Keith Banks, seen at his Wyandanch barbershop last year, said that, on...

Keith Banks, seen at his Wyandanch barbershop last year, said that, on top of New York's high taxes and other costs, paying a rental fee would be "a slap in the face." Credit: Barry Sloan

A new state rule prohibiting landlords’ agents from collecting fees from tenants is set to be the subject of a court battle, as real estate industry groups said Friday they will sue to block it.

The Albany-based New York State Association of Realtors and the Real Estate Board of New York, a Manhattan-based industry group, said they will file a lawsuit in state court on Monday along with major brokerages to block the restriction.

The groups will ask a judge to rule that the New York Department of State, which regulates the real estate industry, has “illegally overstepped its role,” James Whelan, president of the Real Estate Board of New York, said in a statement. “The announcement of this new rule without warning has caused widespread confusion and havoc among dedicated real estate agents and the clients they serve.”

Jennifer Stevenson, president of the Albany-based trade group, said brokers “provide valuable services to the consumer and the property owners and they should be fairly compensated.”

The Long Island Board of Realtors posted a message on its website urging members to contact state officials and express opposition to the change.

Real estate agents were taken by surprise this week when the Department of State issued a clarification about legislation signed by Gov. Andrew M. Cuomo in June.

In the document, the agency said agents and brokers working for a landlord “cannot be compensated by the prospective tenant.” The change means that agents working for landlords would need to charge the landlords instead.

Tenants have expressed support for the new rule.

Keith Banks did not pay a fee to rent his apartment at Wyandanch Rising, and he said he would not be willing to pay a brokerage commission to rent an apartment. On top of New York’s high taxes and other costs, a rental fee is “a slap in the face,” said Banks, 55, a banker who owns the Sir Shave barbershop in Wyandanch.

But real estate agents said the new restriction will make it difficult for agents to make a living, and it might end up hurting tenants, too. In many cases, renters pay fees ranging from a month's rent to 15% of the annual rent, though some owners of large apartment complexes do not charge fees.   

For agents, the new rule “makes an already difficult career more difficult,” said Wendy Sanders, a Great Neck-based real estate agent with Douglas Elliman. Sanders said in some cases, she spends months working with prospective renters, driving all over Long Island.

The owners of market-rate apartments might raise rents to make up for their higher brokerage costs, and then future increases will be based off that higher initial rent, she said. It remains to be seen how it would affect the owners of rent-stabilized apartments, she said. 

“In the long term,” she said, “what they’re hoping will save the tenant money is going to cost the tenant more.”

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