LANDLORDS CAN’T REQUIRE APARTMENTTENANTS TO PAY THE BROKER’S FEE
Landlords have traditionally required tenants to pay the broker’s fee when they rent an apartment, and tenants have generally expected to incur that expense. But this standard practice in the rental housing industry is now illegal in Massachusetts as the result of an amendment to the state law governing the registration of real estate brokers and salespeople. That amendment, which took effect August 1, prohibits landlords from requiring tenants to pay the fee for the landlord’s broker.
Although this is being characterized as significant change, we have argued for a long time that requiring tenants to pay the broker’s fee violated the Massachusetts Security Deposit Law (M.G.L. c. 186 § 15B), which allows landlords to charge tenants in advance for only four items: The first month’s rent, the last month’s rent, a security deposit and the cost of changing the locks on the apartment. The amendment explicitly makes improperly charging a broker’s fee a violation of the Massachusetts Security Deposit Law. This doesn’t really change the existing law, but it will change industry practice by ensuring that landlords comply with the limits the law imposes on what they can require tenants to pay in advance.
Lawmakers in many states are reportedly considering similar bans on the payment of broker fees, aimed at increasing transparency in leasing transactions and reducing rental costs, but Massachusetts is the first to enact one. New York City, which enacted a similar measure a few months ago, was the first city to do so.
There are no exemptions to the Massachusetts law; it applies equally to landlords who rent hundreds of units and those who rent only one. Landlords cannot:
Require tenants to pay the fee for a broker the landlord has hired;
Make leasing the unit contingent on the tenant’s agreement to pay the broker’s fee;
Add the broker’s fee to the stated rent;
Characterize the broker’s fee as something else – administrative fee, finder’s fee, or leasing fee, for example. Any up front charges beyond those permitted by the Security Deposit Law violate that statute.
Tenants can pay the broker’s fee only if they hire the broker and if the broker represents them exclusively and works exclusively in their interests. An explanation of the law on the state’s web site emphasizes that brokers hired by a tenant may not “violate any duty of loyalty to the prospective tenant by, for example, only showing tenants properties owned by landlords with whom they have an existing relationship, or by representing the landlord’s interests in lease negotiations.”
Brokers who represent tenants must give them a written disclosure affirming that relationship.
The new law isn’t retroactive. Landlords who executed a lease prior to August 1 can require the tenant to pay the broker’s fee; for leases executed after August 1, however, the fee would be illegal, and the penalties are significant. Because charging an improper fee is also considered an “unfair and deceptive trade practice” under the Massachusetts Consumer Protection Act (M.G.L.93A), landlords could be required to pay triple the amount charged plus the tenant’s legal fees and court costs.
Tenants who are aware of the law may challenge the broker’s fee up front if landlords attempt to impose it, but the issue is most likely to arise in the context of an eviction. A tenant’s attorney will almost certainly ask whether the tenant was required to pay a broker’s fee. If the answer is yes, the tenant will raise the illegal charge as a defense, in which case the eviction could be denied and the landlord may not be able to regain control of the apartment and/or otherwise evict a tenant they may have had good reasons to evict.
Adding financial insult to this legal injury, not only will the landlord not be able to regain control of the unit or recover unpaid rent, he/she will probably owe the tenant money. If a tenant who owes $2,000 in back rent improperly paid a $2,000 broker’s fee, the landlord will owe the tenant $4,000: That is $6,000 (triple the $2,000 charged illegally) minus the $2,000 the tenant owes, plus potentially several thousand dollars more for the tenant’s legal fees.
Although the law targets landlords, brokers face potential liability as well.
Tenants who sue landlords for improperly charging the broker’s fee will no doubt name the brokers involved in their suit as well, possibly requiring the brokers to pay a portion of any damages assessed against the landlords. Brokers who violate the law may also be fined and have their license suspended or revoked. For brokers and landlords, the incentives for compliance are significant.
It is too early to assess how the law will affect the rental housing market, but higher rents certainly may be among the consequences. The law prohibits landlords from adding broker’s fees as a surcharge to the rent, but it does not prevent them from increasing their rents for other reasons – to cover rising operating and maintenance costs, for example, or to increase their profit margins. Market conditions may limit how much landlords can raise their rents, if at all, but this new law will not.
The law may have less of an impact on larger property owners, whose buildings come up quickly in Google searches for apartments, than on smaller property owners, who may be more reliant on brokers to find tenants for the one or two or three units they are renting. I’m thinking particularly of condominium owners who purchased one or two investment units or who have encountered financial problems requiring them to rent the unit they occupy.
Some of these owners may decide to find and screen prospective tenants on their own, forgoing the use of brokers or property managers in order to avoid incurring the broker’s fee.
I’d file this firmly under “penny-wise-pound-foolish” or “high risk-low reward.” Tenant protection laws in Massachusetts are extensive and complicated; compliance is difficult and the penalties for violations are severe, potentially far more costly than the broker’s fee landlords may be trying to avoid.
For landlords of all sizes, the best way to avoid paying the broker’s fee is by working harder to retain the good tenants you have. If your existing tenants don’t move, you won’t incur any of the expenses or assorted headaches involved in replacing them.
For more information regarding landlord tenant matters please contact Dillon Brown directly.