California school districts have long used lease-leaseback agreements to construct and modernize school facilities. A recent appellate court decision revisits the legal requirements governing these agreements and provides important guidance regarding contractor financing.
In Davis v. Fresno Unified School Dist. (2015) 237 Cal.App.4th 261, the Fifth District Court of Appeal interpreted the former lease-leaseback statute as requiring a genuine lease with a contractor-financing component. The court held that a taxpayer's allegations challenging the district's agreements were sufficient to state a claim, allowing the lawsuit to proceed.
On October 22, 2026, California's Fifth District Court of Appeal issued another decision in Davis v. Fresno Unified School District (Oct. 22, 2026, F089619) ___ Cal.App.5th ___, continuing a years-long legal dispute over a school construction project completed through a lease-leaseback arrangement.
Although the decision provides useful guidance, it does not fundamentally change the law governing lease-leaseback projects. Instead, it highlights existing legal uncertainties that school districts should continue to consider when planning construction projects.
What Is Lease-Leaseback?
Lease-leaseback is a construction delivery method authorized under California Education Code section 17406. Under this arrangement, a school district first leases its property to a contractor, who agrees to construct or improve school facilities on the property. The contractor then leases the improved property back to the district, typically in exchange for payments over an agreed period.
Historically, school districts used lease-leaseback agreements to gain greater flexibility in selecting construction contractors compared to traditional design-bid-build procurement. Rather than awarding a project to the lowest responsible bidder, districts could select contractors based on experience, qualifications, and project needs.
Some districts used this approach even when they already had sufficient funds to pay for construction. These districts structured progress payments as "leaseback" payments and substantially paid for the project by completion. Such arrangements provided flexibility in contractor selection without requiring long-term financing through the contractor. The first Davis opinion called this practice into question by interpreting Education Code section 17406 as requiring a genuine lease with a contractor-financing component.
Assembly Bill 2316 took effect on January 1, 2017, and introduced a competitive best-value selection process based on price and contractor qualifications. However, the legislation did not resolve whether lease-leaseback arrangements must include contractor financing.
In the recent Davis decision, the court revisited the financing issue under the statute governing the district's 2012 agreements.
What Did the Davis Court Decide?
In its latest decision, the Davis court continued to apply its earlier ruling, rejecting the argument that advancing construction expenditures and receiving delayed payments, including retention payments, were sufficient to establish the type of contractor financing required under its interpretation of the statute.
However, other appellate courts have reached different conclusions. In California Taxpayers Action Network v. Taber Construction, Inc. (2017) 12 Cal.App.5th 115 and McGee v. Balfour Beatty Construction, LLC (2016) 247 Cal.App.4th 235, the courts interpreted the former statute differently, concluding that it did not expressly require contractor financing.
As a result, California appellate courts remain divided over whether contractor financing is legally required. The California Supreme Court has acknowledged this disagreement but has not resolved it.
What Does This Mean for School Districts?
School districts should exercise substantial caution before entering into lease-leaseback agreements, particularly when district funds will be used to pay construction costs as work progresses. The recent Davis decision confirms that advancing construction costs, awaiting reimbursement, and deferring retention payments do not establish contractor financing under the Fifth District's interpretation of the former statute.
Although Assembly Bill 2316 introduced competitive best-value selection requirements, it did not expressly resolve whether lease-leaseback agreements must include contractor financing.
The disagreement among appellate courts leaves an important question regarding the financing structure of lease-leaseback agreements unresolved. Districts should not assume that compliance with the contractor selection procedures under Education Code section 17406 necessarily resolves questions concerning an agreement's lease and financing structure.
Until the California Supreme Court or Legislature provides further guidance, school districts should evaluate whether alternative authorized construction delivery methods can meet their project needs with less legal uncertainty. Before entering into a lease-leaseback agreement, districts should seek legal advice regarding the proposed financing structure and the conflicting appellate decisions.
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