Why this matters: Government regulations control the use of real estate. Often, state and federal rules governing the use of real estate will conflict. This article explains which rules take precedence, and when police powers can be used to take property.
Authority to enact real estate regulation
The authority of the California legislature to enact laws regulating real estate activities comes from three main constitutional powers:
- police power;
- power of eminent domain; and
- power to tax.
The U.S. Constitution confers on California the right to enact laws to protect public health, safety and welfare. [U.S. Constitution Amend. X]
Further, the California Constitution confers an equal power to local cities and counties to likewise protect the public good. [California Constitution, Article XI §7]
This power to protect the public well-being is called police power. Police power is the source of the state or local government’s authority to act. This is the basis for laws governing such things as highway construction and maintenance, rent control, zoning and traffic. [Village of Euclid, Ohio v. Ambler Realty Co. (1926) 272 US 365]
A statute or ordinance passed under the government’s constitutional police power and affecting real estate-related activity is valid as long as the law:
- is fair and reasonable;
- addresses a legitimate state interest;
- does not unreasonably burden the flow of interstate commerce; and
- does not conflict with related federal law.
Eminent domain
The second key power of the state to regulate real estate is the power of eminent domain. [Calif. Const., Art. 1 §19]
Eminent domain is the right of the government to take private property for public use. The process of using the power of eminent domain is called condemnation.
As part of the taking process, the government pays the owner the fair market value (FMV) of the interest taken in a property. [Loretto v. Teleprompter Manhattan CATV Corp. (1982) 458 US 419]
Examples of eminent domain include condemning property to provide highways and roads, establish parks, construct flood control levees and provide land for redevelopment.
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Inverse condemnation
When the government damages the value of a property without exercising their power of eminent domain, the government’s exercise of police power becomes a taking of an owner’s real estate by inverse condemnation.
For example, an owner demolishes their beachfront bungalow. The owner intends to rebuild the home and submits an application to the coastal commission which has jurisdiction over the use of a beachfront parcel. A public beach is located nearby, but not directly adjacent to the owner’s real estate.
The coastal commission grants the owner a permit to build, conditioned on the owner granting to the public a frontage easement across their beachfront parcel. The coastal commission claims its goal is to allow better public viewing of the coastline.
The owner refuses to comply with the condition unless the coastal commission pays for the easement. The coastal commission denies the owner’s application and permit to build, claiming it is reasonably exercising its police power.
Does the coastal commission need to pay for the easement across the owner’s beachfront?
Yes! The coastal commission has not merely restricted the owner’s use of their land, it has required the owner to deed an interest away in the form of an easement.
Conditioning a permit to build on the granting of an easement to the public is a taking which requires reimbursement to the owner from the governmental agency. The coastal commission did not show the easement related to a legitimate state interest to constitute eminent domain. Instead, the government agency’s action — in this case, demanding an easement as a condition of administratively granting a permit — led to the taking of an interest in real estate and is inverse condemnation.
However, most California inverse condemnation cases filed by owners fail. California courts do not want to burden local governments with the obligation of paying for any diminution of property values which result each time it regulates or downgrades the use of real estate. [Nollan v. California Coastal Commission (1987) 483 US 825]
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The government imposes land use regulations
Zoning and other use restrictions which affect an owner’s future use of a parcel also affect its value.
For example, unique factors and conditions located off the property, but have an adverse effect on the use of the property due to noise, vibrations, odors or some other ability to inflict harm, include:
- military ordnance sites within one mile of the property; [CC §1102.15]
- industrial zoning in the neighborhood of the property; [CC §1102.17]
- airport influence areas established by local airport land commissions; [CC §§1103.4(c), 1353; Bus & P C §11010(b)(13)]
- mining operations within one mile of the property; [Calif. Public Resources Code §2207] and
- contamination of a controlled substance on or within the immediate vicinity of the property. [See RPI Form 308]
These types of environmental hazards have an adverse effect on a property’s value and desirability. Thus, they are considered defects which, when known, are disclosed as material facts: The hazards might affect a prospective buyer’s decision to purchase the property.
This information is readily available in the public record or from public agencies with a phone call.
Zoning laws can safeguard housing against nuisances and hazards, as well as preserve property values. But zoning also keeps out people and businesses by restricting growth in inventory, driving up prices to unsustainable levels.
Restrictive zoning laws stifle the creative and productive spirit of desirable areas. Places where zoning laws restrict growth see less residential construction and thus a less vibrant housing and commercial market. The long-running result is the state’s infamous housing shortage.
Across California, zoning restrictions were designed to result in:
- reduced construction;
- failure to meet demand for local housing;
- uncompetitive pricing of new and resale homes;
- a destabilized housing market as home prices increase faster than incomes;
- increased traffic to commute from home to work; and
- stunted homeownership and home sales volume.
Vocal not-in-my-backyard (NIMBY) advocates continue to preserve overly restrictive zoning regulations intended to discourage builders from meeting local demand. Politically responsive city councils are the biggest offenders as they enact ordinances to limit density, building height, mixed use and parking.
The state legislature, beginning in the late 2010’s, began to aggressively establish a pattern for increased density by adding low-income units to the permitted use. This includes authorization to subdivide and construct housing — accessory dwelling units (ADUs) — on SFR parcels everywhere. [Calif. Government Code §65852.2]
But due to local council willful resistance to implement legislated changes, insufficient quantities of dwelling units are coming online to house our state’s residents. Unlawfully restrictive zoning regulations are typically enforced in coastal cities where the most promising job growth and cultural advantages take place. These local preference conditions are being set aside by the courts due to the Attorney General’s Office’s enforcement of public policy under statewide zoning laws.
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The power to tax
State and local governments also regulate the crucial power to tax real estate activities to generate revenue for funding state and local governmental functions conducted based on their police power. [Calif. Const., Art. XIII D §6]
For example, a city passes an ordinance which imposes an inspection fee on all landlords renting residential properties. The fee charged is based on a flat rate per unit, not on current property values or amount of rental income.
A landlord subject to the ordinance claims the ordinance is unenforceable since the city must have voter approval before adopting an ordinance which imposes a regulatory fee on property.
The city claims the ordinance is enforceable without voter approval since the fee is imposed on a use of the parcel — renting — not on an aspect of property ownership which requires voter approval.
Here, the ordinance imposing the inspection fee on landlords based on a flat rate per unit offered for rent is enforceable. Voter approval is only required when fees and taxes are imposed on owners simply because they own real estate. Fees and taxes imposed on the owner’s exercise of the uses and rights which come with ownership of the parcel do not require voter approval. [Apartment Association of Los Angeles v. City of Los Angeles (2001) 24 C4th 830]
The power of escheat
Escheat occurs when the owner of a property dies, and they have no heirs to inherit it. When this occurs, ownership of the property reverts automatically to the state.
Escheat also refers to the process of transferring abandoned property to the state, whether or not the rightful owner is still alive.
For example, banks possessing an individual’s property (read: money) have a duty to return the property to the owner after three years of inactivity. [California Code of Civil Procedure §1513(a)(a)(A)]
Intangible personal property — funds — held by a bank or broker escheats to the state after three years of inactivity when the:
- last known address of the owner is in California;
- bank or broker have no record of an address of the owner, and the:
- last known address of the owner was in California; or
- banker/broker resides in California and has not previously delivered the property to the state of the last known address of the apparent owner (say, Nevada);
- last known address of the owner is in a state without escheat laws for the money, or a foreign nation, and the bank/broker is domiciled in this state. [CCP §1510]
A bank or broker holding unclaimed property has a duty to notify owners of unclaimed property valued over $50 before sending it to the state. [CCP §1513.5(c)]
The bank or broker initially identifies accounts dormant for two to two-and-a-half years with unclaimed funds. The holder sends a notice to the owner’s last known address that their property will be sent to the State Controller’s Office (SCO) unless they request the holder to continue maintaining the account. [CCP §1513.5(a)(2)]
The notice shall specify the time period that the funds will escheat and the effects of escheat, including the necessity for filing a claim for the return of the funds. The notice shall contain a boldface heading at least two font sizes larger than the rest of the notice that reads: “THE STATE OF CALIFORNIA REQUIRES US TO NOTIFY YOU THAT YOUR UNCLAIMED PROPERTY MAY BE TRANSFERRED TO THE STATE IF YOU DO NOT CONTACT US.” [CCP §1513.5(b)]
No statutory form exists for this notice, though the holder may find sample notices at the SCO’s website.
The holder is required to inform the SCO of unclaimed property using the Universal Holder Face Sheet (UFS-1) before November 1 each year. [CCP §1530(d)]
When the holder does not receive a response, the SCO then sends a separate notice to the owner alerting them to claim their funds before they are transferred to the SCO. [CCP §1520(b)]
When the owner still does not claim their funds, the holder remits the funds to the SCO. The holder submits an updated UFS-1 along with other documents requested by the SCO between June 1-15 each year.
Editor’s note — Just as one regularly checks their credit score, brokers and other small business owners ought to make it a habit to periodically determine whether they have any unclaimed property with the state so they may get it back. This information may be accessed on the website of the SCO.
Federal authority to regulate
The federal government’s authority to regulate real estate also comes from the U.S. Constitution. Like the state, the federal government has the power to tax and the power to take private property for public use. [U.S. Const., Amend. XVI; Calif. Const., Art. 1 §19]
However, the federal government has no police power. In its place, the federal government has a powerful clause to regulate areas of national concern, called the commerce clause. The federal government has the right to regulate all commercial enterprises which affect interstate commerce.
Originally, the clause was designed to combat attempts by local states to pass protectionist laws under their police powers which would inhibit the flow of goods between states — interstate commerce. [Heart of Atlanta Motel, Inc. v. United States (1964) 379 US 241]
Today, the clause also applies to local and intrastate activities which have an indirect effect on the flow of goods, services and people from state to state.
For example, the federal government’s interest in the flow of commerce between states outweighs a motel owner’s right to exclude specific classes of patrons. The owner’s exclusion interferes with the flow of commerce – which includes the mobility of people.
The federal government’s ability to regulate a purely local activity even extends to local real estate brokers’ activities within their trade unions.
For example, a broker sues the local board of realtors for federal antitrust violations, claiming the association fixes rates charged clients by its members for their services.
The local association ostracizes brokers who refuse to comply with the fee-setting policies established by the board based on the claim they need to maintain a minimum level of income acceptable for its union members.
The board claims the federal government may not regulate their activities as their services are purely local and have no effect on interstate commerce.
Do the federal antitrust laws cover local brokerage activities?
Yes! The board’s fee-setting of the charges for their members’ services affects housing locally, which in turn affects the desire to live in the area, which in turn affects the mobility of people to move freely about the county — interstate commerce. [[1] McLain v. Real Estate Board of New Orleans, Inc. (1980) 444 US 232]
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When federal and state law conflicts
States have the sovereignty to regulate within their own borders. At the same time, the federal government has the right to regulate local activities affecting commerce in general.
What happens when federal and state law conflict?
Consider the following example. An airport is established under the Federal Aviation Act of 1953. The airport expands its number of late-night and early-morning flights.
The residents around the airport complain of the noise during late and early hours. The city where the airport is located passes an ordinance restricting the number of flights between 11 p.m. and 7 a.m.
The airport objects, claiming it was established under the sole jurisdiction of federal law and the Federal Aviation Act of 1953 set forth by the Federal Aviation Administration (FAA) which has no restriction on flights between 11 p.m. and 7 a.m.
Does the federal law preempt (supersede) state law?
Yes! The goals of national flight service and the role of the FAA outweigh local laws inhibiting flight times. [City of Burbank v. Lockheed Air Terminal, Inc. (1973) 411 US 624]
A federal law preempts state and local statutes and ordinances when:
- federal interests outweigh local interests;
- the federal law is so pervasive as to exclude inconsistent state law; and
- inconsistent treatment nationwide results when state law controls.
Thus, it is possible for federal and state law to regulate the same real estate activity.
For example, federal and state fair housing laws prohibiting discrimination exist. Both the state and federal governments can regulate fair housing. The state may provide more — but may not allow less — protection than the federal law. [CC §51]
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