At issue was an alley in downtown Washington that a developer wanted to buy. The D.C. government owned half of it. The federal government claimed to own the other half and allowed the city to act as its agent in the sale.

For the half of the alley that the federal government claimed, the city charged the developer, McGregor Properties, $65 a square foot. For its own half, the city demanded somewhat more--$341 a square foot.

Now, three years after the sale, D.C. Superior Court Judge David L. Norman has ordered the District government to pay McGregor Properties nearly $234,000 for the overcharge and related damages.

"When have you ever heard of alley space selling for $341 a square foot?" attorney Neil I. Levy, who represents the McGregor firm, asked yesterday. The firm sued the city over the price discrepancy, and it was on this lawsuit that Norman ruled yesterday.

"It shocked me that this was city government that was quintupling the price," Levy said, adding that he believes the case proves "that even the city government can't change the rules on you in the middle."

Assistant Corporation Counsel Martin Grossman, who represented the city, said he had not read the judge's order and therefore had not determined if the city would appeal. The city contended in court that it had never promised to sell both halves at $65 a square foot.

The McGregor firm wanted to close the small alley, located in the middle of the block bounded by 21st, 22nd, K and L streets NW, because doing so would allow the firm to increase the size of an adjoining office building it was building--a normal procedure for developers in Washington.

Since Stevens Elementary school, at 21st and K streets, abuts the eastern side of the alley, the D.C. government owned the eastern half, according to court records. In 1979, when the sale was negotiated, the U.S. government was thought to have an interest in all alleys located within Washington's original boundaries, and claimed the western half. A subsequent court ruling stated that the federal government has no such interest in the city's alleys.

The D.C. Surveyor wrote McGregor on Sept. 7, 1979, that the city would charge $65 a square foot to close the entire 1200-square-foot alley, or $78,288, according to court records. McGregor paid half that amount in August 1980.

That December, McGregor needed to buy the rest of the alley in order to receive a $13.1 million construction loan for its office building.

The city wrote McGregor that an assessor in the District's Department of General Services now valued the property at $341 a square foot and that McGregor owed $205,000 for the other half.

The firm contended in court that when the city made its demand, city officials knew the firm was "bottlenecked" on its project and needed the alley closed in order to proceed.

The District contended that McGregor's payment of the $205,000 was not "under duress."

Norman ordered the city government to pay McGregor $166,355, the amount of the overcharge, and $67,575 in other related damages.

Following the unrelated court case overturning federal claims to city alleys, the city refunded McGregor its initial $39,000 payment. CAPTION: Picture, D.C. charged $341 a square foot for its share of alley. By Dudley M. Brooks -- The Washington Post