The U.S. Supreme
Court recently decided Kelo v. City of New London, one of the most significant
property rights cases in decades. The Court determined it is constitutional for
a local government to condemn non-blighted private property for purely economic
development purposes. The decision turned on whether the meaning of the Fifth
Amendment’s takings clause, which states “[P]rivate property [shall not] be
taken for public use without just compensation,” includes economic development as
a public use. In Kelo, the Court held that, under the right circumstances,
economic development can be considered public use under the Fifth Amendment,
creating broad implications for municipalities, commercial real estate
developers, and property owners alike.
Case Background
Kelo arose out of the city of New London, Conn.’s
attempts to acquire a group of private homes by eminent domain as part of an
effort to revitalize its downtown and waterfront areas. In 1998, when
pharmaceutical company Pfizer decided to build a $300 million research and
development facility in New London, the city established New London Development
Corp., a nonprofit organization acting with state and local governmental
approval to assist in creating related economic development.
NLDC formed a plan to build a conference hotel, marinas,
a riverwalk, a museum, and several private residences, as well as office and
retail properties, on a 90-acre site near the proposed Pfizer facility. To
carry out the development plan, the New London City Council charged NLDC with
acquiring the necessary property by purchase or, if necessary, by eminent
domain. After successfully purchasing most of the property in the area, NLDC
was unable to acquire homes owned by Suzette Kelo and a number of other residents
who declined to sell. Since the acquisition of those homes was necessary to
implement the development plan, NLDC initiated condemnation proceedings to
acquire the properties.
Kelo and the other homeowners argued that the takings
clause states that taking property from owner A to give to owner B because
owner B would make more economically productive use of that property stretches
the definition of public use beyond the constitutional limits. Even if private
economic development was considered a public use, the petitioners contended
that no economic benefits for the community could be guaranteed. The city
countered that the project would spur economic development, significantly
increase property tax revenues, and create jobs.
A divided Connecticut Supreme Court (4-3) held that under
the U.S. and Connecticut constitutions, the taking of land as part of an
economic development project qualified as valid public use. The Court rejected
a more stringent test that would have forced the city to provide conclusive
evidence that the anticipated economic benefits actually would materialize.
In 2004, the U.S. Supreme Court granted a legal review on
the question of whether the taking of private property solely for economic
development purposes qualifies as a public use within the meaning of the
takings clause.
Analyzing the Court’s Decision
In a 5-4 ruling, the U.S. Supreme Court affirmed the
Connecticut Supreme Court’s holding that New London and NLDC’s exercise of
eminent domain was constitutional. Writing for the majority, Justice John Paul
Stevens stated that “over a century of case law” dictated that “carefully
formulated” economic development projects such as New London’s are permissible
public use. Justice Stevens rejected the property owners’ argument that economic
development never qualifies as a public use, because public use jurisprudence
“eschew[s] rigid formulas and intrusive scrutiny.”
Acknowledging the efforts of the property owners in this
case, Justice Stevens noted “the necessity and wisdom of using eminent domain
to promote economic development are certainly matters of legitimate public
debate,” and he emphasized that nothing in the Court’s opinion “precludes any
state from placing further restrictions on its exercise of the takings power.”
The Court stressed that the creation of more than 1,000 jobs in an economically
distressed city made the takings “reasonably necessary.”
Justice Anthony Kennedy, the critical swing vote in the
decision, wrote a separate concurrence stating that there may be some occasions
when the courts could presume an “impermissible private purpose.” However, in
this case the development plan primarily was aimed at benefiting the local
economy as a whole rather than just Pfizer’s or the project developer’s private
economic interests.
Future Implications
Whether the decision will make it easier for private
developers involved in municipal public/private partnerships remains to be
seen. In making the decision, the Court emphasized that New London carefully
had formulated a development plan that it believed would provide appreciable
benefits to its residents. Still, the decision preserves a role for lower
courts to evaluate challenges to the use of eminent domain for economic
development. Judicial scrutiny clearly will be applied in cases where the
alleged public benefit is incidental or a pretext and the intended primary
beneficiary of the economic development is a private entity. In such cases,
lower courts may evaluate the purpose of and motive behind property transfers.
As Justice Stevens explicitly noted, states may enact
further restrictions on the exercise of the takings power, and many already
have. In this respect, it is important for commercial real estate professionals
to monitor the legal developments regarding eminent domain in both the courts
and their respective state legislatures.