Annexation Agreements for Economic Development – Not an Option

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The City of Promiseland has been in discussions with a developer about a property just outside the city that is perfect for a small business center. The city is willing to extend water and sewer services to the property, and according to the city’s policy, will require the developer to petition for annexation. The property is subject to county zoning (currently, agricultural and low density residential uses), so the developer will expect the city to annex the property and rezone it for commercial use. The developer also wants to make sure the annexation takes places as soon as possible in order to take advantage of the inside rates for water and sewer, and the other city services that will be necessary for the project to be marketable. The lawyers are ready to put all of these conditions into a development agreement along these lines: City agrees to annex the property, rezone the property and extend water and sewer services and other services under existing city rates and policies; developer agrees to petition for annexation, apply for rezoning, and construct the project according to the parameters set out in the agreement. There’s just one problem: This agreement is not legally enforceable in North Carolina because the city’s promises to take legislative action are not binding on the board that made them or on any future boards.

Local government experts who are in the know have probably heard that governing boards can’t “bind future boards.” What some don’t know is that the legal principle that prevents binding future boards also prevents a board from binding itself. Here’s why:

North Carolina courts have held that government agencies can’t contract away its core governmental powers. Unfortunately, there is no complete list of what powers are off limits. The leading case on this subject, Plant Food Company v. City of Charlotte, 214 N.C. 518 (1938), held that a contract that “deprives a governing body, or its successor, of a discretion which public policy demands should be left unimpaired,” is not enforceable. Id at 519-20. There aren’t very many cases on this topic, so it’s hard to develop a comprehensive list of things that are off limits for government agreements. But we can be certain that a government can’t enter into an agreement exercise its legislative authority. Both annexation and rezoning are legislative actions. See Bessemer Improvement Co. v. Greensboro, 247 N.C. 549 (1958); Thrash v. City of Asheville, 95 N.C. App. 457, 472-74 (1989) rev’d, on other grounds, 327 N.C. 251 (1990) (We conclude that the power to annex is such a discretionary power which must remain unfettered for the public good. The annexation power, like a municipality’s power to lay out and maintain streets, to build bridges and to levy taxes, is an exercise of a City’s governmental discretion.); Rockingham Square Shopping v. Town of Madison, 45 N.C.App. 249 (1980) (“Our courts have previously held that zoning is a governmental rather than a proprietary function.” citing Taylor v. Bowen, 272 N.C. 726, 158 S.E.2d 837 (1968)).

Now if you’re really in the know, you might ask, “Don’t cities have authority to enter into annexation agreements?” The answer is “yes.” How can that be? The legal doctrine that bars contracting away government powers is based in common law. That means it’s a principle developed by courts and in this case, it does not involve an interpretation of any statutory or constitutional provisions. See Edwards v. City of Goldsboro, 141 N.C. 60, 53 (1906, emphasis added.) (“Powers are conferred upon municipal corporations for public purposes; and as their legislative powers cannot, as we have just seen, be delegated, so they cannot, without legislative authority, express or implied, be bargained or bartered away.) The North Carolina General Assembly can override this court-made law and specifically authorize contracts that involve legislative or other governmental powers. Indeed, the legislature has enacted laws that authorize cities to enter annexation agreements but only with other cities. Cities and counties also have statutory authority to enter into development agreements that including binding zoning conditions and other commitments for a specific project. See G.S. 160A-400.25, 153A-349.6. There is, however, no statutory authority to enter into annexation agreements with private entities.

Well isn’t it the case that many cities enter into annexation agreements requiring property owners to petition for annexation as a condition of receiving water and sewer services to out-of-town properties? Are those all void contracts? The answer is “no.” Remember that the legal restriction is about the government binding itself to exercise (or not exercise) its core governmental powers. When the city requires a property owner to petition to annex, the city typically does not promise to annex. Instead, it requires the property owner to request annexation and the city retains its discretion to act on the petition or not.

What options do the City of Promiseland and the developer have? One option is to move forward with an agreement that the developer will petition for annexation, and with a nonbinding understanding that the board will annex and rezone. It may even be possible for the city to begin processing the rezoning application before the annexation vote occurs so that those decisions can be made immediately following the annexation decision. An example of this type of a “pre-annexation” agreement was upheld in Town of Brockway v. City of Black River Falls, 285 Wis.2d 708 (2005). The mutual expectations for actions to be taken after the annexation were set out in an agreement that was created prior to the annexation, but not executed by the city until after the vote on the annexation. The court held that since the city retained its discretion to approve the annexation the contract was enforceable.

A second option would be to obtain a local act specifically authorizing the agreement.

For more information on contracts that bind government boards see my blog post here.

Frayda Bluestein is a School of Government faculty member.

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