The basic idea is that negotiations between a developer and a local government are not permitted. If a property owner wants to change the zoning on a piece of property, and he anticipates significant public opposition, he might offer, for example to buffer the affected neighboring properties from the zoning change by not building in the first 200 feet of the property. If the local government accepts this suggestion, and passes the zone change based on the agreement, this is contract zoning and is illegal under current standards.
On the other hand, suppose the suggestion that a buffer be provided is mandated by the government, and not the property owner. The local government unilaterally imposes a requirement that the property owner buffer the surrounding properties; this is conditional zoning and is perfectly appropriate under Tennessee law.
As you can see, the examples above demonstrate that the same zone change may be either valid or not depending on the process involved. If the local government unilaterally imposes the condition, then the zoning change is valid. If the condition is the result of bilateral negotiations between the local government and the property owner, then the zoning is invalid as contract zoning.
Does this make any sense? I don't think so.
What difference does it make if the zoning change is the result of unilateral requirements or bilateral negotiations? If the zoning makes sense from a urban planning viewpoint, shouldn't it stand? Couldn't the local government accomplish the same objective as the buffer in the above examples by simply passing a zoning text amendment to the same effect? Would that be invalidated? Most likely not since it would apply to every property across the board.
Some might object that the difficulty in contract zoning is in creating a special construct which applies only to this particular property. But that is certainly not true: properly viewed, almost all zone changes are special treatments of a particular property. Now, it is true that these conditions imposed may cause administrative nightmares for codes officials. That is another question however.
Let's analogize to another type of zoning technique. Planned unit developments are in many ways the ultimate of contract zoning. Through what is often a complicated of three- way negotiations between the owner, the government, and the neighbors, a mini-zoning ordinance applicable only to the subject property is hammered out. The advantage is of course its flexibility; but doesn't the government give up its sovereignty in this situation just as it supposedly does in contract zoning? If contract zoning is illegal, why in the world is a PUD legal? A PUD is most assuredly, the most extreme form of contract zoning.
A modest suggestion: permit contract zoning under the same circumstances as any other zoning ordinance. If it makes sense from a land use planning perspective, then it should stand, contract or no.
There are two exceptions. First, there have been some cases that look amazingly like the zone change was purchased by the property owner. Suppose the owner wants commercial zoning on his property, and he offers the city $500,000 in return for the zoning? Or how about a property swap? He gives the city 25 acres of valuable ground (on which the city plans to build a new city office building) in return for the rezoning of his property. This is the flip side of an illegal condition imposed by the city which doesn't relate to the construction. In addition, it sure looks bad and shouldn't be tolerated.
Second, there are situations where a property owner changes his position in return for getting a zone change, but then never takes advantage of the change (presumably because the economic conditions aren't ripe) until 20 years later. Of course, as he begins to gear up for construction the city changes the zoning. Can the developer require the zoning to be set aside to permit his anticipated construction? No. This is truly the situation that the courts have hypothesized about: the government does not give up its sovereignty; if the circumstances have changed and the city believes that the zoning must be changed for the benefit of the public, then that judgment (provided it is reasonable) must be upheld.
I hope this has clarified these twin doctrines of contract and conditional zoning. Hopefully, our courts will sometime in the near future take another look at this antiquated doctrine and perhaps discard it as a relic no longer needed in modern land use planning.