Did the Department of State Overstep with Respect to Broker Fees?

By Jacqueline Handel-Harbour, Partner SDK Heiberger

It wasn’t an issue for over six (6) months, after enactment, until the Department of State (DOS) had to offer its “guidance,” essentially its interpretation, in late January 2020 within a memorandum on its website, that put brokers and landlords alike in a tizzy. As part of the recently enacted Housing Stability and Tenants Protection Act (HSTPA) Of 2019 under Part M thereof, a new section of the Real Property Law was added, Section 238-a, with respect to residential dwelling units that 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 except background checks and credit checks . . .”

The DOS has taken it upon themselves to expand the law in its interpretation to provide that this Section prohibits a landlord’s agent from being compensated from the prospective tenant for “bringing about the meeting of the minds.”  The DOS argues that a broker fee collected from a prospective tenant would be a “payment, fee, or charge before the beginning of the tenancy” subjecting the agent to discipline. However, nowhere in the statute is a broker or agent mentioned. 

Up in arms, the major players in the field, Douglas Elliman, The Corcoran Group, Halstead Real Estate, REBNY, etc. joined forces and brought an Article 78 in Supreme Court – Albany against the DOS.  Since February 2020, the Petition has been pending, with various adjournments.  Fortunately, Judge Mackey, in Supreme – Albany, issued a stay enjoining the DOS from enforcing its interpretation or disciplinary action against agents or brokers who demand or collect a fee from the tenant pending a determination of the case.

If the brokers lose this fight, it will be devastating for the NYC Real Estate Community since the brokers work for the tenant to find the tenant a new home and have been traditionally compensated by the tenant in the form of a commission.

The Brokers have argued to the Supreme Court that the DOS issued the memorandum in violation of the State Administrative Procedure Act (SAPA), whereas, DOS claims that its guidance is just that guidance; it is neither a rule and does not implement a law, rather it is an interpretation and, therefore, procedurally the Petition should fail and/or fail for not following other required procedural channels before seeking judicial review.

Statutes are to be enacted by the Legislature and interpreted by the Courts. So, has the DOS overstepped? Tune in November 6, 2020, the next court date.