A Primer on RPL 12-A
Article 12-A of the New York Real Property Law is a crucial provision that governs the licensing and regulation of real estate brokers in New York. As a key element of real property law, it outlines the legal framework for licensing brokers and real estate salespersons who facilitate real estate transactions in New York State.
The primary purpose of Article 12-A is to ensure that all individuals and entities engaged in the business of buying, selling, leasing, or renting real estate are appropriately licensed. It establishes a system of licensing that protects the public by ensuring that only qualified and trustworthy individuals are permitted to engage in real estate transactions .
Among other things, Article 12-A requires all real estate brokers and salespersons to pass a licensing examination and prove that they possess the necessary knowledge and experience to practice in the field. It also mandates that brokers maintain certain records and follow ethical and professional standards when dealing with clients and customers.
In essence, Article 12-A provides the legal foundation for the entire real estate industry in New York. It regulates the entire range of activities undertaken by real estate brokers and salespersons and provides the legal authority for the New York State Real Estate Commission to regulate the profession.
An Overview of Its Origins
Under the original form of the Real Property Law, the subject of broker commissions was not addressed. The concept of regulating brokers who engaged in the practice of law has its roots in the General Business Law in the early part of the twentieth century and those laws initially were embodied in Section 442 of the Real Property Law. In 1931, the Licensing System for real estate brokers and salesmen was enacted into law by Chapter 372 of the Laws of that year. Those provisions addressed sections 440-447 of the Real Property Law. The Broker License Law and the Article 12A provisions have been, and I believe continue to be responsive to the evolution of the real estate industry in an effort to provide a manageable and workable framework within which to operate.
The 1980’s was another very busy time for the purchase and sale of residential real estate. A great number of NEW real property brokers entered the profession to satisfy the market demand and these brokers, along with existing practitioners, also sought the comfort and protection of a written commission agreement for substantiation of the legal, contractual, and ethical aspects of the transaction from listing through closing. Article 12-A was again amended, in 1986, to delete the requirement that all commission agreements in such transactions, whether written, oral, or otherwise, be filed with the Department of State; to exempt real estate licensees acting as general and limited partners of partnerships from licensing requirements when acting as brokers or salespersons; to provide that persons receiving referral fees from brokers be required to be licensed, or exempt; to prohibit persons from acting as real estate brokers or real estate salesmen without having been issued a current license; and to provide that when two or more brokers are licensed to act as a real estate broker, they may designate one of their members with the authority to receive service of legal process on their behalf. The 1986 amendment also more closely aligned Article 12-A with its federal counterpart, the Real Estate Settlement Procedures Act (RESPA).
In 1991, further amendments to the text of Article 12-A added additional exemptions to the registration requirement for instructors at accredited real estate schools and schools that offer real estate programs to colleges and universities which are accredited by the State Board of Regents, and eliminated the term "commercial broker", which had been used to describe an individual or entity authorized to engage in the business of a real estate broker as part of a corporation or partnership. In 1993 Article 12-A was amended again to require that certain forms utilized in the residential rental property arena be retained by the owner or manager for a longer period of time, to conform to General Obligations Law requirements. And in 1998 yet another amendment deleted the obsolete requirement for Oral Consent to Representation to be signed by a seller and/or buyer at the time that the licensee commenced discussing the sale/purchase of real estate with a residential buyer or seller.
Licensing Under RPL 12-A
Article 12-A contains a catch all section at §440-a(5) which provides that, in addition to the other provisions of the article, "every person who engages in any activity related to a mortgage loan, mortgage loan origination or mortgage loan servicing shall be licensed pursuant to this article unless exempt under this article." The various licensing requirements are explained in greater detail below.
Mortgage Brokers
Any person, partnership or corporation who "takes applications or offers or negotiates terms of a residential mortgage" must obtain a mortgage broker license. Residential mortgages are defined as loans primarily for personal, family or household use.
A 10-hour pre-licensing course is required for any principal or branch office manager and a 20-hour course is required for any employee loan originator. One must also pass an exam given by the Nationwide Mortgage Licensing System (NMLS) and register with NMLS. There is an application and fingerprint-based background check as well as an application fee. There are also continuing education requirements.
Mortgage Bankers
Mortgage bankers are those people or entities who "mortgage, offer, negotiate or arrange terms for a residential mortgage" in larger amounts than what they are usually capable of using their own funds. In addition to a mortgage broker’s license, a mortgage banker needs to also apply for a mortgage banker license.
A 10-hour pre-licensing course is required for the branch office manager and a 20-hour course is required for other mortgage bankers. Again one must register with NMLS, take an exam and undergo a background check. A mortgage banker also needs a law firm opinion from a NY attorney which should be accompanied by a sample commitment letter, a sample note and mortgage, a settlement statement, and a letter on firm letterhead on the firm’s letterhead attesting to the firm’s preparation of the relevant documents.
Mortgage Loan Originators
A person who "for or in anticipation of compensation or gain takes a residential mortgage loan application, offers or negotiates terms of a residential mortgage loan, or negotiates or performs activities relating to closing such residential mortgage loan" must obtain a mortgage loan originator license. Residential mortgages are defined as having a residence as collateral security. On the other hand, a residential mortgage loan does not include a revolving credit account secured by a dwelling or any extension of credit relating to a reverse mortgage.
The licensing requirements for a loan originator are the same as those for a mortgage banker, namely: registering with NMLS, taking a pre-licensing course, passing an exam, and completing a fingerprint-based background check. There is also an application fee.
Servicing
Servicing of a residential mortgage is defined as "receiving or collecting of funds for the owner or holder of a residential mortgage loan" or "the right or obligation to manage and administer a residential mortgage loan or mortgage loan servicing, including the supervision of any third party servicer engaged to perform such activities on behalf of the owner or holder." The licensing requirements for servicers are similar to the licensing requirements for mortgage bankers and brokers.
The Bottom Line
It is obvious that the systems for mortgage banking, brokering, and servicing in NY has been overhauled significantly by Article 12-A. The result is that many mortgage industry participants must now be licensed in numerous different areas thus adding to the expense of mortgage banking in the state.
Key Terms and Conditions
The central tenets of Article 12-A of the Real Property Law can be boiled down to three basic obligations that must be fulfilled by any individuals or companies looking to engage in a type of company known as a "brokerage."
- Failure to provide an agency disclosure notice. For all residential real estate transactions, whether a sale or a rental, agents are required to provide a disclosure notification to the client detailing their agency relationship. If you have worked with a New York City real estate agent then this is probably not the first time you have heard of such a notification. The requirement does not end there, however, for real estate agents. They must also ensure that this written agency notification is provided to any potential buyers or tenants who are not represented by an agent.
- License required for all participants. In order to receive payment from a buyer, seller, landlord, or tenant, anyone who receives compensation for a "brokerage" must have a license as an individual broker or as a principal broker of a corporation, limited liability company (LLC), or other business entity that nets a fee, commission, or other compensation, from others. While this obligation has likely always been present, the enactment of Article 12-A offers a new level of required diligence for entities and individuals engaged in real estate.
- Keeping a register of transactions: The final obligation that is set forth under Article 12-A is a record-keeping requirement. All brokerage entities are now required to keep a "register… showing the dates of the transactions, the parties thereto, the street address of the property involved, the type of interest to be acquired or disposition, the terms and conditions thereof and the consideration for such acquisition or disposition, and the source and itemization of the compensation received in relation to each such transaction." As a practical matter the retained information may be more cumbersome than what may have been kept previously, but it is a compliance issue worthy of mention.
Penalties for Non-Compliance
In addition to the obligations imposed on the broker under the Article 12-A, Article 12-A contains a "remedy specific" section imposing liability on any broker or salesman who violates a provision outlined in Article 12-A. The following are commonly assessed monetary penalties: Another remedy available to the New York State Attorney General under Article 12-A is that of injunctive relief, i.e., an injunction restraining the respondent from violating the provisions of Article 12-A, the regulations promulgated thereunder, or the orders of the Secretary of State. Further, the Attorney General may request that a respondent be enjoined from conducting or continuing to conduct any business as a real estate broker, salesman, or branch office until that person is duly licensed as a real estate broker or salesman and the respondent pays any fines assessed. In lieu of proceeding for the imposition of fines or for injunctive relief , the Department may levy a disciplinary action with respect to the violation of a provision of Article 12-A on the part of any broker, salesman, or branch office. The majority of prosecutions brought by the New York State Attorney General under Article 12-A stem from (a) consumer complaints, (b) complaints from competitors, (c) investigative or monitoring actions or (d) information obtained by the Department as a result of its examination of records and files. These can range from minor violations to the charging of an excessive commission charge or failure to acknowledge receipt of a deposit check. Charges brought before the Executive Secretary of the Department of State will be decided based upon a review of the papers, without a hearing. Such charges not decided in favor of the complainant may be appealed to a hearing officer for an evidentiary hearing, and an opportunity to cross examine all witnesses and be heard on the issues.
Implications for Real Estate Professionals
This new provision will have a significant impact on real estate professionals and their multi-faceted businesses. First, an individual with a 20 percent or greater ownership interest in the business entity must be licensed as a real estate broker in order to provide a real estate service. This includes situations where an unlicensed person is working alongside a licensed person, in which case both need to be licensed to avoid discipline.
Second, the change applies whether the service is on an exclusive basis or not. Thus, even if the service is provided to a client upon that client’s request, and not under a written "exclusive" agreement, this statute still applies.
Third, the real estate service contract (whether with a buyer, seller or tenant) must state whether the company or any owner of the company will act as agent for the client.
Fourth, the requirement that an agent represent the client is not alleviated by a statement in the service contract that the agent, rather than the company, is acting as the agent. Under 12-A, the agent is acting as the company.
Fifth, the timing of the new requirements under 12-A is ambiguous. Will the Department of State require the licensed broker to provide disclosure statements to all her clients as of the effective date of the amendments, despite the fact that owners of the business entity may not be required to be licensed until six months after the amendments become effective? Stay tuned for further guidance from the DOS regarding applicable dates for compliance with this law.
Sixth, a frequently asked hypothetical question is whether an individual’s failure to comply with 12-A’s new mandated disclosures will oust the protections of the Statute of Frauds.
Seventh, I believe there will be an increased demand for limited liability companies to operate real estate brokerages. However, some of the real estate companies that were once set up as LLCs to maximize the impact of 12-A, are now being formed as single member LLCs to avoid the onerous reporting requirements related to the new ownership, agency and disclosure requirements and the risk of losing business opportunities as a result of the new organization within six months.
Eighth, the law could have far-reaching effects on multi-listed real estate boards, their member businesses and state-wide lobbying groups as they become more aware of the dangers created by the new law in its current form.
While some provisions of the new legislation are good for consumers or support changes in the practice of real estate, the fact that the DOS had no input on the law is very troubling. For example, this bill was pushed through without public hearings, and the DOS was blind-sided by the bill’s sponsors, who then turned their backs on the agency they used to affect their own legislative objectives.
Recent Cases and Developments
Article 12-A and its accompanying regulations have been the focal point of New York’s surging rent deregulation efforts in recent years. Fueled by a mid-2011 4-3 Court of Appeals decision that invalidated the "low income" requirement for certain deregulation practices, the New York State legislature has acted to block deregulation. New York State established new income limits in 2011 at $200,000 for a two consecutive year renovation income average (up from $175,000), and $500,000 for a deregulation income ceiling (up from $500,000). Further increases occurred in 2012, 2015 and 2019.
The real estate industry turned back a lawsuit in 2012 that sought a court interpretation that would permit the continued practice of vacancy deregulation for apartments where a "suitable legal rent" was never established because the apartment was occupied prior to 1974. The suit sought a declaration that such apartments were not exempt from regulation and should not be subject to vacancy deregulation. Such an interpretation would have rendered Article 12-A moot for all apartments subject to prior rights under the Emergency Tenant Protection Act of 1974 ("ETPA") (including most cooperative apartments in New York City) and effectively granted unwarranted windfall to these tenants.
In 2018, in Hudson Realty LLC v. The City of New York, et al., 88 N.Y.S.3d 568 (Sup. Ct. N.Y. Co. 2018), Vacation Resorts Subscription Series 2017, Inc. v. Loft Planning Board of Review, 91 N.Y.S.3d 665 (Sup. Ct. N.Y. Co. 2018), Big Apple Metal Prods. Co., v. B & P Indus. Erectors & Scaffolders Corp., 91 N.Y.S.3d 569 (Sup. Ct. Bronx Co. 2018) and Seaboard Sur. Co. v. St. Clair, 92 N.Y.S.3d 86 (Sup. Ct. Bronx Co. 2018), the Appellate Division, First Department also dealt with Article 12-A. In Hudson, the Appellate Division affirmed the trial court’s rejection of the landlord’s challenge to the constitutionality of the existing statutory framework and the possibility of creating a landlord/purchaser exemption. In Vacation Resort and Big Apple, the Appellate Division affirmed the trial court’s ruling against the plaintiffs and dismissed their claims. Seaboard involved a challenge to the constitutionality of Article 12-A, which the Appellate Division affirmed. The majority found that the Legislature’s amendments to EPTA in the 2015 Housing Stability Legal Assistance Program, N.Y. City Administrative Code § 26-521, et seq. were not conflict preempted by the Rent Stabilization Code. The majority held that the program should be read together with Section 26-511 of EPTA, particularly subdivision (d). The minority deemed the EPTA amendments conflict preempted. The dissent stated that there is no room for a legislative enactment requiring that a court award attorneys’ fees, where the Code clearly provides courts with discretion to grant or deny attorneys’ fees. The dissent further opined that the amendments do not provide a rational basis for the April 1, 2016 deadline because they do not require tenants to present evidence of coverage for legal assistance.
Conclusion
In summary, Section 12-A of Article 12 governs the activities of real estate brokers in New York. It codifies the licensing requirements and qualifications for individuals looking to become brokers or associated brokers. This Article 12-A was amended in 2019 to extend the statute of limitations applicable to the filing of third party claims for commissions against sales brokers. The State Law also continues to impose certain duties and obligations upon brokers as part of their dealings with customers (i . e., board packages) that go beyond those in a typical contractual setting.
These laws and rules governing the practice of real property law are incredibly important for buyers, sellers and broker representatives alike to be knowledgeable about in order to ensure there are no surprises either as to the appropriate parties to commence an action or as to the minimum duties a broker must follow.