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Appeals Court Affirms Legality of Lease/Leaseback Delivery Method

On January 23, 2015, the Second District Court of Appeal reaffirmed the use of the Lease/Leaseback delivery method on public works projects.

Lease/Leaseback projects are built pursuant to the requirements of Education Code section17406, which authorizes school district governing boards, without advertising for bids, to lease property currently owned by a school district to any person, firm, or corporation for a minimum of $1 per year as long as such lease requires the other party to construct (or provide for the construction of) a building or buildings upon the subject property and that title to the subject property and the buildings vest in the school district at the expiration of the lease. Section 17406requires that school districts first lease its property to a chosen design/build contractor.

Lease/Leaseback has been authorized by the State Legislature in hopes of delivering school facilities on time and on budget. The waiver of formal bidding was seen as a way to reduce the risk associated with design problems and cost overruns, typically found on standard hard bid and design/build projects.

Lease/Leaseback has come under criticism from its inception. Taxpayer and other advocacy groups have decried the lack of formal bidding and contend that Lease/Leaseback permits the public owner to routinely award contracts to the same design/builder, regardless of cost. Critics claim that such a delivery method expressly contradicts the Public Contract Code which mandates that public projects be awarded to the lowest responsive and responsible bidder.

In McGee v. Torrance Unified School DistrictB252570 (Ct. App. 2015), the Second District Court of Appeal affirmed the use of the Lease/Leaseback delivery method and determined that the provisions set forth in Education Code Section 17406 did not impermissibly conflict with the lowest bidder requirements found within the Public Contract Code. Specifically, the Court determined that the plain-language of Section 17406 does not require competitive bids. The Court largely relied on an earlier opinion, Los Alamitos Unified School Dist. v. Howard Contracting, Inc. (2014) 229 Cal.App.4th 1222, which upheld the validity of Lease/Leaseback on school district projects.

McGee, a taxpayer, had sought to present evidence that Lease/Leaseback delivery increases the risk for favoritism, corruption and fraud within public works contracting and that these could only be curtailed by awarding projects to the lowest bidder. The Court rejected these arguments, stating that if the Legislature feared fraud and corruption within school contracting, it could alter or abolish Lease/Leaseback.

The important takeaway from McGee and the Los Alamitos Unified School Districtcases is that absent significant statutory revisions by the Legislature, the Courts are not inclined to second-guess construction project delivery methods which may not require competitive bidding. If the delivery method is blessed by the Legislature, it appears that any taxpayer challenges to such a method will fall on deaf ears. The taxpayers’ better option to remedy any perceived or actual problem is through the Legislature, not the Courts.