A municipal corporation’s authority to sell, lease, or mortgage a municipal public utility property is governed by the acts of the legislature[i]. Any sale, lease, or mortgage conducted by a municipal corporation in the absence of express legislative authority will be treated as invalid[ii]. Therefore, a municipal corporation should not execute a valid mortgage on a public utility system that it owns, if there is no statute supporting such act. Likewise, the duty to provide service by a public utility system cannot be devolved upon another.
However, a municipal corporation can sell or lease its utility property without express statutory authority under the following circumstances[iii]:
- where a municipal corporation takes a view that it owns a public utility in its proprietary capacity and operates it as a business corporation;
- where a municipal corporation takes a view that it does not have a duty to own and operate a public utility;
- where a municipal corporation contracts to purchase a public utility before dedication of such property to a public use.
However, such exception does not apply to any property that is held by a municipal corporation or other public corporation for public purposes[iv]. Properties that do not fall under the exception include public buildings, school houses, streets, alleys, public squares, parks, promenades, waterworks, hose and hose carriages, engines and engine houses, and engineering instruments[v]. The principle behind exempting such property from sale, lease, or mortgage is that the title to such property is held in trust for the public and they cannot be sold to settle the debts of a municipal corporation just like any other trust property.
However, a municipal corporation is not precluded from competing with a grantee or lessee of a municipal plant.
[i] Kline v. Parish of Ascension, 33 La. Ann. 562 (La. 1881).
[ii] Brown v. Mayor, etc. of Ft. Valley, 199 Ga. 234 (Ga. 1945).
[iii] J. B. McCrary Co. v. Winnfield, 40 F. Supp. 427 (D. La. 1941).
[iv] American-La France & Foamite Industries, Inc. v. Winnfield, 184 La. 1043 (La. 1936).
[v] Meriwether v. Garrett, 102 U.S. 472 (U.S. 1880).