1
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”).1 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
1
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 65.530.2
regarding whether it may, under Section 164 of the Kentucky Constitution, convey
its property on these terms.2
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 146 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).
2
The Authority has not provided the Office with copies of any documents for the proposed
conveyance. Therefore, the Office relies on the description of the transaction provided by the
Authority’s counsel.3
Here, the Authority represents the proposed agreement as a land sale
contract.3 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.4
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 146.
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
3
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).
4
“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).4
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.5
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.5
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.
5
This Office opined as much on at least one prior occasion. See OAG 09-007 (relying on Pattie and
Capital Amusement Co. v. Board of Common Council of City of Frankfort, 276 S.W.528 (Ky. 1925))
(noting that the “granting of a lease is not equivalent to granting a franchise,” and approving a 99-
year lease under Section 164).6
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 773.6 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.”7 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
6
The Court also distinguished Pattie by noting that, in that case, the city advertised for and received
sealed bids for the lease arrangement and that, unlike in the case before it, the term of the lease was
in issue. E.M. Bailey, 676 S.W.2d at 774.
7
Though decided after E.M. Bailey, Porter does not mention the Supreme Court case. But arguably,
Porter tracks E.M. Bailey because the Court of Appeals stressed the lease of the property at issue was
only “for temporary purposes.” Porter, 696 S.W.2d at 795.7
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.8
Russell Coleman
Attorney General
Aaron J. Silletto, Executive Director
Office of Civil and Environmental Law
8
To the extent the analysis in OAG 09-007 differs from the analysis above, and thus conflicts with
E.M. Bailey, see footnote 5, supra, it is withdrawn.