The Supreme Court of North Carolina recently held in Meinck vs. City of Gastonia that a city’s lease to a non-profit arts group in connection with a downtown revitalization project was a “governmental function”, which entitled the city to governmental immunity.

Gastonia (the “City”) had purchased a vacant historic building in its downtown area.  The building was in a strategic location for the City’s effort to redevelop and revitalize a blighted section of the downtown area.  The City leased the building to the Gaston County Art Guild (the “Art Guild”), which then subleased portions of the building to individual artists to use as studios.

Among the relevant lease provisions, the City was responsible for maintaining the exterior of the premises.  The plaintiff, a subtenant of the Art Guild, fell on a set of concrete steps while exiting the building, sustaining injuries.  She filed suit against the City, alleging it was negligent in failing to maintain the building’s exit in a reasonably safe condition and failing to warn of the dangerous and hazardous condition of the exit.  The City denied liability and raised governmental immunity as a defense.

Generally speaking, absent a waiver, the doctrine of governmental immunity shields cities and counties from lawsuits arising out of the negligence of their employees in the exercise of “governmental functions.”  A governmental function is an activity that is “discretionary, political, legislative, or public in nature and performed for the public good in behalf of the State rather than for itself.”  Governmental immunity does not apply when a city or county is engaged in a “proprietary function.”  A proprietary function is one that is “commercial or chiefly for the private advantage of the compact community.”

The distinction may seem straight forward, but even with guidance from decades of case law, our courts candidly acknowledge that distinguishing between governmental and proprietary functions is sometimes easier said than done.

The “threshold inquiry” addressed by the Court in Meinck was whether, and to what extent, the legislature has designated the activity as governmental or proprietary.  The Court focused its attention on two laws in particular: the Urban Redevelopment Law (“URL”) (N.C.G.S. §§ 160A-500 et seq.), which authorizes municipalities to engage in “redevelopment projects” in the interest of public health, safety, convenience, and welfare of its citizens; and the Municipal Service District Act of 1973 (“MSDA”) (N.C.G.S. § 160A-535 et seq.), which authorizes municipalities to establish “service districts” in order to finance, provide, or maintain certain services, facilities, and functions including “downtown revitalization projects.”

Although there is no explicit designation in either law, the provisions of the URL and the MSDA offered “statutory indications” that an urban redevelopment project, like the one undertaken by the City, is a governmental function.  The URL, for example, declares its purposes to be “public uses for which public money may be spent.”  In addition, both the URL and MSDA establish downtown revitalization to be in the public interest.  The legislature also recognized in both the URL and MSDA that urban blight is “a serious problem that could not be adequately remedied by private enterprises alone.”

Of course, commercial leases and redevelopment projects are not activities in which the government solely engages.  Such activities can be (and certainly are) performed by private actors.  The same can be said, more specifically, of maintaining a historic building and leasing it to a non-profit art guild.

The City’s undertaking, however, was seen as “decidedly noncommercial” in nature.  The Court recognized “art occupies a unique role in our society and our state,” and the City’s lease with the Art Guild promotes the arts by bringing individual, local artists into the downtown area which, in turn, furthers the broader revitalization effort.

It was also important that the City did not seek to profit from the lease.  As the city manager testified, “there’s no profit in this operation.”  The City received 90 % of all rents paid by subtenants and 15 % of the gross receipts from all sales or commissions earned on the property.  The revenue from the lease was not “substantial,” though, and it failed to cover the City’s operating expenses for the project.  The City booked considerable losses of $11,489.03 and $18,072.56 for the 2013 and 2014 fiscal years, respectively, and it had expected to suffer even greater losses on the project than those actually incurred.

To be sure, the Court’s decision in Meinck does not mean every urban redevelopment activity or lease to a nonprofit arts group can be characterized as a governmental function.  The Court reminded us that governmental immunity is a fact-intensive inquiry that is properly applied on a case-by-case basis.  As such, the true precedential value of the decision remains to be seen.

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