Here in the United States, it's easy to take fundamental liberties for granted. Everyone's unalienable right to life, liberty, and the pursuit of happiness is set out in the Declaration of Independence. Yet some circumstances appear to contradict these rights. For instance, in some cases, federal, state, or local governments are legally entitled to force you to surrender your own property, including your home and land. This power, known as eminent domain, is intended to give governments the right to take action that benefits the public good, even against the wishes of particular individuals.
The concept of eminent domain is a centuries-old, well-established principle of legal government. However, recent applications of eminent domain seem to stretch the power beyond its original purposes, favoring certain private parties over others. Recent innovations in the use of eminent domain have led to fierce court battles and strong legislative responses at the state and federal level that have tried to rein in the potential expansion of this power.
The basics of eminent domain
In general, people in the United States enjoy the benefits of private property rights over what they own. These property rights are usually established under state law, and the Fifth Amendment to the Constitution further strengthens them against attack, stating that no person shall be "deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use, without just compensation."
Notice, though, that the specific language of the Constitution doesn't entirely prohibit the government from taking property. Rather, it requires that before the government takes it, it must go through appropriate procedures. Also, if government uses its eminent domain power to take private property for public use, it must pay a fair price to the property owner.
Historically, eminent domain has been used primarily for public projects with a clear element of community use, such as taking land for road construction or building a new school, or granting public utilities access to private property to build and maintain power lines, telephone poles, and underground pipelines. In many cases, formal eminent domain proceedings weren't even necessary; landowners and utilities or local governments negotiated private contractual agreements to allow use of the land. This saved a lot of effort; landowners knew that governments would use eminent domain if necessary to get access, but utilities benefited from avoiding the delays of litigation.
Modern eminent domain
More recently, however, eminent domain has been used in a broader set of cases that force people to question the definition of "public use." It's fairly clear that roads and schools that serve the general public qualify as public use. The question becomes more difficult when governments take property in distressed neighborhoods for purposes of encouraging new private development. Such purposes arguably have the public benefit of improving local neighborhoods, increasing tax revenues and employment prospects for all. However, their net result is the transfer of property from previous owners to private development companies, which profit from their ability to employ the government's eminent domain power. Without eminent domain, it's unlikely that developers would be able to make private arrangements with all the property owners in a particular targeted area.
One case involving a Connecticut town, Kelo v. City of New London, went all the way to the Supreme Court, where the government won by a narrow 5-4 decision. In response, state and federal legislators across the country started proposing laws that would more narrowly define their own eminent domain rights, with an emphasis on limiting its use to promote private development. In addition, President Bush issued an executive order last June that allows eminent domain only to benefit the general public, rather than advancing the economic interest of private parties.
Eminent domain and investing
Investors may rightly wonder how recent limitations on eminent domain will affect private companies. Certainly, companies that rely on construction and development will want to be especially careful not to alienate their potential customers, if they intend to solicit government assistance by using eminent domain to facilitate their plans. While recent declines in homebuilder stocks such as Pulte (NYSE: PHM ) , Toll Brothers (NYSE: TOL ) , and Centex (NYSE: CTX ) are more likely due to slowing in the overall housing market, each of them reached a high in their stock prices shortly before the Supreme Court's decision on Kelo in June 2005.
While many community leaders oppose eminent domain, there are also many real estate speculators who purchase land based on its prospects for future construction and development by private developers, public projects with government oversight, or fellow speculators. Although tightening eminent domain rules removes one potential source of buyers for these speculators, the legislation probably won't greatly affect the prospects for private development and construction.
Because property ownership is such a fundamental right, issues concerning eminent domain strike a particularly sensitive nerve with Americans who seek minimal government interference in their lives. Even though taking of property for public use may serve the interests of an entire community, eminent domain is a power that few people hope to see used. Ideally, basic economics and market-based transactions will suffice to convince property owners to bow to the common good. However, as long as there are situations that call for more drastic measures, you can count on the eminent domain debate continuing well into the future.
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Fool contributor Dan Caplinger will probably never be a land speculator, though he might sometimes thinks about having a place to camp. He doesn't own shares of the companies mentioned in this article. The Fool's disclosure policy doesn't take away your rights.