courses4realestate.com · (pm6.5\martha\mydocs\relscoverpages\legalaspectsinstructions.pm6.5) 1)...

$: Courses4RealEstate.com · (PM6.5\MARTHA\MYDOCS\RELSCOVERPAGES\LEGALASPECTSINSTRUCTIONS.PM6.5) 1) This course consists of text reading and a final examination. 2) Practice questions$
LEGAL ASPECTSOF REAL ESTATE

Textbook and Student Workbook, Combined

Course by Correspondence.For Qualification For a California Real Estate BrokerLicense or to Extend a California Real Estate License

(D.R.E. Approval #1226-90)

REAL ESTATE LICENSE SERVICES5059 Newport Avenue, #209

San Diego, CA 92107(619) 222-2425

Includes “Student Instructions,” Quiz Questions and Answers, and Page Ref-erences for the Quiz Questions for the Course “Legal Aspects of Real Estate”Please Read and follow the complete “Student Instructions” just after this page.

Copyright © 2011, 2003, 2000, 1991, 1990, 1989, 1988, 1987, 1983 Real Estate License Services, Inc. Copyright registered. All rightsreserved. No part of this material may be reprinted, reproduced, transmitted, stored in a retrieval system, placed in a computer or on theInternet, or otherwise utilized, in any form or by any means electronic or mechanical, including photocopying or recording, now existing orhereinafter invented, nor may any part of this course be used for teaching without permission from the copyright holder.

C:\PM6.5\MyDocs\RELSBroker Coverpages\Legal AspectsWBCoverpage\.PM6.5

(Also Known as REAL ESTATE LAW)

(PM6.5\MARTHA\MYDOCS\RELSCOVERPAGES\LEGALASPECTSINSTRUCTIONS.PM6.5)

1) This course consists of text reading and a final examination.2) Practice questions ("Written Assignments") covering most of the chapters in the book are based on the text reading in each

chapter. Answers to those practice questions (with page referenes) are included for your convenience and may be found onthe page after this page. The "Written Assignments" are for your practice only. NO QUIZ QUESTIONS ARE REQUIREDPRIOR TO YOUR FINAL EXAM.

3) The minimum time limit to complete one course is 20 days from the date of enrollment. The maximum time limit tocomplete one course is six (6) months from the date of enrollment. Two three (3) month extensions may be obtained (seesection below on Extensions and Re-enrollments). Under no circumstances can your enrollment last beyond twelve (12)months.

FINAL EXAMINATION: When you are ready to take the final test, please fill out the form "Request To Take Final Exam." Youmay mail it to Real Estate License Services, 5059 Newport Ave., #209, San Diego, California 92107, or fax to (619) 222-8593.Real Estate License Services will arrange for your final examination online or with a test administrator. If your final exam isnot online, you may suggest who your test administrator will be. The examination consists of 100 multiple choice questions andyou must complete it within 150 minutes (2.5 hours). When you finish the test, If your final exam is not online, turn it in tothe test administrator, who will mail it to Real Estate License Services. The questions used for the final exam must be mailedto Real Estate License Services along with the answers.

GRADING OF THE FINAL EXAM AND ISSUING OF CERTIFICATES: A passing grade is based on a minimum passing scoreof 60% on the final examination. Only the final examination grade is used in determining the student's overall grade.Students will be assigned a letter grade, but the grading system reflects the 60% passing requirements.

% OF POINTS = GRADE100% - 90% = A89% - 80% = B79% - 70% = C69% - 60% = D59% - 0% = Fail. In this case the course would have to be repeated and passed in order to receive credit.

An official certificate of your course grade will be mailed to you within two weeks after receipt of your completed finalexamination if taken with a test administrator. Additional certificates are $15.00 each.

REFUNDS: Students may apply in writing to REAL ESTATE LICENSE SERVICES, mailing address, 5059 Newport Ave., #209,San Diego, California 92107 within 15 days from the date of enrollment and cancel and receive a refund for the full tuition. AllREAL ESTATE LICENSE SERVICES materials must be returned in good condition at the time of cancellation; the materialsshould not be soiled, torn or marked upon. Refunds are not allowed if any work has been submitted.

EXTENSIONS AND RE-ENROLLMENTS: If the course has not been completed within six (6) months of enrollment, thestudent may receive an extension of three (3) months by paying an extension fee of $35.00. If at the end of that three monthextension the student still has not completed the course, a second three (3) month extension may be obtained by paying anadditional fee of $30.00. IN NO CASE MAY THE PERIOD OF ENROLLMENT EXTEND BEYOND TWELVE (12) MONTHS.If the student has not completed the course within 12 months from the original date of enrollment, the enrollment expires andno further extensions are allowed. The student must re-enroll and begin the course over again in order to complete the course.The student may re-enroll under such circumstances for a discounted re-enrollment of $40.00 per course.

TRANSFERS: Courses may be transferred to another person by paying a transfer fee of $30.00 per course. Transfers are notallowed if any work has already been submitted.

STUDENT INSTRUCTIONS/GENERAL INFORMATIONThe California Department of Real Estate DOES NOT REQUIRE COMPLETION OF QUIZ-ZES OR ESSAYS PRIOR TO YOUR FINAL EXAM. Study the "Written Assignment" questionsbased on the chapter readings as well as the answers with page references that are on the followingpage. YOU DO NOT NEED TO SEND IN ANY "WRITTEN ASSIGNMENT" ANSWERS. Tocomplete this course, just study the practice questions and answers, take the final exam online oron paper and, if on paper, make sure the final exam question sheets and completed Scantron an-swer forms are returned to us along with the completed "Certification of Test Administrator."THE FINAL EXAM IS OPEN BOOK. If you have any questions, please call (619) 222-2421.

Answers with Page References to Practice Questionsat the end of Each Chapter in the Textbook.

LEGAL ASPECTS OF REAL ESTATETo finish this course, you need to do the following:

1. Quizzes are NOT required. Included below are the answers to the questions at the end of each chapter. Page references for topics in each question and answer are also listed. Read the book and study thequestions and answers. You may take your final exam 18 days after having possession of the textbook.

2. When you’re ready to take the final exam, please fill out the form “Request To Take Final Exam.” and faxto (619) 222-8593 or mail to: Real Estate License Services, 5059 Newport Ave., #209, San Diego, CA92107. Real Estate License Services will arrange for your final exam online or with a test administrator.

ASSIGNMENT 11CHAPTER 11

Quest Ans Pg1 B 9 52 B 9 53 B 9 54 B 9 55 C 9 66 C 9 87 D 9 88 A 9 99 C 1001 0 B 100


Quest Ans Pg1 D 1092 A 1093 B 1094 C 1095 A 1096 C 1097 C 1108 C 1109 D 1101 0 A 110


Quest Ans Pg1 A 1212 C 1213 B 1214 C 1215 D 1216 B 1227 C 1228 C 1229 B 1231 0 A 122


Quest Ans Pg1 B 1372 B 1383 B 1384 B 1385 C 1396 C 1397 D 1408 A 1399 C 1401 0 B 139


Quest Ans Pg1 D 1552 A 1623 B 1564 C 1615 A 1616 C 1617 C 161-628 C 155-569 D 1631 0 A 163


Quest Ans Pg1 D 4 52 A 4 53 B 4 54 C 4 65 A 4 66 C 4 77 C 4 78 C 4 89 D 4 81 0 A 4 8


Quest Ans Pg1 A 5 32 C 5 33 B 5 44 C 5 35 D 5 56 B 5 47 C 5 48 C 5 59 B 5 51 0 A 5 4


Quest Ans Pg1 B 6 52 B 6 53 B 6 54 B 6 55 C 6 56 C 6 67 D 6 68 A 6 69 C 6 61 0 B 6 6




Quest Ans Pg1 A 8 92 C 8 93 B 8 94 C 8 95 D 9 06 B 8 97 C 8 98 C 8 99 B 9 01 0 A 8 9


Quest Ans Pg1 A 12 C 13 B 1-24 C 25 D 26 B 27 C 28 C 39 B 31 0 A 3


Quest Ans Pg1 B 1 12 B 1 13 B 1 14 B 1 15 C 1 16 C 11-127 D 1 28 A 1 29 C 1 21 0 B 1 2




Quest Ans Pg1 A 2 32 C 2 33 B 2 34 C 2 45 D 23-246 B 2 57 C 2 48 C 2 59 B 2 51 0 A 2 5


Quest Ans Pg1 B 3 32 B 3 33 B 3 34 B 3 35 C 3 46 C 3 47 D 3 58 A 3 59 C 3 41 0 B 3 5

c:/pm6.5\MyDocs\RELSBrokerCoverpages\LegalAspectsQuizAnswers\pm6.5

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Estoppel 14Written Assignment 2 (based on Chapter 2) 14

Chapter 3

THE COMPONENTS OFPROPERTY 15

Land 15Water 15That which is Affixed 15That Which is Incidental or Appurtenant 16Personal Property -- The Modern Concept 16Perfecting Security Interest in Fixtures 17Recap 18Descriptions 18Metes and Bounds 19Description by Section and Township 19Government Lots 20Ownship Plats 20Written Assignment 3 (based on Chapter 3) 21

Chapter 4

SUBDIVISION LAW 23

Why Subdivision Laws are Necessary 23Stages of Map Preparation and Approval 24The Subdivided Lands Law 24Compliance and Governmental Consultation 25Mobilehomes 26Resort Properties 26Common Interest Subdivisions 26Functions in Land Subdivision 27Title Company 27Private Professional Services 28Planning Commission 28Lending Agencies 28Procedures Prescribed by California

Subdivided Lands Law 28Affirmative Standards 29Written Assignment 4 (based on Chapter 4) 31

INTRODUCTION iv

Chapter 1

REAL ESTATE AND THE LAW 1

What is Property? 2Ownership 4Title 4The Most Important Incident of Ownership 4Exclusive Use Not Absolute 4Temporary Transfer of Right of Possession and Use 4Police Power 4Transfer of Ownership of Property 5Voluntary and Involuntary Transfer

of Property Ownership 5Where Laws Come From 5Due Process -- Substantive and Procedural 6Equal Protection 6The Fundamentals of Law 6Double Amenability 7Written Law 7The Structure of The Courts 8Bankruptcy Courts 8State Courts 9Small Claims Court 9Precedent 9Written Assignment 1 (based on Chapter 1) 10

Chapter 2

LEGAL DOCTRINES ANDCONCEPTS 11

Publication and Citation 11The Difference between Legal and Equitable 11Remedies Available in Courts of Equity 12The Statute of Frauds 13Statute of Limitations 13Laches 13

TABLE OF CONTENTS

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Creation of Agency Relationship 81Agent’s Authority 82Duties of Agent Toward Principal 84Rights of Agent Against Principal 86Written Assignment 9 (based on Chapter 9) 87

Chapter 10

LANDLORD AND TENANT LAW 89

Types of Leasehold Estates (Tenancies) 89Requisites for Creation of Leasehold Estate 89Rights and Obligations of Parties to Lease 90Written Assignment 10 (based on Chapter 10) 93

Chapter 11

THE CALIFORNIA CODES ANDREAL ESTATE 95

Business and Professions Code 95Penal Code 101The Corporations Code 103Labor Code 104Health and Safety Code 105Written Assignment 11 (based on Chapter 11) 106

Chapter 12

NATIONAL LAW: IMPORTANTFEDERAL LAWS AFFECTING 109

The Constitution 109The Bill of Rights 109The Civil Rights Act of 1968 110Truth in Lending Act 110Exemptions 110Form of Disclosures 111Required Disclosures 111Annual Percentage Rate 112Variable Rate 112Payment Schedule 112Total of Payments 112Demand Feature 112Total Sale Price 113Prepayment Penalties and Rebates 113Late Payment Charge 113Security Interest 113Insurance 113Certain Security Charges 113Reference to Contract Terms 113Assumption Policy 113Required Deposit 113Time of Disclosures 114

Chapter 5

ESTATES AND TITLES: REALESTATE OWNERSHIP LAW 33

History of Land Ownership in California 33Ownership of Real Property 37Separate Ownership 37Concurrent Ownership 37Community Property 40Assuring Marketability of Title 41Written Assignment 5 (based on Chapter 5) 44

Chapter 6

REAL ESTATE LICENSE LAW 45

The Real Estate Law 47Written Assignment 6 (based on Chapter 6) 52

Chapter 7

MECHANIC’S LIENS ANDOTHER ENCUMBRANCES 53

The Theory 53Who May Obtain 53Terms and Procedures 54Procedures 55Prior to Start of Project 56At The Start of The Project 56When Work is Completed 56Questions You May Have About Liens and

Stop Notices, etc. 56Attachments and Judgements 58Easements 59Restrictions 60Encroachments 62Declared Homestead 62Written Assignment 7 (based on Chapter 7) 64

Chapter 8

CONTRACT LAW 65

Essential Elements of Contract 65Real Estate Contracts 72Written Assignment 8 (based on Chapter 8) 75

Chapter 9

LAW OF AGENCY 77

Agency Distinguished from Other Relationships 77

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Respa 114Redisclosure 114Refinancing 114Assumption 114Exemptions 115Notice of Right to Rescind 115Rescission Period 115Waiver of Right to Rescind 115Advertising The Rate of Finance Charge 116Variable Rate Mortgages 116Buydowns 116Payment of Effective Rates 116Criminal Liability 118Conclusion 118Respa 118Written Assignment 12 (based on Chapter 12) 119

Chapter 13

CASE LAW: IMPORTANT COURTDECISIONS IN REAL ESTATE 121

Anderson and Miles v. Resnick; Public Liability 121Andrade Development Co. v. Martin; Management

and Control 121Barkis v. Scott; Real Property Sales Contract 122Cohen v. Shearer; Cancellation of Purchase Contract123Estate of Levinthal; Probate Sales & Commissions 123Fidelity Federal Savings & Loan Assoc. v. De La

Cuesta and Wellenkamp v. Bank of America andLa Sala v. American Savings and Loan Associa-tion 124

Exceptions 125Enforceability 125Special Provision 126Reed v. King and George Ball Pacific, Inc. v. ColdwellBanker & Co.; Duties of Agent Toward Princi-pal 126More Cases Guiding The Fiduciary Relationship 127Walters v. Marler; Obligations of Real Estate Sales-

persons 128Hall v. Geiger-Jones, Riley v. Chambers, and Haas v.

Greenwald; Decisions and Rulings Affecting RealEstate Law 129

Kruse v. Miller, Hale v. Wolfsen; Subagents 129Milner v. D.R.E., and Norman v. D.R.E.; Regulation of

Transactions in Loans (Pooling of Loan Funds) 130

Realty Projects, Inc. v. Smith and Wyatt v. UnionMortgage Co.; Mortgage Loan Transactions 131

Harvey v. Davis; Real Property Securities Transac-tions 132

Jones v. Mayer; Antidiscrimination by PropertyOwners and Agents 133

People v. Sipper; Unlawful Practice of Law 134Simons Brick Co. v. Hetzel; Mechanic’s Lien Law --

Determination of Starting Time 134

Written Assignment 13 (based on Chapter 13) 136

Chapter 14

OTHER CALIFORNIA LAWSAFFECTING REAL ESTATEACTIVITIES 137

Alquist-Priolo Special Studies Zones Act 137Criminal Law 138Grand Theft and Petty Theft 138Real Estate Related Crimes 138The Civil Code 139The Code of Civil Procedures 139The Coastal Zone Conservation Act 139The Uniform Commercial Code -- Division 9 140Security Agreements & Personal Property Secured

Transactions 140Some UCC Definitions 140Why The UCC? 141Priorities 142The Environmental Quality Act 142California Financial Code -- Division 6 142Developer Prohibition 143The Many Laws of Mobilehomes Sales 143Restrictions 143Mobilehome Transformed to Real Property 145Taxation of Mobilehomes 145Removal of a Mobilehome From Its Foundation 146Transfer of Title 146Mobilehome Sales Office 147State Housing Law (Housing Standards) 148The Labor Code 148The Porter-Cologne Water Quality Control Act 149The Uniform Partnership Act 149The Uniform Vendor and Purchaser Risk Act 150The Usury Law 150Special Assessment Acts 151Written Assignment 14 (based on Chapter 14) 152

Chapter 15

FAIR HOUSING 153

Introduction 153

Section I: Fair Housing 153Federal Level 153State Level 155Fair Housing Law 163

Section II: Ethics 168Codes of Ethics 168Related California Law 173Bibliography 175Written Assignment 15 (based on Chapter 15) 175

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INTRODUCTION

This course is organized in such a way as to acquaint youwith a very broad spectrum of the legal aspects of real estate,especially as the real estate business is practiced in Califor-nia. Special emphasis is given to the so-called “Real EstateLaw” as found in the Business and Professions Code ofCalifornia, as well as: The Regulations of the Real EstateCommissioner, the Subdivision Map Act, the SubdividedLands Law, and the Administrative Procedures Act. Thesecodified statutes and regulations cover such diverse mat-ters as licensing law, map laws for subdivisions, and lawsdesigned to prevent fraud and misrepresentation. They arethe heart of California real estate law.

In addition, you will be acquainted with legal doctrines andconcepts and shown how they apply to real property andthe regulation of real estate activities. Besides an explora-tion of the basic laws mentioned above, you will be intro-duced to pertinent sections of other California legal codes,as well as a study of applicable case law (i.e., judgmentsrendered in important court decisions concerning ques-tions of real estate).

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

An attempt has been made to demonstrate, as often aspossible, how the law is applied in real circumstances andwhat bearing it might have upon your own conduct. Thelanguage of law, so-called “legalese,” may seem difficult atfirst, but as you proceed you should become relativelyfluent in its use, as terms are frequently reintroduced andexplained within a meaningful context. If you find you havetrouble with the language, it would be helpful to availyourself of a good legal dictionary or a dictionary of realestate 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).

New Department of Real Estate Rules Allow You to Avoid AllQuizzes and to Go Straight to Your Final Exam, Which is OpenBook! You May Suggest Your Own Test Administrator Also!

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rules of social conduct, ranging from constitutional law tofederal, state, and local statutory law, law derived by prece-dent from court cases, and the regulations of agencieswhich administer the laws.

“Law” itself can be defined as a body of rules adopted byan organized society in order to regulate human behavior.Anyone with a passing acquaintance with human behaviorwill immediately realize that a law is something whichrequires enforcement. Society therefore gives the machin-ery of government the job of enforcement, and provides thethreat of public sanctions to compel people to follow therules.

As mentioned, wherever there are rights, there are obliga-tions. In the study of law, we speak of a legal right and a legalduty. These are correlative terms; that is to say, one can onlyexist if the other does. For example, if I own a certain legalright, society owes a legal duty to respect that right and myenjoyment of it.

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

In some cases, the corresponding rights and duties relatingto a particular subject matter involve only two people; forexample, two parties to a contract. In other cases, as withreal property ownership, the rights arising from this subjectmatter 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 inthe settling of disputes. This is sometimes known as case

The study of Real Estate Law is primarily a study of the legalrights and duties that are incidents of the acquisition,possession, and transferral of real property. The partiesinvolved in the various aspects of property ownershipinclude not only the buyers and sellers, but the mortgagelenders, real estate brokers, escrow companies, appraisers,property managers, developers, building contractors, sup-pliers, planning agencies, building inspectors, and thevarious civil servants and legislators who make laws andregulate them.

With regard to the owner of a piece of real property, thelaws govern not so much his or her relation to the ownedproperty, but rather the relation between the owner andsociety. While the property owner has certain rights withrespect to his property, he or she also has certain socialobligations. Wherever there are rights, there will alwaysbe concurrent responsibilities, and these are usually ex-pressed as laws.

Obviously, inherent in this balance between private rightsand social obligations is the risk of imbalance. The UnitedStates has attempted to achieve the necessary balance byattempting to preserve private rights so long as they arecompatible with the social interest as it is currently per-ceived by society and as expressed politically.

When most people think of law as it relates to the privateownership 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 own-ership of property has indeed become progressively regu-lated. Common law intervened at first to ensure that no oneused his or her property in such a way as to interfere withthe use and enjoyment of land by others. Zoning laws havebeen created out of state police powers to protect the health,safety, morals and general welfare of the people. Recentenvironmental concerns have brought even more laws tobear upon the uses of real property.

“Real estate law” is actually comprised of a large body of

1REAL ESTATE AND THE LAW

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law or judgment law, both of which are conveniently de-scriptive terms. Common law makes up a significant portionof all the law which is pronounced by society, but the largershare of lawmaking originates in the legislative process —federal, state and local.

“Stare decisis” is a doctrine which states that precedentsshould be respected and followed. Anyone who has seena “Perry Mason” show will know about precedent. Courtsare constrained by this doctrine, which is to say they “followprecedent.” Legislative bodies are not so constrained.

Because they are not so constrained, the state legislaturesand Congress are free to create sudden and radical change.This sort of change usually occurs as a result of deliberationand debate in the legislative bodies, following appropriateinvestigation, and usually (but not necessarily) supportedby public opinion. Obviously, this is a process not availableto the courts, and is the primary reason that courts adhereto the doctrine of stare decisis.

In this course, when we refer to the Real Estate Law, wewill be referring to a very specific portion of the CaliforniaBusiness and Professions Code. We may, on the otherhand, speak of real estate law in general, and when we do weare referring to that body of rules within the general bodyof law which regulates human behavior in relation to thecommodity called “real estate.” If you want to know how toacquire, possess, use, enjoy, or dispose of real propertywithin the legal limits of the law, then you refer to “real estatelaw.” There are laws governing real estate as distinct fromother commodities largely because real estate has certainproperties distinct from other commodities and peculiaronly 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 itscharacteristics, for these determine the nature of the lawswhich govern property. From strictly a legal point of view,the word “property” refers to the rights which a person maylawfully have in a thing or object. That is not the sense inwhich the word “property” is normally used, however; thepopular sense of the word “property” is that of the thingwhich 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 dividedinto two distinct types: personal property and real property.The physical characteristics of the thing being considereddetermine whether it is personal or real property. Histori-cally, the terms “real property” and “personal property”

have arisen in response to a need to distinguish betweentwo types of court cases. The term “real property” is notmeant to convey that “personal property” is somehow lesssubstantial.

Since these two categories are so important to the wholestructure of law, the law has been careful to provide legaldistinctions between the two, based on their physicalcharacteristics. Basically, land and those things attached toit, and those things which belong to it, are called realproperty.

Fixity of location is perhaps the most important character-istic of land; another way to say “fixity of location” is to saythat it is “immobile.” In the strictest sense, however, landis 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 toimmobility or fixity of location, in the strictest sense we aretalking about the location of the parcel. A parcel is a unitof space in the most literal sense, and is something whichcannot be destroyed or consumed. A characteristic of aparcel is that since it cannot be consumed or destroyed itexists in perpetuity, that is, indefinitely. Another character-istic of real property is that it cannot be concealed. Personalproperty is much easier to conceal (from such people, forinstance, as creditors or tax collectors). Laws governing aspecific parcel of land are state laws and differ from one stateto another. An owner of land in California may move toColorado and retain possession of his California land, buthe will be subject to California laws relating to that land, notColorado laws. This is “law of the situs.” (Basically, “lawof the site.”)

Personal property then becomes everything which is notreal property, both tangible and intangible, which can beowned. Personal property is characteristically consumed orit fails to be useful after a given period of time, unlike realproperty. Also, personal property can be moved from oneplace to another.

A complication arises when “fixtures” to real property(originally personal property) become by attachment, andby 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)” theSupreme Court of California stated “Real estate at commonlaw and in its generally accepted meaning is synonymouswith real property.” Therefore, in this course, we shall usethe terms interchangeably to refer to land, those thingsattached to the land, and those things which belong to theland.

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There are several things which law is meant to accomplish.Perhaps the first in order of importance, is the abstractconcept of order, or the establishment and preservation oforder. Society itself cannot exist without some semblance oforder, and it is generally agreed that the greater the refine-ment of order, the more benefits which accrue to society asa whole. The problem with chaos, which is the opposite oforder, is that it imposes terrifically high costs. Peopleattempting life without socially imposed order have tospend all of their time simply trying to survive and protecttheir possessions and families. It is generally assumed thatthe world we live in, without the benefits of intelligentlyconstructed order, is hostile. That which must be wrungfrom the hostile natural world in order to provide productive,enjoyable living requires time and effort, which in turnrequire the establishment of social order. It may be said,then, that the first task of law is to provide order, so thatpeople can be freed of the struggle to survive and given theopportunity to live fulfilling lives.

As difficult as the establishment of order may be, it is evenmore difficult to maintain it. The natural world tends towardchaos. Physicists recognize this principle as entropy.Evidence of this principle is everywhere, from the chaos ofa room where children have been allowed to play unsuper-vised, to the gradual deterioration of a poorly maintainedautomobile, to the regression into barbarism which occursamong people isolated from society. Therefore, order, onceestablished, must be maintained or enforced. This brings usto what is perhaps law’s second most important task:settling disputes.

Disputes are inevitable in human society, and they are athreat to order. The only way order can be maintained is ifthe parties involved in a dispute have some means ofsettling the dispute. Not only must they have a means ofsettling disputes, but people must be assured that disputeswill 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 theresult would be chaos, violence, retaliation, and counter-retaliation, a perpetual “Hatfields v. McCoys.” Societycannot survive that kind of disruption. Local, state, andfederal courts, then, offer the necessary forum, as dovarious administrative tribunals, hearings, etc., sometimesassisted by professionals in arbitration and mediation.

So the law protects social order and settles disputes. Whatelse does it do? Well, people, in order to conduct their affairseffectively and profitably, need to be able to depend uponthe outcome of their endeavors. That is to say, theirexpectations need to be protected, and this too is a task oflaw. One of the most important activities in an advanced

society is planning, and planning requires reliability, de-pendable expectations. Inherent in planning is the need todepend upon promises made to us by others. Commitmentsare necessary and must be supported by law. If reasonableexpectations of a future outcome based upon promises arenot met, the law provides for remedy or compensation. Thereal estate business in particular is replete with legal rela-tionships based upon promises and trust as regards futureoutcomes. A listing agreement is one such relationship, butthere are many others: mortgage instruments, leasingagreements, land contracts, and insurance policies, to namea few. All of these arrangements have inherent expectationsfor everyone involved, and the law must protect theseexpectations.

In addition to protecting expectations, settling disputes,and ultimately providing order, another task of law is toprevent exploitation. In the context of exploitation, pertinentlaws would be any of those which protect against fraudulentactions. The law provides remedy for victims of falsebehavior, whether it be misrepresentation or dishonestadvertising. The Constitution also provides for protectionfrom the government itself. In other words, the state maynot, in this democracy at least, take private property withoutproviding just compensation. There is the concept of “theright of eminent domain,” however, which allows the stateto take private property, but it cannot do this unless theproperty is to be used for a legitimate public purpose, andthen only with fair compensation. If a property owner wholoses his property because of eminent domain feels he hasbeen unfairly compensated, he or she may take the matterto court.

So law prevents exploitation (fraud, unfair taking of prop-erty, etc.), protects expectations, settles disputes and pro-vides order. It should be clear by now that all tasks of laware aimed at the one overriding concern of providing fororder. One further task of law is to ensure equality. Theadministration of law and the promotion of justice are notnecessarily one and the same thing, but it is generallyconceded that, however much one society may differ in itsdefinition of “justice,” the law should seek to promote it.Justice implies fairness and equality, and so when law seeksto promote justice it is seeking to promote fairness andequality. Particularly in a democracy such as that in theUnited States, the concept of justice is very important. Thisimplies that people should not be treated differently on thebasis of such things as religion, sex, marital status, color,national origin, or sex. Chapter 15 of this book takes up thequestion of fair housing, which is the application of “jus-tice” in the area of real estate.

OWNERSHIP

It is because of the concept of ownership that many of our

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laws exist, particularly real estate laws. In the strictest legalsense, “property” is really a bundle of rights which may beowned. One owns the rights to objects or things, the rightsto possess, control, enjoy, and use something, as well as theright to transfer all these rights to someone else. Therefore,when we speak of ownership, we are speaking of the rightby which something belongs to a person, and the “belong-ing” has to do with the “bundle of rights” concerning whatone may do with that which is owned.

Naturally, the rights and privileges pertaining to ownershipalso imply certain limitations or obligations. Society im-poses through law necessary duties or obligations on aproperty owner, and these duties and obligations are usu-ally, if not always, clear expressions of the demands ofsociety. 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 popularsense of the word.

Having clear title to something implies complete ownership.The word “title” may also refer to evidence of such owner-ship.

THE MOST IMPORTANT INCIDENT OFOWNERSHIP

Without question, the right to possess something is themost important incident of ownership. Ownership has nomeaning if the right to possess that which is owned does notexist. It is also implied that the right to possess it is the rightto use it, and to do so to the exclusion of others, “others”being those who do not have an ownership interest. Obvi-ously, a thing may be owned by more than one person.

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

EXCLUSIVE USE NOT ABSOLUTE

In speaking of the right to possess and use property, itshould be noted that the right to do so to the exclusion ofothers (non-owners) is not an absolute fact of life. It ispossible that while others may not be permitted to use one’sproperty, one may have to use it in accordance with the

needs and desires of others: neighbors, planning commis-sions, zoning boards, building inspectors, etc.

TEMPORARY TRANSFER OF RIGHT OFPOSSESSION AND USE

Obviously, one of the most significant features of owner-ship is, as noted, the right of possession. An owner,however, may deprive himself of the right of ownershipwithout impairing his title. For example, he may grant aleasehold estate to someone, allowing that person to takepossession and use his property for a given period of time.In that instance, the owner continues to have the right tofuture possession of the property on which he holds title.He has, in that instance, sold his right to immediate posses-sion.

POLICE POWER

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

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

Police power does not, as might be supposed, issue from theConstitution. States existed prior to the Constitution, andhad police power. Therefore, the courts have reiteratedmany times that the U.S. Constitution presupposes theexistence of police power.

As you know, government in America is divided into threemain branches: the legislative, the executive, and thejudicial. It is in the legislative branch of state governmentthat police power resides. There it is subjected to thescrutiny of elected representatives and the legislative pro-cess itself, in order that it may not be abused. The Consti-tution does not enumerate police power as one of thosegranted by the Constitution to the federal government. Itisn’t entirely correct, however, to say that the federal

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government has no police power at all. It has that measureof police power necessary to properly exercise the sover-eignty granted to it by the Constitution.

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

How, you may wonder, do courts decide whether policepower is being exercised by the legislatures in a proper way?The answer is that courts use the following standard: it mustbe reasonable. That, on the face of it, seems rather vague.What the courts generally mean by “reasonable” is that itmust not be arbitrary or capricious. To exercise police powerarbitrarily or capriciously implies that it is done withoutdiscretion. The next question, then, is how much discretiondo legislatures use in exercising police power. The answeris that we the people have given our state legislative bodiesrather broad discretionary leeway in the ways they exercisepolice power. As a result, certain laws which today aredeemed to be in the public interest might have been consid-ered violations of constitutional rights in earlier times.

The ultimate test of the validity of the exercise of policepower is the Fourteenth Amendment of the U.S. Constitu-tion. Contained in the Fourteenth Amendment are theprovisions for due process and equal protection before thelaw. The Fourteenth Amendment does not impair states’rights to exercise police power, but it does limit them to anexercise of police power which meets the provisions of theFourteenth Amendment.

TRANSFER OF OWNERSHIP OFPROPERTY

It was mentioned earlier that one of the most importantincidents of property ownership is the right to possess itand use it. It is also very important that a property ownerbe able to transfer ownership. To transfer ownership in realestate, is the same as to “convey” ownership or to “alienate”ownership. This is a two part process, in which the owneror transferor extinguishes his own rights at the same timethat the transferee or buyer acquires those rights.

VOLUNTARY AND INVOLUNTARY TRANSFER OF PROPERTY OWNERSHIP

Transfer of ownership of real property may occur voluntar-ily 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 involuntaryin 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 transferof property ought to be free; that is, a property owner oughtto be free to alienate his property, and the welfare of societydepends upon this freedom. Any limitation imposed uponthe right to convey any interest in property is called arestraint on alienation.

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

Restraints on transferability are considered to be repugnantto the concept of fee simple absolute title, and society wantsto be able to easily transfer what it considers one of its mostimportant and valuable commodities. There are exceptionsto this position, however, as when a landlord leasesproperty with the stipulation that the tenant not assign thelease to anyone else or sublet the property. The rationalefor this exception is that landlords need to have somecontrol over who uses their properties.

WHERE LAWS COME FROM

Let’s move back to a consideration of law itself for a moment.As previously mentioned, there are three basic sources oflaw. They are: constitutions, statutes, and precedent. Inaddition, there are administrative rules and regulations.

Constitutions (state and federal) are a basic source of lawand provide the framework within which state and localgovernments operate. It is important to remember that statepowers are retained powers. That is, the states had thesepowers prior to the U.S. Constitution and retained them. Thepowers of the federal government are powers granted to itby the states through the U.S. Constitution. It is becausethis is the case that most real estate laws are actually stateand local laws. There remain, however, a couple of veryimportant ways in which the federal government and theU.S. Constitution affect real estate at the local level.

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First of all, both state and federal constitutions serve thepurpose of protecting individual rights, and among indi-vidual rights are property rights. Because of our constitu-tions, neither the federal nor state governments may depriveanyone of life, liberty or property without due process (theFourteenth Amendment). We have mentioned the right ofeminent domain, using which the government may claimprivate property for legitimate public use and for fair com-pensation.

The other way in which the U.S. Constitution and the federalgovernment can affect local real estate transactions isthrough the regulation of interstate commerce. The stateshave not retained this particular regulatory power, but havegiven it to the federal government. There are, as a result,numerous federal statutes affecting real estate. We willbe dealing with some of them in this course. A few such actsare: The Sherman and Clayton Acts, the Real EstateSettlement Procedures Act, Regulation Z of Truth-in-Lend-ing, etc.

DUE PROCESS - SUBSTANTIVE ANDPROCEDURAL

We have mentioned due process in passing as the clausein the U.S. Constitution which prevents government fromdepriving its citizens of life, liberty, or property without dueprocess. Procedural due process refers to requirements thatgovernment use fair and just methods when taking privateproperty. Substantive due process is a broader concept,guaranteeing that if government deprives someone of life,liberty or property it shall do so reasonably and not arbi-trarily. There also must be a meaningful relationship be-tween the objective the government seeks and the means itis using to accomplish the objective.

It is important to note, however, that as honored as theseconstitutional protections are, there is no all-encompassingblanket protection from government control of privateproperty. The California Supreme Court has said the follow-ing:

We do not minimize the importance of the constitu-tional guarantees to private ownership of property;but as long as 50 years ago it was already ‘thoroughlyestablished in this country that the rights preserved tothe individual by these constitutional provisions areheld in subordination to the rights of society. Al-though one owns property, he may not do with it ashe pleases any more than he may act in accordancewith her personal desires. As the interest of societyjustifies restraints upon individual conduct, so, also,

does it justify restraints upon the use to which propertymay be devoted. It was not intended by these consti-tutional provisions to so far protect the individual inthe use of his property as to enable him to use it to thedetriment of society. By thus protecting individualrights, society did not part with the power to protectitself or to promote its general well-being. Where theinterest of the individual conflicts with the interest ofsociety, such individual interest is subordinated to thegeneral welfare.

EQUAL PROTECTION

Another thing that the Fourteenth Amendment does is toguarantee that no state shall “deny any person within itsjurisdiction the equal protection of the laws.” That isgenerally accepted to mean that laws shall apply equally toall persons regardless of class, color, race, etc., and thateveryone, regardless of class, color, etc., shall have thesame or equal protection of life, liberty, property, and thepursuit of happiness.

The owner or occupant of real property is further protectedby another amendment to the Constitution, namely theFourth Amendment, which affords such person protectionagainst unreasonable search and seizure. The state maynot, in other words, without good reason, search yourdwelling or seize your property, and this applies to bothstate and federal authorities.

The Fourth Amendment specifically provides that “Theright of the people to be secure in their persons, houses,papers, and effects, against unreasonable searches andseizures, shall not be violated...” The term “houses” in thelanguage of the amendment is taken to mean any dwellingor office. The Fourth Amendment further provides that“...no warrants shall issue, but upon probable cause, sup-ported by oath or affirmation, and particularly describingthe place to be searched, and the persons or things to beseized.” When people speak of the interest that is protectedby the Fourth Amendment, they are speaking of the right ofprivacy.

THE FUNDAMENTALS OF LAW

Now that we have briefly surveyed the relationship of lawto real estate, let’s take a crash course in the fundamentalsof law, especially as it is applied in California.

This state was admitted to the Union on September 9, 1850,and on admission adopted the common law of England asits basic legal foundation. It also kept the civil law ofcommunity property. Upon joining the Union California

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citizens became subject to two sets of laws.

DOUBLE AMENABILITY

Double Amenability is a very important legal concept in theUnited States. Each state in the United States is a sover-eignty within itself, but each is also subject to the laws ofthe sovereign United States, or what we call the federalgovernment, or simply the United States Government.Because this is our structure each citizen has double ame-nability, that is each person is answerable to or responsibleto two separate sovereigns — his or her state of residence,plus the federal government. It is therefore possible thata citizen may commit a crime which is an offense to bothsovereigns. This single act, therefore, may cause the perpe-trator to be accused, tried, convicted and punished by bothsovereigns. This is the concept of double amenability.

Now it is important to distinguish between double amena-bility and double jeopardy. Double jeopardy means beingtwice placed in jeopardy of a criminal sentence for thecommission of a single crime. The U.S. Constitution pro-tects each of us from double jeopardy. In other words, theState of California may not place anyone in jeopardy of acriminal sentence twice for the same crime, nor may theUnited States Government. However, if a crime is an offenseboth to the state in which the offender lives and to the UnitedStates Government, then each may bring action against theoffender without placing the offender in double jeopardy —because the citizen is only in jeopardy once as to eachsovereignty.

Another important thing to remember about double jeop-ardy is that when it exists it is always with reference tocriminal matters. The Founding Fathers were concernedthat America’s citizens not be subjected to some of thepractices to which they had been subjected, mainly that oftrying a subject over and over again for the same crime untila verdict of guilty was reached, or until the defendantbecame so demoralized as to plead guilty just to get it overwith.

Even though double jeopardy is a criminal matter, there isa civil equivalent, and it is called res judicata, which literallytranslated means “a thing decided.” Another word for“decided” is “adjudicated.” Therefore, a matter which hasonce been adjudicated, it may not be adjudicated again.This principle is designed to keep persons from having their“day in court” over and over again until a more favorableverdict is reached.

As an example of res judicata, suppose a person whois owed two separate payments of $1,000, and who sues

the payor to recover the money owed. In California the smallclaims court maximum is $1,500. Each of the $1,000 paymentsis considered a separate claim; therefore, the plaintiff maysue twice, once for each $1,000 payment due, since eachpayment is considered a separate claim. On the other hand,he may sue for the maximum of $1,500 and waive theremainder. In that case, he may not go back to court to suefor the remainder. He has had his day in court, and to sueagain would be res judicata.

WRITTEN LAW

Bearing in mind that American citizens are subject to doubleamenability, let’s now examine the sources of written lawand the structure of the court system. First of all, theprinciple sources of federal written law in the United Statesare:

a. The Federal Constitution

b. Treaty Making Powers

c. Statutes

d. Administrative Codes

United States statutes are sometimes abbreviated as “USC”or United States Codes. Federal Administrative Regula-tions are abbreviated as “CFR” or the Code of FederalRegulations.

As previously mentioned, the U.S. Constitution is aconstitution of delegated authority or power. That is, itspowers are granted to it by the states. This distinction isimportant because it only permits the federal government toact on matters which are expressly granted by the statesthrough the Constitution — or that are reasonably impliedfrom the powers which have been expressly granted.

Treaty making powers were given up by the states as eachjoined the Union, and the federal government was grantedthose powers. Consequently, no state has any such corre-sponding power to enter into treaties with foreign powers,and any attempt to do so would be considered unconstitu-tional.

The United States statutes are the codified laws governingthe country at large, and they appear in the USC (UnitedStates Codes), where they are divided into “titles.” Indi-vidual states also have codified statutes, and they alsoshare with the federal government the right to have admin-istrative regulations.

Since the U.S. Constitution is a constitution of grantedpowers or delegated powers, as explained earlier, then state

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constitutions are constitutions of retained powers. Theseare powers which the states already possessed prior to thewriting of the U.S. Constitution. Retained powers aresometimes called “reserved” powers. It can be said thatretained or reserved powers are all powers of a sovereignstate except those expressly granted to the federal govern-ment. Whenever a court is asked to interpret a question offederal constitutionality, it is being asked to find where inthe U.S. Constitution the power being exercised by the U.S.Government is expressed or implied. If the court determinesthat it does not exist in the Constitution, the act is consid-ered “unconstitutional.”

The statutes of California are written down in 27 codes andthe general law. The codes are arranged alphabetically, andeach has an abbreviated title. Within each code, the subjectmatter is arranged in numbered “sections.” For example, ifyou were to look for the disciplinary rules governing realestate licensees, you would find them in Section 10176 of theBusiness and Professions Code, which is abbreviated asB&PC Section 10176. As you will discover, the Businessand Professions Code contains most of the rules or statuteswhich govern the actions of real estate licensees in thisstate. The Legal Codes of California, from the AgriculturalCode to the Welfare and Institutions Code, represent thevoice of the legislature, or the “speaking” of the legislature.

Therefore, in the State of California, we have at the apex ofwritten law the State Constitution (in which there are notreaty making powers), and beneath that the statutes (ex-pressed in 27 “Codes”). Following the state statutes are theadministrative regulations, and following these are the localordinances. Counties and cities are considered politicalsubdivisions of the state, and these municipalities mayenact statutes which are called ordinances. As long as theseordinances are not in conflict with, or pre-empted by, statestatutes, ordinances represent the law of the locality. It isinteresting to note that the federal government has nopolitical subdivisions as states do. Therefore, on the federalside of things, there are no ordinances. Remember, though,that the federal government shares with the states the abilityto enact statutes and administrative regulations.

THE STRUCTURE OF THE COURTS

There are a number of levels of courts in the United States,as well as different types of courts. There are trial andappellate courts, federal and state courts, courts of limitedjurisdiction, intermediate appellate courts, courts of generaljurisdiction, courts of special jurisdiction, and the courts oflast resort.

The court system may also be considered by dividing it into

state and federal divisions. The Supreme Court, of course,is the highest court in the land. On the federal side, belowthe Supreme Court are the federal courts of appeal orappellate courts. Below the courts of appeal are the federaldistrict courts. It is at this last level, the level of the federaldistrict courts, that the federal court system first hears alegal matter. That is why the federal district courts are alsocalled the courts of original jurisdiction.

It is customary that most state and local matters are handled,not in the federal court system, but in the state court system.If a state or local case involves a violation of constitutionalrights (or alleged violation), such case may be heard in thefederal courts. Also, if a person’s constitutional right to afair and speedy trial has been violated, or his right to counselor privilege against self-incrimination, the matter may betransferred from the state to the federal system.

Other matters which are considered in the federal courtsystem include:

1. bankruptcy court cases

2. patent infringements

3. federal tax matters

4. cases where a citizen of one state sues a citizen ofanother state and where plaintiff feels defendant’s statecourt would be biased toward defendant

BANKRUPTCY COURTS

Bankruptcy is a special matter. Because of the FederalBankruptcy Act, states are pre-empted from enacting bank-ruptcy laws. Since there are increasing numbers of bank-ruptcy cases, special bankruptcy courts have been as-signed to handle them. These courts are on an equivalentbasis with the federal district courts.

The Bankruptcy Act of 1978 was adopted as Title II of theUnited States Code, effective October 1, 1979. All previousbankruptcy reorganization has now been consolidatedunder Chapter 11 of Title II. A bankrupt is now called adebtor, and the adjudication (judgment) is now referred toas an order or relief.

It should be noted that, under the present Chapter 11bankruptcy law, whenever a Chapter 11 proceeding hasbeen filed there may be no foreclosure action against thetrustor or mortgagor (borrower) under a deed of trust ormortgage, until otherwise ordered by the bankruptcy court.Furthermore, if a foreclosure action is in progress when aChapter 11 is filed, the foreclosure action is halted until

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further ordered by the court.

The primary purpose of bankruptcy is rehabilitation. Thatis to say, the debtor is given an opportunity to save hisequity from loss in foreclosure by presenting to the court aplan of reorganization which, if the court finds it acceptable,could change the terms and conditions of the trust deedor mortgage, as well as the debtor’s rights. Therefore,another term for filing bankruptcy is to file a reorganizationproceeding.

It might seem to some that this is unfair to lenders, but it hasbeen decided that whenever a loan is made which is securedby real property it is done with either the actual or construc-tive knowledge of the potential effects of the BankruptcyAct, and therefore the lender’s rights have not been im-paired.

STATE COURTS

As in the federal court system, in California (as in otherstates) the highest state court is the California SupremeCourt. California’s Supreme Court is called the court of “lastresort,” which means that its decisions are binding upon allother courts in the state. It is made up on six associatejustices and a chief justice.

If a death sentence has been decreed by a lower state court,the Supreme Court has appellate jurisdiction. In otherwords, the matter may be appealed to the state SupremeCourt. Also, if a lower court is considering a case, the resultof which has significant bearing on major legal issuespending in the state, the Supreme Court may transfer thecase from the lower court.

Beneath the Supreme Court in California is the state’sappellate court system, or courts of appeal. These arelocated in and serve the following areas: Fresno, SanBernardino, San Diego, Sacramento, Los Angeles, and SanFrancisco.

The courts of original jurisdiction in the state court systemare the municipal and superior courts. Whether a case isheard in municipal court or superior court depends largelyupon the subject matter and/or the dollar amount at issue.If the amount being sought by the plaintiff does not exceed$15,000, the case may be heard in municipal court. Municipalcourts may also hear unlawful detainer (eviction)proceedings up to $1,000 per month tenancies. There issome likelihood that municipal courts and superior courtswill eventually be merged.

For each of California’s fifty-eight counties, there is one

superior court. Some counties have many more superiorcourt judges, even though there is only one superior court.Los Angeles County, for instance, has more than onehundred and fifty superior court judges. Superior courtjudges are elected in general elections to serve six yearterms. If any of them retire, die, or are removed fromincumbency, or if a new position is created, the position isfiled by appointment from the governor. These courts havejurisdiction when the dollar amount in question exceeds$15,000, or when the subject matter is required by statute tobe heard in superior court. The following are some of thematters which must be heard in superior court:

1. domestic relations, child custody suits, dissolutions ofmarriages, and adoptions

2. quiet title to real property

3. probates, guardianships and conservatorships

4. cases involving equitable remedies (explained later)

5. criminal cases involving the death penalty, imprison-ment in a state prison and felonies

6. appeals from municipal courts

7. requests for writs of habeas corpus, mandamus, certio-rari and prohibition

SMALL CLAIMS COURT

This is a subdivision of the municipal court. There areseveral characteristics unique to the small claims court:

1. Claims may not exceed $1,500

2. Procedures are informal

3. Plaintiff may not appeal the judgment

PRECEDENT

We have mentioned precedent earlier, but it should bementioned here as another source of written law. As youknow, legislatures are not constrained by the doctrine ofstare decisis. They may make entirely new laws withoutrelying on precedent. Whenever a legislature enacts a newstatute it frequently requires interpretation, and that is oneof the functions of the court system, to interpret the speak-ing of the legislature as expressed in statutes. Besidesinterpretation, the courts also have the task of testing thestatutes against the constitution. Occasionally portions ofa new law will be declared constitutionally invalid or will be

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reinterpreted because of changing conditions in the socialcontext. One way of ensuring some measure of consistencyin this process is through the doctrine of stare decisis, byfollowing precedent.

All lower courts in a state must “stand on” or adhere to thebinding decisions handed down by the state supreme court.This is the principle way in which stare decisis operates.However, the dicta (speaking) of other courts of equaljurisdiction may also carry some weight in the decisions thata court reaches. Even court decisions of other states maybe used to provide precedent, even though their decisionsare not binding.

This chapter has attempted to introduce the student to thebasic structure of the legal system in this country and in theState of California, with special reference to the place of realestate law in the overall system. In the following chapter,you will be introduced to some of the basic concepts anddoctrines by which the legal system operates, with particu-lar emphasis on real estate law.

WRITTEN ASSIGNMENT 1Chapter 1

1. Real estate law is comprised of constitutional law, statutory law, and law derived from precedent.a. true b. false

2. In which of the following ways may a person fail to perform a legal duty?a. by being ignorant of the pertinent law c. both “A” and “B”b. by willfully disregarding the law d. neither “A” nor “B”

3. Which of the following refers to a huge body of opinion formulated by courts in the settling of disputes?a. “stare decisis” c. both “A” and “B”b. common law, also known as case law or judgement law. d. neither “A” nor “B”

4. Which of the following must follow the doctrine of “stare decisis”?a. legislatures c. courtsb. real estate agents d. none of the above

5. From strictly a legal point of view, the word “property” refers to what?a. land c. parcelb. improvements on land d. certain rights a person has in a thing or object

6. Property was divided into real and personal categories as the result of:a. the fact that land is more real than other objects c. the fact that you can’t carry land on your “person”b. two categories of legal dispute d. none of the above

7. Which of the following is perhaps the most important characteristic of land?a. trees grow on it c. its fixityb. it contains minerals d. none of the above

8. What is the first and foremost thing that law is meant to accomplish?a. makes future planning possible c. establish and preserve orderb. provide a forum for ideas d. none of the above

9. Not only must people have a means of settling disputes, but they must be settled fairly and timely.a. false b. true

10. A major task of law is protecting expectations, settling disputes, and preventing exploitation.a. true b. false

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the same order. As an example, John Jones versus Bill Smith,appearing in Volume 99 of the Pacific Reports, SecondSeries, on page 40, would be cited as Jones v. Smith, (1970)99 P2d 40.

Law libraries containing these series vary in how compre-hensive they are. Attorneys’ offices normally have limitedlaw libraries, as do the trust or legal departments of manybanks, etc. The public may usually use the law librariesfound in some courthouses. Public libraries may also havelegal volumes as well as sets of the various state legal codes.

“California Jurisprudence” (Cal.Jur.) is a legal encyclopediain which may be found articles on all sorts of legal subjectmatter areas, extensively annotated. “Witkin’s Summary ofCalifornia Law” offers legal overviews, arranged by subjectmatter area. “Shephard’s Citations” is also an extremelyuseful tool used to stay abreast of the latest citations inareas of interest. In recent years, with the advent of thecomputer, it has become possible to do legal research muchfaster than previously.

THE DIFFERENCE BETWEEN LEGALAND EQUITABLE

One of the main reasons there is a difference between legaland equitable matters is because of real estate. In England,during the period of history when kings had absolutepower, anyone seeking relief, or remedies, in courts of lawdid so strictly at the king’s pleasure. Legal courts of thosetimes only offered remedies of money, which was calleddamages. This sufficed for some time, but an importantchange occurred when people began to acquire propertyownership interests.

Whenever there was a dispute over title to property, or overthe terms of an agreement, there was no adequate remedy,simply because the courts were not empowered to awardtitle. They could only award money or damages, andfrequently this wasn’t what was needed. Because of

2LEGAL DOCTRINES AND CONCEPTS

PUBLICATION AND CITATION

In the previous chapter we introduced the doctrine of staredecisis, that is the doctrine of precedent which is followedin the courts. Because precedent is such an importantdoctrine in the practice of law, it is all the more importantthat attorneys and other interested parties, includingplaintiffs and defendants, have access to publishedreports of cases.

Whenever reasonable persons disagree upon matters oflaw, it is then the courts’ responsibility to find a resolutionto the disagreement. Very often the ability to find thepertinent law or judgments rendered can obviate the neces-sity for litigation, and if litigation cannot be forestalled, thenfinding the pertinent information can do much to predict theoutcome.

In attempting to prove that a given proposition is supportedby law, attorneys will refer to citations. In other words,citations represent legal authority. If my attorney proposesthat it is legal for me to use part of your land for my ownpurposes, he will cite the authority of any one of severalpossible established legal precedents. The authority herefers to in putting his case may be constitutional authorityor statutory authority. That is, he may find something inthe constitution or in statutes to support hisproposition onmy behalf. Failing to find a constitutional or statutorycitation, he might then offer a citation from administrativerule, regulation or interpretation, or failing that, case law.

The question then arises: Where does he find thesecitations and how are they organized? Certain cases areapproved (certified) for publication in what are called “re-porter series.” The two reporter series in California are:

a. California Reports (Bancroft-Whitney)

b. Pacific Reports (West Publishing Company)

Both of these series contain the same material, but they arelisted differently as to page number and volume. When acase is cited, it is done by names and locations, always in

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mounting displeasure among feudal lords and barons (fromwhom the king received all his armies, taxes, etc.) the kingappointed his chancellor to examine claims which werebeing brought that couldn’t be settled with money. Aseparate court was set up for this purpose, and was calledthe Chancery Court after the chancellor. The chancellor wasauthorized by the king to grant any remedy the king himselfhad the power to grant in cases which appeared to havemerit. This system of court administration grew up along-side the formal legal system, and became equally as impor-tant. In this court, an appeal was being made to the king’sconscience, and another word for that is “equity.” Hence,courts of conscience or courts of equity.

Today there is no physical distinction between these twocourts, but there remains a distinction between equitablematters and legal matters. As pertains to real estate, thisdistinction is still important today. The way to understandthe distinction is to concentrate on the remedy. Legalremedies today include damages and rescission. Equitableremedies include: specific performance, injunction, quiettitle, foreclosure, mandamus, and reformation. We willdiscuss these in some detail presently.

Damages, as previously mentioned, means monetary reliefor remedy. To provide adequate relief, a remedy must “makethe plaintiff whole,” as the saying goes. Frequently anaward of damages will do just that. If you suffer a dollar lossthat can be determined, you may be perfectly satisfied to beawarded what you have lost in dollars. In a complaint aplaintiff will pray for a remedy. That remedy may be chosenfrom a number of possible remedies, of which one may bedamages (money).

Besides damages, another legal remedy is that of rescis-sion, which means to cancel or terminate an agreement.Suppose you enter into an agreement with someone whohas misrepresented important factual information to you.You might want out of the agreement, and you might besatisfied to leave it at that if you haven’t suffered a financialloss. In that case, you would seek the legal remedy ofrescission. It is possible to have a formal rescission withoutthe necessity of court action, provided both parties agreeto it. If it goes to court, the case will be adjudicated accordingto whether or not the judge thinks you have the right toterminate the agreement.

Although there is no physical separation between courts oflaw and courts of equity today, and the same judge may hearboth types of cases, it is still appropriate to speak of courtsof equity and courts of law. For instance, if you have acomplaint for which neither damages nor rescission isadequate remedy, you will want to pursue the matter in acourt of equity, which means that you are seeking a differenttype of remedy.

REMEDIES AVAILABLE IN COURTS OFEQUITY

As previously mentioned, the remedies available in courtsof equity are: specific performance, injunction, quiet title,foreclosure, mandamus and reformation. Suppose youhave an agreement with someone in which that personagrees to convey real property to you, to sign and deliverto you a proper deed. Now suppose that person refuses todo so. What is your remedy?

The remedy to compel the defendant to honor the agree-ment is that of specific performance. In the case of a realproperty dispute as described above, the defendant wouldbe compelled to convey the real property. The only condi-tion would be that there existed an enforceable contract. Itshould be apparent that since a contract must be enforce-able for the specific performance remedy to work, then itbecomes very important to properly prepare all contracts,agreements, deposit receipts, etc.

Injunction is a term which signifies just the opposite ofspecific performance. In other words, a decree of injunctionis a court order not to do something. Courts will grant adecree of injunction if it can be demonstrated that irrepa-rable harm will result from the action if it is carried out, andthat decision rests upon the discretion of the court.

As an example, suppose a lender forecloses on a propertybecause the owner of the property has sold it withoutallowing the lender to approve the new borrower, despitethe fact that the note and trust deed contain a due-on-saleclause giving the lender that right. Now suppose that theforeclosing lender was about to sell the property before thecourts could test his right to enforce the due-on-sale clause.The owner might get an injunction to stop the sale of theproperty until such could be determined.

Actions which are brought to eliminate a “cloud” on the titleof property are known as quiet title actions. Sometimes anaction to impose a cloud is also referred to as a quiet titleaction, but this is not technically correct. The quiet titleaction is an action to quiet the title to adverse or hostileclaims. For example, suppose someone is claiming aninterest in the title to your property, such as an easement,and it is discovered that there is a document in the chain oftitle granting that easement, but which does not properlybelong there. If the adverse claimant will not voluntarilyeliminate this cloud on the title, and it can be proven that theclaim is invalid, the plaintiff would seek a quiet title action.

As you probably know, a lien is an encumbrance in whichproperty serves as security for the payment of a debt ordischarge of an obligation. You probably also know that toforeclose a lien is to cut off an owner’s interest in property

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upon which a lien is claimed. This is yet another type ofequitable remedy. The ownership interest which is cut offmay be entire, or it may be to the extent of the lien.

A judicial foreclosure involves the following steps:

1. foreclosing plaintiff alleges:

a. existence of a lienb. nonpayment of the lien

2. foreclosing plaintiff establishes that the lien is securedby the specific property being foreclosed

3. foreclosing plaintiff asks the court to:

a. sell the propertyb. apply the proceeds of the sale to the lien amount

In California there is a nonjudicial foreclosure proceedingcalled a “trustee’s sale proceeding.” The results are thesame; it just doesn’t require any type of court action.

The term mandamus refers to yet another remedy in courtsof equity. This one is used to compel public officials,whether elected or appointed, to do that they are supposedto do. This is not a common problem, but occasionally it isnecessary. Mandamus means “writ of mandate,” which is anorder. Problems requiring a writ of mandate might occur inthe recording of documents. In real estate, for example, thecounty recorder might refuse to record a document whichis meant to convey title to property on the grounds that itdoes not meet the recorder’s requirements. If the plaintiffbelieves that it indeed does meet the requirements, he mightseek a writ of mandate to compel the recorder to record thedocument. Another example would be in the issuance oflicenses. The real estate commissioner’s job, or part of it, isto issue licenses to people who complete all the require-ments. If there is a dispute between the commissioner andan applicant, and the applicant feels he can prove he hassatisfied the requirements, the applicant might seek a writ ofmandate compelling the commissioner to issue the license.

Finally, reformation is an equitable remedy. Reformationrefers to the remedy of getting a document rewritten toconform more closely to the intent of the parties involved,such as parties to a contract. It is important to note than anaction for reformation can in no way change the actualagreement between the parties, but is intended to correcterrors, or to force the correction of errors, should one partyto the contract refuse to. For example, if a critical date ina contract is inadvertently entered incorrectly, and if thaterror in some way benefits one of the parties to the contract,it is conceivable that that party might refuse to change thedate to the actual date agreed upon. If this were to happen,the remedy of reformation would be appropriate.

THE STATUTE OF FRAUDS

One of the reasons that errors might appear in a contract isthat the Statute of Frauds requires real estate contracts tobe in writing. This implies that an agreement exists prior tothe written contract, and that the written contract shouldreflect as accurately and honestly as possible the actualagreement which the written contract reflects. Sometimeserrors occur in the translation from spoken agreement tocontract. Contracts for real estate transactions, which wewill discuss in greater detail in a later chapter, must not onlybe written but written properly if they are to be enforceable.If it is not enforceable, it is not enforceable either in courtsof law or courts of equity. The statute of frauds is a legaldoctrine which is both legal and equitable.

STATUTE OF LIMITATIONS

There is a series of laws which require that if a legal actionis to be brought, it must be done within a prescribed periodof time following the cause of the action. These statutesconstitute another legal doctrine and are called collectivelythe statute of limitations. Legal actions (actions brought incourts of law) concerning contracts have a statute oflimitations in California of four years. A plaintiff may waitfor as long as three years and eleven months after the causeof the action to bring a lawsuit to a court of law, and willgenerally find the courts willing to hear the case. Courts ofequity differ in this regard.

LACHES

Courts of equity have an equivalent of the statute oflimitations called laches. Courts of equity will considerwhether a plaintiff may have waited to bring a lawsuit inorder to harm the defendant. If it is determined that thedefendant “sat on his rights,” and caused unconscionableharm to the defendant, the court may use the doctrine oflaches to disallow the action.

It is said that “equity must follow law.” A good example ofthat is in this business of the legal doctrine of statute oflimitations and the equitable doctrine of laches. Since thelegal period for the statute of limitations is four years, courtsof equity must follow law in that respect. In other words,they cannot extend the statute of limitations beyond fouryears, so that if an action is brought four years and a dayafter the cause of the action, courts of equity must bar theaction. However, since courts of equity, as you will remem-ber, are courts of “conscience,” the court will not allow anyactions which might prejudice the rights of the defendant,and that would include delaying the action unreasonably.A remedy may still be available, but it will have to be found

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in a court of law instead, and there, as you know, the onlyremedy is one of damages, which may not be what is needed.

ESTOPPEL

Like laches, “estoppel” is a French word. The literal meaningis “stopper”. The following is the definition of estoppelgiven in “California Jurisprudence:

“...a bar by which a person, in consequence of his ownprevious action, is precluded from denying a fact which hasled another to so conduct himself that if the truth is estab-lished the other will suffice.” What? Good question. To“preclude” from “denying” something means that one maynot deny it. In this case, one may not deny a certain fact.What is that fact? It is a fact which has led someone else todo something. And what is the nature of that something?It is something which will cause the “person precluded fromdenying it” harm if the truth of it is established.

If that doesn’t help, think of it this way. If I have donesomething to you which, if I admitted it, would cause me tosuffer (even where no actual illegality exists), and if this issomething which will cause you harm if I don’t admit it, youcan rely upon the doctrine of estoppel to “preclude me fromdenying it.”

Here’s another definition, this one from Section 623 of theCalifornia Evidence Code: “Whenever a party has, by hisown statement or conduct, intentionally and deliberatelyled another to believe a particular thing is true, and to actupon such belief, he is not, in any litigation arising out ofsuch statement or conduct, permitted to contradict it.”

If you sue me for something which is a result of you actingupon what I have led you to do, and if I have deliberately ledyou to do this by intentionally making you believe some-thing is true, then the doctrine of estoppel says that I maynot deny having done that. In real estate, there are applica-tions of estoppel in conveyances and easements, as well ascontract and agency law. We will be discussing all of thesein more detail later.

For now, here is a concrete example of the application ofestoppel in a real estate transaction. Suppose that I own aneasement across your land, and this easement gives meaccess to a public street. I don’t use the easement for yearsand lead you to believe that I mean to abandon the easement.As a consequence, you build a structure that completelycovers the easement. I watch the construction go up anddon’t complain. When it’s nearly finished, I claim a right touse the easement. Under those conditions, my right to usethe easement is terminated by estoppel. In real estate, thedoctrine of estoppel is used in this way to terminate ease-ments because society has expressed a desire to free titlesof encumbrances which are in fact unused easements.


1. The doctrine of precedent which is followed in the courtsis called:

a. citation c. statuteb. stare decisis d. none of the above

2. In attempting to prove that a given proposition is sup-ported by law, attorneys will refer to:

a. the constitution c. the judge’s conscienceb. citations d. none of the above

3. An attorney might offer a constitutional authority, statu-tory authority, or administrative rule citation.

a. false b. true

4. Which is a legal encyclopedia in which may be foundarticles on all sorts of legal subject matter areas?

a. California Law c. California Opinionb. California Jurisprudence d. none of the above

5. Which is a “reporter series” in California?a. California Reports c. both “A” and “B”b. Pacific Reports d. neither “A” nor “B”

6. Remedies of money are called:a. equitable remedies c. damagesb. equitable relief d. none of the above

7. Legal remedies today include:a. damages c. specific performanceb. rescission d. both “A” and “B”

8. Equitable remedies includes: specific performance, in-junction, quiet title, foreclosure, mandamus, and reforma-tion.

a. true b. false

9. Which of the following terms means to cancel or terminatean agreement?

a. foreclosure c. rescissionb. mandamus d. none of the above

10. The remedy to compel the defendant to honor theagreement is that of:

a. mandamus c. injunctionb. specific performance d. none of the above

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idea a little more realistically by saying that land “...in-cludes free and occupied space for an indefinite distanceupwards as well as downwards...”

Yielding to the realities of the air and space age, the courtsin modern times have recognized a public right to the use ofair space above private land, as a highway available to all,so long as such use does not unreasonably interfere withthe landowner’s enjoyment of the property. Below thesurface of the earth they have recognized the fluid and“fugitive” or moving nature of subsurface oil and gas. Suchsubstances cannot be identified, isolated and confinedstrictly in a given space, and so they are incapable ofownership while they are in their natural state. They becomecapable of ownership when they are “captured.” The rightof the landowner to drill vertically into his or her land for thepurpose of capturing these substances is an intangible butvaluable part of what is included in land, but this does notinclude any right to drill slantwise under a neighbor’s landfor this purpose.

WATER

Despite the attention given to oil and gas and the wealththey represent, another fluid substance — water — isprobably of greater economic importance to our society. Aconsiderable body of law has developed concerning under-ground and surface water and related water rights.

THAT WHICH IS AFFIXED

In addition to land, real property consists of anythingaffixed to the land so as to be regarded as a permanent partof it, such as a building or a bridge or a tree, as well asanything that is similarly affixed to any already affixed objectsuch as the doors of a building or permanently installedcabinets, or built-in appliances. For purposes of sale,however, emblements, industrial growing crops, and things

3THE COMPONENTS OF PROPERTY

Technically, and in the historical sense, the word “prop-erty” does not refer to the thing owned, but rather to therights or interests which the owner has in the thing owned.These rights include the right to possess, to use, to encum-ber, to dispose and to exclude. Thus property may be saidto consist of a “bundle of rights” or a “bundle of interests”a person has in a thing, whether the thing is real or personalproperty.

However, today the practicing broker or salesperson andclients are not likely to think of real property in the historicallegal sense as a bundle of rights or interests. Rather theyregard the thing which is owned as property. This is a usefuland appropriate approach and indeed it has the approval ofCalifornia’s Legislature. In the Civil Code, the legislaturehas stated that “the thing of which there may be ownershipis called property.” Ownership of a thing is the right topossess and use it to the exclusion of others. Property in thissense again is either real or personal. Real property, or realestate, as it is often called, consists of:

1. Land

2. Anything affixed to it as to be regarded as a permanentpart of the land

3. That which is incidental or appurtenant to the land

4. That which is immovable by law

LAND

Land includes the soil, rock, other substances that composethe material of the earth. It also includes space — not justthe space on the surface of the earth — but also the spacebeneath it and the space above it as well. The common lawconcept of land includes the space beneath the surface ofthe earth down to the center, and the space above it up tothe “top of the sky.”

The California Civil Code expresses essentially the same

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attached to or forming a part of the land which are agreed tobe severed before sale or under contract of sale, are treatedas goods and governed by the provisions of the CommercialCode regulating the sale of goods.

Emblements are the growing crops of the vegetable produc-tion of the soil produced annually by labor and not spon-taneously. The term also denotes the right of a tenant tocarry away, after the tenancy has ended, such annualproducts of the land as have resulted from the tenant’s owncare and labor.

It is interesting to trace the possible metamorphosis ofpersonal property into real property, and vice versa, byseverance and affixation. An underground deposit of ironis clearly land. When removed, transported and processedinto steel girders, it is movable personal property. Used toerect a building it reverts to its status as real property.Eventually, when the building is razed, the salvage steelbecomes personal property. Any part of it which is rel-egated to a dump and restored to its original status as partof the earth reverts to real property

THAT WHICH IS INCIDENTAL ORAPPURTENANT

That which is appurtenant to the land would include any-thing which is by right used with the land for its benefit.Examples are watercourses or easements — such as rightsof way over adjoining lands, or even passages for light, airor heat, from or across the land of another. Another commontype of appurtenance is stock in a mutual water company.When such stock is “appurtenant to the land,” ownershipof the stock may not be transferred unless the land istransferred with it. When such stock may not appurtenantto the land, of course, other landowners in the mutual watercompany district may buy it and thus become entitled to alarger share of the available water.

Finally, real property is anything which is immovable by law.

PERSONAL PROPERTY — THEMODERN CONCEPT

In an earlier chapter we said that personal property consistsof every kind of property that is not real. It includes money,movable goods or chattels, evidences of debt and choses(things) in action. The last term is a legal phrase used looselyto describe the right to recover money or other personalproperty through a judicial proceeding. In includes the rightto recover something under a contract, e.g. money owned

on a note, and the right to recover damages (money) for atort or private wrong suffered.

In the light of the above definition and distinction betweenreal and personal property, ordinarily it is not necessary tospecify what is included in the conveyance of a clearlydescribed parcel of land. However, in any doubtful case,prudence suggests clearly spelling out in writing the inten-tions of seller and buyer.

A likely place for such expression of intent is the depositreceipt agreement. This is especially appropriate whencertain borderline types of property are involved, such asfixtures.

Fixtures are items of personal property which are attachedto the land in such a manner as to be considered part of theland itself. Depending on the circumstances, personalproperty may or may not be so integrated with the land thatit is regarded as part of the property and belongs to theowner thereof. This delicate question often arises whenland is bought or sold, or when a tenant makes improve-ments and later the lease ends.

The California Legislature has provided at least a partialanswer by statute. For example, it has declared that a thingis affixed to the land when it is attached to it by roots, as inthe case of trees, vines, or shrubs; or embedded in it, as inthe case of walls; or permanently resting upon it, as in thecase of buildings; or permanently attached to what is thuspermanent, as by means of cement, plaster, nails, bolts, orscrews. (Under the code, industrial growing crops, andthings which by agreement are to be severed before the saleor under the contract of sale shall be treated as personalproperty and are governed by the law of sales of goods.)

This statutory definition is not all-inclusive, and the courtshave upon occasion utilized five general tests to determinewhether or not a given piece of personal property is a fixture.These are:

1. The intention of the person incorporating the personalproperty into the land. This test is usually considered themost important.

2. The method by which the property is so incorporatedinto the land. The degree of permanence of the annexationis significant. Thus, even in the absence of statutorydefinition, when the attachment is by cement and plaster,for example, the goods so attached are likely to be classi-fied as fixtures.

3. The adaptability of the personal property so attachedfor ordinary use in connection with the land. If welladapted, it is probably a fixture.

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4. The existence of an agreement between the partiesinvolved as to the nature of the property affixed to theland. If the parties have displayed sufficient foresight andproperly anticipated the problem, there need be no prob-lem.

5. The relationship between the person who adds orannexes the article, and the person with whom a disputearises as to its character. As already noted, this wouldtypically involve seller and buyer of the land, or landlordand tenant.

Having determined whether a given item is or is not a fixture,the question remains — who owns it?

(1) As between seller and buyer of the land, in the absenceof an agreement to the contrary, things affixed to the landas of the time of the contract of sale or conveyance goto the buyer by grant of the land. This same rule wouldapply in the relationship between a mortgagor and mort-gagee, or trustor and beneficiary. Fixtures stay with theland. Buyers and lenders inspecting property in contem-plation of purchase or loan are justified in assuming thatwhatever is attached to the land or building and is essen-tial for its use is a fixture.

PERFECTING SECURITY INTEREST INFIXTURES

Since fixtures have such an equivocal place the the compo-nents of real property, and since providers and installers offixtures often have some security interest (lien rights) infixtures, we should take a moment to explain how securityinterest in fixtures is perfected.

One purpose of the Uniform Commercial Code Division 9 isto give lien rights to providers and installers of fixtures. Aperfected security interest in fixtures by the provider haspriority over the conflicting interests of owners andsubsequent encumbrancers. The question the arises: Whohas priority when different claimants have conflicting se-cured interests in the same collateral? Basically, it is thesame rule as applies to any recording sequence — “first intime is first in right.”

How then is a security interest in a fixture filed? Under theUCC, tangible personal property includes “goods,” andgoods includes fixtures which are deemed fixtures under thelaw, meaning when they become so related to particular realproperty that an interest in them arises under the real estatelaw.

However, ordinary building materials incorporated into abuilding are not deemed fixtures. A security interest infixtures attached to real estate can be created by:

1. specific provisions included in a trust deed ormortgage secured by the real property, or

2. a fixture filing in the form of a Financing Statement.

Both must be recorded in the county where the real propertyis located.

In either case, to qualify as a fixture filing, the instrumentsmust contain the information required by law, which in-cludes a description of the goods which are or will becomefixtures, a legal description for the real property, statementthat the goods are, or will become, fixtures, and the assertionthat the statement will be recorded in the real estate recordsin the county where the real property is located.

A fixture filing in the form of a Financing Statement is a lienon the fixtures for 5 years from the date of the filing, unlessa Continuation Statement is recorded prior to the lapse of theoriginal Financing Statement, in which case the lien isextended an additional 5 years. A fixture filing in the formof a trust deed or mortgage is effective as long as the trustdeed or mortgage remain a lien.

As to enforcement, a fixture filing in the form of a FinancingStatement is enforced according to the provisions forpersonal property secured interests in the UCC; if the fixturefiling is contained in a trust deed or mortgage, the securedparty has the option of proceeding under the UCC to enforcethe lien on the fixtures or by foreclosure proceedings underthe trust deed/mortgage to enforce the lien on both the realand the personal property.

UCC 9402 provides a form of Financing Statement to be usedas a fixture filing; the formal requisites of a FinancialStatement; and Amendments and contents of a mortgage tobe used as a Financing Statement. A copy of a securedagreement signed by the debtor is sufficient as a FinancingStatement if it contains all the information required bySection 9402.

PLEASE NOTE: THIS CHAPTER CONTAINS GENERALINFORMATION CONCERNING THE REQUIREMENTSOF FILING UNDER THE CODE WHICH ARE INTENDEDTO MERELY INTRODUCE THE STUDENT TO THECODE’S DIVISION 9 WHICH APPLIES TO ANY TRANS-ACTION INTENDED TO CREATE A SECURITY INTER-EST IN PERSONAL PROPERTY OF EVERY KIND. REF-ERENCE TO MATTERS ON THE UNIFORM COMMER-CIAL CODE SHOULD NOT SERVE AS SUBSTITUTES

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FOR STATUTORY ANALYSIS WHEN DEALINGWITH SPECIFIC PROBLEMS, CONSULTATION WITHLEGAL COUNSEL ON LEGAL MATTERS, OR WITHFINANCIAL COUNSEL ON BANKING OR FINANCINGPROBLEMS.

It was mentioned previously that buyers and lendersinspecting property in contemplation of purchase or loanare justified in assuming that whatever is attached to theland or building and is essential for its use is a fixture. Thisis so even though the particular item can be easily removedwithout physical or lasting injury to the building or thearticle. Such items include: linoleum cemented to the floor,wall beds, window screens and curtain rods. It might eveninclude a rug, if the rug has been made specifically to lie ona floor in a very irregularly shaped room.

As between landlord and tenant, again in the absence ofan agreement to the contrary, the basic rule is that the fixturebelongs to the owner of the land, unless the owner choosesto require the tenant to remove it. However, by statute thereis a broad area of exception. A tenant may remove from thepremises anything the tenant has affixed thereto for pur-poses of trade, manufacture, ornament or domestic use,if the removal can be effected without injury to the premises.This exception does not apply if the thing has, by the mannerin which it is affixed, become an integral part of the premises.

Note: If the tenant is to take advantage of the statute, thetenant must remove the fixture during the continuance of thetenant’s term, unless, of course, there is an agreement withthe landlord which permits removal after expiration of theterm.

RECAP

Let’s review briefly the components of property. First of all,property in general (generic property) is THE THING OFWHICH THERE MAY BE OWNERSHIP. Some examplesare: animals, inanimate objects, obligations, products oflabor and skill, and statutory rights. Any of those thingsmay be owned. And what does ownership mean? It is abundle of rights, including: THE RIGHT OF PERSONS TOPOSSESS, USE, ENJOY, ENCUMBER, AND DISPOSE OF ATHING TO THE EXCLUSION OF OTHERS.

Of things which may be owned, there are two basiccategories: REAL AND PERSONAL PROPERTY. Realproperty includes: Land, that which is affixed to the land,that which is incidental or appurtenant to the land, and thatwhich is immovable by law. Land itself includes: earthmaterial, surface space, land or water, subjacent space andair space. Fixtures and vegetation are considered affixed to

the land. Natural rights, servitudes, easements and restric-tions are considered incidental or appurtenant to realproperty.

Personal property includes all property that is not realproperty. These things include: Money, coins, goods,merchandise, some crops, chattels (both real and personal)such as leaseholds and mortgages as well as furniture,vehicles and livestock; in addition personal property in-cludes such intangibles as the right to sue, as well as stocks,notes, bonds, and evidences of debt.

Taken all together that just about covers everything.

DESCRIPTIONS

We have been dealing thus far in definitions; now we moveinto descriptions of real property, a very important aspectof the real estate business, also covered by various laws.Definitions and descriptions are complementary but circu-lar means of dealing with reality. You can think of definitionsas dealing in the abstract or general, while description hasmore to do with the specific.

A cow, for example, is given the following definition byWebster: “The mature female of domestic cattle (genusBos), valued for its milk.” That’s true enough, but it is sogeneral that someone who had never seen a cow would stillbe pretty much in the dark. A description would clarifymatters, and the more specific, the more clarification. Onecould say that a cow has four legs, udders, horns, and issuch-and-such height and weight, which begins to providea picture. Bessie the Cow, however is all of those things, butis also spotted brown and white, while her friend next dooris a Black Angus.

Individual parcels of real property, being fixed in place anddistinguishable thereby from other parcels of property,have to be described. In fact, every parcel of land sold,leased or mortgaged must be properly identified or de-scribed, and these descriptions are often referred to as legaldescriptions.

Every real estate instrument to be recorded must have anadequate description of the physical property — the land.Any improvements upon the property need not be de-scribed. A good or legal description is said to be one whichdescribes no other piece of property but the one in questionin such a way that the land can be identified.

There are three general methods of describing property:

1. metes and bounds

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2. U.S. Government section and township system

3. recorded tract, map or lot and block system

Some descriptions may involve two or even three of thesemethods.

METES AND BOUNDS

Legal description by “metes and bounds” is used when theproperty referred to is not covered by a duly recorded map,or where it is in such shape as to make it impracticable todescribe by section, township and range. “Metes andbounds” descriptions are sometimes used, and are perfectlylegal, in connection with property which could be legallydescribed otherwise.

A metes and bounds description starts at a fixed point ofbeginning and follows, in detail, the boundaries of the landdescribed in courses and distances from one point toanother until the point of beginning is reached. If a mistakeis made at the point of beginning, the description is worth-less.

Metes are measures of length, e.g. inches, feet, yards orrods.

Bounds are measures of boundaries, both natural andartificial, e.g. rivers and roads. Landmarks (markers) referredto as monuments, are often used in such descriptions (trees,boulders, creeks, fences, roads and iron pipes, etc.).

Older descriptions of this type used markers that havedisappeared, moved or otherwise been altered, making thedescriptions indefinite. Thus, since markers are subject todestruction and disappearance, they should be used onlywhere necessary, and every identifying feature should bedesignated.

Here is a partial metes and bounds description of a regularlyshaped parcel on a plat map:

Beginning at a point on the southerly line of “O”Street, 150 feet westerly of the SW corner of the inter-section of “O” and 8th Streets; running thence duesouth 300 fee to the northerly line of “P” Street...

Here is a partial metes and bounds description of an irregularparcel:

Beginning at a point from which the southwest cornerof said east one-half bears south 01 degree 46' 30” east534.80 feet; thence from said point of beginning along

the arc of a 120.00 foot radius curve which is concaveto the southwest...

Note: A metes and bounds description should be used asa last resort due to its many disadvantages. They may belengthy and unintelligible to anyone but a civil engineer orsurveyor, as they deal with angles and measured distancesfrom objects which may no longer be distinguishable.These descriptions add a great burden to the work of publicofficials such as recorders, assessors, and tax collectorsbecause of their length and awkwardness.

DESCRIPTION BY SECTION ANDTOWNSHIP

The United States Surveyor General has jurisdiction overthe surveys of all public lands. From a prominent startingpoint, true north and south and east and west lines are runon a true parallel of latitude. The intersection of these linesat this point (or monument are called the base and principal(prime) meridian, respectively. Thus the base lines andmeridians (with a proper descriptive name) were establishedin order to locate and describe lands. From these base linesand meridians the location of land may be accurately deter-mined.

Range and Township Lines. The public domain is dividedinto north and south lines, six miles apart, called “ranges”and into east and west lines, also six miles apart, called“township” lines. The areas between the intersection ofthese ranges and township lines are called “townships.”The standard township is six miles square and contains 36square miles.

The intersection of the “base line and meridian” is thestarting point of calculations east or west, north or south,to locate a definite township. Ranges are numbered east orwest from a principal meridian, while townships are num-bered north or south from the principal base line.

Note: Township 4 north, rant 3 east, would be threetownships (squares of six miles each) to the east (to theright) of the principal meridian, and four townships (squaresof six miles each) to the north (up) of the principal base line.

Then township 5 south, range 4 west, would be five town-ships south of the principal base line and four townshipswest of the principal meridian.

California has three base lines and meridians. They are theHumboldt Base Line and Meridian, located in the north-western part of the state; the Mt. Diablo Base Line andMeridian, located in the central part of the state; and the San

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Bernardino Base Line and Meridian, located in the southernpart of the state.

Townships are further divided into sections. Each townshipcontains 36 sections, each section theoretically being onemile square and therefore containing one square mile ofland. The township is six sections long and six sectionswide, and therefore contains 36 square miles.

A section may then be divided for the purpose of having amore particular and specific description, into quarter-sec-tions and fractions of quarter-sections.

Due to the spherical shape of the earth, the sections alongthe north and west boundaries of each township areapproximately fifty feet shorter than the south side. Be-cause of this irregularity additional lines called guide merid-ians are run every 24 miles east and west of the meridian.Other lines called standard parallels are run every 24 milesnorth and south of the base line. These guide meridians andstandard parallels also are known as correction lines.

GOVERNMENT LOTS

In the original government survey system, lakes, streamsand other features were sometimes encountered whichcreated fractional pieces of land less than a quarter sectionin size. These fractional segments were identified bynumber. The specific lot number then became the legaldescription for that land parcel and these parcels were calledgovernment lots.

Today, the loss of acreage due to township correction linesand inascertainable errors are placed in the quarter sectionsbordering the western and northern boundaries of thetownship. These geographical divisions which wouldotherwise qualify as quarter-quarter sections are alsoreferred to as “government lots.” A government lotnecessarily does not contain a standard number of acres.

OWNSHIP PLATS

A township plat is divided into square sections which arein turn divided into quarters of quarter-sections, sixteen infor each section, and each small square represents thelocation of a 40 acre plot of land. Therefore each majorsection of a township plat contains 640 acres total. Thenumbers for each major section of a township plat rangefrom one to thirty six. In other words, there are thirty sixsections. Following is a typical description of a section:

Beginning at the NE corner of SW 1/4 of Sec. 17, thence

southeasterly to the NW corner of the SE 1/4 of Section21, thence southwesterly to the SE corner of the NW 1/4 of Sec. 29, thence northwesterly to the SW corner ofthe NE 1/4 of Sec. 19, thence northeasterly back to thepoint of beginning.

Some examinations given by the Department of Real Estatefor real estate broker and salesperson licenses containproblems based on descriptions similar to the foregoing. Amore detailed explanation of this process belongs in anothercourse. Here we are mainly getting acquainted with thevarious ways in which property is legally described.

Lot and Block Descriptions. Under the California Subdivi-sion Map Act (Government Code Section 66410 et seq.) allnew subdivisions must be mapped or platted. The mapshows the relationship of the subdivision to other lands,and each parcel in the new subdivision is delineated andidentified. When accepted by county or city authority themap is filed in the county recorder’s office and has officialstatus. Afterwards, any parcel in the subdivision is simplydescribed in legal instruments by reference to the tractnumber or name, and block and lot numbers. To this is addedthe city and county. It makes for simplicity in describingproperty as:

Lot 14, Block B, Parkview Addition (as recorded July17, 1926, Book 2, Page 49 of maps), City of Sacra-mento, County of Sacramento, State of California.

Record of Survey. Within 90 days after the establishmentof points or lines, a land surveyor or civil engineer who hasmade a survey in conformity with land surveying practicesshall file a record of survey relating to boundaries orproperty lines with the county surveyor in the county inwhich the survey was made. This record of survey map shalldisclose:

1. material evidence or physical change which does notappear on any map previously recorded in the office of thecounty recorder.

2. any material discrepancy with information of recordwith the county

3. any evidence that might result in alternate positions oflines or points

4. the establishment of lines not shown on a recorded mapwhich are not ascertainable from an inspection of the mapwithout trigonometric calculations

The county surveyor, after examining a record of surveymap filed with the surveyor’s office, shall then file it with thecounty recorder.

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Assessor’s Maps. The county assessor may prepare andfile in the assessor’s office an accurate map of any land inthe county and may number or letter the parcels in a mannerapproved by the board of supervisors. Section 327 of theRevenue and Taxation Code provides that ...land shall notbe described in any deed or conveyance by a reference toany such map unless such map has been filed for record inthe office of the county recorder of the county in which suchland is located.

Informal Method of Land Description. In the absence of atitle report, it is often found convenient to refer to a specificparcel of realty by street number, name, (e.g., “The NorrisRanch”), or blanket reference (e.g., “my lot on High Street”).These methods are legal, but title companies ordinarily willnot insure title derived through such a description. Usuallythe specific boundaries of the grant must be established byone of the formal methods of description as set forth above,before title insurance can be obtained.

If the boundary is a public road, the owner of land abuttingon it is presumed to own to the center of the road, but thecontrary may be shown.

A deed to a parcel in a subdivision showing a dedicatedstreet adjoining, will, unless the contrary intent appears,carry the title of the grantor to the center of the street subjectto the rights of the public to the use of the street.

Owners of property abutting on a main or public highwayhave a peculiar right in that highway distinct from the public,

whether or not they own the fee thereof. Upon vacation,they might still have a right to ingress and egress.

Words “except” and “reserving” as used in descriptions ofproperty are not conclusive in determining whether or notthe fee title to the portion in question is being conveyed.

An innocent looking phrase may be omitted, or the wrongcourse given, either of which may change the entire com-plexion of the description and thus exclude property in-tended to be included, or include property which the partyexecuting the instrument did now own. Although descrip-tions may fail because of omissions, elaborations cansometimes result in a void or uncertain conveyance.

A person in doubt about the correct description to beused should consult with a licensed engineer or surveyoror with a title company.

In this chapter we have attempted to present the basicphysical components of property, to divide property into itstwo basic categories, and to present the ways in whichproperty is given legal description. The next chapter willcarry forth the discussion of subdivisions to examine insome detail two of California’s primary real estate laws: TheSubdivided Lands Law and the Subdivision Map Act.


1. Which of the following are included in a “bundle of rights”?

a. right to possessb. right to usec. right to encumberd. all of the above

2. Land includes: soil, rock, and other substances that compose the material of the earth.

a. trueb. false

3. Real property does not consist of that which is incidental to the land.

a. trueb. false

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4. The common law concept of land includes:

a. the space beneath the surface of the earth to the centerb. the space above the earth to “the top of the sky”c. both “A” and “B”d. neither “A” nor “B”

5. Who says that land “...includes free and occupied space for an indefinite distance upwards as well as downwards...”?

a. the California Civil Codeb. the California Business and Professions Codec. California Jurisprudenced. the Code of Civil Procedure

6. A likely place for expression of intent concerning what is included in the conveyance of a clearly described parcelof land is:

a. the deed of trustb. the listingc. the deposit receipt agreementd. none of the above

7. Emblements are growing crops which are produced:

a. spontaneouslyb. twice a weekc. annually by labord. none of the above

8. That which by right is used with the land for its benefit is considered:

a. affixed to the landb. an emblementc. appurtenant to the landd. none of the above

9. Which of the following is considered affixed to the land?

a. trees and bridgesb. doors of a building and permanently installed cabinetsc. built-in appliancesd. all of the above

10. One purpose of the Uniform Commercial Code Division 9 is:

a. to give lien rights to providers and installers of fixturesb. to clarify the license lawc. to deprive providers and installers of fixtures of their lien rightsd. none of the above

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4SUBDIVISION LAW

The category of subdivision law is being introduced at thispoint because it furthers the discussion of property compo-nents and descriptions introduced in the last chapter.Furthermore, it is important to begin to see how the relation-ship between real estate and the law, together with the legaldoctrines introduced in chapter two, come together toregulate one of the more important aspects of modern realestate practice.

The basic major laws governing the practice of real estatein California are:

1. The Real Estate Law, as amended and in effect January1, 1985. This law consists of Division 4 of the Businessand Professions Code, and is in two parts. The first partcovers licensing of persons (Sections 10000 to 10602), andis the part normally referred to as “The Real Estate Law.”The second part of Division 4 covers regulations oftransactions (Sections 11000 to 11202), and is normallyreferred to as the Subdivided Lands Law.

2. The Subdivision Map Act. This law is found inGovernment Code Sections 66410 et seq. Although thislaw together with the Subdivided Lands Law are the twobasic laws governing subdivisions in California, only theSubdivided Lands Act (part of the Real Estate Lawmentioned in (1) above) is actually administered by theReal Estate Commissioner. The important thing toremember about these two subdivision laws is that eachwas adopted for a different purpose, and in order toachieve those purposes each one adopted a differentdefinition of a subdivision. The primary objective of theSubdivision Map Act is to provide definitions of termsand to outline methods of map filing procedure applicableon a statewide basis. The primary objective of the Sub-divided Lands Law, on the other hand, is to protectpurchasers of property in new subdivisions from fraud,misrepresentation, or deceit in the marketing of subdi-vided lots, parcels, units and undivided interests in theState of California.

(3) Regulations of the Real Estate Commissioner. Another

major law governing real estate business in California,this one is found as Title 10 of the California Administra-tive Code. We will discuss this law separately.

(4) The Administrative Procedures Act. This law is foundas Government Code Sections 11503-11528, and will alsobe treated separately.

Although these four are the principle laws which governreal estate in California, you will realize as you continuethrough the course that there are many other pertinentstatutes found in other codes which reflect upon real estateand with which you must become familiar.

But to return to the subject at hand — remember for now thatthe Subdivided Lands Law is the second part of the so-called “Real Estate Law” found in the Business and Profes-sions Code as Section 11000 - 11202, and has the objectiveof protecting purchasers of property; whereas, the Subdi-vision Map Act, which is Government Code Sections 66410et seq., has the purpose of defining terms and outliningmethods for filing.

WHY SUBDIVISION LAWS ARENECESSARY

Government at all levels is involved in the real estatebusiness. Its activities are manifested in a number of federaland state agencies or departments, as well as through thework of many special administrative agencies and local ordistrict organizations.

With the continued growth of population and movement ofpeople into cities and suburban areas, problems arosewhich only concerted public effort through governmentalaction could solve. These problems included the preven-tion of fraud and misrepresentation in the sale of subdi-vided real property; the regulation of lot design andphysical improvements for the orderly and proper develop-ment of the community; the construction of streets and

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highways and parking facilities adequate for our motorizedsociety; the regulation of airways over the land; theprovision for a sufficiency of water; the protection of life andproperty by police and firemen; the maintenance of thepurity of the air we breathe; the abatement of noise; thedisposal of sewage and waste; and the provision, underpublic or regulated private auspices, of essential utilityservices.

If communities grow haphazardly, such problems are aggra-vated and new problems arise. Through state laws regulat-ing the subdivision of real estate and by means of planningcommissions, master plans, zoning laws and building codes,cities and counties strive to assure for their area of jurisdic-tion the greatest possible livability as well as protection ofland values and the general welfare of the community. Thereal estate broker often makes a substantial contribution tothe success of such efforts by furnishing ideas and support.

Prior to 1929 there was no effective control of the filing ofsubdivision maps in California. As a result, coordinationof land subdivision with overall community developmentplans was lacking. This resulted in the enactment of the MapFiling Act of 1929, which was subsequently superseded bythe present Subdivision Map Act described above. Thisis primarily a statewide enabling act permitting the enact-ment of subdivision ordinances by local governmentalbodies having direct jurisdiction over subdivisions in thecommunities affected, within the limitations and scope setforth in the Subdivision Map Act. Thus, the direct controlof the kind and type of subdivisions to be platted in eachcommunity and the physical improvements to be installedare left to the control of the local jurisdictions (city andcounty) within certain general limits specified in theSubdivision Map Act. This act has tow major objectives:

1. To coordinate the subdivision plans and planning,including lot design, street patterns, rights-of-way fordrainage and sewers, etc., with the community pattern andplan, as laid out by the local planning authorities.

2. To insure that the areas dedicated for public purposesby the filing of the subdivision maps, including publicstreets and other public areas, will be properly improvedinitially by the subdivider so that they will not become anundue burden in the future upon the general taxpayers ofthe community.

STAGES OF MAP PREPARATION ANDAPPROVAL

The steps in the process of map preparation and approvalcan be summarized as follows:

1. Preliminary planning begins with an economic feasibil-ity analysis, a locational analysis, and a physical surveyof the site.

2. There follows a preliminary discussion with agencieshaving jurisdiction over subdivision, including ques-tions concerning the environmental impact report.

3. At this point, on the basis of the preliminaryconference, the subdivider obtains the requirements (toproceed) from the local authorities, state agencies, titlecompanies, and financial sources.

4. The subdivider then prepares a tentative map andsends copies to the Coastal Zone Commission if theproperty is located in the Coastal Zone.

5. The tentative map is now submitted for approval tothe local government and any government loan insuringagency such as FHA.

6. The planning commission accepts the tentative mapfrom the subdivider and obtains approval from the othercity and county offices. Copies are forwarded to theDepartment of Real Estate by the applicant to be used fora Public Report.

7. The subdivider then prepares the final map and securesall necessary signatures (such as record owners, publicutilities, and other public entities).

8. The final map is submitted for approval to localgovernment and any government loan insuring agency.

9. The officer designated in the local ordinance acceptsthe map from the subdivider and obtains approval fromother city or county offices.

10. The approved map is recorded and a copy sent tothe Department of Real Estate by the applicant for PublicReport.

11. The development begins.

The Subdivision Map Act requires that every city and everycounty must adopt a subdivision ordinance to regulatesubdivisions for which a tentative and final map, or a parcelmap, is required. Remember, the state law is mostly anenabling law, which means that it enables localities to enactthe necessary local legislation. In this case, it not onlyenables them to do so, but requires it. In addition the MapAct permits cities and counties to adopt ordinances forsubdivisions for which no map is required.

THE SUBDIVIDED LANDS LAW

This law is statewide in its operation and is directlyadministered by the Real Estate Commissioner. No subdi-

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vision can be offered for sale in California until thecommissioner has issued a subdivision public report. Thisapplies not only to tracts located in California, but tosubdivided lands lying outside the state’s boundaries. Thepublic report is a disclosure document giving a factualaccount of the subdivided property.

The public report is not issued until the commissioner issatisfied that the subdivider has met all statutory require-ments with particular emphasis on the establishment offinancial arrangements to assure completion and mainte-nance of improvements and facilities included in the offer-ing and a showing that the lots or parcels can be used forthe purpose for which they are being offered.

The definitions of “subdivision” under Section 11000 etseq. of the Subdivided Lands Law and Section 66424 of theSubdivision Map Act differ in many important respects.The common part of the definition for “subdivision” is:

“division of improved or unimproved land for the purposeof sale or lease or financing whether immediate or future”

The main differences or similarities are as follows.

1. The Subdivided Lands Law (hereafter called SLL) hasno standard qualifying subdivisions within city limits; theSubdivision Map Act (hereafter called SMA) has thisincluded.

2. The SLL refers to 5 or more parcels; the SMA refersto 2 or more parcels.

3. The SLL refers to “proposed” divisions; SMA does not.

4. There is no contiguity requirement in the SLL; inthe SMA land must be contiguous units.

5. In the SLL, 160 acres and larger parcels, designatedas such by government survey, are exempt; there is nosuch exemption in the SMA.

6. Community apartments are included in both the SLL andSMA.

7. Condominiums are included in both.

8. Stock cooperatives are included in the SLL, but noin the SMA unless they are 5 or more existing dwellingunits converted.

9. In neither law is the leasing of apartments, offices,stores or similar space in apartment building, industrialbuilding or commercial building included.

10. In the SLL, long term leasing of spaces in mobilehomeparks or trailer parks is included; the leasing or financingof mobilehome parks or trailer parks is not included in theSMA.

11. Undivided interests are included in the SLL, but notthe SMA.

12. Expressly zoned industrial or commercial subdivisionsare exempt in the SLL, but not in the SMA.

13. Agricultural leases are included under the SLL, but notthe SMA.

14. Time shares are included in the SLL, but not the SMA.

15. Limited-equity housing cooperatives are includedin SLL, but not the SMA; however, there are some exemp-tions available under Section 11003.4 of the Business andProfessions Code.

It should be noted that a division of land for purposes offinancing is included under both definitions and requiresthe filing of a notice of intention under the SubdividedLands Law and may require the filing of a map under theSubdivision Map Act.

COMPLIANCE AND GOVERNMENTALCONSULTATION

Full compliance with all of the provisions of the SubdivisionMap Act and the Subdivided Lands Law is required in anysubdivision development program. Subdividers and theirprofessional consultants must be thoroughly familiar notonly with the provisions of the state laws, but also withthe specific provisions in the local subdivision controlordinance in effect in a particular community in which thesubdivision is being developed. Numerous differencesexist in the various local subdivision ordinances because ofa great diversity in types of communities and conditionsthroughout the state.It is recommended that land developers and subdividersconsult the Department of Real Estate at an early stage in theplanning of any subdivision development program to befully aware of the current requirements of the Real EstateCommissioner with respect to the subdivision qualificationunder consideration.

The federal government plays an important role in thefinancing of home building through its mortgage insuranceprogram. It is vital in a subdivision which proposes abuilding program with government-insured or guaranteedfinancing that the developer consult with the Federal Hous-ing Administration, the Veteran’s Administration and any

26

other appropriate agencies.

Subdivisions Differ — Laws Regulating Them Differ

The commissioner, under the law, regulates the conditionssurrounding the sale or lease of subdivided real propertywhile the city or county regulates the lot design andphysical improvements. The commissioner is concernedwith preventing fraud and misrepresentation in selling; thecity or county is concerned with the orderly and properdevelopment of the community.

It is common to think of a subdivision as a partition of alarge piece of property into units designed for sale or leasefor specific purposes. Ordinarily this is the case. Themajority of subdivisions might be designated as lot andresidential subdivisions. The parcels created are intendedfor sale to private individuals who plan to build homes uponthem, or to speculative builders who will erect houses andsell the entire package, that is, the house and lot together.

Note: Every broker and salesperson and prospectivelicensee — even though they have no thought of subdi-viding on their own account — should be thoroughlyfamiliar with the extent and purpose of the Commissioner’sjurisdiction over the sale or lease of newly subdividedland. Sooner or later the majority of active licensees areassociated with the sale of subdivided property or arecalled on for advice in preparing a subdivision for market.

Sometimes a broker will find that a principal is creating asubdivision without realizing it. The broker should beequipped to protect the principal from the danger of runningafoul of the law.

Furthermore, when selling subdivision property the brokermust make sure that two important requirements of thesubdivision law are observed. First, broker must furnish theprospective buyer with a copy of the Commissioner’sSubdivision Public Report and give the prospective buyeran opportunity to read it before the prospect signs up topurchase. Secondly, broker must handle the deposit orpurchase money in accordance with the law. Moreover,since out-of-state subdivision offerings are treated as realproperty securities under the provisions of Section 10249,10249.1 and 10249.2 of the Business and Professions Codethe licensee should pay special attention to the require-ments imposed before agreeing to act as an agent to handlesuch properties.

MOBILEHOMES

This state has been called the most mobile state in thenation. In the past this referred to the great amount ofautomobile and truck travel, but today it has a new dimen-

sion — mobilehomes. Since mobilehomes offer permanenthousing they have become a significant factor in the hous-ing industry. The sale or lease of five or more lots in amobilehome park is under the jurisdiction of the commis-sioner and the provisions of the Subdivided Lands Lawapply.

The rental of lots in a mobilehome park is under the jurisdic-tion of the State Department of Housing and CommunityDevelopment. Section 18214 of the Health and Safety Codedefines a mobilehome park as “...any area or tract of landwhere two or more mobilehomes used or leased or held outfor rent or lease to accommodate mobilehomes used forhuman habitation.” The enforcement of the code may beadministered by local authority if they assume the respon-sibility of such enforcement.

RESORT PROPERTIES

Then there are the resort type subdivisions involving suchproperties as lots created or interests created with theintention of selling them to persons who propose to builda retirement home or a second vacation home or who desireto purchase an interest in a time-share project.

Other divisions of land occur when the subdivider has theintention of creating an industrial or commercial complex, ora community of small agriculturalists. In the past, mineral, oiland gas subdivisions have been created, the intentionbeing the sale or lease of the parcels to persons interestedin the mineral, oil and gas possibilities extant in the land. Notfor some time has such a subdivision been offered inCalifornia.

COMMON INTEREST SUBDIVISIONS

As the subdivision process has become more sophisti-cated, very often due to scarcity of land suitable for subdi-viding and the resulting higher land prices, new types ofsubdivisions have come into being. The legislature hastaken cognizance of this trend and has enacted laws toregulate such developments, including planned develop-ments, community apartment houses, condominiums, lim-ited-equity housing cooperatives, and undivided interestsubdivisions. It is quite evident that these projects departfrom the classic conception of a subdivision as being thesimple division of a large piece of land into smaller parcelsfor the construction of individual homes.

Classification of Subdivisions

Basically, subdivisions may be classified as:

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1. Standard: a land division with no common or mutualrights of either ownership or use among the owners of theparcels created by the division.

2. Common interest: individuals own or lease a separatelot or unit, or an interest therein, together with an undi-vided interest or membership interest in the common areasof the entire project, which common areas are usuallygoverned by a homeowner’s association. These subdi-visions vary both in physical design and legal form.Condominiums, planned developments, stock coopera-tives and community apartment projects are examples, asare time-sharing projects.

3. Undivided interests: the purchaser receives an undi-vided interest in a parcel of land as a tenant in common withall the other owners. All owners have the nonexclusiveright to the use and occupancy of the property. Arecreational vehicle park, with campground and otherrecreational amenities is an example.

4. Land project: briefly, it is a remote area subdivisionof 50 or more parcels without onsite improvements, withless than 1,500 registered voters residing within certaindistances from the subdivision.

FUNCTIONS IN LAND SUBDIVISION

Before going into specifics regarding the Subdivision MapAct and the commissioner’s role under the SubdividedLands Law controlling the sale of subdivisions, let us firstconsider the functions of other agencies and individualsimportant to the subdivision process.

TITLE COMPANY

Services provided by California land title companies cangreatly assist the subdivider in the development of a sub-division. After the land to be subdivided has been acquired,the title company will issue a preliminary guaranty showingthe names of the persons required to sign the subdivisionmap as specified by the Map Act. The title company alsoprovides the preliminary title report required by the Depart-ment of Real Estate when the Application for a public reportis filed by the subdivider.One of the main services offered by title companies is thesubdivision processing service. They will handle all the“paper work” to be submitted to the Department except forthe management documents and the homeowner associa-tion budget. Usually, this valuable service is offered tosubdividers at little or no cost, provided the subdividercontracts for title insurance through the company.

In addition to the standard title policy coverages, manylenders require affirmative insurance on encroachments,priority over possible mechanics’ liens, and certain posses-sory and survey matters. Most California land title compa-nies make these coverages available, but arrangementsshould be made before work on the subdivision is started.

Covenants, Conditions and Restrictions

Subdividers, mortgage lenders, government agencies, andhomebuyers need a means of assurance that the nature ofa subdivision will remain unchanged. The mechanism mostcommonly used in California to assure this protection isdeed restrictions, for which the current term is the “decla-ration of covenants, conditions and restrictions” or CC&Rs.

The traditional use of deed restrictions has been to controlland use by requiring structures to be a certain size or price,or by restricting types of use such as prohibitions againstthe sale of alcoholic beverages.

The importance of restrictions has lately shifted to abroader purpose as the number of condominiums andplanned developments has increased. CC&Rs are used notonly to control land use, but to prescribe the very nature ofthe common interest subdivision, to provide for mainte-nance of the project, set down rules for behavior of persons,and as a vehicle for raising money for maintenance, repairand replacement of the project’s components.

Restrictions may be set out in the deed to the land, whichis frequently the case when the restrictions are quite simple.When the covenants, conditions and restrictions are com-plex, as they usually are for a common interest subdivision,they are best put out in a separate document. There aretechnical requirements to be met if the CC&Rs are to beeffective. It is an excellent idea to employ a knowledgeablelawyer to draft and control the implementation of the restric-tions.

Common interest subdivisions almost invariably have ahomeowners’ association to carry out the mandates of theCC&Rs. For common interest subdivisions, the Commis-sioner has adopted regulations that require reasonablearrangements for CC&Rs and the other governing instru-ments for the subdivision.

Often, a parcel of land is subject to restrictions that wererecorded years before. A title report will disclose them, andthey should be examined to discover whether their provi-sions will hinder the intended development. They arefrequently set back provisions, limits on density and myriadother provisions which cannot be eliminated.

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PRIVATE PROFESSIONAL SERVICES

Although the subdivider or land developer bears the heavi-est responsibility in the organizing, financing and devel-opment of the subdivision, the private engineer, land sur-veyor, the professional site or land planner, and architectprovide valuable assistance to him in determination of landuse, physical design, and cost analysis. Frequently, it maybe desirable for the subdivider to retain the services ofa professional broker, land planner, market research analyst,tax expert, and attorney.

Professional Land Planner

Among the functions of the site or land planner are thedetermination of the appropriateness of the location withinthe larger community, the integration of the particulardevelopment and its facilities with those of the largercommunity, and the making of recommendations for variousdevelopment standards such as density, community ser-vice, functional design, and others which would lead to thevisual quality and general livability achieved by the finaldevelopment. The site or land planner may be called uponto prepare the preliminary design of the subdivision forsubmission to the planning commission and other agenciesconcerned.

Private Engineer

Survey maps used in preliminary planning should be pre-pared by the private engineer. The property lines, topo-graphic, public utilities, and site location maps are neces-sary in the preliminary planning of a subdivision and laterin the preparation of the tentative and final maps.Other preliminary functions to be performed by the privateengineer include soil analysis, water table determination,and storm drainage studies. These factors are important andshould be calculated by an experienced registered engineer.The local jurisdiction may require a soil condition report.

The engineer may be called upon by the sponsor to preparethe preliminary design of the tract. The engineer preparingthe preliminary map must be familiar with the local masterplan, zoning ordinances, subdivision ordinances, and therequirements of the planning commission and other agen-cies involved. Following approval of the preliminarydesign, the private engineer prepares the tentative map inaccordance with the limitations imposed by state laws, localordinances, and the local regulatory bodies.

Section 66434 of the Subdivision Map Act requires that thefinal map must be prepared by or under the direction of aregistered civil engineer or licensed surveyor. Details

required on the final map include a complete boundarysurvey, location of monuments, and final improvementplans as required by local ordinance. The actual engineer-ing requirements for all maps vary somewhat from localityto locality, and the engineer may determine the map require-ments from local subdivision ordinances.

PLANNING COMMISSION

The California Government Code provides that the legisla-tive body of each city and county shall, by ordinance,assign responsibility for the jurisdiction’s planning pro-gram to the legislative body itself, the planning commission,the planning department, or some combination of these.

Most of a planning commission’s work is related todeveloping and maintaining the jurisdiction’s general planand reviewing and making recommendations to thelegislative body on zoning and development proposals.State law provides that one of the major functions of theplanning commission is to develop and maintain the localgeneral plan.

The planning commission’s responsibility for maintenanceof the local general plan is underscored by the state require-ment that the commission consider any general plan pro-posal or modification prior to action by the legislative body.By local ordinance, in most cities and counties, the planningcommission reviews and makes recommendations to thelegislative body on zoning proposals, subdivision andparcel maps, use permits, variances, and other developmentpermits in furtherance of the general plan goals and policies.

LENDING AGENCIES

In addition to title companies, professional land planners,private engineers, and planning commissions, developersof subdivisions and agents representing principals in suchprojects are often involved with lending agencies. Becauseof the vital role played by financing in the final success ofa tract, the subdivider will endeavor to include in financialplanning the proper safeguards to insure appropriate fi-nancing.

PROCEDURES PRESCRIBED BYCALIFORNIA SUBDIVIDED LANDS LAW

The Subdivided Lands Law, which the commissioner en-forces, is designed to protect the purchasing public frommisrepresentation, deceit and fraud in the sale of subdivi-

29

sions. This is done in two ways — by disclosure in thepublic report of pertinent facts about the property and theterms of its offering, and by making the issuance of thepublic report the authorization for the subdivider to offer thesubdivided real property for sale or lease.

In past years the Legislature greatly strengthened thesubdivision law to eliminate previous sharp or undesirablepractices and representations resorted to by some subdi-viders. Present statutes augment the disclosure principlewhich has characterized the law from its inception andinclude a number of specific grounds for denial of a publicreport by the commissioner. The commissioner is to makecertain the seller of subdivision interests can deliver themas represented and meet any warranties made.

Public Report Process

Subdivided lands in California under the jurisdiction of theReal Estate Commissioner cannot be offered for sale or leaseunless a public report is first obtained. Public reports areissued only if the proposed subdivision meets a collectionof requirements specified in the Subdivided Lands Law.These requirements, known as affirmative standards, arefurther defined and articulated by the Regulations of theReal Estate Commissioner, which you will remember is oneof the four major laws governing real estate activities inCalifornia.

“Standard” subdivisions must meet affirmative standardsset forth in Business and Professions Code Section 11018;for example, the subdivider must demonstrate ability todeliver the title contracted for, provide for satisfactoryfinancial arrangements for completion of improvementssuch as streets and utilities, assure vehicular access andprovide a source of potable drinking water if the propertyinvolves a residential subdivision.

“Common interest” subdivisions must meet the same stan-dards as required by Section 11018 but in addition thecommissioner must also make affirmative findings underSection 11018.5 that certain reasonable arrangements havebeen made to assure completion of the entire project (includ-ing offsite improvements), the use of legally bindingdocuments, delivery and control of project to purchasers,and adequate provisions for management, maintenance,preservation and control of the subdivision.

The regulatory authority of the commissioner differs asapplied to “standard” subdivisions and “common interest”subdivisions in that his authority is greatly expanded by lawto provide the special safeguards needed for commoninterest type projects. Generally, “standard” subdivisionsare those that consist of single lots with or without houses

and the purchaser acquires a fee interest to the entire parcel.“Common interest” subdivisions are those in which apurchaser acquires an individual property interest or exclu-sive occupancy right in a particular lot or unit but there alsois some element of the subdivision that is either directly orindirectly owned by the individual homeowner in commonwith others as undivided interests, and almost always thereis a homeowners association. The common interest subdi-visions are condominium projects, community apartmentprojects, stock cooperatives and planned developments(Business and Professions Code 11004.5).

AFFIRMATIVE STANDARDS

Affirmative standards deal with two major aspects of theproposed subdivision offering: (1) suitability for intendeduse and (2) fair-dealing regarding the sale or lease of theoffering.

The Subdivided Lands Law specifies that a public report willbe denied if there is any evidence that the offering isunsuitable for the use proposed by the subdivider. Thesuitability test is, of course, paramount in residential offer-ings. Here, as mentioned earlier, applicant for a public reportmust show that there is vehicular access, a potable watersource, available utilities, offsite improvements, etc. Ifsuitability cannot be demonstrated, the offering will betreated as raw land, which type of offering makes no claimto any particular use.

The second major area of protection under affirmativestandards is assuring the public that the subdivider candeliver subdivision interests as represented and that thepurchaser will “get what he bargained for,” e.g., buyer’sdeposit money will be made secure in accordance withprovisions of law, subdivider has made satisfactory ar-rangements to clear mechanic’s liens or blanket mortgagelien, other important aspects of the sale or lease will beassured, and upon consummation of the transaction titleas contracted for will be conveyed to the purchaser. Bythe subdivider’s meeting the fair-dealing test, the consumerwill not be subjected to unscrupulous practices or bogusofferings.

(NOTE: SINCE THE “MECHANIC’S LIEN LAW” HASBEEN MENTIONED SEVERAL TIMES, WE SHOULDPOINT OUT THAT THIS VERY IMPORTANT LAW WILLBE EXAMINED IN GREATER DETAIL LATER ON.)

Disclosures

The public report discloses significant consumer informa-tion about the particular subdivision for which the publicreport is issued. All prospective purchasers must be given

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a copy of the public report and a chance to read it. A receipttherefor must be signed and delivered to the subdividerbefore any binding contract or agreement for sale or leaseis made (Business and Professions Code Section 11011.1).This disclosure function of the public report is no lessimportant than the affirmative standards function becauseit can alert consumers to any significant (sometimes nega-tive) aspects of each particular offering.

Typically, a final public report for a standard residentialsubdivision will disclose applicable information such as:location and size of the offering, subdivider’s name andproject name, interest to be acquired by purchaser or lessee,procedure for handling the purchase money, taxes,assessments and restrictions, as well as informationconcerning:

• Any unusual cost that the buyer will have to bear at timeof purchase or in the future.

• Any hazards or adverse environmental factors.

• Anything that affects the use of a lot including:

• Unusual restrictions or conditions imposed upon buy-ers (e.g., no pets, no antennas, etc.)

• Unusual easements, rights of way, or set-backs

• Any special permits that may be needed in order to buildadditional improvements, sewer systems, etc.

• Any unusual or potentially harmful financial or con-veyancing arrangements.

• Any other information that would assist the potentialpurchaser in making a determination to purchase or not topurchase.

The commissioner’s jurisdiction extends not only to landsubdivided in California, but also to out-of-state subdi-vided land offered for sale or lease in California. A developerwho proposes to offer out-of-state subdivided land toCalifornia residents must first obtain a permit under Section10249 of the Business and Professions Code. Out-of-statesubdividers must comply with the requirements of both thein-state subdivision statutes and the California laws relativeto out-of-state subdivision offerings (real property securi-ties). These out of state offering are considered to besecurities and the Commissioner’s Regulation 2790.7 stateswhich of the respective securities laws are applicable inregulating them.

Filing Application and Notice of Intention

Before subdivided land can be offered for sale or lease, aNotice of Intention must be filed with the commissioner. TheNotice of Intention is combined with a Questionnaire and

Application and must be completed on forms provided bythe department. The Questionnaire is specifically designedto obtain pertinent details about the land and the conditionsattending its offering.

When anyone proposes to issue promissory notes securedby individual lots in an unrecorded subdivision, a Notice ofIntention must also be filed with the commissioner.

A filing may be made by the owner, subdivider, or agent.Usually, however, the owner assumes this responsibility. Inmost cases the owner and subdivider are the same, butsometimes the owner will turn over the land to someone elsequalified to develop it and will give necessary authority tooffer it for sale. The second party is commonly known as asubdivider. In practice, title companies often file for theowner or subdivider. Anybody filing on behalf of the ownermust furnish the department with the owner’s written autho-rization to do so.

In some cases the subdivider does not handle the marketingprogram, and an agent comes into the picture. The agentmust be a licensed real estate broker, and anyone, except theowner (or regular officers of a corporation receiving nospecial compensation while selling the corporation’s ownproperty), who sells the properties must be licensed as abroker or salesperson. Even salaried employees of theowner or subdivider must be licensed to do such selling.

Penalties For Noncompliance; Civil

Any owner, agent or subdivider who fails to pay therequired filing fee may be liable civilly for a penalty equalto triple the amount of the unpaid fee. However, thecommissioner may waive the filing of the subdivision Ques-tionnaire and fee when, in the commissioner’s opinion, thefacts and circumstances disclosed in a Notice of Intentionjustify a waiver. Business and Professions Code Section11029.1 provides special civil penalties for violations of thesubdivision law involving land projects.

Fine and Imprisonment Possible Penalty

In addition to disciplinary actions which may be imposed bythe;e commissioner against licensees for infractions of thesubdivision sections of the law, the code further providesthat anyone who willfully violates or fails to comply withSections 11010, 11010.1, 11013.1, 11013.2, 11013.4, 11018.2,11018.7, 11019 or 11022 of the code shall be guilty of a publicoffense punishable by a maximum fine of not to exceed$10,000, or up to one year’s confinement in a county jail orin a state prison or by both fine and imprisonment.

The district attorney of each county in the state is chargedwith prosecuting violators. If the violator is a real estate

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licensee, his or her license may also be revoked or sus-pended by the department. Steps to revoke or suspendlicenses must be taken not later than three years from theoccurrence of the alleged ground for disciplinary actionunless the acts or omissions with which the licensee is tobe charged involve fraud, misrepresentation or a falsepromise, in which case the accusation must be filed withinone year after the date of discovery by the aggrieved partyof the fraud, misrepresentation or false promise, but in noevent later than ten years after the occurrence. In case ofa violation of the subdivision law, the statute of limitationsperiod counted from the time of the most recent deed, leaseor contract of sale by which any property is conveyed inviolation of the subdivision law.

Notice to Buyer

The final subdivision report must be obtained before offer-ing the property for sale or lease, a copy thereof must bedelivered to the prospective purchaser, and a receipt on aform approved by the commissioner obtained by the sub-divider from the buyer. Further, receipts must be kept on filefor the commissioner’s inspection for at least three years.

The report is limited to a term of five years. A renewal maybe issued, however, if the subdivider,owner or agent makesan application for renewal of any report and has submittedsuch additional information as the commissioner mayrequire.

Not only must a copy of the public report be given tothe purchaser, but a copy must also be given to any memberof the public upon request. A copy and notice of itsavailability must also be posted conspicuously wheresales within the subdivision are being made. The copy mustbe that furnished by the commissioner or an exact andapproved reproduction. The approved form of receipt forpublic report may be found in Commissioner’s RegulationsSection 2795.1.

The Subdivided Lands Law and the Subdivision Map Acteach contain additional information which the studentwould be wise to consult prior to engaging in businessrelating to subdivisions.


1. Which of the major laws governing real estate is found as Title 10 of the California Administrative Code?

a. Regulations of the Real Estate Commissionerb. Administrative Procedures Actc. Subdivided Lands Lawd. The Real Estate Law

2. Which of the following is a basic major law governing the practice of real estate in California?

a. The Real Estate Law (Division 4 of the B&P Code)b. The Subdivision Map Actc. Both “A” and “B”d. Neither “A” nor “B”

3. Which of the following has the objective of protecting purchasers of property?

a. The Subdivision Map Actb. The Subdivided Lands Lawc. Both “A” and “B”d. Neither “A” nor “B”

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4. The Map Filing Act was enacted when?

a. 1980b. 1956c. 1929d. 1985

5. Which of the following problems are associated with population growth and the movement of people into cities andsuburban areas?

a. the prevention of fraud and misrepresentation in the sale of subdivided real propertyb. the regulation of lot design and physical improvements for the orderly and proper development

of the communityc. the construction of streets and highways and parking facilities adequate for our motorized societyd. all of the above

6. The Subdivided Lands Law is directly administered by the Commissioner, and requires the issuance of a public report.

a. Falseb. True

7. Which of the following is part of the preliminary planning stage of the map preparation and approval process?

a. an economic feasibility studyb. a physical survey of the sitec. both “A” and “B”d. neither “A” nor “B”

8. The Public Report is not issued unless the Commissioner is satisfied that the subdivider has met all statutoryrequirements, with particular attention to:

a. the establishment of financial arrangements to assure completion and maintenance of improve-ments and facilities included in the offering

b. a showing that the lots or parcels can be used for the purpose for which they are being offeredc. both “A” and “B”d. neither “A” nor “B”

9. The Subdivided Lands Law has standard qualifying subdivisions within city limits, refers to 5 or less parcels, andunproposed subdivisions.

a. trueb. false

10. In the Subdivided Lands Law 160 acres and larger parcels, designated as such by government survey, are exempt,and there is no such exemption in the Subdivision Map Act.

a. trueb. false

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HISTORY OF LAND OWNERSHIP INCALIFORNIA

It is appropriate to begin a discussion of property owner-ship in California (estates, titles, etc.) and applicable lawswith a brief historical overview of land titles in this state. Thestory of California is one of the most picturesque among thehistories of our states. From the time in 1513 when VascoNunez de Balboa first sighted the Pacific Ocean, claiming itand the shores washed by it for the King of Spain, until 1822,the lands that are now California were part of the Spanishrealm.

During this period of Spanish rule, the local government wasof a patriarchal nature, with little regard for formal civil law.Military law prevailed as presidios or army garrison townswere established to maintain Spanish dominion over thevast and varied, but sparsely populated territory. As instru-ments for spreading the Christian faith, and for the moremundane purpose of providing supplies for the militaryposts, numerous missions were established, beginning in1769 with the Franciscan mission at San Diego.

All land in California was held in the name of the King ofSpain, and technically it belonged to him. Ownership andtransfer of land and property rights therein were governedby the law prevailing in Spain. Significantly, Spain, like theother leading countries on the Continent of Europe, usedthe Roman Civil Law as distinguished from the Common Lawfollowed in England and its colonies.

In Civil Law countries the judges were guided by elaborateand detailed codes imposed by the sovereign. Under theCommon Law of England, on the other hand, the judges, inhearing and deciding cases, recognized and enforced thecustoms and usages of the people. To be sure, whenspecific legislation on a question had been enacted, thejudges would accept and apply it. And so it was that at thetime of the American Revolution the Common Law ofEngland then in force (including applicable acts of Parlia-

ment) became a part of our law. Since then it has continuedto develop in this country with contributions by bothlegislative bodies and the courts.

Returning now to California under the Civil Law of Spanishrule: the use of the land could be acquired only by politicalor military agencies of the king. These rights to the use ofthe land were not, however, grants of an absolute fee title.Thus it was that several rancho grants made by the Spanishmonarchs were solely for limited grazing and agriculturalpurposes.

Mexican Rule. In 1822 Mexico, then a territorial posses-sion of Spain, established its independence. Inspired bythe stories of fabulous wealth in California, the Mexicangovernment encouraged colonization. Governors weregiven absolute discretion in the selection of the personswho could receive grants of land. An applicant for landfiled a petition with the governor and, if approved receiveda decree which was referred to the legislative body forratification.

Upon such approval a formal grant of the land petitioned forwas made. This grant, together with the various instrumentsappurtenant thereto, was filed and recorded in the govern-ment archives and was known as “expediente.”

Other steps in the transfer of property from the state to theindividual was the marking off of monuments on the landbeing transferred, and establishing the grantee in posses-sion. The latter act was usually done by some officer withjudicial capacity. The governor was empowered to recog-nize grants and possessory rights formerly made by theSpanish government.

American Rule. In the early 1800s it became increasinglyapparent, by reason of the immigration of American settlersto the Pacific coast, that Mexico could not maintain itssovereignty over California. Conditions in California be-came chaotic, and after years of turmoil and disorder theBear Flag Republic emerged, to be followed by the American

5ESTATES AND TITLES:REAL ESTATE OWNERSHIP LAW

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conquest of California during the Mexican War. Commo-dore John Sloat captured Monterey, but was soon relievedof command by Commodore Robert Stockton. John C.Fremont, who was already in California, organized the“California Battalion.” These commanders of Americanforces were soon joined by General Stephen W. Kearny, andthey completed the conquest of California in 1847, althoughthe Mexican War continued until 1848.

From the time of the establishment of California as a Mexicanpossession in 1822 until the year 1846, when the MexicanWar broke out, there were approximately 675 grants of landmade. In the latter years of this period several grants weremade in evident anticipation of American occupation.Curious in nature, and of vague description, these grantslater became the basis of many judicial contests of title toCalifornia land, some of these contests having occurredeven in recent years.

Nebulous and more or less speculative evidence of rightsof ownership were made more uncertain because of thedifficulty in maintaining actual possession of the landsgranted. The making of land surveys, the turbulent condi-tions, and the lack of a system of recording land transfers,required the accredited owners of the land to keep theevidence of their titles under actual physical possession.

Possession of the United States. In 1848 the Treaty ofGuadalupe Hidalgo ended the war with Mexico. Californiabecame a possession of the United States subject to a treatyprovision that existing property rights of Mexicans shouldbe “inviolably respected.” Thereupon confusion of landtitles and property rights became rampant. To remedy thesituation Congress in 1851 passed an act providing for theappointment of a Board of Land Commissioners to whichall claims to private land in California were to be submitted.

All titles and claims of title of every nature were to bedetermined by this commission. Claims to land titles rejectedby this commission were appealable to the United StatesDistrict Court. Claims that were approved were dischargedby giving grants of land by the United States governmentto the claimants.

The adjudications of this commission have been repeatedlyheld to be conclusive as to the validity of the grantspertaining to titles and boundaries involved. In addition tothe privately owned rancho land grants under Spanish andMexican law, each organized city (or pueblo, as it was thencalled) received four square leagues of land without neces-sity of any formal government grant. A league under the oldSpanish law consisted of approximately 4,440 acres, and sosizable areas were involved.

The mayor of the pueblo, with the approval of his council,was empowered to grant house lots and farm lots to inhab-itants, but the national Mexican government retainedultimate control over the disposition of the pueblo lands.Understandably then, by the Treaty of Guadalupe Hidalgo,this sovereignty over pueblo lands passed to the UnitedStates, in trust for the future State of California.

California Admitted to the Union. Upon admission ofCalifornia into the Union in 1850, the state became owner ofall lands lying under navigable streams and lakes and aboveordinary high tide line. The ownership passed from theUnited States without the formality of a grant. The stateowns the tidelands in trust for the people, for suchpurposes as navigation, recreation, and fishery. Generallyspeaking, the state cannot transfer these lands absolutelyto private owners, although substantial revenues havebeen realized from the sale of oil and gas rights thereon.

The United States retained certain paramount rights in theterritory involved. Thus the federal government kept aspublic lands all those not specifically confirmed as Mexicanor Spanish grants, tidelands, cities or towns. Thereafter titleto public lands was acquired only by specific grants from theUnited States government. Much of this land has since beengranted to the State for educational purposes and stateparks, and large grants were made to railroad companiesas an inducement for the construction of transportationfacilities. Nevertheless, of the state’s total area of some100,300,000 acres, the federal government still owns about44 percent.

Although California inherited from Spain and Mexico cer-tain laws governing the estates of real property, the basicprinciples now employed were derived from England’sCommon Law, and in the absence of some constitutional orstatutory provisions specifically applicable, the CommonLaw prevails.

California Legislature Adopts the Recording System.There were no registry or recording laws in California underthe Spanish and Mexican governments. It was, therefore,natural that one of the first acts of the legislature of the infantstate was to adopt a recording system by which evidenceof title or interest could be collected in a convenient and safepublic place, to the end that those planning to purchase orotherwise deal with land might be more fully informed asto the ownership and condition of the title. This system wasdesigned to protect against secret conveyances and liensand allow the property to be freely transferable.

A recording system was adopted by the California Legis-lature, modeled after the system established by the originalAmerican Colonies. It was strictly an American device for

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safeguarding the ownership of land. Recording consists ofcopying the instrument in the Record Book and indexing itunder the names of the parties.

Which Instruments May be Recorded. The Recording Actof California provides that, after being acknowledged, anyinstrument or judgment affecting the title to or possessionof real property may be recorded. Section 27282 of theGovernment Code, however, lists the following documentswhich may be recorded without acknowledgment, certifi-cate of acknowledgment, or further proof without in any waylessening their validity as constructive notice of contentsto subsequent purchasers or mortgagees:

1. Judgments affecting title or possession of real property,authenticated by the certificate of the clerk of the court inwhich the judgment was rendered;

2. Notices of locations of mining claims;

3. Certificates of amounts of taxes, interest and penaltiesdue extensions or releases thereof executed by state,county, or city taxing agencies or officials pursuant tospecified provisions of the Revenue and Taxation Codeand the Government Code;

4. Notices of liens for postponed property taxes;

5. Releases of liens for postponed property taxes;

6. Fixture filings; and

7. In addition, Section 27285 of the Government Codeprovides, in substance, that letters patent the UnitedStates or from the State, leases for the development andextraction of minerals, including oil and gas, in which theUnited States is the lessor, copies of interdepartmentalletters or decisions of the Department of the Interiorpertaining to such leases, etc., may be recorded withoutacknowledgment or further proof.

Recorder to Give Notice. Upon recording an abstract ofjudgment or other document creating an involuntary lienaffecting title to real property, the county recorder is re-quired to notify the person against whom such lien isrecorded. A fee is authorized to cover the cost of the notice.

The word “instrument” as used in the Recording Act means“some paper signed and delivered by one person to another,transferring the title to , or giving a lien on, property or givinga right to a debt or duty.” In a broad sense the instrumentswhich affect real property are formal or legal documentssuch as deeds, mortgages, deeds of trust, leases andcontracts of sale. Recording is said to give constructivenotice of the existence and content of these instruments.

Note: There are many other documents which have a direct

effect on making the record title to land complete and whichmay (and in some cases in order to be effective must) berecorded. Among these documents are revocation of apower of attorney to convey or execute instruments affect-ing real property, homestead, assignments and releases ofmortgages, reconveyances, assignments of deeds of trust,probate orders affecting real property, subdivision maps,notice of completion, notice of nonresponsibility, assign-ments of leases, and subordination agreements. To the endthat records may reflect the entire condition of title to realproperty, the law specifically requires recording of evi-dences of involuntary liens and proceedings such as:attachments, executions, certificates of sale, deeds on fore-closures, execution sales, mechanic’s liens, abstracts ofjudgment, tax deeds, and certificates of redemption.

Purpose of Recording Laws. The general purpose ofrecording statutes is to permit, rather than to require, therecordation of any instrument which affects the title to orpossession of real property, and to penalize the person whofails to take advantage of the privilege of recording. How-ever, trustees of trust deeds and mortgagees under mort-gages are required to record or cause to be recorded fullreconveyances (for trust deeds) and certificates of dis-charge (for mortgages), unless specifically directed other-wise by the trustors or mortgagors when encumbrances aresatisfied. The Recording Act does not specify anyparticular time within which an instrument must berecorded. Time of recording is of course very important tothe bona fide purchaser since the purchaser is protectedonly by properly using the recording statutes.

As between conflicting claims to the same parcel of land,priority of recordation will ordinarily determine the rights ofthe parties.

Instruments affecting real property must be recorded by thecounty recorder in the county within which the property islocated. If the property lies in more than one county, theinstrument, or certified copy of the record, must be recordedin each county in which the property is located in order toimpart notice in the respective counties.

When it is necessary to record a document written in aforeign language, such as Spanish, the recorder must per-manently file the foreign language instrument with a certi-fied translation attached. In those counties where a photo-graphic method of recording is employed, the whole instru-ment, including the foreign language instrument and thetranslation thereof, may be recorded and the original instru-ment may be returned to the party who has left it forrecording.

When an Instrument is Deemed Recorded. Generally, an

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instrument is deemed to be recorded when it is duly ac-knowledged or verified and deposited in the recorder’soffice with the proper officer of record and marked “filed forrecord.” When a document is deposited or filed for recordit is the duty of the recorder to endorse upon it its properfiling number in the order in which it is deposited and the timewhen it was received, noting the year, month, day, hour andminute of its reception, and to record the document withoutdelay. The recorder indicates at whose request it was “filedfor record.” The contents of the document then must betransferred in writing to its appropriate book of recordsupon the page endorsed on the document, and when thishas been done the original document is returned to the partywho left it for recording. The recorder indexes all recordeddocuments in alphabetical order according to the names ofthe grantors and grantees or mortgagors or mortgagees,name or nature of the document, date of recording, andrecording reference.

The effect of recording an instrument is to give constructivenotice to all the world of the content of any instrument ordocument filed for record.

Actual notice consists of express information of a fact.Constructive notice is construed to be that which isimputed by law. Thus even if a person did not see therecorded information, such person is presumed to know itbecause he or she could have discovered the facts by properinquiry. Courts have held, however, that mere recordingdoes not validate a void or defective instrument.

Effect of Recording as Imparting Notice. The courts haveruled that the benefits of a recording statute are not availableto one who takes title with actual notice of a previouslyexecuted though unrecorded instrument. Also it has beenruled that possession of land by a person other than therecord owner is implied notice to the purchaser (or to theperson acquiring an interest in or lien upon said propertyfrom such owner) of the right, title, interest or claim of thepossessor. Thus despite the recording statutes and theassurance they give as to the status of title, the prudentpurchaser should always make an actual inspection of thepremises in person or through a trusted agent. This is so notonly to evaluate the property, but also to determine therights of anyone — other than the seller — who may be inpossession. Failure to make such an inspection does notrelieve the buyer of the notice buyer would have receivedby proper inquiry.

Priorities in Recording. As already noted recordation isa privilege and is not essential to validate most instrumentsaffecting title to real property, although failure to takeadvantage of the recording laws penalizes those who do notuse the recording system. Certain documents, such as a

declaration of homestead, must be officially recorded to beeffective. But deeds, judgments, contracts, if valid inthemselves, bind the parties thereto without benefit ofrecordation. Recordation is eminently useful neverthelessto clarify the status of land, which remains one of the mostvaluable assets acquired by the average individual and isnot to be dealt with casually. Recordation moreover servesto reward the diligent and to protect the innocent against thedishonest.

In the absence of special conditions, such as possession bysomeone other than the seller, if an unscrupulous ownersells the same land to two or more persons in succession,the question of who records first is critical.

Note: One might properly assume that the first buyer getstitle — i.e., that the first interest created is prior because“first in time is first in right.” However, if the recordationstatutes are to function as intended, this basic rule must giveway. It does indeed yield under the California recordingsystem which provides that the first in time may not prevailover parties who in good faith and for a valuable consider-ation acquire an interest and record it first. In other words,with respect to this limited class of “bona fide purchasersand encumbrancers for value and without notice” thegeneral rule of priority is altered to read “first to record is firstin right.” Of course, a party first recording who cannotdefinitely establish a position as a “bona fide purchaser”will not prevail over an unrecorded interest prior in time.

Unrecorded Interests. There are many types of unrecordedinterests, the existence of which may be suggested by aphysical inspection of the property and which are thereforepresumed to put the purchaser on sufficient notice to denyany claim to a preferred status as “bona fide purchaser.” Inother words, the evidence of these unrecorded interests isso apparent that a prospective purchaser is presumed to beput on notice by their very existence.

For example: some of the types of notice which may bepresumed from an inspection of the property include thefollowing: possession in one other than the seller — noticepresumed of an unrecorded contract of sale or lease; path-ways or sewer line on property — notice presumed of anunrecorded easement in adjoining owners; fence or wall ina particular location — notice presumed of rights of adjoin-ing owners to encroach upon subject property; lumber onlot or recent carpentry work on premises — notice presumedof rights of persons to file mechanic’s liens.

The recording laws do not protect the party “first to record”against the foregoing, nor do standard-form title insurancepolicies cover such situations.

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Special Lien Situations. The subject of liens and encum-brances is discussed in some detail in Chapter Seven, butit will be helpful to note here the impact of the recording lawson this subject.

Lenders often agree to make what are termed “future ad-vances” as a part of the secured loan transaction. It mayhappen that another lien will intervene (for example, asecond deed of trust or mechanic’s lien) between the timeof recordation of the original lender’s security instrumentand the time of future advance made pursuant thereto. Apriority question is then posed.

Sometimes under the terms of the original loan transaction,the lender is required to make further advances. An exampleof this is an installment payment under a construction loan.This is called an “obligatory advance.” It takes priority fromthe date the original deed of trust was recorded regardlessof intervening liens.

In other cases, the lender may have the privilege ofadvancing more money to the borrower, but is not requiredto do so. This advance is called an “optional advance.” Itdates only from the time it is made unless the lender canshow lender received no actual or constructive notice ofintervening liens.

As between deed of trust and mechanic’s liens, the latterrelates back to the time of the commencement of the con-struction work as a whole. This accounts for the rule that adeed of trust must be executed and recorded prior tocommencement of any work at all in order to assure itspriority.

Tax and assessment liens generally prevail over private realproperty interests. Among themselves, these governmen-tal liens are now often held to be on a parity.

Persons having priority may be agreement waive their rightsin favor of others. An agreement to do this is called a“subordination agreement.” These agreements are oftenexecuted in connection with deeds of trust to subordinatea landowner’s “purchase-money deed of trust” to a con-struction loan. Without such priority of claim for paymentagainst the real property, the building contractor mightrefuse to expend time and materials on the project.

OWNERSHIP OF REAL PROPERTY

The historical development of land titles has been traced,and the importance of recording titles to land has beennoted. This is an appropriate time to consider how title may

be held.

All property has an owner — either the government, federal,state or local, or some private institution or party. It is thelatter category that concerns us. We can recognize twobasic kinds of ownership, one having certain divisions:

1. Separate ownership

2. Concurrent ownership

a. Tenancy in common

b. Joint tenancy

c. Community property

d. Tenancy in partnership

SEPARATE OWNERSHIP

Sole or several ownership simply means ownership by oneperson. Don’t be confused by the word “several.” Think of“several” in relation to “severed,” as ownership severedfrom others. Being the sole owner, one person alone enjoysthe benefits of property and is subject to the accompanyingburdens, such as the payment of taxes. A sole owner is freeto dispose of property at will, and normally only a soleowner’s signature is required on the deed of conveyance.Indeed, even after marriage, a husband or wife may continueto own real (and personal) property in severalty (sepa-rately).

CONCURRENT OWNERSHIP

Concurrent ownership or co-ownership, on the other hand,means simultaneous ownership of a given piece of propertyby two or more persons. The several types of concurrentownership are listed above, and we will discuss themseparately.

Tenancy in Common. Tenancy in common exists when twoor more persons are owners of undivided interests in a singleestate. It is created whenever an instrument conveying aninterest in real property (or personal property, for thatmatter) to two or more persons does not specify that theinterest is acquired by them in joint tenancy or in partnershipor as community property.

Example: Interests of such co-tenants may be any fractionof the whole — thus one party may own one-tenth, anotherthree-tenths, and a third party may own the remaining six-tenths. The deed to co-tenants should recite their respec-

38

tive interests, or there is a presumption their interests areequal.

There is a unity of possession in tenancy in common,meaning each owner has a right to possession and none canexclude the others nor claim any specific portion for himselfor herself alone. It follows that no tenant in common whilein possession can be charged rent for the use of the landunless otherwise agreed to by all tenants.

On the other hand, a tenant in common who receives rent forthe premises from a third party, must divide such profits withthe other tenants in common in proportion to the sharesowned. By the same token, payments made by one tenantin common for the benefit of all may normally be recoveredon a proportionate basis from all. These might includemoneys spent for repairs, taxes, interest and principal undera trust deed. Of course, this would not apply to unnecessaryimprovements, unless made with the consent of the otherowners.

Any tenant in common is free to sell, convey or mortgagethe tenant’s own interest as he or she sees fit, and the newowner simply takes a place as a tenant in common with theother owner or owners. Sometimes this may be impractical,and the tenant in common may force a sale of the entireproperty by filing an action in court known as a “partitionaction.” Upon death there is no right of survivorship, theundivided interest of a tenant in common passes to his orher heirs or devisees who simply take the tenant’s placeamong the owners of the property in common.

Joint Tenancy. Joint tenancy exists when two or morepersons are joint and equal owners of the same undividedinterest in specified real (or personal) property. Dating backmany years to the classic “Commentaries” of Blackstone,this identity, under which each owner has exactly the samerights as every other owner, is described as a fourfold unity:“The unity of interest, the unity of title, the unity of time, andthe unity of possession; in other words, joint tenants haveone and the same interest, accruing by one and the sameconveyance, commencing at one and the same time, andheld by one and the same possession.”

The most important characteristic of a joint tenancy from apractical standpoint, however, is the right of survivorshipwhich flows from the unity of interest. It means that if onejoint tenant dies, the surviving joint tenant (or tenants)immediately becomes the sole owner. As the CaliforniaSupreme Court has stated, the survivor ...succeeds to nonew title or right upon the death of his tenant, but is merelyrelieved thereby from the further interference of the co-tenant. This accounts for the fact that joint tenancyproperty cannot be disposed of by will of a joint tenant nordoes it become part of the estate of a joint tenant subject to

probate. Further, the surviving joint tenant is not even liableto creditors of the deceased who hold unforeclosed liens onthe joint tenancy property.

The creditors of a joint tenant who is still alive may proceedagainst the interest of that tenant and force an executionsale. This would leave the title in the execution purchaserand the other joint tenant as tenants in common.

The Unities — Exception to: At common law, if any one ofthe four unities — time, title, interest or possession — islacking, a tenancy in common exists. California appellatecourts have accepted and enforced this rule, but by statuteone exception does exist.

Prior to the creation of this statutory exception, if the soleowner of land in severalty wanted to make someone else ajoint tenant with himself or herself, this could not be doneby direct conveyance to the sole owner and the co-tenant.This was so because the essential unity of title was notrespected: the interests of the two joint tenants did not arisefrom a single transfer, since one already previously ownedthe property.

By amendment to the Civil Code, the State Legislatureauthorized creation of joint tenancies:

(1) By a title created by a simple will or transfer, whenexpressly declared to be a joint tenancy. (Note: This is thetraditional and customary manner.)

(2) By transfer from a sole owner to himself or herself andothers. (Note: This would validate the hypotheticalexample cited above.)

(3) By transfer from tenants in common or joint tenants tothemselves or to themselves and others.(4) By transfers from a husband and wife (when holdingtitle as community property or otherwise) to themselves,or to themselves and others.

(5) By transfer to executors of an estate or trustees of atrust.

In each case it is important to designate the grantees in thedeed “as joint tenants” or to state that they take “in jointtenancy.” Although it is generally stated that these “magicwords” of the statute are not essential if the words actuallyused clearly indicate an intent to create a joint tenancy,failure to use them may hamper insurability of the title, andinvites litigation. There is, moreover, disagreement in thedecisions of the courts as to just what is a sufficientexpression of intent.

Contrary to the belief of many, the words “with the right of

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survivorship” are not necessary for a valid joint tenancydeed, although they may be and often are inserted.

Joint Tenancy and Community Property. Considerableconfusion surrounds the status of most residential propertyin California since husband and wife usually acquire suchproperty with community funds, but proceed to take recordtitle “as joint tenants.” It is not generally understood thatthe effects of holding title in joint-tenancy are entirelydifferent from the effects of holding title as communityproperty.

The California courts are aware of this problem and haveestablished the rule that the true intention of husband andwife as to the status of their property shall prevail over therecord title. This results in the anomalous situation ofhaving the record title in joint tenancy while the truecharacter of the property (assuming sufficient proof toovercome the joint-tenancy presumption) is in fact commu-nity. This transition might be accomplished by appropriateagreement in writing, or even by a deed from themselves asjoint tenants to themselves “as community property.”

Among themselves the rights and duties of joint tenants aregenerally the same as among tenants in common, with thevital exception of the rule of survivorship. A joint tenantmay borrow money and as security execute a mortgage ordeed of trust upon such interest.

This does not destroy the joint tenancy, but if the borrowershould default, and the mortgage or deed of trust should beforeclosed while the borrower is still alive, the joint tenancywould be ended and a tenancy in common created. Mostlenders would hesitate to make such a loan. If the borrowerdies before the mortgage is paid off or foreclosed, thesurviving joint tenant gets title free and clear of suchencumbrance.

Severance. Any joint tenant may sever the joint tenancy asto his or her own interest by a conveyance to a third party,or to a co-tenant. If there are three or more joint tenants, thejoint tenancy is severed as to the interest conveyed butcontinues as between the other joint tenants as to theremaining interests. If title is in A,B and C as joint tenants,and A conveys to D, then B and C continue as joint tenantsas to a two-thirds interest, and D owns a one-third interestas tenant in common. If A and B only are joint tenants andB conveys to C, then A and C own as tenants in common.Also partition may be had by joint tenants. If the partitioncannot be made without prejudice to the owners, a court mayorder sale of the property and division of the proceeds.

As already noted, upon death of a joint tenant the jointtenancy is automatically terminated. Nevertheless, for

record title purposes the following must be recorded in thecounty where the property is located:

(1) A certified copy of a court decree determining the factof death and describing the property; OR

(2) A certified copy of the death certificate of equivalent,or court decree simply determining the fact of death, orletters testamentary or of administration or a court decreeof distribution in probate proceedings. In any of thesealternatives it is customary to attach an affidavit whichidentifies the deceased as one of the joint tenants of theproperty, along with the certificate of inheritance taxrelease by the State Controller, inheritance tax attorney, orinheritance tax appraiser, where no inheritance tax is due.

The Pros and Cons of Joint Tenancy. On the plus sidethe major advantage of joint tenancy is the comparativesimplicity of vesting title in the surviving joint tenant (orjoint tenants). The title delay of upward of six monthsinvolved in probate proceedings is avoided. Althoughcertain legal costs are ultimately involved in formallyterminating the joint tenancy, the customary commissionsand fees payable to executors or administrators and toattorneys are avoided.

A further advantage of joint tenancy is that the survivorholds the property free from debts of the deceased tenantand from liens against the tenant’s interest. This can workan injustice to creditors, but the diligent creditor can usuallytake appropriate precautionary steps to avoid such loss, ormay have access to other assets of the decedent.

On the other hand, and on the minus side, in many situationsjoint tenancy is a pitfall for the ignorant or unwary.

The supposed advantages may be imaginary: possibly thedecedent did not really want the surviving joint tenant toget the title free and clear; the saving in probate fees is atleast partly offset by costs of terminating the joint tenancy,and, indeed, it may be completely overcome by added taxes,as described below; the probate delay is not unreasonablylong; and there may in fact be no creditors to worry about.Moreover, the joint tenant gives up the right to dispose ofhis or her interest by will.

Sometimes too it may be preferable to hold title in severalty:for example, a spendthrift son or daughter if made a jointtenant by their father may dispose of his interest, or may loseit to creditors under execution sale while he lives.

Finally, there may be disadvantages from the standpointof estate planning and income taxes. Since the late thirtiesthe United States has seen a major decline in the purchasingpower of the dollar, and prices have risen substantially. As

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a consequence, many property owners have experiencedsubstantial capital gains.

For example: A house purchased in 1946 for $8,000 maynow be worth $80,000 or more. If held as communityproperty, upon the death of either spouse it acquires thenew basis of $80,000. If held in joint tenancy, however, itacquires a new and higher basis only to the extent that anycontributed portion of or interest in the house is includedin the gross estate of the deceased joint tenant for estate taxpurposes. Thus, only one half receives the new basis.Subsequently, if and when the survivor sells the property,the survivor will have to pay a higher capital gains tax thanwould be the case if title had been held as communityproperty.

COMMUNITY PROPERTY

Community property basically consists of all propertyacquired by a husband and wife, or either, during a validmarriage, other than specific types of separate property.Under the Civil Code of California as interpreted by thecourts, the excluded separate property of the husband orwife includes:

(1) All property owned by either husband, or wife, beforemarriage.

(2) All property acquired by either spouse during marriageby gift or inheritance (bequest, devise or descent).

(3) All rents, issues and profits of such separate property,as well as other property acquired with the proceeds fromthe sale of separate property. For instance, if a wife owneda duplex prior to marriage, the rents from the duplex wouldremain her separate property. If she sold the duplex andbought common stock, the stock and dividends therefromwould be her separate property. It would have to beidentifiable as separate property, and separate recordsshould be maintained, lest it be so commingled with thecommunity property as to be indistinguishable. Veryoften, to be sure, husband and wife deliberately or casu-ally allow their separate property to merge with commu-nity property in keeping with their intentions.

(4) Earnings and accumulations of a spouse while livingseparate and apart from the other spouse.

(5) Earnings and accumulations of each party afterrendition of a court decree of separate maintenance.

(6) Property conveyed by either spouse to the other withthe intent of making it the grantee’s separate property.

It should be recalled that a husband and wife may holdproperty as joint tenants. Yet even when title is held in jointtenancy, it is possible (e.g., by separate agreement) to ownthe assets as community property. The record title may notbe controlling in light of off-record agreements showingother intentions of the parties.

Management and Control. Prior to January 1, 1975 thehusband generally had the power to manage and controlthe real and personal community property with the excep-tion of the wife’s earnings. Community property wassubject to the debts of whoever had management andcontrol. Community property was liable for: both pre- andpost-marital debts of husband; only pre-marital debts of thewife, in which case the husband’s earnings could not beheld liable.

On and after January 1, 1975 each spouse was given co-equal management and control of the community property.An exception to co-equal management and control existswhere one of the spouses manages a community personalproperty business. This spouse has sole management andcontrol of the business. Community property is liable for thedebts of either spouse contracted after marriage. For debtscontracted prior to marriage, community property is liablefor those debts except that portion of the communityproperty comprised of the earnings of either spouse.

Neither spouse may make a gift without the consent of theother. Neither spouse may encumber the furniture, furnish-ings or fittings of the home, or the clothing of the otherspouse or minor children without the written consent of theother spouse. As in prior law, both must join in theconveyance, encumbrance or leasing (one year or more) ofcommunity real property. Civil Code Section 5127 providesthat both spouses either personally or by duly authorizedagent must joint in executing any instrument by whichcommunity real property or any interest therein is sold,leased or encumbered. In “Andrade Development Co. v.Martin” the court found a contract null and void which wassigned only by a husband and purported to sell communityproperty.

Where real property is owned by more than one person,licensees should obtain all necessary signatures to thecontract when the owners sign the listing and acceptance.

Each spouse has the right to dispose of his or her one-halfof the community property by will. Failing to do so, thesurviving spouse gets the decedent’s half by intestatesuccession.

Tenancy in Partnership.

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(b) Tenancy in Partnership exists when two or morepersons, as partners, own property for partnership pur-poses. Under the Uniform Partnership Act, the incidentsof tenancy in partnership are such that:

(1) A partner has an equal right with all other partnersto possession of specific partnership property for part-nership purposes. Unless the other partners agree,however, no partner has a right to possession for anyother purpose.

(2) A partner’s right in specific partnership property isnot assignable except in connection with the assign-ment of rights of all the partners in the same property

(3) A partner’s right in specific partnership property isnot subject to attachment or execution, except on a claimagainst the partnership.

(4) Upon death, a partner’s right in specific partnershipproperty vests in the surviving partner (or partners).The rights in the property of the last surviving partnerwould vest in the decedent’s legal representative. Ineither case, the vesting creates a right to possess thepartnership property only for partnership purposes.

(5) A partner’s right in specific partnership property isnot subject to dower or curtesy (both have been abol-ished in California by statute), nor allowance to widows,heirs, or next of kin. Even when married, a partner’s rightis not community property. On the other hand, apartner’s interest in the partnership as such (that is, apartner’s share of profits and of surplus) is governed bycommunity property rules for some purposes.

When it is realized that a partnership is “an association oftwo or more persons to carry on as co-owners a business forprofit” the reasonableness of the foregoing “incidents” isapparent. Without them, continuity and unified, efficientoperations might be impossible. They do not, however,prevent he partners from owning different fraction parts ofthe business. Thus, although each partner has unlimitedliability to third parties for firm debts, as among the partners,each partner’s interest in profits and losses may be anypercentage agreed upon.

ASSURING MARKETABILITY OF TITLE

Casual reflection of the nature of real property and its useand transfer must lead to the conclusion that establishingmarketable title is often a complex and difficult undertaking.The term itself has no universally accepted meaning. It doesnot mean a perfect title, but rather one which is free fromplausible or reasonable objections. In effect, the title is

marketable (or merchantable) when there is reasonableassurance as to the extent of the rights involved. The titlemust be such that a proper court would compel the buyer toaccept it, if asked to decree specific performance of the salecontract.

Establishing a marketable title is especially important when-ever land is transferred for consideration, and when, inconnection with such transfer or otherwise, money is loanedwith land as security. The prospective buyer or lenderwould be reluctant to commit funds to the transactionwithout some assurance of getting what was bargained for.Many doubts beset a buyer since real property can be heldin so many ways; since it is intrinsically permanent andimmovable and lends itself to concurrent use by more thanone person, each with claims thereto; and since the veritablebundle of rights in the land may be legitimately divided.

For example: One uses the surface, another extractssubsurface minerals, and a third controls the air space abovethe surface; since much land is of comparatively high value,especially in urban areas where the growth and concentra-tion of population have placed a premium on parcels of landand consequently the land has been divided and subdi-vided and recombined into a patchwork measured in feetand sometimes even in inches; since the persons who ownor deal with land are themselves subject to a variety of lawswhich determine the extent of their rights (e.g., probate,divorce, guardianship, bankruptcy, business associationlaws); and since creditors and others may burden the realproperty with a variety of encumbrances.

Who Owns What. Essentially, then, the problem is one ofdetermining all the important facts with reference to whoowns what interests or rights in a particular parcel of landin question. Actual possession of the property has alwaysbeen important and helpful in providing the answer. Butpossession may be by someone other than the owner, andtransfers may be made without taking possession. Hencethe documentary record of ownership assumes great sig-nificance. Reliance on such documents is encouraged bythe official recording system under which deeds and otherinstruments affecting title may be recorded with the recorderof the county in which the land is situated. Thus a “chainof paper title” could be traced back to the original convey-ance from the government.

However, recordation is not compulsory, nor is it alwaysproperly done. Records may be erroneous, or sometimesmay even reflect fraudulent and unenforceable transac-tions. When done thoroughly and conscientiously, theresulting records over the years become a complicatedhistory in themselves, yet they may be woefully incompletefor purposes of determining the status of the title in ques-

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tion. This is so for a variety of reasons.

For example: In an intestate transfer upon death, aqualified heir might have inadvertently been excluded; ora transfer, valid on its face, may have been made by a personincompetent because of age or mental condition. Then too,other official records may profoundly affect the picture (e.g.,tax records and records of court judgments). In short,ownership of land and marketability of title depend not onlyon recorded facts of title transfer, but also upon a vast arrayof extraneous information.

Abstract of Title. As might be expected under such complexcircumstances, historically the individual buyer or lenderwas ill-equipped to make the necessary investigation of thestatus of the title to property. They soon came to rely on thetitle specialist who made a business of studying therecords, and preparing summaries or abstracts of title of allpertinent documents discovered in the search. The abstractof title together with a lawyer’s opinion of the documentsappearing in the abstractor’s “chain of title” were the basisof our earliest attempts to establish merchantable title. Thismethod still exists today, with modern refinements.

Certificate of Title. In time abstracters accumulated exten-sive files of abstracts and other useful data, including “lotbooks” wherein references to all recorded documents weresystematically arranged according to the particular prop-erty affected, and “general indices” wherein landownerswere listed alphabetically together with informationconcerning them and affecting titles (e.g., probates, prop-erty settlements, etc.).

These files came to be known as “title plants” and providedclassified and summarized histories of real estate transac-tions and of other activities which affect or might affectownership of the land in the areas covered. With the growthand improvement of title plants and increased proficiencyof examiners employed by the abstracters (or by abstractcompanies, for often they were incorporated), the formalabstract of title for delivery to the customer and the relatedlegal opinion were sometimes dispensed with completely.The abstract company would simply study its records andfurnish the customer with a certificate of title in which itstated that it found the title properly vested in the presentowner, subject to noted encumbrances. The certificate planhas strictly limited use today, for it was a transitional methodof assuring titles.

Guarantee of Title. The next step was the guarantee of titleunder which the abstract company did more than certifythe correctness of its research and examination. As thename suggests it guaranteed the title to the owner.

Thus the company agreed to indemnify the customer againstloss if the title proved to be otherwise than as described.This meant it was engaged in the insurance business andgenerally was subjected to regulation as such.

Title Insurance. All three plans previously outlined —abstract-opinion, certificate of title, guarantee of title — arebased upon examination of public records, and any protec-tion they afford is limited to matters disclosed by an exami-nation of the public records. True, much vital informationis obtained from such records. The files of the countyrecorder’s office and such other sources as the county clerk,various tax agencies, federal court clerk, and the Secretaryof State all are important sources of data bearing upon landtitles.

However, as already noted, the public records may beincomplete or erroneous, and they do not necessarilydisclose shortcomings arising from forgery, incompetence,and failures to comply with legal requirements. Accordinglythe policy of title insurance was developed as the culmina-tion of the quest for marketability of title. Although stillcovering most risks which are a matter of public record, italone extends protection against many nonrecorded typesof risks, depending on the type of policy purchased. Thetitle insurance company continues to utilize the title plantand with competent examiners and legal assistance it con-ducts as accurate a search of the records as feasible, andseeks to interpret correctly what it finds in the records. Butits unique contribution is the protection it affords againstrisks which lie outside the public records.

Standard Policy. The standard policy of title insurance, inaddition to risks of record, protects against:

Off-record hazards such as forgery (e.g., a forged deed in thechain of record title), impersonation, and lack of capacity ofa party to any transaction involving title to the land (e.g., adeed of an incompetent or an agent whose authority hasterminated, or of a corporation whose charter has expired);the possibility that a deed of record was not in fact deliveredwith intent to convey title; the loss which might arise fromthe lien of federal estate taxes, which is effective withoutnotice upon death; and the expense, including attorneys’fees, incurred in defending the title — whether the plaintiffprevails or not.

The standard policy of title insurance does not, however,protect the policyholder against defects in the title knownto the holder to exist at the date of the policy and notpreviously disclosed to the insurance company; nor againsteasements and liens which are not shown by the publicrecords; nor against rights or claims of persons in physicalpossession of the land, yet which are not shown by publicrecords (since the insurer normally does not inspect the

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property); nor against rights or claims not shown by publicrecords, yet which could be ascertained by physical inspec-tion of the land, or by appropriate inquiry of persons on theland, or by a correct survey; nor against mining claims,reservations in patents, or water rights; nor against zoningordinances.

These limitations are not as dangerous as they might appearto be. To a considerable extent they can be eliminated bycareful inspection of the land involved and routine inquiryas to the status of persons in possession. However, ifdesired, most of these risks can be covered by specialendorsement or use of extended coverage policies at addedpremium cost.

A.L.T.A. Policy. In California many loans secured by realtyhave been made by out-of-state insurance companieswhich were not in a position to make personal inspectionof the properties involved except at disproportionate ex-pense. For them and other nonresident lenders, the specialA.L.T.A. (American Land Title Isooctane) policy was devel-oped. It expands the risks normally insured against underthe standard policy to include the following:

1. Unrecorded liens

2. Off-record easements

3. Rights of parties in physical possession, includingtenants and buyers under unrecorded instruments.

4. rights and claims which a correct survey or physicalinspection of the land would show.

5. mining claims, reservations in patents, and water rights.

Needless to say, the insurance company issues such apolicy only after itself obtaining a competent survey andphysical inspection of the property.

Extended Coverage. The American Land Title Associationhas adopted an owner’s extended coverage policy (desig-nated as A.L.T.A. Owner’s Policy Form, Standard Form, asamended 1970) that provides to buyers or owners the sameprotection that the A.L.T.A. policy gives lenders. But notethat even in these policies no protection is afforded againstdefects on other matters concerning the title which areknown to the insured to exist at the date of the policy yethave not previously been communicated in writing to theinsurer, nor against governmental regulations concerningoccupancy and use. The former limitation is self-explana-tory; the latter is due to the fluid and frequently changingnature of governmental zoning regulations.

Title Insurance Companies in California. Under the provi-sions of the Insurance Code of California, each title insur-

ance company organized under the laws of this State musthave at least $500,000 paid-in capital, and must deposit withthe Insurance Commissioner a “guaranteed fund” of $100,000in cash or approved securities.

It must also set apart annually, as a title insurance surplusfund, a sum equal to 10 percent of its premiums collectedduring the year, until this fund equals the lesser of 25 percentof the paid-in capital of the company or $1,000,000. This fund— very substantial in the case of the larger and oldercompanies — is constantly maintained as a further securityto the holders and beneficiaries of policies of title insurance.

Policies of title insurance are now almost universally usedin California, largely in the standardized forms prepared bythe California Land Title Association, which is the tradeorganization of the title companies of the state. Every titleinsurer must adopt and make available to the public aschedule of fees and charges for title policies. today it is thegeneral practice in California for buyers, sellers and lenders— as well as the attorneys and real estate brokers who servethem — to rely on title insurance companies for title infor-mation, title reports and policies of title insurance.

Rebate Law. Title companies are required to charge for titlereports under the terms of legislation adopted at the 1967general session of the California Legislature. The rebate lawrequires the title companies to not only charge for reports,but to also make sincere efforts to collect them except incertain defined circumstances.

Title insurance companies can still furnish “the name of theowner of record and the record description of any parcel ofreal property” without charge.

The statute extends the anti-commission provisions ofSection 12404 of the Insurance Code to prohibit direct orindirect payments by a title company to principals in atransaction as a consideration for title business.

Thus, the law prohibits a title company from paying, eitherdirectly or indirectly, any commission, rebate, or otherconsideration as an inducement for or as compensation onany title insurance business, escrow or other title businessin connection with which a title policy is issued.

Torrens System of Land Registration. Of purely historicalinterest in California — although still found elsewhere — isthe Torrens system of land title registration, patterned afterthe system of registering titles to ships. It was adopted herein 1914 as the Land Title Act, and provided for registrationafter a court decree in an action similar to a quiet title suit.

Always optional, the system never became popular, and itslimited use was confined almost exclusively to the southerncounties of the State. In 1955 the Torrens Act was repealed.

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All Torrens registers and files were incorporated into therecords of the county recorders, and since then land for-merly in the Torrens system is conveyed by regular grantdeed and recorded in the conventional way.


1. During the period of Spanish rule in California, all land was held:a. in the name of the governor of Mexico c. privatelyb. in the name of the king d. none of the above

2. In which kind of countries did the judges, in hearing and deciding cases, recognize and enforce the customs and usages of thepeople, rather than be guided by elaborate and detailed codes imposed by the sovereign?

a. civil law countries c. both “A” and “B”b. common law countries d. neither “A” nor “B”

3. Which kind of law operated during the Spanish rule of California?a. common law c. both “A” and “B”b. civil law d. neither “A” nor “B”

4. When Mexico established independence in 1822, the new government encouraged colonization of California. Who had absolutediscretion in the selection of the persons who could receive grants of land?

a. the church c. the president of Mexicob. governors d. none of the above

5. The Treaty of Guadalupe Hidalgo ended what?a. Spanish rule c. the war with Mexicob. the Bear Flag Republic d. none of the above

6. Upon admission of California to the Union in 1850, who became owner of the tidelands?a. the federal government c. the stateb. the fish and game department d. none of the above

7. Which of the following documents may be recorded without acknowledgment, certificate of acknowledgment, or further proof,without in any way lessening their validity as constructive notice of contents to subsequent purchasers or mortgagees?

a. notices of locations of mining claims c. releases of liens for postponed property taxesb. notices of liens for postponed property taxes d. all of the above

8. “Some paper signed and delivered by one person to another, transferring the title to, or giving a lien on, property or giving aright to a debt or duty” is the definition in the Recording Act for what?

a. an instrument c. a filingb. a deed d. none of the above

9. What was done with much of the land that the federal government kept as public lands after California was admitted to the Union?a. donations to the state for educational purposes and parks c. both “A” and “B”b. grants to railroads d. neither “A” nor “B”

10. There are many documents which have a direct effect on making the record title to land complete and which may be recorded.These documents are revocation of a power of attorney to convey or execute instruments affecting real property, homestead,assignments and releases of mortgages, reconveyances, assignments of deeds of trust, probate orders affecting real property,subdivision maps, etc.

a. false b. true

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6REAL ESTATE LICENSE LAW

As previously explained, the so-called “Real Estate Law” iscodified as Division 4 of the Business and ProfessionsCode, and consists of two parts. Part 1 covers Licensing ofPersons (Sections 10000 to 10602), and it is this part whichis normally referred to as “The Real Estate Law.” The secondpart of Division 4 of the B&P Code covers Regulation ofTransactions, and is called The Subdivided Lands Law(Sections 11000-11202). The Subdivided Lands Law will betreated in a separate chapter. In this chapter, “Real EstateLicense Law,” we are concerned primarily with Part 1 ofDivision 4. The full text of the law and Regulations of theReal Estate Commissioner which clarify, implement, inter-pret or make specific its various sections appears in the“Real Estate Law,” a book published by the Department ofReal Estate.

As America outgrew its pioneering and homesteadingstages of development and moved steadily toward greaterand greater urbanization, city dwellers across the landfound they personally could no longer satisfactorily “strikea deal” with strangers in bargaining for land and homes.

The need for an intermediary to provide basic real estateknowledge and services, to negotiate and bring aboutdesired results, was very real. This need was met in theperson of the real estate agent, who continues to fill thisimportant role in the complexities of today’s society.

However, along with increasing opportunities to providereal estate agency services to the maturing nation camecertain abuses of the public trust in the form of unethical,illegal or sharp practices by dishonest or incompetentagents operating in a climate of unorganized and oftenunscrupulous competition. Real estate practitioners them-selves began to see the need for some type of controllingorganization.

The general public’s legitimate interest in the buying,selling, exchanging and financing of real property predict-ably led to the regulation of the real estate business throughthe adoption, state by state and over time, of reasonable

legislative and administrative controls. The enactment ofsuch controls is within the general power of a state toregulate any occupation whose membership should meetspecified qualifications.

Today, all fifty states and the District of Columbia haveenacted statutes governing to some degree the licensing,regulation and conduct of real estate agents. The nations’first real estate licensing law was passed in California in1917. It was challenged in the courts and declared to beunconstitutional. The Real Estate Act of 1919 was thenadopted and upheld by the State Supreme Court as being areasonable exercise of the power of the state to regulate theconduct of its citizens in the interest of the common good.With subsequent amendments and additions the law hasbeen in effect ever since.

Real estate agents operating in the 1980s provide both basicservices and specializations to the modern community.General brokerage, property management, development,financing, counseling, franchising and appraising are ex-amples of the services offered by today’s real estate pro-fessionals in the fields of residential, commercial andindustrial, investment, special purpose, raw land, and agri-cultural real estate. Consumer concern that high businessstandards be maintained by today’s broker professional isno less that it was when the real estate profession first cameunder regulation.

During the past 65 years, as weaknesses in existing laws tocontrol abuses in real estate activities were revealed, correc-tive legislation was passed by socially responsive legisla-tors until today a complete set of reasonable licensing,regulatory and subdivision marketing controls are in placeand enforced by the California Real Estate Commissioner.As you already know, this power of government regulationand supervision is called “police power,” and since we haveexplained police power in some detail, we will move on to aconsideration of the Real Estate Law itself.

Real Estate Act — A Brief History. The California Depart-ment of Real Estate, whose chief officer is the Real Estate

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Commissioner, was created by legislative act in 1917. It wasthe first law of its kind providing for the licensing andregulation of real estate agents. It has served as a patternfor similar legislation in many other states.

As first enacted, the law was declared unconstitutional bythe state Supreme Court In re Raleigh, 177 C.746 on March19, 1918. Opponents had claimed the act was unreasonableinterference with the right of every citizen to engage inlegitimate and useful occupation and that the power givento the commissioner was arbitrary. In its ruling the courtfound the act invalid because it exempted from its provi-sions those corporations and persons who had “receivedfrom the Insurance Commissioner or the Bureau of Buildingand Loan Supervision a certain authority or license to dobusiness within the state.”

The court noted the requirements for obtaining licensesfrom the Insurance Commissioner were much more simpleand far less burdensome than those imposed upon realestate brokers and salespersons by the real estate act, e.g.,insurance licensees did not require recommendations vouch-ing for their truthfulness and honesty; did not need a bond;and did not need to maintain an office. The court could notdiscern any reason for these special conditions or conces-sions but raised no other objections to the act.

Constitutionality of Act Declared. The constitutionality ofthe act was still in question when a new Real Estate Commis-sioner, Ray L. Riley, was appointed on July 28, 1919.Through his urging, the Legislature passed the Gates Billwhich amended the original real estate law. As amended, thelaw was upheld by the Supreme Court in November, 1919.

Among the strongest supporters of the real estate licensinglaw was the organized real estate industry itself. Theindustry believed the reasonable regulation of those en-gaged in the real estate business would benefit the publicand assist in creating and maintaining higher professionalstandards and ethical practices in the conduct of real estatebrokerage activities.

Thus the law is designed primarily for the protection of thepublic in real estate transactions in which the services of anagent are employed. By requiring qualifications for licens-ing (the original act did not require a licensing examination)the Commissioner is able to ascertain that persons acting inthe capacity of a broker or salesperson have certain knowl-edge qualifications.

This power given to the Commissioner is not arbitrary andis not without control or guidance. If the Commissionerfinds that an applicant for license is not honest and truthful,that finding must be based upon facts which reasonablyjustify this conclusion. When an applicant in fact has the

qualifications required by law, the Commissioner must issuethe license.

By requiring qualifications for license and by the establish-ment and enforcement of definite standards and practices,the law has also played an important part in the continuingindustry drive for professional designations and recogni-tion for those engaged in real estate practice.

Commissioner’s Jurisdiction Extended. Since the passageof the original act creating the Department of Real Estate, thejurisdiction of the Real Estate Commissioner, at first onlyover the licensing of real estate brokers and salespersons,has been gradually extended.

Beginning in 1933 the administration and enforcement ofthose provisions of the Business and Professions Coderegulating the sale or lease of subdivided lands (SubdividedLands Law) have been a responsibility of the Commissionerand the department with gradual yet consistent increasesover time in the degree of authority given to the Commis-sioner by law.

As with the licensing law, the subdivided lands provisionswere attacked as being unconstitutional in that they placedunreasonable burdens on the exercise of property rights,they were vague and uncertain, and they benefited only aspecial class and not a whole public. Again, our SupremeCourt held these contentions were not sound. The courtheld that the object of the law was the prevention of fraudand sharp practices in a type of real estate transactionpeculiarly open to abuses. The court said the method offurnishing information to real property purchasers whichinvolved investigation and written disclosure of certainessential facts was protection for innocent purchasers.

Extensions of Authority. Licensing and regulatory controlsfor mineral, oil and gas brokers were enacted by law in 1943,as were the activities of business opportunity brokers. Laterlegislation permitted and still allows any licensed real estatebroker or salesperson to engage in the business opportu-nity field under a general real estate license.

In 1955, because of complaints about practices of somebrokers which were clearly adverse to the public good, theLegislature passed and has since amended and strength-ened statutes regulating the handling of real property loansby licensees. Substantial new laws and regulations wereadopted in 1982 regulating disclosures in mortgage loanbroker activities. These are covered later in this course.

On January 2, 1970, the Commissioner became responsiblefor administering the Real Estate Syndicate Act relating tosome types of real estate syndicates that were formerlyunder the jurisdiction of the Corporations Commissioner.

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However, under a law change on January 1, 1978, thisjurisdiction was returned to the Corporations Commis-sioner.

On July 1, 1975, brokers and salespersons under the author-ity of their real estate licenses, became authorized to engagein the sale, purchase, negotiation, etc., of mobilehomesregistered for at least one year with the Department of MotorVehicles. Effective July 1, 1980, licensees may also negoti-ate the sale of other mobilehomes provided the require-ments of the Health and Safety Code Section 18551 fortransforming a mobilehome to real property have beensatisfied.

On September 25, 1980, prepaid rental listing services be-came regulated and require the licensing of any personrendering such services, other than a real estate licensee, bythe Department of Real Estate.

Public Trust. In the brief history given, it can readily beunderstood that brokers and salespersons are engaged inmany activities, as representatives of others in a confiden-tial and fiduciary capacity. The public has more than apassing interest in seeing that the trust of the community iswell placed in the real estate professional. To that end, thestate seeks to help justify this trust and confidence byprescribing certain educational, experience and ethicalrequirements for real estate practitioners and subjecting todiscipline those licensees who violate this trust.

Decisions and Rulings Affecting Real Estate Law. Whatis commonly referred to as the “Real Estate Law” mustclearly be distinguished from what is known as real propertylaw, law of agency, contract law, or other legal aspects of realestate ownership and conveyancing. Although these setsof laws interrelate and overlap, they are nevertheless differ-ent legal rules and should be separately understood. TheReal Estate Law affects the licensing and conduct of per-sons acting as real estate agents. The law is enforced atspecial administrative hearings by the Commissioner ratherthan by a court of law. You understand by now that thiscourse, titled “Real Estate Law,” includes a study not onlyof the so-called Real Estate Law, as just described, but alsothe other sets of laws which comprise the legal aspects ofCalifornia real estate activity.

The California Real Estate Law, or license law, as it issometimes referred to, has two principal purposes: (1) theprotection of the general public from harm at the hands ofdishonest and incompetent agents and (2) the protection ofthe reputation of honest agents against the adverse pub-licity and public resentment often caused by the unprin-cipled and unscrupulous who would infiltrate the agent’sranks.

Since the entire text of the Real Estate Law and a detailedanalysis, as published by the state, is 124 pages in length,and since this course is meant to acquaint you with manymore legal aspects of California real estate, the Real EstateLaw has been compressed into an outline of essentialinformation, which follows. The student is advised to studythe outline, which presents the essential information inclear, easy-to-follow steps, and be prepared to answerquestions based on the information contained therein.

THE REAL ESTATE LAW

I. Police Power

A. Definition: Police power is the authority of the state toenact legislation within constitutional limitations in orderto ensure the safety, health, morals, and general welfareof the people of the state.

B. Constitutional Justification.

1. Contained in the Bill of Rights to the U.S. Constitution

2. It states, “The powers not delegated to the UnitedStates by the Constitution nor prohibited to it by thestates are reserved to the states respectively or to thepeople.”

II. Need for license law: To protect the public from unquali-fied and unethical real estate agents.

III. Real Estate Bureaucratic Structure

A. The Department of Real Estate

1. Was created in 1917

2. Has the following responsibilities:

a. license and regulate real estate agents

b. regulate the sale or lease of subdivided land

c. govern the handling of real property loans by realestate licensees

d. regulate certain types of mobile home transactions

e. manage prepaid rental listing services run bysomeone other than a licensee.

B. Real Estate Commissioner

1. Job background

a. The Commissioner is the chief executive officer ofthe Department of Real Estate and the chairperson ofthe Real Estate Advisory Commission

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b. The Commissioner is appointed by the Governor

c. The Commissioner must have five years of activeexperience as a California real estate broker or fiveyears of related experience in California in the last tenyears.

2. Overall objectives of the Commissioner

a. Decide departmental policy

b. Enforce the provisions of the Real Estate Law

3. Specific duties of the Commissioner

a. Screen license applicants

b. Investigate nonlicensees conducting businesstransactions requiring a real estate license

c. Review complaints against licensees

d. The pertinent regulations within limits of non-exempt franchises, real property securities and thesale of subdivisions

e. Hold formal hearings within the limits of the Admin-istrative Procedures Act

f. NOT settle commission disputes

C. Real Estate Advisory Commission

1. Organizational background

a. Established January 1, 1977

b. Comprised of ten membersi. 6 licensed real estate brokersii. four public members

c. Only the Commissioner receives compensation

d. Must meet a minimum of four times a year

2. Function: Assist in shaping administrative policyand procedure.

D. Real Estate Funds

1. Real Estate Fund: Provides funds to support theDepartment of Real Estate

2. Real Estate Education, Research & Recovery Alloca-tion Fund

a. Education and Research Subfund: Supports appli-cable education and research

b. Recovery Subfundi. Purpose: To provide recovery money to wrongedparties where no other remedy is availableii. When applicable:

(A) In certain cases of fraud, misrepresentation, and deceit in a real estate transaction(B) The agent does not pay the court judgment

iii. Award maximums:(A) $20,000 per transaction(B) $100,000 for all combined transactions

IV. Activities requiring a license:

A. Applicable activities

1. sell or buy real property

2. offer to sell or buy real property

3. solicit real estate buyers

4. list or solicit listings of real property

5. exchange, offer to exchange, lease, or offer to leasereal property*

6. buy, sell, or exchange an existing lease *

7. collect rent*

8. sell or issue a real estate syndicate security

9. assist with filing on state or federal lands

10. negotiate mortgages and trust deeds

11. buy or offer to buy existing real property loans

12. sell or offer to sell existing real property loans

13. exchange or offer to exchange real property loans

B. (*): Does not pertain to managers of a motel, hotel,trailer park, apartment building, or apartment complex.

C. Concept of “in the business”

1. Definition: The presence of eight or more notes orsales contracts in any one calendar year

2. Pertains to the last three activities listed even ifperformed for the benefit of one’s self, if it constitutesbeing “in the business.”

V. Maximum Penalty for practicing without a license.

A. Individual: $1,000 fine, six months in jail, or both

B. Corporation: $10,000 fine

C. Consumer who utilizes an unlicensed agent: $100 fine

VI. Activities exempt from license requirements.

A. Anyone dealing with their own property as long as itdoes not constitute being “in the business.”

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B. An employee of a lending institution

C. An appraiser

D. Real Estate related clerical help

E. An attorney if performing duties for a client as anattorney

F. An attorney-in-fact conducting a real estate transac-tion for the principal

G. A resident manager or employee of an apartmentbuilding or apartment complex

H. Cemetery personnel

VII. California Real Estate License

A. Qualifications

1. Salesperson

a. at least 18 years old

b. complete the prescribed application (RE Form 400)

c. pass the Department of Real Estate examination

d. be an honest and truthful person

e. on or after January 1, 1986:i. pass an approved real estate principles courseprior to examinationii. pass additional courses within 18 months oflicensure

2. Broker

a. At least 18 years of age

b. Complete the prescribed application (RE Form 400)

c. Pass the Department of Real Estate exam

d. Be an honest and truthful person

e. Meet the statutory education and experience re-quirements:

i. Complete the eight required college level coursesdescribed earlier in this chapter.ii. Experience requirement(A) Applicant actively engaged as a real estatesalesperson for at least two years out of the fiveyears immediately preceding application filing,or...(B) Applicant proves equivalent general realestate experience and the Real Estate Commis-sioner agrees.(C) Applicant has completed a four year collegedegree in any field.

VIII. Re-examination.

A. Exam can be taken an innumerable number of times

B. The original license application is valid for two years.

C. A new application must be filed if the applicant has notpassed the examination in that time period.

IX. Fingerprints.

A. All original applicants for a real estate license who havenot held some type of real estate license in current statusin the previous two years must be fingerprinted.

B. Mandated by Section 10152 of the California B&P Code.

X. License term.

A. Original salesperson or broker license valid for a termof four years.

B. Renewed licenses are valid for a term of four years.

XI. Continuing Education.

A. Must complete 45 clock-hours of approved subjectswithin the preceding four years before license renewal

1. 3-hour minimum in ethics, professional conduct, andthe legal aspects of real estate

2. 21-hour minimum in consumer protection

3. remaining hours in “consumer service” courses

B. Verification of competency must be furnished by theinstitution providing the instruction

C. The institution must be approved by the Department ofReal Estate.

XII. License Renewal.

A. A license must be renewed by midnight of the date ofexpiration on the license.

B. Renewal occurs when:

1. The appropriate fee has been paid

2. The continuing education requirements have beenmet

C. An applicant has two years after the expiration of alicense to file for late renewal.

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XIII. Fees

A. No fee is refundable

B. 1987 Department of Real Estate Fee Schedule:

1. Real estate salesperson license examination, includ-ing re-examination, if necessary — $25.00

2. Reschedule of a real estate salesperson license exam— $10.00

3. Real estate salesperson license — $145.00

4. Restricted real estate salesperson license — $120.00

5. Late renewal of a salesperson license. — $160.00

6. Real estate or mineral, oil and gas (M.O.G.) brokerlicense examination, including re-exam,if necessary —$50.00

7. Reschedule of a real estate broker license examination— $15.00

8. Real estate broker license — $165.00

9. Restricted real estate broker license — $165.00

10. Late renewal of a broker license — $220.00

11. Reschedule of a M.O.G. broker license — $15.00

12. M.O.G. broker license — $165.00

13. Late renewal of a M.O.G. broker license — $220.00

14. M.O.G. permit — $ 50.00

15. Fingerprint processing, when applicable — $ 19.00

16. Real property securities deal endorsement* —$100.00

(*): The endorsement is valid for the term of the license.The fee must be paid each license renewal.

XIV. Inactive License.

A. The inactive license status has been eliminated as ofJanuary 1, 1981.

B. Current inactive licenses which have not beensuspended or revoked may be reinstated or renewed if alllicense requirements have been met. Reinstatement orrenewal is now only granted on an active basis.

C. An additional fee is required if the license was takenout on an inactive basis to compensate for the initial lowerfee payment.

XV. Types of licenses.

A. Salesperson

1. Must be under the control and supervision of alicensed real estate broker

2. Cannot act independently

3. License must be available in the broker’s principaloffice.

B. Broker.

1. Individual broker

a. Most common type of broker license

b. Characteristics:i. Licensee can conduct business under own nameor fictitious nameii. Must maintain a definite place of businessiii. The licenses of the broker and all employedsalespersons, if any, must be available for inspec-tion.

2. Partnership brokerage.

a. Partnership license discontinued in 1968

b. Partnerships are allowed between licensees

c. Partnerships may be formed between brokers aloneor with salespersons.

3. Corporate brokerage.

a. License is issued to the corporation

b. The license must be qualified by a responsiblelicensed broker who is a corporate officer.

c. The qualifying officer must control the real estateoperations of the corporation.d. Replacement of the qualifying officer does notaffect the license.

4. Fictitious business name.

a. Concept of “DBA”i. “DBA” stands for “doing business as”ii. Any DBA must be approved by the Commis-sioner.

b. Reasons for denying a fictitous business namei. Implies a nonexistent partnership or corporationii. Violates the lawiii. Construed to be false advertisingiv. Incorporates a salesperson’s namev. Utilizes a name used previously by a person whohas their license suspended or revoked.

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c. Characteristics:i. A fictitious business name is an addition to anexisting licenseii. Valid for the term of the licenseiii. In order to continue using a DBA when thelicense expires, the license must be renewed.iv. A new fictitious business name statement mustbe filed every five years.

5. Branch office.

a. Needed when a broker operates more than one office

b. Each office requires its own license

c. Each license must be available for inspection

6. Mineral, oil and gas.

a. M.O.G. license is necessary if a broker negotiatesmore than ten mineral, oil or gas transactions in anycalendar year.

b. M.O.G. permit is necessary if a broker negotiatesten or fewer mineral, oil or gas transactions in anycalendar year.

c. M.O.G. license or permit is unnecessary if thetransfer of mineral, oil or gas property is incidental toa normal real estate transaction

7. Prepaid rental listing services.

a. Definition: A company that receives compensationfor supplying a prospective tenant with a list ofavailable rental units.

b. Regulated and licensed by the California Depart-ment of Real Estate.

8. Restricted, suspended, revoked, or canceled.

a. Restrictedi. Definition: Limits the actions of the licensee withrespect to term, type of acceptable activity, place ofacceptable employment, the necessity of filing asurety bond, or a variety of other restrictions.ii. Nature: Probationary

b. Suspendedi. Definition: Bars a person from engaging in anytransaction needing a real estate license for a spe-cific period of time.ii. Nature: Probationary

c. Revokedi. Definition: Bars a person from engaging in anytransaction needing a real estate license for anindefinite period of time.ii. Nature: Disciplinary

d. Canceledi. Definition: The license is currently inactive butis not permanently terminated.ii. When applicable: Cancellation can occur undersituations such as a salesperson quitting, beingfired by the employing broker, or having the brokerdie.iii. Nature: Not a disciplinary status.

9. Special License Categories.

a. Real property securities dealeri. Definition: Broker allowed to engage in selling andguaranteeing the return on any land contract or trustdeedii. Characteristics:

(A) Broker’s license must be endorsed with thestamp “Certified as Real Property Securities Dealer”by the Commissioner.(B) A bond of $5,000 must be posted(C) Each security must have an additional permitfrom the Commissioner.(D) A disclosure statement to each investor(E) Not allowed to deal in stocks and bonds

b. Mobile home dealer.i. Broker’s limitations: Broker can sell; buy; offer tosell or buy; solicit purchasers or listings; or negoti-ate the purchase, sale, or exchange of anymobilehome within certain parametersii. Characteristics

(A) Mobilehome must be registered for at least oneyear with the Department of Motor Vehicles or theDepartment of Housing and Community Develop-ment unless it has been transformed into realproperty as specified in the Health and SafetyCode.(B) Broker cannot display and offer for sale two ormore mobilehomes at his place of business.(C) Additional limitations in Section 10131.7 of theCalifornia Business and Professions Code.

iii. Mobilehome dealer’s license.(A) Activities not limited by Section 10131.7 ofthe Business and Professions Code.(B) Available from the Department of Housing andCommunity Development.

c. Franchising

i. Definitions: Salespersons and brokers can offerfranchises to prospective parties.

ii. Regulated by the Franchise Investment Law

iii. Legal intent of the law is to force the disclosureof sufficient information to potential franchisees sothat the prospective investors are able to formulatean intelligent investment decision.

d. Business opportunity transactions

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i. Definition: Includes a business, business oppor-tunity, and goodwill of an existing business.ii. Differentiated from a regular real estate transac-tion in that a business opportunity often involvesthe sale of personal property.iii. Scope of practice: Broker or salesperson canconduct transactions involving the buying, selling,exchanging, or leasing of a business opportunity.


1. Which state passed the first real estate licensing law?a. Washington c. Arkansasb. New York d. California

2. How many of the states today have statutes governing the licensing, regulation, and conduct of real estate agents?a. all of them c. 49 of themb. 48 of them d. none of the above

3. Which part of the Real Estate Law covers licensing of persons?a. Part 2 c. both “A” and “B”b. Part 1 d. neither “A” nor “B”

4. What happened to the state’s first real estate law in the state Supreme Court case “In re Raleigh, 177 C.746?a. it was upheld c. it was declared unconstitutionalb. it was interpreted d. none of the above

5. The Subdivided Lands Law was originally attacked by opponents on what grounds?a. all the following are correctb. that it placed unreasonable burdens on the exercise of property rightsc. that it was vague and uncertaind. that it benefited only a special class and not a whole public

6. Which of the following is a principal purpose of the Real Estate Law?a. the protection of the general public from harm at the hands of dishonest and incompetent agentsb. the protection of the reputation of honest agents against the adverse publicity and public resentment often

caused by the unprincipled and unscrupulousc. both “A” and “B” d. neither “A” nor “B”

7. Which is a responsibility of the Department of Real Estate?a. license and regulate real estate agents c. both “A” and “B”b. regulate the sale or lease of subdivided land d. neither “A” nor “B”

8. Which is true about the Real Estate Commissioner?a. appointed by the Governorb. must have five years of active experience as a California real estate broker, or five years of related experience in

California, in the last ten yearsc. both “A” and “B”d. neither “A” nor “B”

9. Which are specific duties of the Commissioner?a. screen license applicants c. investigate nonlicensees conducting business transactions

requiring a real estate licenseb. review complaints against licensees d. all of the above

10. Which of the following activities requires a license?a. all of the following c. list or solicit listings of real propertyb. negotiate mortgages or trust deeds d. assist with filing on state or federal lands

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7MECHANIC’S LIENS & OTHER ENCUMBRANCES

California law expressly provides that persons furnishinglabor or material for the improvement of real estate may fileliens upon the property affected if they are not compen-sated. Thus an unpaid contractor, or a craftsman employedby the contractor to work upon a building project, but whohas not been paid by the owner or contractor may protectany interests by filing a lien against the property in a mannerprescribed by law. The same right is held by any person whohas furnished material such as lumber, plumbing, or roofingif the claim is not paid. It is because of the possibility of theseliens being filed that an owner employing a contractorsometimes requires that a bond be furnished to guaranteepayment of such possible claims.

THE THEORY

The mechanic’s lien law is based on the theory that improve-ments contribute additional value to land; therefore, it isonly equitable to impose a charge on the land equal to suchincrease in value. This charge may exist in the absence ofany direct contract relationship between the lien claimantand the landowner. The lien must, however, be foundedupon a valid contract with the contractor, subcontractor,lessee or vendee. Also, ordinarily the lien is valid only tothe extent of labor and materials furnished for and actuallyused in the job.

WHO MAY OBTAIN

The California Civil Code specifies who may secure amechanic’s lien. "Laborer" means any person who, actingas an employee, performs labor upon or bestows skill orother necessary services on any work of improvement."Materialman" means any person who furnishes materialsor supplies to be used or consumed in any work of improve-ment. Thus the statute extends the right to all persons andlaborers of every class who perform labor or bestow ser-vices or furnish materials or equipment, which contribute to

the construction, alteration, addition or repair of any build-ing or other structure or work of improvement.

It includes grading and filling and landscaping of lots ortracts of land, as well as demolition and removal of buildings.In each case the contributor has a lien upon the propertyupon which the contributor has bestowed labor or fur-nished material, for the value given, including a charge forany appliances or power provided. The work may have beendone at the instance of the owner, or by any person actingby owner’s authority or under the owner, as a contractor.Indeed the statute states that every contractor, subcontrac-tor, architect, builder or other person in charge of the job isdeemed to be an agent of the owner for purposes of the lienlaw.

Normally, bills for materials and services are paid when due.But if there is a default by the owner or contractor, theclaimant must act promptly to exercise lien rights. The lienlaw is quite technical in its requirements, particularly withrespect to notice by subcontractors and materialmen re-quired as a prerequisite to filing a valid mechanic’s lien, butwe will presently offer you a condensed version of the law.

It will sometimes happen that a real estate broker is also alicensed contractor, and for that reason will be concernedwith the Mechanics Lien Law. For that matter, the real estatelicensee may himself be the property owner who is involvedin a development project, and thus must know how theMechanic’s Lien Law is applied. In any case, the principlereason for learning about the Mechanic’s Lien Law and theStop Notice is that they are encumbrances, and an under-standing of encumbrances is vital to the real estate profes-sional.

Because of its comparatively high value, coupled with itspermanence, it is not extraordinary to find that mankind’singenuity has devised a multitude of ways to deal with land.We have, for example, already observed the various waysin which title may be held.

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An encumbrance may be defined broadly as any right orinterest in land possessed by a stranger to the title, whichaffects the value of the owner’s estate, but does notprevent the owner from enjoying and transferring the fee.

There are two categories of encumbrances -- (1) thoseaffecting title and (2) those affecting condition or use ofproperty.

1. Those that affect the title, notably liens. A lien is definedas a charge imposed upon specific property by which it ismade security for the performance of an act, typically thepayment of a debt. Liens may affect both real and personalproperty. They may be voluntary or involuntary. Theymay be specific, affecting only a particular property, orgeneral, affecting all property of the owner not exempt bylaw. The principle kinds of liens are:

1. Mortgages and trust deeds

2. Mechanic’s liens

3. Tax liens and special assessments

4. Attachments and judgments

2. The other type of encumbrance, as mentioned, affectscondition or use of property, notably:

1. Easements

2. Building restrictions and zoning requirements

3. Encroachments.

TERMS AND PROCEDURES

To return to our discussion of mechanic’s liens, before weexplain the proper procedures for perfecting a mechanic’slien, you should first read through the following list of termswhich are related to the procedure:

1. Awarding Authority -- This is the owner or the agentof the owner who awards an original building or construc-tion contract, also called the prime contract.

2. Bonded Stop Notice -- A bond which accompanies aStop Notice to a construction lender and must be in a sumequal to one-and-one-fourth times the amount of theclaim. The bond, along with the Stop Notice, must bedelivered by certified or registered mail or in person, to thepersons responsible for administering or holding con-struction funds. Should the claimant lose his or her action(lawsuit on the bond), then the claimant must pay all coststhat may be awarded against the owner or contractor orconstruction lenders. This is the reason for the bond on

the stop notice.

3. Stop Notice -- A written notice, signed and verifiedby the claimant or the claimant’s agent, which puts alender or anyone else holding construction funds onnotice that there is money due and owing to the claimant.(Note: Whereas a mechanic’s lien is a lien against prop-erty, a stop notice is a lien against funds).

The Stop Notice must state the following:

a. The kind of labor, services, equipment, or materialsfurnished or agreed to be furnished by the claimant.

b. The name of the person to or for whom the labor,services, etc. were furnished.

c. The amount based on value as near as possible, ofthe work or equipment already completed or furnishedand the amount of the whole work agreed to be done orfurnished.

IF INVOLVING A PRIVATE WORK OF IMPROVEMENT,THE STOP NOTICE MUST BE DELIVERED TO THEOWNER PERSONALLY OR LEFT AT HIS/HER RESIDENCEOR PLACE OF BUSINESS WITH SOME PERSON INCHARGE, OR DELIVERED TO HIS/HER ARCHITECT, IFANY, AND, IF THE NOTICE IS SERVED UPON A CON-STRUCTION LENDER, HOLDING CONSTRUCTIONFUNDS AND MAINTAINING BRANCH OFFICES, ITMUST BE DELIVERED TO THE MANAGER OR OTHERRESPONSIBLE PERSON AT THE OFFICE OR BRANCHWHICH ADMINISTERS OR HOLDS THE CONSTRUC-TION FUNDS.

IF INVOLVING ANY PUBLIC WORK FOR THE STATE,THE NOTICE MUST BE FILED WITH THE DIRECTOR OFTHE DEPARTMENT WHICH LET THE CONTRACT.

IF INVOLVING ANY OTHER PUBLIC WORK, THE NO-TICE MUST BE FILED IN THE OFFICE OF THE CONTROL-LER, AUDITOR, OR OTHER PUBLIC DISBURSING OF-FICER WHOSE DUTY IT IS TO MAKE PAYMENTS UN-DER THE PROVISIONS OF THE CONTRACT, OR WITHTHE COMMISSIONERS, MANAGERS, TRUSTEES, OF-FICERS, BOARD OF SUPERVISORS, BOARD OF TRUST-EES, COMMON COUNCIL, OR OTHER BODY BY WHOMTHE CONTRACT WAS AWARDED.

ANY STOP NOTICE MAY BE SERVED BY REGISTEREDOR CERTIFIED MAIL WITH THE SAME EFFECT ASPERSONAL SERVICE (CIVIL CODE, SECTION 3103)

THE STOP NOTICE OBLIGATES THE PERSON HOLD-ING CONSTRUCTION FUNDS TO WITHHOLD SUFFI-CIENT FUNDS TO SATISFY THE AMOUNT IN THE

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STOP NOTICE. IF THE PERSON HOLDING THE FUNDSDOES NOT WITHHOLD SUFFICIENT FUNDS TO SAT-ISFY THE STOP NOTICE, THEN THE LENDER OR WHO-EVER ELSE IS HOLDING THE FUNDS MAY BE RESPON-SIBLE TO THE CLAIMANT DIRECTLY.

In order to bind a construction lender, the stop notice mustbe bonded. The bond which accompanies the stop noticeto any construction lender must be in the sum equal to one-and-one-quarter times the amount of the claim. The bondmust be delivered along with the stop notice in person or bycertified or registered mail to the persons responsible foradministering or holding the construction funds.

Should the claimant lose in his/her action (lawsuit on thebond), then the claimant must pay all costs that may beawarded against the owner or contractor or constructionlender. That is the reason for the bond on the stop notice.

4. Preliminary 20-day Notice -- This is a notice in writingfrom a claim- and that is a necessary prerequisite to filinga mechanic’s lien or stop notice. This notice is to bedistinguished from the "Notice to Owner" form that homeimprovement contractors are required to give to owners.This notice has to be given by anyone who furnisheslabor, equipment, services or materials, with the followingexceptions:

a. Anyone who is working for wages is not requiredto give this notice

b. Anyone who has a direct contract with the owner ofthe property is not required to give the preliminary 20-day notice.

c. An express trust fund which is established to payfringe benefits to workers is not obligated to give thisnotice.

The preliminary 20-day notice is given to the owner, theoriginal contractor, and the lender. Materialmen, suppliers,and architects (non-licensed people) also have to give thePreliminary Notice to lenders, even if they are dealingdirectly with the property owner. The deadline for giving thePreliminary Notice is 20 days after first supplying the labor,services, equipment or materials.

The Preliminary 20-day Notice must describe what has beenfurnished or supplied (labor, services, etc.), or what is to befurnished. It is also necessary to provide any lender witha total price estimate. In addition, all of the following mustbe on the Preliminary Notice:

a. Name and address of the person supplying the labor,material, etc.

b. Name of the person who contracted for these things.

c. Description of the job site sufficient for identification.

d. Statement equivalent to a threat of a mechanic’s lienif bills for labor, materials, etc. are not paid.

e. Name and address of express trust fund, if any.

NOTE: IF AN OWNER AGREES TO WAIVE SERVICE OFTHE PRELIMINARY NOTICE, SUCH AGREEMENT HASNO EFFECT WHATSOEVER; NOTICE MUST STILL BESERVED

The Preliminary Notice may be delivered in person, and it isnecessary to get a receipt. If it is not delivered in person,then it may be left with a person in charge at the principleplace of business of the person being notified. Again, theperson making the delivery should get a receipt. It may alsobe delivered by certified or registered mail addressed to theappropriate residential address, the address on the buildingpermit, or the address which appears on the constructiontrust deed. It is only necessary to give one notice for eachwork of improvement, unless that being furnished is fur-nished by more than one contractor or subcontractor, inwhich case separate notices are required.

FAILURE TO GIVE A PRELIMINARY NOTICE FORCONTRACTS AMOUNTING TO $400 OR MORE NOTONLY NULLIFIES LIEN AND STOP NOTICE RIGHTS,BUT MAY BE GROUNDS FOR DISCIPLINARY ACTIONBY THE REGISTRAR.

5. Notice of Cessation of Labor -- A form which, if signed,verified, and recorded by a property owner after work hasstopped on a construction project, will limit the time withinwhich mechanic’s liens must be filed to 60 days by theoriginal contractor and 30 days for any subcontractors.

PROCEDURES

Now that you’ve been introduced to some of the terms (andby inference, some of the procedures), let’s examine whatwould be proper procedure for any contractor with regardto Preliminary Notices, the Mechanic’s Lien Law and StopNotices.

PRIOR TO START OF PROJECT

All contractors should obtain the legal description of thework site (Map book and page number), get the name of theowner and the extent of the owner’s interest in the property,and find out if the owner is the one who is requesting theimprovement. If not, then find out what the interest is of the

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person making the request. Then find out who, if anybodyelse, also claims an interest in the property, such as lenders.Make a determination about yourself as to whether you area prime contractor, subcontractor, laborer, or material sup-plier. If there is a construction lender, then get the lender’sname.

NOTE: ALL OF THE FOREGOING INFORMATION WILLBE NECESSARY TO INCLUDE ON ANY FORMS OR NO-TICES WHICH MAY LATER HAVE TO BE FILLED OUT.

AT THE START OF THE PROJECT

ALL SUBCONTRACTORS are required to send out a Pre-liminary 20-day Notice to the owner, the original contractor,and the construction lender. The most common way inwhich this notice is served is by first class certified orregistered mail, return receipt requested, postage prepaid.

WHEN WORK IS COMPLETED

SUBCONTRACTORS

If the owner files a Notice of Cessation of Labor or a Noticeof Completion, you have 30 days from the date either ofthese forms is filed by the owner within which to record aClaim of Lien or Stop Notice.If the owner does not file either a Notice of Cessation ofLabor nor a Notice of Completion, and if labor ceases andthe owner or agent uses the work of improvement or acceptsthe improvement, then you have 90 days within which torecord a Claim of Lien or Stop Notice.

PRIME CONTRACTORS

You are not required to send a preliminary notice; that is justfor subcontractors. The requirements for recording a claimof lien are the same as described above for subcontractors,except that if the owner does file his Notice of Cessation orCompletion, you have thirty more days than the subcon-tractor within which to file a Claim of Lien or Stop Notice. Inother words, in that case you would have 60 days insteadof 30 to file.

BOTH SUBCONTRACTORS AND PRIME CONTRAC-TOR

Both have 90 days after filing a Claim of Lien within whichto file a Lien Foreclosure action and record a Lis Pendens atthe same time. A Lis Pendens is a notice that a lawsuit ispending and that the lawsuit affects the real property inquestion. It warns everyone who might acquire the propertythat he or she may be bound by an adverse judgment (Civil

Code Section 3146)

And that’s how simple (and complicated) it is.

QUESTIONS YOU MAY HAVE ABOUTLIENS AND STOP NOTICES, ETC.

Question: What is the biggest difference between a lien anda stop notice?

Answer: Mechanic’s liens are claims against property,primarily the improvement made on the property; stopnotices are claims against construction funds. Both areways of recovering money due and owed to someone.

Question: What exactly is an express trust?

Answer: In the construction business this is usually a trustwhich is established through collective bargaining agree-ments for the management of fringe benefits. It is consid-ered to have lien rights against the owner, just like individualworkers.

Question: Who has lien rights and stop notice rights?

Answer: Both skilled and unskilled mechanics and laborers,contractors (both specialty and general, prime and sub),material suppliers, equipment lessors, and any expresstrust fund accounts.

NOTE: IF NOTICE IS GIVEN WITHIN 20 DAYS OF THESTART OF A PROJECT, THOSE PEOPLE WHO PREVI-OUSLY CONTRIBUTED TO THE IMPROVEMENTPROJECT MAY ALSO MAKE A CLAIM OF LIEN. THISWOULD BE SUCH PEOPLE AS ARCHITECTS, ENGI-NEERS AND SURVEYORS.

Question: Who is not entitled to a claim of lien?

Answer: We said earlier that employees working for wageswere not entitled to a claim of lien, but that isn’t strictlyaccurate and requires some clarification. If they are not paidtheir wages, they may assign their lien rights to the LaborCommission, which will collect their wages for them. There-fore, they have an indirect right to a claim of lien. Employeesof material suppliers are not entitled to lien rights. Peoplewho furnish materials, supplies, labor, etc. which is notspecifically ordered by the owner or the owner’s agent arealso not entitled to a lien.

Question: What or who is an owner’s agent?

Answer: For general purposes, an agent of an owner is any

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person who is in charge of any work of improvement or anyportion of any work of improvement, which would includethe prime contractor and all subcontractors.

Question: If the Preliminary 20-Day Notice isn’t filed, is itstill possible to make a claim of lien?

Answer: Absolutely not.

Question: Why not?

Answer: Because it is the Preliminary Notice which legallyinforms the owner about the Mechanic’s Lien Law and yourright to his property if you aren’t paid, REGARDLESS OFWHETHER THE OWNER PAYS THE PRIME CONTRAC-TOR IN FULL OR NOT.

Question: How soon should a Foreclosure of Lien bebrought to trial?

Answer: As soon as possible, and not later than two years.

Question: How much might one recover?

Answer: The reasonable value of what you provided, whetherlabor, services, materials, etc., or the price you agreed uponwith whomever you had a contract, whichever is less. Theowner also has the right to limit your recovery to the contractprice by filing the contract with the county recorder andposting a payment bond in an amount equal to 50 percentof the contract.

NOTE: YOU AUTOMATICALLY FORFEIT YOUR CLAIMOF LIEN IF YOU CLAIM MORE THAN WAS ACTUALLYOWED TO YOU.

Question: If a foreclosure sale does not produce sufficientmoney to pay everyone who has a legitimate claim, whogets paid first?

Answer: Mechanic’s liens will probably be only one ofseveral different types of liens which are competing for ashare of the proceeds from a foreclosure sale, and generallyspeaking those who record first get paid first. However, asyou might suspect, property taxes have first priority, regard-less of when you might have filed a mechanic’s lien. As forwho among all the various mechanic’s liens gets firstmoney, there is no priority. In other words, all mechanic’slien claimants share pro rate if the amount of the foreclosuresale is insufficient to pay all claims. Another type of lien,in addition to property tax lien, which takes priority overmechanic’s liens is the lien made by any mortgage holder,trust deed, etc., IF SUCH A LIEN IS RECORDED PRIORTO START OF WORK OR DELIVERY OF MATERIAL.

Otherwise, mortgage liens, etc., are subordinate tomechanic’s liens.

Question: If an owner pays a prime contractor in full, is heprotected from liens from subcontractors who are not paidby the prime contractor?

Answer: NO.

Question: Then how can an owner protect himself againstliens which might be brought against his property?

Answer: He can record his contract and post a bond in theamount of 50 percent of the contract. This limits the owner’sliability to the contract price, but does not actually eliminatethe possibility of having a mechanic’s lien brought againsthis property.

Question: What is a performance bond?

Answer: This is a bond that an owner may post whichguarantees that the project will be completed. The bondingcompany, should the project be abandoned or if the work isnot acceptable, may hire another contractor to complete theoriginal contractor’s work or sue for damages.

Question: What is a contract bond?

Answer: This is a bond which an owner may purchase whichguarantees not only that the job will be completed, but thatall labor and materials will be paid for.

Question: What are progress payments, and how are theymanaged?

Answer: This is an installment payment situation where theowner agrees to pay the prime contractor in periodic sumsof money, and the contractor agrees to furnish, in return,proof of having paid his subcontractors and materialmen orelse a waiver of lien from those has has not paid. In mostcases, the owner will keep the final payment for a period oftime after the project is completed, until the lien period isover.

Question: How is a mechanic’s lien terminated?

Answer: Voluntary release of the lien, normally after pay-ment of the underlying debt, would terminate the lien. Buteven in the absence of release, the lien does not endure in-definitely. The code provides that a mechanic’s lien will notbind any property for more than 90 days after filing of thelien or 90 days after the expiration of a credit, unless prop-erty foreclosure proceedings are commenced within thattime. When credit is extended for purposes of this limitation,it may not extend for more than one year from the

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time of the completion of the work. Moreover, a notice ofthe fact and terms of the credit must be filed for record withinthe 90 day lien period. If the lien is foreclosed by court action,there may ultimately be a judicial sale of the property andpayment to the lien holders out of the proceeds.

Question: Why is it important to determine the exactstarting time of a work of improvement?

Answer: Fixing the time, to the instant, is crucial whenquestions of priority of claim arise as between mechanic’sliens and deeds of trust. A California appellate court hasprovided this useful definition of commencement of work:"...some work and labor on the ground, the effects of whichare apparent -- easily seen by everybody; such as beginningto dig the foundation or work of like description, whicheveryone can readily see and recognize as the commence-ment of a building."

Question: Why is it important to determine the exactcompletion time of the work of improvement?

Answer: Fixing this time, to the exact day, is critical whenestablishing whether or not a given claim of lien has beenfiled within the proper time limit fixed by law.

Question: What is a Notice of Nonresponsibility?

Answer: The owner, or any person having or claiming anyinterest in the land, may, within 10 days after obtainingknowledge of construction, alteration or repair, give noticethat he or she will not be responsible for the work by postinga notice in some conspicuous place on the property andrecording a verified copy thereof. The notice must containa description of the property with the name and nature of titleor interest of the person giving it, name of the purchaserunder the contract, if any, or lessee, if known, and astatement that the person giving the notice will not beresponsible for any claims arising from the work of improve-ment. If such notice is posted, the owner of the interest inthe land may not have owner’s interest liened, providing thenotice is recorded within the ten day period.

The validity of a notice of nonresponsibility cannot bedetermined from the official county records since they willnot disclose whether compliance has been made with thecode requirements as to posting on the premises. If suchposting has not been made, a recorded notice affords noprotection from a mechanic’s lien.

ATTACHMENTS AND JUDGMENTS

In addition to mechanic’s liens and stop notices, attach-ments and judgments are two more types of liens which

create encumbrances affecting the title to property. By nomeans as common as mechanic’s liens or tax liens, but fullyas effective and important when they do apply, are the lienscreated by attachments and judgments.

Attachment. This is the process by which real or personalproperty of a defendant in a lawsuit is seized and retainedin the custody of the law as security for satisfaction of thejudgment the plaintiff hopes to obtain in the pendinglitigation. The plaintiff gets the lien before entry of judg-ment, and thus is assured of availability of property of thedefendant for eventual execution in satisfaction of the claim-- assuming the judgment is awarded to the plaintiff.

Prejudgment attachments of the property of a naturalperson have been limited by case law and statute to claimsarising out of the conduct of a business, trade or profession.There are numerous other limitations on obtaining a pre-judgment attachment.

Property Exempt From Attachment and Execution. As amatter of public policy -- no doubt to prevent extremehardship -- certain property is exempt from attachment orexecution when proper claim is made for exemption (Code ofCivil Procedure Section 706.010 et seq.) The most importantexemption is the homestead, and the formalities of declara-tion of homestead by the owner to obtain exemption will bepresented later in this chapter.

Judgment. A judgment is the final determination of therights of the parties in an action or proceeding by a court ofcompetent jurisdiction. There is, of course, always a pos-sibility that either party will appeal, and the judgment mightsubsequently be reversed or amended. Comparatively fewjudgments are appealed, but even for those which are not,the judgment is not truly finalized until the time to appeal orseek other procedural legal relief has elapsed.

A judgment does not automatically create a lien. However,as soon as a properly certified abstract of the judgment ordecree of any court of this state, or any federal court ofrecord, is recorded with the recorder of any county, itbecomes a lien upon all nonexempt real property of thejudgment debtor, located in that county. It extends, more-over, to all realty the debtor may thereafter acquire beforethe lien expires. Since the lien normally continues for tenyears from the date of entry of the judgment or decree, it isrigorous in its effect.

As with the lien on attachment, various ways are providedby law for discharging it, e.g., when the enforcement of thejudgment is stayed on appeal and the defendant executesa sufficient undertaking (i.e., promise or security) or depos-its in court the requisite amount of money.

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EASEMENTS

Having considered various types of liens which are encum-brances affecting the title to property, we now direct ourattention to encumbrances which affect the physical con-dition or use of the property. Easements, probably the mostcommon of this category, are rights to enter and use anotherperson’s land or a portion thereof within definable limits.Therefore, an easement is a right, privilege or interest limitedto a specific purpose which one party has in the land ofanother.

Easement rights are usually created for the benefit of theowner of adjoining land, hence such benefited land is calledthe "dominant tenement," and the land subject to theeasement is described as the "servient tenement." Unlessthe right is specifically described to be "exclusive," itscreation does not prevent the owner of the land from usingthe land and the portion covered by the easement in anynon-interfering manner.

Appurtenant Easements. Typical statutory easements (orland burdens or servitudes as they are also known) include:rights-of-way; rights of taking water, wood, minerals andother things; right of transacting business or conductingsports upon the land; the right of flooding land; the rightof receiving air, light, or heat from over, or discharging thesame upon or over land; the right of using a wall as a partywall; the right of receiving more than natural support fromadjacent land or things affixed thereto. These easements,when attached to a "dominant tenement," are consideredappurtenant thereto, and pass automatically upon transferof the dominant tenement, or, "run with the land." Appur-tenant means "belonging to." Purchasers of the servienttenement usually take subject to the easement either be-cause the easement is recorded or because it is apparent onthe ground.

Easements in Gross. It is possible to have an easementwhich is not appurtenant to particular land. Thus A, whoowns no land, may have a right-of-way over B’s land. Publicutilities frequently enjoy easements to erect poles andstring wires over private lands, yet own no related dominanttenement. Such easements are technically known as ease-ments in gross, and are personal rights -- attached to theperson of the easement holder and not attached to anyspecific land, yet in reality they encumber someone’s landand in effect constitute an interest therein.

In determining whether an easement is appurtenant or ingross, if the instrument creating it is unclear, (1) if theeasement can fairly be construed as being attached to the

land it will be so construed (2) the intention of the parties andthe right created are important considerations and (3) out-side evidence may be considered.

How Easements are Created. Easements may be created invarious ways, such as by express grant, express reserva-tion, implied grant or implied reservation, agreement, pre-scription, necessity, dedication, condemnation, sale of landwith reference to a plat, or estoppel.

Normally, easements arise in one of three ways. Either theyare expressly set forth in some writing (such as a deed ora contract) or they arise by implication of law or by virtue oflong use. Those created by deed must comply with the usualrequirements of any deed and may arise either by expressgrant to another or by express reservation to oneself.

While the most common method of creating an easement isby express grant or reservation in a grant deed, writtenagreements between adjoining landowners often are used.The only person who can grant a permanent easement is thefee owner of the servient tenement or a person with thepower to dispose of the fee.

Easement by Implication of Law. Civil Code Section 1104contains the rule for implied grants. Certain conditions mustexist at the time a property is conveyed before an easementby implied grant will have effect. Easements created byimplication of law may be somewhat difficult to understand.An easement by necessity is one example of an easement byimplication.

The "way of necessity" is generally recognized whenevera transfer occurs which truly landlocks a parcel of real estateand there is no method of access whatsoever, except overthe servient tenement retained by the seller, or over the landof a stranger.

Another implied easement is recognized when land in oneownership is divided, and at the time of division one portionis being used for the benefit of the other portion, e.g., a sewerlateral. Another type of easement by implication is whereland is sold with reference to a plat delineating streets. Thepurchaser of the land gains an easement over such delin-eated ways.

Easement by Prescription. Continuous and uninterrupteduse for five years will create an easement by prescriptionwhere such use is hostile and adverse (i.e., without licenseor permission by the owner), open and notorious (i.e., theowner knows of the use or may be presumed to have noticeof the use), exclusive (i.e., although use is not necessarilyby one person only, yet it is such as to indicate to thelandowner that a private right is being asserted), and under

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some claim of right.

Termination of Easements. Easements may be extinguishedor terminated in several ways, including express release;legal proceedings; non-use of prescriptive easement forfive years; abandonment; merger of the servient tenementand the easement in the same person; destruction of theservient tenement; and adverse possession by the owner ofthe servient tenement.

RESTRICTIONS

A very common type of encumbrance is the restriction,which, as the name suggests, in some way restricts the freeuse of the land by the owner. Commonly, restrictions arereferred to as "covenants, conditions, and restrictions," orsimply CC&Rs. You will remember that this term has beenintroduced earlier.

Restrictions are generally created by private owners, typi-cally by appropriate clauses in deeds, or in agreements, orin general plans of entire subdivisions (as previously ex-plained). Usually restrictions assume the form of a covenant-- a promise to do or not to do a certain thing -- or a condition.Zoning is an example of a public use restriction.

A covenant is essentially a promise to do or not to do acertain thing, and it is generally used in connection withinstruments pertaining to real property, and is created byagreement. Typically, it is embodied in deeds, but it maybe found in any other writing. For example, a tenant mightcovenant in a lease to make certain repairs, or a buyer mightcovenant to use certain land only for a retail grocery store.

A condition, on the other hand, is a qualification of an estategranted. Conditions, which can be imposed only in convey-ances, are classified as conditions precedent and condi-tions subsequent. A condition precedent requires certainaction or the happening of a specified event before theestate granted can vest (i.e., take effect).

A familiar example is a requirement found in most of theinstallment contracts of sale of real estate. All paymentsshall be made at the time specified before the buyer maydemand transfer of title. When there is a condition subse-quent in a deed, the title vests (takes effect) immediately inthe grantee, but upon breach of the condition, the grantorhas the power to terminate the estate. This is termed aforfeiture, since the title may revert or be forfeited to thecreator of the condition without payment of any consider-ation.

Covenants and conditions are distinguishable in two fur-ther respects: first, in regard to the relief awarded, and

second, as to the persons by or against whom they may beenforced.

Relief Awarded. As to the first: While a condition affectsthe estate created, and the failure to comply with it may resultin a forfeiture of title, the only remedy to a breach ofcovenant is an action of damages or an injunction. Breachof a condition may prevent any right arising in favor of theguilty party, or destroy a right previously acquired, but doesnot subject the guilty party to liability and damages. Breachof covenant, while it gives rise to a right of actual damages,does not necessarily excuse the other party from perfor-mance.

Enforcement. As to the second difference: A covenantnormally doesn’t bind successors of the promisor who maybecome owners of the affected and restricted land. How-ever, some covenants "run with the land" (i.e., they bind theassigns of the covenantor or promisee), or they may bebinding and effective by statute or in equity. Conditions, onthe other hand, always run with the restricted land into theindefinite future.

How Construed. Whether a particular provision is a condi-tion or covenant is a question of construction. Since thelaw abhors forfeitures, the courts ordinarily will construerestrictive provisions as covenants only, unless the intentto create a condition is plain. The use of the term "condi-tions" or "covenants" is not always controlling. The realtest is whether the intention is clearly expressed and theenjoyment of the estate conveyed was intended to dependupon the performance of a condition; otherwise, it will beconstrued as a covenant only.

For instance, the deed reciting that it is given upon theagreement of the grantee to do or not to do a certain thingimplies a covenant and not a condition. So also with a recitalthat the land conveyed is or is not to be used for certainpurposes, as to be used for church purposes, or school-house grounds. Moreover, the plaintiff must allege andprove performance of all conditions precedent in order torecover.

Sufficiency of Performance. Where the contracting partiesagree that the sufficiency of a performance shall be deter-mined by some third person, as an architect in a buildingcontract, the architect’s determination is conclusive in theabsence of proof of fraud or mistake. Where the contractinvolves matters of fancy, taste or judgment, the party towhom the promise is made is the sole judge of satisfaction.Unless the contract provides otherwise, if this party assertsdissatisfaction in good faith, there can be no inquiry intothe reasonableness of such attitude though there may be aquestion concerning whether any contract in fact wascreated where performance is said to depend entirely upon

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the undefined satisfaction of one of the parties.

Where a contract for sale of real property contains anagreement by the vendor to buy it back if the purchasershould be dissatisfied with the investment, personal dissat-isfaction in the value or quality of the property is controlling.In the ordinary contract for the sale of real estate, thedelivery of a deed on the payment of the purchase price orlast installment thereon is a concurrent condition, and theremust be a performance or tender thereof by one party to putthe other party in default.

Certain Covenants and Conditions Are Void. Covenantsand conditions that are unlawful, impossible of perfor-mance, or in restraint of alienations are void; otherwise agrantor may impose any conditions in the grant.

A condition that a party shall not marry is void, but acondition to give use only until marriage is valid. Acondition against conveying without the consent of thegrantor, or for only a specified price, is void as in restraintof alienation. In such case, title passes free of the conditionsubsequent. Title does not pass at all if a conditionprecedent is impossible of performance or requires theperformance of an act wrong in itself; however, if the act benot wrong of itself, but is otherwise unlawful, the deed takeseffect and the condition is void.

Covenants Implied in Grant Deed. When the word "grant"is used in any conveyance of an estate of inheritance or feesimple (unless excluded or restrained by an express term),it implies certain covenants on the part of the grantor, andgrantor’s heirs or successors in interest, to the grantee, andgrantee’s heirs, successors and assigns:

(1) That the grantor has not already conveyed the sameestate or any interest therein to any other person.

(2) That the estate is free from undisclosed encumbrancesmade by the grantor, or any person claiming undergrantor. As noted earlier, encumbrances include liens,taxes, easements, restrictions and conditions.

Thus a grant deed, which is the form commonly used, ispresumed by law to convey a fee simple title (i.e., absoluteownership) unless it appears from the wording of the deeditself that a lesser estate was intended. Moreover, if agrantor subsequently acquires any title or claim of title to thereal property which grantor had purported to grant in feesimple, such after-acquired title passes by operation of lawto the grantee or grantor’s successor’s.

Deed Restrictions. Restrictions imposed by deeds, or insimilar private contracts, may be drafted to restrict, for anylegitimate purpose, the use or occupancy of land. The right

to acquire and possess property includes the right todispose of it or any part of it, and to impose upon the grantany reservations or conditions the grantor may see fit.However, the right may not be exercised in a mannerforbidden by law. Restrictions prohibiting the use of prop-erty on the basis of race, color, sex, religion, ancestry ornational origin are unenforceable because enforcementundertaken by the state would violate the 14th Amendmentof the U.S. Constitution. In addition, conditions consideredunreasonable or "repugnant to the interest created" areprohibited by Section 711 of the Civil Code.

Restrictions may validly cover a multitude of matters includ-ing use for residential or business purposes; character ofbuildings, such as single family or multiple units; cost ofbuildings, such as a proviso that houses must cost morethan $50,000; location of buildings, such as side lines of fivefeet and 20-feet setbacks; and even requirements for archi-tectural approval of proposed homes by a local groupestablished for that purpose.

New Subdivisions. In contrast to zoning ordinances, privatecontract restrictions need not necessarily advance publichealth or general public welfare. They may be intended tocreate a particular type of neighborhood deemed desirableto the tract owner and may be based solely on aestheticconditions. As might be expected, the most common useof restrictions today is in new subdivisions. The originalsubdivider establishes uniform regulations as to occu-pancy, use, character, cost and location of buildings andrecords a "declaration of restrictions" when the subdivisionis first created. All original deeds contain a reference to thedeclaration. Thereafter all lot owners, as among themselves,may enforce the restriction against any one or all of theothers.

In some cases when land is originally subdivided, arrange-ment is made in the nature of a covenant whereby a perpetualproperty owner’s association is formed, to be governed byrules and regulations set forth in an agreement signed by allnew lot purchasers. Such associations are often given thepower to amend tract restrictions from time to time tocorrespond with community growth. They may have thepower to revise building restrictions pertaining to certainblocks of lots in the development, impose architecturalrestrictions and make other authorized requirements fromtime to time.

Termination. Restrictions may be terminated by (1) expira-tion of their terms (2) voluntary cancellation (3) merger ofownership (4) act of government, or (5) changed conditionscausing judicial determination of the issue.

Restrictions usually either have a fixed termination date, or

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one which becomes effective upon recordation of a cancel-lation notice by a given percentage of the lot owners. Manysubdividers insert a clause in deeds which permits them tomodify or alter the restrictions as to any lot in the tract, withthe consent of a specified number of lot owners. Unlessa device similar to the above is initially provided, it maybe that all lot owners will have to give releases or quitclaimdeeds before the restrictions become unenforceable.

Courts, however, under unusual circumstances, may some-times refuse to enforce otherwise valid restrictions; forexample, where the complainant has violated them or wherethere is a very material change in the conditions of the area(as from residential to commercial, when a neighborhoodchanges.)

Restrictions may also be terminated by the existence of factswhich would serve as the basis for an action for affirmativerelief, and, in some cases, quiet title. Moreover, a personmay lose the right to the enforcement of the restrictionthrough a running of the Statute of Limitations by the waiveror abandonment of the rights.

Who Benefits From CC&Rs? Unless the language used inthe deed indicates definitely that the grantor intended theconditions or restrictions to operate for the benefit of otherlots or persons, the restrictions run to the grantor only, anda quitclaim deed from the grantor, or grantor’s heirs orassigns, is a sufficient release. However, if the languageused in the deed shows that the conditions or restrictionswere intended for the benefit of adjoining owners, or otherlots or owners in the tract, then quitclaim deeds must beobtained from all owners of lots having the benefit thereof,as well as from the grantor or grantor’s heirs or assigns, inorder to release them.

Zoning Restrictions. Restrictions upon the use of land maybe imposed by governmental regulation as well as by privatecontracts. The governing authority of a city or county asthe power to adopt ordinances establishing zones withinwhich structure must conform to specified standards as tocharacter and location, and to prohibit buildings designedfor business or trade in designated areas. However, zoningrestrictions, to be valid, should be substantially related tothe preservation or protection of public health, safety,morals or general welfare. They must be uniform for thegeneral public welfare. They cannot be discriminatory norbe created for the benefit of any particular group. Publicauthorities may enjoin or abate improvements or alterationswhich are in violation of a zoning ordinance, but the title tothe land is not affected thereby.

ENCROACHMENTS

Adjoining owners of real property often find themselvesinvolved with real estate law because of encroachments inthe form of fences or walls and buildings extending over therecognized boundary line. The party encroaching on aneighbor may be doing so with legal justification. Suchperson may have gained title to the strip encroached uponby adverse possession, or may have acquired an easementby prescription or possibly by implication.

On the other hand, the encroachment may be wrongful. Ifthis is the case the party encroached upon may sue fordamages and require removal of the artificial structure.

Note: Where the encroachment is slight (perhaps measur-able in inches), the cost of removal great, and the cause anexcusable mistake, the courts will not require removal butmay award dollar damages.

DECLARED HOMESTEAD

We mentioned earlier that we would examine the declaredhomestead in some detail. Although not an encumbrance,as are liens, restrictions, etc., it is appropriate to discuss thedeclared homestead at this point because its principalpurpose is to shield the home against creditors of certaintypes whose claims might be exercised against debtorsthrough judgment lien enforcement.

Two Homestead Statutes. Effective July 1, 1983, Code ofCivil Procedure Sections 704.710-704.990 supersede theformer Civil Code provisions for both the residential Home-stead Exemption (Title 9, Article 4, Sections 704.710-704.850)and the Declared Homestead (Title 9, Article 4, Section704.910-704.990).

While both Articles similarly deal with granting homeownershomestead protection from the claims of certain creditors,the Articles seem to be mutually exclusive. Article 4provides protections to homeowner debtors who properlycomply with all of the procedural requirements for entitle-ment to an exemption without the filing of a declaration ofhomestead. Article 5, on the other hand, concerns the actualfiling of a Homestead Declaration by an owner/spouse toobtain the protection.

If there is no homestead declaration, the "residential"exemption provided by Article 4 applies. With a recordeddeclaration of homestead, the provisions of Article 5 apply.Where a "dwelling" qualifies as a homestead, one of theother exemptions affords the debtor protection against

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certain judgment liens to the amount of the exemptionafforded by law.

The following discussion concerns primarily the DeclaredHomestead under Article 5.

Declared Homestead. A "dwelling" in which an owner or hisor her spouse resides may be selected as a declared home-stead by recording a homestead declaration in the office ofthe county recorder of the county where the "dwelling" islocated."Dwelling" means a place where a person actually residesand may include but is not limited to the following:

1. A house together with the outbuildings and the landupon which they are situated.

2. A mobilehome together with the outbuildings andthe land upon which they are situated.

3. A boat or other waterborne vessel.

4. A condominium, as defined in Section 783 of the CivilCode.

5. A planned development, as defined in Section 11003of the Business and Professions Code.

6. A stock cooperative, as defined in Section 11003.2of the B & P Code, and

7. A community apartment project, as defined in Section11004 of the Business and Professions Code.

A "Family Unit" means any of the following:

1. The judgment debtor and the judgment debtor’sspouse if the spouses reside together in the homestead

2. The judgment debtor and at least one of the followingpersons who the judgment debtor cares for or maintainsin the homestead:

a. The minor child or minor grandchild of the judgmentdebtor or the judgment debtor’s spouse or the minorchild or grandchild of a deceased spouse or formerspouse.

b. The minor brother or sister of the judgment debtoror judgment debtor’s spouse or the minor child of adeceased brother or sister of either spouse.

c. The father, mother, grandfather, or grandmother ofthe judgment debtor or the judgment debtor’s spouseor the father, mother, grandfather, or grandmother of adeceased spouse.

d. An unmarried relative described in this paragraphwho has attained the age of majority and is unable to take

care of or support himself or herself.

3. The judgment debtor’s spouse and at least one of thepersons listed in paragraph (2) whom the judgment debtor’sspouse cares for or maintains in the homestead.

Under Section 704.910 of the Code, a "declared homestead"is the dwelling described in a homestead declaration and a"declared homestead owner" includes both (1) the owner ofan interest in the declared homestead who is named as adeclared homestead owner in a homestead declarationrecorded pursuant to Article 5 and (2) the declarant namedin a declaration of homestead recorded prior to July 1, 1983pursuant to former law (Civil Code) and the spouse of suchdeclarant.

Amount of Homestead Exemption. Under both Article 4 and5 the amount of the homestead exemption is the same andis based upon the debtor’s status at the time the creditor’slien is created. The amount is one of the following:

(1) $50,000, unless the judgment debtor or his/her spouseresiding in the homestead is a person described in para-graph (b) above.

(2) $75,000, if the judgment debtor or his/her spouseresiding in the homestead is either or both of the following:

(a) at least 65 years of age

(b) a member of the family unit, and at least one memberof the family unit owns no interest in the homestead orthe interest is a community property interest with thejudgment debtor

(3) $75,000 maximum for any combined exemption of bothspouses on the same judgment, whether or not they arejointly obligated and regardless of whether the home-stead is community or separate property, or both. Whereeach spouse is entitled to an exemption (e.g., living sepa-rately) the exemption proceeds will be apportioned be-tween the spouses based on their proportionate interests.

Effect of Homesteading -- How Terminated. When a validdeclaration of homestead has been filed in the office of thecounty recorder where the property is located, containingall the statements and information required by law, theproperty becomes a homestead protected from executionand forced sale, except as otherwise provided by statute,and it remains so until terminated by conveyance, aban-doned by a recorded instrument of abandonment, or sold atexecution sale.

A homestead declaration does not restrict or limit any rightto convey or encumber the declared homestead.

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To be effective, the declaration must be recorded; whenproperly recorded, the declaration is prima facie evidence ofthe facts contained therein; but off-record matters couldprove otherwise.

Federal Homestead Act of 1862. The declared homesteaddiscussed above has nothing to do with the term "home-steading" as applied to filings on federal lands whereby aperson acquired title to acreage by establishing residenceor making improvements on the land.

The purpose of the Federal Homestead Act of 1862 was toencourage settlement of the nation. Except for Alaska,homesteading was discontinued on public lands in 1976when -- since all the good agricultural land had already beendeeded, leaving only deserts, mountain tops, and other

areas unsuitable for farming -- Congress recognized that theHomestead Act had outlived its usefulness and passed theFederal Land Policy and Management Act of 1976, whichimmediately repealed the old law as to all states exceptAlaska. Today there is no free public land available toprivate individuals.


1. The mechanic’s lien law is based on the theory:a. that improvements contribute additional value to land,b. that mechanics should be paid before suppliers and that therefore it is only equitable to impose a chargec. that workers have more rights than owners on the land equal to such increase in value.d. none of the above

2. Which of the following is protected by mechanic’s lien rights?a. an unpaid contractor b. an unpaid craftsman working for a contractor c. both “A” and “B” d. neither “A” nor “B”

3. “Any right or interest in land possessed by a stranger to the title, which affects the value of the owner’s estate, but does not preventthe owner from enjoying and transferring the fee” is a definition of:

a. title b. encumbrance c. fixture d. estate

4. The mechanic’s lien law includes:a. grading and filling b. landscaping of lots or tracts of land c. both “A” and “B” d. neither “A” nor “B”

5. Which of the following must appear on the Preliminary Notice?a. name and address of the person supplying the labor, material, etc.b. name of the person who contracted for these thingsc. description of the job-site sufficient for identification d. all of the above

6. Which is a principal kind of lien?a. easements c. encroachmentsb. mortgages and trust deeds d. all of the above

7. A stop notice must state which of the following?a. the kind of labor, services, equipment, or materials furnished or agreed to be furnished by claimantb. the name of the person to or for whom the labor, services, etc. were furnishedc. both “A” and “B” d. neither “A” nor “B”

8. Which is true about a stop notice?a. it obligates the person holding construction funds to withhold sufficient funds to satisfy the amount in the stop noticeb. in order to bind a construction lender, the stop notice must be bonded.c. both “A” and “B” d. neither “A” nor “B”

9. If an owner agrees to waive service of the Preliminary Notice:a. notice need not be served b. notice must still be served c. notice may or may not be served d. none of the above

10. Which is a category of encumbrances?a. those affecting condition or use of property b. those not affecting title c. both “A” and “B” d. neither “A” nor “B”

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8CONTRACT LAW

The transfer of interests in real property requires the use ofcontracts, and as in all other aspects of real estate there areapplicable laws. Probably no other phase of the law is asimportant to parties to transactions in real estate, real estatebrokers and salespersons as the law of contracts. It isimportant therefore to understand their nature and to be wellacquainted with some of the broad rules governing theircreation, operation and enforcement.

Contract Defined. Any term which is so broad in itsapplication as “contract” is bound to be difficult to definewith precision. California’s Civil Code says “A contract isan agreement to do or not to do a certain thing.” TheAmerican Law Institute offers this definition: “A contractis a promise or a set of promises for the breach of which thelaw gives a remedy, or the performance of which the lawin some way recognizes as a duty.” Still another authorityon the subject — Corbin — submits a definition whichcombines the foregoing two versions: “A contract is anagreement between two or more persons consisting of apromise or mutual promises which the law will enforce, orthe performance of which the law in some way will recognizeas a duty.” This latter can serve as your working definition,and its meaning will be clarified later when we analyze theessential elements of a contract.

Classification. It will be helpful to review certain termswhich are commonly used to classify contracts. Thus, withreference to manner of creation, a contract may be ex-pressed or implied.

In an express contract the parties declare the terms andmanifest their intentions in words, either oral or written. Inan implied contract, their agreement is shown by acts andconduct rather than words (e.g., in a hurry, you enter thecorner drugstore, where you have an account, pick up a packof cigarettes, wave it at the clerk, the clerk nods, and youleave).

With reference to content of the agreement, a contract maybe bilateral or unilateral. A bilateral contract is one inwhich the promise of one party is given in exchange for the

promise of the other party. (e.g., A tells B “I’ll give you $300if you will promise to paint my house” and B so promises).In a unilateral contract, on the other hand, a promise is givenby one party to induce some actual performance by the otherparty. The second party is not bound to act, but if the secondparty acts, the former is obligated to keep the promise (e.g.,A offers a reward of $100 to anyone who will find and returnA’s lost dog. B finds and returns the dog).

With reference to extent of performance, a contract may beexecutory or executed. In an executory contract, somethingremains to be done by one or both parties. In an executedcontract, both parties have completely performed.

Finally, with reference to legal effect, contracts may beclassified as void, voidable, unenforceable, or valid.

A void agreement is not a contract at all; it lacks legal effect(e.g., an agreement to commit a crime, or in California, anattempt by a minor under 18 to make a contract relating toreal property).

A voidable contract is one which is valid and enforceableon its face, but one which one or more of the parties mayreject (e.g., certain contracts of infants are voidable at theoption of the infant; or the contract induced by fraud maybe voided by the victim).

An unenforceable contract is valid, but for some reasoncannot be proved or sued upon by one or both of the parties(e.g., a contract that cannot be enforced because of thepassage of time under the statute of limitations).

A valid contract is one that is binding and enforceable. Ithas all the essential elements required by law.

ESSENTIAL ELEMENTS OF CONTRACT

Under the Civil Code of California it is essential to theexistence of a contract that there be:

1. Parties capable of contracting;

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2. Their consent;

3. Lawful object; and

4. A sufficient consideration.

It may be helpful to add a fifth requirement which is presentonly in certain contracts, namely:

5. A proper writing.

Parties Capable of Contracting. For a valid contract, theremust be two or more parties who have at least limited legalcapacity. Generally everyone is fully capable of contract-ing, except persons who are subject to certain limitations.

Example: un-emancipated minors, persons of unsoundmind, aliens and persons deprived of civil rights (e.g.,convicts).

Minors. A minor is a person under the age of 18 years. Aminor is either un-emancipated or emancipated (set freefrom parental control/supervision) under the Emancipationof Minors Act.

An un-emancipated minor (hereafter “minor”) cannot givea delegation of power, make a contract relating to realproperty, or any interest therein, or relating to any personproperty not in the minor’s immediate possession or con-trol. With certain statutory exceptions he or she maydisaffirm any contracts entered into during the minority orfor a reasonable time after reaching majority; or, in case ofa minor’s death within that period, by the minor’s heirs orperson representatives.

A minor is deemed incapable of appointing an agent, hencesuch delegation of authority, i.e., power of attorney, isabsolutely void. Thus a broker could not serve as agent ofa minor to buy or sell. A broker could represent an informedadult in dealing with a minor, but the client must be willingto hazard the possibility of having the contract voided.Difficulty can be forestalled by negotiating in real propertywith or for a minor only through a court appointed guardian.For the minor’s protection, such negotiations cannot beconcluded by the guardian without court approval.

Emancipation of Minor’s Act. Under this Act (Civil CodeSections 60 et seq.) emancipated minors have certain pow-ers to deal with real property and are considered as beingover the age of majority for certain purposes, including thefollowing: to enter into a binding contract; to buy, sell, lease,encumber, exchange, or transfer any interest in real orpersonal property; and to convey or release interests inproperty. (Civil Code Section 63).

An emancipated minor is a person under 18 years of age whohas entered into a valid marriage (even though terminatedby dissolution) or is on active duty with any of the armedforces of the United States of America or has received adeclaration of emancipation by petitioning the superiorcourt of the county where he or she resides. (Civil CodeSection 62). Brokers dealing with minors must proceedcautiously and should seek the advice of their attorney.

Incompetents. California law provides that after the inca-pacity of a person of unsound mind has been judiciallydetermined, no contract can be made with such person untilrestoration to capacity. Similarly, a person who is entirelywithout understanding but has not been judicially declaredincompetent has o power to contract.

In dealing with incompetents concerning real property,proper procedure calls for appointment of a guardian andcourt approval of the latter’s acts.

Note: Both minors or incompetents, however, may acquiretitle to real property by gift or by inheritance. They mayconvey, mortgage, lease or acquire real property pursuantto a superior court order obtained through appropriateguardianship or conservatorship proceedings.

Aliens. In California resident or nonresident aliens haveessentially the same property rights as citizens. Section 671of the Civil Code provides that “any person, whether citizenor alien, may take, hold, and dispose of property, real orpersonal, within this state.” In the federal law, however,there are certain restrictions upon the property rights ofaliens.

Convicts. Persons sentenced to imprisonment in stateprisons are deprived of such of their civil rights as may benecessary for the security of the institution in which theyare confined and for the reasonable protection of the public.

Convicts do not forfeit their property. They may acquireproperty by gift, inheritance or by will, under certain condi-tions, and they may convey their property or acquireproperty through conveyance.

We now arrive at an appropriate time to consider briefly thecapacity of certain other persons or associations to enterinto contracts, particularly those involving real property.The bulk of the nation’s business is conducted by indi-vidual proprietors, by ordinary partnerships, and by corpo-rations. The first category presents no special problems.The owner who is a sole proprietor takes title in his or hername, or if married the spouse may join as a grantee.

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Partnerships. In a partnership two or more persons carryon a business as co-owners for profit. The partnership mayexist if such intention can be proved whether or not thepartners reduced their agreement to a formal writing. Themore important characteristics of a partnership are: its lackof separate capacity to deal with property independentlyfrom its members (with certain exceptions hereafter noted);customary equal participation of members in management;co-ownership of partnership assets; individual interest ofeach partner in profits and surplus; and the mutual agencyrelationship between partners making each the agent of theother, insofar as partnership business is concerned.

Partnership property constitutes the originally vested andsubsequent partnership acquisitions. The best practiceusually is to take title in the name of the partnership itself,but title may be taken in the individual names of one or moreof the partners, or in the name of a third party holding astrustee for the partnership. Although any authorized part-ner may then dispose of the property, it is customary for allpartners to execute the instrument of transfer.

Where property is acquired in the partnership name, itshould not be transferred until a “statement of partnership”is filed in the recorder’s office showing the names of thepartnership and its members, and until a special partnershipacknowledgment is attached to the instrument.

Of course if title to real property stands in an individual’sname, both the individual and such person’s spouse shouldsign the instrument of transfer.

In order to enjoy some of the benefits of incorporation, yetretain the partnership form, it is possible to form a “limitedpartnership.” This can be achieved only by filing a formalcertificate. Limited partners may not allow their names to beused in the business and may not participate in manage-ment. If these requirements are met, the limited partners arenot responsible for firm debts beyond their investment, butat least one partner in such a firm must be a general partnerwith unlimited liability.

Corporation. The more important characteristics of a cor-poration are separate capacity to deal with property inde-pendently from its members, centralized control in a boardof directors; liability of shareholders normally limited to theamount of their investment; freely transferable shares, andcontinued existence regardless of death or retirement of itsshareholders.

Although a corporation may take title to property in its ownname, it is an artificial person created by law, and mustfunction through human agents. Accordingly, corporatecontrol is vested in the board of directors and so it becomesimportant to have some evidence of the board’s decision in

connection with the proposed property transaction. Thedecisions of the board are usually in the form of resolutionsauthorizing certain officers to deal with the corporate prop-erty. Certified copies of these resolutions, obtained from thesecretary, will disclose the corporate officers with whomone can safely negotiate. It should be noted that since acorporation has perpetual existence, it is not permitted totake title to property in joint tenancy with right of survivor-ship.

Note: Some corporations are organized on a non-profitbasis. Members of such a nonprofit corporation are notpersonally liable for the debts or obligations of the corpo-ration, and in many respects such an organization is similarin operation to a regular corporation. Thus its property iscontrolled and its affairs are conducted by a board ofdirectors, and it may make contracts and acquire and dis-pose of real or personal property in its own name.

Nonprofit Associations. Sometimes transactions in realproperty will involve nonprofit associations, which areloosely knit, unincorporated associations of natural per-sons for religious, scientific, social, educational, recre-ational, benevolent or other purposes.

When an un-incorporated association proposes to disposeof property, the conveyance should, in the case of benevo-lent or fraternal societies or associations, be executed by itspresiding officer and recording secretary under seal afterresolution duly adopted by its governing body.

Personal Representative. A final category of parties tocontracts, and one of considerable importance, is that ofpersonal representatives of decedents. A person wholeaves a will may name an executor or executrix to carry outits provisions. If this person fails to name an executor, ordoesn’t leave a will, the probate court will appoint anadministrator to administer the estate. The acts of theseofficials are generally subject to court supervision. Realestate agents usually come into contact with executors andadministrators when the latter are interested in selling aparcel of real estate belonging to the estate. The proceduresincident to these so-called “probate sales” are somewhatinvolved, and will be explored further in the chapter on“Agency.”

Mutual Consent. The second major requirement of a validcontract (remember, the first requirement was “parties ca-pable of contracting) is that the parties who have thecapacity to contract shall properly and mutually consent orassent to be bound. This mutual consent is normallyevidenced by an offer of one party and acceptance by theother party. There need not be a true “meeting of the minds”of the parties, for they are bound only by their apparent

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intentions outwardly manifested in words or acts.

Courts cannot read minds, and secret or unexpressed inten-tions, hopes and motivations are immaterial. However, theassent must be genuine and free, and if it is clouded ornegated by such influences as fraud or mistake, the contractmay be voidable at the option of one or both parties,depending on the circumstances.

An offer expresses the offeror’s willingness to enter into thecontract. It must of course be communicated to the offeree.It must, therefore, manifest a contractual intention. Thus,a social invitation is not a legal offer which results in abinding contract when accepted. Nor is the usual advertise-ment an offer; it is merely an invitation to deal.

The offer must be definite and certain in its terms. Theprecise acts to be done must be clearly ascertainable. Courtscannot make contracts for the parties, nor fix terms andconditions. The offer must be “nonillusory” in character;that is, it must actually bind the offeror if it is accepted. Anillusory offer would exist if it were stated in it that the offerorcould cancel or withdraw at pleasure without reasonablenotice.

Many examples might be cited where the California courtshave refused to enforce contracts because of uncertainty.In one case, the broker provided in a deposit receipt thatthere was to be a first deed of trust in a fixed amount to abank, and a second to the seller for the balance. Interestin each case was fixed. Then the contract stated “totalmonthly payments, including interest, to be $95.” Specificperformance was denied because the deposit receipt wassilent as to what portion of the $95 was to be paid to the bankand what to the seller.

Land Identification. The problem of certainty may be acutein connection with land identification. A broker may nothave the deed by which the owner acquired the property, orthe title report or policy connected with it. The contractmust, however, contain such a description,or at least fur-nish a key to the property agreed to be sold so that it can beexactly ascertained. The problem of property descriptionhas been discussed in some detail in an earlier chapter.Suffice it to say that the description should be as detailedand accurate as possible.

Termination of Offer. The hope of the offeror is that theother party will accept and a contract will be formed. But theofferor does not want to wait indefinitely, and need not. Theoffer may be terminated in any one of a number of ways:

(a) Lapse of Time. The offer is revoked if the offeree failsto accept it within a prescribed period of time.

(b) Communication of Notice of Revocation. Can be doneanytime before the other party has communicated accep-tance, and is true even if the offeror has said the offerwould be kept open for a stated period of time which hasnot elapsed. If the offeree pays to keep the offer open fora prescribed period of time, we have an option, and theofferor must abide by its terms. Usually an option in-volves the right to buy the particular property under thestated terms with a firm price.

An option is itself a form of contract — a contract to keepan offer open.

It should be noted that some consideration, even though itbe only 25 cents on a $100,000 parcel of real estate, must infact pass from the optionee to the optioner.

The option may be given either alone or in connection witha lease of the property. It may be in either the customary formof an exclusive right to purchase or lease, or in the form ofa privilege of first right of refusal to purchase or lease.

Although option rights are usually assignable unless thereis a restriction to the contrary, they do not give the optioneeany “interest in the land.” The option will terminate auto-matically upon expiration of the time specified without“exercise” by the optionee. In addition, the termination ofa lease containing an option also usually terminates theoption. However, the option provisions and lease provi-sions may be divisible. It is possible that a renewal of thelease will renew the option. Leases are discussed in greaterdetail in Chapter Ten.

If the offeree makes a qualified acceptance (as by changingthe price), in effect a counter-offer is made and the originaloffer is dead. It cannot later be accepted, unless revived bythe offeror repeating it. Thus the roles of the parties areexchanged, and the counter-offer itself may then be termi-nated like an original offer. It should be noted here that thisdiscussion of offer and acceptance, and the rest of thediscussion as to formation of contracts, may not apply tocontracts between merchants for the sale of goods. Theseare governed by the California Uniform Commercial Code.

Rejection by the Offeree. An unequivocal rejection endsthe offer, but simple discussion and preliminary bargainingdo not do so when they involve no more than inquiries orsuggestions for different terms.

Death of insanity of the offeror or offeree works a revoca-tion of the offer regardless of the notice thereof.

Having considered the offer let us now look at the other sideof the coin. An acceptance is the proper assent by the

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offeree to the terms of the offer. Clearly the person to whomthe offer is made must have knowledge of it before he or shecan accept. That may seem obvious, but it needs to be statedbecause acceptance by anyone other than the offeree is notpossible.

Most contracts are bilateral, but interesting problems arisein connection with the less common unilateral variety wherethe offeror asks for action, not a promise. Normally, whenthe requested act is performed, the offer is automaticallyaccepted. But if the offeree doesn’t intend an act to be anacceptance, or if there is no knowledge of the offer, there canbe no acceptance and no contract. This sort of thing mighthappen when one returns a lost dog without even seeing theads offering a reward for its return.

The acceptance must be absolute and unqualified, for if itmodifies the terms of the offer in any material way, itbecomes a counter-offer.

Acceptance must be expressed or communicated, though itmay be sufficient without actually being received by theperson making the offer.

Silence cannot be regarded as acceptance of an offerordinarily, because the party making the offer cannot forcethe party to whom an offer is made to make an expressrejection. Silence may amount to an acceptance when thecircumstances or previous course of dealing with a partyplaces the party receiving the offer under a duty to act or bebound. Acceptance may be made by implication, as by theacceptance of a consideration tendered with an offer.

Acceptance of an offer must be in the manner specified inthe offer, but if no particular manner of acceptance isspecified, then acceptance may be of any reasonable andusual mode.

A contract is made when the acceptance is mailed or put inthe course of transmission by any other prescribed orreasonable mode (e.g., by deposit of a telegram for transmis-sion). This is so even though the letter of acceptance is lostand never reaches the party making the offer, as the accep-tance has been placed in the course of transmission by theofferee.

Genuine Assent. The final requirement for mutual consentis that the offer and acceptance be genuine. The principalobstacles to such genuine or real assent are fraud, mistake,menace, duress or undue influence. If any one of theseobstacles is present, the contract may be voidable and aparty to the alleged contract may seek rescission (restoringboth parties to their former position ) or dollar damages orpossibly reformation of the contract to make it correct.

Fraud. Fraud may be either actual or constructive in nature.Normally fraud exists when a person misrepresents amaterial fact while knowing it’s not true, or does so withcareless indifference as to its veracity. A person mustmisrepresent with the intent to induce the other person toenter the contract, and the other person must rely thereonin entering the contract. “Material fact” means an importantfact which significantly affects the party’s decision to enterinto the contract.

The Civil Code lists five acts which would be deemed actualfraud when done by a party to a contract or with his or herconnivance with intent to induce another to enter into thecontract, or even simply to deceive such other party:

(1) The suggestion, as a fact, of that which is not true, byone who does not believe it to be true.

(2) The positive assertion, in a manner not warranted bythe information of the person making it, of that which is nottrue though the person believes it to be true.

(3) The suppression of that which is true, by one havingknowledge or belief of the fact.

(4) A promise made without any intention of performingit.

(5) Any other act fitted to deceive.

Ordinarily, misrepresentation of law does not amount toactionable fraud, no doubt because everyone is presumedto know the law. Nevertheless, this may be actionable fraudwhere one party uses superior knowledge to gain an uncon-scionable advantage, or where the parties occupy some sortof confidential relationship, even though the guilty party isnot a strict fiduciary.

Constructive Fraud. Constructive fraud, on the other hand,as defined in the Civil Code, may consist of first, any breachof duty which, without an actual fraudulent intent, gains anadvantage for the person in fault, or anyone claiming underthat person, by misleading another to the other’s prejudiceor to the prejudice of anyone claiming under the otherperson.

Second, it may consist of any such act or omission as thelaw specifically declares to be fraudulent without respect toactual fraud. The element of reliance is essential, and whereit is shown that no commitments were made until indepen-dent investigation by others, there can be no action claimingfraud.

A distinction should be made between fraud in the inception

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or execution, and fraud in the inducement of a contract. Forexample: Where the promisor knows what he or she issigning, and the consent is induced by fraud, the contractis voidable by the promisor; but if the fraud goes to theinception or execution of the agreement so that the promisoris deceived as to the nature of his or her act and actually doesnot know what is being signed, and does not intend to enterinto a contract at all, is is void. Thus it can be seen that wherethe contract is voidable, it is binding until rescinded, whileif the contract is void, a formal act of rescission is notnecessary.

Where one signs the contract without reading it, and wherethe failure to familiarize oneself with the contents of a writtencontract, prior to its execution, is solely carelessness ornegligence, relief is denied. Where such failure or negli-gence is induced by the false representations and fraud ofthe other party to the contract, so that its provisions aredifferent from those set out, the court, even in the absenceof a fiduciary or confidential relationship between theparties, may reform or cancel the instrument to reflect thetrue agreement of the parties.

A party to a contract who has been guilty of fraud in itsinducement, is not relieved of the effects of the fraud by anystipulation in the contract, either that no representationshave been made, or that any right which might be groundedupon them is waived. Such a stipulation or waiver will beignored, because the fraud renders the whole agreementvoidable, including the waiver provisions.

False Representations. Where the false representationsare made by an agent, and the contract contains a recitallimiting the agent’s authority to make representations, theinnocent principal may, by certain stipulations, be relievedof liability in a court action for damages for fraud and deceit,but the defrauded third party may nevertheless rescind thecontract. The guilty agent may, of course, be liable indamages for the wrongful act.

Mistakes. Another possible obstacle to genuineness ofassent, which might make the contract either void orvoidable, is mistake. Where both parties are mistaken as tothe identify of the subject matter of the contract there canbe no contract. Where the subject matter of the agreementhas, unknown to the parties, already ceased to exist, sothat performance of the contract would be impossible, thereis no contract.

Mutual agreement as to the subject matter is the basis of thecontract, and if the parties of the agreement consent thereto,a contract results, but it may be voidable where there is asubstantial mistake as to some basic or material fact whichinduced the complaining party to enter into it.

Negligence of the injured party does not in itself precluderelease from mistakes, unless it is gross, as where the partysimply fails to read the agreement. One who accepts or signsan instrument which is on its face a contract is deemed toassent to all of its terms and cannot escape liability on theground of not having read it. This is true only in the absenceof such influences as fraud, undue influence, duress.

Mistakes are classified in the Civil Code as mistakes of factor law. A mistake of fact is one consisting of ignorance orforgetfulness of a fact material to the contract, but which isnot caused by the neglect of a legal duty on the part of theperson making it. Or it may consist in the mistaken belief inthe existence of a thing material to the contract, or a beliefin the past existence of such a thing, which has not existed.

A mistake of law, on the other hand, is described as onewhich arises from a misapprehension of the law by all partiesinvolved, all supposing they knew and understood it, yetmaking substantially the same mistake.

It may also be a misapprehension of the law by one party,of which the others are aware at the time of contracting, butwhich they do not rectify.

Duress, Menace, Undue Influence. Sometimes a contractmay be rendered voidable because it was entered into underthe pressure of duress, menace or undue influence. Allthree, in effect, deprive the victim of the free exercise of will,and so the law permits such person to avoid the contract,and may also provide other remedies.

There are two kinds of duress:

(1) The duress of persons

(2) The duress of goods, which is the unlawful detentionof the property of any such person.

Menace consists of a threat to commit duress, but alsoincludes threat of unlawful and violent injury to any of thepersons designated above, or a threat of injury to thecharacter of any such person.

Undue influence consists in the use by one in whom aconfidence is reposed by another, or who holds a real orapparent authority over another, of such confidence orauthority for the purpose of obtaining an unfair advantage.It may involve taking an unfair advantage of another’sweakness of mind, or in taking a grossly oppressive andunfair advantage of another’s necessities or distress. Un-due influence is most frequently encountered in connectionwith contracts between persons in confidential relation-ships, where the victim is justified in assuming the otherparty will not act contrary to the former’s welfare.

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The relationships which usually fall within this rule includetrustee and beneficiary, broker and principal, attorney andclient, guardian and ward, parent and child, husband andwife, physician and patient, clergymen and parishioner.

Lawful Object. Assuming now that parties are capable ofcontracting and have properly manifested their consentthrough an offer and acceptance, the validity of theiragreement might still be attacked on grounds of legality.The contract must be legal in its formation and operation.Both its consideration and its object must be lawful. Theobject refers to what the contract requires the parties to door not to do. Where the contract has but a single object, andthat object is unlawful in whole or in part, or is impossibleof performance, the contract is void.

If there are several distinct objects, the contract is normallyvalid as to those parts which are lawful. The object is notlawful which is contrary to an express provision of the law,or contrary to the policy of express law, or otherwisecontrary to good morals.

In general, the law will lend its resources to neither partyinvolved in an illegal contract.

Thus if it is executory, neither party may enforce it; if it isexecuted, neither party may rescind and recover consider-ation given. But sometimes the law which was violated wasdesigned to protect one of the parties (e.g., rent control lawsduring World War II), or the parties are not equally blame-worthy, or sometimes one party repents and calls the dealoff before any part of the illegal object has been realized. Insuch cases, the law will provide appropriate relief.

Common Violations. Thus the objects and considerationsof a contract must be legal and not violate some specificprohibition of the law. If such violation does occur, its effectupon the contract may depend upon the particular statuteinvolved. Some of the more frequent types of situations inthe real estate field involving statutory violations are thefollowing:

(a) Contracts of unlicensed “brokers” or “general contrac-tors.” These persons are not permitted to enforce theircontracts unless they can prove they are properly li-censed by the State of California to act in their respectivecapacities.

(b) Forfeiture clauses in deposit receipts, contracts of saleand leases. A contract clause which specifies a fixedamount of damages in the event of a breach is known asa liquidated damages clause. The law in this area wasamended, effective July 1, 1978. Under the old law, whichstill applies to contracts entered into prior to that date,

liquidated damages clauses are presumed invalid, unlessthe party seeking to enforce the clause proves that at thetime the contract was entered into: (1) actual damageswould be difficult to ascertain in the event of a breach, and(2) the amount fixed was a reasonable endeavor to fix a faircompensation for the breach.

However, under the amended law, which applies to con-tracts entered into on or after July 1, 1978, which certainimportant exceptions, that rule is completely turned around.Under the new rule, a liquidated damages clause ispresumed valid unless the party seeking to invalidate theprovision proves that it was unreasonable under the circum-stances existing at the time the contract was made.

The exceptions, which are particularly significant in the realestate field, are as follows: First, the old rule, under whichliquidated damages clauses were presumed invalid as de-scribed above, continues to apply where the liquidateddamages are sought to be recovered from (1) a party to acontract for the retail purchase or rental of person propertyor services primarily for that party’s personal, family, orhousehold purposes; or (2) from a party to a lease of realproperty for use as a dwelling for that party or his or herdependents.

Second, special rules apply to liquidated damages provi-sions in contracts for the purchase and sale of residentialreal property. These rules are explained below in the sectionentitled “Real Estate Contracts.”

Lastly, special rules apply to liquidated damages clauses inconstruction contracts with certain government entities,making provisions for amounts to be paid for each day ofdelay in construction valid unless manifestly unreasonableat the time the contract was made.

(c) Contracts by which one is restrained from engaging inbusiness may be void, although a person selling goodwillmay promise the buyer not to compete within a reasonablylimited area.

(d) Persons may not generally avoid responsibility fortheir own fraud or negligence merely by so providing ina contract.

(e) A contract calling for the payment of interest in excessof the California Constitution’s new limits may beusurious depending upon the identity of the lendingentity and the purpose of the loan. If such a contract isusurious, that portion of the contract relating to thepayment of interest is void.

(f) Federal law with respect to FHA-VA programs prohib-its secondary financing. Attempted evasions of this law

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through the use of unrecorded mortgages or deeds oftrust may render the entire transaction void.

(g) In addition to the foregoing, brokers must be carefulto comply with the numerous regulatory measures incor-porated in the Real Estate Law. Specific violations mayprevent enforcement of a listing contract. It should benoted that violations of law not only affect the enforce-ability of the contract involved, but may also subject theviolater to criminal punishment.

Sufficient Consideration. Even if the agreement meets allthe requirements of a valid contract already discussed, itmay fail because of the lack of a sufficient consideration. Ingeneral every executory contract requires consideration.The consideration may be either a benefit conferred, oragreed to be conferred, upon the person making the prom-ise, or any other person; or a detriment suffered or agreedto be suffered. It may be an act of forbearance or a changein legal relations. It is the price bargained for and paid fora promise, and it may, of course, be a return promise. If a validconsideration exists, the promise is binding even thoughsome motive other than obtaining a consideration inducedthe promisor to enter into the contract.

Ordinarily, the nature of the consideration is reflected in thewritten agreement of the parties. However, the consider-ation must have some value. A purely moral obligation mayunder some circumstances be consideration. However,there is no requirement of adequacy to make the contractenforceable; thus an option to purchase valuable propertymay be given for consideration of one dollar or some othernominal sum. It is only in an action for specific performancethat the amount is important, and in this event the equitableremedy will be denied unless an adequate consideration isproved. Also, gross inadequacy of consideration may bea circumstance which, together with other facts, will tend toshow fraud or undue influence.

Thus in an unilateral contract a promise of the offeror is inconsideration of an act or forbearance sought from theofferee. However, in a bilateral contract a promise of oneparty is consideration for the promise of another, andgenerally any valid promise, whether absolute or confiden-tial, is sufficient consideration for another promise.

A Proper Writing. Generally the law is more concernedwith substance than with form. Accordingly, with referenceto forms, it is generally immaterial whether the contract beoral, or in writing, or even manifested by acts or conduct.Thus all contracts may be oral except those speciallyrequired by a statute to be in writing. But any contract orclasses of contracts which the law requires to be in writingmust be reduced to writing in order to create a valid andenforceable contract regardless of how many witnesses a

party has to an agreement.

For example, negotiable instruments (bills of exchange,promissory notes, checks) must be in writing to be valid. So,too, must acknowledgments of debts barred by the Statuteof Limitations or in bankruptcy.

REAL ESTATE CONTRACTS

We now turn from a consideration of contracts in general toa consideration of real estate contracts in particular. Thestudent should be aware that there is much more to besaid about the law of contracts in general, and cautionedthat the subject is sufficiently vast and complex as torequire further independent study. Furthermore, innegotiating contracts, you will be well advised to availyourself of legal counsel.

Real estate contracts include: (1) contracts for the sale of realproperty or of an interest therein; (2) agreements for leasingof realty for a longer period than one year, and (3) agree-ments authorizing or employing an agent or broker to buyor sell real estate for compensation or a commission.

These contracts are essentially like any other contractexcept that they must be in writing and must be signed bythe party to be charged to make them valid under the Statuteof Frauds. Thus as we have seen in the discussion oncontracts in general, there must be: (1) parties capable ofcontracting; (2) their consent (i.e., genuine offer and accep-tance); (3) a lawful object; and (4) sufficient consideration.

In the usual real estate sales transaction, the prospectivebuyer states the terms and conditions under which thebuyer is willing to purchase the property. These terms andconditions constitute the offer. If the owner of the propertyagrees to all of the terms and conditions of the offer it is anacceptance which results in the creation of a contract. Itmakes no difference whether the offer comes from the selleror the buyer; if the negotiation finally leads to a definite offeron the one side and unconditional acceptance on the otherside, a contract of sale has been effected. All that is legallyrequired to complete the contract for sale of real property isto reduce the terms and conditions to writing, and to havethe parties sign the contract.

Provisions in Contracts. Forms such as listing agreements(authorization to sell) and deposit receipts, exchangeagreements, and other real estate contracts for the sale orexchange of real estate should contain the following provi-sions:

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(1) The date of the agreement

(2) The names and addresses of the parties to the contract

(3) A description of the property

(4) The consideration

(5) Reference to creation of new mortgages (or trustdeeds), if any, and the terms thereof; also the terms andconditions of existing mortgages, if any.

(6) Any other provisions which may be required or re-quested by either of the parties

(7) The date and place of closing the contract.

The contract should contain a description of the propertyso that it may be referred to in absolute certainty. A contractof sale normally calls for the preparation of a deed to conveythe property. It is executory in that when the deed is properlysigned and delivered to the purchaser the contract isexecuted.

Deposit on Property in a Sale. An earnest money depositby a prospective purchaser of real property is trust funds.The deposit must be handled by the broker as prescribed bythe Real Estate Law and the regulations. Section 10145 ofthe Real Estate Law provides that the broker who receivestrust funds must place the funds into a trust fund accountin a bank or other recognized depository if the broker doesnot place the funds into a neutral escrow or into the handsof the broker’s principal.

The regulations of the Commissioner spell out the proce-dures to be followed by the broker who elects to place theearnest money deposit into broker’s trust fund account.The applicable regulation provides that the earnest moneydeposit shall be maintained in the trust fund account for thebenefit of the offeror until there has been an acceptance ofthe offer (Regulation 2832).

Handling Deposits. The provision of the law which pur-ports to sanction the handing over of all varieties of trustfunds to a principal by the broker poses some real dilemmasfor brokers when the trust funds in question are in the formof deposits toward purchase. The problems for the brokerare particularly troublesome in those transactions wherethere has been an alleged breach by the buyer of whatappears to be a binding contract to purchase the realproperty.

Since the law apparently permits a broker to hand over anearnest money deposit to the seller as soon as there has

been an acceptance of the offer to purchase unless the termsof the contract otherwise provide, can the broker who hasthe money in his or her trust fund account refuse to turn itover to the seller upon demand when the seller concludesthat the buyer has breached the contract?

There is no legal authority that provides a clear-cut answerto this question. There are those knowledgeable in the RealEstate Law in California who contend that the broker holdsthe earnest money deposit after an apparent acceptance ofthe contract as an escrow holder rather than as an agent ofthe seller. While the Department of Real Estate does notaccept this proposition, it does recognize that the brokeris in a very difficult position when a transaction fallsapart and either or both parties make demand for the earnestmoney. To avoid having to make a decision as to who isentitled to an earnest money deposit and later possibly beheld liable or subject to disciplinary action for having madethe wrong choice, the broker is probably well advised to filean interpleader action and deposit the funds with the courtin which the action is brought.

Forfeitures. Contracts for the sale of real property fre-quently include a provision that a deposit toward purchasemade by a prospective buyer shall be divided between theseller and the broker if the prospective buyer breaches thecontract through no fault of the seller or broker. Suchprovisions for the forfeiture of the deposit by the buyer incase of breach come within the definition of liquidateddamages clauses. For contracts entered into prior to July 1,1978, former law still applies, and to enforce such a clauseit must be proven that at the time the contract was enteredinto it would be impractical or extremely difficult to fix actualdamages.

As to contracts entered into on or after July 1, 1978, specialrules apply. First, as previously mentioned, if the liquidateddamages are sought to be recovered from a party to a leaseof real property for use as a dwelling by that party or his orher dependents, the old rule still applies.

Second, if the contract in question is for the purchase andsale of residential real property, defined as a dwelling of notmore than four residential units where the buyer intends tooccupy the dwelling or one of the units as a residence, thefollowing rules apply:

(1) These special rules apply only to amounts actuallyprepaid, in the form of deposit, downpayment, or other-wise.

(2) If the amount paid pursuant to the liquidated damagesclause does not exceed 3% of the purchase price, theclause is valid unless the buyer proves that the amount

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paid is unreasonable.

(3) If the amount actually paid pursuant to the liquidateddamages clause exceeds 3% of the purchase price, theclause is invalid unless the party seeking to enforce itproves that the amount paid is reasonable.

(4) The provision must be separately signed or initialed byeach party to the contract, and if it is a printed contract,the provision must be set off in ten point bold type orcontrasting red print in eight point type.

(5) These rules do not apply to installment land salecontracts.

Effect of Seller’s Death on Real Estate Contract. If thecontract is entered into for the sale or purchase of real estate,and before the time of taking title the seller dies, a realproblem ensues. A real estate contract properly drawnusually contains a provision which states that all the termsof the contract are to be binding upon the heirs, executors,administrators, and the assigns of the respective parties.

In the event this wording is used, the buyer’s rights are thesame against the executors, administrators, or assigns of theseller as the buyer had against the seller. Under thesecircumstances, buyer may compel the seller’s heirs, admin-istrators, executors, or assigns specifically to perform thecontract.

Uniform Vendor and Purchaser Risk Act. It sometimeshappens, although infrequently, that after a contract ismade for the purchase and sale of real property, a fire or otherdisaster destroys or seriously damages the property. Whoshall take the loss? Under California’s Uniform Vendor andPurchaser Risk Act, any contract made in this state for thepurchase and sale of real property shall be interpreted asincluding an agreement that the parties shall have thefollowing rights and duties unless the contract expresslyprovides otherwise:

(a) If, when neither the legal title nor the possession of thesubject matter of the contract has been transferred, all ora material part thereof is destroyed without fault of thepurchaser or is taken by eminent domain, the seller cannotenforce the contract, and the purchaser is entitled torecover any of the portion of the price paid;

(b) If, when either the legal title or the possession of thesubject matter of the contract has been transferred, all orany part thereof is destroyed without fault of the vendoror is taken by eminent domain, the purchaser is notthereby relieved from a duty to pay the price, nor entitledto recover any portion thereof that has been paid.

Options. We have already discussed options in connectionwith contracts in general. However, because of their special

importance in real estate transactions, they merit a closerscrutiny here. Option contracts typically “run from” sellerto buyer. that is, in exchange for consideration paid by thebuyer, the seller is deprived of the right and power to revokethe basic offer to sell. The buyer, in effect, purchases anagreed amount of time in which to accept or reject the seller’sunderlying offer concerning the property.

Thus the underlying offer is rendered irrevocable for theperiod specified in the collateral option contract.

An option to purchase real estate is a written agreementwhereby the owner of real property agrees with the prospec-tive buyer that such buyer shall have the right to purchasethe property from the owner at a fixed price within a certaintime. However, terms of financing, payments, etc., shouldbe set forth in such agreement.

Thus the prospective buyer, at buyer’s option, may complywith all the terms of the agreement or be relieved from theterms of the agreement without the owner having recourseto legal procedure for damages or specific performance. Theoption does not bind the optionee to any performance. Itmerely gives the optionee a right to demand performance.Time is of the essence in an option and is usually strictlyconstrued. That is, the option must be exercised punctually,within the precise time named. If no time is specified, areasonable time is implied.

The broker usually does not earn a commission for havingsecured a client who takes an option, as the broker’s rightof commission does not arise unless the option is exercised.In the event an option is recorded by the optionee, but is notexercised before or on the date of the expiration of theoption, the optionee should remove the effect of the optionfrom the records by recording a quitclaim deed.

Listings. A listing is a contract by which a principalemploys an agent to do certain things for the principal.Therefore an agent holding a listing is always bound by thelaw of agency and has certain obligations to the principalthat do not exist between two principals. Because of thespecial nature of these kinds of contracts, the subject willbe dealt with separately in the following chapter on “TheLaw of Agency.”

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1. With reference to manner of creation, a contract may be expressed or implied.

a. false b. true

2. With reference to content of agreement, a contract may be bilateral or unilateral.

a. false b. true

3. With reference to the extent of performance, a contract may be executory or executed.

a. false b. true

4. With reference to legal effect, a contract may be void, voidable, unenforceable, or valid.

a. false b. true

5. Which of the following would be a “void” agreement?

a. an agreement to commit a crimeb. in California, an attempt by a minor under 18 to make a contract relating to real propertyc. either “A” or “B”d. neither “A” nor “B”

6. Which is an essential element of a contract?

a. parties capable of contractingb. consent of partiesc. both “A” and “B”d. neither “A” nor “B”

7. Which would be excluded from “parties capable of contracting”?

a. unemancipated minorsb. persons of unsound mindc. aliensd. all of the above

8. A minor is a person:

a. under the age of 18 yearsb. 18 years of age or youngerc. under 21 years of age

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d. none of the above

9. Which would be an example of an emancipated minor?

a. a person under 18 years of age who has entered into a valid marriageb. a person who is on active duty with any of the armed forcesc. both “A” and “B”d. neither “A” nor “B”

10. A minor can acquire title to real property only by inheritance or gift.

a. false b. true

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estate broker or salesperson will deal in real property for hisor her own account. Because of professional backgroundand contacts, a licensee is more aware of investment andprofit opportunities in real property than are a majority of thepeople who do not have real estate licenses. An effort toexploit these opportunities to personal advantage mayinvolve legal or ethical matters to be carefully considered bythe licensee before becoming involved in a transaction forlicensee’s own account.

Numerous complaints are made to the Department of RealEstate resulting from the efforts of licensees to secureprofits in real estate transactions by purporting to act asprincipals. In this connection they have resorted to the useof options, net listings, and other types of contracts whichcombine features of listing with those of an option.

The use of options and net listings is neither illegal norunethical in those cases where a full disclosure of thelicensee’s involvement in the transaction and the legaleffect of the contract is made known to the persons withwhom the licensee is dealing. The other party to theprospective transaction must be given to understand thatthe licensee is acting as a principal rather than an agent sothat the party may at all times deal at arm’s length with thelicensee.

A licensed real estate broker should be particularly carefulin this respect, inasmuch as a broker’s contacts with ownersand prospective purchasers of real estate are made largelybecause of the fact that the broker advertises and holdshimself or herself out to be a licensed agent. Office signs,signs on properties and stationery advertise the fact that thelicensee is a licensed real estate broker. Care must be takento dispel this agency image if the licensee chooses to act asa principal in a real property transaction. It is particularlydangerous for a broker to start out as an agent in a transac-tion and to switch status to that of a principal before the dealis consummated. Prior to switching status, the broker hasa duty to exercise due diligence in attempting to find a buyerfor the principal’s property at the highest price and upon the

9LAW OF AGENCY

According to Civil Code Section 2295, “An agent is one whorepresents another, called the principal, in dealing with thirdpersons. Such representation is called agency.”

In an agency relationship, the principal delegates to theagent the right to act on his or her behalf in businesstransactions or other dealings and to exercise some degreeof discretion while so acting. The agent acts for and in theplace of the principal for the purpose of bringing theprincipal into legal relationships with third persons.

The agent owes loyalty to the principal and a duty createdby a fiduciary relationship which the law compares to theduty owed to a beneficiary by a trustee under a trust (CivilCode Section 2228 et seq.).

In most real estate transactions the real estate broker actsas an agent for someone else — the principal — who seeksto sell to or buy from or exchange real property or a businessopportunity with a third party. As agent, the real estatelicensee is authorized to represent licensee’s principal inreal property transactions with third persons. From theagency relationship a vast body of rules has emergedgoverning the rights and duties of principal, agent, and thirdparty. We shall examine the basic rules in some detail andapply these rules of law to specific situations in which realestate licensees are frequently involved.

AGENCY DISTINGUISHED FROMOTHER RELATIONSHIPS

It is important to distinguish agency from other types ofrelationships, notably where:

(1) The real estate broker acts on his or her own account;

(2) There is an ordinary employer-employee relationship;

(3) Services are rendered by an independent contractor.

Broker Acting for Own Account. Not infrequently a real

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best terms for the principal that the broker can negotiate.

Various court decisions indicate that the burden of proofunder these circumstances is upon the agent to show thatpersons with whom he or she has dealt were fully informedof this change of status. To merely advise the other partyto the transaction that the agent “controls a property” or asimilar vague reference to the fact that the broker is notacting as an agent will probably not be held by a court toconstitute sufficient notice of a change of status from brokerto principal.

Option to Purchase. A somewhat similar situation ariseswhen a broker who is employed to find a purchaser of realproperty is given an option to purchase the property by theowner which runs concurrently with the agency. In such acase the broker, when pursuing self-interests, cannotignore those of the broker’s principal, and broker will not bepermitted to enjoy the fruits of an advantage taken of afiduciary relationship. The law does not allow a listing agentwho has a concurrent option to purchase the real propertyto make a profit at the expense of the owner by delayingexercise of the option until a price has been received inexcess of the option/listing price, unless there is a fulldisclosure of the circumstances to the owner.

The law is well summarized in “American Jurisprudence”:“If a broker employed to sell property is also given...anoption to purchase the property himself, he occupies thedual status of agent and purchaser and he is not entitled toexercise his option except by divesting himself of hisobligation as agent by making a full disclosure of anyinformation in his possession as to the prospect of makinga sale to another.”

Disclosure. In the language of “The Restatement of Agency”:“Before dealing with the principal on his own account...anagent has a duty, not only to make no misstatements of fact,but also to disclose to the principal all material facts fully andcompletely. A fact is material...if it is one which the agentshould realize would be likely to affect the judgment of theprincipal in giving his consent to the agent to enter into theparticular transaction on the specified terms. Hence, thedisclosure must include not only the fact that the agent isacting on his own account..., but also all other facts whichhe should realize have, or are likely to have, a bearing on thedesirability of the transaction from the viewpoint of theprincipal.”

The very nature of combined listing and option contractsplaces the broker using them in a position where the brokermust exercise utmost caution not to violate obligations toa client. The broker must remember that it is a violation ofthe Real Estate Law to fail to give written notification of the

amount of broker’s profit to the employer and to obtain thewritten consent of the employer if agent elects to exercisethe option (Business and Professions Code, Section10176(h)).

As mentioned in the previous chapter on contracts, a listingis a type of contract, and is ruled by the law of agency. Itis therefore appropriate at this time to discuss listings inmore detail.

Net Listing

In a net listing the compensation is not definitely deter-mined, but a clause in the contract usually permits the agentto retain as compensation all the monies received in excessof the selling price by the seller. The agent is required bythe Real Estate Law to reveal to both buyer and seller, inwriting within one month of the closing of the transaction,the selling price involved. The law permits this informationto be disclosed by the closing statement of the escrowholder, and this is the usual practice.

Note: A net listing is perfectly legitimate, but it may give riseto a charge of fraud, misrepresentation and other abuseswhich the Real Estate Law is designed to protect the publicagainst. Accordingly, if a net listing is used, the meaningshould be thoroughly explained to the principal who shouldbe fully informed that all moneys received over and abovethe net price will be kept by the broker as commission on thetransaction.

Under the Real Estate Law failure of an agent to disclose theamount of agent’s compensation in connection with a netlisting is cause for revocation or suspension of license. Thismust be done prior to or at the time the principal bindshimself or herself to the transaction.

Open Listing.

An open listing is a written memorandum signed by theparty to be charged (usually the seller of the property) whichauthorizes the broker to act as agent for the sale of certaindescribed property. Usually no time limit is specified for theemployment. However, open listings have been used whichprovide a definite term. The property is identified by asuitable description, and generally the terms and conditionsof sale are set forth.

Open listings are the simplest form of written authorization.They may be given concurrently to more than one agent,and usually the seller is not required to notify the otheragents in case of a sale by one of them, in order to preventliability of paying more than one commission. The sale ofthe property under such an agreement is considered to

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cancel all outstanding listings.

Thus where several open listings are given, the commissionis considered to be earned by the broker who first finds abuyer who meets the terms of the listing, or whose offer isaccepted by the seller. If the owner personally sells theproperty, the owner is not obligated to pay a commission toany of the brokers holding “open listings.”

Exclusive Agency Listing. An exclusive agency listing isa contract containing the words “exclusive agency.” Thecommission is payable to the broker named in the contractand if the broker or any other broker finds the buyer andeffects the sale, the broker holding the exclusive listing isentitled to a commission.

Note: If a broker other than the broker holding the exclusiveagency listing is the procuring cause of the sale, the ownermay be liable for the payment of two full commissions. It isto be noted that the listing refers to an agency and as theowner is not an agent, the owner may personally effect thesale without incurring liability for commission to the brokerholding the agency listing.

Exclusive Right to Sell Listing. Another form of listing isthe “exclusive right to sell.” Under such listing, a commis-sion is due the broker named in the contract if the propertyis sold within the time limit by the said broker, by any otherbroker, or by the owner. Frequently such contracts alsoprovide that the owner shall be liable to pay a commission,if a sale is made within a specified time after the listingexpires, to a buyer introduced to the owner by the listingbroker during the term of the listing. The real estate brokeris usually obligated under the terms of the listing contractto furnish a list of the names of persons with whom thebroker has negotiated during the listing period within aspecified number of days after the expiration of the listing.

The “exclusive right” and the “exclusive agency” type oflisting should be for a definite term, with a specified time oftermination. If a licensed broker does not provide for this,the broker is subject to disciplinary action against broker’slicense, under the California Real Estate Law.

Multiple Listing Service. A multiple listing service is acooperative listing service conducted by a group of bro-kers, usually members of a real estate board. The groupprovides a standard “multiple listing” form which is used bythe members. It is usually an “Exclusive Authorization Rightto Sell” listing form, and provides, among other things, thatthe member of the group who takes the particular listing isto turn it in to a central bureau. From there it is distributedto all participants in the service and all have the right to workon it. Commissions earned on such listings are shared

between the cooperating brokers, with the listing brokerproviding for the division of commission in each listing sentto other participants.

There are numerous such multiple listing services con-ducted by real estate boards and other groups throughoutCalifornia. The number has grown during the past few years,and they have been generally successful.

Deposit Receipt. Generally, California brokers use a depositreceipt when accepting “earnest money” to bind an offer forproperty by a prospective buyer. This is a very importantinstrument in the usual real estate transaction. It is a receiptfor the money deposited, but more importantly it is custom-arily the basic contract for the purchase and sale of the realproperty involved. It should set forth all the basic factorswhich are included in a contract of sale, including arrange-ments for financing. It should contain a complete under-standing among the buyer, seller, and broker as to the returnof the deposit in the event the offer is not accepted, andprovisions for disposition of deposit money should thebuyer fail to complete the purchase.

Some of these provisions are incorporated by “standard”clauses in the printed deposit receipt forms, but it is appar-ent that the terms and conditions of the offer must be filledout with extreme care by the broker or salesperson.

Agent Must Give Copies of Contracts. The real estatelicense law provides that brokers and salespersons mustgive copies of documents and agreements to the personssigning them at the time the signature is obtained. The lawnot only applies to copies of listing contracts and depositreceipts, but to any document pertaining to any of the actsfor which one is required to hold a license.

When Broker is Entitled to Commission. Ordinarily thebroker is entitled to a commission when the broker producesa buyer, ready, willing and able to purchase the property forthe price and on the terms specified by the principal,regardless of whether the sale is ever consummated. Con-tracts may expressly provide that no commissions arepayable except upon a completed sale or on an installmentof the purchase price when paid by the buyer, and such aprovision controls in the absence of fraud or prevention ofperformance by the principal. The broker must be theprocuring cause of the sale; it is not sufficient that the brokermerely introduces the seller and buyer, if they are unable toagree upon the terms of the sale within the time period of theagency.

The broker may, however, have a cause of action for thepayment of commission under the listing contract if theproperty is sold to the buyer introduced by the broker afterthe listing has expired.

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Tender Defined. A tender in a real estate transaction is anoffer by one of the parties to the contract to carry out thatparty’s part of the contract. A tender is usually made at thetime of the closing of title (i.e., concluding the transaction).If, at closing of title, one of the parties defaults or is unableto carry out his or her contractual obligation, and the otherparty is ready to close, the latter makes the tender. If thelatter is the seller, then the seller offers the deed to thepurchaser, and demands the payment of the balance of thepurchase price.

If the latter is the purchaser, the purchaser offers the amountof money required in accordance with the provisions of thecontract, and demands the deed from the seller. In the eventof litigation arising out of some dispute between the buyerand the seller, the party who made the tender can rightfullyclaim that he or she was ready, willing, and able to gothrough with the deal, and that the other party defaulted. Ifboth parties were in default, neither may recover any dam-ages against the other. Whether the parties made a tenderis a question of fact which must be established by compe-tent evidence.

The person to whom the tender is made must specify anyobjections at the time or they are waived. The tender ofperformance, when properly made, has the effect of placingthe other party in default if the other party refused to acceptit and the party making the tender may rescind or sue forbreach of contract, or for specific performance where thisremedy is available.

It will be helpful at this point, since we are discussing agencywithin the context of the acquisition and transfer of realproperty, to reiterate the ways in which these activities mayoccur. Few topics are of greater interest to the real estatesalesperson and broker than those concerned with acqui-sition and transfer of title to property. Usually acquisitionof property by one owner entails a transfer from anotherowner, and so we consider the techniques together.

The basic distinction between real and personal propertyis not taken into account in the broad statutory statementof how property is acquired. The Civil Code declares thatfive ways or means are available for the acquisition ofproperty: will, succession, accession, occupancy, and bytransfer. These may be further broken down as follows:

(1) By will:

a. Formal or witnessed will

b. Holographic will

c. Nuncupative will

(2) By succession:

a. Of separate property

b. Of community property

(3) By accession:

a. Through accretion

1. By alluvion

2. By dereliction

b. Through avulsion

c. Through addition of fixtures

d. Through improvements made in error

(4) By occupancy:

a. Abandonment

b. Prescription

c. Adverse possession

(5) By transfer:

a. Private grant

b. Public grant

c. Gift:

1. To private person

2. To public — by dedication

d. Alienation by operation of law or court action:

1. Judgment of court

(a) Partition action

(b) Quiet title action

(c) Foreclosure action

(d) Declaratory relief action

2. Execution sale

3. Forfeiture:

(a) Estate on condition subsequent

(b) Estate on special limitation

4. Bankruptcy:

(a) Voluntary

(b) Involuntary

5. Marriage

6. Escheat

7. Eminent Domain

8. Equitable estoppel

Employer-Employee vs. Independent Contractor

With reference to the law of agency, it is important to makedistinctions between independent contractor status andthe employer-employee relationship. An ordinary em-ployee, or servant, is defined in the Labor Code as one

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employed to render personal services to the person’semployer, otherwise than in pursuit of an independentcalling, and who, in such service, remains entirely under thecontrol and direction of the master. A servant works for hisor her master, while an agent not only does this, but acts forand in the place of the principal for the purpose of makingcontracts and thus bringing the principal into legal relation-ships with third persons. For purposes of the Real EstateLaw, a real estate salesperson is an agent of the real estatebroker under whom he or she is licensed. If the broker is acorporation, the salesperson is an agent of the corporation,not of the supervising qualifying broker.

Independent Contractor. An independent contractor isone who, in rendering services, exercises an independentemployment or occupation and is responsible to the em-ployer only as to the results of his or her work. An importantfactor in establishing one as an independent contractor isthat the individual determines the method of accomplishingthe work for which the individual has contracted.

Real estate brokers are almost always independent contrac-tors. Under the law of agency a real estate broker is ordinarilydeemed a special agent who deals in the name of the broker’sprincipal, but does not have custody and control of thesubject matter of the agency.

Real Estate License Law. This subject is discussed in detailin a separate chapter, but it is appropriate here to mentionthat for purposes of the Real Estate License Law — and thisis of primary importance to the licensee — salespersons areemployees of the broker as a matter of law and cannot beindependent contractors. A contract between a salesper-son and his/her broker in which the salesperson is charac-terized as an independent contractor does not make it sounder the Real Estate Law.

Interrelating Factors. An independent contractor is aperson who sells final results rather than time and whosemethods of achieving those results are not subject to thecontrol of another. The independent contractor agrees todo the work contracted for in his or her way. An independentcontractor may, however, be an agent. The real estate brokeris usually in this category. On the other hand, officepersonnel are not independent contractors. Further compli-cating a clear understanding of the above classifications isthe fact that there are many independent contractors suchas building subcontractors who are not agents at all.

CREATION OF AGENCY RELATIONSHIP

The relationship of principal and agent can be created byagreement (with or without a written contract), by ratifica-tion or by estoppel. Normally, however, the status of realestate agent is created by express contract. When created

in this manner, the basic principles of contract law areapplicable.

Consideration. Consideration is not essential to the cre-ation of an agency. One may gratuitously undertake to actas an agent and will still be held to certain standardsdemanded of an agent for compensation. Generally, how-ever, there is a contract with consideration from the realestate broker and principal. Under the Real Estate Law, actsmust be performed for or in expectation of a compensationin order for a licensed agency to exist. When the principalsigns a listing contract promising compensation for serviceby an agent and the agent renders the service requested, thecontract is described as unilateral.

When the broker makes a counter-promise in the listingagreement to “use due diligence” in finding a purchaser itis a bilateral contract in that the consideration is a promisefor a promise.

An agreement authorizing or employing an agent or brokerto purchaser or sell real estate for compensation is unen-forceable unless the agreement, or some note or memoran-dum thereof, is in writing and subscribed by the party to becharged or by the party’s agent.

This is a logical application of the “equal dignities” rulewhich states that to be enforceable the authority to enterinto a contract required by law to be in writing must also bewritten. There are certain exceptions, however, as where theagent acts in the immediate presence of the principal andexecutes the instrument under the principal’s direction.

Another exception is sometimes made in circumstanceswhere an agent is an executive officer of a corporation, butthis is only in limited cases where the making of the contractis within the scope of the officer’s authority. These require-ments are in general based upon the English Statue ofFrauds which, in modified form, is applied in most, if not all,American jurisdictions.

Employment Contract. Thus the first act that takes placebetween broker and client is the written contract of employ-ment. Although this transaction between the parties wouldseem to be the most simple phase of the entire relation, it hasnevertheless been one of the greatest sources of litigation.

The duty to know the proper employment procedure isplaced upon the broker. A broker draws clients from all walksof life and it is incumbent upon the broker in view of thebroker’s knowledge and expertise to see that the employ-ment relationship is created in correct form and in a fairmanner according to the circumstances.

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AGENT’S AUTHORITY

The following is a brief and general summary of the “law ofagency.” Some of the material has limited application toeveryday real estate transactions, but the general principlesshould nevertheless be understood.

The Civil Code provides that every agent has authority:

(1) To do everything necessary, or proper or usual in theordinary course of business, for effecting the purpose ofthe agency;

(2) To make representations as to facts involved in thetransaction in which the agent is engaged.

The authority of an agent may be actual or ostensible.Actual authority is that authority a principal intentionallyconfers upon the agent, or intentionally, or by want ofordinary care, allows the agent to believe that he or shepossesses. Ostensible authority is that authority a principalintentionally, or by want of ordinary care, causes thirdpersons to believe that the agent possesses.

The principal is liable to persons who have sustained injurythrough a reasonable and prudent reliance upon the osten-sible authority of an agent. The act or declaration of theagent can never alone establish ostensible authority, butsilence upon the part of the principal who knows that anagent is holding himself or herself out as vested withcertain authority may give rise to liability of the principal.

When the principal executes and entrusts to the agent anegotiable or non-negotiable instrument containing blanksand the agent fills them in, the principal will be bound to thirdpersons who rely upon the instrument, even though theagent was not so authorized.

Emergency Broadens Authority

An agent has expanded authority in an emergency, includ-ing the power to disobey instructions where it is clearly inthe interests of the principal, and where there is no time toobtain instructions from the principal.

Restrictions on Authority.

An agent who is given the power to sell and convey realproperty for a principal also possesses the power to give theusual covenants of warranty unless there are express re-strictions in this regard in the agent’s agreement with theprincipal.

The Civil Code expressly states that an agent can never haveauthority, either actual or ostensible, to do an act which isknown or suspected by the person with whom the agentdeals to be a fraud upon the principal. Unless specificallyauthorized an agent has no authority to act in the agent’sown name unless it is in the usual course of business for theagent to do so.

An agency to sell does not carry with it the authority tomodify or cancel the contract of sale after it has been made.A mere agency to sell property ordinarily empowers theagent to find a purchaser but does not authorize the agentto enter into a contract to convey on behalf of the principal.Unless otherwise specified the authority to sell only permitsa sale for cash and the agent is not entitled to accept goodsin payment.

An agent who has authority to collect money may endorsea negotiable instrument received in payment only where theexercise of this power is necessary for the performance ofthe agent’s duty. Where an agent is expressly authorized tocollect money, the agent may accept a valid check and theagent’s receipt of the check will be considered payment tothe principal.

An agent who negotiates a loan on behalf of a lender-principal ordinarily has no authority to collect from theborrower except in those instances where the agent haspossession of the security and the borrower has knowledgeof this fact.

Ratification of Unauthorized Acts

Occasionally a person may act as agent without any author-ity to do so, or the true agent may act beyond the scope ofthe agent’s authority. The alleged principal is not bound bysuch acts. However, a principal may under certain circum-stances ratify the acts of the agent and thus become bound.Not only must the principal intend to ratify, but:

(a) The agent must have professed to act as a represen-tative of the principal;

(b) The principal must have been capable of authorizingthe act both at the time of the act and at the time ofratification (e.g., sometimes the promoters of a proposedcorporation make contracts on its behalf, but the corpo-ration cannot ratify them — though it may achieve thesame result by other means);

(c) The principal must have knowledge of all the materialfacts (unless ratification is given with the intention toratify whatever the facts may be);

(d) The principal must ratify the entire act of the agent,

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accepting the burdens with the benefits;

(e) The principal must ratify before the third party with-draws.

Once ratified the legal consequences are the same as thoughthe act had been originally authorized. Generally an act maybe ratified by any words or conduct showing an intentionupon the part of the principal to adopt the agent’s act as theprincipal’s own. Acquiescence or acceptance of benefitsby the principal must be with full knowledge of the factsunless made with the intention to ratify whatever the factsmay be.

Where the principal’s ignorance of the fact arises from theprincipal’s own failure to investigate, and the circumstancesare such as to put a reasonable person on inquiry, theprincipal may be held to have ratified the act in spite of lackof full knowledge. A ratification can be made only in themanner that would have been necessary to create theoriginal authority for the act ratified. Accordingly, in realproperty dealings, the ratification must be in writing.

Duty to Ascertain the Scope of Agent’s Authority

No liability is incurred by the principal for acts of the agentbeyond the scope of the agent’s actual or ostensibleauthority. A third party who deals with an agent and knowsof the agency is under a duty to ascertain its scope. If theagent acts beyond the agent’s actual authority and theconduct of the principal has not been such as to give theagent ostensible authority to do the act, the third partycannot hold the principal.

Power of Attorney

A power of attorney is a written instrument giving authorityto an agent. The agent acting under such a grant of authorityis generally called “attorney in fact.” A special power ofattorney authorizes the attorney in fact to do certain pre-scribed acts on behalf of the principal. Under a generalpower of attorney, the agent may transact all of the businessof the principal.

Note: Powers of attorney are strictly construed and ordi-narily where an authority is given partly in general and partlyin specific terms, the general authority is limited to actsnecessary to accomplish the specific purposes set forth.

Authority to Receive Deposits

The general rule is that when the scope of authority of a realestate broker has been limited to producing a buyer able andwilling to purchase the property upon terms prescribed by

the broker’s principal, the broker has no authority to accepta deposit from the buyer. Even when an agent has expressauthority to negotiate a sale of real property, this does notgive him or her implied or ostensible authority to collect thepurchase price. When an agent does so the agent is actingas agent for the buyer and not the seller. Consequently anymisappropriation of these funds by the broker would resultin loss to the buyer and not the seller.

This general rule of law does not apply, however, where thebroker actually had authority to receive a deposit on behalfof the seller. Virtually all listing contract forms in use todaygive express authority to the broker to accept an earnestmoney downpayment on behalf of the owner.

In those cases where a downpayment has been paid to thebroker and not deposited in escrow, title to such paymentvests in the seller when the seller accepts the contract.Further, where an agreement for sale of realty provides thata deposit with the broker is to become a part of thedownpayment when the seller puts in escrow a deed evi-dencing good title, the deposit becomes the seller’s prop-erty when the deed is put in escrow and the broker cannot,except at broker’s own risk, return it to the buyer. Similarly,money received by seller’s agent under a deposit receiptwith a valid liquidated damages clause is not recoverableby the buyer in the case of the buyer’s breach.

The rationale behind this rule is that money received by abroker as agent for the seller belongs to the seller when theoffer has been accepted. The broker may not return thefunds to the buyer without the consent of the seller.

Checks. In those cases where a downpayment has beenpaid to the broker with written instructions to hold the checkuncashed until acceptance of the offer, the buyer’s instruc-tions should be followed, but the seller must be informed,preferably in writing, that the buyer’s check is being helduncashed. This information should be given to the seller notlater than the actual presentation of the offer to the seller andprior to the seller’s acceptance of the offer. In the interim thebroker should enter the fact of receipt of the check into thebroker’s trust fund records and hold the check in a safeplace. (Commissioner’s Regulation 2832)

Although there may be a custom in real estate transactionsfor a broker to accept a check instead of cash as adownpayment, the existence of such a custom does notjustify the acceptance of a promissory note in lieu of cashunless there is a full disclosure to the seller. While checksare universally accepted as the equivalent of money inbusiness transactions, promissory notes are not. The makerof a check represents that the maker has money in the bankto cover it and the failure to have such money may be a crime.The maker of a note makes no such representation and the

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maker’s failure to pay is not a crime. It has been held underthe criminal law of California that a post-dated check is theequivalent of a promissory note.

Promissory Note. A real estate broker, like a trustee, has anaffirmative duty to disclose all material facts which mightinfluence a principal’s decision. Thus the broker whorepresents by implication that the broker has received cashfrom a purchaser as a downpayment when in fact the brokerhas accepted a non-negotiable promissory note has vio-lated the Real Estate Law.

Escrow Deposit. In those cases where a downpayment hasbeen paid by the buyer directly into escrow under thestandard form of escrow instructions which provide for theexchange of money and a deed on stipulated conditions, thebuyer retains title to the money until the conditions havebeen performed. When the buyer and seller have eachperformed under an escrow agreement, the escrow holderbecomes the agent of the seller as to the purchase moneyand the agent of the buyer as to the deed.

Commingling. The agent who places a client’s money inagent’s personal bank account is guilty of commingling andcreates a risk of having it attached for personal claimsagainst the agent (Business and Professions Code Section10176(e)). Hence, real estate licensees are required by lawto immediately place all funds received on behalf of princi-pals in a special trust account, unless they place them in aneutral escrow depository or in the hands of the principalwho is entitled to them. Checks must be deposited forcollection by the next business day following receipt by thebroker. If the broker fails to do so, the broker is liable todisciplinary action by the commissioner. A salespersonshould immediately deliver all deposits into the hands orinto the control of salesperson’s broker, or as instructed bythe broker.

DUTIES OF AGENT TOWARD PRINCIPAL

Loyalty as a Fiduciary.

A real estate agent owes a loyalty to the agent’s client andis prohibited from personally profiting by virtue of theagency except through the receipt of the agreed compensa-tion for services. This fiduciary obligation of the agent toa client throughout their dealings is probably the mostsignificant aspect of their relationship. The courts haveconsistently equated the duty of an agent to a principal withthe duty owed by a trustee to a beneficiary.

The Civil Code provides that, in all matters connected witha trust, a trustee is bound to act in the highest good faithtoward trustee’s beneficiary and may not obtain any advan-

tage over the latter by the slightest misrepresentation,concealment, duress or adverse pressure of any kind.

An agent may not unite the agent’s personal and represen-tative characters in the same transaction. The act of an agentwithin the scope of the agent’s authority is the act of theprincipal. In exercising that authority the agent is dealingwith property or other matters of grave concern to theprincipal. The agent has the principal’s confidence and istherefore not permitted to enjoy the fruits of any advantagewhich the agent might take of this confidential relationship.As a fiduciary, the agent in relations with the principal isbound by law to exercise the utmost good faith, loyalty andhonesty.

Fair and Honest Dealing. A real estate licensee who is theagent of a seller owes a duty of fair and honest dealing tothe buyer. This is a duty which the courts have held to existby reason of the agent’s status as a real estate licensee. Theduty may also be found to exist by way of the agent’sfiduciary obligation to the seller since any misrepresenta-tion or material concealment on the part of the agent mayafford the buyer grounds upon which to seek rescission ordamages from the seller. An agent must not withhold froma prospective buyer material facts regarding the propertywhich are known to the agent and unknown to the buyer andunascertainable by the buyer through diligent attention orobservation. For example, in “Reed v. King (1983) 145Cal.App.3d 261, seller and his agent were held to have a dutyto disclose to buyer that murder had taken place on theproperty in question ten years earlier.

Disclosure Duty. In a fiduciary relationship it is the duty ofthe agent, in whom such trust and confidence are reposedby the agent’s principal, to make full disclosure of all materialfacts relating to the subject matter of the agency. Forexample, the courts have held that negotiating a sale to theagent’s wife without making a full disclosure to the principalis a violation of the duty which the agent owes to discloseall material facts.

Note: Although agents are obliged to fully disclose to aprincipal all material facts that might influence the principal’sdecision concerning any real estate transaction, they shouldbe aware of a California Attorney General’s opinion (Op. 69/263) explaining that race, creed or color is not a material factand should not be disclosed, even though the furnishing ofsuch information is at the request of the owner.

A later case was concerned with the failure of the real estatebroker to disclose to the seller that the buyer was thebroker’s mother-in-law. The court stated that where aseller’s real estate agent is obligated to disclose to agent’sprincipal the identity of the buyer, and where the buyer is

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not the agent but has with the agent such blood, marital orother relationship which would suggest a reasonable pos-sibility that the agent could be indirectly acquiring aninterest in the property, such relationship is a material factwhich the agent must disclose to the agent’s principal.

An agent’s duty includes full disclosure and explanation offacts necessary for the principal to make an intelligentdecision. In some circumstances that duty may include aduty to investigate. In George Ball Pacific, Inc. v. ColdwellBanker & Company (1980) 117 Cal.App.3d 248, 172Cal.Rptr.597, the court found that the broker had made aninaccurate representation when he arranged a lease withoutknowing whether the lessor owned the property beingleased.

Note: The above cited case and many others will be exploredin the chapter on case law, in which it will be demonstratedhow important court decisions are in determining real estatelaw in general.

Reasonable Care and Skill. An agent moreover is under aduty to use reasonable care and skill, to obey directions ofthe employer and to render an account on demand. Agratuitous agent (i.e., one who is not paid for the agent’sservices) cannot be compelled to perform the undertaking,but such an agent who actually enters upon performancemust also obey instructions and is bound to exercise theutmost good faith in dealing with the principal.

Agent May Not Act For More Than One Party WithoutConsent of Both. An agent cannot act for two principals innegotiations with each other unless both have knowledgeof and consent to the dual agency. Such conduct isopposed to public policy in that it places the agent in aposition where the agent may represent conflicting inter-ests. Therefore, regardless of the agent’s honesty orfairness of the contract in the particular case, the agentcannot recover commissions from either. Carrying theprinciple further, it has been held by the Supreme Court thatthe undisclosed dual agency is a ground for rescission byeither principal without any necessity of showing injury.Even when the dual agency position is known and con-sented to by all parties, the agent owes to each party thesame duty of utmost good faith, honesty, and loyalty in thetransaction, and the same duty to disclose any material factthat would affect the judgment of either party.

This rule of agency is specifically mentioned in theCalifornia Real Estate Law and its violation is cause forrevocation or suspension of a real estate license. (Section10176(d) of the Business and Professions Code).

No Secret Profits

The courts have unequivocally held that an agent cannotacquire any secret interests adverse to the principal; that theagent cannot lawfully make a secret personal profit out ofthe subject of the agency; that if an agent conceals theagent’s interest in the property sold the agent is liable to theprincipal for all secret profits made by the agent; that wherean agent falsely represents the figure at which property canbe purchased and then purchases it for self at a lower figure,charging the principal the larger price and pocketing thedifference, the agent will be compelled to disgorge thesecret profits; that the fact that the principal was willingto pay the larger amount or that the property may have beenworth the amount charged the principal is immaterial.

Note: The cases of “Rattray v. Scudder” and “Thomas v.Snyder” are presented in some detail in the chapter on caselaw. These cases present the attitude of the courts towardthe fiduciary relationship between the broker and the prin-cipal. The position is upheld that not only may an agent losehis license for violation of the fiduciary relationship, but thatin addition the agent is not entitled to any profits from thetransactions in which this important principal was violated.You will also be referred to the cases of “Rempel v. Kells”and “Jorgensen v. Beach ‘n’ Bay Realty, Inc.” All of thesecases support the proposition that an agent cannot beallowed to profit at the expense of the agent’s principal, nomatter whether the result is reached by misrepresentation orconcealment or fraudulent device. Furthermore, the agentwho obtains profits fraudulently is not even entitled torecover expenses incurred in connection with the transac-tion.

Obligations of Real Estate Salespersons.

A real estate salesperson to the same extent as thesalesperson’s broker is subject to the obligations arisingout of the fiduciary relationship between the broker and thebroker’s principal. The salesperson is the agent of thebroker and is employed to carry on licensed activities onbehalf of the broker. In performing these acts for which alicense is required, the salesperson must disclose to thebroker’s principal all of the information salesperson haswhich may affect the principal’s decision in a transactioninvolving the principal.

A failure on the part of the salesperson to fulfill this obli-gation could result in disciplinary action against the sales-persons license. Moreover, the broker could be held liablein damages to the principal for acts and omissions of thesalesperson under the doctrine of respondent superior.

Since the broker may be subject to administrative disciplin-

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ary action or civil liability for the acts of broker’s salesper-sons, the broker should take particular care in instructingsalespersons on their duties and obligations to the broker’sprincipals. The salespersons should also exercise thegreatest care in carrying out these instructions of the brokerin dealing with the broker’s client.

A real estate salesperson is also subject to the proscriptionsof the Real Estate Law against dual agency, secret profitsand other acts and omissions which violate an agent’sduties to the agent’s principal.

Duties and Liabilities of Agent Toward Third Party

There are a number of considerations with regard to thirdparties which should be mentioned, and most of them arein the same vein as those concerning the agent/principalrelationship. For example, as concerns the warrant ofauthority, the agent must take care not to claim to a thirdparty an authority not warranted by the principal.

In addition, the agent should take care concerningcontracts whether he or she has any personal liability tothe third party. Also the contract should contain, for thethird party’s benefit, the name of the principal.

Torts are private wrongs committed upon the person orproperty of another and arising from a breach of dutycreated by law rather than by contract. An agent is alwaysliable to third parties for the agent’s own torts whether theprincipal is liable or not, and in spite of the fact that the agentacts in accordance with the principal’s directions.

A misrepresentation to a prospective buyer (third party) ofthe lowest price acceptable to the owner is not usually ac-tionable because it is not a representation of a material fact.

An agent must take care not to misrepresent either fraudu-lently or by negligence. Both are likely to subject the agentto discipline and/or damages.

In addition to making false or misleading misrepresenta-tions to third parties, the agent may err by nondisclosure ofmaterial facts. Nondisclosure may also lead to disciplinaryaction or civil liability.

In recent years there appears to be a growing tendency onthe part of the courts to treat “puffing” or “sales talk” asrepresentations of material fact. The agent, therefore, mustbe careful when making such statements to third parties as:“This is the best house on the block,” or “This house is inperfect shape.”

RIGHTS OF AGENT AGAINSTPRINCIPAL

Generally, to be entitled to a commission the broker must (1)produce a buyer ready, willing and able to purchase uponthe terms and at the price stipulated by the seller or (2) securefrom he prospective buyer a binding contract upon termsand conditions which the seller subsequently accepts.

From the broker’s standpoint, a listing agreement is verymuch result oriented. The broker’s right to a commission isin no way dependent upon, nor is it affected by, the amountof work put into finding a buyer ready, willing and able topurchase and in the “meeting of the minds” of buyer andseller.

It is important to remember, as regards the rights of the agentagainst the principal, that the payment of a commissionunder a listing contract may be made dependent upon anylaw condition. A seller may be relieved of the obligation topay a commission if it appears from the language of thecontract that the payment of a commission was contingentupon the happening of a condition that did not occur.

If a broker performs within the time limit specified in thelisting, the broker is entitled to commission. In other words,it is well settled that a principal cannot discharge an agentpending negotiations by the agent with a prospectivecustomer, then effect a sale to the customer, without liabilityto the agent.

Termination of Agency. Ordinarily an agency may beterminated by the acts of one or both of the parties or byoperation of law. An agency is also terminated by theexpiration of its term, extinction of its subject matter, or thedeath or incapacity of either principal or agent.

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1. Which of the following is an agency relationship?

a. where the real estate broker acts on his or her own behalfb. where there is an ordinary employer-employee relationshipc. where services are rendered by an independent contractord. none of the above

2. The law compares a fiduciary relationship to:

a. that of a trustee to a beneficiary under a trustb. that of a minister to his or her congregationc. that of an officer to an enlisted mand. none of the above

3. The use of options and net listings is illegal and unethical.

a. trueb. false

4. Which is true of a net listing?

a. the compensation is not definitely determinedb. a clause in the contract usually permits the agent to retain as compensation all the monies

received in excess of the selling price by the sellerc. both “A” and “B”d. neither “A” nor “B”

5. Open listings, are the simplest form of written authorization, they may be given concurrently to more than one agent,and usually the seller is not required to notify the other agents in case of a sale by one of them.

a. trueb. false

6. Which is true of an exclusive agency listing?

a. it is a contract containing the words “exclusive agency”b. the commission is payable to the broker named in the contractc. both “A” and “B”d. neither “A” nor “B”

7. Which is true of an exclusive right to sell listing?

a. a commission is due the broker named in the contract if the property is sold within the time limitby the said broker, by any other broker, or by the owner

b. frequently such contracts also provide that the owner shall be liable to pay a commission if a saleis made within a specified time after the listing expires to a buyer introduced to the owner bythe listing broker during the term of the listing

c. both “A” and “B”d. neither “A” nor “B”

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8. Which is true of multiple listing services?

a. They are cooperative listing services conducted by a group of brokers.b. Usually an exclusive authorization right-to-sell listing form is used.c. Both “A” and “B”d. Neither “A” nor “B”

9. Which is true of a deposit receipt?

a. it should set forth all the basic factors which are included in a contract of saleb. it should contain a complete understanding among the buyer, seller, and broker as to the return

of the deposit in the event the offer is not acceptedc. it should contain provisions for disposition of deposit money should the buyer fail to complete

the purchased. all of the above

10. Ordinarily a broker is entitled to a commission when:

a. he produces a buyer ready, willing, and able to purchaseb. the buyer completes the transactionc. he supplies a likely prospectd. none of the above

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between lessor and lessee. The label is somewhat mislead-ing because the period may be for less than a year, measuredin specific days or weeks or months.

Estate From Period to Period. An estate from period toperiod (or periodic tenancy) is one which continues fromperiod to period (either year to year, month to month, or weekto week) as designated by lessor and lessee in their agree-ment. Perhaps the most common periodic tenancy is themonth-to-month tenancy.

Estate at Will. An estate at will is one which is terminableat the will or unilateral decision of either party, with nodesignated period or duration. Tenancies at will are uncom-mon because through the landlord’s acceptance of periodicrents, the tenancy is treated like a periodic tenancy (CivilCode Section 1946). By statute California and certain otherstates have modified the potentially summary and abruptconclusion of such estates and require advance 30-daynotice of termination by each party.

Estate at Sufferance. An estate at sufferance is one in whichthe lessee who has rightfully come into possession of theland retains possession after the expiration of the term. Forexample, a tenant holds over after the expiration of a lease.

REQUISITES FOR CREATION OFA LEASEHOLD ESTATE

No particular language is required in order to create aleasehold so long as the intention to rent the propertyappears. The language, however, must include the namesof the parties, description of the property, amount of rentalpayments and length of time the lease will continue. It is notnecessary that the words “let” or “demise” be written intothe lease to make it legal.

In Writing. Leases for one year or less need not be inwriting. However, it makes for certainty and intelligibility toreduce all leases, even those from month to month, to written

10LANDLORD AND TENANT LAW

We have seen spent most of this course, so far, consideringreal estate law as it applies to the acquisition, ownership andtransfer of real property. In the old historical sense a basicdistinction was made between freehold estates and less-than-freehold estates. The latter category consists of whatare today more commonly called leases or leaseholds, andthat is the subject of this chapter. When you considerleaseholds, you are obviously considering the landlord/tenant relationship and the various laws which pertain to it.

The distinguishing feature of a leasehold interest is the rightto exclusive possession and use for a fixed period of time ofreal property held by the lessee (tenant). The lessor(landlord), having parted with this right to exclusive posses-sion, merely holds the basic title (reversion) during theexistence of the lease. Hotel guests, licensees and employ-ees may all be privileged to use a given space under certaincontractual conditions; yet since none of these has anexclusive right to possession, they are not governed by thelaws regulating the relation of landlord and tenant.

Leasehold estates are chattels real. Although they give theowner (i.e., the tenant or lessee) an estate (i.e., an interest)in real property, they are in fact a form of personal propertyand are governed by laws applicable to personal property.

TYPES OF LEASEHOLD ESTATES(TENANCIES)

Most authorities recognize four fundamental types of leasesbased on the length of their duration, namely:

(1) Estate for years

(2) Estate from period to period (periodic tenancy)

(3) Estate at will

(4) Estate at sufferance

Estate for Years. An estate for years is one which is tocontinue for a definite period fixed in advance by agreement

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form. Leases for longer than one year are required to be inwriting by the provisions of the Statute of Frauds.

It should be noted that a lease for merely one year, normallynot within the Statute of Frauds, nevertheless falls thereinwhen the one-year period is to start subsequent to the dateof entering into the agreement.

The California courts have held that in the event the leaseis a written one, it must be signed by the lessor. It is notnecessary that the lessee sign the lease as delivery to andacceptance by the lessee is sufficient. Acceptance by thelessee of the provisions of the lease may be evidenced bythe lessee paying rent and entering into possession of thereal property, even though the lessee may not have signedthe lease agreement.

Thus the lessee entering into possession of the propertyand paying rent binds both the lessor and the lessee to theprovisions of the lease agreement. Upon acceptance bothlessee and lessor become bound under the lease as aconveyance. A lessor, in order to have the lease operative,must deliver it signed, and the instrument must pass into thecontrol of the lessee or assignee of the lease to constitutean effective delivery. As indicated, acceptance of the leasedpremises by the lessee may also be regarded as delivery.

Language of the Lease. The landlord is one who has anestate in real estate which he or she agrees to rent to anothercalled the tenant for a fixed period of time. The relationshipbetween landlord and tenant is created by a lease. A leaseis a conveyance of an estate in land coupled with a contractbetween the one granting the lease, called the lessor, and theone to whom the estate is granted, called the lessee, for thepossession and use of the property in consideration of rent.Obligations of a dual nature are thereby established:

(1) Those growing out of the relationship of landlord andtenant, and

(2) Those growing out of the expressed stipulation of thelease.

A lease is construed according to the intent of the parties,as gathered from the language of the lease and inaccordance with the rules of interpretation of contractsgenerally. Like other contracts a written lease cannot bealtered in its executory provisions by an oral agreement.Any alterations of the lease agreement mutually agreedupon by all parties thereto must be in writing. The leasecannot be changed by mutual oral agreements unless theseagreements have been fully performed and thereby becomean executed modification of the lease.

The rental of real property is presumed to be from month to

month unless otherwise designated in writing. There areexceptions to this general statement; namely, lodgings anddwelling houses, in places where there is not custom orusage on the subject, and also real property used foragricultural or grazing purposes may be leased for one yearor less verbally.

Note: This has the effect of making oral leases for a year orless on such property as vacant lots and business struc-tures unenforceable unless the lease is in writing. Lackinga written lease, the presumption is that the hiring is on amonth-to-month basis.

RIGHTS AND OBLIGATIONS OFPARTIES TO LEASE

A number of matters as between landlord and tenant shouldbe considered before entering into the lease agreement.Many of these matters are relatively unimportant in the oralmonth-to-month tenancy, but become increasingly impor-tant in the case of written leaseholds for a longer period oftime.Since these subjects are each covered in considerable detailby contract provisions of the instrument, each written leasemust be separately studied to determine the rights andobligations of the parties involved. Some of the moreimportant subjects which should be covered even in thesimpler types of leases are the following:

1. Duration of lease

2. Rent

3. Possession, maintenance and improvements

4. Liability of parties for injuries resulting from conditionof the premises

5. Transfer by lessee

6. Special covenants, conditions and provisions

7. Termination

Tenant’s Privacy vs. Landlord’s Right of Entry. Under whatconditions may a landlord legally enter the tenant’s dwell-ing? Civil Code Section 1954 states such entry may be made:

(a) in an emergency

(b) to make necessary or agreed repairs, alterations, im-provements, decorations, supply necessary or agreedservices, or show dwelling to prospective or actual pur-chasers, mortgagors, tenants, workmen or contractors

(c) where tenant has abandoned or surrendered the pre-

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mises

(d) pursuant to court order

Other than in the case of emergency or tenant abandonment,landlord must enter during “normal business hours,” unlesstenant consents at time of entry. Except in an emergencysituation or where otherwise impracticable to give notice,landlord must give tenant reasonable notice of intent toenter (24 hours presumed reasonable). Landlord shall notabuse this right of entry nor harass tenant.

Civil Code Section 1953 provides that any lease or rentalagreement provision attempting to waive or modify tenant’srights under Civil Code Section 1954 is void.

Thus the tenant’s basic right to privacy, use and posses-sion is protected while providing for landlord’s reasonableaccess to the premises in emergency or necessary situa-tions.

Possession, Maintenance and Improvements. In everylease the law implies a covenant on the part of the lessor tothe quiet enjoyment and possession of the property by thelessee during the term of the lease. It is a warranty by thelessor against lessor’s own acts, not those of strangers.Eviction of the lessee constitutes a breach of this covenant.Eviction occurs when the landlord ousts the tenant orallows the tenant to be ousted by another who has para-mount title.

An eviction, however, can exist without a physical ousterof the tenant. Generally, any disturbance of the tenant’spossession, whereby the property is rendered wholly orsubstantially unsuitable for the use for which it was leased,or any interference with the tenant’s beneficial enjoymentof the property (such as threats of expulsion) will constituteeviction.

Constructive Eviction. Constructive eviction may alsooccur through the landlord’s attempts to lease the propertyto others or through the making of extensive and unwar-ranted alterations to the property.

A tenant who is evicted, or constructively evicted, mayabandon the premises and refuse to pay further rent withoutincurring liability for breach of the lease. For many years thecourts held that a tenant relying on the doctrine of construc-tive eviction must have surrendered possession of theproperty in order to escape the obligation to pay rent.Where the building is a dwelling house, however, theCalifornia Supreme Court has held that there is an impliedwarranty of habitability from the landlord to the tenant thatthe premises will be maintained in a condition to meet bareliving requirements. A breach of this implied warranty by

the landlord is directly related to the tenant’s obligation topay all or part of the rent and is considered a form ofconstructive eviction, and the tenant’s obligation to payrent will depend upon the extent of the eviction.

Landlord’s Minimum Obligations. Civil Code Section1941.1 sets forth the landlord’s minimum obligations to thetenant. These obligations require the landlord to assure:

• The plumbing, including hot and cold water, gasfacilities, sewer and septic tank connections are in work-ing order

• The heater, lights, and wiring work and are safe

• Floors, stairways, and railings are in good condition

• When rented, the premises are clean, with no piles oftrash, rats, mice, roaches, or other pests; and maintainareas which are under his/her control during the tenancy.An adequate number of appropriate garbage containers

• There are no leaks when it rains, and no broken doorsor windows.

Tenant’s Legal Obligations for Care of Premises. Atenant’s affirmative duties to a landlord for reasonable careof the premises are found in Section 1941.2 of the Code. Thetenant must:

• Keep his/her part of the premises as clean and sanitaryas possible (unless the landlord has expressly agreed inwriting to do it)

• Dispose of garbage or trash (unless the landlord hasexpressly agreed in writing to do it)

• Properly use the plumbing, electrical and gas fixturesand keep them clean

• Not permit any person, with tenant’s permission, todamage or deface any part of the rental building not do sohim/herself

• Use the dwelling for a residence and use the rooms forthe purpose for which they were designed or intended.

Housing Standards. The State Housing Law and varioushousing codes require the landlord to keep a dwelling ingood condition in accordance with specified structural,plumbing, electrical, sanitation, fire and safety standards.These laws are generally enforced by local city and countyBuilding Inspection Department, Health Department, or FireDepartment, depending on the type of problem. If there isa violation, a tenant can file a complaint with the appropriatedepartment. They can investigate the complaint and requirethe landlord to make needed repairs.

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Repairs by Tenants. There are other remedies available toa tenant if the landlord fails to maintain the property in acondition fit for human occupancy. The tenant may give thelandlord a notice to repair and do either of the following ifthe landlord fails to make the repairs necessary to render theproperty habitable:

(1) Spend up to one month’s rent in repairs *, or

(2) Abandon the premises in which case the tenant isrelieved from the requirement of paying additional rentand the performance of other conditions of the lease.

(*This remedy not available more than twice in twelvemonths) If the landlord attempts to evict the tenant orincreases rent or decreases services in retaliation againstthe tenant’s having utilized one month’s rent to repair theproperty, the landlord may be restrained by court order fromundertaking any such retaliatory action for a period of sixtydays.

Condemnation of Premises. If the entire leased property iscondemned under a proceeding in eminent domain, thelessee is ordinarily released from all of his obligations underthe lease agreement including the obligation to pay rent. Ifthe premises are only partially taken and the portion of theproperty which has not been condemned may still be usedby the lessee for the purpose for which it was leased, thelessee must continue to pay rent according to the terms ofthe lease agreement.

In such a case, the lessee rather than the lessor is entitledto damages resulting from the condemnation.

Tenant Improvements. Before a tenant makes improve-ments such as the installation of fixtures, the tenant shouldenter into a supplemental agreement with the landlordconcerning these fixtures. If he or she does not, the fixtureswill ordinarily become a part of the real property and willbelong to the owner of the land when the lease has termi-nated. This rule of law has been modified by statute inCalifornia in those cases where a tenant has installedfixtures for the purposes of trade, manufacture, ornamentalor domestic use. Such fixtures may be removed by the tenantduring the term of the lease unless they have become anintegral part of the premises through the manner in whichaffixed and if removal can be effected without injury to thereal property.The law as written leaves much room for honest differencesof opinion between landlord and tenant. It is thereforepreferable to provide in advance by agreement for thedisposition of fixtures.

Liability of Parties for Injuries Resulting From Condition

of Premises. Generally, where the entire premises areleased, the landlord is not liable for injuries to the tenant orthe tenant’s invitees resulting from the defective conditionof the premises, even though the exercise of reasonablediligence would have disclosed the defects. If the premisesare a dwelling house, the landlord’s failure to repair dilapi-dation does not make the landlord liable where the tenant,after knowledge of the dilapidation, stays on instead ofabandoning the premises.

A special covenant by the landlord to repair may make thelandlord liable for injuries if after notice to repair he or shefails to do so. Where the landlord has actual knowledge ofdefects and conceals them from the tenant, the landlord maybe liable for injuries sustained by reason thereof. A landlordmay be liable also where an injury results from the defectivecondition of some part of the premises over which thelandlord retains control, such as hallways, stairs, elevatorsor roof, where there are several tenants.

Transfer by Lessee. The tenant may, in the absence of acovenant or condition to the contrary, make an assignmentof the lease or create a sublease of the premises. Anassignment is a transfer of the entire leasehold. A subleaseis a transfer of less than the leasehold with the reversion inthe sublessor.

For example, suppose two years of a three year lease remain.The tenant might assign a third party all rights to occupancyfor the entire two years, or might sublet the tenant’s rightsfor one year and reoccupy the premises in the third year.

Termination. A tenancy for a specified term (i.e., estate foryears) ends at the expiration of the term and without notice.Periodic tenancies may be terminated by either party by awritten notice of at least as long before the expiration thereofas the term of the lease but not exceeding one month. Thegeneral rule, therefore, is that if a tenant pays rent weeklyone week’s notice suffices; if tenancy is on a two-week basisand rent is paid for that period, then two weeks notice isrequired.

The failure of a tenant to give proper notice may result in thetenant’s having to pay additional rent. The notice of depar-ture of the tenant does not have to correspond to the duedate for the rent; e.g., if the rent is due on July 1, the tenantcan give notice on July 10 and and move out on August 10when a 30 day notice is appropriate. Of course, the tenantmust still pay the rent for the first 10 days of August.

Parties may specifically agree that a seven day notice shallbe sufficient. When this agreement exists, there is nonecessity for the notice to be in writing as an oral or verbalnotice is sufficient. Tenancies at will require no less than 30

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days’ written notice to vacate to be served upon the tenant,the 30-day notice being made at any time during the rentalperiod. A tenant at sufferance is not entitled to a notice.

Other than the expiration of the term of the lease, there areimportant grounds for termination, as:

(1) By the tenant for violation of the landlord’s duty toplace the tenant in quiet possession;

(2) By the tenant for the violation of the landlord’s dutyto repair;

(3) By the tenant upon eviction by the landlord;

(4) By either party upon the destruction of the premisesif there is no covenant to repair;

(5) By the landlord upon use of the premises for unautho-rized purposes or by abandonment of the premises by thetenant;

(6) By either party upon breach of a condition of the lease;

(7) By the tenant for the landlord’s breach of the impliedwarranty of habitability.

Lessee’s Rights. Any provision in a lease executed afterJanuary 1, 1976, which attempts to modify or waive any ofthe following tenant rights is void and unenforceable:

(a) A tenant’s rights under Section 1950.5 of the Civil Codeor 1954 of the Civil Code.

(b) The right of a tenant to assert a cause of action againstthe landlord which may arise in the future;

(c) The right of a tenant to a notice referred by law;

(d) The procedural rights of a tenant in any litigationinvolving rights and obligations as a tenant;

(e) The right of a tenant to have the landlord exercise a dutyto care to prevent personal injury or personal propertydamage where that duty is imposed by law.

General Comment. This discussion is an overview of someof the most common areas in tenant-landlord relationships.Laws and regulations in this legal relationship are con-stantly changing. persons experiencing difficulty in tenant-landlord situations should contact the local public agencyhaving authority over such matters. (Look under city orcounty offices in your phone book under Consumer Af-fairs, Legal Aid or Housing; or consult your own attorney.)Also, local libraries and bookstores are additional sourcesof information on this issue.


1. The distinguishing feature of a leasehold interest is:

a. right to exclusive possession and use for a fixed period of timeb. the fact that the tenant does not own the propertyc. the fact that rents are involvedd. none of the above

2. Which is true about leasehold estates?

a. they are chattels realb. they give the tenant an estate in real propertyc. both “A” and “B”d. neither “A” nor “B”

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3. Estate for years, estate from period to period, and estate at will are types of leasehold estate.

a. falseb. true

4. Which of the following is not a leasehold estate?

a. estate at sufferanceb. estate at willc. estate for considerationd. estate for years

5. Which is a true statement about leases?

a. it is not necessary that the lessee sign the leaseb. it must be signed by the lessorc. neither “A” nor “B”d. both “A” and “B”

6. Which type of leasehold estate is terminable at the unilateral decision of either party?

a. estate at sufferanceb. estate at willc. estate from period to periodd. estate for years

7. Which type of leasehold estate is one in which the lessee who has rightfully come into possession of the propertyretains possession after the expiration of the term?

a. estate at willb. estate from period to periodc. estate at sufferanced. estate for years

8. Which is true of the requisites for the creation of a leasehold estate?

a. no particular language is required to create it, so long as the intention to rent property appearsb. it is not necessary that the words “let” or “demise” be written into the lease to make it legalc. both “A” and “B”d. neither “A” nor “B”

9. Which leases need not be in writing?

a. those for six months or lessb. those for one year or lessc. those for more than one yeard. all of the above

10. Which type of leasehold estate is month to month?

a. estate from period to periodb. estate at sufferancec. estate at willd. estate for years

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11THE CALIFORNIA CODES AND REAL ESTATE

way reproduces any license or facsimile thereof insuch a manner that it could be mistaken for a validlicense, or displays or has in his possession any suchphotograph, photostat, duplicate, reproduction, orfacsimile unless authorized by the provisions of thiscode.

As used in this section, “license” includes “certifi-cate,” “permit,” “authority,” and “registration” orany other indicia giving authorization to engage in abusiness or profession regulated by this code or re-ferred to in Sections 1000 or 3600.

Disciplinary Provisions for Discriminatory Acts

Section 125.6 Every person who holds a license underthe provisions of this code is subject to disciplinaryaction under the disciplinary provisions of this codeapplicable to such person if, because of the applicant’srace, color, sex, religion, ancestry, physical handicap,marital status, or national origin, he or she refuses toperform the licensed activity by another licensee, or if,because of the applicant’s race, color, sex, religion,ancestry, physical handicap, marital status, or nationorigin, he or she makes any discrimination, or restric-tion in the performance of the licensed activity. Noth-ing in this section shall be interpreted to apply todiscrimination by employers with regard to employeesor prospective employees, nor shall this section autho-rize action against any club license issued pursuant toArticle 4 (commencing with Section 23425) of Chap-ter 3 of Division 9 because of discriminatory member-ship policy. The presence of architectural barriers tothe physically handicapped person which conform toapplicable state or local building codes and regula-tions shall not constitute discrimination under thissection.

It shall not constitute discrimination under this sec-tion for a person licensed pursuant to Division 2(commencing with Section 500) to refuse to perform a

As previously explained, Sections 10000-10602 of the Busi-ness and Professions Code comprise the so-called RealEstate Law, and Sections 11000-11200 define the Real EstateCommissioner’s jurisdiction over subdivisions and hisresponsibilities in connection therewith. This does notimply that a licensee’s conduct is amenable only to thesesections. Scattered throughout the California Codes arestatutes with which the licensee should be acquainted inorder to avoid pitfalls in practice. Some of these, or theircontent description, are presented in this chapter.

BUSINESS AND PROFESSIONS CODE

In addition to the sections referred to as the Real Estate Law,licensees should be familiar with the following pertinentsections of the Business and Professions Code.

License Offenses

Section 119. Any person who does any of the followingis guilty of a misdemeanor:

(a) Displays or causes or permits to be displayedor has in his possession any canceled, revoked,suspended, fictitious, or fraudulently altered license,or any document simulating a license or purportingto be or to have been issued as a license.

(b) Lends his license to any other person orknowingly permits the use thereof by another.

(c) Displays or represents any license not issued tohim as being his license.

(d) Fails or refuses to surrender to the issuing au-thority upon its lawful demand any license which hasbeen suspended, revoked, or canceled.

(e) Permits any unlawful use of a license issued tohim.

(f) Photographs, photostats, duplicates, or in any

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licensed activity if the licensee determines that be-cause of the relation between the licensed activitysought and the physical handicap, the licensed activ-ity sought is beyond the licensee’s skill, or could betterbe performed by another licensee.

“License” as used in this section includes (same defi-nition as given earlier).

“Applicant” as used in this section means a personapplying for licensed services provide by a personlicensed under this code.

“Physical handicap” as used in this section includesimpairment of sight, hearing or speech, or impairmentof physical ability because of amputation or loss offunction or coordination, or any other health impair-ment which required special education or relatedservices.

(For a further detailed discussion of discrimination andrelated disciplinary action, refer to chapter 15, “Fair Hous-ing.”)

Grounds for Denial of License

Section 475. (a) Notwithstanding any other provi-sions of this code, the provisions of this division shallgovern the denial of licenses on the grounds of:

(1) Knowingly making a false statement of factrequired to be revealed in an application for license;

(2) Conviction of a crime;

(3) Commission of any act involving dishonesty,fraud or deceit with the intent to substantially ben-efit himself or another, or substantially injure an-other; and

(4) Commission of any act which, if done by alicentiate of the business or professions in question,would be grounds for suspension or revocation oflicense.

(b) Notwithstanding any other provisions of thiscode, the provisions of this division shall governthe suspension and revocation of licenses ongrounds specified in subdivision (a)(1) and (2)above.

(c) A license shall not be denied, suspended, orrevoked on the grounds of a lack of good moralcharacter or any similar ground relating to anapplicant’s character, reputation, personality, orhabits.

Inapplicability of Division to Attorneys and PersonsSubject to Alcoholic Beverage Control Act

Section 476. Nothing in this division shall apply to thelicensure or registration of persons pursuant to Chap-ter 4 (commencing with Section 6000) of Division 3,or pursuant to Division 9 (commencing with Section23000) or pursuant to Chapter 5 (commencing withSection 19800) of Division 8.

“Board” and “License” Defined

Section 477. As used in this division: (a) “board”includes “bureau,” “commission,” “committee,” “de-partment,” “division,” “examining committee,” and“agency.”

Denial of License by Board

Section 480. (a) A board may deny a license regulatedby this code on the grounds that the applicant has oneof the following:

(1) Been convicted of a crime. A conviction withinthe meaning of this section means a plea or verdictof guilty or a conviction following a plea of nolocontendere. Any action which a board is permittedto take following the establishment of a convictionmay be taken when the time for appeal has elapsedor the judgment of the conviction has been affirmedon appeal, or when an order granting probation ismade suspending the imposition of sentence, irre-spective of a subsequent order under the provi-sions of Section 1203.4 of the Penal Code.

(2)Done any act involving dishonesty, fraud ordeceit with the intent to substantially benefit him-self or another, or substantially injure another; or

(3) Done any act which if done by a licenciate of thebusiness or profession in question, would begrounds for suspension or revocation of license.

The board may deny a license pursuant to this subdi-vision only if the crime or act is substantially relatedto the qualifications, functions, or duties of the busi-ness or profession for which application is made.

(b) Notwithstanding any other provision of thiscode, no person shall be denied a license solely onthe basis that he has been convicted of a felony if hehas obtained a certificate of rehabilitation underSection 4852.01 and following of the Penal Code orthat he has been convicted of a misdemeanor if he hasmet all applicable requirements of the criteria ofrehabilitation developed by the board to evaluate

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the rehabilitation of a person when considering thedenial of a license under subdivision (a) of Section482.

(c) A board may deny a license regulated by this codeon the ground that the applicant knowingly made afalse statement of fact required to be revealed in theapplication for such license.

Criteria Development

Section 481. Each board under the provisions of thiscode shall develop criteria to aid it, when consideringthe denial, suspension or revocation of a license, todetermine whether a crime or act is substantiallyrelated to the qualifications, functions, or duties of thebusiness or profession it regulates.

Rehabilitation Criteria

Section 482. Each board under the provisions of thiscode shall develop criteria to evaluate the rehabilita-tion of a person when:

(a) Considering the denial of a license by the boardunder Section 480; or

(b) Considering suspension or revocation of alicense under Section 490.

Each board shall take into account all competentevidence of rehabilitation furnished by the applicantor licensee.

Attestation by Other Persons to Good MoralCharacter Not Required for Application for License

Section 484. No person applying for licensure underthis code shall be required to submit to any licensingboard any attestation by other persons to his goodmoral character.

Procedure by Board Upon Denial of Application forLicense

Section 485. Upon denial of an application for alicense, under this chapter the board shall: (a) Fileand serve a statement of issues in accordance withChapter 5 (commencing with Section 11500) of Part1 of Division 3 of Title 2 of the Government Code; or,in the alternative,

(b) Notify the applicant that the application isdenied, stating (1) the reason for the denial, and (2)that the applicant has the right to a hearing under

Chapter 5 (commencing with Section 11500) of Part1 of Division 3 of Title 2 of the Government Code ifwritten request for hearing is made within the 60 dayperiod, the applicant’s right to a hearing is deemedwaived.

Service of the notice of denial may be made in themanner authorized for service of summons in civilactions, or by registered mail addressed to the appli-cant at the latest address filed by the applicant inwriting with the board in his application or otherwise.Service by mail is complete on the date of mailing.

Re-application; Informing Applicant of Requirements

Section 486. Where the board has denied an applica-tion for a license under this chapter it shall, in itsdecision, or in its notice under subdivision (b) ofSection 485, inform the applicant of the following:

(a) The earliest date on which the applicant mayreapply for a license.

(b) That all competent evidence of rehabilitationpresented will be considered upon a re-application.

Along with the decision, or the notice under subdivi-sion (b) of Section 485, the board shall serve a copy ofthe criteria relating to rehabilitation formulated un-der Section 482.

Hearing

Section 487. If a hearing is requested by the applicant,the board shall conduct such hearing within 90 daysfrom the date the hearing is requested unless theapplicant shall request or agree in writing to a post-ponement or continuance of the hearing. Notwith-standing the above, the Office of Administrative Hear-ings may order, or on a showing of good cause, granta request for, up to 45 additional days within which toconduct a hearing but in no case shall more than twosuch orders be made or requests be granted.

Conviction of Crime; Relationship of Crime to Li-censed Activity

Section 490. A board may suspend or revoke a licenseon the ground that the licensee has been convicted ofa crime, if the crime is substantially related to thequalifications, functions, or duties of the business orprofession for which the license was issued, or theground of knowingly making a false statement of factrequired to be revealed in an application for such

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license. A conviction within the meaning of thissection means a plea or verdict of guilty or a convictionfollowing a plea of nolo contendere. Any action whicha board is permitted to take following the establish-ment of a conviction may be taken when the time forappeal has elapsed, or the judgment of conviction hasbeen affirmed on appeal, or when an order grantingprobation is made suspending the imposition of sen-tence, irrespective of a subsequent order under theprovisions of Section 1203.4 of the Penal Code.

Information to Ex-Licensee

Section 491. Upon suspension or revocation of alicense by a board on one or more of the groundsspecified in Section 490, the board shall:

(a) Send a copy of the provisions of Section 11522of the Government Code to the ex-licensee.

(b) Send a copy of the criteria relating to rehabili-tation formulated under Section 482 to the ex-lic-ensee.

Public Reprovals

Section 495. Notwithstanding any other provision oflaw, any entity authorized to issue a license orcertificate pursuant to this code may publicly reprovea licentiate or certificate holder thereof, for any actwhich would constitute grounds to suspend or revokea license or certificate. Any proceedings for publicreproval, public reproval or suspension, or publicreproval and revocation shall be conducted in accor-dance with Chapter 5 (commencing with Section11500) of Part 1 of Division 3 of Title 2 of the Govern-ment Code.

Examination Security; Penalty for Violating

Section 496. A board may deny, suspend, revoke orotherwise restrict a license on the ground that anapplicant or licensee has subverted or attempted tosubvert any licensing examination or the administra-tion of an examination, including but not limited to:

(a) Conduct which violates the security of the exami-nation materials; removing from the examinationroom any examination materials; the unauthorizedxerographic, photographic or other mechanical re-production of any portion of the actual licensingexamination; aiding by any means the unauthorizedxerographic, photographic or other mechanical re-production of any portion of the actual licensingexamination; paying or using professional or paid

examination-takers for the purpose of reconstruct-ing any portion of the licensing examination; ob-taining examination questions or other examina-tion material, except by specific authorization eitherbefore, during or after an examination or use orpurport to use any examination questions or mate-rials which were improperly removed or taken fromany examination for the purpose of instructing orpreparing applicants for examinations; or selling,distributing, buying, receiving or having unautho-rized possession of any portion of a future, current orpreviously administered licensing examination.

(b) Conduct which violates the standard of examina-tion administration; communicating with any otherexaminee during the administration of a licensingexamination; copying answers from another exam-inee or permitting one’s answers to be copied byanother examinee; having in one’s possession dur-ing the administration of the licensing examinationany books, equipment, notes, written or printedmaterials or data of any kind, other than the exami-nation materials distributed, or otherwise autho-rized to be in one’s possession during the examina-tion; or impersonating any examinee or having animpersonator take the licensing examination onone’s behalf.

Conduct Constituting Violation of Examination Se-curity

Section 497. Whenever any person has engaged, or isabout to engage, in any acts or practices which con-stitute, or will constitute, a violation of any provisionof this chapter, the superior court in and for the countywherein the acts or practices take place, or are aboutto take place, may issue an injunction, or other appro-priate order, restraining such conduct on applicationof a board, the Attorney General or the district attor-ney of the county.

The proceedings under this section shall be governedby Chapter 3 (commencing with Section 525) of Title7 of Part 2 of the Code of Civil Procedure.

The remedy provided for by this section shall be inaddition to, and not a limitation on, the authorityprovided for in any other provision of this code.

Illegal Practice of Law Punishable

Section 6125. No person shall practice law in thisstate unless he is an active member of the State Bar.

(Note: The term “to practice law” and equivalent expres-

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sions are not confined to appearances in court. Theyinclude “legal advice and counsel and the preparation oflegal instruments by which such legal rights are secured.”It has been held that the selection and preparation of a note,mortgage and deed of trust by a broker in an independentloan transaction, in which a fee was charged, was theunlawful practice of law, even though only one transactionwas involved — People v. Sipper, 1943, 61 C.A. 2d, Supp.844.)

Section 6126. Any person advertising himself aspracticing or entitled to practice law or otherwisepracticing law, after he has been disbarred or whilesuspended from membership in the State Bar, or whois not an active member of the State Bar, is guilty of amisdemeanor.

Certification of Absence or Presence of Wood-De-stroying Pests or Organisms

Section 8519. Certification as used in this sectionmeans a written statement by the licensee attesting tothe statement contained therein relating to the ab-sence or presence of wood-destroying pests or organ-isms and listing such recommendations, if any, whichappear on an inspection report prepared pursuant toSection 8516, and which relate to (1) infestation orinfection of wood destroying pests or organisms found,or (2) repair of structurally weakened members causedby such infestation or infection, and which recommen-dations have not been completed at the time ofcertification.

Any licensee who makes an inspection report pursu-ant to Section 8516 shall, if requested by the personordering such inspection report, prepare and deliverto such person or his designated agent, a certification,to provide:

(a) When the inspection report prepared pursuant toSection 8516 has disclosed no infestation or infec-tion: “This is to certify that the above property wasinspected on (date) in accordance with the Struc-tural Pest Control Act and rules and regulationsadopted pursuant thereto, and that no evidence ofactive infestation or infection was found.”

(b) When the inspection report prepared pursuantto Section 8516 discloses infestation or infectionand the notice of work completed prepared pursuantto Section 8518 indicates that all recommendationsto remove that infestation or infection and to repairdamage caused by that infestation or infection havebeen completed: “This is to certify that the property

described therein is now free of evidence of activeinfestation or infection.”

(c) When the inspection report prepared pursuantto Section 8516 discloses infestation or infectionand the notice of work completed prepared pursuantto Section 8518 indicates that the licensee has notcompleted all recommendations to remove that in-festation or infection or to repair damage caused byit: “This is to certify that the property describedherein is now free of evidence of active infestation orinfection except as follows: (describing infestationsor infections, damage or evidence thereof, excepted).”

Such certificate shall be accompanied by a copy of theinspection report prepared pursuant to Section 8516,and by a copy of the notice of work completed preparedpursuant to Section 8518, if any such notice has beenprepared at the time of the certification, or such cer-tification may be endorsed on and made a part of thatinspection report or notice of work completed.

Any Person May Legally Request Pest Control (“ter-mite”) Report

Section 8614. Any person, whether or not a party toa real property transaction, has a right to request and,upon payment of the required fee, to obtain directlyfrom the board (Structural Pest Control Board) acertified copy of all inspection reports and completionnotices prepared and filed by any structural pestcontrol operator on a particular property during thepreceding two years. Notice of this right shall beprominently disclosed on every inspection report andwork completion notice.

To Make or Cause to Be Made False or MisleadingStatements Is Unlawful

Section 17500. It is unlawful for any person, firm,corporation or association, or any employee thereofwith intent directly or indirectly to dispose of real orpersonal property or to perform services, professionalor otherwise, or anything of any nature whatsoever orto induce the public to enter into any obligationrelating thereto, to make or disseminate or cause to bemade or disseminated from this state before the publicin any state, in any newspaper or other publication, orany advertising device, or by public outcry or procla-mation, or in any other manner or means whatever, anystatement, concerning such real or personal propertyor services, professional or otherwise, or concerningany circumstance or matter of fact connected with theproposed performance or disposition thereof, whichis untrue or misleading, and which is known, or which

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by the exercise of reasonable care should be known,to be untrue or misleading, or for any such person, firm,or corporation to so make or disseminate or cause tobe so made or disseminated any such statement as partof a plan or scheme with the intent to sell such personalproperty or services, professional or otherwise, soadvertised at the price stated therein, or as so adver-tised. Any violation of the provisions of this section isa misdemeanor punishable by imprisonment in thecounty jail not exceeding six months, or by a fine notexceeding two thousand five hundred dollars ($2,500),or by both.

(Note: That is a very convoluted piece of legalese whichessentially boils down to the admonition not to make orcause to be made any false or misleading statements in yourbusiness practice, unless you want to commit a misde-meanor.)

False Advertising in California of Real Estate Lo-cated Anywhere Is Unlawful

Section 17530. It is unlawful for any person, firm,corporation or association, or any employee or agenttherefor, to make or disseminate any statement orassertion of fact in a newspaper, circular, circular orform letter or other publication published or circu-lated in any language in this state, concerning theextent, location, ownership, title or other characteris-tic, quality or attribute of any real estate located in thisstate or elsewhere, which is known to him to be untrueand which is made or disseminated with the intentionof misleading.

Nothing in this section shall be construed to hold thepublisher of any newspaper, or any job printer, liablefor any publication herein referred to unless the pub-lisher or printer has an interest either as owner oragent, in the real estate so advertised.

Prize or Give Offer — Disclosure of Intent to MakeSales Presentation

Section 17533.8. (a) It is unlawful for any person tooffer, by mail, by telephone, in person, or by any othermeans or in any other form, a prize or gift, with theintent to offer a sales presentation, without disclosingat the time of the offer of the prize of gift, in a clear andunequivocal manner, the intent to offer such salespresentation.

(b) This section shall not apply to the publisher of anynewspaper, periodical, or other publication, or anyradio or television broadcaster, or the owner or opera-tor of any cable, satellite, or other medium of commu-

nications who broadcasts or publishes an advertise-ment or offer in good faith, without knowledge of itsviolation of subdivision (a).

Provides Civil Remedies for a Violation of theSections Prohibiting False Advertising

Section 17536. (a) Any person who violates anyprovision of this chapter shall be liable for a civilpenalty not to exceed two thousand five hundreddollars ($2,500) for each violation, which shall beassessed and recovered in a civil action brought in thename of the people of the State of California by theAttorney General or by any district attorney, countycounsel, or city attorney in any court of competentjurisdiction.

(b) If the action is brought by the Attorney General,one-half of the penalty collected shall be paid to thetreasurer of the county in which the judgment wasentered, and one-half to the State Treasurer. Ifbrought by a district attorney or county counsel, theentire amount of penalty collected shall be paid tothe treasurer of the county in which the judgment wasentered. If brought by a city attorney or city prosecu-tor, one-half of the penalty shall be paid to thetreasurer of the county and one-half to the city.

(c) If the action is brought at the request of the boardwithin the Department of Consumer Affairs, the courtshall determine the reasonable expenses incurred bythe board in the investigation and prosecution of theaction.

Before any penalty collected is paid out pursuant tosubdivision (b), the amount of such reasonableexpenses incurred by the board shall be paid to theState Treasurer for deposit in the special fund of theboard described in Section 205. If the board has nosuch special fund the moneys shall be paid to the StateTreasurer.

As used in this subdivision, “board” includes commis-sion, bureau, division, and other similarly constitutedagency.

(d) As applied to the penalties for acts in violationof Section 17530, the remedies provided by thissection and Section 17534 are mutually exclusive.

That about sums up the more important aspects of theBusiness and Professions Code, taken together withthat portion called the Real Estate Law, with whichreal estate licensees need to be acquainted. We moveon now to the code which deals with criminal behav-ior.

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PENAL CODE

Definition of Theft Has Broad Applications

Section 484. (a) Every person who shall feloniouslysteal, take, carry, lead, or drive away the personalproperty of another, or who shall fraudulently appro-priate property which has been entrusted to him, orwho shall knowingly and designedly, by any false orfraudulent representation or pretense, defraud anyother person of money, labor or real or personalproperty, or who causes or procures others to reportfalsely of his wealth or mercantile character, and bythus imposing upon any person, obtains credit andthereby fraudulently gets or obtains possession ofmoney or property, or obtains the labor or service ofanother, is guilty of theft. In determining the value ofthe property obtained, for the purpose of this section,the reasonable and fair market value shall be the test,and in determining the value of services received thecontract price shall be the test. If there by no contractprice, the reasonable and going wage for the servicerendered shall govern. For the purposes of this sec-tion, any false or fraudulent representation or pre-tense made shall be treated as continuing, so as tocover any money, property or service received as aresult thereof, and the complaint, information or in-dictment may charge that the crime was committed onany date during the particular period in question. Thehiring of any additional employee or employees with-out advising each of them of every labor claim due andunpaid and every judgment that the employer has beenunable to meet shall be prima facie evidence of intentto defraud.

(b) Except as provided in Section 10855 of theVehicle Code, intent to commit theft by fraud ispresumed if one who has leased or rented the per-sonal property of another pursuant to a writtencontract fails to return the personal property to itsowner within 20 days after the owner has madewritten demand by certified or registered mail fol-lowing the expiration of the lease or rental agree-ment for return of the property so leased or rented.

(c) Notwithstanding the provisions of the subdivi-sion (b), if one presents with criminal intent identi-fication which bears a false or fictitious name oraddress for the purpose of obtaining the lease orrental of the personal property of another, the pre-sumption created herein shall apply upon the failureof the lessee to return the rental property at theexpiration of the lease or rental agreement, and no

written demand for the return of the lease or rentedproperty shall be required.

(d) The presumptions created by subdivisions (b)and (c) are presumptions affecting the burden ofproducing evidence.

(e) Within 30 days after the lease or rentalagreement has expired, the owner shall make writtendemand for return of the property so leased or rented.Notice addressed and mailed to the lessee or renterat the address given at the time of the making of thelease or rental agreement and to any other knownaddress shall constitute proper demand. Where theowner fails to make such written demand the pre-sumption created by subdivision (b) shall not apply.

Grand Theft Defined

Section 487. Grand theft is committed in any of thefollowing cases:

1. When the money, labor or real or personal prop-erty taken is of a value exceeding four hundreddollars ($400); provided, that when domestic fowls,avocados, olives, citrus or deciduous fruits, otherfruits, vegetables, nuts, artichokes, or other farmcrops are taken of a value exceeding one hundreddollars ($100); provided further that when fish,shellfish, mollusks, crustaceans, kelp, algae, orother aquacultural products are taken from acommercial or research operation which is produc-ing that product, of a value exceeding one hundreddollars ($100); provided further that where themoney, labor, real or personal property is taken bya servant, agent or employee from his principal oremployer and aggregates four hundred dollars($400) or more in any 12 consecutive month period,then the same shall constitute grand theft.

2. When the property is taken from the person ofanother.

3. When the property taken is an automobile, fire-arm, horse, mare, gelding, any bovine animal, anycaprine animal, mule, jack, jenny, sheep, lamb, hog,sow, boar, gilt, barrow or pig.

Unauthorized Conversion of Real Estate Into Per-sonal Property and Appropriation of Same is a Felony.

Section 487b. Every person who converts real estateof the value of one hundred dollars ($100) or more intopersonal property by severance from the realty ofanother, and with felonious intent to do so, steals,

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takes and carries away such property is guilty of grandtheft and is punishable by imprisonment in the stateprison.

Unauthorized Conversion of Real Estate (less than$100 in value) Into Personal Property is Theft

Section 487c. Every person who converts real estateof the value of less than one hundred dollars ($100)into personal property by severance from the realty ofanother, and with felonious intent to do so steals,takes, and carries away such property is guilty of petittheft and is punishable by imprisonment in the countyjail for not more than one year, or by a fine notexceeding one thousand dollars ($1,000), or by bothsuch fine and imprisonment.

Copying, Inducing to Copy, or Receiving Copy ofDocuments Relating to Title of Realty Without Con-sent of Owner Thereof is Theft.

Section 496c. Any person who shall copy, transcribe,photograph or otherwise make a record or memoran-dum of the contents of any private and unpublishedpaper, book, record, map or file, containing informa-tion relating to the title to real property or containinginformation used in the business of examining, certify-ing or insuring titles to real property and belongingto any person, firm or corporation engaged in thebusiness of examining, certifying, or insuring titles toreal property, shall be guilty of theft, and any personwho shall induce another to violate the provisions ofthis section by giving, offering, or promising to suchanother any gift, gratuity or thing of value or by doingor promising to do any act beneficial to such another,shall be guilty of theft; and any person who shallreceive or acquire from another any copy, transcrip-tion, photograph or other record or memorandum ofthe contents of any private and unpublished paper,book, record, map or file containing information usedin the business of examining, certifying or insuringtitles to real property, with the knowledge that thesame or the contents thereof has or have been ac-quired, prepared or compiled in violation of thissection shall be guilty of theft. The contents of any suchprivate or unpublished paper, book, record, map orfile is hereby defined to be personal property, and indetermining the value thereof for the purposes of thissection the cost of acquiring and compiling the sameshall be the test.

To Make, Benefit by, or Reaffirm Falsification Re-garding Financial Condition Punishable

Section 532a. (1) Any person who shall knowingly

make or cause to be made, either directly or indirectly,or through any agency whatsoever, any false state-ment in writing, with intent that it shall be relied upon,respecting the financial condition, or means or abilityto pay, of himself, or any other person, firm or corpo-ration, in whom he is interested, or for whom he isacting, for the purpose of procuring in any form what-soever, either the delivery of personal property, thepayment of cash, the making of a loan or credit, theextension of a credit, the execution of a contract ofguaranty or suretyship, the discount of an accountreceivable, or the making, acceptance, discount, saleor endorsement of a bill of exchange, or promissorynote, for the benefit of either himself or of such person,firm or corporation shall be guilty of a public offense.

(2) Any person who knowing that a false statementin writing has been made, respecting the financialcondition or means or ability to pay, of himself, or aperson, firm or corporation in which he is interested,or for whom he is acting, procures, upon the faiththereof, for the benefit either of himself or of suchperson, firm or corporation, either or any of thethings of benefit mentioned in the first subdivision ofthis section shall be guilty of a public offense.

(3) Any person who knowing that a statement inwriting has been made, respecting the financialcondition or means or ability to pay of himself or aperson, firm or corporation, in which he is interested,or for whom he is acting, represents on a later day inwriting that the statement theretofore made, if thenagain made on said day, would be then true, when infact, said statement if then made would be false, andprocures upon the faith thereof, for the benefit eitherof himself or of such person, firm or corporationeither or any of the things of benefit mentioned in thefirst subdivision of this section shall be guilty of apublic offense.

(4) Any person committing a public offense undersubdivision (1), (2), or (3) shall be guilty of amisdemeanor, punishable by a fine of not more thanone thousand dollars ($1,000), or by imprisonmentin the county jail for not more than six months, or byboth such fine and imprisonment. Any person whoviolates the provisions of these subdivisions by usinga fictitious name, social security number, businessname, or business address, or by falsely representinghimself or herself to be another person or anotherbusiness, is guilty of a felony and is punishable by afine not exceeding five thousand dollars ($5,000) orby imprisonment in the state prison, or by both suchfine and imprisonment, or by a fine not exceeding twothousand five hundred dollars ($2,500) or by impris-

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onment in the county jail not exceeding one year, orby both, or by both such fine and imprisonment.

(5) This section shall not be construed to precludethe applicability of any other provision of the crimi-nal law of this state which applies or may apply toany transaction.

To Give Real Property With Tickets of Admission orat Drawings May Be a Misdemeanor

Section 532c. Any person, firm, corporation or co-partnership who knowingly and designedly offers orgivers with winning numbers at any drawing or num-bers or with tickets of admission to places of publicassemblage, any lot or parcel of real property andcharges or collects fees in connection with the transferthereof, is guilty of a misdemeanor.

To Fraudulently Sell Real Property Twice BearsHeavy Penalty

Section 533. Every person who, after once selling,bartering, or disposing of any tract of land or town lot,or after executing any bond or agreement for the saleof any land or town lot, again willfully and with intentto defraud previous or subsequent purchasers, sells,barters, or disposes of the same tract of land or townlot, or any part thereof, or willfully and with intent todefraud previous or subsequent purchasers, executesany bond or agreement to sell, barter, or dispose of thesame land or lot, or any part thereof, to any otherperson for a valuable consideration, is punishable byimprisonment in the state prison.

False Statements by Licensees May Lead to Fine andImprisonment

Section 536. Every commission merchant, broker,agent, factor, or consignee, who shall willfully andcorruptly make, or cause to be made, to the principalor consignor of such commission merchant, agent,broker, factor or consignee, a false statement as to theprice obtained for any property consigned or en-trusted for sale, or as to the quality or quantity of anyproperty so consigned or entrusted, or as to anyexpenditures made in connection therewith, shall bedeemed guilty of a misdemeanor, and on convictionthereof, shall be punishable by fine not exceeding onethousand dollars ($1,000) and not less than twohundred dollars, or by imprisonment in the county jailnot exceeding six months and not less than 10 days, orby both such fine and imprisonment.

Clearly, just about any fraudulent or dishonest action(direct or indirect) that can be imagined within the activities

of the real estate market is covered in the Penal Code.Obviously, the best advice, if one is in doubt of the legalityor illegality of a possible course of action, is that “when indoubt, don’t.” Or at the very least, to seek professional legalcounsel. Fortunately, relatively few real estate profession-als fall afoul of the Penal Code, but it is important tounderstand that improper behavior can result in more thansuspension or revocation of one’s license. The state standsready to prosecute criminal behavior, in real estate activitiesas in all others.

THE CORPORATIONS CODE

Now we move on to some of the pertinent sections of theCalifornia Corporations Code. The subject under discus-sion here is real estate syndicates.

Broker Exemption

Section 25206. A broker licensed by the Real EstateCommissioner is exempt from the provisions of Section25210 (of the Corporations Code) when engaged intransactions in any interest in any general or limitedpartnership, joint venture, unincorporated associa-tion, or similar organization (but not a corporation)owned beneficially by no more than 100 persons andformed for the sole purpose of, and engaged solely in,investment in or gain from an interest in real property,including, but not limited to, a sale, exchange, trade,or development. An interest held by a husband andwife shall be considered held by one person for thepurposes of this section.

Jurisdiction Transfer of Real Estate Syndicates

Section 25706. (a) All effective permits, orders, andconsents under the Real Estate Syndicate Act, alladministrative orders relating to the Real Estate Syn-dicate Act, and all conditions imposed upon the RealEstate Syndicate Act remain in effect so long as theywould have remained in effect if such act had not beenrepealed, but shall be considered to have been filed,entered, or imposed under this law. An application toamend, extend, modify, revoke, or set aside any suchpermits, orders, or consents shall be filed under and besubject to the provisions of this division.

(b) Any application pending under the Real EstateSyndicate Act, upon the effective date of this section,shall be processed by the Real Estate Commissionerpursuant to the provisions of the Real Estate Syndi-cate Act in effect on December 31, 1977, until suchapplication is granted or denied by such commis-

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sioner.

(c) Except as expressly provided by this section,the Real Estate Syndicate Act continues to governall suits, actions, prosecutions, or proceedings whichare pending prior to, or which may be initiatedthereunder on the basis of facts or circumstancesoccurring prior to, the effective date of this section.

(d) No civil suit or action may be maintained toenforce any liability under the Real Estate SyndicateAct, unless brought within any period of limitationwhich applied the time the cause of action accrued.

(e) Judicial review of all administrative ordersunder the Real Estate Syndicate Act as to whichreview proceedings have not been commenced priorto the effective date of this section shall be governedby Section 25609, except that no review proceedingmay be commenced unless the petition is filed withinthe applicable period of limitation which applied toa review proceeding when the order was issued andexcept that judicial review of administrative ordersof the Real Estate Commissioner made pursuant tosubdivision (b) shall be governed by the provisionsof law applicable to such proceedings on December31, 1977.

Franchise Defined

Section 31005. (a) “Franchise” means a contract oragreement, either expressed or implied, whether oralor written, between two or more persons by which:

(1) A franchisee is granted the right to engage in thebusiness of offering, selling or distributing goods orservices under a marketing plan or system pre-scribed in substantial part by a franchiser; and

(2) The operation of the franchisee’s businesspursuant to such plan or system is substantiallyassociated with the franchiser’s trademark, servicemark, trade name, logotype, advertising or othercommercial symbol designating the franchiser or itsaffiliate; and

(3) The franchisee is required to pay, directly orindirectly, a franchise fee.

Unlawful to Sell Unless Registered or Exempted

Section 31110. On and after April 15, 1971, it shall beunlawful for any person to offer or sell any franchisein this state unless the offer of the franchise has beenregistered under this part or exempted under Chapter1 (commencing with Section 31100) of this part.

Unlawful to Sell Non-Exempt Franchise Unless Li-censed

Section 31210. It is unlawful for any person to effector attempt to effect a sale of a franchise in this state,except in transactions exempted under Chapter 1(commencing with Section 31100) of Part 2 of thisdivision, unless such person is: (1) identified in anapplication or amended application filed with thecommissioner pursuant to Part 2 (commencing withSection 31100) of this division, (2) licensed by theCalifornia Department of Real Estate as a real estatebroker or real estate salesman, or (3) licensed by thecommissioner as a broker-dealer or agent pursuant tothe Corporate Securities Law of 1968.

Penalty for Violating Franchise Investment Law

Section 31410. Any person who willfully violates anyprovision of this law, or who willfully violates any ruleor order under this law, shall upon conviction be finednot more than ten thousand dollars ($10,000) orimprisoned in the state prison, or in a county jail for notmore than one year, or be punished by both such fineand imprisonment; but no person may be imprisonedfor the violation of any rule or order if he proves thathe had no knowledge of the rule or order.

Obviously the foregoing sections of the Corporations Codeare important in relation to the conduct of real estatebusiness within a franchise, a business arrangement whichhas grown in importance over recent years and promises tocontinue doing so. The following brief excerpt from theLabor Code touches upon a requirement for anyone in thereal estate business who is an employer.

LABOR CODE

Employer Required to Secure Payment of LiabilityCompensation

Section 3700. Every employer except the state shallsecure the payment of compensation in one or more ofthe following ways:

(a) By being insured against liability to paycompensation in one or more insurers duly autho-rized to write compensation insurance in this state.

(b) By securing from the Director of Industrial Rela-tions a certificate of consent to self-insure, whichmay be given upon furnishing proof satisfactory to

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the Director of Industrial Relations of ability to self-insure and to pay any compensation that may be-come due to his employees.

(c) For all political subdivisions of the state, includ-ing each member of a pooling arrangement under ajoint exercise of powers agreement (but not the stateitself), by securing from the Director of IndustrialRelations a certificate of consent to self-insureagainst worker’s compensation claims, which cer-tificate may be given upon furnishing proof satisfac-tory to the director of ability to administer workers’compensation claims properly, and to pay workers’compensation claims that may become due to em-ployees. On or before March 31, 1979, a politicalsubdivision of the state which, on December 31,1978, was uninsured for its liability to pay compen-sation, shall file a properly completed and executedapplication for a certificate of consent to self-insureagainst workers’ compensation claims. The certifi-cate shall be issued and be subject to the provisionsof Section 3702.

The Health and Safety Code contains other informationpertinent to the conduct of real estate business, not the leastof which is the following.

HEALTH AND SAFETY CODE

Smoke Detectors Required; Notice To Be Given ToTransferee

Section 13113.8. (a) On and after January 1, 1986,every single- family dwelling and factory-built hous-ing, as defined in Section 19971, which is sold shallhave an operable smoke detector. The detector shallbe approved and listed by the State Fire Marshal andinstalled in accordance with the State Fire Marshall’sregulations. Unless prohibited by local rules,regulations or ordinances, a battery-operated smokedetector shall be deemed to satisfy the requirements ofthis section.

(b) On and after January 1, 1986, the transferor ofany real property containing a single-family dwell-ing, as described in subdivision (a), whether thetransfer is made by sale, exchange, or real propertysales contract, as defined in Section 2985 of the CivilCode, shall deliver to the transferee a written state-ment indicating that the transferor is in compliancewith this section. The disclosure statement shall beeither included in the receipt for deposit in a realestate transaction, an addendum attached thereto,or a separate document.

(c) The transferor shall deliver the statement re-ferred to in subdivision (b) as soon as practicablebefore the transfer of title in the case of a sale orexchange, or prior to execution of the contract wherethe transfer is by a real property sales contract, asdefined in Section 2985. For purposes of this subdi-vision, “delivery” means delivery in person or bymail to the transferee or transferor, or to any personauthorized to act for him or her in the transaction, orto additional transferees who have requested deliv-ery from the transferor in writing.

Delivery to the spouse of a transferee or transferorshall be deemed delivery to a transferee or transferor,unless the contract states otherwise.

(d) This section does not apply to any of the follow-ing:

(1) Transfers which are required to be preceded bythe furnishing to a prospective transferee of a copyof a public report pursuant to Section 11018.1 ofthe Business and Professions Code.

(2) Transfers pursuant to court order, including,but not limited to, transfers ordered by a probatecourt in the administration of an estate, transferspursuant to a writ of execution, transfers by atrustee in bankruptcy, transfers by eminent do-main, or transfers resulting from a decree of specificperformance.

(3) Transfers to a mortgagee by a mortgagor indefault, transfers to a beneficiary of a deed of trustby a trustor in default, transfers by any foreclosuresale after default, transfers by an foreclosure saleafter default in an obligation secured by a mort-gage, or transfers by a sale under a power of saleafter a default in an obligation secured by a deedof trust or secured by any other instrument contain-ing a power of sale.

(4) Transfers by a fiduciary in the course of theadministration of a guardianship, conservator-ship, or trust.

(5) Transfers from one co-owner to one or more co-owners.

(6) Transfers made to a spouse, or to a person orpersons in the lineal line of consanguinity of oneor more of the transferors.

(7) Transfers between spouses resulting from adecree of dissolution of marriage, from a decree oflegal separation, or from a property settlementagreement incidental to either of those decrees.

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(8) Transfers by the Controller in the course ofadministering the Unclaimed Property Law pro-vided for in Chapter 7 (commencing with Section1500) of Title 10 of Part 3 of the Code of CivilProcedure.

(9) Transfers under the provisions of Chapter 7(commencing with Section 3691) or Chapter 8(commencing with Section 3771) of Part 6 ofDivision 1 of the Revenue and Tax Code.

(e) No liability shall arise, nor any action bebrought or maintained against, any agent of anyparty to a transfer of title, including any person orentity acting in the capacity of an escrow, for anyerror, inaccuracy, or omission relating to the disclo-sure required to be made by a transferor pursuant tothis section. However, this subdivision does notapply to a licensee as defined in Section 10011 of theBusiness and Professions Code, where the licenseeparticipates in the making of the disclosure requiredto be made pursuant to this section with actualknowledge of the falsity of the disclosure.

(f) Except as otherwise provided in this section, thissection shall not be deemed to create or imply a dutyupon a licensee, as defined in Section 10011 of theBusiness and Professions Code, or upon any agentof any party to a transfer of title, including anyperson or entity acting in the capacity of an escrow,to monitor or ensure compliance with this section.

(g) No transfer of title shall be invalidated on thebasis of a failure to comply with this section, and theexclusive remedy for the failure to comply with thissection is an award of actual damages not to exceedone hundred dollars, exclusive of any court costsand attorney’s fees.

(h) Local ordinances requiring smoke detectors insingle-family dwellings may be enacted or amended.However, the ordinances shall satisfy the minimumrequirements of this section.

(i) For the purposes of this section, “single-familydwelling” does not include a manufactured home asdefined in Section 18007, a mobilehome as definedin Section 18008, or a commercial coach as definedin Section 18001.8.

(j) This section shall not apply to the installation ofsmoke detectors in dwellings intended for humanoccupancy, as defined in and regulated by Section13113.7 of the Health and Safety Code, as added bySenate Bill No. 1448 in the 1983-84 Regular Ses-sion.

Section 18029.6 On and after January 1, 1986, allused manufactured homes, used mobilehomes, andused commercial coaches which are sold shall have asmoke detector which is operable on the date of trans-fer of title. The department may promulgate regula-tions to carry out the provisions of this section.


1. According to the Business & Professions Code, License Offenses, Section 119 any person who does any of the following:1) displays or cause or permits to be displayed or has in his possession any canceled, revoked, suspended, fictitious, orfraudently altered license, or any document simulating a license or purporting to be or to have been issued as a license,2) lends his license to any other person or knowingly permits the use thereof by another; and 3) displays or representsany license not issued to him as being his license, is guilty of a:

a. felonyb. misdemeanorc. tortd. all of the above

2. Which of the following is permitted?

a. Failing or refusing to surrender to the issuing authority upon its lawful demand any license whichhas been suspended, revoked, or canceled.

b. obtaining the real estate salesperson license by person 21 years old.c. permitting any unlawful use of a license issued to one.d. and reproducing a license.

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3. As used in the Business & Professions Code, the word “license” does not include “certificate”, “permit”, “authority”and “registration”.

a. trueb. false

4. In which section of the B&P Code, it is stated that licensees under the provisions of this code are subject to disciplinaryaction for discriminating on the basis of: race, color, sex, religion, ancestry, physical handicap, marital status or nationalorigin.

a. 119b. 125.6c. 475d. 480

5. Section 475 lists which of the following as reasons for denial of a license?

a. knowingly making a false statement of fact required to be revealed in an application for licenseb. commission of any act involving dishonesty, fraud, or deceit with the intent to substantially benefit

himself or another, or substantially injure anotherc. both “A” and “B”d. neither “A” nor “B”

6. A board may deny, suspend, revoke, or otherwise restrict a license on which of the following grounds?

a. removing from the examination room any examination materialsb. unauthorized mechanical reproduction of any portion of the actual licensing examinationc. both “A” and “B”d. neither “A” nor “B”

7. A board may deny, suspend, revoke, or otherwise restrict a license on the basis of which of the following?

a. communicating with any other examinee during the administration of a licensing examinationb. copying answers from another examinee or permitting one’s answers to be copied by anotherc. having in one’s possession during the administration of the licensing exam any books, equipment,

notes, written or printed materials or data of any kind, other than the exam materials distributedd. all of the above

8. “To practice law” includes:

a. all of the followingb. appearances in court as a lawyerc. giving legal advice and counseld. the preparation of legal instruments.

9. Making or causing to be made false or misleading statements in connection with real estate is punishable by:

a. a fine of $2,500 onlyb. imprisonment onlyc. imprisonment in the county jail not exceeding six months, or by a fine not exceeding $2,500 or

by bothd. none of the above

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10. It is legalized to offer by mail, by telephone, in person or by any other means or in any other form, a prize or gift, withthe intent to offer a sales presentation, without disclosing at the time of the offer of the prize or gift, in a clear and unequivocalmanner, the intent to offer such sales presentation.

a. trueb. false

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12NATIONAL LAW: IMPORTANT FEDERAL LAWSAFFECTING REAL ESTATE

THE CONSTITUTION

The federal Constitution is the means by which legislaturesare prevented from exercising capricious authority of regu-lation. Because of the Constitution, legislative bodies maynot arbitrarily pass laws taking the life, liberty or propertyof citizens. Each statute must be justified as necessary andproper for the protection or advancement of a genuinepublic interest. You will remember that legislative bodieshave “police power,” the power which is described by theSupreme Court in the following way:

“By means of it, the legislature exercises a supervision overmatters affecting the common weal and enforces the obser-vance by each individual member of society of duties whichhe owes to others and the community at large. The posses-sion and enjoyment of all rights are subject to this power.Under it the state may prescribe regulations promoting thehealth, peace, morals, education and good order of thepeople, and legislate so as to increase the industries of thestate, develop its resources and add to its welfare andprosperity.”

In short, police power is the power in the state to enact lawswithin constitutional limits to promote the order, safety,health, morals and general welfare of the commonwealth.The various real estate laws which we have examined are allupheld by this police power, and it is important to rememberthat they have been enacted within constitutional restraints.

Under our system of government the United States Govern-ment has only those powers granted to it by the federalConstitution. This includes all powers necessary and properto carry into effect the powers expressly granted. This latterdoctrine of implied powers is necessary for the federalgovernment to function. Implied powers have been vastlyincreased in recent years by all three branches of the federalgovernment.

The states have all powers of sovereignty except thoseexclusively granted to the United States, those prohibited

to them by the federal Constitution and those powers limitedby their own respective constitutions. Hence the statelegislative branch is possessed of the entire police power ofthe state except as so limited.

By the California Constitution this power of legislation isalso vested in counties, cities and towns to make andenforce within their respective limits all such local police andother regulations as are not in conflict with general laws.

THE BILL OF RIGHTS

The first 10 amendments to the United States Constitution,all adopted in 1791, expressly provide that “the powers notdelegated to the United States by the Constitution norprohibited to it by the states are reserved to the statesrespectively or to the people.” It is these first 10 amend-ments that are commonly known as the Bill of Rights. Theyare limitations solely upon the power of the United Statesand not upon the power of the states.

Our State Constitution, however, has its own Bill of Rightsprotecting the people in the same manner.

The legislature may not impose onerous, unreasonable orunnecessary burdens upon persons, property or business.Where a law operates upon all persons and property simi-larly situated, it is not obnoxious to the constitutionalprovisions guaranteeing equal protection of the law to allpersons and classes of persons, or guaranteeing persons’freedom of contract, or guaranteeing that no person shall bedeprived of life, liberty or property without due process oflaw.

In no country do the citizens have more liberty than inAmerica. Yet liberty does not mean license to do as onepleases. Each person must so use his own rights, privilegesand property so as not to injure another. Where our libertyis restricted, it is in the public interest and this power oflegislation, as mentioned, is called police power. Just as

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individual states enact laws authorized by police power, sothe federal government will do likewise when it is necessaryto protect the health, well being, morals, etc. of the nationat large.

THE CIVIL RIGHTS ACT OF 1968

Perhaps it is appropriate to begin a discussion of federallaws affecting real estate with a brief mention of the CivilRights Act of 1968. This very important law is discussed inthe context of fair housing, along with other important anti-discrimination statutes, in chapter fifteen. You will also finda discussion of the Civil Rights Act in Chapter 13 in thecontext of the Jones v. Mayer Supreme Court decision.Therefore, we will forego any further mention of the CivilRights Act at this point, except to underscore that this lawhas a very significant bearing on the conduct of real estatebusiness. As you read chapters 13 and 15, the reasons forthis will become increasingly clear.

TRUTH IN LENDING ACT

The Truth in Lending Act became effective July 1, 1969. Theprincipal purpose of the Act is to promote the informed useof consumer credit by requiring creditors to disclose creditterms in order to enable consumers to make comparisonsbetween various credit sources. To implement the Act theBoard of Governors of the Federal Reserve System issueda regulation known as Regulation Z.

After a decade of experience with the Act and Regulation Zit became clear that the requirements placed too great aburden on creditors, provided too many disclosures forconsumers, and fostered too much litigation. This promptedthe Congress in 1980 to amend the Act by passing the Truthin Lending Simplification and Reform Act. To reflect theamendments to the Act the Federal Reserve Board substan-tially revised Regulation Z. Compliance with the simplifiedAct and revised regulation Z became mandatory on October1, 1982.

At the time revised Regulation Z was promulgated, theFederal Reserve Board adopted model disclosures for closed-end transactions such as purchases of real property, andmodel language for certain other disclosures. The Boardalso announced that its staff would no longer providewritten responses to individual requests for interpretationsof the Regulation, but would issue a staff commentary fromtime to time to address questions of interpretation.

The creditor is responsible for furnishing Truth in Lendingdisclosures to the consumer. Regulation Z now defines a

creditor as a person who extends consumer credit more than25 times a year or more than 5 times a year for transactionssecured by a dwelling. The credit extended must be subjectto a finance charge or be payable by written agreement inmore than four installments. Another requirement that mustbe met to render a person a creditor is that the obligation beinitially payable on its face or by agreement to that person.

In its definition of “creditor” revised Regulation Z included“arranger of credit,” which it defined as a person whoarrange or the extension of credit by persons who did notmeet the “creditor” definition. The Federal Reserve Board,in considering the necessity for a more specific descriptionof the type of activity which would constitute “arranger ofcredit,” inquired whether real estate brokers who arrangeseller financing of homes should be considered “arrangersof credit.” In 1982, Congress resolved the question bypassing the Garn-St. Germain Depository Institutions Act,which amended the Truth in Lending Simplification andReform Act of 1980 by deleting “arranger of credit” from thedefinition of “creditor.” To implement the amendment theFederal Reserve Board amended revised Regulation Z byremoving “arranger of credit” from the “creditor” definition,effective October 1, 1982. The effect of the Board’s actionis to release real estate brokers or other arrangers of creditfrom the responsibility for providing Truth in Lendingdisclosures, unless such persons otherwise come withinthe definition of “creditor.”

EXEMPTIONS

There are two basic types of transactions that are exemptfrom coverage under Regulation Z. The first exemption is forcredit extended primarily for a business, commercial, oragricultural purpose. If property is not, or is not intendedto be, owner-occupied, and the creditor extends credit toacquire, improve, or maintain a rental property, regardlessof the number of family units, the transaction will be consid-ered to be for a business purpose.

Special rules apply for credit to acquire, improve, or maintainrental property that is, or will be, owner-occupied within ayear. If the property contains more than two family units andthe purpose of the credit is to acquire the property, the creditis deemed to be for a business purpose. However, if thecredit is extended to improve or maintain the property, it isdeemed to be for a business purpose if it contains more thanfour housing units. These rules should not be construed toprevent an extension of credit for property containing fewerthan the aforesaid prescribed number of units from beingconsidered business credit. Credit involving fewer num-bers of units may be considered business credit dependingon the circumstances of the transaction.

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The second exemption is for credit over $25,000. The dollarlimitation does not apply if the loan is secured by realproperty, or by personal property which is used or expectedto be used as the consumer’s principal dwelling.

FORM OF DISCLOSURES

Regulation Z requires all Truth in Lending disclosuresconcerning the credit sale or loan to be grouped togetherand segregated from other information. The Regulationprohibits the inclusion of any information not directlyrelated to the disclosures required by Regulation Z. It alsoprovides that any itemization of the amount financed bemade separately from the other required disclosures. Inaddition, Regulation Z requires that the terms “financecharge” and “annual percentage rate” shall be more con-spicuous than other required disclosures.

The disclosures may be segregated by putting them on aseparate sheet of paper, or if the disclosures are on acontract or other document they may b e set off from otherinformation by outlining them in a box or by printing themin a different type style, with bold print dividing lines, or witha different color background. The portion of the sale or loandocument that contains these disclosures is commonlycalled “the federal box.”

Before its revision, Regulation Z required that all Truth inLending disclosures be made on one side of a page. Underrevised Regulation Z, the Truth in Lending disclosures mustbe separate from everything else, but may be continued fromone page to another.

Regulation Z contains several model forms, including formswhich contain disclosures required for transactions involv-ing loan assumptions, variable rate mortgages, and gradu-ated payment mortgages. Lenders may duplicate theseforms or modify them by including disclosures required forparticular transactions.

REQUIRED DISCLOSURES

There are as many as eighteen disclosures required byRegulation Z for closed-end credit transactions such asmortgage loans. A creditor is only required to make thosedisclosures that are relevant to a particular transaction. Thedisclosure statement must have simple descriptive phrasesnext to five of the most important items disclosed. Theseitems are: the amount financed, the finance charge, theannual percentage rate, the total of payments, and, in creditsales, the total sale price. Regulation Z provides suggested

phrases for the five required terms. These phrases are notrequired to be used verbatim.

The following is a summary of the required disclosures.

Identity of Creditor

The creditor making the disclosures must be identified.

Amount Financed

Regulation Z requires the use of the term “amount financed”together with a brief description of the term. The suggestedphrase is “the amount of credit provided to you or on yourbehalf.”

Itemization of Amount Financed

The disclosure of the itemization of the amount financedmay be eliminated in those cases where good faithestimates of settlement costs have been supplied fortransactions subject to the Real Estate Settlement Proce-dures Act (RESPA). If the transaction is not subject toRESPA, the creditor must either provide a written itemiza-tion of the amount financed, or provide a statement thatthe consumer has the right to receive a written itemizationof the amount financed together with a space for theconsumer to indicate whether an itemization is desired.However, many state laws require that the creditor providethe itemization even if the consumer does not specificallyrequest it. The itemization must be separate from the“federal box.”

Finance Charge

Regulation Z requires the use of the term “finance charge”together with a brief description such as “the dollar amountthe credit will cost you.”

The requirement that the components of the finance chargebe itemized has been eliminated from revised Regulation Z.In fact, the new rules prohibit creditors from itemizing thefinance charge with the other disclosures. Only the totalamount may be given. In addition, Regulation Z requires thedisclosure of the finance charge in all real estate transac-tions. Prior to its revision Regulation Z did not require eitherthe total dollar amount of the finance charge or the total ofpayments to be disclosed on a first loan to finance thepurchase of the borrower’s dwelling.

The finance charge must include any charge payable di-rectly or indirectly by the consumer and imposed directly orindirectly by the creditor as an incident to or a condition ofthe extension of credit. Regulation Z provides examples ofcharges that must be included in the finance charge and

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examples of charges that are excluded from the financecharge.

Charges of particular importance in real estate and residen-tial mortgage transactions which Regulation Z lists amongthose charges included in the finance charge, are:

1. interest

2. loan fees, assumption fees, finders fees and buyerspoints

3. investigation and credit report fees

4. premiums for mortgage-guaranty or similar insurance

Charges which are not finance charges include seller’spoints, and the following fees, when occurring in a transac-tion secured by real property or in a residential mortgagetransaction (which may include the purchase of a mobilehome), if they are bona fide and reasonable in amount:

1. fees for title examination, abstract of title, title insur-ance, property survey, and similar purposes

2. fees for preparing deeds, mortgages, and reconvey-ance, settlement, and similar documents

3. notary, appraisal and credit report fees

4. amounts required to be paid into escrow or trusteeaccounts if the amounts would not otherwise be includedin the finance charge

ANNUAL PERCENTAGE RATE

The disclosure of the annual percentage rate requires theuse of that particular term together with a brief descriptionsuch as “the cost of your credit as a yearly rate.” In a regulartransaction, the disclosed annual percentage rate is consid-ered accurate if it is not more than 1/8 of 1 percentage pointabove or below the actual annual percentage rate deter-mined. However, in irregular transactions, the annualpercentage rate is considered accurate if it is not more than1/4 of 1 percentage point above or below the actual percent-age rate determined. Irregular transactions include multipleadvances, irregular payment periods (other than an odd firstmonth), or irregular payment amounts (other than an oddfirst or final payment).

VARIABLE RATE

In the case of variable rate loans such as adjustable ratemortgages, where the annual percentage rate originallydisclosed to the consumer may later increase, there must be

a disclosure of:

1. the circumstances under which the rate may increase

2. any limitations on the increase

3. the effect of an increase

4. an example of the payment terms that would result froman increase. The variable rate disclosures required byother federal agency regulations, such as those of theFederal Home Loan Bank Board or Comptroller of theCurrency, may be substituted for the Regulation Z re-quirements.

PAYMENT SCHEDULE

The creditor must disclose the number, amounts, and timingof payments scheduled to repay the obligation. RegulationZ provides for an abbreviated disclosure of payment sched-ule for transactions in which a series of payments varysolely because of the application of a finance charge to theunpaid principal balance. This situation arises most fre-quently in graduated payment mortgages or in mortgageswhere mortgage insurance premiums are based on theunpaid principal balance. In these transactions creditorsneed to disclose only the amount of the largest and smallestpayments in the series and that the other payments mayvary.

TOTAL OF PAYMENTS

Regulation Z requires the creditor to use the term “total ofpayments” as well as a brief description such as “the amountyou will have paid when you have made all scheduledpayments.” The total of payments (which is the sum of thepayments disclosed in the payment schedule) must bedisclosed for all real estate transactions under revisedRegulation Z.

DEMAND FEATURE

Regulation Z requires that if the obligation has a demandfeature, that fact be disclosed. This disclosure is requiredonly for a demand feature contemplated by the parties aspart of the legal obligation. Transactions that convert to ademand status as a result of the consumer’s default are notwithin the purview of this requirement. Neither is a due-on-sale clause.

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obtained from the creditor and stating that the insurancemay be obtained from a person of the consumer’s choice.The disclosure may be made on the disclosure form, or, atthe creditor’s option, on a document different from thedisclosure form.

CERTAIN SECURITY CHARGES

If disclosed, taxes and fees paid to a public official withrespect to a security interest may be excluded from thefinance charge. The charges may be aggregated, or may bebroken down by individual charge. No special form isrequired for this disclosure, which could be labeled “filingfees and taxes.” This disclosure may be made on thedisclosure form, or, at the creditor’s option, on a documentdifferent from the disclosure form.

REFERENCE TO CONTRACT TERMS

A new provision under Regulation Z requires that creditorsinclude in their disclosures a statement that refers consum-ers to appropriate contract documents for information aboutnon-payment, default, the right to accelerate the maturity ofthe obligation, and prepayment rebates or penalties. At thecreditor’s option the statement can also include a referenceto the contract for more information about security interestsand the creditor’s assumption policy.

ASSUMPTION POLICY

In a residential mortgage transaction, the creditor must statewhether a subsequent purchaser of the dwelling from theconsumer may be permitted to assume the remainingobligation on its original terms.

REQUIRED DEPOSIT

An example of a required deposit is a savings accountcreated as a condition of a loan. If a creditor requires theconsumer to maintain the deposit as a condition of theextension of credit, the creditor must state that the annualpercentage rate does not reflect the effect of the requireddeposit.

TIME OF DISCLOSURES

Regulation Z requires disclosures to be made before con-summation of the credit transaction, which is usually thetime of closing. Consummation is defined as the time that aconsumer becomes contractually liable on a credit obliga-

TOTAL SALE PRICE

In a credit sale, (a sale in which the seller is a creditor)Regulation Z requires the use of the term "total sale price"together with a brief description such as "the total price ofyour purchase on credit, including your downpayment of$..."

PREPAYMENT PENALTIES ANDREBATES

Creditors are required to make a disclosure of the existenceof a penalty on prepayment in full. Even if a creditor doesnot charge a prepayment penalty, a statement to that effectmust be included. However, this disclosure is only requiredif the finance charge is computed from time to time byapplication of a rate to the unpaid principal balance. In anyother type of transaction a statement must be includedindicating whether the consumer is entitled to a rebate ofany portion of the finance charge in the event of prepay-ment. It is no longer necessary to disclose a particularmethod of rebate, such as the rule of 78’s.

LATE PAYMENT CHARGE

A disclosure is required only for those charges imposedbefore maturity due to a late payment. The disclosure mayreflect the fact that late charges may be determined as eithera percentage or a specified dollar amount.

SECURITY INTEREST

Regulation Z requires the creditor to disclose what securityinterest is or will be retained in the property purchased in thetransaction, or other property. In transactions in which thecredit is being used to purchase the collateral the creditoris required to give only a general identification such as “theproperty purchased in this transaction.” In the revision ofRegulation Z the requirement that a security interest in after-acquired property must be disclosed was deleted.

INSURANCE

If charges for credit life, accident, health, or loss-of-incomeinsurance are excluded from the finance charge there mustbe a disclosure of the premium and that the insurance is notrequired to obtain credit, and the consumer must sign orinitial a request for the insurance. If the charges for propertyinsurance are excluded from the finance charge there mustbe a disclosure setting forth the cost of the insurance if

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tion as determined by law.

Certain residential mortgage transactions. Creditors asa whole have been encouraged through liberalized provi-sions on estimates in revised Regulation Z, to use earlydisclosures in order to enable consumers to have ample timeto shop for credit. However, creditors involved in residen-tial mortgage transactions subject to the Real Estate Settle-ment Procedures Act, known as RESPA, are required tomake Regulation Z disclosures before consummation, ordeliver or place them in the mail within three business daysafter receiving the consumer’s written application, which-ever is earlier. If the estimates turn out to be inaccurate, itmay be necessary to make another disclosure at consum-mation.

RESPA

We will deal in greater detail with RESPA, the Federal RealEstate Settlement Procedures Act, later in this chapter, butsince it has been mentioned here in the context of timerequirements for Truth in Lending disclosures, the follow-ing brief discussion will clarify the matter.

One of the main purposes of the Federal Real Estate Settle-ment Procedures Act is to provide purchasers of realproperty with information to take the mystery out of thesettlement (closing) process and thereby assist purchasersin obtaining the most in settlement services for the moneyspent.

Under RESPA, lenders are required to distribute informationbooklets authorized by the U.S. Department of Housing andUrban Development (HUD). Among other things, thebooklet describes the settlement process and the nature ofthe charges which are generally incurred by the principalsin the transaction. The booklet sets forth information as torights and remedies available under RESPA; it describesunfair or illegal settlement practices and provides an item-by-item explanation of closing costs and services.

The Act covers sales or transfers or one-to-four familyhomes, condominiums and cooperatives financed by fed-erally-related loans. RESPA regulates the maximum amountsa lender can require a borrower to deposit in escrow (or trustor impound account) for payment of future taxes andinsurance. RESPA prohibits the giving or acceptance of anycompensation or “thing of value” for the referral of anysettlement service business.

REDISCLOSURE

To resume our discussion of Truth in Lending disclosures,or Regulation Z disclosures, in general, an event occurringafter delivery of the disclosures to the consumer, whichrenders the disclosures inaccurate, does not result in aviolation of Regulation Z and does not require redisclosure.However, if disclosures are given before the date of con-summation and a subsequent event makes them inaccurateprior to consummation, redisclosure is required beforeconsummation, if the actual annual percentage rate is aboveor below the disclosed rate by more than 1/8 of 1 percent ina regular transaction, or more than 1/4 of 1 percent in anirregular transaction, as described earlier.

If redisclosure is required, the creditor has the option ofproviding the consumer with either a complete set of newdisclosures or a disclosure of only the terms that vary fromthose originally disclosed.

Two events occurring after consummation that require thecreditors to make new disclosures are a refinancing or anassumption.

REFINANCING

Revised Regulation Z states that a “refinancing” is a newtransaction requiring new disclosures to the consumer, andthat a refinancing occurs when an existing obligation issatisfied and replaced by a new one undertaken by the sameconsumer. In addition, the Regulation sets forth examplesof what does not constitute a refinancing, which include,among others: (1) a renewal of a single payment obligationwith no change in the original terms, (2) a reduction in theannual percentage rate with a corresponding change in thepayment schedule, and (3) a change in the payment sched-ule or a change in collateral requirements as a result of aconsumer’s default or delinquency.

ASSUMPTION

Revised Regulation Z states that an “assumption” is a newtransaction requiring new disclosures to the consumer, andthat an assumption occurs when a new party becomesobligated on an existing obligation. Whenever a creditoragrees in writing to accept a new consumer as a primaryobliger on an existing residential mortgage transaction,before the assumption occurs the creditor must make newdisclosures to the new obliger based on the remainingobligation. The mere addition of a guarantor to an obligationfor which the original consumer remains primarily liabledoes not constitute an “assumption.”

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Consumer’s Right to Rescind

As a general rule, the right of rescission applies to allconsumer credit transactions where the obligation is se-cured by a lien against the consumer’s principal dwelling.A consumer can have only one “principal dwelling” at atime. Since the definition of a dwelling is not limited to realproperty, transactions involving mobile homes can berescindable even if they are treated as personal propertyunder state law.

EXEMPTIONS

There are a number of important exemptions applicable toresidential real estate transactions. One of these exemptionsconcerns “residential mortgage transactions.” Under thisexemption the right of rescission does not apply to transac-tions made to finance acquisition or initial construction ofthe consumer’s principal dwelling and secured by thatdwelling, regardless of lien status. In other words, secondmortgages for the purpose of financing an acquisition areno longer subject to the right of rescission.

Another exemption is for a refinancing by the same creditorof a loan already secured by the principal dwelling, providedno new money is advanced. If new money is advanced, thetransaction is rescindable to the extent of the new money ifthe loan is secured by the consumer’s principal dwelling.This exemption is most likely to arise in connection withrenewals, extensions, or refinancing of balloon notes.

By restricting the right of rescission to transactions inwhich the secured property is currently used as theconsumer’s principal dwelling, revised Regulation Z hasexempted from the rescission requirements loans securedby property that is merely expected to be used as a principaldwelling, such as vacant lots, vacation homes or retirementhomes.

NOTICE OF RIGHT TO RESCIND

The creditor must provide each consumer entitled to rescind(any consumer with an “ownership interest” in theprincipal dwelling subject to the security interest) with twocopies of the notice of right to rescind.

Creditors are not required to use any specific languagewhen making rescission disclosures. Regulation Z containsa model rescission form that meets the requirements.

RESCISSION PERIOD

The consumer has the right to rescind until midnight of thethird business day following the last of these events tooccur:

1. consummation of the transaction

2. delivery of all material Truth in Lending disclosures

3. delivery of the notice of right to rescind

A business day is any calendar day, except Sundays andfederally legal holidays.

WAIVER OF RIGHT TO RESCIND

Regulation Z provides that the consumer may waive theright to rescind if the consumer determines that the exten-sion of credit is needed to meet a bona fide personal financialemergency. To waive the right the consumer must give thecreditor a dated written statement that describes the emer-gency and specifically waives the right to rescind. The useof preprinted waiver forms is prohibited by the Regulation.Prior to its revision the Regulation provided that the rightto rescind could not be waived unless the consumer’swelfare, health, safety, or property was jeopardized. Byeasing the strictness of this test, revised Regulation Zallows consumers prompt access to their money.

Advertising Consumer Credit

Anyone placing an advertisement for consumer credit mustcomply with the advertising requirements of the Truth inLending Act and Regulation Z. Thus, real estate brokersand home builders who place ads must comply even if theyare not creditors in the financing being advertised. (Readthis paragraph again.)

Disclosures in credit advertisements must be made “clearlyand conspicuously.” This standard requires that disclo-sures be made in a reasonably understandable form, butdoes not prescribe the type size or the placement of disclo-sures in the ad.

An advertisement may state specific credit terms only if thecreditor is actually prepared to offer those terms. A creditormay advertise terms that will be offered for only a limitedperiod, or terms that will become available at a future date.

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ADVERTISING THE RATE OF FINANCECHARGE

If the finance charge in a credit advertisement is expressedas a rate, it must be stated as an “annual percentage rate,”using that term. If a component of that finance charge isinterest computed at a simple annual rate, that rate may alsobe included. However, it must not be displayed moreconspicuously than the annual percentage rate. Forexample, an advertisement for mortgage credit may includethe contract rate of interest together with the annual per-centage rate, which reflects insurance, discounts, points,and other charges, as well as interest.

VARIABLE RATE MORTGAGES

If the annual percentage rate offered may be increased afterconsummation of the transaction, the advertisement muststate that fact. An advertisement for a variable rate mort-gage with an initial annual percentage rate of 14% that mayvary after settlement without any limit could be advertisedas “14% annual percentage rate, subject to increase aftersettlement.” This disclosure may be used for any type ofmortgage instrument with a variable interest rate. It may notbe used in advertisements of graduated payment mortgagesthat have a fixed interest rate and payments that mayincrease during the loan. Fixed-rate “buydowns” and “step-rate” mortgages are also not variable rate mortgages. Thesemortgages involve different interest rates in effect duringthe life of the loan, all of which are known at settlement. Avariable rate transaction involves future interest rates un-known at settlement.

The Official Staff Commentary to Regulation Z, which ispublished by the staff of the Federal Reserve Board, setsforth special rules for advertising rates other than simpleannual or periodic rates, i.e., for “buydowns” and “pay-ment” or “effective” rates.

BUYDOWNS

A seller or creditor may advertise a reduced simple interestrate resulting from a “buydown” so long as the advertise-ment shows the limited term to which the reduced rateapplies and the simple interest rate that applies to thebalance of the term, as well as the annual percentage rate thatis determined in accordance with the commentary to Section226.17(c) of Regulation Z.

PAYMENT OR EFFECTIVE RATES

In some transactions the consumer’s payments may bebased upon an interest rate lower than the rate at whichinterest is accruing. The lower rate may be referred to as theeffective rate, payment rate or qualifying rate. A creditor orseller may advertise such rates if the advertisement containsall of the following information: the term of the reducedpayment schedule, the interest rate upon which the reducedpayments are calculated, the rate at which the interest is infact accruing, and the annual percentage rate. The adver-tised annual percentage rate that must accompany this ratemust take into account the interest that will accrue but willnot be paid during this period. For example, an advertise-ment may state “An effective first year interest rate of 10percent. Interest being earned at 14 percent. Annualinterest rate 15 percent.”

Advertising Terms that Require Additional Disclosure

If only the annual percentage rate is disclosed, additionaldisclosures are not required. If, however, an advertisementcontains any one of the following terms, then the ad mustalso disclose other credit terms:

1. the amount or percentage of any downpayment

2. the number of payments or period of repayment

3. the amount of any payment

4. the amount of any finance charge

These provisions apply even if the so-called “triggeringterm” is not stated explicitly but may be readily determinedfrom the advertisement. An ad that states “80% financing”implies that a 20 percent downpayment is required. How-ever, an ad that states “100% financing” requires no furtherdisclosures because no downpayment is required.

If any triggering term is used, then the following threedisclosures must also be included in the advertisement:

1. the amount or percentage of the downpayment

2. the terms of repayment; and

3. the “annual percentage rate,” using that term spelledout in full. If the annual percentage rate may be increasedafter consummation of the credit transaction, that factmust be disclosed.

Regulation Z also permits the advertiser to substituteexamples of one or more typical extensions of credit forrequired disclosures that are specific to a particulartransaction. Where typical examples are used, the adver-

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tisement must contain all of the terms that apply to eachexample. The examples must be typical of the credit termsthat are actually available.

The Official Staff Commentary to Regulation Z providesadditional guidance and illustrative examples of thesegeneral rules. It also prescribes special rules for advertisingcomplex transactions such as graduated payment mort-gages and wrap-around loans.

In addition, the Federal Trade Commission publishes amanual for business entitled, “Complying With the Law:How to Advertise Consumer Credit.” This manual is avail-able from the U.S. Government Printing Office.

Administrative Enforcement

The Federal Trade Commission enforces the Truth in Lend-ing Act and Regulation Z, the implementing regulation ofthe act, with respect to real estate brokers, mortgage loanbrokers, mortgage bankers, and other creditors and adver-tisers not regulated by the following federal agencies,which have jurisdiction over the indicated financial institu-tions:

• Comptroller of the Currency (national banks)

• Federal Deposit Insurance Corporation (FDIC-insuredbanks that are not members of the Federal Reserve Sys-tem)

• Federal Reserve Board (state member banks of theFederal Reserve System)

• Federal Home Loan Bank Board (FSLIC-insured sav-ings institutions and members of the Federal Home LoanBank System not insured by FDIC), and

• National Credit Union Administration (federally char-tered credit unions).

The FTC may determine that a creditor or advertiser hasviolated law and order the creditor or advertiser to cease anddesist from further violations. Violations of such an admin-istrative order may result in a $10,000 civil penalty each daythe violation continues.

If creditors or advertisers engage in practices which theyknow the Commission has previously determined to beunfair or deceptive, the Commission may file an action infederal district court seeking penalties of up to $10,000 foreach violation.

In addition, where a creditor inaccurately discloses anannual percentage rate or finance charge, the FTC canrequire the creditor to adjust the accounts of persons to

whom credit was extended to assure that the obligors willnot be required to pay a finance charge in excess of thefinance charge actually disclosed or the dollar equivalent ofthe disclosed annual percentage rate, whichever is lower.Section 108(e) of the Truth in Lending Act sets forth theconditions under which these administrative restitutioncases may be brought as well as defenses the creditor canassert in such cases.

Civil Liability

Under the amended Truth in Lending Act a creditor may beliable to a consumer for a statutory penalty of twice theamount of the finance charge, with a minimum of $100 anda maximum of $1,000. Statutory liability applies only toseven specific violations: failing to property disclose theright of rescission, where applicable; and the improperdisclosure of the amount financed, the finance charge, theannual percentage rate, the total of payments, the paymentschedule, and the security interest taken by the creditor. Inaddition, the creditor is liable for actual damages suffered bythe consumer and, if the consumer prevails, for theconsumer’s reasonable attorney fees and costs.

The creditor can avoid such liability if it notifies the con-sumer within 60 days after discovering the error and adjuststhe account to reflect the correct annual percentage rate orfinance charge, provided the consumer has not institutedsuit, or the creditor has not received written notice of itserror, prior to its notification.

Creditors are not liable for violations that were unintentionaland resulted from bona fide errors. They must show thatthey have procedures reasonably adapted to prevent sucherrors. Examples of bona fide errors include clerical,calculation, computer malfunction and programming, andprinting errors. Errors of legal judgment do not qualify asbona fide errors.

Creditors are deemed to be in compliance with the non-numerical disclosure provisions of the Truth in Lending Actif the creditor (1) uses any appropriate model form or clauseas published by the Federal Reserve Board, or (2) uses anysuch model form or clause and changes it by (a) deleting anyinformation that is not required by the Act, or (b) rearrangingthe format, if in making such deletion or in rearranging theformat, the creditor does not affect the substance, clarity, ormeaningful sequence of the disclosure.

CRIMINAL LIABILITY

A creditor is also subject to a fine of not more than $5,000or imprisonment for not more than one year, or both, for

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willfully and knowingly violating the Act or Regulation Z bygiving false or inaccurate information, failing to providerequired disclosures, or consistently understating the an-nual percentage rate.

CONCLUSION

The foregoing summary of the Truth in Lending Act andRegulation Z incorporates the Federal Reserve Board’sofficial staff commentary issued in October, 1981, and theupdates to the commentary published September 17, 1982and April 6, 1983. The summary is intended to be a guide tothe new law; it does not cover all contingencies. Anyoneneeding additional information may contact the FederalTrade Commission, Box 36005, 450 Golden Gate Avenue,San Francisco, California 94102. Telephone number: (415)556-1270.

RESPA

In the context of Truth in Lending and necessary disclo-sures, we should here take up the matter of the Real EstateSettlement Procedures Act (RESPA) in more detail. TheFederal Real Estate Settlement Procedures Act of 1974, asamended by the Real Estate Settlement Procedures ActAmendments of 1975, became law on June 30, 1976. The Actsets forth special disclosure requirements for nonexemptlenders who provide loan funds in transactions involvingthe sale or transfer of one-to-four unit dwellings. The Actrequires specific procedures and forms for settlements(closing costs) involving most home mortgage loans,including FHA, VA, and loans from financial institutionswith federally-insured deposits. Most of the requirementsare the responsibility of the lender. Some of them, however,directly affect the real estate licensee.

Applicability.

RESPA is applicable to all federally related mortgage loans.Federally related mortgage loans are those which meet thefollowing requirements:

1. The proceeds of the loan are used in whole or in part tofinance the purchase by the borrower, or other transfer oflegal title of the Mortgaged Property. Execution of aninstrument creating a security interest is not consideredto be a transfer of legal title for purposes of this part;

2. The loan is secured by a first lien or other first securityinterest covering real estate, including a fee simple, lifeestate, remainder interest, ground lease or other long-termleasehold estate;

(a) upon which there is located a structure designedprincipally for the occupancy of from 1 to 4 families; or

(b) upon which there is located a mobilehome; or

(c) upon which a structure designed principally foroccupancy of from 1 to 4 families is to be constructedusing proceeds of the loan; or

(d) upon which there will be placed a mobilehome to bepurchased using the proceeds of the loan; or

(e) which is a condominium unit (or a first lien coveringa cooperative unit) designed principally for the occu-pancy of from 1 to 4 families);

3. The loan is made by a lender which is:

(a) a lending institution, the deposits or accounts ofwhich are insured by the Federal Savings and LoanCorporation (FSLIC), the Federal Deposit InsuranceCorporation (FDIC), or any other agency of the FederalGovernment;

(b) a lending institution which is regulated by theFederal Home Loan Bank Board or any other agency ofthe Federal Government or where the loan is made inwhole or in part, or insured, guaranteed, supplemented,or assisted in any way, by HUD or agency of the FederalGovernment, or is made in connection with a housing orurban development program administered by HUD orother agency of the Federal Government, or is intendedto be sold by the originating lender to the FederalNational Mortgage Association (FNMA), the Govern-ment National Mortgage Association (GNMA), or theFederal Home Loan Mortgage Corporation (FHLMC),or to a financial institution which intends to sell themortgage to FHLMC.

(c) a non-exempt “creditor” making or investing morethan $1,000,000 per year in residential loans. (Creditor isdefined in Section 103(f) of the Consumer Credit Protec-tion Act (15 U.S.C. 1602(f).

Exemptions.

RESPA does not apply to:

(1) A loan to finance the purchase of transfer of a propertyof 25 or more acres;

(2) A home improvement loan, loan to refinance, or otherloan where the proceeds are not used to finance thepurchaser or transfer of legal title to the property;

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(3) A loan to finance the purchaser or transfer of a vacantlot, where not proceeds of the loan are to be used for theconstruction of a 1 to 4 family residential structure or forthe purchase of a mobilehome to be placed on the lot;

(4) An assumption, novation or sale or transfer subject toa pre-existing loan, except (a) the use of or conversion ofa construction loan to a permanent mortgage loan tofinance purchaser by the first user and (b) where a loanassumed or taken subject to is modified or assumptionfees exceed $50;

(5) A construction loan, except where the constructionloan is used as or converted to a permanent loan to financepurchase by the first user;

(6) A permanent loan the proceeds of which will be usedto finance the construction of a 1 to 4 family structure,where the lot is already owned by the borrower or borrow-ers;

(7) A loan to finance the purchase of a property where theprimary purpose of the purchase is for resale; or

(8) Execution of a land sales contract or installment landcontract where the legal title is not transferred to thepurchaser upon execution. However, a loan to finance theacquisition of title pursuant to a land sales contract is aFederally Related Mortgage Loan.

One of the main purposes for the Federal Real EstateSettlement Procedures Act (RESPA) is to provide purchas-ers of real property with information to take the mystery outof the settlement (closing) process and thereby to assistpurchasers in obtaining the most in settlement services forthe money spent.

Under RESPA, lenders are required to distribute informationbooklets authorized by the U.S. Department of Housing and

Urban Development. Among other things, the bookletdescribes the settlement process and the nature of thecharges which are generally incurred by the principals in thetransaction. The booklet sets forth information as to rightsand remedies available under RESPA; it describes unfair orillegal settlement practices and provides an item-by-itemexplanation of closing costs and services.

The Act covers sales or transfers of one-to-four familyhomes, condominiums and cooperatives financed by feder-ally-related loans. RESPA regulates the maximum amountsa lender can require a borrower to deposit in escrow (or trustor impound accounts) for payment of future taxes andinsurance. RESPA prohibits the giving or acceptance of anycompensation or “thing of value” for the referral of anysettlement service business.

Developer Prohibition. Civil Code Section 2995 prohibitsany real estate developer (defined as any person or entityhaving an ownership interest in real property which isimproved by such person or entity with single-family dwell-ings which are offered for sale to the public) from requiringas a condition precedent to the transfer of real propertycontaining a single-family residential dwelling that escrowservices effectuating such transfer be provided by anescrow entity in which the developer has a “financialinterest.” The term “financial interest” means ownership orcontrol of 5 percent or more of an escrow entity. The lawimposes on developers violating its provisions a liability fordamages in an amount equal to the greater of $250 or threetimes the charge for escrow services, plus attorney’s feesand costs. Any waiver of the prohibition is void as againstpublic policy.


1. Police power is the power in the state to enact laws within constitutional limits to promote what?

a. order and safety c. the general welfare of the commonwealthb. health and morals d. all of the above

2. What prevents legislatures from exercising capricious authority of regulation?

a. the Constitution c. the various administrationsb. the courts d. none of the above

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3. What powers does the United States Government have?

a. retained powers c. all powersb. granted powers d. none of the above

4. The states have what powers?

a. granted powersb. powers derived from the U.S. Constitutionc. all powers of sovereignty except those granted to the U.S. governmentd. none of the above

5. By the California Constitution, police power, or the power of legislation, is vested in:

a. the state, counties, cities and towns c. the state and the countiesb. the state only d. none of the above

6. The Bill of Rights is found where?

a. the Declaration of Independence c. the first 10 amendments to the Constitutionb. the last 10 amendments to the Constitution d. none of the above

7. The principal purpose of the Truth in Lending Act is:

a. to protect mortgage lendersb. to eradicate false advertisingc. to promote the informed use of consumer credit by requiring creditors to disclose credit terms in

order to enable consumers to make comparisons between various sources.d. none of the above

8. The purpose of Regulation Z is:

a. to give lending institutions more latitude in their lending practicesb. to enforce fair housing standardsc. to implement the Truth in Lending Actd. none of the above

9. Which is true about Regulation Z?

a. it defines a creditor as a person who extends consumer credit more than 25 times a year or morethan 5 times a year for transactions secured by a dwelling

b. it says that the credit extended must be subject to a finance charge or be payable by writtenagreement in more than four installments

c. neither “A” nor “B”d. both “A” and “B”

10. The Garn-St. Germain Depository Institutions Act amended the Truth in Lending Simplification and Reform Actof 1980 by:

a. deleting “arranger of credit” from the definition of “creditor”b. adding “arranger of credit” to the definition of “creditor”c. making real estate brokers “creditors”d. none of the above

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13CASE LAW: IMPORTANT COURT DECISIONSIN REAL ESTATE

ANDRADE DEVELOPMENT CO. V.MARTIN

MANAGEMENT AND CONTROL

Prior to January 1, 1975, the husband of a marriage generallyhad the power to manage and control the real and personalcommunity property with the exception of the wife’s earn-ings. Community property was subject to the debts ofwhoever had management and control. Community prop-erty was liable for: both pre- and post-marital debts ofhusband; only pre-marital debts of the wife, in which casethe husband’s earnings could not be held liable.

On and after January 1, 1975, each spouse was given co-equal management and control of the community property.An exception to co-equal management and control existswhere one of the spouses manages a community personalproperty business. This spouse has sole management andcontrol of the business. Community property is liable forthe debts of either spouse contracted after marriage. Fordebts contracted prior to marriage, community property isliable for those debts except that portion of the communityproperty comprised of the earnings of either spouse.

Neither spouse may make a gift without the consent of theother. Neither spouse may encumber the furniture, furnish-ings or fittings of the home, or the clothing of the otherspouse or minor children without the written consent of theother spouse. As in prior law, both must joint in theconveyance, encumbrance or leasing (one year or more) ofcommunity real property. Civil Code Section 5127 providesthat both spouses either personally or by duly authorizedagent must joint in executing any instrument by whichcommunity real property or any interest therein is sold,leased or encumbered.

In Andrade Development Co. v. Martin the court found acontract null and void which was signed only be a husbandand purported to sell community property. Where realproperty is owned by more than one person, licensees

Numerous court decisions have established a substantialbody of “case law” relating to real estate matters. Some aremore important than others. In this chapter we will examinea number of the more important decisions and legal opin-ions, and discuss how they apply to the everyday businessof real estate.

ANDERSON AND MILES V. RESNICK

PUBLIC LIABILITY

Even though an employer or principal may not be personallyat fault, they can be held liable in damages for the negligentconduct of employees while they are acting within thegeneral scope of their employment. This liability finds itsmost notable illustrations in cases involving automobileaccidents of employees while driving on the employer’sbusiness. If the wrongdoer is an independent contractor,however, the person who hired him or her would notordinarily be liable for injuries caused by negligence of theindependent contractor.

In view of the difficult question of law as to the true legalstatus of any particular salesperson and the great risksinvolved, serious consideration must be given by brokersto carrying public liability insurance covering all theirsalespersons and office personnel regardless of employ-ment contract clauses attempting to create an “independentcontractor” status. The courts will look to the relationshiprather than to labels placed upon it by the parties.

In August 1980 in Anderson and Miles v. Resnik, theCalifornia Second District Court of Appeals said, A sales-man, insofar as his relationship with his broker is con-cerned, cannot be classified as an independent contractor.Any contract which purports to change that relationshipis invalid as being contrary to the law. The CaliforniaSupreme Court in late October declined to hear the Resnikcase, an action which allows to stand the Appeal Courtdecision in the matter.

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should obtain all necessary signatures to the contract whenthe owners sign the listing and acceptance.

Each spouse has the right to dispose of his or her one-halfof the community property by will. Failing to do so, thesurviving spouse gets the decedent’s half by intestatesuccession.

BARKIS V. SCOTT

REAL PROPERTY SALES CONTRACT

A real property sales contract is an instrument by which theseller agrees to convey title to real property to the buyer afterthe buyer has met certain conditions specified specified inthe contract and which does not require conveyance of titlewithin one year.

Primarily, a sales contract is used where a buyer can makeonly a small down payment plus monthly installment pay-ments over a period of time. When the buyer has paid overtime an agreed-upon sum, the buyer is entitled to a deed fromthe seller. The buyer is called the vendee; the seller is calledthe vendor.

This device, variously designated “Installment Sales Con-tract,” “Agreement to Convey,” “Agreement for Purchaseand Sale,” “Land Sale Contract,” or “Land Contract of Sale,”meets the definition of a contract set forth in Section 1549of the California Civil Code. Such agreement is invalidunless the same or some note or memorandum thereof is inwriting and subscribed to by the party being charged or bythat party’s agent.

The presumed advantage of such an instrument to a selleris the ease with which seller may eliminate a purchaser’sinterest in the event of a default. This presumption, how-ever, was considerably weakened by the court’s decision inBarkis v. Scott (34 Cal.2d 116, 208 P.2d that California CivilCode Section 3275 was a sufficient barrier to harsh andunreasonable foreclosure proceedings. Since seller is stillthe “vestee” seller remains in a position to deed the propertyto another or to further encumber it.

When selling a parcel of land under a sales contract whichis not recorded, the seller is prohibited from otherwiseencumbering the parcel to an aggregate amount exceedingthe amount due under the contract without the writtenconsent of the purchasing parties.

Real property sales contracts must recite the number ofyears required to complete payment in accordance with theterm of the contract and, if tax estimate is made, the basis forit.

When selling improved or unimproved real property undera real property sales contract, the seller or assignee mustapply installment payments from the buyer first to paymentswhich might be due on obligations secured by an encum-brance or encumbrances on the property.

The law requires that each sales contract relating to pur-chase of real property in a subdivision shall clearly set forththe legal description of the property, all the existing encum-brances at the date of the contract, and the terms of thecontract.

The seller faces the problems of difficulty in "clearing title"and regaining possession of the property if the buyerdefaults. In the light of this fact, except in the special areaof large land developments, the advantage which a landcontract may have held as a security device seems to havedissipated in favor of the use of a deed of trust with powerof sale.

The disadvantages of a sales contract to the buyer areseveral, the chief of which are:

1. Covenants in restriction of assignment or transfer ofthe land contract which hamper or prevent the transfer ofbuyer’s interest therein.

2. A prevailing opinion among financial institutions thata land contract is poor collateral.

3. After full performance the buyer may receive defectivetitle or no title at all, although normally the contract willrequire delivery of a policy of title insurance. The buyermay have to pay the premium for this.

4. Lack of assurance that the seller has good title at thetime the contract is made, coupled with the fact that priorto full performance by the buyer the buyer may not rescindthe contract on these grounds.

5. If during the interim from the execution of the contractto full performance by the buyer, the seller should beadjudicated a bankrupt, die and title pass to heirs, beadjudicated an incompetent or have a conservator ap-pointed, the buyer can with reasonable certainty antici-pate time consuming, frustrating, and expensive litigationbefore obtaining a deed and policy of title insurance.

Many of these disadvantages are largely eliminated byusing a contract secured by a deed of trust or a three-partyinstrument, where a trustee is appointed in the same way asin a deed of trust, coupled with the title insurance insuringthe equitable title of the vendee and the legal title of vendor.

A buyer shall be engaged to prepay all or any part of the

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balance due on any real property sales contract with respectto the sale of land which has been subdivided into residen-tial lot or lots which contain a dwelling for not more than fourfamilies entered into on or before January 1, 1969; provided,however, that the seller, by an agreement in writing with thebuyer, may prohibit prepayment for up to a 12-month periodfollowing the sale. Any waiver by the buyer of the provi-sions of this section shall be deemed contrary to publicpolicy and shall be unenforceable and void; provided,however, that any such waiver shall in no way affect thevalidity of the remainder of the contract. A buyer may beobligated to pay a prepayment penalty.

COHEN v. SHEARER

CANCELATION OF PURCHASECONTRACT

Escrows are voluntarily completed or terminated either byfull performance and closing or by mutual consent andcancellation. It has been held that all the performancesrequired by escrow instructions must be performed withinthe time limit set forth in the escrow agreement, and theescrow agent has no authority to enforce or accept theperformance after the time limit provided in the instructions.When the time limit provided in the escrow instructions hasexpired and either party to the escrow has not performed inaccordance with the terms of the escrow agreement, theparties may cancel escrow and are entitled to the return oftheir respective papers, property and documents from theescrow agent. Care must be exercised to avoid escrowholder determining whether anyone has not performed.Without clear and precise instructions governing the returnof anything, escrow should obtain joint and mutual con-sents of all parties.

Moreover, cancellation of the escrow may not cancel thepurchase contract. In Cohen v. Shearer (1980) 108 C.A. 3d939, a Court of Appeal decided that cancellation of anescrow by mutual agreement of the parties did not rescindthe purchase contract between them.

Therefore, a real estate broker seeking to carry out theprincipal’s decision to cancel a contract of purchase or saleshould be sure the other party to the contract agrees inwriting to do precisely that and not simply settle for writtenadvice to cancel the escrow. As happened in the Cohen casecited, if a purchase agreement is not canceled along with theescrow, either party to the agreement may retain the right tospecific enforcement of the contract or for the recovery ofdamages.

ESTATE OF LEVINTHAL

PROBATE SALES AND COMMISSIONS

From time to time a broker may have occasion to make a saleof property included in the estate of a decedent. Lessfrequently a broker may represent a Board of Education orthe State of California. Finally, a broker may be innocentlyembroiled in a lawsuit by merely holding assets claimed bytwo or more contesting parties. The following commentsthrow some light on these special situations.

The representative of the estate of a decedent may initiatea probate sale by seeking offers to purchase directly orthrough one or more brokers. The executor or administratormay sell the real property of an estate where it is found tobe in the best interests of the estate. Whether the sale ispublic or private, it must be advertised by publication orposting of the notice. (Probate Code Sections 780, 782)Acceptance of an offer by the estate representative issubject to probate confirmation. The representative of theestate of the decedent with court permission may grant anexclusive right to sell the property for a period of not toexceed 90 days.

Initial information concerning the property can befurnished by the attorney for the estate. If a bank or trustcompany has been appointed representative, interestedpersons may apply directly to the trust office of theinstitution for information. If a public administrator is theestate representative, inquiry may be made at that office.

An offer to purchase must be for a price which is not lessthan 90% of the property’s appraised value (appraisal datewithin one year of sale) and it must conform to statutoryrequirements, the rules of the local superior court governingprobate sales and the terms stated in the public notice ofsale. The court will make efforts to assure the executor oradministrator of the estate has exposed the property to themarket.

When an offer has been received which the representativehas accepted subject to court confirmation, the representa-tive will petition the court to confirm the sale. When thecourt has set the matter for hearing, any interested personmay bid at the time of the hearing. To open the biddingthere must be an increase over the bid returned to the courtfor confirmation which is at least 10% of the first $10,000 bidand 5% of the bid in excess of $10,000. Once the bidding hasbeen opened, the court in its discretion may permit thebidding to continue on lesser raises until it declares a bidto be the highest and best obtainable. The sale will then beconfirmed by the court to the maker of that bid.

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The person making the offer returned to court for confirma-tion, and the broker representing that person, should attendthe confirmation hearing whether or not that person plansto participate in higher bidding for the property. All pro-spective bidders and brokers should be familiar with localrules of court governing advance bidding, deposits re-quired and similar matters.

Ordinarily after court confirmation of a sale, normal escrowprocedures are used to consummate the transaction on theterms and conditions approved by the court.

The payment of commissions to brokers participating inprobate sales is generally within the discretion of theprobate court subject to certain standards prescribed bystatute. For example Section 785 of the Probate Codeprovides that the compensation of the agent producing asuccessful bidder shall not exceed one-half of the differencebetween the amount of the bid in the original return and theamount of the successful bid provided that the limitationshall not apply;y to any compensation of the agent holdinga contract with the estate representative. In the case of anoverbid ion open court at the confirmation hearing, it is amatter of importance to the broker that the court be informedthat a licensed b broker has produced the bid in question.If a purchaser not represented by an agent has his overbidconfirmed, the listing broker receives a full commission onthe original bid only.

The court in its order confirming the sale will set forth theamount of commission to be paid and the division of thecommission if more than one broker is to be compensated.(Probate Code Section 761)

Needless to say, where an agent is also the purchaser, thecourt will carefully examine “the substantiality” of theagent’s acts in putting together “the best deal” for theestate, especially where the agent expects a commission.(Estate of Levinthal, 105 Cal.App. 3d 691, 1980).

The Education Code provides that the governing body ofany school district may pay a commission to a licensed realestate broker who procures a buyer for real property sold bythe board. The sealed bid for the property must be accom-panied by the name of the broker to whom the commissionis to be paid and by a statement of the rate or amount of thecommission.

In the event of a sale on a higher oral bid to a purchaserprocured by a qualified licensed real estate broker, otherthan the broker who submitted the highest written proposal,the board will allow a commission on the full amount forwhich the sale is confirmed.

Note: One-half of the commission on the amount of thehighest written proposal will be paid to the broker whosubmitted it, and the balance of the commission on thepurchase price to the broker who procured the purchaser towhom the sale was confirmed.

From time to time the State of California has real property fordisposal. When bids received for this property, afteradvertising, do not equal its appraised value, the Depart-ment of Finance may authorize employment of a licensed realestate broker to effect the sale on a commission basis. Thisprocedure does not apply to surplus real property of theState Division of Highways.

The real estate broker as escrow holder has often beennamed as a defendant in a law suit to recover money whichthe broker is holding as a trustee in a transaction. All toooften the licensee must retain counsel and pay the expenseof defending in such a suit.

Under the Code of Civil Procedure, where the only reliefsought against one of several defendants is payment of astated amount of money, such defendant may upon affida-vit that he or she is a mere stakeholder with no interest in theamount and that parties to the action have made conflictingdemands upon the defendant, and upon notice to the otherparties, apply to the court for an order discharging saidbroker from liability and dismissing defendant-broker fromthe action. This is known as an inter-pleader action. Thedefendant must however deposit the amount in dispute withthe clerk of the court. The court may then dismiss this suitas to defendant-broker.

FIDELITY FEDERAL SAVINGS & LOANASSOC. V. DE LA CUESTA AND

WELLENKAMP V. BANK OF AMERICAAND LA SALA V. AMERICAN SAVINGS

AND LOAN ASSOCIATION

(PRE-EMPTED BY THE GARN-ST. GERMAIN DEPOSI-TORY INSTITUTIONS ACT) RECENT HISTORY OF DUE-ON-SALE ENFORCEMENT IN CALIFORNIA

The California Supreme Court ruled in Wellenkamp v. Bankof America (1978) 21 Cal. 3d 943 that a state charteredinstitutional lender could automatically enforce a due-on-sale provision in its loan documents to accelerate paymentof a loan when residential property securing the loan is soldby the borrower. Under this ruling an institutional lenderhad to demonstrate that enforcement was necessary toprotect against impairment of its security or the risk ofdefault (credit considerations).

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In its opinion the court reviewed prior decisions having todo with the enforceability of the due-on-sale clauses, par-ticularly La Sala v. American Savings and Loan Association(1971) 5 Cal. 3d 864, and Tucker v. Lassen Savings and LoanAssociation, (1974) 12 Cal. 3d 629. In La Sala furtherencumbering of real property through a second loan wasfound to be insufficient justification for acceleration of thematurity date while in Tucker, sale of the property under areal property sales contract (installment contract) was heldto be insufficient justification.

A flurry of California court cases followed Wellenkampaddressing issues it left unresolved, such as the applicabil-ity of Wellenkamp to private lenders, commercial as well asresidential property, and federal regulations pre-emptingstate laws on due-on-sale provisions. The Wellenkamp rulewas found applicable, and it generally prevailed.

However, federally chartered banks and savings and loanassociations successfully asserted that the validity andautomatic exercisability of due-on-sale provisions is appli-cable to them. This contention was upheld by the UnitedStates Supreme Court in Fidelity Federal Savings and LoanAssociation v. de la Cuesta (1982) 50 USLW 4916.

In de la Cuesta, the High Court ruled on June 28, 1982, thatfederally-chartered savings and loan associations can en-force acceleration provisions in their real property loanspursuant to regulations of the Federal Home Loan BankBoard regardless of conflicting state statutes and courtdecisions. This decision gave a competitive advantage tofederally chartered associations. Congress then extendedthe enforcement right to other associations and lenders inOctober of 1982.

On October 15, 1982, the President signed into law the Garn-St. Germain Depository Institutions Act of 1982, whichbecame effective upon signing. With certain exceptions thelaw makes due-on-sale provisions in real property securedloans automatically enforceable by all types of lenders,including non-institutional private lenders.

The federal law pre-empts state laws and judicial decisionswhich restrict enforceability of due-on-sale provisions infinancing instruments, including those cited above, andassures that due- on-sale clauses in real property loansoriginated after October 15, 1982 can be automaticallyenforced.

EXCEPTIONS

Under the Garn-St. Germain Bill, certain loans originated byother than federal saving and loans and federally charteredcredit unions remain assumable until October 15, 1985,unless changed by the state Legislature or the Comptrollerof the Currency for National Banks. These loans are referredto as window period loans, and are loans which wereoriginated, assumed, or transferred “subject-to” during thetime state laws prevented automatic enforcement of due-on-sale clauses. In California this was the period of timebetween (1) the date on which it by constitutional provisionor statute or a decision of its highest court prohibitedunrestricted enforcement of due-on-sale clauses and (2)October 15, 1982, the effective date of the Garn Act — the“window period.”

The beginning date for the “window period” has not beenofficially established by the California Legislature as of thiswriting, but there seems to be general agreement thatAugust 25, 1978, the date the California Supreme Courthanded down the Wellenkamp decision, is the beginningdate of the "window period." The Comptroller of the Cur-rency has established the period from August 25, 1978 toOctober 15, 1982 as the "window period" for national banks.

The apparent reason for the “window period” is to avoid theharsh effects that automatic enforceability of due-on-saleclauses would be likely to have upon persons who enteredinto real property purchase and financing transactions inreliance upon state statutory or decisional law restrictingthe enforceability of due-on-sale clauses. The new lawleaves it for each state to determine how best to amelioratethe effect of the legislation upon those persons who enteredinto transactions believing — on the basis of state law orjudicial decisions — that due-on-sale clauses were notenforceable by lenders without a showing of securityimpairment.

ENFORCEABILITY

As this book goes to press the following appears to be thesituation concerning automatic enforceability of due-on-sale provisions in loan instruments:

1. Federally-chartered savings and loan associations mayautomatically enforce due-on-sale clauses in promissorynotes and deeds of trust which they originated whilefederally chartered.

2. With certain exceptions of limited application all loansoriginated after October 15, 1982, may be accelerated bythe lender upon transfer of the property securing the loan.

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3. Loans originated before the “window period” which aresecured by real property that was not transferred duringthe window period may be accelerated upon transfer of theproperty.

4. Loans originated, assumed or taken “subject to”during the “window period” are governed by Californialaw and remain assumable under the rationale ofWellenkamp and related California decisional law for aperiod of up to three years after October 15, 1982, unlessand until the California Legislature (for state-charteredlending institutions and individuals) or the Comptroller ofthe Currency (for national banks) acts to adopt or modifythe “window period” provisions of the law. Licensees areadvised to stay abreast of all developments in this veryimportant area.

Some of the notable exceptions to automatic enforceabilityof due-on-sale clauses enumerated under the new lawinclude the following:

1. Creation of a junior trust deed or lien on property whichis not related to a transfer of the rights of occupancy.

2. Transfer of the property to a joint tenant.

3. Transfer to a relative of a borrower resulting from thedeath of the borrower.

4. Transfer into an inter vivos trust of which the borroweris a beneficiary if it does not relate to a transfer of rightsof occupancy of the property.

Assumptions of real property, however, may still be nego-tiable. The Garn-St. Germain Act specifically encourageslenders to allow loan assumptions at blended, the contract,or below-market-rate of interest, and nothing in Garn is to beinterpreted to prohibit any such assumptions. Brokersshould proceed cautiously in the course of negotiating anytransaction in which a buyer is to assume or take “subjectto” an existing loan.

Lenders may still require the buyer to satisfy its creditstandards and complete customary credit forms; but thelender can not modify the loan terms, charge fees and pointsor add costs, except for a credit investigation. If the buyerrefuses to provide the information within 15 days of thelender’s written request, a lender may then enforce the due-on-sale provision in its loan.

SPECIAL PROVISION

Since June 30, 1972, a clause in any trust deed or mortgagethat provides for acceleration of the due date of the obliga-tion upon sale, conveyance, alienation, lease, succession,

assignment or other transfer of property (containing four orfewer residential units) subject to the trust deed or mortgageis invalid unless the clause is printed, in its entirety, in bothtrust deed or mortgage and the promissory note or otherdocument evidencing the secured obligation.

REED V. KING AND GEORGE BALLPACIFIC, INC. V. COLDWELL BANKER

& COMPANY

DUTIES OF AGENT TOWARD PRINCIPAL

A real estate agent owes a loyalty to the agent’s client andis prohibited from personally profiting by virtue of theagency except through the receipt of the agreed compensa-tion for services. This fiduciary obligation of the agent toa client throughout their dealings is probably the mostsignificant aspect of their relationship. The courts haveconsistently equated the duty of an agent to a principal withthe duty owed by a trustee to a beneficiary.

The Civil Code provides that, in all matters connected witha trust, a trustee is bound to act in the highest good faithtoward trustee’s beneficiary and may not obtain any advan-tage over the latter by the slightest misrepresentation,concealment, duress or adverse pressure of any kind.

An agent may not unite the agent’s personal and represen-tative characters in the same transaction. The act of an agentwithin the scope of the agent’s authority is the action of theprincipal. In exercising that authority the agent is dealingwith property or other matters of grave concern to theprincipal. The agent has the principal’s confidence and istherefore not permitted to enjoy the fruits of any advantagewhich the agent might take of this confidential relationship.As a fiduciary, the agent in relations with the principal isbound by law to exercise the utmost good faith, loyalty andhonesty.

A real estate licensee who is the agent of a seller owes a dutyof fair and honest dealing to the buyer. This is a duty whichthe courts have held to exist by reason of the agent’s statusas a real estate licensee. The duty may also be found to existby way of the agent’s fiduciary obligation to the seller sinceany misrepresentation or material concealment on the partof the agent may afford the buyer grounds upon which toseek rescission or damages from the seller. An agent mustnot withhold from a prospective buyer material facts regard-ing the property which are known to the agent and unknownto the buyer and unascertainable by the buyer throughdiligent attention or observation. For example, in Reed V.King (1983) 145 Cal.App.3d 261, seller and his agent wereheld to have a duty to disclose to buyer that murder had

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taken place on the property in question ten years earlier.

In a fiduciary relationship it is the duty of the agent in whomsuch trust and confidence are reposed by the agent’sprincipal, to make full disclosure of all material facts relatingto the subject matter of the agency. (Note: Although agentsare obliged to fully disclose to a principal all material factsthat might influence the principal’s decision concerningany real property transaction, they should be aware of aCalifornia Attorney General’s opinion (Op. 69/263) explain-ing that race, creed, or color is not a material fact and shouldnot be disclosed, even though the furnishing of suchinformation is at the request of the owner.)

The courts have held that negotiating a sale to the agent’swife without making a full disclosure to the principal is aviolation of the duty which the agent owes to disclose allmaterial facts. A later case was concerned with the failureof the real estate broker to disclose to the seller that thebuyer was the broker’s mother-in-law. The court stated thatwhere a seller’s real estate agent is obligated to disclose toagent’s principal the identity of the buyer, and where thebuyer is not the agent but has with the agent such blood,marital or other relationship which would suggest a reason-able possibility that the agent could be indirectly acquiringan interest in the property, such relationship is a material factwhich the agent must disclose to the agent’s principal.

An agent’s duty includes full disclosure and explanation offacts necessary for the principal to make an intelligentdecision. In some circumstances that duty may include aduty to investigate. In George Ball Pacific, Inc. v. ColdwellBanker & Company (1980) 117 Cal.App.3d 248, 172Cal.Rptr. 597, the court found that the broker had made aninaccurate representation when he arranged a lease withoutknowing whether the lessor owned the property beingleased.

An agent, moreover, is under a duty to use reasonable careand skill, to obey directions of the employer and to renderan account on demand. A gratuitous agent (i.e., one who isnot paid for the agent’s services) cannot be compelled toperform the undertaking, but such an agent who actuallyenters upon performance must also obey instructions andis bound to exercise the utmost good faith in dealing withthe principal.

MORE CASES GUIDING THEFIDUCIARY RELATIONSHIP

RATTRAY V. SCUDDER

THOMAS V. SNYDER

REMPEL V. KELLS

JORGENSEN V. BEACH ‘N’ BAY REALTY, INC.

An agent cannot act for two principals in negotiations witheach other unless both have knowledge of and consent tothe dual agency. Such conduct is opposed to public policyin that it places the agent in a position where the agent mayrepresent conflicting interests. Therefore, regardless of theagent’s honesty or the fairness of the contract in theparticular case, the agent cannot recover commissions fromeither. Carrying the principle further, it has been held bythe Supreme Court that the undisclosed dual agency is aground for rescission by either principal without any neces-sity of showing injury. Even when the dual agency positionis known and consented to by all parties, the agent owes toeach party the same duty of utmost good faith, honesty, andloyalty in the transaction, and the same duty to disclose anymaterial fact that would affect the judgment of either party.

This rule of agency is specifically mentioned in theCalifornia Real Estate Law, and its violation is cause forrevocation or suspension of a real estate license. (SeeSection 10176(d) of Business and Professions Code).

Furthermore, the courts have unequivocally held that anagent cannot acquire any secret interests adverse to theprincipal; that the agent cannot lawfully make a secretpersonal profit out of the subject of the agency; that if anagent conceals the agent’s interest in the property sold theagent is liable to the principal for all secret profits made bythe agent; that where an agent falsely represents the figureat which property can be purchased and then purchases itfor self at a lower figure, charging the principal the largerprice and pocketing the difference, the agent will be com-pelled to disgorge the secret profits; that the fact that theprincipal was willing to pay the larger amount or that theproperty may have been worth the amount charged theprincipal, is immaterial.

The decision in the case of Rattray v. Scudder is a clearexposition of the attitude of the Supreme Court of our statetoward the fiduciary relationship between the broker andthe principal. In that case a real estate broker was retainedby an owner of realty to find a purchaser for the property.The broker violated fiduciary duties where, without disclos-ing to the principal that broker had found a purchaser, brokermade misrepresentations that broker was unable to sell theproperty at the agreed price, and by untruthful and mislead-ing statements induced the principal to reduce the price ofthe property and to sell it to the brokerage firm of whichbroker was a member. In commenting on duties and goodfaith of a broker the court said:

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The law of California imposes on...the real estateagent the same obligation of undivided service andloyalty that it imposes on a trustee in favor of hisbeneficiary. Violation of his trust is subject to the samepunitory consequences that are provided for a dis-loyal or recreant trustee...

A real estate agent when acting as such is duty bound toinform a principal of every fact material to the principal. Inthis fiduciary capacity the agent owes an affirmative dutyof disclosure. Not only does failure to abide by thesefundamentals place the agent in a position of jeopardizingthe agent’s license, but the courts have held that the agentis not entitled to any profit from transactions in which suchagent is guilty of violating these principles.

In the case of Thomas v. Snyder, California’s Court ofAppeal stated:

What is required of an agent toward his principal isclearly set forth in the text found in 1 CaliforniaJurisprudence, page 789, as follows: ‘The propositionis conclusively settled that an agent is charged in fullmeasure with the duty of good faith in his dealings withhis principal, touching the subject of his authority. Theanimating principle in this proposition is that no oneshould, nor will he be permitted to enjoy the fruits of anadvantage taken of a fiduciary relation whose domi-nant characteristic is the confidence reposed in oneperson by another. The law requires perfect good faithon the part of agents not only in form but in substance,and not only from agents receiving compensation, butalso from gratuitous agents. Indeed, the rule is sofamiliar as to be trite that the obligation of an agentto his principal demands of him the strictest integrityand most faithful service.

The requirements of law governing the relation of agent andprincipal is to the effect that the agent cannot be allowed toprofit at the expense of the agent’s principal, no matterwhether the result is reached by misrepresentation or con-cealment or other fraudulent device.

In the case of Rempel v. Kells a California appellate courtheld that an agent obtaining profits by fraudulent conductand concealment from the principal is not even entitled torecover expenses incurred by the agent in connection withthe transaction.

The duty of a real estate broker to disclose material factsknown by him to the seller employing him was againconfirmed in the recent appellate court case Jorgensen v.Beach ‘n’ Bay Realty, Inc., (125 C.A. 3d 155). In that case,the listing broker presented an offer to his seller that wasonly about 7 percent less than the listing price. The brokerpresented the offer on behalf of a speculator for whom the

broker hoped to act in future transactions. When the brokerpresented the offer, he informed the seller that he was alsoacting on behalf of the offeror and was therefore a dual agentin the transaction. The seller wished to counter offer on theprice, but the broker recommended that she not do so. Theseller followed this recommendation. The sale was consum-mated. Shortly thereafter the purchaser resold the propertythrough the broker at a 13.5 percent profit.

In reversing the nonsuit for the broker, the appellate courtheld that the broker did not fully discharge his fiduciaryobligations to the seller by simply disclosing that he wasacting as a dual agent in the transaction. It was the broker’sduty to disclose all material facts known to him which mighthave affected the seller’s decision to accept the offer. Thecourt suggested that the facts known to the broker whichmight have affected the seller’s decision included (1) thefact that the buyer was acquiring the property for invest-ment purposes and (2) the fact that the broker had asubstantial personal stake in negotiating a bargain pur-chase for the buyer.

WALTERS V. MARLER

OBLIGATIONS OF REAL ESTATESALESPERSONS

A real estate salesperson to the same extent as thesalesperson’s broker is subject to the obligations arisingout of the fiduciary relationship between the broker and thebroker’s principal. The salesperson is the agent of thebroker and is employed to carry on licensed activities onbehalf of the broker. In performing these acts for which alicense is required, the salesperson must disclose to thebroker’s principal all of the information salesperson haswhich may affect the principal’s decision in a transactioninvolving the principal. A failure on the part of the salesper-son to fulfill his obligation could result in disciplinary actionagainst the salesperson’s license. Moreover, the brokercould be held liable in damages to the principal for acts andomissions of the salesperson under the doctrine of respon-dent superior. Since the broker may subject to administra-tive disciplinary action or civil liability for the acts ofbroker’s salespersons, the broker should take particularcare in instructing salespersons on their duties and obliga-tions to the broker’s principals. The salespersons shouldalso exercise the greatest care in carrying out these instruc-tions of the broker in dealing with the broker’s clients.

A real estate salesperson is also subject to the proscriptionsof the Real Estate Law against dual agency, secret profitsand other acts and omissions which violate an agent’sduties to the agent’s principal. Since a broker has a statutory

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duty to execute reasonable supervision over the activitiesof salespersons licensed to him or her, it is quite possible fora broker to be disciplined for the acts and omissions ofbroker’s salespersons in violation of provisions of the RealEstate Law, even if the broker was not aware that these actshad taken place. See Sections 10176(d), 10176(g), and10177(h) of Business and Professions Code.

It should be noted that, for purposes of a civil action, theduty of the qualifying broker, under a corporate license, tosupervise salespersons, is a duty owed to the corporation.In the recent California Appellate Court case Walters v.Marler (1978) 83 Ca.App.3d 1, a salesperson (who had notbeen appointed a subagent of the qualifying broker)breached the duty to disclose to the purchaser all materialfacts affecting the purchaser’s decision. The court held thatwhen a salesperson who agent for a purchaser breachessuch a duty, the qualifying broker’s duty to supervise doesnot make the broker individually liable to the purchaser. Thebroker’s actions are considered the actions of the corpora-tion.

HALL V. GEIGER-JONES, RILEY V.CHAMBERS, AND HAAS V. GREENWALD

DECISIONS AND RULINGS AFFECTINGREAL ESTATE LAW

Just a reminder that what is commonly referred to through-out this book as the “real estate law” must clearly bedistinguished from what is known as real property law, lawof agency, contract law, or other legal aspects of real estateownership and conveyancing. Although these sets of lawsinterrelate and overlap, they are nevertheless different legalrules and should be separately understood. The “real estatelaw” affects the licensing and conduct of persons acting asreal estate agents. The law is enforced at special adminis-trative hearings by the Commissioner rather than by a courtof law.

The California Real Estate Law or “license law” as it issometimes referred to, has two principal purposes: (1) theprotection of the general public from harm at the hands ofdishonest and incompetent agents and (2) the protection ofthe reputation of honest agents against the adverse public-ity and public resentment often caused by the unprincipledand unscrupulous who would infiltrate the agent’s ranks.

In upholding legislation of this character the court in Hallv. Geiger-Jones, 242 U.S. 539 (1917) ruled licensing regu-lation was a proper exercise of the police power of the state.Other courts have held that license law regulation must bereasonable and that no enforcement officer can be vested

with an arbitrary power to grant or refuse a license (See Rileyv. Chambers, 181 Cal. 589).

An unlicensed person who acts as a real estate broker or realestate salesperson violates the Real Estate Law and is guiltyof a misdemeanor. This portion of the law is upheld in thecase of Haas v. Greenwald, 196 Cal. 236. In the same caseit was also held that an attorney at law performing a realestate broker’s service is required to obtain a real estatebroker license in order to collect a commission and that anattorney does not come within the exception of the lawunless it can be shown that he or she is acting as an attorneyand not as a real estate broker in the transaction.

The statutes vesting the Real Estate Commissioner withcertain responsibilities and authority over the offering ofsubdivided real property have had their constitutionalityupheld several times, the leading case being In re Sidebotham,12 C. 2d 434.

KRUSE V. MILLER, HALE V. WOLFSEN

SUBAGENTS

A principal may expressly authorize his or her agent toappoint a subagent and establish a new contractual andfiduciary relationship directly between the principal and thesubagent. When this occurs the subagent represents theprincipal in the same manner as the agent. The latter is liablefor the acts of the subagent only when negligent in theselection of the subagent.

In effect the original agent drops out of the picture and isnot liable for the acts of the subagent unless in somefashion the agent is at fault. Conversely the subagent maysue the principal directly for compensation.

In the absence of express or implied authorization by theprincipal to appoint a subagent, the general rule is that anagent may not establish a new relationship of principal andagent between the principal and a third person. If the agentdoes attempt to employ a “subagent” without authority, anagency between the principal and the purported subagentdoes not exist.

The cooperating broker may not as a general rule sue theseller of the property for a commission. It would appear tofollow that the cooperating broker would thus not be liableto the seller having no privity of contract with the seller.However, recent appellate cases evidence a trend to hold acooperating broker to be the agent of the seller of the prop-erty and to owe certain obligations to this principal. A coop-erating broker acting with express permission of the listingbroker has been held liable to the seller of the property for

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damages sustained by the seller on account of misrepresen-tations by the cooperating broker. Kruse v. Miller, 143 CA2d 656, and Hale v. Wolfsen, 276 CA 2d 285.

An agent, unless specially forbidden by agent’s principalto do so, can delegate the agent’s powers to another personin any of the following cases, and in no others.

1. When the act is purely mechanical

2. When it is such as the agent cannot do alone and thesubagent can lawfully perform

3. When it is the usage of the place to delegate suchpowers, or when the principal authorized the delegation

Discretionary powers cannot be delegated unless autho-rized by the principal, by usage, or by imperative necessity.

Although an agent may not be authorized to assign a dutyof performance to a subagent, the agent may neverthelessbe authorized to delegate the actual performance of suchduty to others and discharge the duty through the perfor-mance of the delegated person. Most contracts do notrequire the personal performance of the original agent,although the latter remains liable for the details delegatedto and exercised by others.

MILNER V. DEPARTMENT OF REALESTATE AND NORMAN V.

DEPARTMENT OF REAL ESTATE

REGULATION OF TRANSACTIONS INLOANS (POOLING OF LOAN FUNDS)

There are certain prohibitions and restrictions in the RealEstate Law which apply to the acts of a real estate licenseewhether the licensee is engaging in the business of brokeringmortgage loans or — as either principal or agent — inbuying, selling or exchanging existing promissory notessecured by real property or existing real property salescontracts.

Since trading in real property sales contracts is relativelyuncommon, this portion of this chapter will discuss only thedeed of trust as a security device. The reader should bearin mind, however, that virtually everything said about thepurchase, sale and exchange of promissory notes securedby deeds of trust is also true with respect to real propertysales contracts.

For the sake of simplicity, the term “promissory note se-cured by a deed of trust” is frequently abbreviated to “deedof trust” or “trust deed.”

Most of the provisions of the Real Estate Law which dealcollectively with the negotiation of mortgage loans and thepurchase, sale and exchange of trust deeds are contained inArticle 5 of Chapter 3. Article 5 is part of a legislative packageenacted in 1961 to prohibit or rigidly control transactions inreal property sales contracts and trust deeds which werecharacteristic of the “Ten Percenter” transactions thatresulted in widespread losses to the investing public in thelate 1950s.

The prohibitions and restrictions contained in Article 5 arefor the most part applicable to the real estate licenseeengaged in the business of brokering mortgage loans orinvolved as an agent in the buying, selling or exchanging oftrust deeds. The provisions of Article 5 apply also to the realestate licensee who engages as a principal in the businessof buying from, selling to or exchanging deeds of trust withthe public and to the broker who makes agreements with thepublic for the collection of payments or the performance ofservices in connection with deeds of trust.

A person making collections on more than ten loans per yearor in amounts exceeding $40,000 per year must be li-censedas a real estate broker unless such person is a corpo-rationlicensed as an escrow agent and the payments are de-posited and maintained in the escrow agent’s trust account.

Pooling of loan funds. Banking or pooling of lenders’ orpurchasers’ funds is prohibited, except as authorized bypermit issued pursuant to the provisions of Article 6 orapplicable provisions of the Corporate Securities Law.Lacking such a permit a broker may not accept funds exceptfor a specific, identified purchase or loan transaction.Before accepting purchase funds, the broker must own thenote or contract to be sold or must be a party to anunconditional written contract obligating the broker topurchase a specific note or contract. Before the broker mayaccept loan funds, the broker must have a bona fide autho-rization from a prospective borrower to negotiate a securedloan for the borrower. The broker may not sell an investorunsecured promissory notes or notes pending availabilityof a secured real estate investment. (See Norman v. Depart-ment of Real Estate (1979) 93 C.A. 3d 768; Milner v. Depart-ment of Real Estate (1980) 102 C.A. 3d 567.)

If a broker receives funds from the obligor in payment ofa promissory note or contract, as is ordinarily the case whenservicing the note or contract for the obligee, the broker maynot retain the funds for more than sixty days without writtenauthorization to do so from the obligee. The authorizationfrom the obligee may not provide for the payment of intereston the funds retained by the broker. Moreover, any agree-ment between the broker and the obligee of the note orcontract authorizing the broker to service the instrument

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must be in writing.

Unless a lender had given written authorization to thebroker, the broker may not disburse the loan funds until afterrecording the trust deed securing the note which evidencesthe loan. If the lender has given the broker authority torelease funds prior to recordation, the securing trust deedmust be recorded, or delivered to the obligee with a writtenrecommendation for immediate recordation, within ten daysfollowing the disbursement of loan funds. The broker issimilarly responsible for the execution and recordation ofthe assignment of a real property sales contract or deed oftrust when the sale of the contract or trust deed has beennegotiated by the broker.

REALTY PROJECTS, INC. V. SMITHAND WYATT V. UNION MORTGAGE CO.

MORTGAGE LOAN TRANSACTIONS

The Real Estate Law has long required the licensing of onewho negotiates a loan secured by real property for anotherfor compensation. Control of mortgage loan brokerageactivities solely through the licensing of persons engagedin the business proved inadequate. In 1955, comprehensivelegislation was enacted in a further effort to curb a varietyof abuses including the charging of exorbitant commissionsand inflated costs and expenses, the negotiating of shortterm loans with large balloon payments and misrepresenta-tion or concealment of material facts by licensees negotiat-ing these loans. This legislation and subsequent amend-ments now largely contained in Article 7, Chapter 3 of theReal Estate Law is variously referred to as the Real PropertyLoan Law, the Mortgage Loan Brokers Law and theNecessitous Borrowers Act, and applies to bona fide loanssecured by first trust deeds under $20,000 and by junior trustdeeds under $10,000.

Significant amendments to the Real Property Loan Law wereenacted by the 1973 Legislature and became effective onJanuary 1, 1974. Among other things, the 1973 amendments(1) prohibited the lender or broker from conditioning themaking of a loan on the purchase of credit life or creditdisability insurance by the borrower (2) disallowed the useof a balloon payment in a promissory note with a term of sixyears or less where the security for the loan is the dwellingunit of the borrower (3) imposed monetary limits on latepayment and prepayment charges to the borrower (4) pro-hibit a real estate licensee from charging the borrower a feefor the servicing of a loan and (5) authorized certain civilpenalties against a licensee for violation of provisions ofArticle 7.

Provisions formerly included in Article 7 pertaining tosubmissions of advertising and activities reporting require-ments by certain mortgage loan brokerage firms have beenstatutorily modified and relocated in Article 5.

The Mortgage Loan Disclosure Statement, also often re-ferred to as the Mortgage Loan Broker’s Statement, is at theheart of the Real Property Loan Law. Its purpose is toprovide a prospective borrower with information concern-ing all salient features of a loan to be negotiated for theborrower.

A real estate licensee negotiating or making a mortgage loanin any amount to be secured directly or collaterally by alien on real property must present a completed MortgageLoan Disclosure Statement to the prospective borrower andobtain the borrower’s signature on the statement prior to thetime that the borrower becomes obligated to complete theloan. In addition, if the loan is subject to Article 7 (bona fidefirst trust deeds of less than $20,000 and junior trust deedsof less than $10,000) the licensee must certify in the state-ment that the loan in question is in compliance with theprovisions of Article 7.

If the licensee is negotiating a loan to be made by aninstitutional lender enumerated in Section 10133.1 of theReal Estate Law and the licensee will receive a commissionfrom the borrower not to exceed 2 percent of the principalamount of the loan, a Mortgage Loan Disclosure Statementis not required.

The information that must be included in the statement is setforth in Section 10241 of the Real Estate Law. The form ofthe statement must be approved by the commissioner priorto its use. The commissioner has by regulation establishedan approved form of statement in Section 2840(Commissioner’s Regulations).

By legislation enacted in 1982, the provisions of Article 7were made expressly applicable to brokers who solicitborrowers, or cause borrowers to be solicited throughexpress or implied representations that the borrower will actas an agent in arranging a loan, but in fact makes the loanfrom funds belonging to the broker. A companion provisionrequires that disclosure be made to the prospective bor-rower if the broker will be lending his own funds or otherbroker-controlled funds. The approved form of statementpreviously mentioned comports with this statutory require-ment. The term “broker-controlled funds” means fundsowned by the broker, by a spouse, child, parent, grandpar-ent, brother, sister, father-in-law, mother-in-law, brother-in-law or sister-in-law of the broker, or by any entity in whichthe broker alone or together with any of the above relativesof broker has an ownership interest greater than 25 percent.

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(Business and Professions Code Sections 10240, 10241 and10241.2)

The Mortgage Loan Disclosure Statement is a requirementof state law. A separate disclosure statement by a personextending consumer credit is required by the Federal Truth-in-Lending Act.

A real estate licensee’s duty of disclosure in a mortgageloan transaction does not begin and end with the prepa-ration of a Mortgage Loan Disclosure Statement. In RealtyProjects v. Smith (1973) 32 CA 3d 204, the court held thatthe statutory obligation of a licensee to act fairly andhonestly when applied to the licensee acting in the capacityof a mortgage loan broker demanded that the licensee informprospective borrowers of the difference between commis-sions and other charges for loans in amounts subject to theReal Property Loan Law as against loans not covered bysaid law. While the court at one point referred to therespondent-licensee as the agent of a prospective bor-rower, the court did not rely upon an agency theory inreaching the decision that the licensee had a duty ofdisclosure to the prospective borrower. The duty wasdeclared to rest upon the respondent’s status as a licenseerather than upon agency or contractual principles.

In the more recent case of Wyatt v. Union Mortgage Co.(1979) 24 CA 3d 773, the court held that a mortgage loanbroker’s duty to disclose information about late chargesand the effective interest rate of the loan to be made to theborrower was based upon a fiduciary relationship betweenthe broker and the prospective borrower.

HARVEY V. DAVIS

REAL PROPERTY SECURITIESTRANSACTIONS

The Real Property Securities Dealer’s Law (Article 6 ofChapter 3 of the Real Estate Law) is part of the 1961legislative package designed to control those transactionsthat characterized so-called “Ten Percenter” operations.Article 6 spells out the various requirements that must bemet by any person before engaging in the marketing ofpromissory notes and real property sales contracts thatcome within the definition of “real property securities” asdefined in Business and Professions Code Section 10237.1.A special endorsement to a real estate broker license mustbe obtained by a licensee before acting as a real propertysecurities dealer. In addition to the license endorsement, thelicensee must maintain on file with the commissioner acorporate surety bond of $5,000 or provide an alternativesurety specified by statute.

The definition of a real property securities dealer is anyperson, acting as principal or agent, who engages in thebusiness of:

(a) Selling real securities as defined by Subdivision (a) ofSection 10237.1 to the public, or

(b) Offering to accept or accepting funds for continualreinvestment in real property securities, or for placementin an account, plan or program whereby the dealer impliesthat a return will be derived from a specific real propertysales contract or promissory note secured directly orcollaterally by a lien on real property which is not specifi-cally stated to be based upon the contractual paymentsthereon.

In addition to the licensure requirement, a permit must beobtained from the commissioner by either the issuer or thereal property securities dealer before any interest in realproperty securities can be sold to the public. Sales tocorporations, institutional lenders, real estate brokers, gen-eral building contractors, attorneys and to pension, retire-ment or similar trust funds are not sales “to the public” andthere is no licensing nor permit requirement if sales of realproperty securities are confined to such entities.

Notwithstanding the general exception applying to pen-sion, retirement or similar trust funds, legislation enacted in1982 requires the issuance of a real property securitiespermit in cases of sale to self-employed individual retire-ment (Keogh) plans and/or individual retirement accounts(IRAs) unless the plan or account is for the exclusive benefitof a real estate broker, general building contractor or anattorney. The Supreme Court of California has, however,broadly construed the phrase “to the public” in a situationinvolving a purchasing entity not exempted by the statute.In the case of Harvey v. Davis (1968) 69 C 2d 362 it was heldby the court that the sale of 24 real property securities to asingle purchaser “selected at random from the public”constituted a sale “to the public” within the meaning of theact.

A permit for the sale of real property securities to the publicis quite similar to a permit that must be obtained from theDepartment of Corporations of the State of California toissue shares in a California corporation. The fee schedulefor a real property securities permit is the same as theschedule under the Corporate Securities Law. A fee sched-ule can be obtained from the Department of Real Estate.

The statutory test for the issuance of a real propertysecurities permit is also the same as that under theCorporate Securities Law. The commissioner must deny theapplication and refuse the permit unless it is determined that

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(1) the proposed plan of business of the applicant and theproposed sale of real property securities is fair, just andequitable, (2) the applicant intends to transact businessfairly and honestly, and (3) the real property securities to besold are not such that they will work a fraud upon thepurchaser.

The act also sets forth the elements of the disclosurestatement that must be given to each prospective purchaserof a real property security. This statement, the form of whichis set forth in the regulations of the commissioner (Section2977), serves the purpose of a prospectus or offeringcircular.

Each purchaser of a real property security is required to signa statement acknowledging receipt of the information andthe issuer of the securities must retain a copy executed bypurchaser for a period of four years. A purchaser must alsobe given a copy of an appraisal of the real property whichsecures the note or contract sold to purchaser unless thepurchaser expressly waves this requirement by stating thathe or she will obtain the appraisal. An appraisal preparedby or on behalf of the real property securities dealer must beretained by the dealer for a period of four years.

JONES V. MAYER

ANTIDISCRIMINATION BY PROPERTYOWNERS AND AGENTS

There is an all-encompassing set of rules prohibiting dis-crimination on the part of owners of property and theiragents, deriving from the U.S. Supreme Court Case Jones v.Mayer and Title VIII of the Civil Rights Act of 1968.Wherever federal law is applicable, it is paramount.

In Jones v. Mayer the Supreme Court interpreted andapplied an Act of Congress, first enacted in 1866 (now 42U.S. Code Section 1982), and rested its constitutionality onthe Thirteenth Amendment of the Constitution of the UnitedStates, the amendment prohibiting slavery. As sointerpreted, Section 1982 applies everywhere to everyonein the United States.

Title VIII declares that its purpose is to provide “withinconstitutional limitations”...”for fair housing throughoutthe United States.” In short, the act applies as thoroughlyand as widely as is permissible under the broadest appli-cable provision of the Constitution.

The Senate Report on the bill that became the Civil RightsAct was intended to rest on whatever constitutional provi-sion could be mustered to support it. Doubtless, no onethought of the 13th Amendment as a basis for the bill, but

the reasoning upon which the Supreme Court found the 13thAmendment to support 42 U.S. Code Section 1982 alsosupports Title VIII. In short, Title VIII applies even to themost local transactions.

Jones v. Mayer holds that Section 1982 is not confined tostate action but operates directly on every person. Title VIIIpurports to do so, and it is likely that the Supreme Court willhold that it does.

The sum of the matter is that every prohibition of the Unruhand Rumford Acts (described in Chapter 15 of this text, “FairHousing”) remains in effect, and what discrimination theseacts did not prohibit federal law now does. There are noexceptions.

Thus, no one may refuse to sell, lease or rent to anotherbecause of race or color, and no real estate licensee may doso, regardless of the principal’s direction. Should a principalseek to restrict a listing according to race or color, thelicensee must refuse to accept the listing.

There appear to be no practical differences between Section1982 and Title VIII. It is true that there are several theoreticaldifferences, but is is either unwise to stand on them or notworth while to do so.

For example, Section 1982 relates only to discriminationbecause of color. It declares that every citizen shall have thesame rights as “white citizens.” But in Jones v. Mayer, theCourt held that Section 1982 “bars all racial discrimination.”Title VIII prohibits discrimination because of “race, color,religion or national origin.” While "religion and na-tionalorigin" are not the same concepts as "race," the courts willprobably not be receptive to distinctions of this kind.

Every interpretation will be taken by courts in favor of thefullest application of the law. Also Title VIII relates only to“dwellings” and land intended to be used for a “dwelling,”but the act enforced in Jones v. Mayer applies to any realand personal property.

There are also some theoretical differences between the twoacts in regard to the means of enforcement. Section 1982provides only for an injunction, whereas Title VIII alsoprovides for damages and a penalty plus attorney’s fees,and for enforcement by the Attorney General. But a foot-note in Jones v. Mayer would appear to indicate thatdamages will be awarded for violation of Section 1982.

Another prohibition of Title VIII deserves mention here. Itprohibits denial of membership or participation in a realestate board or multiple listing service to a person becauseof race, color, religion or national origin, or discrimination

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against a person in terms or conditions of membership.

In conclusion: for all practical purposes Jones v. Mayer andTitle VIII sum up to this, so far as real estate licensees areconcerned: They must not discriminate, and to that endshould not accept restrictive listings or make, print, orpublish any notice, statement or advertisement with re-spect to a sale or rental of a dwelling which suggestsdiscrimination because of race, color, religion or nationalorigin.

PEOPLE V. SIPPER

UNLAWFUL PRACTICE OF LAW

As rare as this may be among real estate licensees, never-theless it is appropriate here to caution licensees andaspiring licensees against conduct which might constitutethe unlawful practice of law. The Business and ProfessionsCode of California (Sections 6125, 6126) specifically prohib-its the practice of law by persons who are not members ofthe State Bar.

In 1943 in People v. Sipper (61 CA 2d 844), California DistrictCourt of Appeal stated that the practice of law is the doingand performing services in a court of justice in any matterpending therein throughout its various stages and in con-formity with the adopted rules of procedure. But in a largersense, the court noted, it includes legal advice and counseland the preparation of legal instruments and contracts bywhich legal rights are secured, although such matters maynot be pending in a court.

In the Sipper case a married couple had asked the real estatebroker “to make out a paper to protect Mrs. Hetman for themoney” which they had borrowed from her in order to payoff the indebtedness on their real property. This requestwas made when they first met the defendant broker, and heproceeded to prepare a trust deed, and later a mortgage. Hecharged $15 for his services, later reducing the charge to $10.

The appellate court held that the trial jury was justified inconcluding the defendant broker undertook to, and did,advise his clients as to the kind of legal document that theyshould execute in order to secure the loan. He made a chargewhich clearly indicated “that he considered he was calledupon to do something more than the mere clerical work oftyping in certain furnished information on a blank form.”This was practicing law.

Significantly, the court stated that if the defendant ...hadonly been called upon to perform and had only undertakento perform the clerical service of filling in the blanks on aparticular form in accordance with information furnished

by the parties, or had merely acted as a scrivener to recordthe stated agreement of the parties to the transaction, hewould not have been guilty of practicing law without alicense.

In discussing this problem the authoritative encyclopediaof California law “California Jurisprudence” (7 Cal. Jur. 3d,Attorneys, Section 172, p. 466) states that “...an establishedbusiness custom sanctions the activities of real estate andinsurance agents in drawing certain agreements in businesstransactions in which they take part in their respectiveprofessional capacities.” The editors then quoted an articleby Robert L. Lancefield (29 CLR 602) in which it is said: Whilethese actions are technically within the usual definition ofpractice of law, they are generally recognized as properwhen:

(1) the instrument is simple and standardized

(2) the draftsman or intermediary does not charge anyfee for such work (other than his regular commissionfor the transaction); and

(3) the drafting is incidental to his other activitiesin the transaction.

SIMONS BRICK CO. V. HETZEL

MECHANIC’S LIEN LAW —DETERMINATION OF STARTING TIME

California law expressly provides that persons furnishinglabor or material for the improvement of real estate may fileliens upon the property affected if they are not compen-sated. Thus an unpaid contractor, or a craftsman employedby the contractor to work upon a building project but whohas not been paid by the owner or contractor may protectany interests by filing a lien against the property in a mannerprescribed by law. The same right is held by any person whohas furnished material such as lumber, plumbing, or roofingif the claim is not paid. it is because of the possibility of theseliens being filed that an owner employing a contractorsometimes requires that a bond be furnished to guaranteepayment of such possible claims.

The Mechanic’s Lien Law is based on the theory thatimprovements contribute additional value to land; there-fore, it is only equitable to impose a charge on the land equalto such increase in value. This charge may exist in theabsence of any direct contract relationship between the lienclaimant and the landowner. The lien must, however, befounded upon a valid contract with the contractor, subcon-tractor, lessee or vendee. Also, ordinarily the lien is validonly to the extent of labor and materials furnished for andactually used on the job.

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The California Civil Code specifies who may secure aMechanic’s Lien. “Laborer” means any person who, actingas an employee, performs labor upon or bestows skill orother necessary services on any work of improvement.“Materialman” means any person who furnishes materialsor supplies to be used or consumed in any work of improve-ment. Thus the statute extends the right to all persons andlaborers of every class who perform labor or bestow ser-vices or furnish materials or equipment, which contribute tothe construction, alteration, addition or repair of any build-ing or other structure or work of improvement. It includesgrading and filling and landscaping of lots or tracts of land,as well as demolition and removal of buildings. In each casethe contributor has a lien upon the property upon which thecontributor has bestowed labor or furnished material, for thevalue given, including a charge for any appliances or powerprovided.

The work may have been done at the instance of the owner,or by any person acting by owner’s authority or under thowner, as a contractor. Indeed the statute states that everycontractor, subcontractor, architect, builder or other personin charge of the job is deemed to be an agent of the ownerfor purposes of the lien law.

Normally bills for materials and services are paid when due.But if there is a default by the owner or contractor, theclaimant must act promptly to exercise lien rights. The lienlaw is quite technical in its requirements, particularly withrespect to notice by subcontractors and materialmen re-quired as a prerequisite to filing a valid mechanic’s lien, andthis discussion can do no more than indicate the highlightswhich must be thoroughly understood to assure compli-ance with procedural steps and time limits.

A written preliminary notice (private work) must be givenprior to the recording of a mechanic’s lien and prior to thefiling of a stop notice by the potential claimant to the owner,general contractor and construction lender within 20 daysof the first furnishing of labor, services, equipment ormaterial to the job site. The notice may be served by handdelivery or by mail. Mailing may be by first class, registeredor certified mail.

The notice must contain a general description of the labor,service, equipment or material furnished, or to be furnished,the name and address of the potential claimant, the name andaddress of the person who contracted for the purchase ofthe labor, service, equipment or material, and a descriptionof the job site sufficient for identification. In addition thenotice must contain a statement that if all bills are not paidin full for labor, service, equipment or material furnished, theimproved property may be subject to a mechanic’s lien. Theconstruction lender’s copy of the preliminary notice must

contain an estimate of the total price of the labor, service,equipment or material to be furnished to the project.

Note: Failure to give the preliminary notice within 20 daysdoes not preclude the right to give a preliminary notice at alater time, but claim rights may thus be subordinated.

The preliminary notice is required even when the claimantcontracts directly with the owner. In such event notice mustbe given to the construction lender, if any, even though theclaimant may desire to rely solely on the remedy of Mechanic’sLien.

A matter of importance is the determination of the time whenthe work of improvement commenced. Fixing this time, to theinstant, is crucial when questions of priority of claim ariseas between mechanic’s liens and deeds of trust. A Californiaappellate court has provided this useful definition of com-mencement of work:

...some work and labor on the ground, the effects ofwhich are apparent — easily seen by everybody; suchas beginning to dig the foundation or work of likedescription, which everyone can readily see andrecognize as the commencement of a building.(SimonsBrick Co v. Hetzel, 72 CA 1).

After filing the mechanic’s lien has priority over any otherlien, mortgage, deed of trust or encumbrance, which mayhave attached subsequent to the time when the buildingwas commenced or materials were first furnished. Inciden-tally, the mechanic’s lien also has priority over any other lienor encumbrance of which the lien holder had no notice, andwhich was unrecorded at the time the work of improvementcommenced or materials were commenced to be furnished.However, the holder of a mortgage or deed of trust, whichotherwise would be inferior to mechanics’ liens arising outof a work of improvement, may achieve priority by filing anappropriate bond with the county recorder.

The bond must be in an amount of not less than 75 percentof the principal amount of the mortgage or trust deed.Thereupon the lien of the mortgage or trust deed is prior andparamount to any mechanics’ liens for work done or mate-rials furnished subsequent to the time such bond was filedfor record. The purpose of the bond is to assure paymentof any judgment in suits which may be brought to foreclosemechanics’ liens on the property.

Court decisions — "decisional law" or "case law" — thatlaw which establishes precedent and provides the frame-work for judgments in present and future legal disputes,supports statutory (legislative) and constitutional law andprovides elaboration and refinement of those laws. It isimportant for the real estate professional to know how

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courts are likely to decide in such matters as we havediscussed in this chapter.

It should also be apparent by now that questions of statu-tory and constitutional law are frequently involved in thedisputes which lead to legal opinions and judgments. Theweb of law covering the many facets of real estate businessactivity is composed of all three. In addition, such laws asthe regulations of the commissioner come into play. Takentogether, these laws are meant to form a consistent, comple-mentary and equitable body of intelligent judgment whichshould serve as a dependable and useful framework for theconduct of business in the real estate profession.


1. The case of Anderson and Miles v. Resnick was concerned with:a. public liability c. real estate sales contractsb. management and control d. none of the above

2. In Anderson and Miles v. Resnick, the California court said:a. a salesman is an independent contractorb. a salesman has a special status between employee and independent contractorc. a salesman, insofar as his relationship with his broker is concerned, cannot be classified as an independent contractord. none of the above

3. Today, where one spouse manages a community personal property business, the husband and wife share equally.a. true b. false

4. Which is true about the management and control of real and personal property prior to January 1, 1975?a. the husband of a marriage generally had the power to manage and control the real and personal property

with the exception of the wife’s earningsb. community property was subject to the debts of whoever had management and controlc. both “A” and “B” d. neither “A” nor “B”

5. Which is true about community property todaya. neither spouse may make a gift without the consent of the otherb. neither spouse may encumber the furniture without the written consent of the otherc. neither spouse may encumber the clothing of the other spouse or minor children without written consent from the otherd. all of the above

6. In a sales contract, the buyer is called the:a. vendor b. vendee c. buyer d. none of the above

7. When selling a parcel of land under a sales contract which is not recorded, the seller is prohibited from otherwise encumbering theparcel to what amount without the written consent of the purchasing parties?a. $1000 b. $500 c. an aggregate amount exceeding the amount due under the contract d. none of the above

8. The law requires that each sales contract relating to purchase of real property in a subdivision shall clearly set forth what information?a. the legal description of the property c. both “A” and “B”b. all existing encumbrances at date of contract d. neither “A” nor “B”

9. The case of Cohen v. Shearer was concerned with:a. probate sales and commissions c. the due-on-sale clauseb. cancellation of escrow d. none of the above

10. Which of the following would be a disadvantage of a sales contract to a buyer?a. all of the followingb. after full performance the buyer may receive defective title or no title at all.c. covenants in restriction of assignment or transfer of the land contract which hamper or prevent the transfer of buyer’s

interest thereind. a prevailing opinion among financial institutions that a land contract is poor collateral

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14OTHER CALIFORNIA LAWS AFFECTING REALESTATE ACTIVITIES

cable to any project defined in Section 2621.6 upon issuanceof the official special zones map to affected local jurisdic-tions but does not apply to any development or structurein existence prior to the effective date of the amendment.Geologic reports are required to be obtained by cities-counties for all projects approved by them after May 4, 1975,unless they find no undue hazards, and they may then waivethe geologic report with the approval of the State Geologist.

If a subdivision was approved by the city/county authori-ties after May 4, 1975, then the geologic report will haveeither been obtained or waived for all lots in the subdivision.

Maps of special studies zones may be consulted at anydistrict office of the California Division of Mines andGeology. Individual copies may be obtained from manylocal jurisdictions.

Real Estate licensees who are involved in property transac-tions located near special studies zones should obtaininformation about that zone.

Section 2621.9 of Public Resources Code provides that anyperson who is acting as an agent for a seller of real propertywhich is located within a delineated special studies zone, orthe seller if acting without an agent, shall disclose to anyprospective purchaser the fact that the property is locatedwithin a delineated special studies zone.

Any subdivision lying within the special studies zonewhich is subject to the Subdivision Map Act shall berequired to obtain special approval by a city or county inaccordance with policies and criteria established by theState Mining and Geology Board. Prior to giving approvalto a subdivision project with the special hazards zone, a cityor county shall require a geologic report defining any hazardof surface fault rupture. With the approval of the StateGeologist, however, the city or county may waive thegeologic report if it finds that no undue hazards of surfacefault rupture exists. A local government may establishpolicies and criteria for approval of projects within the

As previously mentioned, the primary laws affecting realestate activity in California are: The California Real EstateLaw (B&P Code Sections 10000-10602); the SubdividedLands Law (B&P Code Sections 11000-11200); the Subdivi-sion Map Act (Govt. Code, Title 2, Division 3, Pt 1); and theRegulations of the Real Estate Commissioner (Title 10,California Administrative Code). In addition, as we haveseen, there are numerous court decisions which pertain tothe conduct of real estate, as well as certain national (federal)laws.

In this chapter we will discuss numerous laws which appearin many of the other California codes, such as the VehicleCode, the Financial Code, the Commercial Code and theLabor Code. While these laws are not comprehensive “realestate laws,” they nevertheless have something to do withthe conduct of real estate business, either directly or indi-rectly, and they are applicable to specific situations.

ALQUIST-PRIOLO SPECIAL STUDIESZONES ACT

Alquist-Priolo Special Studies Zones Act (Public ResourcesCode Sections 2621-2630) is a zoning act designed to controldevelopment in the vicinity of hazardous earthquake faultsfor the benefit of public safety. The act is directed solely atthe problem of surface fault rupture. Although seismicshaking effects are more damaging than fault rupture, the actis not directed at the other earthquake hazards.

A “special studies zone” is a special kind of geologic hazardzone, delineated by the State Geologist around traces ofpotentially active faults, where specific site investigationsare needed to avoid inadvertent construction over traces ofactive (i.e. hazardous) faults. A zone normally extends onequarter of a mile or more in width, centering on the trace ofa fault which may be hazardous for development orconstruction of a structure for human occupancy due tosurface faulting or fault creep.

The Alquist-Priolo Special Studies Zones Act is now appli-

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special studies zone which are stricter than those pro-scribed by the Special Studies Zone Act.

CRIMINAL LAW

Comparatively few prosecutions are brought againstpersons engaged in the real estate business for violationsof criminal laws of the state. The problem of violations ofthe Penal Code is nevertheless of interest to all practitioners,particularly since many offenses may be committed byclients or by others with whom brokers come into contact.

And so we scan a representative selection of statutes in thisarea. Most are drawn from the Penal Code and the wordingis rather technical. In some cases the penalty for violationsis specified; in others the offense is simply identified as afelony or misdemeanor. A felony is a crime which ispunishable with death or by imprisonment in the stateprison. Every other crime is a misdemeanor.

Many crimes may, in the discretion of the court, be punish-able by imprisonment in the state prison on the one hand orin the county jail or fine on the other. Such a crime is amisdemeanor for all purposes if the court’s judgment im-poses punishment other than imprisonment in the stateprison or where the court grants probation without imposi-tion of sentence and declares the offense to be a misde-meanor.

Except in cases where a different punishment is prescribedby any law of this state, every offense declared to be afelony, or to be punishable by imprisonment in a stateprison, is punishable by imprisonment in any of the stateprisons...for 16 months or two or three years; provided,however, every offense which is prescribed by any law ofthe state to be a felony punishable by imprisonment in anyof the state prisons or by a fine, but without an alternatesentence to the county jail, may be punishable by imprison-ment in the county jail not exceeding one year or by a fineor by both. Misdemeanors, on the other hand, are punish-able by imprisonment in the county jail for not more than sixmonths, or by a fine, or by both, unless a different punish-ment is prescribed by the law violated (Penal Code Sections18, 18a, 18b, 19, 19a).

There are several provisions in the Penal Code of thestatutes of California which are pertinent to, and in regula-tion of, various real estate and other transactions and thereal estate business. It might be well to review some of theseprovisions for the purpose of acquainting real estate bro-kers and salespersons with their context.

The definitions which follow are paraphrased from theactual code sections in the interest of brevity and clarity.

Reference to the actual code language is necessary to learnthe precise meaning and effect. No attempt has been madeto include every crime that may be related to the real estatebusiness, as that would be impossible in a course of thislength.

GRAND THEFT AND PETTY THEFT

References to “larceny,” “embezzlement,” or “stealing” inall California laws or statutes have been changed to “theft.”Grand theft is committed when the money, labor, or real orpersonal property taken exceeds four hundred dollars ($400)in value. There are provisions however which define theftof property of lesser value as grand theft, such as some farmcrops, farm animals and real property severed from the land.(Penal Code Sections 484, 487, 487a, 487b, 487d, 487g).

REAL ESTATE RELATED CRIMES

a. Receiving funds for the purpose of construction, andwrongfully directing that money from the intended pur-pose is theft, as is receiving such funds by submitting afalse voucher for construction loan funds. (P.C. Sections484b, 484c)

b. Copying without permission, and with intent to use,documents owned by a title company is theft. (P.C. Sec-tion 496c)

c. Removing a structure from mortgaged real property, orafter foreclosure sale, with intent to defraud or to injure themortgagee or purchaser is theft. (P.C. Section 502.5)

d. A debtor who sells property covered by a securityagreement and fails to pay to the secured party theamounts due under the security agreement, or the pro-ceeds (whichever is the lesser), commits embezzlement.(P.C. Section 504b)

e. A broker or other fiduciary fraudulently appropriatingor secreting trust funds commits embezzlement. (P.C.section 506)

f. Obtaining property from another by a threat to accusethat other person or members of his or her family of a crimeis extortion. (P.C. Sections 518, 519)

g. Making or recording a deed, knowing the maker has notitle is a misdemeanor. (P.C. Section 531a)

h. Making or procuring a false financial statement tobenefit oneself or another person in obtaining credit isa misdemeanor. (P.C. Section 532a)

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i. Offering or giving parcels of real property with winningnumbers at any drawing of members or with admissiontickets, and collecting fees in connection with the landtransfer are misdemeanors. (P.C. Section 532c)

j. Giving a kickback of construction funds is a misde-meanor. (P.C. Section 532e)

k. Selling the same land twice to different persons is afelony. (P.C. Section 533)

l. Willful concealing by a married person of the necessityfor concurrence of a spouse in sale of land is a felony. (P.C.Section 534)

m. A broker “holding out” on a principal, or rendering aprincipal, on demand, a false accounting is committing amisdemeanor. (P.C. Sections 536, 536a)

n. Except for posting legal notices, placing advertisingsigns on public or private property without permission isa misdemeanor. (P.C. Sections 556, 556.1, 556.2)

o. Bribing a lender to obtain credit is a felony andaccepting the bribe is also a felony. (P.C. Sections 639,639a)

p. Signing the name of another person, or of a fictitiousperson, without authority to do so or falsely making,altering, forging or counterfeiting certain documents suchas leases, deeds or checks or passing such documents astrue and genuine, with intent to defraud is a felony. (P.C.Sections 470, 473)

q. Being a party to a fraudulent conveyance of land isa misdemeanor. (P.C. Section 531a)

THE CIVIL CODE

The Civil Code sets out several crimes. Several are forregulation of real property sales contracts, which are de-fined as agreements to convey title to land upon satisfactionof specified conditions set forth in the contract and whichdo not require conveyance within one year of formation ofthe contract.

a. Seller under an unrecorded contract of sale who,without the buyer’s consent, encumbers the land in anamount exceeding the present contract balance, commitsa crime. (Civil Code Section 2985.2)

b. A seller under a contract of sale who knowingly, whilethere is a payment due on an obligation secured by theland, appropriates a payment received from the buyer toany purpose except payment on that obligation commits

a crime. (Civil Code Section 2985.3) This does not applyto any difference between the payment received by theseller over the amount due on the seller’s obligation.

c. If the seller under a contract of sale receives pro rata taxand insurance payments from the buyer, seller must holdthose sums in trust and disburse the funds only for thatpurpose, unless seller has the consent of the buyer andany holder of an encumbrance. To violate this Section2985.4 of the Civil Code is a crime by virtue of Penal CodeSection 506b, which also, redundantly, makes a crime ofviolation of Civil Code Section 2985.3

d. Real property sales contracts entered into after January1, 1978, describing property created by a division of landafter and before that date, must contain a statement by thevendor that the parcel or parcels conveyed either complywith the Subdivision Map Act or meet other criteria. Awillful violation is a misdemeanor. (Civil Code Section2985.51)

THE CODE OF CIVIL PROCEDURES

The principal purpose of the Declared Homestead is toshield the home against creditors of certain types whoseclaims might be exercised against debtors through judg-ment lien enforcement. Effective July 1, 1983, Code of CivilProcedures Sections 704.710-704.990 supersede the formerCivil Code provisions for both the residential HomesteadExemption (Title 9, Article 4, Sections 704.710-704.850) andthe Declared Homestead (Title 9, Article 5, Section 704.910-704.990)

The student is advised to examine cited sections of the Codeof Civil Procedure for details regarding homestead exemp-tions, amounts of homestead exemptions and the contentsof the declaration of homestead.

THE COASTAL ZONE CONSERVATIONACT

This act, and other related laws, implement California’scoastal plan. The act gives most authority to local govern-ments to provide and adopt permanent programs for coastalconservation and preservation of resources. Any subdi-vider planning to develop a tract of land or any ownerplanning any improvements within the Coastal Zone, asdefined by the Coastal Zone Conservation Act, must beprepared to satisfy the local government and obtain acoastal development permit or an exemption under theexclusions from permit requirements. To find out whether

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or not a specific area is in the coastal zone, the nearestregional commission office should be contacted. The coastalzone in general runs the length of the state from the seainland about 1,000 yards, with wider spots in coastalestuarine, habitat and recreational areas and includes about1,800 square miles.

If a subdivision lies within the Coastal Zone as defined inSection 30103 of the Public Resources Code, a copy of thesubdivision’s tentative map must be transmitted to theCalifornia Coastal Zone Conservation Commission.

THE UNIFORM COMMERCIALCODE — DIVISION 9

SECURITY AGREEMENTS & PERSONALPROPERTY SECURED TRANSACTIONS

“Security interest” is a term designating the interest of thecreditor in the property of the debtor whereby certain assetsof the borrower are set aside so that the creditor can reachor sell them if the debtor defaults on his or her obligation.The creditor’s right to look to those assets, and theirproceeds upon sale, if the borrower defaults, is called asecurity interest. The document that describes the rightsand duties of the lender and the borrower is called a securityinstrument. A mortgage and a deed of trust are legalinstruments by which certain real property or collateral ispledged as a guarantee for the repayment of a loan. Theyare security instruments.

In contrast to the trust deed or mortgage whereby realproperty is pledged as security for an obligation (debt), a“security agreement” is the device commonly used to createa security interest in personal property. To protect or“perfect” the interest created by the security agreement, asagainst other security interests and/or lien creditors orsubsequent purchasers, a Financing Statement must befiled in connection with personal property security transac-tions.

A standard form Financing Statement (UCC-1) is commonlyused. If non-standard forms are used, the filing fee isincreased. The Financing Statement should not be con-fused with the actual security agreement. It is the securityagreement which creates the security interest of the securedparty, not the Financing Statement. The FinancingStatement is no substitute for the security agreement be-cause it does not contain the necessary grant of a securityinterest, although it gives other basic information concern-ing the security agreement.

In most cases, a security interest is “perfected” when it has(1) attached and (2) been properly filed with the appropriatefiling officer (the Office of the Secretary of State in Sacra-mento or the office of the appropriate county recorder). Thesecurity interest attaches when: (1) there is agreement bythe parties that it attach, (2) value has been given, the (3)debtor has acquired rights in the collateral.

Division 9 (entitled “Secured Transactions, Sale of Ac-counts, Contract Rights and Chattel Paper”) of the UniformCommercial Code (UCC) contains the unified and compre-hensive scheme for the regulation and control of the sale,creation and priority of all liens and security interests inpersonal property. It covers a transaction in any form whichis intended to create a security interest in personal propertyor fixtures, including goods, documents, installments,chattel paper, accounts or contract rights and similar items.The security interest gives the secured party the right toforeclose and apply the sale proceeds toward the satisfac-tion of the secured obligation should the debtor default.

The UCC became law on January 1, 1965. For all securityinterests created after that date, it replaces all former laws onsecured transactions and all former types of liens andsecurity interests in personal property. There are a numberof transactions excepted from the coverage (Section 9104).Most sections of the UCC apply to security interestswithout regard to the nature of the collateral or its use (e.g.,a chattel mortgage, conditional sale, etc.) although somerules exist for particular types of collateral.

SOME UCC DEFINITIONS

Security Interest — The interest of the creditor in theproperty of the debtor in all types of credit transactions.

Security Agreement — The agreement between the se-cured party and the debtor which creates or provides for thesecurity interest.

Secured Party — The party in whose favor there is asecurity interest; the person holding both the obligationand the security agreement (a mortgagee, conditional seller,pledgee, etc.)

Debtor — The person who owes payment or other perfor-mance of the obligation secured, whether or not he or sheowns or has rights in the collateral (the mortgagor, pledgor,etc.)

Collateral — The property subject to the security interestand includes accounts and chattel paper which have beensold.

Financial Statement — The instrument which is filed in

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order to give public notice of the security interest andthereby protect the interest of the secured party in thecollateral.

Instrument — A negotiable instrument or a security asdefined or any other writing which evidences a right to thepayment of money and is not itself a security agreement orlease and is of a type which is in ordinary course of businesstransferred by delivery with any necessary endorsement orassignment.

Purchase Money Security Interest — A security interesttaken or retained by the seller of the collateral to secure allor part of its purchase price or taken by a person giving valueto the debtor to allow the debtor to acquire rights in or useof the collateral.

Chattel Paper — A writing(s) evidencing both a monetaryobligation and a security interest in or a lease of specificgoods.

Document of Title — Any document which in the regularcourse of business or financing is treated as adequateevidence that the person entitled under the document hasthe right to receive, hold and dispose of the document andthe goods it covers.

Goods — Includes all things which are movable at the timethe security interest attaches or which are fixtures (otherthan goods incorporated into a structure) but excludesmoney, documents, instruments, accounts, chattel paperand general intangibles. Goods are “equipment” whenused or bought primarily for use in a business; or are notincluded in the definition of inventory. Goods are “inven-tory” when held for sale or lease. Goods are “fixtures” whenthey become so related to particular real estate that aninterest in them arises under the real estate law (Section9313). Fixture filings to be perfected must be filed in theproper county recorder’s office and meet the formal require-ments of Financing Statements shown in Section 9402(5)(6).

Consumer Goods — Goods used or bought for use primarilyfor personal, family or household purposes.

Fixtures — “Goods” that are “fixtures” when they becomeso related to particular real estate that an interest in themarises under the real estate law.

Fixture Filing — The filing in the office where a mortgageon real estate would be recorded of a Financing Statementcovering goods which are or are about to become fixtures.

Consumer Goods Generally — Consumer goods (goodsused or bought for use primarily for personal, family orhousehold purposes) present special problems not at-

tempted to be entirely regulated in a general commercialcodification. While Division 0 applies generally to securityinterests in consumer goods, transactions in consumergoods sold or encumbered under installment sales or con-sumer loans may also be subject to certain other regulatorystatutes, such as the Consumer Finance Lending Law(Financial Code 22000, et seq.) and Retail Installment SalesAct (Civil Code 1801, et seq.

WHY THE UCC?

The basic purpose of the Uniform Commercial Code is toprovide a simple and unified structure within which theimmense variety of present-day secured financing transac-tions can be completed with less cost and greater certaintyby discarding the traditional distinctions that once empha-sized the "form" of the transaction rather thanthe "function."

The UCC no longer refers to chattel mortgages, conditionalsales contracts, trust receipts, assignment of accountsreceivable, and similar items, but brings all these traditionalsecurity interests in personal property under the Articlewithout distinguishing the form by merely labeling them assecurity interest, although their function may be the func-tion of a chattel mortgage, a conditional sales contract, etc.

The Uniform Commercial Code enacted by the Californialegislature in 1965 was basically the Uniform CommercialCode as proposed by the National Conference of Commis-sioners on Uniform State Laws and the American Law Insti-tute, but in some particulars varied from the "official text."

As amended over the years, the purpose of the UCC is tomaintain a uniform, clear and easily available set of rules forthe conduct of commercial transactions in this state and totie in with other states in providing a method of developmentand expansion with interstate commerce. Although theinstrument creating the security interest may still be filed asa non-standard Financing Statement providing it meets therequisites for a Financing Statement contained in UCCSection 9402, the single term security interest substitutesfor the variety of descriptive terms which grew up atcommon law and under a 100-year accretion of statutes.

The law does not determine whether title to collateral is inthe secured party or in the debtor and adopts neither a “titletheory” nor a “lien theory” of security interests. Rights,obligations and remedies do not depend upon the locationof title. The location of title may become important for otherpurposes — e.g., determining taxation — and in such casesthe parties are left free to contract as they will. In thisconnection the use of a form which has traditionally been

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regarded as determinative of title (e.g., conditional sales)could reasonably be regarded as evidencing the parties’intention with respect to title to the collateral.

A more rational filing system has replaced the former systemof different files for each security device which is subject tofiling requirements. Thus not only is the information con-tained in the files made more accessible, but the cost ofprocuring credit information, and, incidentally, of maintain-ing the files, is greatly reduced.

PRIORITIES

One purpose of the Uniform Commercial Code Division 9 isto give lien rights to providers and installers of fixtures. Aperfected security interest in fixtures by the provider haspriority over the conflicting interests of owners andsubsequent encumbrancers.

Who then has priority when different claimants have con-flicting secured interests in the same collateral? Basically,it is the same as applies to any recording sequence — “firstin time is first in right.” The secured creditor who is first tofile according to the requirements of the statute has thepriority, regardless of when his or her claim arose. However,Sections 9301 (2) and 9312 (4) grant sellers special priorityon purchase money security interests when perfected withten days of the purchaser’s receiving possession of thecollateral.

Section 9312 of the UCC sets forth the basic rules of priorityamong conflicting security interests in the same collateraland Section 9313 gives the priority rules for liens of a trustdeed and other fixture filings.

Caution — This chapter contains general informationconcerning the requirements of filing under the codewhich are intended to merely introduce the student to thecode’s Division 9 which applies to any transaction intendedto create a security interest in personal property of everykind. Reference to the matters contained in this section onthe Uniform Commercial Code should not serve as substi-tutes for statutory analysis when dealing with specificproblems, consultations with legal counsel on legal mat-ters, or with financial counsel on banking or financingproblems.

THE ENVIRONMENTAL QUALITY ACT

Environmental Impact Reports may be required by localgovernments prior to approval of a map for a subdivision.Subdivision developers should determine as early as pos-sible (preferably prior to filing for a tentative map or a parcelmap) whether an EIR will be required for the project. In

nearly all cases, the city or county authorities will beresponsible for determining the necessity for an EIR; butin some cases, the responsibility for preparation of the EIRwill be that of the Department of Real Estate.

Environmental Impact Reports are required subject to theCalifornia Environmental Quality Acts of 1970 (CEQA) andPublic Resources Code Sections 21000-21176.

The procedures and regulations pertaining to Environmen-tal Impact Reports, including information concerning thepossibility of a Negative Declaration in lieu of anEnvironmental Impact Report will be found in the Rules andRegulations of the Resources Agency, Sections 15000-15387, Title 14, California Administrative Code. Theseregulations are available from the Department of GeneralServices, Office of Procurement, Documents Section, Sac-ramento, California 95820.

Also, refer to Sections 2820 through 2823.1 of the Regula-tions of the Real Estate Commissioner for specific proce-dures to be followed when the Department of Real Estate isthe responsible agency for environmental impact evalua-tion for certain subdivision projects.

CALIFORNIA FINANCIAL CODEDIVISION 6

The Escrow Law, Division 6 of the California Financial Code,provides that escrow agents must be licensed by theCommissioner of Corporations.

Exemptions from the licensing requirements of the EscrowLaw are granted to banks, savings and loan associations,title insurance companies, attorneys and real estate brokers.The exemptions granted to these entities are limited exemp-tions, and the entities are regulated by their respectiveregulatory agencies.

The exemption for real estate brokers (Section 17006 (d) ofthe Financial Code) was amended by the 1980 legislativesession to provide that the exemption applies to any brokerlicensed by the Real Estate Commissioner while performingacts in the course of or incidental to a real estate transactionin which the broker is a party or in which the broker is anagent performing an act for which a real estate license isrequired.

The Department of Corporations has interpreted Section17006 (d) to mean that: (1) the exemption is available onlyto the real estate broker; (2) the exemption is personal to thebroker and the duties, other than ministerial functions,

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cannot be delegated by the broker; (3) in a purchase and saletransaction, if the broker is not a party, he must be the sellingor listing broker; (4) the exemption is not available for anyassociation with other brokers for the purpose of conduct-ing escrows; and (5) when the broker’s escrow business isa substantial factor in the utilization of the broker’s services,the escrow business is not “incidental to his real estatebusiness.” The broker may not delegate or “contract out”any escrow services that may be provided pursuant to theexemption.

A broker cannot advertise that he or she conducts escrowswithout specifying in the advertisement that such servicesare only in connection with the broker’s real estate broker-age business. A broker also may not use a fictitious nameor a corporate name containing the word “escrow,” oradvertise in any other manner which would tend to bemisleading to the public.

Furthermore, the Real Estate Commissioner has ruled thatany real estate licensee who acts as an escrow holder underthis exemption must maintain all escrow funds in a trustaccount subject to inspection by the Commissioner, andkeep proper records. The licensee is advised to follow theprovisions of Section 2950 and 2951 of the Commissioner’sRegulations without exception, since failure to do so willsubject the broker to disciplinary action.

DEVELOPER PROHIBITION

Civil Code Section 2995 prohibits any real estate developer(defined as any person or entity having an ownershipinterest in real property which is improved by such personor entity with single-family dwellings which are offered forsale to the public) from requiring as a condition precedentto the transfer of real property containing a single-familyresidential dwelling that escrow services effectuating suchtransfer be provided by an escrow entity in which thedeveloper has a “financial interest.”

In other words, if a developer has a financial interest in anescrow service, he or she may not require that buyers usethe services of that escrow entity as a condition of transferof single-family dwellings which he or she is selling. “Finan-cial interest” means ownership or control of 5 percent ormore of an escrow entity. The law imposes on developersviolating its provisions a liability for damages in an amountequal to the greater of $250 or three times the charge forescrow services, plus attorney’s fees and costs. Anywaiver of the prohibition is void as against public policy.

THE MANY LAWS OF MOBILEHOMESALES

Real estate brokers were given a limited right to act as agentsin the sale of mobilehomes as a result of legislation whichbecame effective on July 1, 1975 (Stats. 1974, Chapter 1351,Section 1). Many laws apply to mobilehomes: Real EstateLaw, Health and Safety Code, Revenue and Taxation Code,Business and Professions Code, Vehicle Code, Revenueand Taxation Code, and Administrative Code, as well as theFederal Truth-In-Lending Law.

The following discussion of the legislation and subsequentamendments is a general outline of some of the importantissues relating to the sale of mobilehomes. It is not designedto provide detailed information on all aspects of mobilehomesales transactions.

The right of a real estate licensee to act as an agent inconnection with the sale of a mobilehome was originallylimited by statute to certain factors pertaining to the age ofthe mobilehome, the length of time the mobilehome had beenregistered with the Department of Motor Vehicles (DMV),the location of the mobilehome at the time of the sale, andother specific limitations which controlled the activities ofa licensee when offering a mobilehome for sale.

Legislation which became effective on July 1, 1980, ex-panded to some extent the ability of licensees to act asagents in the sale of mobilehomes, provided the require-ments of Section 18551 of the Health and Safety Code are metfor transforming a mobilehome to real property.

Once the mobilehome has been transformed into real prop-erty, it is treated, for most purposes, in the same manner asother residential real property offered for sale or lease orfinance.

RESTRICTIONS

Because there are statutory restrictions on the activities oflicensees when offering for sale a mobilehome which hasnot been transformed into real property, a short discussionabout these restrictions is in order.

A mobilehome is defined as a “structure transportable inone or more sections, designed and equipped to contain notmore than two dwelling units to bused with or without afoundation system.” (Business and Professions Code Sec-tion 10131.6 (c)). “Recreational vehicles,” “commercialcoaches” and “factory-built housing,” as defined in Healthand Safety Code Sections 18010, 18001.8 and 19971, respec-tively, are not mobilehomes (Business and Professions

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Code Section 10131.6 (c)). Licensees should be careful notto confuse the term “factory-built housing,” which is basi-cally modular or prefabricated housing, and the term “manu-factured home,” which also means a mobilehome (Healthand Safety Code Section 18007).

There are three sections of the Business and ProfessionsCode which direct the activities of licensees when sellingmobilehomes: 10131.6, 10131.7, and 10177.2. Under theprovisions of Section 10131.6 real estate brokers and sales-persons may sell or offer to sell, buy or offer to buy, solicitprospective purchasers of, solicit or obtain listings of, ornegotiate the purchase, sale or exchange of anymobilehome if the mobilehome has been registered underthe provisions of Division 3 (commencing with Section4000) of the Vehicle Code, or Part 2 (commencing withSection 18000) of Division 13 of the Health and SafetyCode for at least one year.

This means that with the exception of those mobilehomeswhich have been transformed into real property underHealth and Safety Code Section 18551, licensees can onlysell mobilehomes which are at least one year old and whichhave been registered either with the Department of MotorVehicles (DMV) or the Department of Housing and Commu-nity Development (HCD) for at least one year. Becauseregistration is not required until a mobilehome is sold,licensees must be careful not to rely solely on the age of themobilehome but on the length of time it has been registered.

In addition to the limitations on the age of the mobilehomeand the length of time which it must be registered, Businessand Professions Code 10131.6, subsection (b), prohibits abroker from maintaining a place of business at any locationwhere two or more mobilehomes are displayed and offeredfor sale, unless the broker is also licensed as a mobilehomedealer.

Business and Professions Code Section 10131.7 also con-tains other limitations on the activities of a licensee inconnection with the sale of a mobilehome.

Such a licensee is restricted in the following ways under thisSection of the Code:

1. May not advertise or offer for sale in any manner anymobilehome unless it is either in place on a lot rentedor leased for human habitation within an establishedmobilehome park, or the mobilehome is otherwiselocated, pursuant to a local zoning ordinance orpermit, on a lot where its presence has been authorizedor its continued presence and such use would beauthorized for a total and uninterrupted period of atleast one year.

(Note: This provision attempts to ensure that purchaserswill have a place to locate their mobilehome and on whichzoning ordinances permit occupancy for residential pur-poses.)

2. The advertising or offering for sale must not becontrary to any terms of a contract between the sellerof the mobilehome and the owner of the mobilehomepark.

3. It is unlawful to fail to withdraw an advertisementof a mobilehome for sale within 48 hours after receiptof notice that the mobilehome is no longer availablefor sale, lease, or exchange.

4. It is unlawful to represent the mobilehome as new,since, with the exception discussed below, a mobilehomemust be at least one year old before a broker can offerit for sale. (Note: This provision is consistent with therequirements of Business and Professions Code Sec-tion 10131.6)

5. There is a prohibition against proration of licenseor transfer of title fees for mobilehomes unless the buyerand seller have agreed to the proration of the fees orthe licensee was required to pay the fees in order toavoid penalties that would have been imposed for latepayment.

6. It is unlawful to (a) represent that the mobilehomecan be transported on a California highway unless itmeets all the requirements applicable to mobilehomesof Division 12 (commencing with Section 24000) of theVehicle Code or (b) to fail to reveal any material factpertaining to equipment requirements. Knowledge ofthese particular facts is particularly important whennegotiating the sale of a mobilehome which is to bemoved from one site to another. (Note: In addition tostatutory equipment requirements for the moving of amobilehome over the public highways, a permit mustalso be obtained — Section 35790 of the Vehicle Code.This permit must be obtained either from the Depart-ment of Transportation or from the local authority withrespect to highways under its jurisdiction. The permitmay be issued on a special or annual basis. Whenevera mobilehome is to be moved, licensees should contactDMV or HCD to ensure that all laws and regulationspertaining to the move are followed.)

7. It is unlawful to advertise or otherwise represent,or to knowingly allow to be advertised or represented,that no downpayment is required in connection withthe sale of a mobilehome when a downpayment is infact required and the buyer is advised or induced tofinance such downpayment by a loan in addition to

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any other loan financing the remainder of the pur-chase price of the mobilehome. Licensees should alsofamiliarize themselves with the requirements of condi-tional sales contracts when used in connection withthe sale of a mobilehome.

8. It is unlawful for a licensee to fail or neglect to causethe endorsement, dating and delivery of the certificateof ownership or certificate of title of the mobilehome,and when in the possession of the licensee to fail todeliver the registration card to the purchaser who islawfully entitled to a transfer of registration. Gener-ally, the deliver requirement is satisfied by submittingthrough the HCD the appropriate transfer and regis-tration documents in accordance with Sections18100.5, et seq. of the Health and Safety Code.

In addition to the restrictions outlined above, as presentedin Section 10131.7 of the Business and Professions Code,there are further restrictions on licensees who performwithin the scope of Section 10131.6. They are found inSection 10177.2, and are the following grounds for disciplineby the Commissioner:

1. Using a false or fictitious name, knowingly makinga false statement, knowingly concealing a false fact inany application for registration or otherwise commit-ting a fraud in such an application.

2. Failure to provide for delivery of a properly en-dorsed certificate of title or ownership from the sellerto the buyer.

3. Knowingly participating in the purchase or saleof a stolen mobilehome.

4. Violation of one or more of the terms and provisionsof Part 2 (commencing with Section 18000) of Divi-sion 13 of the Health and Safety Code or Part 5(commencing with Section 10701) of Division 2 of theRevenue and Taxation Code, or Chapter 2b (com-mencing with Section 2981) of Title 14 of Part 4 ofDivision 3 of the Civil Code, or a rule or regulationadopted pursuant thereto.

5. Submission of a check, draft, or money order to HCDfor any fee or obligation due the State for whichpayment is refused or presentation.

MOBILEHOME TRANSFORMED TOREAL PROPERTY

The sections of the Business and Professions Code we havejust discussed are not applicable to a situation in which a

licensee is offering to sell a mobilehome which has beenattached to a foundation system in accordance with therequirements of Section 18551 of the Health and SafetyCode. This section became effective on July 1, 1980, andpermits licensees to offer for sale and sell mobilehomesregardless of age, provided the conditions described inSection 18551 are satisfied.

There are four principal prerequisites for transforming amobilehome into real property: (1) obtaining a buildingpermit, (2) placing a mobilehome on a foundation (3) obtain-ing a certificate of occupancy and (4) recording a documentreflecting that the mobilehome has been affixed to a foun-dation system. There are also six preconditions which mustbe met before a local agency can issue a building permit.These are set forth in Health and Safety Code Sections18551(a)(1) through 18551(a)(6).

After a mobilehome has been installed on a foundationsystem pursuant to Section 18551, it is deemed a fixture orimprovement to the real property and is taxed as such. Oncea mobilehome has been transformed into real property itis no longer considered a vehicle for purposes of registra-tion or any other purposes. Attachment to a foundationsystem in accordance with the provisions of Section 18551also results in other consequences for the mobilehome, itsowner and the licensee.

First, the mobilehome is taxable as real property. Secondly,DMV or HCD must cancel its registration, and title to themobilehome is thereafter registered with the county re-corder and ownership is transferred accordingly (until itsremoval from the foundation). Finally, once a mobilehomehas been transformed into real property, it appears thatSection 10131.6(b) of the Business and Professions Code isno longer applicable. Real Estate brokers should be able tomaintain an office to engage in the sale of mobilehomes atany location where all except one of the mobilehomes havebeen attached to a foundation system.

TAXATION OF MOBILEHOMES

After a mobilehome has been attached to a foundationsystem pursuant to Section 18551, it is taxable in the samemanner as other real property. Mobilehomes which are soldnew after July 1, 1980, but which are not attached to afoundation system pursuant to Section 18551, andmobilehomes sold new on or before June 30, 1980, for whichvehicle license fees are 120 days or more delinquent on,or at any time after July 1, 1980, will be taxed as personalproperty. Taxation as personal property will be virtuallyindistinguishable from taxation as real property.

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Those mobilehomes sold new on or before June 30, 1980, willcontinue to be taxed as vehicles, i.e., license fees willcontinue to be paid until either permanently attached to afoundation pursuant to Section 18551 or until the registra-tion fee is delinquent for 120 days or more. (These fees willbe payable to HCD commencing on July 1, 1981.)

A broker engaged in the sale of mobilehomes should, withsome degree of assurance, be able to advise clients andprospective clients of the following:

1. A mobilehome affixed to a foundation, certified, re-corded, etc. after July 1, 1980, will be entered on the realproperty tax rolls of the county and will be taxed as realproperty.

2. Mobilehomes with license fees delinquent for 120 daysor more as of or after July 1, 1980, will be reported by DMVor HCD to the assessor of the county in which themobilehome is located and will then be placed on theunsecured property tax rolls.

3. Mobilehomes on foundations before or after July 1,1980, but not legally so in accordance with Section 18551,if license fees are 120 days or more delinquent, will appearon the unsecured property tax rolls and will be taxed aspersonal property.

REMOVAL OF A MOBILEHOME FROMITS FOUNDATION

The new law prohibits removal of a mobilehome that hasbeen attached to a foundation in accordance with theprovisions of Section 18551 unless the following conditionsare met: (1) all persons who have title to any estate or interestin the real property consent to its removal, and (2) 30 daysprior to removal, the owner of the mobilehome notifies HCDand the local assessor of its intended removal.

HCD must be given written evidence of the consent toremoval of all persons having title or interest in the realproperty. HCD will then require the owner to obtain atransportation permit or mobilehome registration, which-ever it deems appropriate. Once removed from the perma-nent foundation, the mobilehome will be treated as personalproperty or as a vehicle, depending upon when it was firstsold new and if at time of attachment its license fees were 120days or more delinquent.

TRANSFER OF TITLE

Beginning on July 1, 1981, and thereafter, all mobilehomesmust be annually registered and licensed with HCD. Reg-istrations previously issued by the Department of MotorVehicles will be transferred to HCD. Those registrations

issued by DMV will remain valid until renewed, replaced,transferred, suspended or revoked. The primary exceptionsto the annual registration and licensing requirements are thefollowing: (1) mobilehomes sold new on or before June 30,1980; (2) mobilehomes sold new on or before June 30, 1980which are 120 days or more delinquent in payment of licensefees; and (3) those mobilehomes affixed to a foundationpursuant to Health and Safety Code Section 18551.

Those mobilehomes sold new on or after July 1, 1980, will beregistered only at the time of sale, resale or transfer of title.Once a mobilehome is placed on the local tax rolls becauseof delinquencies in the payment of license fees, it too willonly be subject to new registration upon sale, resale ortransfer of title. The reason these mobilehomes are exceptedfrom registration fee requirements is that they pay annuallocal property taxes (personal or real property) rather thanvehicle license fees. There are other exceptions to theregistration requirements set forth in Section 18075.5 of theHealth and Safety Code, which essentially exempt foreignmobilehomes owned by nonresidents of California.

Requirements for transferring title and registering amobilehome with HCD are set forth in Section 18100.5, etseq., of the Health and Safety Code. Upon registration withHCD, HCD must issue a certificate of title to the registeredowner.

A real estate broker engaging in used mobilehome salesmust, not later than the end of the tenth calendar day afterthe sale of a mobilehome that is subject to registration, givewritten notice of the transfer to the headquarters office ofthe Department of Housing and Community Developmenton a form prescribed by that department. (Regulation 2861of the Real Estate Commissioner and Section 18100.5, Healthand Safety Code.)

The certificate of title must contain all of the following:

1. Information required on the registration card (the truename and mailing address of the registered owner, thelegal owner if any, and junior lien holder if any; the nameof the county in which the registered owner resides; thesitus of the mobilehome, including county; a descriptionof the mobilehome);

2. Provisions for transferring title;

3. Provisions for application for transfer of registration bythe purchaser or transferee;

4. A statement that the certificate may not reflect all liens.

All persons who acquire or release an interest in amobilehome must notify HCD within 20 days of the date ofrelease of acquisition (Health and Safety Code Section

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18100.5). HCD must then amend the registration and certifi-cate card and provide a copy of amended registration to alllien holders. Both the transferor and transferee must thensign the certificate of title. Before registration will betransferred, if the mobilehome is taxable as property, thecounty tax collector must issue a tax clearance. In addition,if the mobilehome is to be located in a mobilehome park, thepurchase agreement must contain a provision signed by thebuyer stating that he has agreed to the terms of the existingrental agreement.

Licensees should refer to Health and Safety Code Sections18080-18110 and appropriate HCD regulations for a detailedunderstanding of the requirements which must be followedin order to transfer title to a mobilehome and establish a lieninterest. Knowledge of these criteria is particularly impor-tant in order to perfect a security interest in a mobilehome.Refer also to the section earlier in this chapter on securityinterests.

MOBILEHOME SALES OFFICE

Under Section 10131.6(b) of the Real Estate Law, a real estatebroker may not maintain an office to engage in the sale ofmobilehomes at any place where two or more mobilehomesare displayed or offered for sale unless he also has amobilehome dealer’s license. However, when a mobilehomeis transformed into real property through compliance withthe requirements of Section 18551, the limitations of Section10131.6(b) are no longer applicable. A broker can set up anoffice where all of the mobilehomes except one have beenplaced on foundations with proper certification and recor-dation.

Special Problems

1. Section 10147.5 Notice: The Notice required by thissection of the Business and Professions Code regardingthe negotiability of the amount or rate of commissions isapplicable to the sale of mobilehomes, whether themobilehome is considered real or personal property or avehicle.

2. Out of State Mobilehomes: Mobilehomes which arepurchased out-of-state and brought into California aretreated, for tax purposes, in the same manner as if theywere originally registered in California. For example, if themobilehome was sold new on or after June 30, 1980, it willbe taxed as personal property. There are potential regis-tration problems relating mainly to documenting owner-ship and out-of-state registration. Licensees should referto Health and Safety Code Section 18075.5, et. seq., fordetailing of the documentation necessary to register anout-of-state mobilehome in California.

3. Escrows: When selling a mobilehome, licensees are notrequired to use third party escrow holders, unless they areperforming acts which require a vehicle dealer’s license.When acting as a vehicle dealer, escrows must be con-ducted in accordance with Health and Safety Code sec-tion 18035. If a broker chooses not to use a third partyescrow in connection with a mobilehome sale transaction,then he must comply with the terms of Section 2950, Title10 of the California Administrative Code.

Title to mobilehomes may be held in joint tenancy, astenants in common or as community property. The mannerin which title is taken will affect the ability of an owner totransfer title to and/or encumber his mobilehome. If title isheld as joint tenants, the signatures of all joint tenants arenecessary to transfer or encumber the mobilehome. Whentitle is held as tenants in common, either tenant can transferhis interest, but he may not encumber his interest withoutthe signature of the other tenant. When title is held ascommunity property the signature of each spouse is alsorequired to transfer title or encumber the mobilehome.

In the preparation of escrow instructions, knowledge of thecapacity of persons to transfer title is essential. Theseinstructions should identify the mobilehome as specificallyas possible. it is suggested that the information containedin the registration card be used to identify the mobilehomebeing transferred or encumbered. Reference to the registra-tion statement will assist the licensee in determining whetheror not the mobilehome has been registered with DMV orHCD for one year and if it is located on a site coming withinthe provisions of Business and Professions Code Section10131.7(a).

When preparing escrow instructions, the proration of usualitems such as ground rent, or taxes is permissible. Theproration of license fees is permitted if buyer and seller agreeto it.

If an escrow is used, the sale is complete upon the close ofescrow. When no escrow is used the sale is completed whenthe buyer has signed a purchase contract or securityagreement and has taken possession of the mobilehome.Regardless of whether or not an escrow is used, the provi-sions of Health and Safety Code Sections 18100.5 and 18101must be followed to effect a transfer of title and the provi-sions of Sections 18103.5 through 18106 must be followedto perfect a security interest.

4. Moving the Mobilehome: The requirements for movinga mobilehome from one site to another were discussedearlier. Nevertheless, there are special problems associ-ated with transfer of mobilehomes from one site to an-other. Every licensee when negotiating the sale of a

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mobilehome which is going to be moved should be familiarwith the various rules. For this purpose, a licensee shouldcontact DMV or JCD for a complete set of rules andregulations pertaining to the transportation ofmobilehomes.

5. Mobilehome Trailer Parks: There is extensivestatutory regulation on the rights and duties of landlordsand tenants of mobilehome parks which is too extensiveto discuss here. Licensees should review the MobilehomeResidency Law, Sections 798, et seq., of the Civil Code andthe Mobilehome Parks Act, Sections 18200, et seq., of theHealth and Safety Code.

Clearly, the real estate agent choosing to specialize inmobilehome sales must be proficient in the intricacies ofthis complicated field and a master of the business in orderto avoid the many pitfalls awaiting the unqualified. TheCalifornia Association of Realtors has published a bookentitled “Mobilehomes” which offers opinions, sugges-tions, guidelines of experts in this field, and insights intothe complexities of this growing area of service and oppor-tunity for real estate licensees.

STATE HOUSING LAW

HOUSING STANDARDS

The State Housing Law and various housing codes requirea landlord to keep a dwelling in good condition in accor-dance with specified structural, plumbing, electrical, sanita-tion, fire, and safety standards. These laws are generallyenforced by local city and county agencies, such as theBuilding Inspection Department, Health Department, or FireDepartment, depending on the type of problem. If there isa violation, a tenant can file a complaint with the appropriatedepartment. They can investigate the complaint and requirethe landlord to make needed repairs.

There are other remedies available to a tenant if the landlordfails to maintain the property in a condition fit for humanoccupancy. The tenant may give the landlord a notice torepair and do either of the following if the landlord fails tomake the repairs necessary to render the property habitable:

1. Spend up to one month’s rent in repairs(Note: This re-medy is available no more than twice intwelve months)or:

2. Abandon the premises, in which case the tenant isrelieved from the requirement of paying additional rentand the performance of other conditions of the lease.

If the landlord attempts to evict the tenant or increase therent or decrease services in retaliation against the tenant’shaving utilized one month’s rent to repair the property, thelandlord may be restrained by court order from undertakingany such retaliatory action for a period of sixty days.

THE LABOR CODE

The California Labor Code is important to real estate licens-ees in terms of employer-employee relationships. Anordinary employee, or servant, is defined in the Labor Codeas one employed to render personal services to the person’semployer, otherwise than in pursuit of an independentcalling, and who, in such service, remains entirely under thecontrol and direction of the master.

A servant works for his or her master, while an agent not onlydoes this, but acts for and in place of the principal for thepurpose of making contracts and thus bringing the principalinto legal relationships with third persons. Thus a filingclerk in an office, or a machinist in a factory, would beordinary employees. A broker normally would not beclassified as an employee. For purposes of the Real EstateLaw, a real estate salesperson is an agent of the real estatebroker under whom he or she is licensed. If the broker is acorporation, the salesperson is an agent of the corporation,not of the supervising qualifying broker. (Walters v. Marler,1978, 83 Cal.App.3d 1, 147 Cal.Rptr.655.)

An independent contractor is one who, in renderingservices, exercises an independent employment or occu-pation and is responsible to the employer only as to theresults of his or her work. An important factor in establish-ing one as an independent contractor is that the individualdetermines the method of accomplishing the work for whichthe individual has contracted.

Real estate brokers are almost always independent contrac-tors. Under the law of agency a real estate broker isordinarily deemed a special agent who deals in the name ofthe broker’s principal, but does not have custody andcontrol of the subject matter of the agency.

For purposes of the Real Estate License Law — and this isof primary significance to a licensee — salespersons areemployees of the broker as a matter of law and cannot beindependent contractors. A contract between a salesper-son and his/her broker in which the salesperson is charac-terized as an independent contractor does not make it sounder the Real Estate Law. Questions relating to how othergovernmental agencies view the broker-salesperson rela-tionship should be referred to those agencies.

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It should be remembered, however, that the broker-sales-person status under one law does not establish what thatstatus is under different laws, rules, or circumstances. Forpurposes of federal and state income tax, worker’s compen-sation, unemployment insurance or other matters outsidethe scope of the License Law, the relationship of broker andsalesperson is a question of fact. Brokers need not, how-ever, pay real estate salespersons the minimum wage gen-erally required in the Labor Code.

THE PORTER-COLOGNE WATERQUALITY CONTROL ACT

Subdivisions which are planned for residential purposesmust have an adequate water supply. The subdivider cancheck with the local water company to ascertain the feasi-bility of connecting to an existing public water supply.Normally the utility company determines the required sizeof connections to supply an area and to provide for futureextensions.

If there is no local water company, the subdivider investi-gates alternative methods of supplying water. The creationof special water districts for the purpose of furnishing waterto a subdivision is a possible method and one which is oftenused.

The quantity of water needed for a given site, the populationserved, and average daily use for all purposes has to beestimated. The quantity of water must meet the needs of thepopulation without lowering pressure at fire hydrants.

Quality of water should meet the standard of the local healthdepartment or the State Department of Health Services.

Predicated upon the truism that the people of the state havea primary interest in the conservation, control, and utiliza-tion of its water resources, and that the quality of all itswaters should be protected for use and enjoyment by itscitizens, the legislature enacted the Porter-Cologne WaterQuality Control Act that provides for a statewide programfor the control of the quality of all the waters of the state.(Water Code Sections 13000 et seq.)

The act is administered by nine regional control boards(North Coast Regional, et al.), within a framework of state-wide coordination and policy by the State Water QualityControl Board.

The following provision of the Act (Section 13266 of theWater Code) is of particular import to subdividers:

“Pursuant to such regulations as the regional board mayprescribe, each city, county, or city and county, shall notify

the regional board of the filing of a tentative subdivisionmap, or of any application for a building permit which mayinvolve the discharge of waste, other than discharges intoa community sewer system and discharges from dwellingsinvolving five-family units or less.

THE UNIFORM PARTNERSHIP ACT

Tenancy in partnership exists when two or more persons, aspartners, own property for partnership purposes. Under theUniform Partnership Act, the incidents of tenancy in part-nership are such that:

1. A partner has an equal right with all other partners topossession of specific partnership property for partner-ship purposes. Unless the other partners agree, however,no partner has a right to possession for any other purpose.

2. A partner’s right in specific partnership property is notassignable except in connection with the assignment ofrights of all the partners in the same property.

3. A partner’s right in specific partnership property is notsubject to attachment or execution, except on a claimagainst the partnership.

4. Upon death, a partner’s right in specific partnershipproperty vests in the surviving partner or partners. Therights in the property of the last surviving partner wouldvest in the decedent’s legal representative. In either case,the vesting creates a right to possess the partnershipproperty only for partnership purposes.

5. A partner’s right in specific partnership property is notsubject to dower or curtesy (both have been abolished inCalifornia by statute), nor allowance to widows, heirs, ornext of kin. Even when married, a partner’s right is notcommunity property. On the other hand, a partner’sinterest in the partnership as such (that is, a partner’sshare of profits and of surplus) is governed by communityproperty rules for some purposes.

When it is realized that a partnership is “an association oftwo or more persons to carry on as co-owners a business forprofit,” the reasonableness of the foregoing “incidents” isapparent. Without them, continuity and unified, efficientoperation might be impossible. They do not, however,prevent the partners from owning different fractional partsof the business. Thus, although each partner has unlimitedliability to third parties for firm debts, as among the partners,each partner’s interest in profits and losses may be anypercentage agreed upon.

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THE UNIFORM VENDOR ANDPURCHASER RISK ACT

It sometimes happens, although infrequently, that after acontract is made for the purchase and sale of real property,a fire or other disaster destroys or seriously damages theproperty. Who shall take the loss? Under California’sUniform Vendor and Purchaser Risk Act, any contract madein this state for the purchase and sale of real property shallbe interpreted as including an agreement that the partiesshall have the following rights and duties unless the con-tract expressly provides otherwise:

(a) If, when neither the legal title nor the possession ofthe subject matter of the contract has been transferred,all or a material part thereof is destroyed without faultof the purchaser or is taken by eminent domain, theseller cannot enforce the contract, and the purchaseris entitled to recover any of the portion of the pricepaid;

(b) If, when either the legal title or the possession of thesubject matter of the contract has been transferred, allor any part thereof is destroyed without fault of thevendor or is taken by eminent domain, the purchaseris not thereby relieved from a duty to pay the price, norentitled to recover any portion thereof that has beenpaid.

THE USURY LAW

Proposition 2 on the November 6, 1979 Special StatewideElection Ballot had its origin in the 1979 California Legisla-ture as Assembly Constitutional Amendment 52. It receivedthe approval of voters and became effective November 7,1979, and amended California’s Constitutional usury law(Article XV, Section 1) and Civil Code Section 1916-1, et seq.

Proposition 2 made several significant changes to theconstitutional provisions (Article XV) on usury. The mostmeaningful of these changes to those who are involved inreal estate finance is the one which exempts any loan “madeor arranged by...a real estate broker...and secured...by...realproperty” from any interest rate limitation.

However, a federal law (Public Law 96-221, 94 Stat. 132, theDepository Institutions Deregulation and Monetary Con-trol Act of 1980) went into effect on April 1, 1980. The newfederal law pre-empts in certain inconsistent provisions ofthe California Constitution as amended: as a practical mat-ter, the state’s usury laws now apply only to private lenders.

The federal regulations which implement this law provide

for pre-emption of state interest ceilings with respect tofederally-related residential first mortgage loans made afterMarch 31, 1980. The regulations: (1) describe mortgagelenders subject to the statute and regulations; (2) definemortgage loans covered by the statute and regulations; (3)provide special rules for loans secured by first liens onmobilehomes; and (4) provide notice that interpretations ofthe statute will be issued upon written request.

The purpose of this pre-emption of state interest-rateceilings applicable to federally-related residential mortgageloans is to ensure that the availability of such loans is notimpeded in states having restrictive interest limitations.

Therefore, the provisions of the constitution or law of anystate expressly limiting the rate or amount of interest,discount points, finance charges, or other charges whichmay be charged, taken, received, or reserved shall not applyto any federally-related loan made after March 31, 1980, andsecured by a first lien on:

• Residential real property;

• Stock in a residential cooperative housing corpora-tion when the loan is used to finance the acquisition ofsuch stock; or

• A residential manufactured home. The act has no pre-emption on prepayment charges, attorneys’ fees, latecharges or other provisions designed to protect borrow-ers in state laws.

Under present California Constitutional law, there are noconstitutional interest rate ceilings on exempt loans. TheConstitution states that the following kinds of loans areexempt:

a. Loans made by banks and savings and loans

b. Loans made by credit unions (however, statutory interestrate ceilings may apply)

c. Loans made by personal finance companies andpawnbrokers (however, statutory interest rate ceilingsmay apply)

d. Loans secured by liens on real property and madeor arranged by persons licensed as real estate brokers(while no statutory rate ceilings apply, other charges areregulated).

If a business or consumer loan is made or arranged by alicensed real estate broker, is secured by a bona fidemortgage, deed of trust or other security interest in realproperty, and is of a kind for which the broker must belicensed, there is no legal limit on the interest that can becharged, even if the loan is a consumer loan. Loans whichare not exempt include personal loans by the real estate

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broker of a kind that could be made without a license, andalso loans by a non-exempt lender which the broker has notactually “arranged.” A broker is not an “arranger” if thebroker is a mere employee of the lender or does not bear afiduciary relationship to the borrower.

SPECIAL ASSESSMENT ACTS

Special assessments differ from property taxes in that thelatter are levied for support of the general functions of gov-ernment, whereas the special assessments are levied for thecost of specific local improvements such as streets, sewers,irrigation, and drainage. In some instances, special assess-ments are periodically levied by improvement districts; inother instances, they are levied only once by the city orcounty for a particular work or improvement. Just as it isimportant for real estate professionals to understand prop-erty taxation, it is important to know something about spe-cial assessments. Since1885 California has enacted numer-ous acts relating to special taxes and assessments and to theformation of easement districts throughout the state. Thefollowing are among the more important assessment acts:

1. Vrooman Street Act. This act was passed in 1885 andconferred authority on city councils to grade and finishstreets, construct sewers, etc., within municipalities orcounties. It further provided for an election and theissuance of bonds secured by special funds collectedunder tax levy. It also provides for the acquisition ofpublic utilities by the municipality or county. A propertyowner may arrange for the street grading according toofficial specifications and secure an offset in the amountof the assessment.

2. Street Opening Act of 1903. The purpose of this actwas to provide for the opening, widening, extension andstraightening of streets and highways and for the acqui-sition of property in connection therewith. The assess-ments are computed according to the benefits derived andthe act provides that the owners shall pay said assess-ments within 30 days after notice. This was made appli-cable to counties in 1923.

3. Street Improvement Act of 1911. This act, as amended,is an act which is utilized more than any other for streetimprovements in this state. It may now be used in thecounty as well as within the city. Assessments may bepaid in equal installments during the term of the bonds,and the local legislative body determines the rate ofinterest which they shall bear. The amount of assess-ments may be paid with local taxes, and such amounts asmay be due appear on the tax bill. The total assessmentagainst each parcel is known and becomes a lien againstthe property.

Bonds may be paid off at any time. Under this act the costof improvements against each parcel may be paid within 30days after the completion of the work to the contractor,thereafter to the municipality. If the bonds are unpaid 30days after completion of the work by the contractor, bondsare issued to represent the assessment. The assessmentmay be paid either in whole or in part during the 30 day periodafter the due date. In other words, the property owner maypay part of the cost of improvements and allow the balanceto go to bond.

The Improvement Bond Act of 1915. Bonds for subdivisionstreet improvement are frequently issued under the termsof this act. The act provides for the issuance by the publicbody (which includes “counties, cities and counties, andpublic corporations, districts and agencies”) of series bondsusually bearing a maximum of 6 percent interest and redeem-able at any time. The proceeds of the sale of the bonds areused for street improvement work, including the construc-tion of sewers. The cost of the redemption of the bondsissued and the interest thereon is assessed against theowners of property directly affected. Under certain definedcircumstances bonds cannot be issued by an improvementdistrict until the California Districts Securities Commissionhas investigated, reported on, and approved the project.

In the previous chapter we discussed real-estate-related lawas rendered by court decision and opinion. In this chapterwe have focused primarily upon law as legislated by electedrepresentatives, especially those laws which do not fallconveniently under the so-called “Real Estate Law” or othermajor laws governing the conduct of real estate business.We have set aside the next, and final, chapter for a separateand detailed discussion of laws which are meant to ensurefair housing and to protect against discrimination based onrace, color, religion, sex, ancestry, disability, and nationalorigin.

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1. The Alquist-Priolo Special Studies Zones Act is designed for what?a. to control development of nuclear power plantsb. to control development in the vicinity of hazardous earthquake faultsc. to control development of heavy industryd. none of the above

2. References to which of the following in California laws has been changed to “theft”.a. felony and misdemeanor c. secret profitsb. larceny, embezzlement, and stealing d. all of the above

3. Except for certain exceptions, such as farm crops and farm animals, the taking of money, labor, or real or personal propertyconstitutes grand theft when the amount taken exceeds:

a. $500 c. $100b. $400 d. $ 50

4. Which of the following is a theft:a. making or recording a deed, knowing the maker has no titleb. copying without permission, and with intent to use, documents owned by a title companyc. both “A” and “B” d. neither “A” nor “B”

5. Which of the following is a felony?a. willfully concealing by a married person of the necessity for concurrence of a spouse in a sale of landb. selling the same land twice to different personsc. both “A” and “B” d. neither “A” nor “B”

6. Which of the following is a misdemeanor?a. giving a kickback of construction fundsb. a broker holding out on a principal, or rendering a principal, on demand, a false accountingc. both “A” and “B” d. neither “A” nor “B”

7. A “security interest” attaches when:a. there is agreement by the parties that it attachb. value has been givenc. the debtor has acquired rights in the collaterald. all of the above

8. The Coastal Zone Conservation Act gives most authority to provide and adopt permanent programs for coastalconservation to whom?

a. local governments c. the stateb. the governor d. none of the above

9. Division 9 of the Uniform Commercial Code concerns:a. environmental conservation c. security agreements and personal property secured transactionsb. escrow laws d. none of the above

10. Law governing homesteads is found where?a. The Civil Codeb. Code of Civil Proceduresc. The Business and Professions Coded. none of the above

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INTRODUCTION

The problems of discrimination and unethical conduct haveplagued our society for many years. To combat these grossinequities, many laws and regulations have been enacted.The courts, in turn, have ruled on the various associatedlegal areas.

As a real estate licensee, you are expected to comply witheach and every law, regulation, and court ruling. Intentionalor unintentional disregard will result in severe legal ramifi-cations! Therefore, pay particular attention as to how thedifferent legal restrictions are applied. If you should haveany future questions, consult the California Department ofReal Estate or an attorney.

SECTION I: FAIR HOUSING

The concept of fair housing states that all persons have theright to housing without being discriminated against inobtaining the housing. This broad topic includes manydiverse applications. To cover each possible situation,many laws and regulations have been adopted at both thefederal and state levels.

FEDERAL LEVEL

The area of fair housing has long been a major concern forthe legislative and judicial branches on the federal level.From the first attempt in 1866 up to and including 1988, theFederal Government has strived to upgrade and expand thefair housing umbrella.

HISTORICAL PERSPECTIVE

The initial effort to outlaw housing discrimination was theCivil Rights Act of 1866. It prohibited any discrimination

15FAIR HOUSING

based upon color. According to §1, it declared,

... all persons born in the United States and not subjectto any foreign power, ... are hereby declared to becitizens of the United States; and such citizens, of everyrace and color, without regard to any previous condi-tion of slavery or involuntary servitude, ... shall havethe same right, in every State and Territory in theUnited States, to make and enforce contracts, to sue,be parties, and give evidence, to inherit, purchase,lease, sell, hold, and convey real and personal prop-erty, and to full and equal benefit of all laws andproceedings for the security of person and property, asis enjoyed by white citizens, and shall be subject to likepunishment, pains, and penalties, ...

This act has been codified as 42 U.S. Code § 1982. It states,

All citizens of the United States shall have the sameright, in every State and Territory, as is enjoyed bywhite citizens thereof to inherit, purchase, lease, sell,hold, and convey real and personal property.

As you probably have already noticed, these first efforts atcontrolling discrimination focused solely upon the raceissue. Other forms of discrimination were not addressed.You should note that race discrimination as applied in § 1982deals with all types of nonwhite discrimination. This coversmore than the black race. As evidenced in the 1987 courtcase of Shaare Tefila Congregation v. Cobb, Md. 107 S.Ct.2019, 95 L.Ed.2d 594, Jews and Arabs are considered to bedistinct races under this statute. Certainly, other nonwhiteraces are covered under § 1982.

Attention was further focused upon this act with thelandmark 1968 U.S. Supreme Court case of Jones v. Mayer392 U.S. 409, 88 S.C.T. 2186, 20 L.Ed. 2d 1189. In it, thecourt ruled, "§ 1982 bars all racial discrimination, private aswell as public, in the sale or rental of property ..." The courtextended the meaning of the act to also cover personalproperty.

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The importance of fair housing was solidified in Titles VIIIand IX of the United States Civil Rights Act of 1968. It wasdesigned to supplement the 1866 act. The stated purpose ofthis act, as stated in Title VIII, § 801, is to provide, withinconstitutional limitations, for fair housing throughout theUnited States.

Title VIII deals with discrimination in the sale or rental ofhousing. According to § 804, ... it shall be unlawful-

(a) To refuse to sell or rent after the making of a bonafide offer, or to refuse to negotiate for the sale or rentalof, or otherwise make unavailable or deny, a dwellingto any person because of race, color, religion, ornational origin.

(b) To discriminate against any person in the terms,conditions, or privileges of sale or rental of a dwelling,or in the provision of services or facilities in connec-tion therewith, because of race, color, religion, ornational origin.

(c) To make, print, or publish, or cause to be made,printed, or published any notice, statement, or adver-tisement, with respect to the sale or rental of a dwellingthat indicates any preference, limitation, or discrimi-nation based on race, color, religion, or nationalorigin, or an intention to make any such preference,limitation, or discrimination.

(d) To represent to any person because of race, color,religion, or national origin that any dwelling is notavailable for inspection, sale, or rental when suchdwelling is in fact so available.

(e) For profit, to induce or attempt to induce anyperson to sell or rent any dwelling by representationsregarding the entry or prospective entry into theneighborhood of a person or persons of a particularrace, color, religion, or national origin.

Clearly, this law attempts to cover all possible forms ofdiscrimination in the sale or rental of housing.

Title VIII also covers other important areas. § 805 barsfinancial discrimination from any business who makescommercial real estate loans. § 807 provides an exemptionwith respect to religious organizations who restrict occu-pancy of their buildings to members of their faith. Ofparticular importance to you the real estate agent, § 806 barsdiscrimination in the

access to or membership or participation in any mul-tiple-listing service, real estate brokers’ organizationor other service, organization, or facility relating to

the business of selling or renting dwellings, or todiscriminate against him in the terms or conditions ofsuch access, membership, or participation, on accountof race, color, religion, or national origin.

Title IX prevents willful injury, intimidation, or interferencein fair housing cases. The penalty for violating this require-ment is a fine of not more than $1,000, imprisonment of notmore than one year, or both; and if bodily injury results, afine of not more than $10,000, imprisonment of not more thanten years, or both; and if death results, an imprisonment forany term of years or for life.

The courts have repeatedly upheld and expanded the scopeof the 1968 act. For example, in U.S. v. Youritan ConstructionCo., 370 F.Supp. 643, the court affirmed that illegal discrimi-natory activity extends even to subtle behavior. In Halet v.Wend Inv. Co., 672 F.2d 1305, rental decisions which resultin discriminatory effects are sufficient to violate the 1968 act.

RECENT LEGISLATIVE ENACTMENT

In an effort to keep abreast of current social thinking, the FairHousing Amendments Act of 1988, Pub.L. 100-430, wasenacted. Discrimination in housing is now viewed to includethe following.

§ 3605. DISCRIMINATION IN RESIDENTIAL REALESTATE-RELATED TRANSACTIONS.

(a) In general.- It shall be unlawful for any person orother entity whose business includes engaging inresidential real estate-related transactions to dis-criminate against any person in making availablesuch a transaction, or in the terms or conditions of sucha transaction, because of race, color, religion, sex,handicap, familial status, or national origin.

You will notice that the categories handicap and familialstatus have been added to the other previously-existingones. The tendency of the various legislatures is to continu-ally expand the scope of fair housing.

According to § 3602 (k), ‘Familial status’ means one ormore individuals (who have not attained the age of 18years) being domiciled with-

(1) a parent or another person having legal custodyof such individual or individuals; or

(2) the designee of such parent or other person havingsuch custody, with the written permission of suchparent or other person.

The protections afforded against discrimination on

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the basis of familial status shall apply to any personwho is pregnant or is in the process of securing legalcustody of any individual who has not attained the ageof 18 years.

As defined in § 3602(h), ‘Handicap’ means, with respectto a person-

(1) a physical or mental impairment which substantiallylimits one or more of such person’s major life activities,

(2) a record of having such an impairment, or

(3) being regarded as having such an impairment, butsuch term does not include current, illegal use of oraddiction to a controlled substance as defined in § 802of Title 21.

The act is very specific in clarifying what is meant by the termphysical or mental impairment in an effort to minimizeunrelated complaints. §6(b)(3) even goes so far as to state,Neither the term ‘individual with handicaps’ nor the term‘handicap’ shall apply to any individual solely becausethat individual is a transvestite.

Finally, certain exemptions are provided for in the act. § 3607provides for a religious organization or private club exemp-tion. Of major interest to some real estate agents, § 3605(c)allows for the following exemption in the appraisal ofproperty. Nothing in this subchapter prohibits a personengaged in the business of furnishing appraisals of realproperty to take into consideration factors other thanrace, color, religion, national origin, sex, handicap, orfamilial status.

Between the various laws and the court cases, discrimina-tion in housing of all origins have been outlawed. All realestate licensee must strictly comply with these federalrules.

STATE LEVEL

To further insure that everyone in California receives theopportunity for fair housing, the California Legislature andthe Real Estate Commissioner have enacted several mea-sures. In this section, we will discuss the applicable statestatutes and any pertinent court cases.

CALIFORNIA BUSINESS AND PROFESSIONS CODE

The California Business and Professions Code contain twosections of particular importance to our discussion. Itshould be noted that other sections of this code will be

discussed in the section on ethics. § 125.6 states,

Every person who holds a license under the provisionsof this code is subject to disciplinary action under thedisciplinary provisions of this code applicable to suchperson if, because of the applicant’s race, color, sex,religion, ancestry, physical handicap, marital status,or national origin, he or she refuses to perform thelicensed activity or aids or incites the refusal to per-form such licensed activity by another licensee, or if,because of the applicant’s race, color, sex, religion,ancestry, physical handicap, marital status, or na-tional origin, he or she makes any discrimination, orrestriction in the performance of the licensed activity.Nothing in this section shall be interpreted to apply todiscrimination by employers with regard to employeesor prospective employees, nor shall this section autho-rize action against any club license issued pursuant toArticle 4 (commencing with Section 23425) of Chap-ter 3 of Division 9 because of discriminatory member-ship policy. The presence of architectural barriers tothe physically handicapped person which conform toapplicable state or local building codes and regula-tions shall not constitute discrimination under thissection.

It shall not constitute discrimination under this sec-tion for a person licensed pursuant to Division 2(commencing with Section 500) to refuse to perform alicensed activity if the licensee determines that be-cause of the relation between the licensed activitysought and the physical handicap, the licensed activ-ity sought is beyond the licensee’s skill, or could betterbe performed by another licensee. ...

‘Physical handicap,’ as used in this section, includesimpairment of sight, hearing or speech, or impairmentof physical ability because of amputation or loss offunction or coordination, or any other health impair-ment which requires special education or relatedservices.

The second section we need to consider from this state codeis § 10177(l). According to it,

The Commissioner may suspend or revoke the licenseof any real estate licensee, or may deny the issuance ofa license to an applicant, who has done, or maysuspend or revoke the license of, or deny the issuanceof a license to, a corporate applicant if an officer,director, or person owning or controlling 10 percentor more of the corporation’s stock has done, any of thefollowing: ...

(l) Solicited or induced the sale, lease or the listing for

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sale or lease, of residential property on the grounds,wholly or in part, of loss of value, increase in crime, ordecline of the quality of the schools, due to the presentor prospective entry into the neighborhood of a personor persons of another race, color, religion, ancestry ornational origin.

This practice is known as panic selling. It is also calledblockbusting. The law specifically prohibits this activity. Inyour dealings as an agent, be particularly careful not to makea remark in passing that could be construed as an induce-ment to panic selling. You are subject to discipline for it.

CALIFORNIA CIVIL CODE

The California Civil Code also deals with many importantareas of fair housing. In particular, § 51 to § 55.1 providesvital legal protection for various groups. We will examinethose sections that are most pertinent to our examination.The law states the following.

§ 51. UNRUH CIVIL RIGHTS ACT; EQUAL RIGHTS;BUSINESS ESTABLISHMENTS

This section shall be known, and may be cited, as theUnruh Civil Rights Act.

All persons within the jurisdiction of this state are freeand equal, and no matter what their sex, race, color,religion, ancestry, national origin, or blindness orother physical disability are entitled to the full andequal accommodations, advantages, facilities, privi-leges, or services in all business establishments ofevery kind whatsoever.

This section shall not be construed to confer any rightor privilege on a person which is conditioned orlimited by law or which is applicable alike to personsof every sex, color, race, religion, ancestry, nationalorigin, or blindness or other physical disability.

Nothing in this section shall be construed to requireany construction, alteration, repair, structural or oth-erwise, or modification of any sort whatsoever to anynew or existing establishment, facility, building, im-provement, or any other structure, or to augment,restrict, or alter in any way the authority of the StateArchitect to require construction, alteration, repair,or modification that the State Architect otherwisepossesses pursuant to other provisions of the law.

Nothing in this section shall require any person rent-ing, leasing, or otherwise providing real property for

compensation to modify his or her property in any way,or to provide a higher degree of care for a blind or otherphysically disabled person than for a person who is notphysically disabled.

Your real estate business falls into this category of businessestablishment. Therefore, you are legally compelled to notdiscriminate in any shape or form in providing services withyour business establishment.

§ 51.2. AGE DISCRIMINATION IN HOUSING PRO-HIBITED; EXCEPTED; INTENT

(a) Section 51 shall be construed to prohibit abusiness establishment from discriminating inthe sale or rental of housing based upon age. Whereaccommodations are designed to meet the physicaland social needs of senior citizens, a business estab-lishment may establish and preserve such housingfor senior citizens, pursuant to Section 51.3 of theCivil Code.

(b) This section is intended to clarify the holdings inMarina Point, Ltd. v. Wolfson (1982), 30 Cal.3d 72,and O’Connor v. Village Green Owners’ Associa-tion (1983), 33 Cal.3d 790.

§ 51.3. HOUSING; AGE LIMITATIONS; NECES-SITY FOR SENIOR CITIZEN HOUSING

(a) The Legislature finds and declares that thissection is essential to establish and preserve spe-cially designed accessible housing for senior citi-zens. There are senior citizens who need specialliving environments and services, and find that thereis an inadequate supply of this type of housing in thestate.

(b) The Legislature finds and declares that differentage limitations for senior citizen housing areappropriate in recognition of the size of a develop-ment in relationship to the community in which it islocated.

(c) For the purposes of this section, the followingdefinitions apply:

(1) ‘Qualifying resident’ or ‘senior citizen’ meansa person 62 years of age or older, or 55 years of ageor older in a senior citizen housing development.

(2) ‘Qualified permanent resident’ means a personwho meets all of the following requirements:

(A) Was residing with the qualifying resident orsenior citizen prior to the death, hospitalization,

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or other prolonged absence of, or the dissolutionof marriage with, the qualifying resident or se-nior citizen.

(B) Was 45 years of age or older, or was a spouse,cohabitant, or person providing primary physi-cal or economic support to the qualifying resi-dent or senior citizen.

(C) Has an ownership interest in, or is in expec-tation of an ownership interest in, the dwellingunit within the housing development that limitsoccupancy, residency, or use on the basis of age.

(3) ‘Senior citizen housing development’ means aresidential development consisting of at least 150dwelling units in a standard metropolitan statisti-cal area or at least 35 dwelling units in any otherarea which is developed for, or substantially reha-bilitated or renovated for, senior citizens. For thepurpose of computing the number of dwelling unitswithin that development, the number of dwellingunits developed, whether in single or multiplephases, shall be included in the computation.Developments commenced after July 1, 1986, shallbe required to have been issued a public report asa senior citizen housing development under Sec-tion 11010.05 of the Business and ProfessionsCode.

(4) ‘Dwelling unit’ or ‘housing’ means any resi-dential accommodation other than a mobilehome.

(5) ‘Cohabitant’ means persons who live togetheras husband and wife.

(d) The covenants, conditions, and restrictions orother documents or written policy shall not limitoccupancy, residency, or use on the basis of age moreproscriptively than to require that one person inresidence in each dwelling unit may be required tobe a senior citizen and that each other resident in thesame dwelling unit may be required to be a qualifiedpermanent resident.

(e) The covenants, conditions, and restrictions orother documents or written policy shall permit tem-porary residency, as a guest of a senior citizen orqualified permanent resident, by a person of lessthan 45 years of age for periods of time, not less than60 days in any year, which are specified in thecovenants, conditions, and restrictions or otherdocuments or written policy.

(f) Upon the death or dissolution of marriage, orupon hospitalization, or other prolonged absence of

the qualifying resident, any qualified permanentresident shall be entitled to continue his or heroccupancy, residency, or use of the dwelling unit.

(g) The condominium, stock cooperative, limited-equity housing cooperative, planned development,or multiple-family residential rental property shallhave been developed for, and initially been put to useas, housing for senior citizens, or shall have beensubstantially rehabilitated or renovated for, andimmediately afterward put to use as, housing forsenior citizens, as provided in this section.

The covenants, conditions, and restrictions or otherdocuments or written policies applicable to any con-dominium, stock cooperative, limited-equity housingcooperative, planned development, or multiple-familyresidential property which contained age restrictionson January 1, 1984, shall be enforceable only to theextent permitted by this section, notwithstanding lowerage restrictions contained in those documents or poli-cies.

Any person who has the right to reside in, occupy, oruse the housing or an unimproved lot subject to thissection on January 1, 1985, shall not be deprived of theright to continue that residency, occupancy, or use asthe result of the enactment of this section.

§ 51.5 DISCRIMINATION, BOYCOTT, BLACKLIST,ETC; BUSINESS ESTABLISHMENTS; EQUALRIGHTS

No business establishment of any kind whatsoevershall discriminate against, boycott or blacklist, refuseto buy from, sell to, or trade with any person in this statebecause of the race, creed, religion, color, nationalorigin, sex, or blindness or other physical disability ofthe person or of the person’s partners, members, stock-holders, directors, officers, managers, superintendents,agents, employees, business associates, suppliers, orcustomers.

As used in this section ‘person’ includes any person,firm, association, organization, partnership, businesstrust, corporation, or company.

Nothing in this section shall be construed to requireany construction, alteration, repair, structural or oth-erwise, or modification of any sort whatsoever to anynew or existing establishment, facility, building, im-provement, or any other structure, or to augment,restrict, or alter in any way the authority of the StateArchitect to require construction, alteration, repair,

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or modifications that the State Architect otherwisepossesses pursuant to other provisions of the law.

Nothing in this section shall require any person rent-ing, leasing, or otherwise providing real property forcompensation to modify his or her property in any way,or to provide a higher degree of care for a blind or otherphysically disabled person than for a person who is notphysically disabled.

§ 51.7. FREEDOM FROM VIOLENCE OR INTIMI-DATION

(a) All persons within the jurisdiction of this statehave the right to be free from any violence, or intimi-dation by threat of violence, committed against theirpersons or property because of their race, color,religion, ancestry, national origin, political affili-ation, sex, sexual orientation, age, disability, orposition in a labor dispute. The identification in thissubdivision of particular bases of discrimination isillustrative rather than restrictive.

This section does not apply to statements concerningpositions in a labor dispute which are made duringotherwise lawful labor picketing.

(b) As used in this section, ‘sexual orientation’means heterosexuality, homosexuality, or bisexual-ity.

You should note the inclusion of the category of sexualorientation. This vividly illustrates the continuing trend forcontinually expanding the discrimination statutes.

§ 51.8. DISCRIMINATION; FRANCHISES

No franchisor shall discriminate in the granting offranchises solely because of the race, color, religion,sex, or national origin of the franchisee and the racial,ethnic, religious, national origin, or blindness orother physical disability composition of a neighbor-hood or geographic area in which the franchise islocated. Nothing in this section shall be interpreted toprohibit a franchisor from granting a franchise toprospective franchisees as part of a program or pro-grams to make franchises available to persons lackingthe capital, training, business experience, or otherqualifications ordinarily required of franchisees, orany other affirmative action program adopted by thefranchisor.

Nothing in this section shall be construed to requireany construction, alteration, repair, structural or oth-

erwise, or modification of any sort whatsoever to anynew or existing establishment, facility, building, im-provement, or any other structure, or to augment,restrict, or alter in any way the authority of the StateArchitect to require construction, alteration, repair,or modifications that the State Architect otherwisepossesses pursuant to other provisions of the law.

Nothing in this section shall require any person rent-ing, leasing, or otherwise providing real property forcompensation to modify his or her property in any way,or to provide a higher degree of care for a blind or otherphysically disabled person than for a person who is notphysically disabled.

§ 52. DENIAL OF CIVIL RIGHTS OF DISCRIMINA-TION; DAMAGES; CIVIL ACTION BY PEOPLE ORPERSON AGGRIEVED; INTERVENTION; UNLAW-FUL PRACTICE COMPLAINT

(a) Whoever denies, or who aids, or incites suchdenial, or whoever makes any discrimination, dis-tinction or restriction on account of sex, color, race,religion, ancestry, national origin, or blindness orother physical disability contrary to the provisionsof Section 51 or 51.5, is liable for each and every suchoffense for the actual damages, and such amount asmay be determined by a jury, or a court sittingwithout a jury, up to a maximum of three times theamount of actual damage but in no case less than twohundred fifty dollars ($250), and such attorney’sfees as may be determined by the court in additionthereto, suffered by any person denied the rightsprovided in Section 51 or 51.5.

(b) Whoever denies the right provided by Section51.7, or whoever aids, incites, or conspires in thatdenial, is liable for each and every offense for theactual damages suffered by any person denied thatright and, in addition, (1) an amount to be deter-mined by a jury, or a court sitting without a jury, upto a maximum of three times the amount of actualdamages; (2) a civil penalty of ten thousand dollars($10,000); and (3) attorney fees as may be deter-mined by the court. In the case of multiple offenders,the ten thousand dollar ($10,000) civil penalty shallbe prorated between them.

(c) Whenever there is reasonable cause to believethat any person or group of persons is engaged in apattern or practice of resistance to the full enjoymentof any of the rights hereby secured, and that thepattern or practice is of such a nature and is intendedto deny the full exercise of the rights herein de-

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scribed, the Attorney General, any district attorneyor city attorney, or any person aggrieved by thepattern or practice may bring a civil action in theappropriate court by filing with it a complaint (1)signed by the officer (or in his or her absence theindividual acting on behalf of the officer) or by theperson aggrieved, (2) setting forth facts pertainingto the pattern or practice, and (3) requesting suchpreventive relief, including an application for apermanent or temporary injunction, restraining or-der, or other order against the person or personsresponsible for such pattern or practice, as he or shedeems necessary to insure the full enjoyment of therights herein described.

(d) Whenever an action has been commenced in anycourt seeking relief from the denial of equal protec-tion of the laws under the Fourteenth Amendment tothe Constitution of the United States on account ofrace, color, religion, sex, national origin, or blind-ness or other physical disability, the Attorney Gen-eral or any district attorney or city attorney for or inthe name of the people of the State of California mayintervene in the action upon timely application if theAttorney General or any district attorney or cityattorney certifies that the case is of general publicimportance. In that action the people of the State ofCalifornia shall be entitled to the same relief as if ithad instituted the action.

(e) Actions under this section shall be independentof any other remedies or procedures that may beavailable to an aggrieved party.

(f) Any person claiming to be aggrieved by an al-leged unlawful practice in violation of Section 51 or51.7 may also file a verified complaint with theDepartment of Fair Employment and Housing pursu-ant to Section 12948 of the Government code.

(g) Nothing in this section shall be construed torequire any construction, alteration, repair, struc-tural or otherwise, or modification of any sort what-soever to any new or existing establishment, facility,building, improvement, or any other structure, or toaugment, restrict, or alter in any way the authorityof the State Architect to require construction, alter-ation, repair, or modifications that the State Archi-tect otherwise possesses pursuant to other provi-sions of the law.

Nothing in this section shall require any person rent-ing, leasing, or otherwise providing real property forcompensation to modify his or her property in any way,

or provide a higher degree of care for a blind or otherphysically disabled person than for a person who is notphysically disabled.

§ 52.1. CIVIL ACTIONS FOR INJUNCTIVE OROTHER EQUITABLE RELIEF TO PROTECTRIGHTS; VENUE; CONTENTS, SERVICE, ANDVIOLATIONS OF ORDERS; ATTORNEY FEES;SPEECH

(a) Whenever a person or persons, whether or notacting under color of law, interferes by threats,intimidation, or coercion, or attempts to interfere bythreats, intimidation, or coercion, with the exerciseor enjoyment by any individual or individuals ofrights secured by the Constitution or laws of theUnited States, or of the rights secured by the Consti-tution or laws of this state, the Attorney General, orany district attorney or city attorney may bring acivil action for injunctive and other appropriateequitable relief in the name of the people of the Stateof California, in order to protect the peaceableexercise or enjoyment of the right or rights secured.

(b) Any individual whose exercise or enjoyment ofrights secured by the Constitution or laws of theUnited States, or of rights secured by the Constitu-tion or laws of this state, has been interfered with, orattempted to be interfered with, as described insubdivision (a), may institute and prosecute in his orher own name and on his or her own behalf a civilaction for injunctive and other appropriate equi-table relief to protect the peaceable exercise orenjoyment of the right or rights secured.

(c) An action brought pursuant to subdivision (a) or(b) may be filed either in the superior court for thecounty in which the conduct complained of occurredor in the superior court for the county in which aperson whose conduct complained of resides or hashis or her place of business. An action brought by theAttorney General pursuant to subdivision (a) mayalso be filed in the superior court for any countywherein the Attorney General has an office, and inany such case, the jurisdiction of the court shallextend throughout the state.

(d) Whenever a court issues a temporary restrainingorder or a preliminary or permanent injunction in anaction brought pursuant to subdivision (a) or (b),ordering a defendant to refrain from conduct oractivities, the order issued shall include the follow-ing statement: VIOLATION OF THIS ORDER IS ACRIME PUNISHABLE UNDER SECTION 422.9 OF

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THE PENAL CODE.

(e) The court shall order the plaintiff or the attorneyfor the plaintiff to deliver, or the county clerk to mail,two copies of any order, extension, modification, ortermination thereof granted pursuant to this section,by the close of the business day on which the order,extension, modification, or termination was granted,to each local law enforcement agency having juris-diction over the residence of the plaintiff and anyother locations where the court determines that actsof violence against the plaintiff are likely to occur.Those local law enforcement agencies shall be des-ignated by the plaintiff or the attorney for the plain-tiff. Each appropriate law enforcement agency re-ceiving any order, extension, or modification of anyorder issued pursuant to this section shall forthwithserve one copy thereof upon the defendant. Eachappropriate law enforcement agency shall provideto any law enforcement officer responding to thescene of reported violence, information as to theexistence of, terms, and current status of, any orderissued pursuant to this section.

(f) A court shall not have jurisdiction to issue anorder or injunction under this section if that order orinjunction would be prohibited under Section 527.3of the Code of Civil Procedure.

(g) Actions under this section shall be independentof any other remedies or procedures that may beavailable to an aggrieved person under any otherprovision of law.

(h) In addition to any injunction or other equitablerelief awarded in an action brought pursuant tosubdivision (b), the court may award petitionerreasonable attorney’s fees.

(i) Violation of an order described in subdivision (d)may be punished either by prosecution under Sec-tion 422.7 of the Penal Code, or by a proceeding forcontempt brought pursuant to Title 5 (commencingwith Section 1209) of Part 3 of the Code of CivilProcedure. However, in any such proceeding pursu-ant to the Code of Civil Procedure, if it be determinedthat the person proceeded against is guilty of thecontempt charged, in addition to any other relief,a fine may be imposed not exceeding six months, orthe court may order both the fine and imprisonment.

(j) Speech alone shall not be sufficient to support anaction under subdivision (a) or (b), except upon ashowing that the speech itself threatens violenceagainst a specific person or group of persons; andthe person or group of persons against whom the

threat is directed reasonably fears that, because ofthe speech, violence will be committed against themor their property and that the person threateningviolence had the apparent ability to carry out thethreat.

(k) No order issued in any proceeding undersubdivision (a) or (b) shall restrict the content of anyperson’s speech. An order restricting the time, place,or manner of any person’s speech shall do so only tothe extent reasonably necessary to protect the peace-able exercise or enjoyment of constitutional or statu-tory rights, consistent with the constitutional rightsof the person sought to be enjoined.

§ 53. RESTRICTIONS UPON TRANSFER ORUSE OF REALTY BECAUSE OF SEX, RACE,COLOR, RELIGION, ANCESTRY, NATIONAL ORI-GIN, OR BLINDNESS OR OTHER PHYSICAL DIS-ABILITY

(a) Every provision in a written instrument relatingto real property which purports to forbid or restrictthe conveyance, encumbrance, leasing, or mortgag-ing of that real property to any person of a specifiedsex, race, color, religion, ancestry, national origin,or blindness or other physical disability, is void andevery restriction or prohibition as to the use oroccupation of real property because of the user’s oroccupier’s sex, race, color, religion, ancestry, na-tional origin, or blindness or other physical disabil-ity is void.

(b) Every restriction or prohibition, whether by wayof covenant, condition upon use of occupation, orupon transfer of title to real property, which restric-tion or prohibition directly or indirectly limits theacquisition, use or occupation of that property be-cause of the acquirer’s, user’s, or occupier’s sex,race, color, religion, ancestry, national origin, orblindness or other physical disability is void.

(c) In any action to declare that a restriction orprohibition specified in subdivision (a) or (b) isvoid, the court shall take judicial notice of therecorded instrument or instruments containing theprohibitions or restrictions in the same manner thatit takes judicial notice of the matters listed in Section452 of the Evidence Code.

Nothing in this section shall require any person rent-ing, leasing, or otherwise providing real property forcompensation to modify his or her property in any way,or provide a higher degree of care for a blind or otherphysically disabled person than for a person who is not

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physically disabled.

The courts have provided many decisions which interpretthe above-mentioned sections of the California Civil Code.In Newby v. Alto Riviera Apartments, 131 Cal.Rptr. 547, 60C.A.3d 288, the court ruled that arbitrary discrimination bylandlords is illegal. In the case of Hubert v. Williams, 184Cal.Rptr. 161, 133 C.A.3d Supp. 1, the issue of a person’ssexual preference was addressed. The court ruled that alandlord may not discriminate in refusing to rent to aprospective tenant because of the person’s sexual orienta-tion. The courts have also placed certain limitations onapplying the Unruh Act. In Crowell v. Isaacs, 45 Cal.Rptr.566, 235 C.A.2d 755, the court ruled that an agent need notspecifically seek out a buyer of a certain ethnic group noradvertise that all races are invited to purchase the property.In Flowers v. John Burnham and Co., 98 Cal.Rptr. 644, 21C.A.3d 700, the court ruled that a landlord may apply certainage restrictions with respect to children. The issue of atenant’s ability to pay was addressed by the State AttorneyGeneral. In SO 75-81, 59 Op.Atty.Gen. 223, it was decidedthat establishing such requirements is not discriminatory.

§ 54 through § 55.1 of the Civil Code, titled Part 2.5, deal withblind and other physically disabled persons. We will exam-ine the most appropriate portions.

According to § 54.1(b)(1), Blind persons, visually handi-capped persons, deaf persons, and other physicallydisabled persons shall be entitled to full and equalaccess, as other members of the general public, to allhousing accommodations offered for rent, lease, orcompensation in this state, subject to the conditionsand limitations established by law, or state or federalregulation, and applicable alike to all persons . . . .

(5) It shall be deemed a denial of equal access tohousing accommodations within the meaning of thissubdivision for any person, firm, or corporation torefuse to lease or rent housing accommodations to ablind person or visually handicapped person on thebasis that such person uses the services of a guide dog,to a deaf person on the basis that such person uses theservices of a signal dog, or to a physically handi-capped person on the basis that such person uses theservices of a service dog, or to refuse to permit such ablind person or visually handicapped person to keepa guide dog, a deaf person to keep a signal dog, or aphysically handicapped person to keep a service dogon the premises.

A party who violates those protected by § 54.1 is liablefor each such offense for the actual damages and anyamount as may be determined by a jury, or the courtsitting without a jury, up to a maximum of three timesthe amount of actual damages but in no case less than

two hundred fifty dollars ($250), and such attorney’sfees as may be determined by the court in additionthereto ...

CALIFORNIA HEALTH AND SAFETY CODE

The portions of this state code which are most significantto us are contained in § 35800 to § 35833. They comprise theHousing Financial Discrimination Act of 1977. This statelaw deals specifically with discrimination in financial situa-tions. It is an effort to guarantee fair lending practices for allCalifornia residents.

CHAPTER 1. FINDINGS AND DECLARATIONSOF PURPOSE AND POLICY

§ 35800. This part shall be known and may be cited asthe Holden Act.

§ 35801. The Legislature finds and declares:

(a) The subject of housing is of vital statewide impor-tance to the health, safety, and welfare of the resi-dents of the state.

(b) A healthy housing market, where residents of thisstate have a choice of housing opportunities andwhere the housing consumer may effectually choosewithin a free market place, is necessary to achieve ahealthy state economy.

(c) The equities that California residents accumulatein family homes must be protected and conserved.

(d) The Legislature has the responsibility to directthe discontinuance of injurious practices.

(e) With respect to certain geographic areas, finan-cial institutions have sometimes denied financialassistance or approved assistance on terms lessfavorable than are usually offered in other geo-graphic areas, regardless of the creditworthiness ofthe applicant or the condition of the real propertysecurity offered, and this practice has the followingeffects;

(1) Contributes to the decline of available family hous-ing in such areas and is likely to continue to do so.

(2) Limits the choice of housing opportunities andinhibits the operation of a healthy housing marketin such areas.

(3) Leads to the abandonment of such areas.

(4) Adversely affects the health, welfare, and safetyof the residents of this state.

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(5) Undermines the value of the equity of currentowners of property in such areas.

(6) Inhibits the granting of amortized loans.

(7) Perpetuates racially and economically segre-gated neighborhoods and geographic areas.

(f) The practice of denying mortgage loans or ad-versely varying the terms of such loans because ofconditions, characteristics, or trends in a neighbor-hood or geographic area that are unrelated to thecreditworthiness of the applicant or the value of thereal property security offered is against public policy.

§ 35802. The purposes of this part include the follow-ing:

(a) To prevent discrimination in the provision offinancial assistance for financing or refinancing thepurchase, construction, rehabilitation, or improve-ment of housing accommodations because of condi-tions, characteristics, or trends in the neighborhoodor geographic area surrounding the security prop-erty.

(b) To encourage increased lending in neighbor-hoods or geographic areas in which conventionalresidential mortgage financing has been available.

(c) To increase the availability of housing accommo-dations to credit- worthy persons.

(d) To ensure the supply of decent, safe housing.

(e) To prevent the abandonment and decay of neigh-borhoods and geographic areas.

§ 35803. This part shall be deemed an exercise of thepolice power of the state for the protection of thehealth, welfare, and peace of the people of this state...

CHAPTER 2. DEFINITIONS

§ 35805. As used in this part: ...

(b) ‘Fair market value’ means the highest pricewhich a property will bring in a competitive and openmarket under all conditions requisite to a fair sale,the buyer and seller acting prudently and knowl-edgeably ...

CHAPTER 3. PROHIBITIONS AND ENFORCE-MENT

§ 35810. No financial institution shall discriminate inthe availability of, or in the provision of, financialassistance for the purpose of purchasing, construct-ing, rehabilitating, improving, or refinancing hous-ing accommodations due, in whole or in part, to theconsideration of conditions, characteristics, or trendsin the neighborhood or geographic area surroundingthe housing accommodation, unless the financial in-stitution can demonstrate that such consideration inthe particular case is required to avoid an unsafe andunsound business practice.

§ 35811. No financial institution shall discriminate inthe availability of, or in the provision of, financialassistance for the purpose of purchasing, construct-ing, rehabilitating, improving or refinancing housingaccommodations due, in whole or in part, to theconsideration of race, color, religion, sex, maritalstatus, national origin, or ancestry.

§ 35812. No financial institution shall consider theracial, ethnic, religious, or national origin composi-tion of a neighborhood or geographic area surround-ing a housing accommodation or whether or not suchcomposition is undergoing change, or is expected toundergo change, in appraising a housing accommo-dation or in determining whether or not, and underwhat terms and conditions, to provide financial assis-tance for the purpose of purchasing, constructing,rehabilitating, improving, or refinancing a housingaccommodation. No financial institution shall utilizeappraisal practices that are inconsistent with theprovisions of this part.

§ 35813. Nothing in this part shall (1) require afinancial institution to provide financial assistance ifit is clearly evident that occupancy of the housingaccommodation would create an imminent threat tothe health or safety of the occupant, or (2) be construedto preclude a financial institution from consideringthe fair market value of the property which will securethe proposed loan.

§ 35814. The Secretary shall issue such rules, regulations,guidelines, and orders as are necessary to interpretand enforce the provisions of this part and to affirma-tively further the provisions of this part.The Secretarymay delegate the responsibilities imposed bythis section to one or more departments within theagency that license persons or organizations engagedin a busi-ness related to, or affecting compliance with,this part.

§ 35815. The Secretary or the Secretary’s designeeshall monitor and investigate the lending patterns and

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practices of financial institutions for compliance withthis part, including the lending patterns and practicesfor housing accommodations which are not occupiedby the owner. If a finding is made that such patterns orpractices violate the provisions of this part, the Secre-tary or the Secretary’s designee shall take such actionas will effectuate the purposes of this part. In additionto other remedies provided by this part or other pro-visions of law, the Secretary may recommend to theState Treasurer that state funds not be deposited in afinancial institution where the Secretary has made afinding that such financial institution has engaged ina lending pattern and practice which violates theprovisions of this part.

CHAPTER 4. COMPLAINT RESOLUTION

... § If ... the Secretary finds that a financial institutionhas engaged in any unlawful practice as defined in thispart, the Secretary shall ... take one on the followingsteps ... :

(a) The making of the financial assistance or themaking of the financial assistance on nondiscrimi-natory terms; or

(b) The payment of damages to the complainant in anamount not to exceed one thousand dollars ($1,000),if the Secretary finds that effective relief under sub-division (a) is no longer available.

One of your clients may feel that he has been discriminatedagainst by a lender. Your help may be requested. Knowl-edge of the above provisions will assist you in informingyour client of his rights. However, do not give any legaladvice. To play it safe, the client should consult with acompetent legal professional.

CALIFORNIA GOVERNMENT CODE

For our purposes, § 12900 to § 12995 of this code pertain themost to fair housing. Together, they comprise the CaliforniaFair Employment and Housing Act. They expand the appli-cation of the Rumford Act.

GENERAL PROVISIONS

§ 12900. This part may be known and referred to asthe ‘California Fair Employment and Housing Act...’

FAIR HOUSING LAW

DEFINITIONS

12927. As used in this part in connection with housingaccommodations, unless a different meaning clearlyappears from the context:

(a) ‘Affirmative actions’ means any activity for thepurpose of eliminating discrimination in housingaccommodations because of race, color, religion,sex, marital status, national origin, or ancestry....

(c) ‘Discrimination’ includes refusal to sell, rent, orlease housing accommodations; includes refusal tonegotiate for the sale, rental, or lease of housingaccommodations; includes representation that ahousing accommodation is not available for inspec-tion, sale, or rental when such housing accommoda-tion is in fact so available; includes any other denialor withholding of housing accommodations; in-cludes provisions of inferior terms, conditions, privi-leges, facilities, or services in connection with suchhousing accommodations; includes the cancella-tion or termination of a sale or rental agreement; andincludes the provision of segregated or separatedhousing accommodations. The term ‘discrimination’does not include refusal to rent or lease a portion ofan owner-occupied single-family house to a personas a roomer or boarder living within the household,provided that no more than one roomer or boarderis to live within a household....

(e) ‘Owner’ includes the lessee, sublessee, assignee,managing agent, real estate broker or salesman, orany person having any legal or equitable right orownership or possession or the right to rent or leasehousing accommodations, and includes the stateand any of its political subdivisions and any agencythereof.

PROHIBITIONS

§ 12955. It shall be unlawful:

(a) For the owner of any housing accommodation todiscriminate against any person because of race,color, religion, sex, marital status, national origin,or ancestry of such person.

(b) For the owner of any housing accommodation tomake or to cause to be made any written or oralinquiry concerning the race, color, religion, sex,marital status, national origin, or ancestry of anyperson seeking to purchase, rent or lease any hous-ing accommodation.

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(c) For any person to make, print, or publish, orcause to be made, printed, or published any notice,statement, or advertisement, with respect to the saleor rental of a housing accommodation that indicatesany preference, limitation, or discrimination basedon race, color, religion, sex, marital status, nationalorigin, or ancestry or an intention to make any suchpreference, limitation, or discrimination.

(d) For any person subject to the provisions ofSection 51 of the Civil Code, as that section appliesto housing accommodations, as defined in this part,to discriminate against any person because of race,color, religion, sex, marital status, national origin,or ancestry with reference thereto.

(e) For any person, bank, mortgage company orother financial institution to whom application ismade for financial assistance for the purchase, or-ganization, or construction of any housing accom-modation to discriminate against any person orgroup of persons because of the race, color, religion,sex, marital status, national origin, or ancestry ofsuch person or persons, or of prospective occupantsor tenants, in the terms, conditions, or privilegesrelating to the obtaining or use of any such financialassistance.

(f) For any owner of housing accommodations toharass, evict, or otherwise discriminate against anyperson in the sale or rental of housing accommoda-tions when the owner’s dominant purpose is retali-ation against a person who has opposed practicesunlawful under this section, informed law enforce-ment agencies of practices believed unlawful underthis section, or has testified or assisted in any pro-ceeding under this part. Nothing herein is intendedto cause or permit the delay of an unlawful detaineraction.

(g) For any person to aid, abet, incite, compel, orcoerce the doing of any of the acts or practicesdeclared unlawful in this section, or to attempt to doso.

COMMISSION’S ACTIONS-PENALTIES

§ 12987. If the Commission, after hearing, finds that arespondent has engaged in any unlawful practice asdefined in this part, the Commission shall state itsfindings of fact and shall issue and cause to be servedon such respondent an order requiring such respon-dent to cease and desist from such practice and to take

such actions, as, in the judgment of the Commission,will effectuate the purpose of this part, including, butnot limited to, any of the following:

(1) The sale or rental of the housing accommodationif it is still available, or the sale or rental of a likehousing accommodation, if one is available, or theprovision of financial assistance, terms, conditions,or privileges previously denied in violation of sub-division (f) of Section 12955 in the purchase, organi-zation, or construction of the housing accommoda-tion, if available.

(2) The payment of punitive damages in an amountnot to exceed one thousand dollars ($1,000), ad-justed annually in accordance with the ConsumerPrice Index, and the payment of actual damages.

(3) Affirmative or prospective relief.

However, no remedy shall be available to the ag-grieved person unless the aggrieved person waivesany and all rights or claims under Section 52 of theCivil Code prior to receiving a remedy, and signs awritten waiver to that effect.

The Commission may require a report of the manner ofcompliance.

If the Commission finds that a respondent has notengaged in any practice which constitutes a violationof this part, the Commission shall state its findings offact and shall issue and cause to be served on thecomplainant an order dismissing the said accusationas to such respondent.

Any order issued by the Commission shall have printedon its face references to the provisions of the Adminis-trative Procedure Act which prescribe the rights ofappeal of any party to the proceeding to whose posi-tion the order is adverse.

The Attorney General provided an interpretation which isof special interest to all real estate agents. In SO73-19, 56Op.Atty.Gen. 546, it was concluded that an agent cannotfurnish the ethnic or race background of a prospectiverenter or purchaser even if requested. Breach of this dutycan result in severe legal actions. Be very careful wheninforming your principals of any third parties. Furtherclarification of this act was provided by the case of Hess v.Fair Employment and Housing Commission, 187 Cal.Rptr.712, 138 C.A. 232. In it, the court ruled that the applica-tion of the prohibition against discrimi-nation based onmarital status extends to unmarried couples.

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REGULATIONS OF THE CALIFORNIA REAL ESTATECOMMISSIONER

In an effort to further apply discrimination prohibitions tothe real estate agent, the Real Estate Commissioner enacted§ 2780 through § 2782. They are contained in the CaliforniaAdministrative Code.

§ 2780. DISCRIMINATORY CONDUCT AS THEBASIS FOR DISCIPLINARY ACTION.

Prohibited discriminatory conduct by a real estatelicensee based upon race, color, sex, religion, ances-try, physical handicap, marital status or nationalorigin includes, but is not limited to, the following:

(a) Refusing to negotiate for the sale, rental orfinancing of the purchase of real property or other-wise making unavailable or denying real propertyto any person because of such person’s race, color,sex, religion, ancestry, physical handicap, maritalstatus or national origin.

(b) Refusing or failing to show, rent, sell or financethe purchase of real property to any person orrefusing or failing to provide or volunteer informa-tion to any person about real property, or channel-ing or steering any person away from real property,because of that person’s race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin or because of the racial, religious, orethnic composition of any occupants of the area inwhich the real property is located.

It shall not constitute discrimination under this subdi-vision for a real estate licensee to refuse or fail to show,rent, sell or finance the purchase of real property to anyperson having a physical handicap because of thepresence of hazardous conditions or architecturalbarriers to the physically handicapped which conformto applicable state or local building codes and regu-lations.

(c) Discriminating because of race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin against any person in the sale orpurchase or negotiation or solicitation of the sale orpurchase or the collection of payment or the perform-ance of services in connection with contracts for thesale of real property or in connection with loanssecured directly or collaterally by liens on realproperty or on a business opportunity.

Prohibited discriminatory conduct by a real estatelicensee under this subdivision does not include acts

based on a person’s marital status which are reasona-bly taken in recognition of the community propertylaws of this state as to the acquiring, financing, hold-ing or transferring of real property.

(d) Discriminating because of race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin against any person in the terms,conditions or privileges of sale, rental or financingof the purchase of real property.

This subdivision does not prohibit the sale price, rentor terms of a housing accommodation containingfacilities for the physically handicapped to differ rea-sonably from a housing accommodation not contain-ing such facilities.

(e) Discriminating because of race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin against any person in providingservices or facilities in connection with the sale,rental or financing of the purchase of real property,including but not limited to: processing applica-tions differently, referring prospects to other licen-sees because of the prospects’ race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin, using with discriminatory intent oreffect, codes or other means of identifying minorityprospects, or assigning real estate licensees on thebasis of a prospective client’s race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin.

Prohibited discriminatory conduct by a real estate licen-see under this subdivision does not include acts basedon a person’s marital status which are reasonably takenin recognition of the community property laws of thisstate as to the acquiring, financing, holding or transfer-ring of real property.

(f) Representing to any person because of his or herrace, color, sex, religion, ancestry, physical handi-cap, marital status or national origin that realproperty is not available for inspection, sale orrental when such real property is in fact available.

(g) Processing an application more slowly or other-wise acting to delay, hinder or avoid the sale, rentalor financing of the purchase of real property onaccount of the race, color, sex, religion, ancestry,physical handicap, marital status or national originof a potential owner or occupant.

(h) Making any effort to encourage discriminationagainst persons because of their race, color, sex,

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complaint or for having undertaken other lawfulefforts to promote fair housing.

(m) Soliciting of sales, rentals or listings of realestate from any person, but not from another personwithin the same area because of differences in therace, color, sex, religion, ancestry, physical handi-cap, marital status or national origin of such per-sons.

(n) Discriminating because of race, color, sex, reli-gion, ancestry, physical handicap, marital status ornational origin in informing persons of the existenceof waiting lists or other procedures with respect tothe future availability of real property for purchaseor lease.

(o) Making any effort to discourage or prevent therental, sale or financing of the purchase of realproperty because of the presence or absence ofoccupants of a particular race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin, or on the basis of the future presenceor absence of a particular race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin, whether actual, alleged or implied.

(p) Making any effort to discourage or prevent anyperson from renting, purchasing or financing thepurchase of real property through any representa-tions of actual or alleged community oppositionbased upon race, color, sex, religion, ancestry, physi-cal handicap, marital status or national origin.

(q) Providing information or advice to any personconcerning the desirability of particular real prop-erty or a particular residential area(s) which isdifferent from information or advice given to anyother person with respect to the same property orarea because of differences in the race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin of such persons.

This subdivision does not limit the giving of informa-tion or advice to physically handicapped persons forthe purpose of calling to the attention of such personsthe existence or absence of housing accommodationservices or housing accommodations for the physi-cally handicapped.

(r) Refusing to accept a rental or sales listing orapplication for financing of the purchase of realproperty because of the owner’s race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin or because of the race, color,

religion, ancestry, physical handicap, marital sta-tus or national origin in the showing, sale, lease orfinancing of the purchase of real property.

(i) Refusing or failing to cooperate with or refusingor failing to assist another real estate licensee innegotiating the sale, rental or financing of the pur-chase of real property because of the race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin of any prospective purchaseror tenant.

(j) Making any effort to obstruct, retard or discour-age the purchase, lease or financing of the purchaseof real property by persons whose race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin differs from that of the majorityof persons presently residing in a structural im-provement to real property or in an area in which thereal property is located.

(k) Performing any act, making any notation, askingany questions or making or circulating any writtenor oral statement which when taken in context,expresses or implies a limitation, preference or dis-crimination based upon race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin; provided, however, that nothing hereinshall limit the administering of forms or the makingof a notation required by a federal, state or localagency for data collection or civil rights enforce-ment purposes; or in the case of a physically handi-capped person, making notation, asking questionsor circulating any written or oral statement in orderto serve the needs of such a person.

(l) Making any effort to coerce, intimidate, threatenor interfere with any person in the exercise or enjoy-ment of, or on account of such person’s havingexercised or enjoyed, or on account of such person’shaving aided or encouraged any other person in theexercise or enjoyment of any right granted or pro-tected by a federal or state law, including but notlimited to: assisting in any effort to coerce any personbecause of his or her race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin to move from, or to not move into, aparticular area; punishing or penalizing real estatelicensees for their refusal to discriminate in the saleor rental of housing because of the race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin of a prospective purchaser orlessee; of evicting or taking other retaliatory actionagainst any person for having filed a fair housing

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sex, religion, ancestry, physical handicap, maritalstatus or national origin of any of the occupants inthe area in which the real property is located.

(s) Entering into an agreement, or carrying out anyinstructions of another, explicit or understood, notto show, lease, sell or finance the purchase of realproperty because of race, color, sex, religion, ances-try, physical handicap, marital status or nationalorigin.

(t) Making, printing or publishing, or causing to bemade, printed or published, any notice statement oradvertisement concerning the sale, rental or financ-ing of the purchase of real property that indicatesany preference, limitation or discrimination becauseof race, color, sex, religion, ancestry, physical handi-cap, marital status or national origin, or any inten-tion to make such preference, limitation or discrimi-nation.

This subdivision does not prohibit advertising di-rected to physically handicapped persons for the pur-pose of calling to the attention of such persons theexistence or absence of housing accommodation ser-vices or housing accommodations for the physicallyhandicapped.

(u) Using any word, phrases, sentences, descriptionsor visual aids in any notice, statement or advertise-ment describing real property or the area in whichreal property is located which indicates any prefer-ence, limitation or discrimination because of race,color, sex, religion, ancestry, physical handicap,marital status or national origin.

This subdivision does not prohibit advertising di-rected to physically handicapped persons for the pur-pose of calling to the attention of such persons theexistence or absence of housing accommodation serv-ices or housing accommodations for the physicallyhandicapped.

(v) Selectively using, placing or designing any no-tice, statement or advertisement having to do withthe sale, rental or financing of the purchase of realproperty in such a manner as to cause or increasediscrimination by restricting or enhancing the expo-sure or appeal to persons of a particular race, color,sex, ancestry, physical handicap, marital status ornational origin.

This subdivision does not limit in any way the use of anaffirmative marketing program designed to attractpersons of a particular race, color, sex, religion, an-

cestry, physical handicap, marital status or nationalorigin who would not otherwise be attracted to thereal property or to the area.

(w) Quoting or charging a price, rent or cleaning orsecurity deposit for a particular real property to anyperson which is different from the price, rent orsecurity deposit quoted or charged to any otherperson because of differences in the race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin of such persons.

This subdivision does not prohibit the quoting orcharging of a price, rent or cleaning or security de-posit for a housing accommodation containing facili-ties for the physically handicapped to differ reason-ably from a housing accommodation not containingsuch facilities.

(x) Discriminating against any person because ofrace, color, sex, religion, ancestry, physical handi-cap, marital status or national origin in performingany acts in connection with the making of anydetermination of financial ability or in the process-ing of any application for the financing or refinanc-ing of real property.

Nothing herein shall limit the administering of formsor the making of a notation required by a federal, stateor local agency for data collection or civil rightsenforcement purposes. In any evaluation or determi-nation as to whether, and under what terms andconditions, a particular lender or lenders would belikely to grant a loan, licensees shall proceed asthough the lender or lenders are in compliance withSections 35800 through 35833 of the California Healthand Safety Code (The Housing Financial Discrimina-tion Act of 1977).

Prohibited discriminatory conduct by a real estatelicensee under this subdivision does not include actsbased on a person’s marital status which are reasona-bly taken in recognition of the community propertylaws of this state as to the acquiring, financing, hold-ing or transferring of real property.

(y) Advising a person of the price or value of realproperty on the basis of factors related to the race,color, sex, religion, ancestry, physical handicap,marital status or national origin of residents of anarea or of residents or potential residents of the areain which the property is located.

(z) Discriminating in the treatment of, or servicesprovided to, occupants of any real property in the

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course of providing management services for the realproperty because of the race, sex, religion, ancestry,physical handicap, marital status or national originof said occupants.

This subdivision does not prohibit differing treatmentor services to a physically handicapped person be-cause of the physical handicap in the course of provid-ing management services for a housing accommoda-tion.

(aa) Discrimination against the owners or occu-pants of real property because of the race, color, sex,religion, ancestry, physical handicap, marital sta-tus or national origin of their guests, visitors orinvitees.

(bb) Making any effort to instruct or encourage,expressly or impliedly, by either words or acts, licen-sees or their employees or other agents to engage inany discriminatory act in violation of a federal orstate fair housing law.

(cc) Establishing or implementing rules that havethe effect of limiting the opportunity for any personbecause of his or her race, color, sex, religion,ancestry, physical handicap, marital status or na-tional origin to secure real property through amultiple listing or other real estate service.

(dd) Assisting or aiding in any way, any person in thesale, rental or financing of the purchase of realproperty where there are reasonable grounds tobelieve that such person intends to discriminatebecause of race, color, sex, religion, ancestry, physi-cal handicap, marital status or national origin.

§ 2781. PANIC SELLING AS THE BASIS FOR DIS-CIPLINARY ACTION.

Prohibited discriminatory conduct includes, but is notlimited to, soliciting sales or rental listings, makingwritten or oral statements creating fear or alarm,transmitting written or oral warning or threats, oracting in any other manner so as to induce or attemptto induce the sale or lease of real property through anyrepresentation, express or implied, regarding thepresent or prospective entry of one or more persons ofanother race, color, sex, religion, ancestry, maritalstatus or national origin into an area or neighbor-hood.

§ 2782. DUTY TO SUPERVISE.

A broker licensee shall take reasonable steps to be-come aware of and to be familiar with and to familiar-

ize his or her salespersons with the requirements offederal and state laws and regulations relating to theprohibition of discrimination in the sale, rental orfinancing of the purchase of real property. Such lawsand regulations include but are not limited to thecurrent provisions and any amendments thereto of:

(a) Sections 12900 through 12996 of the CaliforniaGovernment Code.

(b) Sections 51 and 52 of the California Civil Code(Unruh Civil Rights Act).

(c) Title VIII and IX of the United States Civil RightsAct of 1968 (Fair Housing).

(d) Sections 35800 through 35833 of the CaliforniaHealth and Safety Code (The Housing FinancialDiscrimination Act of 1977).

(e) Sections 54 through 55.1 of the Civil Code (Blindand Other Physically Disabled Persons).

Between the various regulations, laws and court cases,virtually all forms of housing discrimination have beendeclared illegal. It is important to note that the courts haverepeatedly expanded the application of fair housing laws tounique situations not previously covered. Therefore, it isimperative that you avoid any type of conduct that could beconstrued as discriminatory.

SECTION II: ETHICS

Ethics is the study of moral judgment and behavior. Youshould always strive to act in an ethical manner. The publicdeserves it and the law requires it.

In the scope of your real estate dealings, certain situationsmay present themselves that might encourage unethicalbehavior. It is critical that you realize what actions areconsidered unethical. You must avoid them. This sectionwill cover the pertinent ethical issues.

CODES OF ETHICS

To assist all real estate professionals, various ethical codeshave been established. They can be of great help to you.

REAL ESTATE COMMISSIONER’SCODE OF ETHICS

The Regulations of the Real Estate Commissioner are ofspecial importance to you. Since the Real Estate Commis-

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sioner is the highest authority of the state board in chargeof ruling on ethical questions regarding real estate licen-sees, the Commissioner’s Regulations carry a great amountof weight. Also, they are the most pervasive since theyapply to all real estate licensees. Read them carefully!

§ 2785. CODE OF ETHICS AND PROFESSIONALCONDUCT.

In order to enhance the professionalism of the Califor-nia real estate industry, and maximize protection formembers of the public dealing with real estate licen-sees, the following standards of professional conductand business practices are adopted:

(a) UNLAWFUL CONDUCT. Licensees shall notengage in ‘fraud’ or ‘dishonest dealing’ or ‘conductwhich would have warranted the denial of an appli-cation for a real estate license’ within the meaningof Business and Professions Code Section 10176 and10177 including, but not limited to, the followingacts and omissions:

(1) Knowingly making a substantial misrepresen-tation of the likely market value of real property toits owner either for the purpose of securing a listingor for the purpose of acquiring an interest in theproperty for the licensee’s own account.

(2) The statement or implication by a licensee to anowner of real property during listing negotiationsthat the licensee is precluded by law, regulation orby the rules of any organization, other than thebroker firm seeking the listing, from charging lessthan the commission or fee quoted to the owner bythe licensee.

(3) The failure by a licensee acting in the capacityof an agent in a transaction for the sale, lease orexchange of real property to disclose to a prospec-tive purchaser or lessee facts known to the licenseematerially affecting the value or desirability of theproperty, when the licensee has reason to be-lieve that such facts are not known to, nor readilyobservable by a prospective purchaser or lessee.

(4) When seeking a listing, representation to anowner of the real property that the soliciting lic-ensee has obtained a bona fide written offer topurchase the property, unless at the time of therepresentation the licensee has possession of abona fide written offer to purchase.

(5) The willful failure by a listing broker to presentor cause to be presented to the owner of the prop-erty any offer to purchase received prior to the

closing of a sale, unless expressly instructed by theowner not to present such an offer, or unless theoffer is patently frivolous.

(6) Presenting competing offers to purchase realproperty to the owner by the listing broker in sucha manner as to induce the owner to accept the offerwhich will provide the greatest compensation tothe listing broker, without regard to the benefits,advantages, and/or disadvantages to the owner.

(7) Knowingly underestimating the probable clos-ing costs in a transaction in a communication tothe prospective buyer or seller of real property inorder to induce that person to make or to accept anoffer to purchase the property.

(8) Failing to explain to the parties or prospectiveparties to a real estate transaction the meaningand probable significance of a contingency in anoffer or contract that the licensee knows or rea-sonably believes may affect the closing date of thetransaction, or the timing of the vacating of theproperty by the seller or its occupancy by the buyer.

(9) Knowingly making a false or misleading rep-resentation to the seller of real property as to theform, amount and/or treatment of a deposit towardpurchase of the property made by an offeror.

(10) The refunding by a licensee, when acting as anagent or subagent for seller, of all or part of anofferor’s purchase money deposit in a real estatesales transaction after the seller has accepted theoffer to purchase, unless the licensee has the ex-press permission of the seller to make the refund.

(11) Failing to disclose to the seller of real prop-erty in a transaction in which the licensee is actingin the capacity of an agent, the nature and extentof any direct or indirect interest that the licenseeexpects to acquire as a result of the sale. Theprospective purchase of the property by a personrelated to the licensee by blood or marriage, pur-chase by an entity in which the licensee has anownership interest, or purchase by any other per-son with whom the licensee occupies a specialrelationship where there is a reasonable probabil-ity that the licensee could be indirectly acquiringan interest in the property, shall be disclosed.

(12) A representation made as principal or agentto a prospective purchaser of a promissory notesecured by real property with respect to the fairmarket value of the securing property without areasonable basis for believing the truth and accu-

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racy of the estimate of fair market value.

(13) Making an addition to or modification of theterms of an instrument previously signed or ini-tialed by a party to a transaction without theknowledge and consent of the party.

(b) UNETHICAL CONDUCT. In order to maintaina high level of ethics in business practice, real estatelicensees should avoid engaging in any of the follow-ing activities:

(1) Representing, without a reasonable basis, thenature and/or condition of the interior or exteriorfeatures of a property when soliciting an offer.

(2) Failing to respond to reasonable inquiries of aprincipal as to the status or extent of efforts to mar-ket property listed exclusively with the licensee.

(3) Representing as an agent that any specificservice is free when, in fact, it is covered by a fee tobe charged as part of the transaction.

(4) Failing to disclose to a person when firstdiscussing the purchase of real property, the exis-tence of any direct or indirect ownership interestof the licensee in the property.

(5) Recommending by a salesperson to a party toa real estate transaction that a particular lenderor escrow service be used when the salespersonbelieves his or her broker has a significant bene-ficial interest in such entity without disclosing thisinformation at the time the recommendation ismade.

(6) Claiming to be an expert in an area of speciali-zation in real estate brokerage, e.g., appraisal,property management, industrial siting, etc., if, infact, the licensee has had no special training,preparation or experience in such area.

(7) Using the term ‘appraisal’ in any advertisingof offering for promoting real estate brokeragebusiness to describe a real property evaluationservice to be provided by the licensee unless theevaluation process will involve a written estimateof value based upon the assembling, analyzing andreconciling of facts and value indicators for thereal property in question.

(8) Failing to disclose to the appropriate regula-tory agency any conduct on the part of a financialinstitution which reasonably could be construedas a violation of the Housing Financial Discrimi-nation Act of 1977 (anti-redlining) Part 6 (com-

mencing with Section 35800) of Division 24 of theHealth and Safety Code.

(9) Representing to a customer or prospectivecustomer that because the licensee or his or herbroker is a member of, or affiliated with, a fran-chised real estate brokerage entity, that such en-tity shares substantial responsibility, with the li-censee, or his or her broker, for the proper han-dling of transactions if such is not the case.

(10) Demanding a commission or discount by alicensee purchasing real property for one’s ownaccount after an agreement in principle has beenreached with the owner as to the terms and condi-tions of purchase without any reference to pricereduction because of the agent’s licensed status.

(c) BENEFICIAL CONDUCT. In the best interestsof all licensees and the public they serve, brokers andsalespersons are encouraged to pursue the follow-ing beneficial business practices:

(1) Measuring success by the quality and benefitsrendered to the buyers and sellers in real estatetransactions rather than by the amount of compen-sation realized as a broker or salesperson.

(2) Treating all parties to a transaction honestly.

(3) Promptly reporting to the California Depart-ment of Real Estate any apparent violations of theReal Estate Law.

(4) Using care in the preparation of any advertise-ment to present an accurate picture or message tothe reader, viewer, or listener.

(5) Submitting all written offers as a matter of toppriority.

(6) Maintain adequate and complete records of allone’s real estate dealings.

(7) Keeping oneself current on factors affecting thereal estate market in which the licensee operatesas an agent.

(8) Making a full, open, and sincere effort tocooperate with other licensees, unless the princi-pal has instructed the licensee to the contrary.

(9) Attempting to settle disputes with other licen-sees through mediation or arbitration.

(10) Complying with these standards of profes-sional conduct, and the Code of Ethics of anyorganized real estate industry group of which the

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licensee is a member.

Nothing in this regulation is intended to limit, add orsupersede any provision of law relating to the dutiesand obligations of real estate licensees or the conse-quences of violations of law. Subdivision (a) listsspecific acts and omissions which do violate existinglaw and are grounds for disciplinary action against areal estate licensee. The conduct guidelines set forthin subdivisions (b) and (c) are not intended as state-ments of duties imposed by law nor as grounds fordisciplinary action by the Department of Real Estatebut as guidelines for elevating the professionalism ofreal estate licensees.

You need to be aware of the fact that various professionalreal estate associations have their own codes of ethics.While everyone can normally benefit from them, they arereally only binding on the members of the associations. Ifyou do in fact belong to one or more such organizations,check with them for their guidelines.

NATIONAL ASSOCIATION OF REALTORS’® CODEOF ETHICS

Many real estate licensees are REALTORS®. They arerequired to abide by the following code of ethics. Otheragents can also benefit by observing it.

PREAMBLE

Under all is the land. Upon its wise utilization andwidely allocated ownership depend the survival andgrowth of free institutions and of our civilization. TheREALTOR® should recognize that the interests of thenation and its citizens require the highest and best useof the land and the widest distribution of land owner-ship. They require the creation of adequate housing,the building of functioning cities, the development ofproductive industries and farms, and the preservationof a healthful environment.

Such interest impose obligations beyond those ofordinary commerce. They impose grave social respon-sibility and patriotic duty to which the REALTOR®

should dedicate himself, and for which he should bediligent in preparing himself. The REALTOR®, there-fore, is zealous to maintain and improve the standardsof his calling and shares with his fellow REALTORS®

a common responsibility for its integrity and honor.The term REALTOR® has come to connote competency,fairness, and high integrity resulting from adherenceto a lofty ideal of moral conduct in business relations.No inducement of profit and no instruction from clients

ever can justify departure from this ideal.

In the interpretation of his obligation, a REALTOR®

can take no safer guide than that which has beenhanded down through the centuries, embodied in theGolden Rule, ‘Whatsoever ye would that men shoulddo you, do ye even so to them.’

Accepting this standard as his own, every REALTOR®

pledges himself to observe its spirit in all of his activi-ties and to conduct his business in accordance with thetenets set forth below.

ARTICLE 1

The REALTOR® should keep himself informed onmatters affecting real estate in his community, thestate, and nation so that he may be able to contributeresponsibly to public thinking on such matters.

ARTICLE 2

In justice to those who place their interests in his care,the REALTOR® should endeavor always to be informedregarding laws, proposed legislation, governmentalregulations, public policies, and current market con-ditions in order to be in a position to advise his clientsproperly.

ARTICLE 3

It is the duty of the REALTOR® to protect the publicagainst fraud, misrepresentation, and unethical prac-tices in real estate transactions. He should endeavorto eliminate in his community any practices whichcould be damaging to the public or bring discredit tothe real estate profession. The REALTOR® shouldassist the governmental agency charged with regulat-ing the practices of brokers and salesmen in his state.

ARTICLE 4

The REALTOR® should seek no unfair advantage overother REALTORS® and should conduct his business soas to avoid controversies with other REALTORS®.

ARTICLE 5

In the best interests of society, of his associates, and hisown business, the REALTOR® should willingly sharewith other REALTORS® the lessons of his experienceand study for the benefit of the public, and should beloyal to the Board of REALTORS® of his community andactive in its work.

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ARTICLE 6

To prevent dissension and misunderstanding and toassure better service to the owner, the REALTOR®

should urge the exclusive listing of property unlesscontrary to the best interest of the owner.

ARTICLE 7

In accepting employment as an agent, the REALTOR®

pledges himself to protect and promote the interests ofthe client. The obligation of absolute fidelity to theclient’s interest is primary, but it does not relieve theREALTOR® of the obligation to treat fairly all partiesto the transaction.

ARTICLE 8

The REALTOR® shall not accept compensation frommore than one party, even if permitted by law, withoutthe full knowledge of all parties to the transaction.

ARTICLE 9

The REALTOR® shall avoid exaggeration, misrepre-sentation, or concealment of pertinent facts. He has anaffirmative obligation to discover adverse factors thata reasonably competent and diligent investigationwould disclose.

ARTICLE 10

The REALTOR® shall not deny equal professionalservices to any person for reasons of race, creed, sex,or country of national origin. The REALTOR® shall notbe a party to any plan or agreement to discriminateagainst a person or persons on the basis of race, creedor country of national origin.

ARTICLE 11

A REALTOR® is expected to provide a level of compe-tent service in keeping with the Standards of Practicein those fields in which the REALTOR® customarilyengages.

The REALTOR® shall not undertake to provide spe-cialized professional services concerning a type ofproperty or service that is outside of his field of com-petence unless he engages the assistance of one whois competent on such types of property or service, orunless the facts are fully disclosed to the client. Any

person engaged to provide such assistance shall be soidentified to the client and his contribution to theassignment should be set forth.

The REALTOR® shall refer to the Standards of Practiceof the National Association as to the degree of compe-tence that a client has a right to expect the REALTOR®

to possess, taking into consideration the complexity ofthe problem, the availability of expert assistance, andthe opportunities for experience available to the RE-ALTOR®.

ARTICLE 12

The REALTOR® shall not undertake to provide profes-sional services concerning a property or its valuewhere he has a present or contemplated interest unlesssuch interest is specifically disclosed to all affectedparties.

ARTICLE 13

The REALTOR® shall not acquire an interest in or buyfor himself, any member of his immediate family, his firmor any member thereof, or any entity in which he hasa substantial ownership interest, property listed withhim, without making the true position known to thelisting owner. In selling property owned by himself, orin which he has any interest, the REALTOR® shallreveal the facts of his ownership or interest to thepurchaser.

ARTICLE 14

In the event of a controversy between REALTORS®

associated with different firms, arising out of theirrelationship as REALTORS®, the REALTORS® shallsubmit the dispute to arbitration in accordance withthe regulations of their board or boards rather thanlitigate the matter.

ARTICLE 15

If a REALTOR® is charged with unethical practice oris asked to present evidence in any disciplinary pro-ceeding or investigation, he shall place all pertinentfacts before the proper tribunal of the member boardof affiliated institute, society, or council of which he isa member.

ARTICLE 16

When acting as agent, the REALTOR® shall not acceptany commission, rebate, or profit on expenditures

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made for his principal-owner, without the principal’sknowledge and consent.

ARTICLE 17

The REALTOR® shall not engage in activities thatconstitute the unauthorized practice of law and shallrecommend that legal counsel be obtained when theinterest of any party to the transaction requires it.

ARTICLE 18

The REALTOR® shall keep in a special account in anappropriate financial institution, separated from hisown funds, monies coming into his possession in trustfor other persons, such as escrows, trust funds, clients’monies, and other like items.

ARTICLE 19

The REALTOR® shall be careful at all times to presenta true picture in his advertising and representationsto the public. He shall neither advertise without dis-closing his name nor permit any person associatedwith him to use individual names or telephone num-bers, unless such person’s connection with theREALTOR® is obvious in the advertisement.

ARTICLE 20

The REALTOR®, for the protection of all parties, shallsee that financial obligations and commitments re-garding real estate transactions are in writing, ex-pressing the exact agreement of the parties. A copy ofeach agreement shall be furnished to each party uponhis signing such agreement.

ARTICLE 21

The REALTOR® shall not engage in any practice ortake any action inconsistent with the agency of an-other REALTOR®.

ARTICLE 22

In the sale of property which is exclusively listed witha REALTOR®, the REALTOR® shall utilize the serv-ices of other brokers upon mutually agreed upon termswhen it is in the best interests of the client.

Negotiations concerning property which is listed ex-clusively shall be carried on with the listing broker,not with the owner, except with the consent of thelisting broker.

ARTICLE 23

The REALTOR® shall not publicly disparage the busi-ness practice of a competitor nor volunteer an opinionof a competitor’s transaction. If his opinion is soughtand if the REALTOR® deems it appropriate to re-spond, such opinion shall be rendered with strictprofessional integrity and courtesy.

RELATED CALIFORNIA LAW

§ 10176 and § 10177 of the California Business and Profes-sions Code directly illustrate appropriate and inappropriateethical behavior. They read as follows.

GROUNDS FOR REVOCATION OR SUSPENSION

§ 10176. The Commissioner may, upon his own motion,and shall, upon the verified complaint in writing of anyperson, investigate the actions of any person engagedin the business or acting in the capacity of a real estatelicensee within this state, and he may temporarilysuspend or permanently revoke a real estate license atany time where the licensee, while a real estate lic-ensee, in performing or attempting to perform any ofthe acts within the scope of this chapter has been guiltyof any of the following:

(a) Making any substantial misrepresentation.

(b) Making any false promises of a character likelyto influence, persuade or induce.

(c) A continued and flagrant course of misrepresen-tation or making of false promises through realestate agents or salesmen.

(d) Acting for more than one party in a transactionwithout the knowledge or consent of all partiesthereto.

(e) Commingling with his own money or property themoney or other property of others which is receivedand held by him.

(f) Claiming, demanding, or receiving a fee, compen-sation or commission under any exclusive agree-ment authorizing or employing a licensee to performany acts set forth in Section 10131 for com- pensationor commission where such agreement does not con-tain a definite, specified date of final and completetermination.

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(g) The claiming or taking by a licensee of any secretor undisclosed amount of compensation, commis-sion or profit or the failure of a licensee to reveal tothe employee of such licensee the full amount of suchlicensee’s compensation, commission or profit un-der any agreement authorizing or employing suchlicensee to do any acts for which a license is requiredunder this chapter for compensation or commissionprior to or coincident with the signing of an agree-ment evidencing the meeting of the minds of thecontracting parties, regardless of the form of suchagreement, whether evidenced by documents in anescrow or by any other or different procedure.

(h) The use by a licensee of any provision allowingthe licensee an option to purchase in an agreementauthorizing or employing such licensee to sell, buy,or exchange real estate or a business opportunity forcompensation or commission, except when such lic-ensee prior to or coincident with election to exercisesuch option to purchase reveals in writing to theemployer the full amount of licensee’s profit andobtains the written consent of the employer approv-ing the amount of such profit.

(i) Any other conduct, whether of the same or adifferent character than specified in this sectionwhich constitutes fraud or dishonest dealing.

(j) Obtaining the signature of a prospective pur-chaser to an agreement which provides that suchprospective purchaser shall either transact the pur-chasing, leasing, renting or exchanging of a busi-ness opportunity property through the broker ob-taining such signature, or pay a compensation tosuch broker if such property is purchased, leased,rented or exchanged without the broker first havingobtained the written authorization of the owner ofthe property concerned to offer such property forsale, lease, exchange or rent.

§ 10177. GROUNDS

The Commissioner may suspend or revoke the licenseof any real estate licensee, or may deny the issuance ofa license to an applicant, who has done, or maysuspend or revoke the license of, or deny the issuanceof a license to, a corporate applicant if an officer,director, or person owning or controlling 10 percentor more of the corporation’s stock has done, any of thefollowing:

(a) Procured, or attempted to procure, a real estatelicense or license renewal, for himself or herself or any

salesperson, by fraud, misrepresentation or deceit, orby making any material misstatement of fact in anapplication for a real estate licensee, license renewalor reinstatement.

(b) Entered a plea of guilty or nolo contendere to, orbeen found guilty of, or been convicted of, a felony ora crime involving moral turpitude, and the time forappeal has elapsed or the judgment of conviction hasbeen affirmed on appeal, irrespective of an ordergranting probation following such conviction, sus-pending the imposition of sentence, or of a subsequentorder under the provision of Section 1203.4 of thePenal Code allowing such licensee to withdraw his orher plea of guilty and to enter a plea of not guilty, ordismissing the accusation or information.

(c) Knowingly authorized, directed, connived at oraided in the publication, advertisement, distribution,or circulation of any material false statement or rep-resentation concerning his business, or any businessopportunity or and land or subdivision (as defined inChapter 1 (commencing with Section 11000) of Part2 of this division) offered for sale.

(d) Willfully disregarded or violated any of the provi-sions of the Real Estate Law (commencing with Section10000 of this code) or of Chapter 1 (commencing withSection 11000) of Part 2 of this division or of the rulesand regulations of the Commissioner for the admini-stration and enforcement of the Real Estate Law andChapter 1 (commencing with Section 11000) of Part2.

(e) Willfully used the term ‘realtor’ or any trade nameor insignia of membership in any real estate organiza-tion of which the licensee is not a member.

(f) Acted or conducted himself in a manner whichwould have warranted the denial of his or her appli-cation for a real estate license, or has either had alicense denied or a license issued by another agencyof this state, another state, or the federal government,revoked or suspended for acts which if done by a realestate licensee would be grounds for the suspension orrevocation of a California real estate license; pro-vided, however, that the action of denial, revocation,or suspension by the other agency or entity was takenonly after giving the licensee or applicant fair noticeof the charges, an opportunity for a hearing, and otherdue process protections comparable to the Adminis-trative Procedure Act (Chapter 5 (commencing withSection 11500) of Part 1 of Division 3 of Title 2 of theGovernment Code), and only upon an express findingof a violation of law by the agency or entity.

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(g) Demonstrated negligence or incompetence in per-forming any act for which he or she is required to holda license.

(h) If, as a broker licensee, failed to exercise reason-able supervision over the activities of his or her sales-persons or as the officer designated by a corporatebroker licensee, failed to exercise reasonable supervi-sion and control of the activities of the corporation forwhich a real estate license is required.

(i) Has used his or her employment by a governmentalagency in a capacity giving access to records, otherthan public records, in such manner as to violate theconfidential nature of such records.

(j) Any other conduct, whether of the same or a differentcharacter than specified in this section, which consti-tutes fraud or dishonest dealing.

(k) Violated any of the terms, conditions, restrictions,and limitations contained in any order granting arestricted license.

(l) Solicited or induced the sale, lease or the listing forsale or lease, of residential property on the ground,wholly or in part, of loss of value, increase in crime, ordecline of the qualify of the schools, due to the presentor prospective entry into the neighborhood of a personor persons of another race, color, religion, ancestry ornational origin.

(m) Violated any of the provisions of the FranchiseInvestment Law (Division 5 (commencing with Section31000) of Title 4 of the Corporations Code) or anyRegulations of the Commissioner of Corporationspertaining thereto.

(n) Violated any of the provisions of the CorporationsCode or of the Regulations of the Commissioner ofCorporations relating to securities as specified inSection 25206 of the Corporations Code.

It should be abundantly clear from a careful reading of theforegoing that discrimination because of any reason what-soever in any aspect of a real estate transaction is unlawfuland will be treated harshly both by the the Commissionerand the courts.

BIBLIOGRAPHY

1. Ward v. Taggart (1959) 51 Cal.2d 736, 336 P.2d 3712. Rattray v. Scudder (1946) 28 Cal.2d 214,

169 P.2d 3713. Richards Realty Co. v. Real Estate Commissioner

(1956) 144 Cal.App.2d 357, 300 P.2d 8934. Rhoades v. Savage 1963) 32 Cal.Rptr. 8855. Marks

v. Watson (1952) 112 Cal.App.2d 196 245 P.2d 11216. Dyer V. Watson (1953) 121 Cal.App.2d 84,

262 P.2d 8737. Summers V. Freeman (1954) 128 Cal.App.2d 828,

276 P.2d 1318. Nichols V. Boswell-Alliance Construction Corp.

(1960) 181 Cal.App.2d 584, 5 Cal.Rptr. 5469. Dale V. Palmer (1951) 106 Cal.App.2d 663,

235 P.2d 65010. Ohanesian v. Watson (1953) 118 Cal.App.2d 386l,

257 P.2d 102211. Tushner v. Savage (1963) 33 Cal.Rptr. 24712. Walters v. Marler 83 Cal.App.3d1, 147Cal.Rptr.65513. Grand v. Griesinger (1958) 1660 Cal.App.2d 397,

325 kP.2d 475


1. Section 125.6 of the California Business and Professions Code specifically prohibits discrimination by a state licensee againstany person for which of the following reasons?

a. race, color, and sexb. religion, ancestry, and physical handicapc. marital status or national origind. all of the above

2. What does “fair market value” mean in the context of the Housing Financial Discrimination Act?a. the highest price which a property will bring in a competitive and open market under all

conditions requisite to a fair sale, the buyer and seller acting prudently and knowledgeablyb. the above, except that an open market is not requiredc. the above, except that buyer and seller are not required to act prudentlyd. none of the above

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3. The Unruh Civil Rights Act, Section 51.2, specifically prohibits discrimination in housing against anyone because of age, withan exception outlined in Section 51.3. What is the exception?

a. children under tenb. where accommodations are designed to meet the physical and social needs of senior citizensc. anyone over seventyd. none of the above

4. According to Section 54.1 (b) (1) of the Civil Code, which of the following are entitled to full and equal access to all housingaccommodations offered for rent, lease or compensation?

a. handicapped personsb. deaf persons and other physically disabled personsc. both “A” and “B”d. neither “A” nor “B”

5. The Housing Financial Discrimination Act of 1977 was an effort to guarantee:a. fair lending practices for all state residentsb. fair competition among lending institutionsc. the right to obtain a mortgage for everyoned. none of the above

6. Which of the following is a declaration of the Housing Financial Discrimination Act?a. that a healthy housing market is necessary to achieve a healthy state economyb. that the equities that California residents accumulate in family homes must be protected and conservedc. both “A” and “B”d. neither “A” nor “B”

7. With respect to certain geographic areas, financial institutions have sometimes denied financial assistance or approvedassistance on terms less favorable than are usually offered in other geographic areas, regardless of the creditworthiness of theapplicant or condition of the real property security offered, and this practice has resulted in which of the following:

a. contributing to the decline of available family housing in such areasb. leading to the abandonment of such areasc. both “A” and “B”d. neither “A” nor “B”

8. Under Section 10177(1) of the California Business and Professions Code, the Commissioner may suspend or revoke thelicense of any real estate licensee, or may deny the issuance of a license to an applicant, who has done which of the following?

a. solicited the sale of property on the grounds that the entry into the neighborhood ofpersons of another race is causing the property to lose value

b. done the same on the grounds that the entry into the neighborhood of another race iscausing a decline in the quality of the schools

c. both “A” and “B”d. neither “A” nor “B”

9. As used in the Fair Housing Law, “affirmative action” means any activity for the purpose of eliminating discrimination inhousing accommodations because of:

a. race or colorb. religion or sexc. marital status or national origind. all of the above

10. As used in the Fair Housing Law, “discrimination” means:a. all of the followingb. refusal to sell, rent, or lease housing accommodationsc. refusal to negotiate for sale, rental or lease of housing accommodationsd. representation that a housing accommodation is not available for inspection, sale or rental

when such housing accommodation is in fact so available