Authored by: Josh Hardy, Esq.
A new decision further muddies the waters of the requirements for lease-leaseback contracts for public school construction. In McGee v. Balfour Beatty Construction, LLC , the court upheld the validity of lease-leaseback construction agreements, following Los Alamitos Unified School Dist. v. Howard Contracting, Inc. and rejecting Davis v. Fresno Unified School Dist.
California Education Code section 17417 requires competitive bidding for all construction contracts. However, Education Code section 17406 is an exception to the rule and allows a school district to lease property to an outside entity as long as the lessee constructs a building that will belong to the school district at the end of the lease.
In McGee, a taxpayer challenged the lease-leaseback construction agreements for two Torrance Unified School District elementary schools. Under the agreements, negotiated without competitive bidding, Balfour Beatty Construction, LLC leased the sites from the District for $1 per year then subleased the properties back to the District. The sublease payments were determined by the cost of the construction, with a cap set by the guaranteed maximum price.
Following Los Alamitos, the McGee court held that, as long as the statutory requirements were satisfied, the plain language of section 17406 permitted this type of lease agreement. The court rejected “efforts to engraft additional requirements—such as the timing of the lease payments, the duration of the lease, and the financing” because the court’s role is “not to rewrite the statute.” McGee rejects the Davis court’s use of these types of considerations to distinguish between genuine lease-leaseback arrangements and sham arrangements designed to subvert the competitive bidding process.
Legislative history buttressed McGee’s plain language analysis. In 2004, the governor vetoed an attempt to delete “without advertising for bids” from section 17406, leaving little doubt that the current statute does not require competitive bidding. The 2014 amendment to section 17406, while successful, specifically refused to address issues related competitive bidding. Because the District owned the land, leased it to Balfour for $1, and the lease agreement required Balfour to build a school that would belong to the District at the end of the lease, the McGee court held that the lease-leaseback agreement satisfied section 17406.
With appellate courts seemingly unable to come to a consensus on the requirements for lease-leaseback agreements, hopefully either the legislature or the Supreme Court will act quickly to settle the confusion. Until then, given the ease with which a taxpayer can bring a challenge, contractors and school districts should be particularly careful when entering into these types of contracts.