Answer
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
1- If there is a need to build a road, a park, or a library, it is best to build around graveyards.
2- Some cities cannot afford to build around graveyards or a bridge over them; and need proper construction to develop their city for its inhabitants. This would be a case of need; and it would be permissible to build over the graveyard, but people should transfer recently buried bodies to another area.
Answering your question, Sheikh Mustafa Umar, President of California Islamic University, states:
Respecting Human Body
Islam gives great respect to the human body even after death. Funeral rituals include washing, shrouding and burying the dead body in a public graveyard. This is probably because burial in a home will be more difficult for the people residing there; and the public graveyard will elicit more prayers for all the ones buried there.
It is the practice of the Prophet Muhammad (peace be upon him) to bury each person in a separate grave. Once buried, it is not permissible to remove the body or re-purpose the graves for some other use. However, in Islam, there are always exceptions when there is a real necessity.
Buying Land with Human Remains in it
If someone bought a piece of land for personal use and found human remains in it, there are two scenarios.
First, if the body has turned to dust and the bones have decayed, then they may build on top of the land or use it for some other purpose. There should be no worry about the fact that a body was buried there.
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However, if people know the person that is buried there, this location will remain the place they come to visit that deceased person.
The second scenario is that; if the bones have not decayed, they may be dug up and moved to another grave. This rule applies for individual graves and entire graveyards with multiple bodies, and also applies to public property as well.
Using Graves for Public Interest
As for public interest such as needing to build a road, a park, or a library, it is best to build around graveyards. This applies as long as there is not significant harm that would result from that. Some cities cannot afford to build around graveyards or a bridge over them; and need proper construction to develop their city for its inhabitants. This would be considered a case of need, and it would be allowed to build over the graveyard, but recently buried bodies should be transferred to another area.
Each situation is different and a team of scholars should be consulted to decide whether there is a legitimate case of need or not.
If there is limited space for burial of Muslims and you want to bury another dead body in the same grave, you should wait until the remains and bones of the deceased have disintegrated.
Imam Ash-Shafi`i said: “If the bones of a dead person are removed, it is best to rebury them. (Kitab Al-Umm 1:316)
Imam Ibn Qudamah said: “If it is known for certain that the deceased has disintegrated and turned to dust, it is then allowed to dig up his grave and bury someone else in it.” (Al-Mughni 2:194)
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However, in the case of necessity when there is no other place to bury someone, a second body can be put in the same grave, but without removing the bones of the first body. It is the same situation that two or more bodies may be buried in one grave when there is a need.
There should be no concern about a sinner being buried in the same grave as a righteous person since Allah states: {And no one shall be responsible for what another has done.} (Fatir 35:18)
However, the Muslim community is responsible for trying to find ways to establish Muslim graveyards so that each person may be buried according to the ideal Islamic method.
Almighty Allah knows best.