Can a Kentucky riverport authority give public land to a company in exchange for job promises, with the land reverting if the jobs don't materialize?

Plain-English summary

The Greenup-Boyd County Riverport Authority wanted to hand a parcel of land to a private individual or company. Instead of paying money, the grantee would promise to create a set number of jobs at a set pay scale, and if it failed, the land would revert to the authority. The authority's counsel asked the Attorney General whether Section 164 of the Kentucky Constitution allowed it.

Section 164 says no county, city, or other municipality may grant a "franchise or privilege" for more than twenty years, and before granting one it must advertise and award to the highest and best bidder. So the whole question turned on whether this land deal was a "franchise or privilege." The opinion works through almost a century of Kentucky case law on municipal leases. In the older cases (Pattie, Inland Waterways, Faulconer, Deters, Porter), courts approved municipal leases, often because the city could take the property back at will or the lease was clearly temporary. But the Supreme Court's 1984 decision in E.M. Bailey Distributing Co. v. Conagra narrowed those cases: it held that a grant giving a private party exclusive use of public property, not revocable at the government's will, is a franchise, and that Section 164's bidding requirements should be read narrowly in favor of applying them.

Measuring the riverport deal against E.M. Bailey, the opinion concludes it is a franchise for two reasons. First, because the reverter had no end date, it gave the grantee exclusive control of public property for an indefinite time, something ordinary citizens don't enjoy. Second, the authority could not retake the land whenever it wanted; the land came back only if the grantee missed its job targets. The authority can sell land it owns outright, but this was effectively an indefinite lease it could not terminate at will, so Section 164's advertising, bidding, and durational limits apply. The opinion also withdraws part of an earlier opinion, OAG 09-007, to the extent it conflicts with E.M. Bailey.

What this means for you

Riverport and other local authorities

Under this opinion, a conveyance of public land whose only consideration is a performance promise, paired with an open-ended reverter, is read as a franchise under Section 164 rather than a clean sale. The opinion treats two features as decisive: whether the government can recapture the property at will, and whether the grantee gets exclusive use for an indefinite (rather than clearly temporary) term. An authority structuring an incentive deal should expect Section 164's advertising and competitive-bidding requirements to apply when those features are present.

Economic development officials

The opinion does not say the authority cannot sell the land; it says it can sell outright. What it questions is the specific structure (no money, indefinite reverter, no at-will recapture). The opinion frames E.M. Bailey, not the older permissive cases, as the controlling precedent.

Municipal and authority attorneys

The opinion is a useful map of the Section 164 lease cases and how E.M. Bailey distinguished and narrowed them. Note the opinion's express withdrawal of OAG 09-007 to the extent it relied on Pattie to approve a 99-year lease in a way that conflicts with E.M. Bailey.

Private developers

A deal in which you receive exclusive, indefinite control of public property in exchange for job commitments may be treated as a franchise, meaning the authority would have to advertise it and award it to the highest and best bidder rather than convey it to you directly.

Common questions

Q: What is a "franchise or privilege" under Section 164?
A: The opinion quotes the Kentucky Supreme Court's definition: a right conferred by law that can be granted only by the sovereign and is not enjoyed by the public by common right, a special privilege that cannot be exercised without a government grant. E.M. Bailey added that it includes a grant of a right to use public property over which the granting authority has control.

Q: Why isn't the riverport's deal just a sale?
A: Because the only consideration was a job-creation promise and the land would revert if the grantee failed, with no end date on that reverter. The opinion reads that as an indefinite lease, not a final transfer of title.

Q: What made the difference between the deals courts approved and this one?
A: In Inland Waterways and Deters, the city could recapture the land at any time, which made the arrangement temporary. Here the authority could not take the land back at will, and the grantee's exclusive use ran indefinitely, which under E.M. Bailey makes it a franchise.

Q: Does the authority have to do anything special if Section 164 applies?
A: Yes. The opinion says such a grant may not exceed twenty years, must be advertised after due notice, and must be awarded to the highest and best bidder (the authority keeping the right to reject bids).

Background and statutory framework

Riverport authorities are created under KRS 65.510 to 65.650 to manage waterway properties and collect revenue (KRS 65.530), and they may contract (KRS 65.520(2)) and sell land (KRS 65.530(4)). Section 164 of the Kentucky Constitution caps any municipal "franchise or privilege" at twenty years and requires advertising and award to the highest and best bidder. The opinion traces the franchise question through Board of Councilmen of City of Frankfort v. Pattie, 12 S.W.2d 1108 (Ky. 1928); Inland Waterways Co. v. City of Louisville, 13 S.W.2d 283 (Ky. 1929); Faulconer v. City of Danville, 232 S.W.2d 80 (Ky. 1950); Deters v. City of Louisville, 249 S.W.2d 796 (Ky. 1952); and Porter v. Hospital Corp. of America, 696 S.W.2d 794 (Ky. App. 1985), before treating E.M. Bailey Distributing Co. v. Conagra, Inc., 676 S.W.2d 770 (Ky. 1984), as the primary controlling precedent because it narrowed those earlier cases and required strict compliance with Section 164. It cites Adamson v. Adamson, 635 S.W.3d 72 (Ky. 2021), for the meaning of a "sale," and Pikeville Oil & Tire Co. v. Deavors, 320 S.W.2d 782 (Ky. 1959), for the definition of a lease.

Citations and references

Constitution and statutes:
- Ky. Const. § 164 (franchise or privilege; advertising and competitive bidding)
- KRS 65.510 to 65.650; KRS 65.530; KRS 65.520(2); KRS 65.530(4) (riverport authority powers)

Cases:
- E.M. Bailey Distributing Co. v. Conagra, Inc., 676 S.W.2d 770 (Ky. 1984), controlling precedent on franchise/Section 164
- Inland Waterways Co. v. City of Louisville, 13 S.W.2d 283 (Ky. 1929), and Deters v. City of Louisville, 249 S.W.2d 796 (Ky. 1952), at-will recapture made leases temporary
- Board of Councilmen of City of Frankfort v. Pattie, 12 S.W.2d 1108 (Ky. 1928); Faulconer v. City of Danville, 232 S.W.2d 80 (Ky. 1950); Porter v. Hospital Corp. of America, 696 S.W.2d 794 (Ky. App. 1985)
- Adamson v. Adamson, 635 S.W.3d 72 (Ky. 2021); Pikeville Oil & Tire Co. v. Deavors, 320 S.W.2d 782 (Ky. 1959)

Source

• Landing page: https://www.ag.ky.gov/Opinions/Pages/default.aspx
• Original PDF: https://www.ag.ky.gov/Resources/Opinions/Opinions/Opinion%20of%20the%20Attorney%20General%2024-02.pdf

Original opinion text

The full opinion as issued by the Office of the Kentucky Attorney General:

April 3, 2024
OAG 24-02
Subject: Whether the Greenup-Boyd County Riverport Authority may, consistent with Section 164 of the Kentucky Constitution, convey public property to a private individual or company on the condition that the grantee create a certain number of jobs at a certain pay scale, or else the property will revert to the Authority.
Requested by: Phillip B. Leslie, Counsel for the Greenup-Boyd County Riverport Authority
Written by: Aaron J. Silletto, Executive Director, Office of Civil and Environmental Law
Syllabus: The Authority's proposed transaction would constitute an impermissible "franchise or privilege" under Section 164 of the Kentucky Constitution because it would be an indefinite lease that the Authority could not terminate at will.

Opinion of the Attorney General

In 2001, Greenup County and Boyd County established the Greenup-Boyd County Riverport Authority (the "Authority"). The Authority's board of directors is considering conveying a parcel of land to a private individual or company. In return for the conveyance, the sole consideration offered by the grantee would be an agreement with the Authority to create a certain number of jobs at a certain pay scale. The agreement would also contain a reversionary clause, under which the land would revert to the Authority if the grantee failed to meet the agreement's requirements for jobs created and pay scale. The Authority has asked the Office for an opinion regarding whether it may, under Section 164 of the Kentucky Constitution, convey its property on these terms.

[Footnote: The Authority is created under KRS 65.510 to 65.650. Its purpose is to manage properties on the Commonwealth's waterways and collect revenue generated from leasing and selling such properties. KRS 65.530.]

Although the Authority is statutorily authorized to enter contracts and sell any land it owns, see KRS 65.520(2), KRS 65.530(4), if the conveyance is a "franchise or privilege" under Section 164 of the Constitution, it may do so only on certain conditions:

No county, city, town, taxing district or other municipality shall be authorized or permitted to grant any franchise or privilege, or make any contract in reference thereto, for a term exceeding twenty years. Before granting such franchise or privilege for a term of years, such municipality shall first, after due advertisement, receive bids therefor publicly, and award the same to the highest and best bidder; but it shall have the right to reject any or all bids. This section shall not apply to a trunk railway.

Ky. Const. § 164. Consistent with Section 164, if the proposed conveyance is a "franchise or privilege," then it: (a) may not be for a term exceeding 20 years; (b) must first be advertised by the Authority; and (c) must be awarded only to "the highest and best bidder." But if the conveyance is not a "franchise or privilege," then neither Section 164 nor these requirements apply to the transaction.

To answer the Authority's question, it must first be determined whether the proposed real estate transaction at issue is a "franchise or privilege," as those terms are used in Section 164. The Supreme Court of Kentucky defined the terms as follows:

A franchise or privilege of the type contemplated by section 164 of the Constitution is generally understood to designate and denote a right or preference conferred by law which may be granted only by the sovereign, and not by individuals generally. It involves some special privilege not belonging to the public by common right. . . . In order to constitute a franchise, the right possessed must be such as cannot be exercised without the express permission of the sovereign power, a privilege or immunity of a public nature which cannot be legally exercised without a legislative grant[.]

Inland Waterways Co. v. City of Louisville, 13 S.W.2d 283, 285 (Ky. 1929) (citations omitted).

Here, the Authority represents the proposed agreement as a land sale contract. [Footnote: The "sale" of land means the "transfer of property or title for a price." Adamson v. Adamson, 635 S.W.3d 72, 78 (Ky. 2021).] In consideration for the Authority's land conveyance, the grantee will promise to create a certain number of jobs at an agreed upon pay scale. No financial consideration from the grantee is identified. But if the grantee fails to fulfill its end of the agreement, the title to the land will revert to the Authority. The Authority has not identified any time after which its reversionary interest would expire or when the "sale" of the property would become "final." So, even though the proposed real estate transaction is packaged as a sale—as it has been explained by the Authority—it appears to be a lease for an indefinite term. [Footnote: "A lease is a conveyance of an estate in realty. It divests the owner for a given time of a certain estate in the land, leaving in the owner the right of reversion at the expiration of the grant." Pikeville Oil & Tire Co. v. Deavors, 320 S.W.2d 782, 785 (Ky. 1959) (internal citations omitted).]

Since the late 1920s, Kentucky courts have frequently examined real estate leases by municipalities to determine whether they constituted a "franchise or privilege" subject to Section 164.

In Board of Councilmen of City of Frankfort v. Pattie, the city proposed to lease a building for a term of 20 years, with the lease commencing two years in the future, after the then-current lease expired. 12 S.W.2d 1108 (Ky. 1928). Because the building needed repairs, the city council and mayor sought bids for a lease of the building, requiring the successful bidder to make the necessary repairs at its own expense. Id. at 1108-09. In reversing the trial court's conclusion that the lease violated Section 164, the old Court of Appeals observed that the city had "the same rights in and control over the [building] owned by it that any individual would have in and over property owned by him." Id. Further, the Court held that the city could "sell or lease property owned by it in its private proprietary capacity, so long as no fraud attaches to its contracts. If it can sell its property, it necessarily follows that it can lease such property, and, since section 164 of the Constitution has no application, there is no limitation upon the term for which the lease may be made." Id.

In Inland Waterways, the city leased land along the Ohio River to a company for the construction and development of river terminals. 13 S.W.2d at 284. Although the city originally acquired the land to use for landings and wharves, the city leased the land to the company "to promote, if possible, the development of a useful and valuable river terminal business, realizing meanwhile some return upon the investment." Id. Besides stating a maximum term of the lease, the lease also provided that the city could terminate it at any time, "provid[ing] for a recapture when and as the city may need the land or any portion of it for municipal wharf purposes." Id. Finding the lease lawful, the Court held that "the recapture provision is wholly incompatible with the idea of a fixed right for a definite term." Id. at 286. The Court noted that it is "the service that is rendered pursuant to an obligation, not the facilities employed, that determines the proper solution of the problem" and determines whether the lease is a "franchise or privilege." Id. Because the city could have terminated the lease at any time, all the city granted to the terminal company was the temporary use of its land. Id. at 287. The Court saw "no room for the argument that the necessary operations under the contract involve the essential exercise of a franchise," and concluded that the lease did not violate Section 164. Id. at 286-88.

Similarly, in Faulconer v. City of Danville, the city proposed to erect a building using bonds that would be paid off over 25 years. 232 S.W.2d 80, 81-82 (Ky. 1950). The city proposed to lease the building to a tenant for 25 years and to use the rental income to pay off the bonds. Id. at 82. The lease also included another 25-year renewal term, with rent of $1 plus the cost of maintenance and preservation of the property. Id. Citing Pattie and Inland Waterways, the Court held that, "[o]nce having reached the conclusion that the owning and leasing on an industrial plant is a proprietary and not governmental function, this limitation of the Constitution [in Section 164] fails of application." Id. at 84. The Court upheld the lease. Id. at 84-85.

The Court reached a similar conclusion in Deters v. City of Louisville, 249 S.W.2d 796 (Ky. 1952). Deters addressed a 40-year lease of the same land at issue in Inland Waterways. Deters, 249 S.W.2d at 796. Under the lease in Deters, the city could cancel it on one year's notice if it needed the land to operate a municipal wharf. Id. All fixed improvements to the land by the lessee became the property of the city upon expiration of the lease. Id. at 797. But if the city terminated the lease before the expiration of the 40-year term, the city would have to pay the lessee the fair value of the improvements. Id. at 796. Referring to Inland Waterways, the Court noted that "a lease containing a similar provision for repossession of the property by the city made the instrument a lease for temporary occupation and operation of river terminals and thereby took it out of the limitations of Sec[tion] 164." Id. at 797. On that basis, the Deters Court approved the lease. Id.

In Porter v. Hospital Corp. of America, the county government determined that it no longer wanted to operate a hospital, but it also wanted to ensure continued healthcare access for its citizens. 696 S.W.2d 794 (Ky. App. 1985). To that end, the county leased the hospital to Hospital Corporation of America ("HCA"). Id. The lease was set to expire once HCA completed its new hospital in Logan County. Id. Citing Deters and Inland Waterways, the Court of Appeals stated that "a lease of land for temporary purposes does not constitute a franchise within the meaning of Section 164." Id. at 795. The Court held, "[t]he parties here obviously contemplated that the lease in question was for temporary purposes, continuing only for the reasonable time it took to construct a new hospital. For this reason alone, the lease does not fall within the purview of Section 164." Id.

In each of these cases—Pattie, Inland Waterways, Faulconer, Deters, and Porter—the court approved the municipal leases because it concluded that, by leasing its real property, the municipality was not granting a "franchise or privilege." The courts in Inland Waterways and Deters relied on the additional fact that the leases were terminable at the will of the municipality. But the leases in Pattie, Faulconer, and Porter did not include such a termination provision. Broadly, these cases could be read to hold that any municipal real property lease would be permitted by Section 164 of the Kentucky Constitution.

But in E.M. Bailey Distributing Co. v. Conagra, Inc., the Supreme Court distinguished the earlier cases and found that a lease between the Lyon County Riverport Authority and Conagra, Inc. was a "franchise or privilege." 676 S.W.2d 770 (Ky. 1984). In E.M. Bailey, the agreement at issue entitled Conagra to the exclusive use of land next to a riverport facility and the use of grain loading apparatus to the exclusion of all others upon a 24-hour notice. Id. at 771. Consequently, Conagra, with the proper notice, could have had exclusive use of the facility every day of the year. Id. The agreement was for two years with an automatic renewal for three consecutive one-year periods. Id. Also under the agreement, the authority had to construct and install facilities and equipment based on Conagra's specifications, and the authority was obligated to keep the facility in good repair. Id. The authority also had to pay for the utilities furnished to the grain loading facility and to reimburse Conagra for structural modifications and improvements it made to the facility. Id. In return, the authority received from Conagra a guaranteed rent based on the amount of grain handled by Conagra. Id.

The Supreme Court held that a "franchise" was "a grant of a right to use public property or at least the property over which the granting authority has control." E.M. Bailey, 676 S.W.2d at 771. Applying that definition, the Court found the lease to be a franchise:

Here the record is clear that the operating agreement grants a right to Conagra to use public property over which the port authority has control and ownership because the agreement provides Conagra with a priority use of the grain-loading facilities that could become exclusive without any difficulty. Conagra has been granted a right to use property in a manner which is not enjoyed by the citizens in general. It can exclude other members of the general public by simply giving 24-hour notice. Obviously the public at large does not enjoy the same privilege.

Id. at 772. The Court distinguished the case from Inland Waterways because the latter case involved property held by the city, but which was not being used by it, and the lease permitted the city to recover the property at any time. Id. "This Court held the lease [in Inland Waterways] was not a franchise, noting that the recapture provisions in the lease were wholly incompatible with the idea of a fixed right for a definite term." Id. But because the lease with Conagra permitted a fixed right to use the grain facilities for a definite term, and the authority could not regain the facility once Conagra gave the required 24-hour notice, the Court held that the operating agreement was a franchise. Id.

The E.M. Bailey Court also distinguished between a franchise and a license, observing that a license is revocable at the will of the licensor, but that a franchise "is neither temporary [n]or personal and it is not revocable at the will of the grantor." Id. The Court distinguished between licenses and franchises, which implies that the court believed the recapture provisions in the leases at issue in Inland Waterways and Deters made them licenses, and not true leases. Finally, the Court stated, "Section 164 of the Kentucky Constitution has existed since 1890, and although case law has diluted its effectiveness to some extent, the cases which limit the requirement for advertisement and competitive bidding should be interpreted on a very narrow basis." Id. at 773. The Court cautioned that "franchise and privilege matters" should be "decided on a case-by-case approach." Id. at 774.

The Supreme Court in E.M. Bailey did not expressly overrule any of its predecessor court's prior Section 164 cases, including Pattie, Inland Waterways, Faulconer, or Deters. However, it distinguished Pattie, and it placed great weight on the portion of Inland Waterways that reasoned the city's ability to recover its property at any time made the lease at issue "temporary." And it both required strict compliance with Section 164's advertisement and competitive bidding requirements and narrowed those earlier precedents. Thus, E.M. Bailey is now the primary precedent interpreting Section 164.

The "sale" proposed by the Authority would constitute a "franchise or privilege" under Section 164 for two reasons. First, since the duration of the Authority's reversionary interest—and thus the term of the transaction—is indefinite, the proposed transaction would confer on the grantee an exclusive "right to use [the Authority's] property in a manner which is not enjoyed by the citizens in general." E.M. Bailey, 676 S.W.2d at 772. As described by the Authority, the proposed transaction would give the grantee the right to exclude all others from the property for an indefinite time. Because that type of absolute and exclusive control over public property is not generally enjoyed by other citizens, the agreement constitutes a franchise.

Second, the agreement's reversion clause is not the sort of recapture provision that was approved in Inland Waterways. See Inland Waterways, 13 S.W.2d at 284. In that case, the lease was not a franchise because "[t]he recapture provision [was] wholly incompatible with the idea of a fixed right for a definite term." Id.; see E.M. Bailey, 676 S.W.2d at 772. But that is not the case here. The Authority's proposed agreement would not allow it to terminate the agreement at any time. Rather, the property would revert to the Authority if, and only if, the grantee failed within some unspecified timeframe to fulfill its obligations as to jobs created and pay scale. The Authority cannot retake the land at any time. The Authority's inability to recapture the property at will makes the proposed real estate transaction a franchise.

The Greenup-Boyd County Riverport Authority may sell outright any land it owns. However, the proposed conveyance described by the Authority would not be an outright sale, but, effectively, an indefinite lease that the Authority would be unable to terminate at will. Under E.M. Bailey, the proposed real estate transaction would be a franchise or privilege governed by Section 164 of the Kentucky Constitution, and thus, would be subject to Section 164's advertising, bidding, and durational requirements.

[Footnote: To the extent the analysis in OAG 09-007 differs from the analysis above, and thus conflicts with E.M. Bailey, it is withdrawn.]

Russell Coleman
Attorney General
Aaron J. Silletto, Executive Director
Office of Civil and Environmental Law