Judge Rules HSTPA Doesn't Prohibit Broker's Fees

An Albany judge recently declared New York state regulators’ attempt to ban tenants from paying landlords’ broker fees an “error of law.” The decision comes more than a year after the Department of State issued guidance banning the practice. That guidance offered regulators’ interpretation of the Housing Stability and Tenant Protection Act (HSTPA), which became law in June 2019.

The backdrop: On Jan. 31, 2020, state regulators issued guidance on HSTPA. The memorandum of guidance issued by the Department of State was 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 guidance suggested that it was illegal for prospective renters to pay a broker if that broker is acting on behalf of a landlord. The Department of State cited 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 reaction: Within days of the regulators’ guidance being issued, the Real Estate Board of New York and the New York State Association of Realtors filed for and were granted a temporary injunction. However, the pandemic dampened the rental market activity soon after and many owners began to forgo the practice of charging tenants broker fees to fill apartments as the city emptied out.

The bottom line: On April 9, Albany County Judge Shannon Kushner ruled against the guidance, saying that HSTPA does not allow the Department of State to prohibit brokers from collecting fees from renters. "The prohibition was intended to apply to application fees, background check fees, credit check fees, and any other fees imposed as a pre-condition to negotiations for entry into a lease agreement," the judge said in her ruling. "No reference is made to 'broker's commission' in the statute." Kushner said that if lawmakers intended to eliminate broker’s fees, the act “would have expressly stated it,” saying the guidance the Department of State issued last year to brokers was an “error,” and “abuse of discretion.”

What to watch: The Department of State, the body that gave the initial guidance that broker fees were illegal in 2020, may appeal the judge's decision. And lawmakers could also introduce a new law that is explicit about banning broker fees.