425 Agreement

The legislature of the State of Michigan enacted Public Act 425 of 1984 which is also known by the title Intergovernmental Conditional Transfer Of Property By Contract Act. It became effective March 29, 1985 and was subsequently amended in 1998. It is often simply referred to as “Act 425” and contractual agreements entered into pursuant to this statute are frequently called “425 Agreements.”

The purpose of Act 425 is to provide for a means for two local units of government to share tax revenues resulting from new or expanding development in the areas of their jurisdiction. Most typically a city and a nearby township are the parties to such an agreement. Because of the limited ability for a city in Michigan to annex adjacent territory, development that takes place outside of the city limits would normally deprive that city of any added revenue benefit. In those cases where the affected township receives its supply of water from the city, the city is given a degree of leverage to negotiate with the township by Act 425.

In the eyes of the Census Bureau, 425 Agreement lands effectively count as annexations, and are included in any calculations of land area and population. The land and population counts toward the party that initiated the agreement.

The two units of government proposing to enter into a 425 Agreement negotiate the terms and conditions of the plan. For it to take effect, it must be approved by a majority of the members of the governing body of each respective party. The contract is recorded by the County Clerk and the Secretary of State.

The agreement creates a temporary transfer of jurisdiction for the affected land rather than an outright annexation. The agreement defines the responsibilities that each party has with respect to the affected area. For example, the city as party to such an agreement might have the right to collect city income tax from residents or employees within the transferred area even though they do not actually live or work within the city itself. The township would still retain policing jurisdiction and provide municipal services to the new development.

425 Agreements can be effective for up to 50 years. At the end of the term of the agreement, the agreement itself defines what should happen to the affected land at the termination of the contract. The law permits for the parties to agree for the land to revert to the original party or permanently attached to the other party.

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