LEGAL NEWS

Confusion Reigns Over Lease-Leaseback Delivery Method

By Tim Truax, Law Offices of Timothy M. Truax PC

On June 1, 2015, the California Fifth

District Court of Appeal issued its opinion in Davis v. Fresno Unified School District, ruling that a taxpayer had adequately al- leged that the Education Code provisions permitting lease-leaseback (LLB) school construction arrangements did not apply to situations where it was alleged: 1. the LLB agreement was not a genu- ine lease, but simply a traditional construction agreement;

2. the LLB agreement did not include a financing component for the construction of the project; and

3. the LLB arrangement did not pro- vide for the district’s use of the new facilities “during the term of the lease.”

The Davis court also ruled that the tax-

payer had adequately alleged that the con- tractor’s preconstruction services for the district may be a conflict of interest under §1090 of the Government Code because the contractor was arguably a district “em- ployee” with a financial interest in the LLB contract. The Davis decision has thrown the LLB

delivery method into extreme disarray and confusion. Many school districts have placed all of their proposed LLB projects on hold. Others have moved ahead, believ- ing that their own LLB arrangements are consistent with the requirements outlined in Davis. There is great uncertainty for school districts, contractors, subcontrac- tors, and others who currently are working on LLB projects or who are being asked to proceed with one. A petition for review of the Davis de-

cision has been filed with the California Supreme Court. If the court grants that petition, the Davis case will no longer be binding on any lower courts considering challenges to LLB contracts. The court also can order the Davis decision de-pub- lished, which will have the same effect, but the court could refuse to grant review and allow the Davis case to remain on the

20 September/October 2015

books. According ly,

due to the urgent need for some clarity and for protection of con- tractors who have LLB agreements in place or are plan- ning to undertake one, AGC and its advocates have held numerous discussions with California’s Coalition for Adequate School Housing (CASH), the Construction Employers Association (CEA), and AGC of San Diego regarding several legislative proposals that would protect contractors against the effects of the Davis decision. These proposals have been discussed with various other interest groups and with se- lected legislators in an attempt to create legislative solutions that can be quickly ad- opted at this very late stage of the legislative process. However, none of these proposals have yet advanced out of committee and the chances of them passing before the end of this session remain unclear.

The Davis decision has

thrown the LLB delivery method into extreme disarray and confusion. Many school districts have placed all of their proposed LLB projects on hold. Others have moved ahead, believing that their own LLB arrangements are consistent with the requirements outlined in Davis.

When the Legislature adjourned for its

summer recess as of July 17, 2015, the only proposal that seemed to have any momen- tum was a bill that would protect contrac- tors against “disgorgement” of amounts paid on an LLB contract that is later found to be invalid. Existing law provides that on public works contracts that are competi- tively bid, the contractor may still recover its costs of performing the work, not in ex- cess of the contract sum and with no enti- tlement to profit, even if the contract is later determined to be legally invalid. (See, Pub- lic Contract Code §5110.) This proposal will add a new statute providing that con- tractors awarded an LLB contract may be paid the amounts due under that contract, even if the contract is later declared invalid. But the bill would apply only to LLB con- tracts awarded prior to July 1, 2015. Other proposals discussed would have

addressed the conflict of interest portion of the Davis decision and clarified the re- quirements for LLB contracts. However, consensus on these proposals has been dif- ficult to achieve. Some stakeholders have expressed strong opposition to the LLB delivery method and appear to be happy that the Davis case has brought the entire delivery method into question. Therefore, it appears unlikely that either of these pro- posals will be enacted during this legisla- tive session. AGC’s advocates, along with a task force

of Building Division and Legal Advisory Committee members, will continue to dis- cuss these issues with the various interest- ed parties (including various labor groups) and will seek to find some consensus about how best to address the issues raised by the Davis decision. Meanwhile, contrac- tors performing or considering LLB work should carefully review their own situa- tions with their legal counsel. Unless the California Supreme Court

steps in and overrules, modifies, or makes the Davis case non-binding, it appears that the uncertainty and confusion regarding the LLB delivery method will remain in place for some time. AGC will publish up- dates as circumstances warrant.

California Constructor