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  • Many involved in public school construction have long held the view that “lease-leaseback” contracts are exempt from competitive bidding. In Los Alamitos Unified School District v. Howard Contracting, Inc., Case No. G049194 (September 17, 2014), a California appellate court has confirmed this widely-held belief by rejecting a contractor’s argument that the Los Alamitos Unified School District’s selection process violated competitive bidding requirements and was, therefore, “unconstitutional, unconscionable, illegal and a theft of public funds.”

    The District had contracted Byrom-Davey Inc. for a lease-leaseback project to upgrade a high school track and athletic field. Another contractor, Howard Contracting, Inc., challenged the legality of the lease-leaseback arrangement. Thereafter, the District filed a complaint in the Superior Court of Orange County pursuant to Code of Civil Procedure section 860 (which permits a public entity to file suit to determine the validity of its action) to validate its arrangement with Byrom-Davey Inc. against the objections of Howard Contracting, Inc.

    Generally speaking, a lease-leaseback arrangement is a construction contract couched as two separate lease agreements. First, there is a ground lease awarded by the district to a contractor (generally for $1 per year). Second, there is a lease agreement for the new facility being constructed by the contractor. The term of both leases generally expire after completion of the construction, and the lease payments to the contractor are fixed for an amount to pay for construction costs and the contractor’s overhead and profit.

    Relying upon the plain meaning of Education Code section 17406 and a long-standing Attorney General’s Office Opinion, as well as an examination of legislative history behind section 17406, the appellate court concluded that competitive bidding was not required holding that “the statute is plain, unambiguous, and explicit, and does not impose bid requirements on school districts.”

    It should be noted that the appellate decision was issued by the 4th appellate district covering such counties as San Diego, Riverside, Orange, San Bernardino, Inyo and Imperial. While this appellate decision makes it clear that competitive bidding is not required for lease-leaseback projects within the 4th appellate district’s boundaries, public entities in other other appellate districts may consider bringing their own validation action under Code of Civil Procedure 860 out of an abundance of caution in appropriate circumstances.

    For more information contact:
    Christopher E. Ng, Esq.
    Gibbs Giden Locher Turner Senet & Wittbrodt LLP
    1880 Century Park East, 12th Floor
    Los Angeles, California 90067
    Phone: (310) 552-3400
    email: cng@ggltsw.com

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