Legal Aspects of Real Estate in California

INTRODUCTION

This course is organized in such a way as to acquaint you with a very broad spectrum of the legal aspects of real estate, especially as the real estate business is practiced in California. Special emphasis is given to the so-called Real Estate Law as found in the Business and Professions Code of California, as well as: The Regulations of the Real Estate Commissioner, the Subdivision Map Act, the Subdivided Lands Law, and the Administrative Procedures Act. These codified statutes and regulations cover such diverse matters as licensing law, map laws for subdivisions, and laws designed to prevent fraud and misrepresentation. They are the heart of California real estate law.

In addition, you will be acquainted with legal doctrines and concepts and shown how they apply to real property and the regulation of real estate activities. Besides an exploration of the basic laws mentioned above, you will be introduced to pertinent sections of other California legal codes, as well as a study of applicable case law (i.e., judgments rendered in important court decisions concerning questions of real estate).

Several chapters concern themselves not merely with a particular law, such as the Subdivided Lands Law, but with broad concepts and the laws which pertain to them (i.e., the concepts of ownership, agency, and contracts).

An attempt has been made to demonstrate, as often as possible, how the law is applied in real circumstances and what bearing it might have upon your own conduct. The language of law, so-called legalese, may seem difficult at first, but as you proceed you should become relatively fluent in its use, as terms are frequently reintroduced and explained within a meaningful context. If you find you have trouble with the language, it would be helpful to avail yourself of a good legal dictionary or a dictionary of real estate terms.

Personal pronouns are used interchangeably in this course, so that whenever a masculine gender pronoun is used (his) it is meant to imply also the female gender (her).

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Chapter 1

REAL ESTATE AND THE LAW

The study of Real Estate Law is primarily a study of the legal rights and duties that are incidents of the acquisition, possession, and transferal of real property. The parties involved in the various aspects of property ownership include not only the buyers and sellers, but the mortgage lenders, real estate brokers, escrow companies, appraisers, property managers, developers, building contractors, suppliers, planning agencies, building inspectors, and the various civil servants and legislators who make laws and regulate them.

With regard to the owner of a piece of real property, the laws govern not so much his or her relation to the owned property, but rather the relation between the owner and society. While the property owner has certain rights with respect to his property, he or she also has certain social obligations. Wherever there are rights, there will always be concurrent responsibilities, and these are usually expressed as laws.

Obviously, inherent in this balance between private rights and social obligations is the risk of imbalance. The United States has attempted to achieve the necessary balance by attempting to preserve private rights so long as they are compatible with the social interest as it is currently perceived by society and as expressed politically.

When most people think of law as it relates to the private ownership of property (if they think about the subject at all), it is likely that they think about the growth of regulation. When viewed from the historical perspective, private ownership of property has indeed become progressively regulated. Common law intervened at first to ensure that no one used his or her property in such a way as to interfere with the use and enjoyment of land by others. Zoning laws have been created out of state police powers to protect the health, safety, morals and general welfare of the people. Recent environmental concerns have brought even more laws to bear upon the uses of real property.

Real estate law is actually comprised of a large body of rules of social conduct, ranging from constitutional law to federal, state, and local statutory law, law derived by precedent from court cases, and the regulations of agencies which administer the laws.

Law itself can be defined as a body of rules adopted by an organized society in order to regulate human behavior. Anyone with a passing acquaintance with human behavior will immediately realize that a law is something which requires enforcement. Society therefore gives the machinery of government the job of enforcement, and provides the threat of public sanctions to compel people to follow the rules.

As mentioned, wherever there are rights, there are obligations. In the study of law, we speak of a legal right and a legal duty. These are correlative terms; that is to say, one can only exist if the other does. For example, if I own a certain legal right, society owes a legal duty to respect that right and my enjoyment of it.

Whenever a person’s rights have been interfered with, that person has a right to a remedy, a legal remedy. The machinery of society, its legal institutions, etc., are there to enforce the remedy. There are a number of ways in which a person may fail to perform a legal duty, and thus break the law. He or she may simply be ignorant of the pertinent law, may be indifferent to it or negligent in conduct toward it, or may in fact show a willful disregard for the law and the rights which the law is designed to protect.

In some cases, the corresponding rights and duties relating to a particular subject matter involve only two people; for example, two parties to a contract. In other cases, as with real property ownership, the rights arising from this subject matter impose duties on everyone else.

Common Law, a term which you are sure to have heard, refers to the huge body of opinion formulated by courts in the settling of disputes. This is sometimes known as case law or judgment law, both of which are conveniently descriptive terms. Common law makes up a significant portion of all the law which is pronounced by society, but the larger share of lawmaking originates in the legislative process — federal, state and local.

Stare decisis is a doctrine which states that precedents should be respected and followed. Anyone who has seen a Perry Mason show will know about precedent. Courts are constrained by this doctrine, which is to say they follow precedent. Legislative bodies are not so constrained.

Because they are not so constrained, the state legislatures and Congress are free to create sudden and radical change. This sort of change usually occurs as a result of deliberation and debate in the legislative bodies, following appropriate investigation, and usually (but not necessarily) supported by public opinion. Obviously, this is a process not available to the courts, and is the primary reason that courts adhere to the doctrine of stare decisis.

In this course, when we refer to the Real Estate Law, we will be referring to a very specific portion of the California Business and Professions Code. We may, on the other hand, speak of real estate law in general, and when we do we are referring to that body of rules within the general body of law which regulates human behavior in relation to the commodity called real estate. If you want to know how to acquire, possess, use, enjoy, or dispose of real property within the legal limits of the law, then you refer to real estate law. There are laws governing real estate as distinct from other commodities largely because real estate has certain properties distinct from other commodities and peculiar only to real estate.

WHAT IS PROPERTY?

Before we can proceed with a discussion of real estate law, we need first to examine the concept of property and its characteristics, for these determine the nature of the laws which govern property. From strictly a legal point of view, the word property refers to the rights which a person may lawfully have in a thing or object. That is not the sense in which the word property is normally used, however; the popular sense of the word property is that of the thing which is owned; in other words, property, for most people, means the subject matter, not the rights.

As you no doubt have learned by now, property is divided into two distinct types: personal property and real property. The physical characteristics of the thing being considered determine whether it is personal or real property. Historically, the terms real property and personal property have arisen in response to a need to distinguish between two types of court cases. The term real property is not meant to convey that personal property is somehow less substantial.

Since these two categories are so important to the whole structure of law, the law has been careful to provide legal distinctions between the two, based on their physical characteristics. Basically, land and those things attached to it, and those things which belong to it, are called real property.

Fixity of location is perhaps the most important characteristic of land; another way to say fixity of location is to say that it is immobile. In the strictest sense, however, land is not fixed. That is, it may be dug up, blasted, washed away, or rendered asunder by earthquake. Trees attached to land (and thus real property) may be blown away by high winds. Streams may be diverted. Therefore, when we refer to immobility or fixity of location, in the strictest sense we are talking about the location of the parcel. A parcel is a unit of space in the most literal sense, and is something which cannot be destroyed or consumed. A characteristic of a parcel is that since it cannot be consumed or destroyed it exists in perpetuity, that is, indefinitely. Another characteristic of real property is that it cannot be concealed. Personal property is much easier to conceal (from such people, for instance, as creditors or tax collectors). Laws governing a specific parcel of land are state laws and differ from one state to another. An owner of land in California may move to Colorado and retain possession of his California land, but he will be subject to California laws relating to that land, not Colorado laws. This is law of the situs. (Basically, law of the site.)

Personal property then becomes everything which is not real property, both tangible and intangible, which can be owned. Personal property is characteristically consumed or it fails to be useful after a given period of time, unlike real property. Also, personal property can be moved from one place to another.

A complication arises when fixtures to real property (originally personal property) become by attachment, and by meeting state criteria, real property. We will discuss this chameleon of legal objects in greater detail later.

In Dabney v. Edwards, 5 Cal. 1,6,53 P.2d 952 (1935) the Supreme Court of California stated Real estate at common law and in its generally accepted meaning is synonymous with real property. Therefore, in this course, we shall use the terms interchangeably to refer to land, those things attached to the land, and those things which belong to the land.

There are several things which law is meant to accomplish. Perhaps the first in order of importance, is the abstract concept of order, or the establishment and preservation of order. Society itself cannot exist without some semblance of order, and it is generally agreed that the greater the refinement of order, the more benefits which accrue to society as a whole. The problem with chaos, which is the opposite of order, is that it imposes terrifically high costs. People attempting life without socially imposed order have to spend all of their time simply trying to survive and protect their possessions and families. It is generally assumed that the world we live in, without the benefits of intelligently constructed order, is hostile. That which must be wrung from the hostile natural world in order to provide productive, enjoyable living requires time and effort, which in turn require the establishment of social order. It may be said, then, that the first task of law is to provide order, so that people can be freed of the struggle to survive and given the opportunity to live fulfilling lives.

As difficult as the establishment of order may be, it is even more difficult to maintain it. The natural world tends toward chaos. Physicists recognize this principle as entropy. Evidence of this principle is everywhere, from the chaos of a room where children have been allowed to play unsupervised, to the gradual deterioration of a poorly maintained automobile, to the regression into barbarism which occurs among people isolated from society. Therefore, order, once established, must be maintained or enforced. This brings us to what is perhaps law’s second most important task: settling disputes.

Disputes are inevitable in human society, and they are a threat to order. The only way order can be maintained is if the parties involved in a dispute have some means of settling the dispute. Not only must they have a means of settling disputes, but people must be assured that disputes will be settled fairly and timely, that is equitably and promptly. Obviously, if no such forum for settling disputes existed, people would take matters into their own hands, and the result would be chaos, violence, retaliation, and counter retaliation, a perpetual Hatfields v. McCoys. Society cannot survive that kind of disruption. Local, state, and federal courts, then, offer the necessary forum, as do various administrative tribunals, hearings, etc., sometimes assisted by professionals in arbitration and mediation.

So the law protects social order and settles disputes. What else does it do? Well, people, in order to conduct their affairs effectively and profitably, need to be able to depend upon the outcome of their endeavors. That is to say, their expectations need to be protected, and this too is a task of law. One of the most important activities in an advanced society is planning, and planning requires reliability, dependable expectations. Inherent in planning is the need to depend upon promises made to us by others. Commitments are necessary and must be supported by law. If reasonable expectations of a future outcome based upon promises are not met, the law provides for remedy or compensation. The real estate business in particular is replete with legal relationships based upon promises and trust as regards future outcomes. A listing agreement is one such relationship, but there are many others: mortgage instruments, leasing agreements, land contracts, and insurance policies, to name a few. All of these arrangements have inherent expectations for everyone involved, and the law must protect these expectations.

In addition to protecting expectations, settling disputes, and ultimately providing order, another task of law is to prevent exploitation. In the context of exploitation, pertinent laws would be any of those which protect against fraudulent actions. The law provides remedy for victims of false behavior, whether it be misrepresentation or dishonest advertising. The Constitution also provides for protection from the government itself. In other words, the state may not, in this democracy at least, take private property without providing just compensation. There is the concept of the right of eminent domain, however, which allows the state to take private property, but it cannot do this unless the property is to be used for a legitimate public purpose, and then only with fair compensation. If a property owner who loses his property because of eminent domain feels he has been unfairly compensated, he or she may take the matter to court.

So law prevents exploitation (fraud, unfair taking of property, etc.), protects expectations, settles disputes and provides order. It should be clear by now that all tasks of law are aimed at the one overriding concern of providing for order. One further task of law is to ensure equality. The administration of law and the promotion of justice are not necessarily one and the same thing, but it is generally conceded that, however much one society may differ in its definition of justice, the law should seek to promote it. Justice implies fairness and equality, and so when law seeks to promote justice it is seeking to promote fairness and equality. Particularly in a democracy such as that in the United States, the concept of justice is very important. This implies that people should not be treated differently on the basis of such things as religion, sex, marital status, color, national origin, or sex. Chapter 15 of this book takes up the question of fair housing, which is the application of justice in the area of real estate.

OWNERSHIP

It is because of the concept of ownership that many of our laws exist, particularly real estate laws. In the strictest legal sense, property is really a bundle of rights which may be owned. One owns the rights to objects or things, the rights to possess, control, enjoy, and use something, as well as the right to transfer all these rights to someone else. Therefore, when we speak of ownership, we are speaking of the right by which something belongs to a person, and the belonging has to do with the bundle of rights concerning what one may do with that which is owned.

Naturally, the rights and privileges pertaining to ownership also imply certain limitations or obligations. Society imposes through law necessary duties or obligations on a property owner, and these duties and obligations are usually, if not always, clear expressions of the demands of society. Therefore, it is useful to think of a bundle of rights as actually a bundle of rights and responsibilities.

TITLE

Title means ownership, in both the legal and popular sense of the word.

Having clear title to something implies complete ownership. The word title may also refer to evidence of such ownership.

THE MOST IMPORTANT INCIDENT OF OWNERSHIP

Without question, the right to possess something is the most important incident of ownership. Ownership has no meaning if the right to possess that which is owned does not exist. It is also implied that the right to possess it is the right to use it, and to do so to the exclusion of others, others being those who do not have an ownership interest. Obviously, a thing may be owned by more than one person.

Land may be said to be valuable as it can be used. The right to possess it, implying the right to use it, signifies that land use is a very important consideration in determining value. Land which has no use has very little value because no one is willing to pay for the possession of real property which has no use.

EXCLUSIVE USE NOT ABSOLUTE

In speaking of the right to possess and use property, it should be noted that the right to do so to the exclusion of others (non-owners) is not an absolute fact of life. It is possible that while others may not be permitted to use one’s property, one may have to use it in accordance with the needs and desires of others: neighbors, planning commissions, zoning boards, building inspectors, etc.

TEMPORARY TRANSFER OF RIGHT OF POSSESSION AND USE

Obviously, one of the most significant features of ownership is, as noted, the right of possession. An owner, however, may deprive himself of the right of ownership without impairing his title. For example, he may grant a leasehold estate to someone, allowing that person to take possession and use his property for a given period of time. In that instance, the owner continues to have the right to future possession of the property on which he holds title. He has, in that instance, sold his right to immediate possession.

POLICE POWER

We’ve mentioned police power in passing, but it is such an important concept that it demands elaboration. The most important thing to remember about police power is that it is exercised within a changing context, that of the social, political and economic conditions of a given society at a given time. In other words, as social, political and economic conditions change, so may society’s perception of what is the proper exercise of police power.

It can be defined simply as the state’s power to enact laws to promote health, safety, morals and general welfare. Another, perhaps more basic, way of viewing police power is as that power inherent in the state to regulate the rights of individual citizens. The next most important thing to remember about police power is that it applies to everyone equally. It may not be exercised arbitrarily and no one is exempt from the laws which issue from it.

Police power does not, as might be supposed, issue from the Constitution. States existed prior to the Constitution, and had police power. Therefore, the courts have reiterated many times that the U.S. Constitution presupposes the existence of police power.

As you know, government in America is divided into three main branches: the legislative, the executive, and the judicial. It is in the legislative branch of state government that police power resides. There it is subjected to the scrutiny of elected representatives and the legislative process itself, in order that it may not be abused. The Constitution does not enumerate police power as one of those granted by the Constitution to the federal government. It isn’t entirely correct, however, to say that the federal government has no police power at all. It has that measure of police power necessary to properly exercise the sovereignty granted to it by the Constitution.

It is important to mention that, as police power relates to real estate, the effect is inhibitory. That is to say, police power may restrain a property owner from using his property in such-and-such a way, but may not compel him to use it in a given way.

How, you may wonder, do courts decide whether police power is being exercised by the legislatures in a proper way? The answer is that courts use the following standard: it must be reasonable. That, on the face of it, seems rather vague. What the courts generally mean by reasonable is that it must not be arbitrary or capricious. To exercise police power arbitrarily or capriciously implies that it is done without discretion. The next question, then, is how much discretion do legislatures use in exercising police power. The answer is that we the people have given our state legislative bodies rather broad discretionary leeway in the ways they exercise police power. As a result, certain laws which today are deemed to be in the public interest might have been considered violations of constitutional rights in earlier times.

The ultimate test of the validity of the exercise of police power is the Fourteenth Amendment of the U.S. Constitution. Contained in the Fourteenth Amendment are the provisions for due process and equal protection before the law. The Fourteenth Amendment does not impair states’ rights to exercise police power, but it does limit them to an exercise of police power which meets the provisions of the Fourteenth Amendment.

TRANSFER OF OWNERSHIP OF PROPERTY

It was mentioned earlier that one of the most important incidents of property ownership is the right to possess it and use it. It is also very important that a property owner be able to transfer ownership. To transfer ownership in real estate, is the same as to convey ownership or to alienate ownership. This is a two part process, in which the owner or transferor extinguishes his own rights at the same time that the transferee or buyer acquires those rights.

VOLUNTARY AND INVOLUNTARY TRANSFER OF PROPERTY OWNERSHIP

Transfer of ownership of real property may occur voluntarily in one of the two following ways:

a. the owner sells his property

b. the owner makes a gift of his property during his lifetime or at death

Transfer of ownership of real property may be involuntary in any of the following ways:

a. taken by eminent domain

b. title acquired by adverse possession

c. foreclosure of a lien

The underlying principle in property law is that the transfer of property ought to be free; that is, a property owner ought to be free to alienate his property, and the welfare of society depends upon this freedom. Any limitation imposed upon the right to convey any interest in property is called a restraint on alienation.

The law does not allow the right to convey interest in property to be impaired. A person who owns a parcel of land in fee simple absolute may not sell that property to someone else with the limitation that the new owner may not sell or otherwise convey that property or any portion of it. The law will consider such a limitation void, and the new owner may convey his interest in the property in any way he sees fit.

Restraints on transferability are considered to be repugnant to the concept of fee simple absolute title, and society wants to be able to easily transfer what it considers one of its most important and valuable commodities. There are exceptions to this position, however, as when a landlord leases property with the stipulation that the tenant not assign the lease to anyone else or sublet the property. The rationale for this exception is that landlords need to have some control over who uses their properties.