This article discusses the powers to regulate real estate given to the state and federal governments under the United States Constitution. Also discussed are the constitutional guarantees given to real estate owners when the government abuses its powers.
The role of the federal Constitution
All real estate law can be traced to a statute or a court decision. Consequently, to understand real estate law, it is essential to understand the source of our statutes and case law.
The United States Constitution is the supreme law of the country. [United States Constitution, Article VI, clause 2]
All powers which the state and federal governments possess are derived from the United States Constitution.
The United States Constitution enumerates (lists) the powers of the national government. All other powers not given to the federal government rest with the individual states or with the people. [United States Constitution, Amendment X]
The form of government where individual states share powers with a national or central government is called federalism.
Federalism is based on the belief certain legal problems are best handled nationally, while others are best dealt with on the state or local level. The boundary between state and federal rights is in constant flux.
Under federalism, the individual states remain independent (sovereign) to regulate matters within their own borders which are not controlled by the federal government.
In fact, each state has its own constitution to regulate state matters remaining under their control.
Still, the federal Constitution remains the basis for all rights in the country. However, a state may provide more constitutional protection than the federal government, but cannot provide less.
Federal and state constitutions
To illustrate this point, consider the following situation.
An owner runs a shopping center outside of California.
The owner does not permit any tenant or visitor to distribute leaflets or express any public opinions on the premises unrelated to advertising the businesses located in the mall.
A political group comes onto the mall to obtain signatures to protest a government activity. The tenants complain the protestors are driving away business.
The owner orders the individuals off the premises.
However, the protestors believe the shopping center is a public gathering place and the owner cannot prohibit the expression of free speech under the United States Constitution.
The owner claims the shopping mall is private property and visitors who do not comply with any of the shopping center rules and regulations may be ejected.
Can the owner keep the protestors off his shopping center under the United States Constitution?
Yes! The owner can eject the protestors as a shopping center is considered private property under the United States Constitution. [Lloyd Corporation, Ltd. v. Tanner (1972) 407 US 551]
Federal freedom of speech rights do not extend to private property, unless the private property has been dedicated to the public.
California’s expanded protection
Consider the same political activity, except the shopping center is located in California.
Instead of using the United States Constitution, the protesters claim the California Constitution’s freedom of speech clause (essentially identical to the federal clause) permits public protest in a shopping center.
The protestors know an attack based on the United States Constitution is futile.
Can the protesters, under the California Constitution, peacefully protest on the premises?
Yes! The protesters cannot be removed or prohibited from protesting in the shopping center. Although private property, the shopping center is open to the public. [Robins v. Pruneyard Shopping Center (1979) 23 C3d 899]
Owners of purely private property can prohibit protesters from coming onto the premises, but owners of private property open to the public cannot.
Thus, these two court decisions appear to be in conflict.
In fact, the two cases are not in conflict. California can afford more constitutional protection for freedom of speech on private property than the United States Constitution does.
However, the California Constitution cannot offer less.
The United States Supreme Court recognizes California’s right to extend more constitutional protection for free speech. [Pruneyard Shopping Center v. Robins (1980) 447 US 74]
Both the federal and state governments created under the United States Constitution are separated into three branches:
· the legislature [U.S. Const., Art. I];
· the executive [U.S. Const., Art. II]; and
· the judiciary [U.S. Const., Art. III].
In theory, the legislative branch makes the law, the executive branch enforces and carries out the law, and the judiciary interprets and settles disputes under the law.
The state and federal legislatures enact the codes and statutes which regulate some aspects of real estate.
The executive branch polices the law and establishes regulations to carry out the administration of government as established by the legislature.
The judiciary settles disputes and issues case opinions regarding the application of the law and regulations.
Supposedly, no branch may exercise a power given to another branch.
However, as will be seen, all three branches of government actually make law.
The discussion in this chapter focuses primarily on the legislative branch of the government. The following chapter discusses the judicial branch in detail.
Authority to legislate
The federal and state legislatures and local governments can only enact laws if they have been given the power to do so by the United States Constitution or the California Constitution. [U.S. Const., Art. I]
The authority of the California legislature to enact laws regulating real estate activities comes from three main constitutional powers:
· the police power;
· the power of eminent domain; and
· the power to tax.
The United States Constitution confers on California the right to enact laws to protect the public health, safety and welfare. [U.S. Const., Amend. X]
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 is called police power. The police power is the source of the state or local government’s authority to act.
The police power 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 police power and affecting real estate related activity will be valid as long as the law:
· is fair and reasonable;
· reaches a legitimate state interest;
· does not unreasonably burden the flow of interstate commerce; and
· does not conflict with related federal law.
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.
However, the government must pay the owner the market value of the property taken. [Loretto v. Teleprompter Manhattan CATV Corp. (1982) 458 US 419]
The process of using the power of eminent domain is called condemnation.
Examples of eminent domain include condemning property to provide highways and roads, establish parks and construct flood control levees.
The government’s exercise of police power may actually become a taking of an owner’s real estate.
For example, an owner tears down his beachfront bungalow. The owner wants to rebuild a better home and submits an application to the coastal commission which has been given jurisdiction over the use of beachfront property by the legislature.
A public beach is located nearby, but not adjacent to the owner’s real estate.
The commission wants the owner to grant access to the public beach across his beachfront to allow people to reach the public beach by walking on the beachfront located on his property.
The commission claims its goal is to allow better viewing of the coastline.
The commission grants the permit to build, conditioned on the owner granting to the public a frontage easement across his beachfront.
The owner refuses, unless the commission pays for the easement. The commission denies the owner’s application, claiming it is reasonably exercising its police power.
Does the commission have to pay for the easement across the owner’s beachfront?
Yes! The commission has not merely restricted the owner’s use of the land, it has required him to deed an interest away. [Nollan v. California Coastal Commission (1987) 483 US 825]
Had the commission condemned and taken the easement by its power of eminent domain, it would have had to pay for the strip.
Thus, conditioning a permit on the granting of the easement to the public is a taking which also requires reimbursement from the governmental agency. In this case, the commission could not show the requirement of the easement related to a state interest.
However, most California inverse condemnation cases fail, as California courts do not want to burden local governments with the obligation to pay for any diminution of property values each time it regulates and downgrades the use of real estate. [First English Evangelical Lutheran Church of Glendale v. County of Los Angeles (1989) 210 CA3d 1353]
The third key power for the state and local government to regulate is the power to tax real estate activities to generate revenue to fund state and local governmental functions. [Calif. Const., Art. XIII D §6]
The power to tax is frequently used to fund and implement the goals of the state and local governments under its police power.
For example, a city passes an ordinance which imposes an inspection fee on all landlords renting residential properties based on a flat rate per unit, not property values.
A landlord subject to the ordinance claims the ordinance is unenforceable since the city must have voter approval before adopting an ordinance which would impose 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 property — renting — not on the mere ownership of the property, which would require voter approval.
Here, the ordinance imposing the inspection fee on landlords is enforceable. Voter approval is only required when fees and taxes are imposed on owners simply because they own real estate, not when fees and taxes are imposed on the owner’s exercise of his uses and rights which come with owning the property. [Apartment Association of Los Angeles v. City of Los Angeles (2001) 24 C4th 830]
Federal authority to regulate
The federal government’s authority to regulate real estate also comes from the United States 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]
However, the federal government has no police power.
In its place, the federal government has its own very powerful clause to regulate areas of federal 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 in interstate commerce. [Gibhons v. Ogden (1824) 22 US 1]
The commerce clause was at one time commonly called the “interstate” commerce clause.
Today, the clause also applies to local and intrastate activities which have an indirect effect on the flow of goods and services and the flow of people from state to state.
For example, an owner runs a motel located off a state highway occupied by travelers visiting in-state. The motel owner refuses to rent to minorities.
The federal government sues the owner, claiming his conduct violates the federal Civil Rights Act.
The owner claims his motel business is purely local and Congress (the federal legislative branch) has no constitutional authority to regulate his purely local business.
The federal government claims its authority is derived from the commerce clause and the owner’s refusal to rent to minorities “inhibits” the flow of interstate commerce — which includes the mobility of people.
Does the federal government have the right to regulate local business that may have only a slight impact on interstate commerce?
Yes! The federal government’s interest in the flow of commerce between states outweighs the owner’s right to exclude certain classes. [Heart of Atlanta Motel, Inc. v. United States (1964) 379 US 241]
The ability of the federal government to regulate a purely local activity even extends to local real estate brokers’ activities within their associations.
For example, a broker sues the local association of realtors for federal antitrust violations claiming the association fixes the commission rate charged by its members.
The association ostracizes brokers who refuse to comply with the fee-setting policy established by the association to maintain a minimum acceptable level of income for real estate professionals.
The association claims its activities are totally local and the federal government cannot regulate the activities as they do not affect interstate commerce.
Do the federal antitrust laws cover local brokerage activities?
Yes! The association’s price fixing of their services affects housing locally, which in turn affects the desire to live in the area, which in turn affects interstate commerce. [McLain v. Real Estate Board of New Orleans Inc. (1980) 444 US 232]
Note — California has its own antitrust laws covering price fixing by California real estate brokers and their associations. Thus, suits could be brought under state or federal law, another example of overlapping applications within the federal system. [Calif. Business and Professions Code §16600; People v. National Association of Realtors (1984) 155 CA3d 578]
Federal and state law conflicts
The 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.
What happens when federal and state law conflict? Consider the following facts.
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.
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 Administration (FAA) which has no restriction on late night/early morning flights.
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 will preempt state and local statutes and ordinances when:
· the federal interests outweigh local interests;
· the federal law is so pervasive as to exclude inconsistent state law; and
· inconsistent treatment nationwide would result if state law controls.
Thus, it is possible for federal and state law to regulate the same real estate activity.
For example, there are federal and state fair housing laws prohibiting discrimination.
Both the state and federal governments can regulate fair housing. However, the state cannot afford less protection than the federal law. [Calif. Civil Code §51]
The constitution gives owners guarantees when the federal or state government attempts to usurp its powers.
Two key constitutional guarantees exist for real estate owners:
· the due process clause; and
· the equal protection clause.
Under the due process clause, the government must deal fairly with real estate owners.
The owner may not win his case, but at least he will be treated fairly by the government.
The due process clause covers both:
· the content of laws, called substantive due process; and
· how the government procedurally applies those laws, called procedural due process.
For example, a city places a tax on parking lot owners to fund traffic services.
Parking lot owners feel the tax is simply too high and an unfair burden on their business. The parking lot owners claim the tax violates the due process clause of the United States Constitution.
The city claims the tax is a reasonable exercise of its police power.
If the tax itself is unreasonably high and burdensome, it violates the due process clause and would be invalid. [City of Pittsburgh v. Alco Parking Corporation (1974) 417 US 369]
However, if the tax does not overly burden owners, the tax survives a substantive due process attack.
Procedural due process
Procedurally, the owner must be given notice of any government action or law and an opportunity to be heard on the matter. [Mullane v. Central Hanover Bank & Trust Co. (1950) 339 US 306]
For example, a city passes a zoning ordinance restricting the extent to which a newsstand can block a sidewalk.
Further, the city delegates to itself the authority to seize and close newsstands it feels violate the ordinance.
A newsstand owner’s business is closed by the city government without warning. The city claims it may do so since the ordinance exists.
Does the city’s seizure and closing of the owner’s newsstand violate the owner’s due process rights?
Yes! The city did not provide the owner with notice of the violation and an opportunity to be heard before the business was closed. [Kash Enterprises, Inc. v. City of Los Angeles (1977) 19 C3d 294]
The equal protection laws provide for similarly situated persons to be treated similarly under the law.
For example, a subdivision’s covenants, conditions and restrictions (CC&Rs) contain a restriction limiting sales to nonminorities.
A minority couple seeks to purchase a home, but the restriction is enforced by the owner’s association governing the subdivision.
Does the restriction violate the couple’s rights to equal protection under the law?
Yes! Enforcement of the restriction would unfairly separate buyers into arbitrary and suspect classifications. [Shelley v. Kraemer (1948) 334 US 1]
The preceding discussion addressed legislative authority to enact laws.
However, the other branches of government also create law. In theory, only the legislative branch can enact laws. In fact, no branch of the government may exercise the powers of another.
Every time a judge interprets a statute or a prior case decision a new common law is created by the opinion produced in his decision. It is as if the legislature introduced and passed an amendment to existing law, and the governor signed the amendment into law.
For example, each time the Civil Rights Act is analyzed and applied to the facts of a case before the judge, the opinion is written in light of prior case law interpreting the Civil Rights Act.
As general real estate law becomes more specialized, the role of administrative agencies becomes more important.
Many administrative agencies are given the powers of all three branches of the government: executive, legislative and judicial.
For example, consider a rent control board established by a local city council under rent control ordinances.
The board is given authority to enact regulations to implement the rent control ordinance, a legislative activity.
The board is also given the power to hear disputes between tenants and landlords, and dispense penalties for landlord failure to comply with the law — a judicial activity.
In this way, the administrative board has the authority to enact regulations (legislative authority) and hear disputes and administer penalties for noncompliance (judicial authority).
A landlord can always go to court to determine whether the board has gone too far by overstepping its power.
The trend with the courts is to continue to give administrative agencies the necessary powers to judge cases involving their own regulations. Thus, the courts are relieved of the processing and resolving of these disputes.