Yes, Indeed. Competitive Bidding Not Required for School District Lease-Leasebacks
Remember when you discovered that the tooth fairy wasn’t real?
It was kind of a bummer on one hand learning that it wasn’t a fairy that magically appeared to swap your tooth for cold hard cash, but rather your mom or, visual horrors, dad.
At the same time, it was, to your nearly-halfway-to-a-decade-on-this-planet-wizened-six-year-old mind, confirmation of what you had a sneaking suspicion was the case in any event.
And, so it is with the next case.
In California, most public school construction projects are built using the traditional design-bid-build project delivery method in which a design professional designs the project, the project is put out for competitive bid and the selected contractor builds the project.
But not all school construction projects are built this way.
In addition to design-build, where design and construction is performed by a single design-build entity, California school districts can also enter into lease-leaseback arrangements in which a school district leases its property to a developer, usually for $1 per year, and the developer builds the school project and leases the property back to the school district.
Like design-build, lease-leasebacks are an alternative project delivery method which has as its ultimate goal getting projects built faster, more cost effectively, with better quality control and fewer disputes.
However, there has been some question regarding whether lease-leasebacks require competitive bidding.
The answer, on its face, would appear to be no. Education Code section 17406, which authorizes school districts to use lease-leasebacks, provides that a school district may “without advertising for bids” lease property to a developer for construction of school facilities and lease such facilities back from the developer:
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).
In addition, more than 40 years ago (I had no idea lease-leasebacks have been around that long), the California Attorney General’s Office has opined that competitive bidding is not required for lease-leasebacks. However, no California court has expressly addressed the issue. That is, until now.
Los Alamitos Unified School District v. Howard Contracting, Inc.
In Los Alamitos Unified School District v. Howard Contracting, Inc., Case No. G049194 (September 17, 2014), the California Court of Appeals for the Fourth District became the first court to definitively answer whether Education Code section 17406 exempts school districts from obtaining competitive bids when entering into lease-leaseback agreements. And the answer was “yes.”
In Los Alamitos Unified School District, the Los Alamitos Unified School District (“District”) entered into a lease-leaseback agreement with contractor Byrom-Davey, Inc. for track and athletic field improvements at a District high school. Another contractor, Howard Contracting, Inc. (“Howard”), challenged the lease-leaseback arrangements contending that it was “unconstitutional, unconscionable, illegal, and a theft of public funds” because it was not competitively bid.
[Note: You’ll notice that Howard was the defendant, not the plaintiff, in the case. The District, who was the plaintiff, filed suit pursuant to Code of Civil Procedure section 860, which authorizes a public entity to file suit to determine the validity of its action]
The contractor also argued that, even if lease-leasebacks generally do not have to be competitive bid, only the lease of the District’s property was exempt from competitive bidding but not the construction of school project itself.
The Court of Appeals disagreed. Relying on the plain reading of Section 17406 which permits school districts to enter into lease-leaseback arrangements “without advertising for bids,” and a long-standing California Attorney General’s Office opinion which held that competitive bidding was not required under a predecessor statute to Section 17406, the Court held that “the statute is plain, unambiguous, and explicit, and does not impose bid requirements on school districts” and that since the Attorney’s General’s opinion 40 years ago “nothing has occurred in the interim that would change our conclusion.”
So, there you go folks. While competitive bidding is required on most public works projects it is not required on all public works projects and is definitely not required on lease-leaseback project. Surprised? Didn’t think so.
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