In a church-state dispute with echoes across the country, a Wayzata congregation has won its battle to build a new church in a residential neighborhood.

The Unitarian Universalist Church of Minnetonka will be allowed to tear down a house and build a church and parking lot in its place, according to a federal court-mediated settlement reached last week between the church and the city of Wayzata.

To underscore the church's victory, the settlement also requires the city and its insurer to pay the church $500,000 in damages and attorney's fees.

The 2000 federal law under which the church sued Wayzata, which effectively allows religious projects to trump local zoning restrictions, is being tested in a growing number of communities around the country. Cases resulting in victories for congregations have cropped up in California, Maryland, Colorado and elsewhere.

In its 2010 federal suit, the Unitarian church also charged Wayzata with violating its First Amendment rights to free speech and religious worship.

Church member and spokeswoman Alison Albrecht said she is pleased that the dispute has been settled and that the congregation will be able to remain in Wayzata, where -- despite the Minnetonka in the church's name -- it has worshipped since 1965.

"Importantly, we also hope the city will now change its regulations so that other religious groups are no longer prevented from locating here," she said.

Wayzata Mayor Ken Willcox said it was not the city's intent to deny anyone's religious freedom. Wayzata is 100 percent developed, he said, and has always tried to protect its single-family home neighborhoods from encroachment.

The property in question is located at 2030 Wayzata Blvd. E., overlooking Hwy. 12.

"It's heavily wooded, and it provides an important buffer between all of the traffic activity and lights on the freeway, and the neighborhood to the south," Willcox said.

In other similar cases, cities have resisted religious land uses because churches and synagogues don't pay taxes and generate few jobs.

The Wayzata dispute began in 2008, when Unitarian congregants decided they had outgrown their small church and asked city officials to rezone the three-acre residential property of a member so they could build there. The city turned them down.

The city argued that it should have the right to control planning and zoning through its long-established comprehensive planning process.

Wayzata has 22 zoning districts. Churches are allowed only in one that's designed for institutions, including schools and government buildings.

Church officials argued that the plan was too restrictive and amounted to unlawful restriction of religious worship. They also said that building a new church on the highway's frontage road would not require churchgoers to drive through a neighborhood to reach it. The Unitarian church draws its attendance from several cities and has more than 200 members. Its current location is at 605 E. Rice St., just across the street from City Hall.

'Best interest of citizens'

Under the terms of the settlement, the city must help the church acquire two small adjacent parcels of land along Hwy. 12 owned by the Minnesota Department of Transportation.

In exchange, the church will drop its lawsuit and agree to work through the city's normal application and permitting process to build the new church, which it must do within the next six years.

Willcox said the city had to settle or face the prospect of exceeding its insurance cap and exposing its taxpayers to additional open-ended legal costs.

"It became clear that ending this expensive and detrimental proceeding was in the overall best interest of the citizens of Wayzata," he said.

Attorneys made oral arguments in the case on Nov. 29. U.S. District Judge Richard Kyle ordered the parties to a settlement conference on Dec. 22.

The agreement must still be ratified by the Wayzata City Council. Willcox expects that to happen at the council's Jan. 17 meeting.

Tom Meersman • 612-673-7388