The United States Supreme Court issued one of its most controversial opinions of this term in June when it found that a local government has the power, under certain circumstances, to condemn private property for economic development. Many members of the real estate community including developers, local governments and others, cheered when the decision in Kelo v. City of New London was announced.

However, since then, there has been an extreme backlash, prompting Congress and most states to introduce legislation in response to Kelo.

Land planners and developers play a critical role in redevelopment projects. Those projects often use the power of eminent domain as a tool to assemble necessary properties. In fact, the Kelo Court stressed that one of the bases for its decision was the “comprehensive character of the [redevelopment] plan” and the “thorough deliberation that preceded its adoption.”
It is important for everyone involved in real estate development to understand the case because it will likely be the source of continued heated debate.

The power of eminent domain (also known as condemnation) authorizes the government to take private property for a public use. There are two general requirements that must be met by a condemning authority.

First, the Fifth Amendment of the United States Constitution requires that the property must be taken for a “public use.” In addition, the owner of the condemned property must be paid “just compensation” for the condemned property.

The power of eminent domain has been a tool for local governments since colonial times. When used properly, it permits a government to acquire properties to achieve important goals such as acquiring land for schools, firehouses, and roads. However, critics argue that it has been used lately for improper purposes.

Condemnation proceedings are often very emotional. Property owners are upset and angry that their property has been taken against their will; well intended governments are desperate to obtain necessary properties for a valid public use.

In Kelo, the city of New London tested the boundaries of the power of eminent domain. In 2000, New London approved a large-scale development plan that was intended to create over 1,000 jobs, increase tax and other revenues and revitalize an economically distressed city, including its downtown and waterfront areas. The plan included replacing a residential neighborhood – which was not “blighted” – with office space for research and development, a conference hotel, new residences and a pedestrian “riverwalk” along the Thames River. Private developers will be used to build and lease portions of the project. It is designed to derive maximum benefit for the City from a $350 million research center nearby built by the pharmaceutical company Pfizer, Inc.
In assembling the land needed for this project, the City initiated condemnation proceedings to acquire some of the properties. The property owners fought the condemnations and alleged that the taking of their properties would violate the Fifth Amendment’s “public use requirement.”

Many groups filed “amicus curiae” briefs with the Supreme Court. For example, the National Association of Realtors, the NAACP, and AARP all filed briefs in support of the property owners. The National League of Cities, the National Conference of State Legislatures, the U.S. Conference of Mayors, developers, and individual governments such as the city of New York and states from Vermont to Hawaii, were among those who filed briefs in support of New London.

In a 5-4 decision, the Supreme Court held that the City’s proposed disposition of the property qualifies as a “public use” within the meaning of the Fifth Amendment. Justice John Paul Stevens wrote the opinion for the majority. He restated the principle expressed in previous opinions that the term “public use” as used in the Fifth Amendment should not be read literally. Rather, the Supreme Court “has embraced the broader and more natural interpretation of public use as ‘public purpose.’”  The Court found that “[p]romoting economic development is a traditional and long accepted governmental function.” Therefore, the condemnations were for a public purpose and met the public use requirement.

One of the fundamental bases for the decision was the Court’s broad deference to local governments.  Justice Stevens wrote that it was not the Court’s role to “second guess” the City’s judgment regarding the “efficacy of its development plan” or “what lands it needs to acquire in order to effectuate the project.” The Court noted that the City has carefully formulated a development plan that it believes will provide appreciable benefits to the community, including, but not limited to, new jobs and increased tax revenue.

Finally, the Court threw the ball back into the states’ courts. The majority stated, “We emphasize that nothing in our opinion precludes any State from placing further restrictions on its exercise of the takings power. . . . [T]he necessity and wisdom of using eminent domain to promote economic development are certainly matters of legitimate public debate.”

Justice Sandra Day O’Connor issued a particularly stinging dissent. She argued that cities should not have unlimited authority to seize property.

“Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random,” O’Connor wrote. “The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.” She added: “The specter of condemnation hangs over all property. Nothing is to prevent the state from replacing any Motel 6 with a Ritz-Carlton, any home with a shopping mall, or any farm with a factory.”

The practical implications of the Kelo decision remain to be seen. It is important to keep in mind that governments have had the ability to condemn property to eliminate blight for some time. Therefore, a condemnation similar to Kelo will only be necessary if there is no other public use such as a school and the project is not intended to eliminate “blight.” Furthermore, economic and political considerations may act as a check on abuses. Kelo type development plans require significant planning, resources, and political support.

The next battles will be fought in Congress and state legislatures as well as in state courts. As the Kelo Court acknowledged, states are within their rights to pass additional laws restricting condemnations.

Within days of the Kelo decision, federal and state legislators in over half of the states announced that they would submit bills in reaction to Kelo.

Alabama became the first state to enact legislation curtailing the power of eminent domain. It is likely that more will follow. The extent to which these bills will ultimately be enacted – and the content of the final bill – is uncertain. This issue is clearly going to be fought in the years to come all across the country.  SLDT