The Torrance Unified School District approved several construction contracts with Balfour Beatty Construction for improvements to two schools. Each contract included: (1) a site lease (leasing land from the District to Balfour), (2) a sublease (leasing land from Balfour back to the District), and (3) a construction agreement. Under the terms of the agreements, Balfour would lease the land from the District for $1 per year and the District would then lease back the land. Payments of the leasebacks cover the cost of the construction projects.

A taxpayer, James McGee, filed an action to invalidate the agreements. McGee claimed the leases were "sham leases" designed to avoid the competitive bid process McGee believed was required prior to awarding the contracts. McGee's challenge was almost identical to a prior lawsuit he had filed against the District regarding other lease-leaseback transactions. The trial court dismissed McGee's prior lawsuit, "McGee I," on the ground that lease-leaseback transactions are exempt from the competitive bid process.

As in McGee I, The District and Balfour argued that lease-leaseback transactions are exempt from the competitive bid process under Education Code section 17406. Education Code section 17406 ("Section 17406") states that school districts may enter into a lease-leaseback arrangement "without advertising for bids."

As in McGee I, the trial court agreed with the District and Balfour and dismissed McGee's lawsuit. Shortly after the trial court's decision, the Court of Appeal decided Davis v. Fresno Unified School District (2015) 237 Cal.App.4th 261. In the Davis case, the Court held that only "genuine" leases qualify for exemption from the competitive bid process under Section 17406. According to Davis, a "genuine" lease under Section 17406 includes financing components and requires the school district to actually use the premises as a tenant during the term of the lease.

Based on the holding in Davis, McGee appealed the trial court's decision. The Court of Appeal, however, agreed that the trial court properly dismissed McGee's claim that competitive bidding was required to enter into the lease-leaseback agreements. In doing so, the Court rejected the analysis in Davis and instead relied on the reasoning in Los Alamitos Unified School District v. Howard Contracting, Inc. (2014) 229 Cal.App.4th 1222, which held that the "plain language" of Section 17406 excludes lease-leaseback transactions from competitive bid requirements. The Court agreed with Los Alamitos that the "plain language" of Section 17406 exempts lease-leaseback agreements from competitive bidding. As the Court explained: "[Section 17406] requires the real property belong to the school district, the lease is for the purposes of construction, and the title shall vest in the school district at the end of the lease term. [McGee's] efforts to engraft additional requirements – such as the timing of the lease payments, the duration of the lease, and the financing – are not based on the plain language of the statute."

The Court's decision creates a widening split within the Courts of Appeal regarding the application of Section 17406 and whether the statute exempts school districts from obtaining competitive bids when entering into lease-leaseback transactions to improve school property. Although the Legislature amended Section 17406 in January 2016, it did not amend or clarify the statute to limit the application of lease-leaseback agreements. This split of authority will continue until the California Supreme Court addresses the question.

McGee v. Balfour Beatty Construction, LLC (2016) __Cal.App.4th __ [April 12, 2016 WL 2620116]