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Significant Changes to Lease-Leaseback

  • September 27, 2016

September 27, 2016

Governor Brown signed AB 2316 yesterday, changing the requirements for entering into Lease-Leaseback contracts.  Although the amendments do not address the financing component raised in Davis v. Fresno Unified School District (2015) 237 Cal. App. 4th 261, they do:  (1) implement extensive requirements for procurement of the builder, (2) authorize entering into a contract with a builder for preconstruction services before Division of State Architect (DSA) approval for a project, and (3) address the potential for conditional, limited contractor recovery under an invalid agreement.

AB 2316 goes into effect on January 1, 2017, and sunsets on June 30, 2022.

New Lease-Leaseback Procurement Requirements

Before AB 2316, school districts had the flexibility of entering into Lease-Leaseback agreements without formally advertising for bids, and without restriction on the school district’s discretion regarding the basis for an award of contract.  Beginning January 1, 2017, school districts using Lease-Leaseback will have to abide by procurement procedures reminiscent of Design-Build requirements.  In summary, the new law will require:

  • Governing boards to adopt and publish procedures for evaluating proposers in accordance with a “best value” competitive procurement process;
  • School districts to use a Request for Proposal (RFP) that discloses its “best value” evaluation and methodology criteria, which may be preceded by a Request for Qualifications (RFQ), if desired;
  • School districts to formally advertise its RFP;
  • Certain subcontractors have rights under the Subletting and Subcontracting Fair Practices Act; and
  • School districts must publicly announce the award and basis for the award.

Clarification about Preconstruction Services

Before AB 2316, the Lease-Leaseback statutes prohibited entering into agreements for construction services before approval of the project’s plans by the DSA.  As a result, many school districts using the Lease-Leaseback project delivery method entered into agreements for preconstruction services with their intended builder to obtain the benefit of the builder’s input before the plans were completed.  However, the courts in Davis v. Fresno USD, supra, and McGee v. Balfour Beatty Construction (2016) 247 Cal. App. 4th 235, have questioned whether such agreements violate conflict of interest statutes.  Beginning January 1, 2017, school districts will be able to enter into agreements for preconstruction services before receiving approval from the DSA, as long as those preconstruction services do not fall under the DSA’s jurisdiction.

Potential for Conditional, Limited Contractor Recovery

Before AB 2316, contractors were not entitled to payment under an invalid Lease-Leaseback agreement.  Beginning on January 1, 2017, under certain circumstances, contractors may be able to recover reasonable costs of labor, equipment, materials and services for satisfactory work, even if the Lease-Leaseback agreement entered into prior to July 1, 2015, is determined invalid for failure to comply with the requirements of Education Code 17406, subd. (a)(1).  Importantly, while potential recovery will apply to already-existing agreements, it does not provide for recovery if the agreement is determined invalid for other reasons, nor does it allow for recovery for profit, unapproved change orders, defective or deficient work.

With regard to determining whether a Lease-Leaseback agreement fails to comply with the requirements of Education Code 17406, subd. (a)(1), AB 2316 does not provide minimum requirements for the terms and conditions of financing in the Lease-Leaseback agreement.

PRACTICE AREAS
  • Business and Property
  • Construction

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