Anderson v. Department of Real Estate

Citations: 93 Cal. App. 3d 696; 155 Cal. Rptr. 307; 1979 Cal. App. LEXIS 1803Docket: Civ. 54049

Court: California Court of Appeal; May 11, 1979; California; State Appellate Court

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The Court of Appeals of California addressed an appeal involving Raymond John Anderson, whose inactive real estate license was revoked by the Department of Real Estate for operating as an "advance fee rental agent" without an active license. The court examined the validity of the department's regulation (Cal. Admin. Code, tit. 10, art. 17. 2850) under statutory authority and First Amendment protections for commercial speech. It determined that while the regulation was statutorily authorized and applicable to Anderson's activities, the requirements imposed were overly restrictive and infringed upon his right to commercial speech.

The trial court had applied the independent judgment test in reviewing the administrative decision, confirming the facts: Anderson, operating as Homefinders, sold lists of rental properties compiled from landlord information and advertisements for a subscription fee. Although three individuals paid for the service, none successfully rented properties, and there were inaccuracies in the listings. The department found Anderson's conduct violated its regulations, leading to the revocation of his license. However, the trial court ruled that this conduct did not warrant disciplinary action, resulting in a peremptory writ to annul the department's revocation. The appellate court affirmed the trial court's judgment.

The Real Estate Commissioner has the authority to regulate the licensing of real estate brokers and salesmen, requiring applicants to demonstrate honesty, pass an examination, and possess knowledge of the English language, arithmetic, real estate principles, agency contracts, and business ethics. Engaging in real estate activities without a license is illegal. The definition of a real estate broker was expanded in 1961 to include those who collect advance fees related to real estate transactions. This provision also covers 'advance fee rental agents,' who charge fees for rental information regardless of whether a rental is secured. Regulations stipulate that salesmen can only act as advance fee rental agents if their employing broker operates in the same office. Anderson's activities fall under this category, and the department disciplined him for acting without an active license. 

The constitutionality of the regulatory framework for advance fee rental agents has been upheld in terms of procedural due process and equal protection. However, Anderson argues that the statutes infringe upon his commercial speech rights when he distributes rental lists for a fee. This claim is valid, as commercial speech is protected under the First Amendment, emphasizing the importance of free communication in commerce for consumers.

Protection of commercial speech includes advertising, as established in previous cases. The current focus is on the validity of licensure requirements imposed by the Department of Real Estate concerning Anderson's right to commercial speech. Limitations on commercial speech are permissible if regulations are narrow and serve a legitimate purpose. Licensure requires objective guidelines that align with valid government objectives. The licensure of 'advance fee rental agents' is deemed acceptable, especially in light of legislative intent to regulate fraudulent practices in advance fee businesses. The Legislature aimed to ensure honesty and integrity among licensees, establish fiduciary relationships, and mandate accountability.

The licensure requirements in question are clear and objective, but it is debated whether they rationally relate to the legislative intent. The character requirements for real estate brokers and salesmen align with this purpose. However, the examination requirements and the stipulation that 'advance fee rental agents' must operate under a licensed broker seem excessive given Anderson's activities, which involve compiling and selling lists of rental units. His work does not necessitate the extensive knowledge typically required for real estate transactions. Therefore, while the intent of fiduciary accountability is valid, the regulations may impose qualifications that are unrelated to achieving that goal.

The licensure requirements for 'advance fee rental agents,' such as Anderson, are found to be overly strict and irrelevant to their activities, which primarily involve publishing and selling lists of available rental units. The constitutional protection of commercial speech necessitates that licensure requirements must be rationally related to the purpose of the license. Current statutes impose disincentives for the dissemination of information, restricting consumer access to housing options. Real estate brokers, who are required to meet specific standards, have little economic incentive to publish rental lists over engaging in commission-based rental negotiations. This creates a barrier to competition and limits market participation. The court concludes that the licensure requirements infringe upon constitutional protections for commercial speech, affirming the trial court's decision that Anderson was improperly disciplined for operating without a license.

Concurrence and dissent were expressed regarding the case of Raymond John Anderson, with agreement on the majority opinion that Anderson's conduct constituted that of an 'advance fee' rental agent, necessitating a real estate license as per California Administrative Code section 2850. Evidence showed Anderson had placed his real estate license on inactive status prior to engaging in the rental business, thus violating several sections of the Business and Professions Code, which prohibits operating without a valid license. Previous disciplinary actions against Anderson, including a 90-day suspension of his license, supported the conclusion that revocation of his license in this instance was justified and not an abuse of discretion. 

However, dissent arose concerning the majority’s view that the licensure requirements for 'advance fee rental agents' infringe upon Anderson's freedom of commercial speech under the First Amendment. While acknowledging the importance of commercial speech and the necessity of reasonable regulations to protect consumers from unscrupulous practices, the dissent emphasized that the legislature is empowered to implement such regulations. The dissent referenced judicial precedents affirming that commercial speech is protected by the First Amendment, noting a shift in legal interpretations allowing for such protections in various business contexts.

The United States Supreme Court in Va. Pharmacy Bd. recognized the significant consumer interest in commercial speech, which informs the public about products and services, thereby supporting resource allocation in a free enterprise system and promoting informed decision-making. In contrast, the current case emphasizes consumer protection, aligning with the Real Estate Act's primary goal of safeguarding the public from dishonest practices by ensuring that real estate brokers and salespeople maintain honesty, truthfulness, and good reputations. This protective scope includes real estate rental agencies that must possess a broker's license to operate legally. The Supreme Court, in Tyrone v. Kelley, highlighted that since 1948, numerous individuals and entities in the 'advance fee' rental business have engaged in fraudulent practices, leading to significant financial losses for consumers. Consequently, the Legislature found it necessary to regulate the advance fee business to protect the public, requiring that those in this sector be licensed to establish fiduciary relationships and ensure accountability for entrusted funds. In Rees v. Department of Real Estate, the appellant argued that the licensing requirements were overly broad and violated his constitutional rights, claiming that the qualifications for a real estate license did not reasonably relate to his business activities, thus constituting an arbitrary burden and a denial of due process and equal protection.

The Rees court upheld the constitutionality of regulations governing 'advance fee' rental agent transactions, rejecting due process and equal protection challenges. Although Rees claimed First Amendment protections, the court deemed the argument waived due to lack of citation. It affirmed that reasonable business regulations are valid even with public expression involved. The court noted that the licensing requirements for 'advance fee rental agents' and the related sections of the Administrative Code are not overly broad and are justified by historical abuses in the industry. Anderson, lacking an active real estate broker's license, could not legally operate his rental business and had provided outdated and inaccurate rental lists, leading to consumer frustration and financial loss. The court highlighted that the legislative intent was to protect the public in the 'advance fee' rental market, and the majority opinion undermined this intent without specifying how existing statutes could be revised to meet constitutional standards. The judgment of the superior court was recommended for reversal, affirming the administrative law judge's findings. The Supreme Court denied a petition for a hearing on the matter.

The department contends that Anderson's First Amendment argument is inadmissible since it was not presented during the administrative hearing. However, failure to raise a constitutional issue in an administrative setting does not bar it from being addressed in judicial review of the agency's actions. Section 2850 defines an "advance fee rental agent" as a real estate licensee who either negotiates rentals or provides rental information to prospective tenants requiring an advance fee or solicits rental listings from landlords expecting compensation. In the case of Rees, the petitioner, who operated a rental data service, sought a writ of mandate to overturn the Department of Real Estate's order prohibiting him from selling rental information without a real estate broker's license. The trial court found against Rees, affirming that he acted as both a real estate broker and an advance fee rental agent, thereby subject to relevant licensing statutes and regulations. The Court of Appeal upheld this, stating that the licensing requirements were validly applied to individuals selling rental information and did not violate Rees' due process or equal protection rights. The court recognized that Rees' actions fell within the definition of an advance fee rental agent as per Section 2850, emphasizing the need for regulation to protect the public from past abuses in the rental market. Sections 10130 and 10131 stipulate the necessity of obtaining a real estate license to engage in related activities.

Section 10143 mandates that real estate licensees negotiating rentals or providing rental information for a fee must issue a contract or receipt to prospective tenants. This document must include a commitment to refund any amount exceeding a ten-dollar service charge if the tenant does not secure a rental. Requests for fee refunds must be made within 10 days after the licensee's service period ends. If the rental information provided is outdated or inaccurate, the full fee must be returned. Additionally, the contract must adhere to regulations set by the commissioner for proper disclosure of material information.

The appeal record reveals that Anderson operated an advance fee rental business from 1971 to mid-1975, during which he failed to timely refund excess fees to clients on multiple occasions, despite their repeated requests for refunds. This issue was first raised during the appeal process.

Section 2850 defines an "advance fee rental agent" as a real estate licensee who collects fees in advance for rental services, regardless of whether a rental is secured. Section 2851 outlines the conditions under which a real estate salesman may act as an advance fee rental agent, including the need for supervision and approval from the employing broker. Section 2852 requires that prior to accepting an advance rental fee, agents must provide a written contract containing specific details, including the agent's information, acknowledgment of the fee receipt, a description of services, and the tenant's rental specifications.

The contract specifies an expiration date and outlines provisions applicable unless alternative language is approved in writing by the commissioner. If a prospective tenant does not secure a rental using the agent's information, they are entitled to a full refund of the amount paid, provided they can demonstrate that the rental information was outdated or inaccurate. A fee exceeding a $10 service charge is refundable if no rental is obtained, with a demand for the refund required within ten days after the contract expires. Refund requests can be made in person or by mail.

Sections 2852.1 to 2855 detail regulatory requirements for advance fee rental agents. Agents must file the contract form with the Real Estate Commissioner before use, and any modifications must also be filed. If relocating, agents must notify current tenants of the new address and telephone number. Collected advance rental fees, minus the service charge, must be deposited into a trust fund by the next business day and can only be withdrawn under specific conditions, including a refund or evidence that a rental was obtained through the agent.

Agents are required to provide an exact copy of the contract to tenants and retain the original for three years, available for inspection. They must maintain a duplicate list of all rental addresses provided to tenants and document advertisements related to rental properties, retaining such records for three years as well.

Section 2856 prohibits advance fee rental agents from providing prospective tenants with rental addresses unless they have specific authorization from the property owner. These agents must also verify the availability of listings within three business days before making referrals. The superior court found that during the period from July 7, 1975, to February 29, 1976, the petitioner operated by gathering rental information and selling it to clients for a subscription fee. 

In several instances, individuals responded to advertisements for rentals and were invited to the petitioner’s office to subscribe for rental lists at prices ranging from $25.00 to $30.00. For example, Deputy Real Estate Commissioner Randolph L. Brendia was solicited for a subscription after expressing interest in a rental. Bruce F. Paul, after paying for a subscription, discovered many listings were outdated and demanded a refund, which he eventually received. Similarly, Stella Weber paid for a subscription but found the information inaccurate and was denied a refund based on a two-year contract clause. Marie Miller faced a similar experience, paying for a subscription, but discovered the listed rentals were no longer available and her request for a new list and subsequent refund was denied.