High Courts Leave Mark on Industry : 1987 Decisions Bring New Rules for Real Estate-Related Matters

Home buyers may remember 1987 as the year interest rates stopped their prolonged decline, while realtors and investors might remember it as a year spent adjusting to the new tax laws.

Lenders and homeowners might call it the “year of the home-equity loan,” while builders and developers will remember the effects the spreading slow-growth movement had on their projects.

But 1987 was, above all, a year in which the face of the real estate industry was changed more by the courts than by lenders, lawmakers or the population at large.

And those changes will affect everyone--from tenants in one-bedroom apartments to owners of multimillion dollar mansions, from part-time real estate agents to the men and women who build the nation’s office towers.

“For years, the pendulum of real estate law had been swinging in a direction that permitted the government to control the property rights of individuals,” said Phillip R. Nicholson, partner in the Los Angeles-based real estate law firm Cox, Castle & Nicholson. “But in 1987, the pendulum swung firmly back in the other direction.”

Part of the courts’ renewed emphasis on the rights of individual property owners has been linked to the new, conservative majorities that gained control in the U. S. Supreme Court, California Supreme Court and many other courts last year.

Previously, those courts had been dominated by more liberal judges who tended to side with state and local agencies acting on behalf of the public as a whole, rather than developers and other individual property owners who were affected by the actions of those agencies.

Perhaps the most important legal decisions in 1987 concerned land-use regulation and control, and were made by the U. S. Supreme Court in the first half of the year.

Developers scored a big victory last June, when the high court ruled that the California Coastal Commission could not force a land owner to allow the public to cross his property in exchange for getting a building permit.

The decision was based on the grounds that there must be a reasonable relationship between the concession the government demanded of a landowner and the impact the proposed development will have on the public.

The case, Nollan vs. California Coastal Commission, involved two Ventura County homeowners who wanted to tear down a tiny beachfront cottage and build a two-story home about four times as large.

The commission, formed in 1972 to assure ample public access to the beach, argued that requiring a builder to allow the public to walk across the beach in front of his house was a fair exchange for giving him the right to “burden” the community with more development, traffic and the resulting need for public services.

But attorneys for the Nollans argued that requiring such an easement effectively was a “taking” of their property, in violation of the Fifth Amendment’s promise that the government can’t take a person’s land for public use without paying the landowner “just compensation.”

The court, in a 5-4 decision written by new conservative judge Antonin Scalia, sided with the Nollans.

“The case is particularly important because it held that the right to build on one’s own land is a right, subject to reasonable regulation, and not a privilege--a reversal of a position taken by the courts of California,” attorney Nicholson said.

Church Camp Decision

The U. S. Supreme Court had validated the concept that extreme land-use regulations could constitute an illegal “taking” earlier in the year in another landmark case, First English Evangelical Lutheran Church of Glendale vs. County of Los Angeles.

Several buildings at a camp the church owned were washed away by a flash flood in Angeles National Forest in 1978, and the county refused to let the church rebuild. The high court bought First English’s arguments that the county’s decision effectively took away the church’s property.

While the Nollan and First English decisions are viewed as victories for developers and other property owners, some experts say the rulings have also undercut the ability of cash-strapped cities to have big builders pay for various types of public facilities.

Over the past several years, a growing number of cities across the nation have successfully required developers to set aside space in their projects for low- and moderate-income housing, or to reserve a portion of the property as undeveloped open space.

Fees on Developers

Other municipalities required developers to build or fund roads, schools, child-care and transit facilities, and other items. The Nollan and First English decisions seemingly will make it harder--or, in some cases, impossible--for cities to impose such fees or set-asides.

Although some controlled-growth proponents initially feared that the two decisions would gut the public’s ability to slow big development projects, some of their fears were laid to rest by a decision the California Supreme Court handed down last summer.

In Friends of Westwood Inc. vs. City of Los Angeles, the California Court of Appeal held that the city could require a detailed environmental impact report for any project that may have a significant effect on the surrounding environment--even if the proposed project was permissible under existing zoning ordinances.

If the results of the study show that the proposed project would cause serious traffic, pollution or other problems, the developer might have to scale down the complex.

‘Adults Only’ Parks

“At the very least, the case gave the city and slow-growth advocates the power to throw one more roadblock into the path of developers,” said Douglas R. Ring, an attorney who heads the real estate practice in the Los Angeles law office of Shea & Gould.

An emotional legal issue was partially settled last October, when the state Supreme Court ruled that a law authorizing “adults only” mobile-home parks is constitutional.

Civil-rights attorneys in the Santa Barbara case had argued that such limitations unfairly reduce the availability of affordable housing for families with children, and that they conflict with other laws forbiding housing- and age-discrimination.

But the court, in Schmidt vs. Superior Court, held that lawmakers had intended to grant mobile-home communities an exception to civil rights laws in a confusing 1975 law allowing “adults-only” parks.

Case Review Granted

The ruling may be appealed. Although the decision undisputedly allows mobile-home parks to ban people under the age of 18--at least for now--the same court has agreed to review its decision later this year to determine whether it also allows parks to ban adults between the ages of 18 and 25.

Two other important rulings last year involved owners of shopping centers--and one of those decisions is viewed as a victory for a person’s First Amendment right to freedom of speech.

That case, H-CHH Associates vs. Citizens for a Responsible Government, clarified an earlier decision that held that the public can exercise free-speech rights in privately owned shopping centers as long as the owner could regulate activities with “reasonable” rules.

In H-CHH, the Court of Appeal found that the owner of a shopping complex in Pasadena couldn’t refuse to allow a group of citizens to petition in the mall because the owner had too much discretion in determining who could conduct such activities in the center and who couldn’t.

Commercial Sublease

“It wasn’t exactly an earth-shattering First Amendment decision, but it strengthened it nonetheless,” Nicholson said.

The other case, John Hogan Enterprises vs. William Crowe Kellogg, pitted shopping center tenant Hogan against the owner of a shopping center in La Jolla.

Hogan had arranged to sublet his space to a firm that wouldn’t generate as much rent for landlord Kellogg as Hogan had, so the landlord refused to approve the subleasing arrangement.

A previous court ruling had found that some landlords could block such an arrangement as long as the landlord had a “commercially reasonable” objection--but no one knew quite what that meant.

Hogan sued, but the Court of Appeal said the refusal was legal because it would cause “substantial financial detriment” to the landlord.

Real Estate Licensees

Nicholson said the ruling gives commercial landlords firmer footing to object to certain subleasing arrangements and may eventually be applied to landlord-tenant relations in apartment buildings and other residential structures.

Real estate licensees--and, perhaps, their pocketbooks--will be affected by a case the state Supreme Court decided last year.

In Phillippe vs. Shappell Industries Inc., the court said that broker Phillippe couldn’t collect a commission from Shappell even though he was responsible for finding land that Shappell eventually bought because no written commission agreement had been executed. The decision could prompt more realtors to get such agreements in writing.

Not all of last year’s most important legal issues were resolved by the courts: Some came from state and local lawmakers.

Commercial Rent Control

A new law that bans rent control at commercial projects, such as office towers and warehouses, was one of the most important real estate measures approved by last year’s state Legislature, Ring said. However, it’s doubtful that similar legislation could be passed outlawing residential rent control, he added.

“Residential rent control has far greater political potency than commercial rent control, and the legislators know that,” Ring said. He also noted that no cities had passed commercial rent control ordinances, “so there wasn’t a big constituency that would get injured by repealing them.”

On the local level, Ring said 1987 will be remembered for “the ripple effects of Proposition U,” the 1986 initiative that halved the amount of allowable commercial development in most parts of the city.

“Prop. U was only supposed to affect commercial buildings, but last year it was used as justification for a moratorium on mini-malls, additional review of certain projects, a mandatory ride-sharing program (which large employers will eventually have to initiate) and increased controls on construction of hillside single-family homes,” Ring said.

Tax Reform Act

Proponents of the slow-growth movement counter that those measures were long overdue, saying city leaders have allowed developers to run rampant for too many years.

Of course, 1987 was also the year most parts of the landmark 1986 Tax Reform Act took effect. It eliminated many of the tax breaks builders and other investors have enjoyed, putting renewed emphasis on making investments that generate cash income instead of big tax write-offs.

Finally, to wind up a hectic year, President Reagan last month signed the first major housing bill in six years, and another measure that establishes new limits on deductions homeowners can take for mortgage interest payments on first and second homes and home-equity loans.

The year ahead promises to be equally busy. Several courts already have important land-use, rent control and other real estate-related cases on their dockets, and the spreading slow-growth movement will undoubtedly spur new lawsuits by developers buoyed by last year’s big court decisions.

Exactly how these cases will turn out is anyone’s guess. “The only thing certain in 1988 is that judges and lawyers are going to be busier than ever,” attorney Ring said.