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September 11 2017

Michigan Supreme Court Reins-in the State Boundary Commission’s Authority Over Act 425 Agreements

By: Ronald M. Redick

The Michigan Supreme Court recently issued two important decisions involving Intergovernmental Contracts for the Conditional Transfer of Property, which are commonly known as “Act 425 agreements.”  The two cases are Clam Lake Township v Department of Licensing and Regulatory Affairs, and TeriDee, LLC v Haring Charter Township.  Attorney Ronald M. Redick, of our firm’s Local Government Practice Group, successfully represented the townships in these lawsuits, and, as explained below, scored an important victory for all advocates of local control.  To understand the significance of these decisions, it is helpful to first review what an Act 425 agreement does, the benefits such agreements provide, and how the State Boundary Commission has historically limited the effectiveness of such agreements.

An Act 425 agreement allows two or more “local units” (i.e., a city, township or village) to conditionally transfer property from one jurisdiction to the other, for a period of not more than 50 years, for the purpose of an “economic development project.”  An “economic development project” is broadly defined by the Act 425 statute, but includes “existing or planned improvements suitable for use by an industrial or commercial enterprise, or housing development, or the protection of the environment.”  More often than not, an Act 425 agreement involves the provision of public sewer and/or public water service to the transferred area.

Importantly, the Act 425 statute provides that, with respect to any land that is subject to an Act 425 agreement, “another method of annexation or transfer shall not take place” for any portion of those same lands.  Stated another way, an Act 425 agreement immunizes the transferred area from annexation attempts.

Act 425 agreements thus provide local units with an important mechanism for protecting their boundaries from unwanted annexation attempts, while at the same time promoting economic development.  Such agreements are often preferable to annexation, because they avoid the onerous “winner take all” situation that necessarily results from an annexation, whereby the annexing community obtains all control  over the annexed lands, and obtains all the tax benefit from the annexed lands.  In contrast, an Act 425 agreement instead allows for a mutually beneficial transfer of land, whereby the transferor and transferee units can agree to split tax revenue and enter cooperative arrangements pertaining to, among other things, the ordinances that will be adopted for the transferred area.  

These are the conceptual benefits of an Act 425 agreement.  But in reality, the effectiveness of Act 425 agreements had been severely diminished by the Court of Appeals’ 2000 decision in Casco Township v State Boundary Commission.  In the Casco Township case, the Court of Appeals held that the State Boundary Commission (“SBC”) has the authority to invalidate an Act 425 agreement, and to thus approve an annexation petition covering the same lands.  The Casco Township decision endowed the SBC with this significant power, even though the SBC is not even mentioned anywhere in the Act 425 statute.  The result was disastrous for many Act 425 agreements.

In that regard, the SBC can fairly be criticized as having an overwhelmingly pro-annexation bias.  As a result, every time the SBC has been presented with an Act 425 agreement and a competing annexation petition, it has invalidated the Act 425 agreement and allowed the annexation to occur.  The SBC has done this for a variety of reasons.  For example, the SBC has interpreted Casco Township as allowing it to invalidate an Act 425 agreement for any combination of the following reasons:

  • The presence of public opposition to annexation.
  • The agreement interferes with annexation.
  • The agreement is not effective at promoting economic development.
  • The timing of agreement (i.e., entered too close to the filing of annexation petition).
  • Unfair degree of revenue sharing under the agreement.
  • Sewer and/or water would be more expensive through the agreement, as compared to annexation.
  • The agreement does not provide for the type of development the landowner wants.  

The end result has been that, because of the Casco Township decision, an Act 425 agreement was almost certain to be invalidated by the SBC, if challenged by a landowner or city who instead wanted annexation of the transferred area.

Such was the fate of the Act 425 agreement that was the subject of Clam Lake Township v Department of Licensing and Regulatory Affairs and TeriDee, LLC v Haring Charter Township.   Each of these lawsuits involved the same Act 425 agreement, entered by and between Clam Lake Township and Haring Charter Township, both located in Wexford County.  Clam Lake and Haring had entered an Act 425 agreement in 2013 that transferred certain lands to Haring for a period of 20 years, for the purpose of an economic development project that would include the following two elements:

  1. The extension of Haring Township sewer and water services to the transferred area, to foster new development on the transferred area; and,
  2. Haring’s adoption of mixed-use, commercial/residential planned unit development zoning regulations for the transferred area, to allow reasonable development that would be compatible with surrounding residential uses that had already been established in the same vicinity.

Problems arose, however, when a private developer instead wanted its transferred land annexed into the City of Cadillac, so that it could obtain city utilities and the benefits of the city’s less stringent zoning regulations.  To achieve this, the developer filed an annexation petition with the SBC covering the same lands, and also challenged the Act 425 agreement in court, arguing that the agreement’s zoning provisions constituted unlawful contract zoning.  Relying on Casco Township, the SBC invalidated the townships’ Act 425 agreement and also approved the annexation petition.  In addition, the Wexford County Circuit Court held that the agreement was void, as constituting illegal contract zoning.

In the end, however, the townships prevailed.  After a hard-fought legal battle of four years, the Supreme Court reversed both the SBC and the circuit court.  In Clam Lake Township v Department of Licensing and Regulatory Affairs, the Supreme Court overruled the 2000 decision in Casco Township, and held that the SBC has no authority to review the validity of an Act 425 agreement.  The Court further held that the SBC may determine only whether an Act 425 agreement is “in effect” (i.e., executed and properly filed with the Secretary of State and county clerk), and if it is in effect, the SBC must reject any annexation petition covering the same lands.

And in TeriDee, LLC v Haring Charter Township, the Supreme Court held that the Act 425 statute expressly allows local units to specify, by agreement, the zoning regulations that will apply to the transferred area.  The Court effectively interpreted the Act 425 statute as authorizing a form of contract zoning.  The end result was that the townships’ Act 425 agreement was deemed effective, and the annexation was thus reversed.

The Supreme Court’s decision breathes new life into Act 425 agreements.  No longer will their validity be determined by the SBC in an annexation-biased forum.  Rather, any challenge to an Act 425 agreement must be brought, if at all, in the neutral forum of a circuit court.  Moreover, municipalities can now be secure in the position that an Act 425 agreement can validly be used to control the type of zoning that will apply to the transferred area.  This ensures that the type of economic development project will be acceptable to both the transferee and transferor municipality.

If your municipality is interested in an Act 425 agreement, please contact Ron Redick or your Mika Meyers’ attorney in the firm’s local government practice group.

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