Earlier today, a divided U.S. Supreme Court ruled that local government may seize people’s homes and businesses against their will for private redevelopment.

The conflict between government sponsored economic development versus individual property rights make this case, Kelo et al v. City of New London, a ‘must read’ for the real estate industry.

The 5-4 ruling represented a defeat for property rights and for the Connecticut residents whose homes were slated for condemnation to make room for a mixed use complex. They argued that governments have no right to take their land except for projects with a clear public use, such as roads or schools, or to revitalize blighted areas.

As a result of today’s decision, government now has wide power to ‘take’ one person’s property to give it to another person for their redevelopment as shopping malls and hotel complexes in order to generate tax revenue. “The city has carefully formulated an economic development that it believes will provide appreciable benefits to the community, including – but by no means limited to – new jobs and increased tax revenue,” Justice John Paul Stevens wrote for the majority.

He was joined by Justice Anthony Kennedy, David H. Souter, Ruth Bader Ginsburg and Stephen G. Breyer.

At issue was the scope of the Fifth Amendment of the U.S. Consitution, which allows governments to take private property through eminent domain if the land is for “public use.”

Susette Kelo and several other homeowners in a working-class neighborhood in New London, Connecticut, filed suit after city officials announced plans to take their homes for a riverfront hotel, health club and offices. New London officials countered that the private redevelopment plans served a public purpose of boosting economic growth that outweighed the homeowners’ individual property rights, even if the area wasn’t blighted.

Justice Sandra Day O’Connor, who has been a key swing vote on many cases before the court, issued a stinging dissent. She argued that cities should not have unlimited authority to uproot families, even if they are provided compensation, simply to accommodate wealthy developers. “Any property may now be taken for the benefit of another private party, but the fallout from this decision will not be random,” O’Connor wrote. “The beneficiaries are likely to be those citizens with disproportionate influence and power in the political process, including large corporations and development firms.”

She was joined in her opinion by Chief Justice William H. Rehnquist, as well as Justices Antonin Scalia and Clarence Thomas. Some might consider it ironic that the conservative justices opposed economic development. But, the Kelso majority opinion can be thought of as a logical end product of a political philosophy that seeks generally to expand government.

Nationwide, more than 10,000 properties were threatened or condemned in recent years, according to the Institute for Justice, a public interest law firm representing the New London homeowners.

New London, a town of less than 26,000, once was a center of the whaling industry and later became a manufacturing hub. More recently the city has suffered the kind of economic woes afflicting urban areas across the country, with losses of residents and jobs.

The New London neighborhood that will be razed includes Victorian-era houses and small businesses that in some instances have been owned by several generations of families. Among the New London residents in the case is a couple in their 80s who have lived in the same home for more than 50 years.

City officials envision a commercial development that would attract tourists to the Thames riverfront, complementing an adjoining Pfizer Corp. research center and a proposed Coast Guard museum. New London was backed in its appeal by the National League of Cities, which argued that “a city’s eminent domain power was critical to spurring urban renewal with development projects such Baltimore’s Inner Harbor” and Kansas City’s Kansas Speedway.

Under the ruling, property owners will be entitled to “just compensation” for their homes as provided under the Fifth Amendment. However, Kelo and the other homeowners had refused to sell at any price, calling it an unjustified taking of their property. And the Supreme Court declined, as had courts below, to delve into the issue of whether just compensation was limited to some artificial definition of fair market value.

Property rights advocates can only trust that Congress and state legislatures will seek to mitigate the harsh effects of this decision by considering what specific limits can be drawn on the concept of “public purpose,” including by barring local governments from using Federal funds on projects that use eminent domain to acquire land.