Government Can Use Eminent Domain for Economic Development

Below are summaries of recent court cases affecting the real estate industry.

August 1, 2005

In a blow to private property rights, the U.S. Supreme Court has ruled that a municipality can use its power of eminent domain to take unblighted property that will be used for private development, so long as that local government determines that the development benefits the entire community.

In 2000, New London, Conn., which had suffered an extended period of economic decline, approved an economic development plan designed to create jobs and expand the city’s tax base. The plan called for the conversion of a closed naval based and an adjoining 115 private homes into an urban village. The city bought 100 of the affected properties but was unable to reach agreements with the remaining owners. It then used its power of eminent domain to condemn the 15 properties.

The property owners filed a suit, claiming that the taking violated the public-use provisions of eminent domain as outlined in the Fifth Amendment to the U.S. Constitution. The trial court issued a permanent restraining order against the taking but was reversed by the Supreme Court of Connecticut. The state court ruled that the taking was valid under state statutes as part of an economic development plan.

The U. S. Supreme Court affirmed this finding. The Fifth Amendment allows government to take property from one private individual and transfer it to another private individual if the taking is for a public use. In the case of Kelo v. City of New London, Conn., the Supreme Court determined that rulings in earlier cases had deferred to local legislative judgments as to what constituted the public good and thus justified a taking. The property owners had argued that takings for economic development purposes should be legal only if there was reasonable certainty that the city would receive the expected public benefits. However, the court determined that this standard was too high and would create an impediment to all such development plans. It also stated that its ruling did not prohibit states from passing laws to limit government rights to take private property.

Brokerage Awarded Commission for Lease Renewal

A Utah appellate court has ruled that a commercial brokerage could collect a commission for a lease renewal that occurred outside of the listing agreement's protection period.

Glen Overton and Zions Holding Co. L.C., the owners of an office building, retained Tom Heal Commercial Real Estate Inc. to help them locate tenants for their building. The agreement contained a provision awarding the brokerage a commission if a tenant that it helped acquire renewed the lease.

The brokerage located a tenant who signed a three-year lease and then renewed the lease at the end of the first lease period. The brokerage sought a commission for the lease renewal, but the owners refused to pay. The brokerage filed a lawsuit seeking payment of the renewal commission. The trial court ruled that the brokerage could recover a commission only for transactions occurring during the “protection” period stipulated in the agreement. This provision stated that brokerage could collect a commission for 24 months following the expiration of the agreement for any party that was introduced to the property by the brokerage and subsequently entered into a transaction with the owners. The brokerage appealed.

The Utah Court of Appeals reversed the trial court, ruling that the brokerage was entitled to a commission from the renewal. The court disagreed with the trial court’s determination that the provisions governing renewals and the protection period language should be read together. Instead the appellate court noted that the protection clause started with “if,” meaning that it only applied to a transaction outside of the listing period and not to a lease renewal. So the court ruled that the protection clause had no relevance to this dispute.

The court also found that the paragraph covering renewals allowed the brokerage to recover a commission for all lease renewals, regardless of how long after the end of the protection period those renewals took place. Although the owners argued that they had never intended the agreement to require commission payments for lease renewals, the court ruled such extraneous testimony was irrelevant when a contract was clear in its terms. Since the agreement required the payment of a commission to the brokerage for renewals, the court reversed the trial court's judgment in favor of the owners.

Editor's Note: The NATIONAL ASSOCIATION OF REALTORS® submitted an amicus curiae brief in support of the brokerage, per the direction of NAR's Legal Action Committee.

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