Authority of Municipalities to Require Annexation as a Condition to the Provision of Sewer and Water Services to Nonresidents

real estate 101Council for the City of Canton, Ohio has adopted legislation requiring prospective or existing extraterritorial customers of City water and sewer services to annex or agree to be annexed into the City and authorizing City’s Director of Public Service to withdraw and terminate water and/or sewer services, upon reasonable notice, if those extraterritorial customers fail, neglect or refuse to be annexed. The annexation requirement applies both to the extension and continued use of water or sewer system service as follows:

• As one of the written terms and conditions for the extension of the City’s water or sewer system service, all extraterritorial customers must agree to be immediately annexed or agree to grant an irrevocable power of attorney to the City consenting to annexation at a future time at which the City determines annexation is feasible.

• As a condition of continued service of the City’s water or sewer system service, all current extraterritorial customers whose property is currently contiguous of the existing City boundaries or which becomes contiguous to the City boundaries must agree to be annexed to the City if requested by the City’s Director of Public Service. The Director must determine a reasonable period of time, no less than 90 days, during which the customer must provide written consent to the annexation or face termination of service.

The resolution provides that the City previously determined to use its power of annexation to achieve organized growth and economic development. The resolution also authorizes the Director to enter into agreements with affected political subdivisions when in the best interests of the City and its inhabitants.

Council adopted this resolution under Article XVIII, Section 6 of the Ohio Constitution, which generally allows, with certain limitations, any municipality owning or operating a public utility to sell surplus water or sewer services outside its territorial boundaries. Municipalities have substantial authority and discretion under this provision, as demonstrated by several court decisions.

A municipality’s authority to acquire, construct, own, and operate a public utility within or outside of its corporate limits is derived from Article XVIII, Sections 4 and 6 of the Ohio Constitution. The State generally cannot limit or restrict this power by requiring the municipality to supply services outside its corporate limits.

A municipality has the complete authority to determine the policy to be followed regarding the sale and delivery to others of a surplus product of a municipality-owned utility. The municipality is not required to supply all those who demand the surplus, but may sell and dispose of its surplus product in those quantities and in that manner as the municipality’s council determines to be in the best interest of the municipality and its inhabitants. Municipally owned public utilities have no duty to sell their products to extraterritorial purchasers absent a contractual obligation. If a municipality limits the scope and extent of its duty through contract, the municipality is bound to supply services to extraterritorial customers in accordance with its contract and without discrimination. However, the municipality is not bound to continue to supply the service to those extraterritorial customers after the contract expires. In those circumstances where there is a contract between the extraterritorial customer and the municipality but the contract provides no termination date, either party may terminate the agreement upon reasonable notice. Accordingly, a municipality has the authority to determine whether to sell its utility services to extraterritorial customers and does not assume a duty to continue supplying utility service in perpetuity to extraterritorial customers merely by virtue of having once agreed to supply it.

A municipality may require annexation prior to the extension of utility service to extraterritorial customers. In 2006, the Ohio Supreme Court considered, in the sale and delivery to extraterritorial customers of the surplus product of a municipally owned public utility, the power of council of a municipality to determine the terms on which the product will be sold. The Court held that a municipality may, through either a written agreement or by ordinance, require extraterritorial water and sewer customers to annex their property to the municipality or be subject to termination of their utility service. The municipality’s council has the sole authority to determine policy relative to the provision of these services.

balancing interests
Case law has also considered whether municipal ordinances imposing conditions on continued utility service to extraterritorial customers are constitutional and therefore enforceable. These ordinances are considered actions by a municipality in the exercise of its police power. To be enforceable, each condition under these ordinances must not be unreasonable, arbitrary or capricious and must bear a rational relationship to the health, safety and welfare of its citizens. Legitimate reasons for requiring annexation as a condition of receiving utility service have included each of the following:

• Regulating municipal growth.

• Increasing the municipality’s tax base, resulting in increased tax revenues.

• Reducing the strain on municipal services caused by adjacent extraterritorial urbanized areas.

• Benefitting extraterritorial residents by providing better and more cost-effective services such as parks, recreation, and police and fire services to those residents.

• Protecting a limited resource by studying the growing needs of all of its customers to ensure adequate service.

• Protecting against uncoordinated, uninvited growth around the municipality, resulting in loss of tax base and inability to properly fund existing or future municipal services.

• Protecting public health by acting to rid of septic systems from adjoin lands by requiring homeowners to connect to the public sewer system.

As a limitation on this municipal authority, one court has held that annexation covenants were unenforceable when, at the time the municipality required annexation covenants in exchange for sewer services, the municipality already had an unconditional contractual duty to provide sewer services to extraterritorial property owners. In this case, the municipality had contracted with a county to provide certain utility services originating in a designated area. The court held that the extraterritorial property owners were third-party beneficiaries to the contract and the municipality could not condition the extension of utility services to the extraterritorial property owners on the signing of an annexation covenant.

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