State Supreme Court Will Not Review Decision Exempting Lease-Leasebacks from Competitive Bidding

December 2014

On December 10, 2014, the California Supreme Court refused to review a Court of Appeal’s decision that Education Code section 17406 exempts school districts from obtaining competitive bids when entering into lease-leaseback agreements to improve school property.  This means that the ruling in Los Alamitos Unified School Dist. v. Howard Contracting, Inc. (9/17/14, No. 6049194) remains binding on all state trial courts.

In September, the Court of Appeal rejected an argument that California’s public contract law requiring competitive bidding applies to the construction delivery method known as “lease lease-back,” an alternative means of construction that permits a school district to lease property for a minimum rental value of one dollar per year to a contractor who is responsible for construction of a building or buildings on the property to be used by the district during the lease term, with title to the building(s) vesting in the district at the expiration of the term (or earlier if the agreement so provides).  Instead, the court observed that the “great weight of authority” supported the District’s contention that the specific language of section 17406 exempted lease-leaseback agreements from the competitive bidding that would generally otherwise apply to a public works contract.

The Court of Appeal pointed to a 1973 interpretation of an earlier version of section 17406 by the California Attorney General stating that “the Legislature excluded a [lease-leaseback] arrangement . . .  from the notice and bid requirements.  Because a school district is not required to obtain bids for [such] lease arrangements . . . , it may lease its property for the purpose of permitting the construction thereon of school buildings which the district will lease at such rental value as the governing board deems in the best interest of the district without reference to competitive bidding.”

The court also noted that the California Legislature, in 2004, sought to amend section 17406 to require that districts solicit competitive bids for lease-leaseback arrangements.  However, the proposed legislation was vetoed by the Governor, who stated that the bill “imposes restrictions on lease-leaseback contracts that could limit competition, inadvertently limit schools’ flexibility, and drive higher administrative costs; thereby potentially increasing the overall cost of school facility construction.”  According to the court, the unsuccessful attempt to amend section 17406 to delete reference to the language “without advertising for bids” implies that the section as it currently reads does not require competitive bidding.

If you have any questions regarding this decision or the use of lease-leasebacks, please call one of our six offices.

F3 NewsFlash prepared by Paul G. Thompson and John W. Norlin.
Paul is a Partner in the F3 Sacramento office.
John is Special Counsel in the F3 San Diego office.

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