(Bloomberg) – A major real estate organization and other industry groups have asked federal judges to block New York City law that requires landlords to pay for brokers they hire, saying the rules that will take effect next month will increase rent and make it harder for low-income tenants to find housing.
The New York State Real Estate Commission and others, including the New York State Association of Realtors, sued the city in December, forcing property owners to pay for brokers instead of giving those fees to tenants, a long time that has been with tenants for decades.
At a court hearing Friday, attorneys for the groups urged U.S. District Judge Ronnie Abrams to stop enforcing the rules as the lawsuit proceeds. The ban was passed by the city council in November and is scheduled to take effect on June 11. The judge did not say when she would make the decision.
Since landlords often sign exclusive contracts with brokers to list their property and find tenants, they “seriously, permanently hinder the listing agreement between brokers and landlords”, violate the constitution, state laws, and private contracts, and attorneys say the judge violated the private contract.
Szyfer said the law would also violate the free voice rights of landlords and brokers, who publish real estate listings and then seek compensation for listing services from tenants.
Two attorneys in the city defended the law. This will help solve the city’s housing crisis by making apartments more affordable and easier to move renters to better real estate without paying thousands of dollars to brokers they don’t have the option.
The current rule is “causing low and middle-income people, especially people of color, which leads them to leave New York,” a lawyer in the city told the judge.
New York City renters pay an average of nearly $13,000 in apartments with broker fees to secure the property’s keys, which often include thousands of dollars in fees hired by landlords to ensure tenants secure tenants’ brokers. On the list on Streeteasy, about half of broker fees range from one month’s rent to 15% of annual rent.
The city's attorneys believe the broker's expenses add huge costs to families who have already paid thousands of dollars upfront and are a large part of their housing income. The Furman Center of New York University, which studies housing, community and urban policies, found that more than half of urban families spend 30% or more on rent.
New York and Boston are the only major cities in the United States, and they usually pass on rental broker fees to tenants even if they don’t hire rent.
But the industry believes that the law will make rent-stable apartments too expensive to operate and force landlords to raise rents to cover broker fees. They believe that when commissions are paid separately, tenants usually pay less for the lease term. The landlord claims that some tenants have refused to pay broker fees even if the law has not yet taken effect.
The lawsuit says the city is just making brokers evil, the bill violates their constitutional right to freedom of speech because they don’t allow them to publish public lists and the state has regulated brokers. It also argued that the law violated the contractual terms of the U.S. Constitution and interfered with the agreement between landlords and brokers.
“New York City brokers have built their business around reasonable expectations that they can charge fees from tenants under conditions prohibited by the bill,” the organizations said in court documents. “If the bill is allowed to take effect, brokers will need to remake the business without publishing public listings, attracting tenants willing to fight them as tenant-side brokers. Or they have to compete for a limited landlord-side exclusive listing agreement. Some will fail and drive it.”
In February 2020, just before the first Covid Lockdown put the rental market close to a halt, there was a state-approved ban on brokers’ fees. By the time the demand for renters began to rise the following year, the court had refuted state law, and brokers were eager to take advantage of it quickly becoming a very competitive market, with prices continuing to rise.
The law could dramatically change the dynamics of the city’s competitive rental market, with prices soaring since the 2021 pandemic restrictions. The median rent for Manhattan is $4,495 in March, just $5 from last month’s record, achieved by Aldaiser Miller Samuel Inc. and Douglas Inc. and Douglas Elliman. Prices have also been recorded in external administrative regions.
Tenant advocates believe that huge upfront costs are unnecessary obstacles for many tenants who want or need to move. While low-income New Yorkers are more likely to face struggles, no-cost units are often in modern buildings. In the long run, the counters of residential brokers in New York City will be much more expensive for tenants to cancel, and landlords increase their marketing costs to rent.
In March, 57.3% of the Streeteasy listings were about 54.2% higher than last year’s fees.
The case is New York v. New York City's Real Estate Commission, U.S. District Court, South District (Manhattan), New York, No. 9678.
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