in the weeks ahead. Meanwhile, we appreciate all of our members’ support and vigilance during this period of upheaval and confusion. We also want to thank Claude Szyfer and his team at Stroock & Stroock & Lavan LLP for their tireless efforts on this matter.”

CityLand reach out to the Department of State and is waiting for comment.

Again, the parties will return to court on March 13, 2020 to determine whether the injunction was justified. Follow CityLand as this story continues to develop.

By: Jason Rogovich (Jason Rogovich is the CityLaw Fellow and New York Law School Graduate, Class of 2019)




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