Morrison Law Journal


The Morrison Law Journal May 2016 Volume XI, Edition 5 How Competitive? Another Court Of Appeal Rules That Education Code Section 17406 - Governing Lease-Lease Back Construction Agreements - Provides A Valid Exception To The Competitive Bid Process For School Construction Projects By: Edward F. Morrison, Jr., Esq. Larry A. Schwartz, Esq.
California is going through a public school education building boom. However, the landscape as to how construction is to occur is changing, dramatically. In the past, the traditional method for financing new school facilities is for school districts to obtain voter approval for the issuance of general obligations bonds and then use the proceeds from the bonds to pay for the construction. The traditional delivery method for new school facilities is referred to as design-bid-build, which involves three separate steps. First, the school district hires an architect to design the project. Second, the district uses the design in its request for competitive bids from construction firms. Third, the winning (lowest) bidder builds the project. School construction contracts are a type of public works contract subject to the competitive bidding process, unless an exception applies. See, Pub. Contract Code § 20111(b). Competitive bidding is favored by a strong public policy “to eliminate favoritism, fraud and corruption; avoid misuse of public funds; and stimulate advantageous marketplace competition.” Marshall v. Pasadena Unified School Dist. (2004) 119 Cal.App.4th 1241, 1256–1257. However, many school districts have taken issue with competitive bidding, citing under bidding, poor work and delays. In response to this, many school districts have resorted to the use of lease – lease back agreements with contractors who were not subject to competitive bidding per Education Code § 17406. That Education Code section provides that a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to a person, firm, or corporation real property that belongs to the school district if the instrument by which this 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 of the lease, and provides that title to that building shall vest in the school district at the expiration of that term. 1 Many contractors have protested lease lease-back agreements on the basis that they avoid the competitive bid process which requires that the lowest bidder be awarded the school construction project. In Los Alamitos Unified School District v. Howard Contracting, Inc. (2014) 229 Cal.App.4th 1222, the Fourth District of the Court of Appeal accepted the lease – lease back agreement scheme as being permissible under Education Code §17406. However, this approach was then rejected by the Fifth District Court of Appeal in Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261. In a closely watched case, the California Court of Appeal, Second Appellate District, in James McGee v. Balfour Beatty Construction, LLC (2016) 247 Cal.App.4th 235, ruled that Education Code §17406 is an exception to the competitive bid requirements for California construction contracts that come within the Education Code. The Court acknowledged that lease – lease back agreements have become widely used throughout the State of California (in a footnote, the Court recognized that one school district spent more than 2.7 billion dollars using lease – lease back contracts). In its holding, the McGee Court ruled that if the legislature wished to narrow the scope of Education Code §17406, it could do so, but it was the legislature's decision. This is a very significant issue. It is anticipated that the State Supreme Court will take up the issue if the legislature fails to act. In the meantime, one can anticipate that the trend toward no bid contracts will continue. About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com. Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com. Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter. 2

California is going through a public school education building boom. However, the landscape as to how construction is to occur is changing, dramatically. In the past, the traditional method for financing new school facilities is for school districts to obtain voter approval for the issuance of general obligations bonds and then use the proceeds from the bonds to pay for the construction. The traditional delivery method for new school facilities is referred to as design-bid-build, which involves three separate steps. First, the school district hires an architect to design the project. Second, the district uses the design in its request for competitive bids from construction firms. Third, the winning (lowest) bidder builds the project.

School construction contracts are a type of public works contract subject to the competitive bidding process, unless an exception applies. See, Pub. Contract Code § 20111(b). Competitive bidding is favored by a strong public policy “to eliminate favoritism, fraud and corruption; avoid misuse of public funds; and stimulate advantageous marketplace competition.” Marshall v. Pasadena Unified School Dist. (2004) 119 Cal.App.4th 1241, 1256–1257.

However, many school districts have taken issue with competitive bidding, citing under bidding, poor work and delays. In response to this, many school districts have resorted to the use of lease – lease back agreements with contractors who were not subject to competitive bidding per Education Code § 17406. That Education Code section provides that a school district, without advertising for bids, may let, for a minimum rental of one dollar ($1) a year, to a person, firm, or corporation real property that belongs to the school district if the instrument by which this 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 of the lease, and provides that title to that building shall vest in the school district at the expiration of that term.

Many contractors have protested lease lease-back agreements on the basis that they avoid the competitive bid process which requires that the lowest bidder be awarded the school construction project. In Los Alamitos Unified School District v. Howard Contracting, Inc. (2014) 229 Cal.App.4th 1222, the Fourth District of the Court of Appeal accepted the lease – lease back agreement scheme as being permissible under Education Code §17406. However, this approach was then rejected by the Fifth District Court of Appeal in Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261. In a closely watched case, the California Court of Appeal, Second Appellate District, in James McGee v. Balfour Beatty Construction, LLC (2016) 247 Cal.App.4th 235, ruled that Education Code §17406 is an exception to the competitive bid requirements for California construction contracts that come within the Education Code. The Court acknowledged that lease – lease back agreements have become widely used throughout the State of California (in a footnote, the Court recognized that one school district spent more than 2.7 billion dollars using lease – lease back contracts). In its holding, the McGee Court ruled that if the legislature wished to narrow the scope of Education Code §17406, it could do so, but it was the legislature's decision.

This is a very significant issue. It is anticipated that the State Supreme Court will take up the issue if the legislature fails to act. In the meantime, one can anticipate that the trend toward no bid contracts will continue.

About the Authors: Edward F. Morrison, Jr. is the founding partner and Larry A. Schwartz is Of Counsel to The Morrison Law Group, a professional corporation. Their biographies can be viewed at www.morrisonlawgroup.com.

Publication Note: The Morrison Law Group wishes to disseminate this publication to all clients and colleagues of the Firm who wish to receive it. Should any recipient desire to be removed from the distribution list, or wishes to have a colleague added, please contact Jim Van Dusen at The Morrison Law Group at 213 356-5504 or vandusen@morrisonlawgroup.com.

Disclaimer Note: The legal article presented above is intended to provide general information which may be of interest or use to clients and colleagues of The Morrison Law Group and should not be construed as legal advice on any matter.