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Lease-Leaseback Agreements Allow School Districts to Avoid Competitive Bidding
Generally, public construction in California requires competitive bidding to award construction contracts. This process traditionally involves the design of the project, the bidding for the award of the construction contract, and the performance of the construction contract. However, there is a growing trend in California for school districts to award their construction contracts through a lease-leaseback agreement. In a lease-leaseback agreement, a school district leases its property to a developer for a nominal amount and the developer constructs the construction project and returns the property back to the school district. A significant number of these lease-leaseback agreements are entered into without competitive bidding.
Parties seeking to avoid the competitive bidding process believed that California Education Code Section 17406 provided statutory authority for foregoing the competitive bidding process. That Section provides:
The governing board of a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to any person, firm, or corporation any real property that belongs to the district if the instrument by which such property is let requires the lessee therein to construct on the demised premises, or provide for the construction thereon of, a building or buildings for the use of the school district during the term thereof, and provides that title to that building shall vest in the school district at the expiration of that term. The instrument may provide for the means or methods by which that title shall vest in the school district prior to the expiration of that term, and shall contain such other terms and conditions as the governing board may deem to be in the best interest of the school district. (Emphasis added.)
That issue was recently brought before the Fourth Appellate District of the California Court of Appeals in Los Alamitos Unified School District v. Howard Contracting, Inc., No. G049194 (September 17, 2014). In this matter, the District had entered into a lease-leaseback agreement with another contractor for the construction of upgrades and improvements to the District's high school track and athletic field. The District filed a complaint pursuant to California Code of Civil Procedure Section 860 to validate the lease-leaseback agreement. Howard Contracting, Inc. filed an answer to the complaint, challenging that the agreement was "unconstitutional, unconscionable, illegal, and a theft of public funds." The District filed a motion for summary judgment which was granted by the trial court. Howard Contracting, Inc. filed a timely notice of appeal from the judgment.
On appeal, the Fourth Appellate District noted that the District had offered admissible evidence that it had complied with the requirements of Section 17406; namely, that the District owned the land to be leased, the contractor agreed to construct the project for a guaranteed maximum price, and title to the site and all improvements made by the project will vest in the District at the end of the lease term. Howard Contracting, Inc. offered no evidence to challenge this proof either before the trial court or the appellate court. Rather, Howard Contracting, Inc. challenged the validity of Section 17406 and the award of construction contracts by school districts without competitive bids.
The Fourth Appellate District reviewed the legislative history of Section 17406, noting that California's Attorney General had interpreted an earlier version of the Section, concluding that the statute exempted school district lease-leaseback agreements from the competitive bidding process. Relying upon the Attorney General's opinion, the Fourth Appellate District affirmed the trial court's ruling. The Court found that Section 17406 is plain, unambiguous, and explicit and does not require school districts to competitively bid lease-leaseback agreements.
The Fourth Appellate District's ruling in Los Alamitos provides further support for the growing trend of lease-leaseback agreements for the award of construction projects by school districts. As noted in an article from the March 1, 2014 edition of the Contra Costa Times, a northern California school district had awarded "more than $83.1 million" in construction contracts through the lease-leaseback process. The article further noted that approximate 76 percent of those contracts were awarded to one construction company. While the lease-leaseback process may be legal, awarding districts should invite a number of qualified contractors to submit proposals for the lease-leaseback projects to avoid the appearance of favoritism and the potential for corruption.