New York real estate industry appeals broker-fee case ruling
Real estate groups are challenging a ruling by a federal judge that allowed New York City to begin enforcing a new law requiring landlords to cover broker fees
(Bloomberg) -- Real estate groups are challenging a ruling by a federal judge that allowed New York City to begin enforcing a new law requiring landlords, rather than their tenants, to pay fees for hiring listing brokers.
US District Judge Ronnie Abrams on June 10 denied a request by the Real Estate Board of New York, the New York State Association of Realtors and others to pause the law while their lawsuit proceeds. The ruling was another setback for the industry’s legal fight against the measure, which went into effect on June 11.
The groups on June 12 filed an appeal of Abrams’ decision to the US Court of Appeals for the Second Circuit. The City Council adopted the measure in November to end the longstanding practice of tenants being forced to pay costs incurred by landlords to hire the brokers who list their properties, which can add thousands of dollars to housing costs. The real estate industry argued the new law branded brokers as villains and would force landlords to raise rents to cover the costs of hiring them.
New York City renters who settle on apartments that have broker fees pay an average of almost $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 40% to 50% of listings on StreetEasy have required lease signers to pay the commissions of agents hired by their new landlords, which have typically ranged from one month’s rent to 15% of the annual bill.
The Real Estate Board contends that the law, known as Fairness in Apartment Rental Expenses Act, or FARE Act, interferes with exclusive agreements that landlords sign with brokers to list their properties and find tenants, in violation of the Constitution’s bar against state laws impairing private contracts. It also argues the law violates 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.
The industry’s lawsuit alleges that the law will make rent-stabilized apartments too costly to operate and force landlords to raise rents to cover the cost of broker fees. The industry says tenants usually pay less over the life of a lease when commissions are paid separately, and that some are already refusing to pay broker fees even though the law hasn’t taken effect yet.
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 cost of new Manhattan leases was $4,571 in May, reaching another all-time high, according to appraiser Miller Samuel Inc. and Douglas Elliman. Prices have also set records in the outer boroughs.
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).
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