(Bloomberg) — A key real estate organization and other industry groups asked a federal judge to block a New York City law that requires landlords to pay fees for the brokers they hire, saying the rule that goes into effect next month will increase rents and make it more difficult for lower-income tenants to find housing.
The Real Estate Board of New York and others, including the New York State Association of Realtors, sued the city in December over the rule, which forces property owners to pay for their brokers instead of passing those costs to their tenants, a longstanding practice that has perturbed renters for decades.
During a court hearing Friday, lawyers for the groups urged US District Judge Ronnie Abrams to halt to enforcement of the rule while the lawsuit proceeds. The ban, which was passed by the city council in November, is scheduled to take effect on June 11. The judge didn’t say when she’ll reach a decision.
Because landlords often sign exclusive contracts with brokers to list their properties and find tenants, the law “severely and permanently impinges on listing agreements between brokers and landlords,” in violation of the Constitution’s bar against state laws impairing private contracts, Claude Szyfer, a lawyer for REBNY, told the judge.
The law also would violate the free-speech rights of landlords and brokers who publish real estate listings and then seek to receive compensation from tenants for the cost of the listing service, Szyfer said.
Two lawyers for the city defended the law. They said it will help address the city’s housing crisis by making apartments more affordable and easier for renters to move to better properties without having to pay thousands of dollars to brokers they didn’t choose.
The current rule is “causing low and middle-income people — especially people of color — it is causing them to leave New York,” one of the city’s lawyers told the judge.
New York City renters who settle on apartments that have broker fees pay an average of nearly $13,000 to secure the keys to a property, which frequently includes thousands of dollars in fees for brokers hired by landlords to secure tenants, according to an analysis by StreetEasy released last year. Roughly half of the listings on StreetEasy come with broker fees, which can range from one months’ rent to as much as 15% of annual rent.
Lawyers for the city argue that the broker fees add a substantial cost to families who already are shelling out thousands of dollars upfront and a substantial portion of their income on housing. New York University’s Furman Center, which studies housing, neighborhoods and urban policy, has found that more than than half of all city households spend 30% or more on rent.
New York and Boston are the only major American cities where rental broker fees are commonly passed to tenants even if they didn’t hire them.
But the industry contends the law will make rent-stabilized apartments too costly to operate and force landlords to raise rents to cover the cost of broker fees. They argue tenants usually pay less over the life of a lease when commissions are paid separately. Landlords claim some tenants already are refusing to pay broker fees even though the law hasn’t taken effect yet.
The suit alleges the city is simply villainizing brokers and the act violates their constitutional right to free speech by not allowing them to publish open listings, and that the state already regulates brokers. It also contends the law violates the contracts clause of the US Constitution by interfering with agreements between landlords and brokers.
“New York City’s brokers have built their businesses around the reasonable expectation that they can collect fees from tenants under conditions prohibited by the act,” the groups said in a court filing. “If the act is permitted to go into effect, brokers will need to retool their businesses to — without publishing an open listing — attract tenants willing to engage them as tenants-side brokers. Or they must compete for a limited number of landlord-side exclusive listing agreements. Some will fail and be driven from the market; all will need to spend potentially unrecoverable sums to adapt to the new regime.”
A state-approved broker fee ban was briefly in place in February 2020 just before the first Covid lockdown brought the rental market to a near halt. By the time renter demand began rising the next year, a court had struck down the state law and brokers were eager to capitalize on what quickly became a very competitive market where prices have continued to rise.
The law could dramatically change the dynamics of the city’s highly competitive rental market, where prices have soared since pandemic restrictions began easing in 2021. The median Manhattan rent was $4,495 in March, just $5 short of the record reached the previous month, according to appraiser Miller Samuel Inc. and Douglas Elliman. Prices have also set records in the outer boroughs.
Tenant advocates argue that the large upfront costs are an unnecessary impediment for many renters who want or need to move. While low-income New Yorkers are more likely to face that struggle, no-fee units tend to be in pricier modern buildings. The city’s residential brokers counter that eliminating the fees will be much more expensive for tenants in the long run, with landlords adding their marketing costs to rents.
In March, 57.3% of StreetEasy’s listings were no fee, up from roughly 54.2% from last year.
The case is Real Estate Board of New York v City of New York, 24-cv-9678, US District Court, Southern District of New York (Manhattan).
More stories like this are available on bloomberg.com
