Lawyers Journal

Introduction

On May 10, 2010, the Supreme Judicial Court (SJC) issued a decision which interpreted the application of the commonwealth's public construction competitive bidding laws to a situation in which a public university contracted with a private party for the development and maintenance of a newly constructed dormitory, by entering into a long-term lease. In Brasi Development Corp. v. Atty Gen.,¹ the SJC found that based on the broad statutory language appearing in G.L. c. 149, § 44A (2)(D), the public construction bidding laws apply to the construction "of any building" undertaken by a public agency, even if the property in question is actually owned by a private party.

Thus, the SJC determined that in circumstances such as those involved here, a long-term lease between a public agency and a private developer may be subject to the strict requirements for soliciting bids and awarding public construction contracts as specified in the competitive bidding laws, where it is established that the public agency retains significant control over the construction process.

The decision is important in that it provides some guidance to public awarding authorities, contractors who bid on public works and to the Attorney General's Office, which enforces the competitive bidding law requirements.

Statutory framework

The commonwealth's public construction bidding laws ² provide the means for awarding authorities to obtain the lowest price that competition among qualified contractors can secure and serve to establish an open and honest procedure for fair competition among bidders for public contracts. St. 1980, c. 579, § 55; St. 2004, c. 193. Section 44A (2)(D) of G.L. c. 149 requires that "[e]very contract for the construction, reconstruction, installation, demolition, maintenance or repair of any building by a public agency …" must be awarded using the specific procedures set forth in G.L. c. 149, §§ 44A to 44H.

As part of this comprehensive statutory scheme, the public construction bid laws include requirements for certification and prequalification of contractors, intended to further the legislative goals of fairness and accountability.³ Before a prospective contractor may submit a bid, the contractor must be prequalified by the Division of Capital Asset Management (DCAM) in order to certify the prospective bidder's financial status, experience and other information related to qualifications and responsibility.

DCAM issues certificates to eligible contractors, which indicate dollar limits for the projects on which they bid, to ensure that applicants are capable of undertaking such construction.⁴ Where a construction project is estimated to exceed $10 million, additional pre-certification requirements apply.⁵ Only contractors who are pre-certified are deemed responsible and eligible bidders who may participate in the process.

The attorney general is responsible for ensuring that the competitive bidding system is faithfully carried out and that public contracts comply with public construction bidding requirements. The attorney general initiates investigations into potential violations through a proceeding known as a "bid protest hearing," in which the attorney general issues a written decision, including factual findings and determinations.⁶ At the conclusion of an investigation, the attorney general may elect to seek judicial enforcement of bid protest decisions.⁷

Events surrounding Brasi's proposal to the University of Massachusetts, Lowell

The University of Massachusetts, Lowell (UML), part of the publicly-funded state university system, wanted to expand the campus housing available to its student population within the city of Lowell.

The plaintiff, Brasi Development Corp. (Brasi), a private property development firm, had not previously undertaken any student housing projects, and was not certified by DCAM. Brasi incorporated in 2005 for the sole purpose of purchasing and developing a particular parcel of land in Lowell, in close proximity to UML's campus. Brasi purchased the parcel in 2006, and at some point had previously approached UML about a project, but no agreement was reached.

During May 2007, Brasi obtained zoning approval from the city's planning board to develop its property as a student dormitory. The Court found that this change in zoning use provided Brasi with an economically viable use of the property at the expiration of any agreement with the university.

About eight months after Brasi received planning board approval, during February 2008, UML issued a request for proposals (RFP) to solicit bids for a privately developed housing facility for 120-400 students, located in close proximity to its campus. The RFP sought a five-year lease with the potential to extend the agreement for two additional five-year terms.

Although the RFP did not provide that the dormitory must be newly constructed, it contained UML's design specifications for the square footage of rooms, window placement, ratio of parking spaces to apartment units, numbering system to be used for each room, security system devices compatible with UML's network, the types and placement of vending machines, and a design concept consistent with the character of UML's existing architecture and with the City of Lowell.

The RFP included a sample "lease agreement," and a general lease, which reserved to UML the right to approve all improvements, architectural design plans, construction materials and product specifications. The sample agreement made future assignment of the agreement contingent upon UML's written approval, and prohibited granting any easement without UML's assent. The successful bidder would also be required to give written notice before mortgaging the property. The sample agreement granted UML a right of first refusal to purchase the property, but that right was later waived.

The university would be responsible only for the lease payments, but not for any construction costs. The RFP further specified that the selected bidder would bear maintenance and repair costs for the building and grounds during the lease, including snow and trash removal and daily cleaning, and would assume all operation costs, such as utility payments, Internet and cable access.

However, any subcontracting of these services required UML's advance approval. In addition, the successful bidder would be required to procure liability insurance coverage for the duration of the project, with UML to be listed as an additional named insured, and must provide advance notice before any insurance cancellation could take effect.

The RFP contained an occupancy schedule, under which any construction was to be completed within 15 months, and specified that an occupancy date of either the fall of 2008 or August 2009 was a critical factor in selecting among the proposals. The university would not be required to make any payments until the dormitory was available for occupancy, and there were substantial penalties if the selected bidder failed to meet the deadline.

Although the bidding process was open, the RFP did not comply with the competitive bidding procedures set forth in G.L. c. 149, §§ 44A-44H. Moreover, the RFP expressly stated that the contract would not necessarily be awarded to the lowest-priced responsible bidder.

UML received seven responses to the RFP, including one from Brasi. Three of the proposals, including Brasi's submission, were for new construction, while the remainder proposed to renovate and convert existing structures. Two bidders proposed structures without any modifications.

Brasi indicated its estimated construction costs to be at least $25 million. On May 9, 2008, UML selected Brasi's submission, subject to various additional conditions not included in the RFP. These conditions included a provision for UML to have the right for full review and approval of the site plans, and that Brasi hire a consultant approved by UML, or that UML be given greater control and sign-off on the project, including the right to attend weekly progress meetings during construction. On May 12, 2008, Brasi accepted UML's conditions.

The attorney general's investigation

In response to a notice of protest, the attorney general initiated an investigation to determine whether UML's proposal to build a student housing facility was subject to the public construction bid laws. The attorney general held a bid protest hearing on June 11, 2008, attended by representatives of UML and the protestors.

While the attorney general's bid protest was pending, during August 2008, UML and Brasi executed a lease agreement, in which the university would be obligated to pay annual rent of $1,702,000 for the first year of the agreement with subsequent increases up to $1,920,636 by the fifth year, exclusive of management and maintenance payments. The subsequent rent payments would be negotiated. The agreement was for an initial five-year term, renewable every five years at UML's option, for a total of 30 years. Under the agreement, Brasi remained the property owner.

On Aug. 13, 2008, the attorney general issued a bid protest decision, allowing the protest, based on the attorney general's determination that the contemplated dormitory project is subject to the public construction bid laws. Based on the attorney general's bid protest decision, UML sent a notice to Brasi intending to terminate their agreement on Aug. 20, 2008. Brasi filed the instant declaratory judgment action. The attorney general counterclaimed, seeking a determination that the bid protest decision be upheld. The parties agreed to resolve the matter through submission of cross-motions for summary judgment.

Court's legal analysis

The issue before the Court was essentially whether the commonwealth's public construction bid laws⁸ apply when a public agency enters into a contract with a private entity to build a facility on private property, where the public agency retained significant control over the construction process.

In beginning its analysis in Brasi, the Court noted that in the context of other similar competitive bidding statutes, such as public procurement and public works, the SJC had previously found such competitive bidding laws may be broad enough to encompass long-term leases between public agencies and private parties.⁹ The Court noted, however, that a determination as to whether a lease is subject to competitive bidding is a fact-specific analysis, which cannot be based on any one single factor.

The SJC continued on in its analysis to expressly agree with the Appeals Court's most recent use of a multi-factor test in Andrews v. Springfield,¹⁰ decided under the same competitive construction bid law at issue in Brasi, G.L. c. 149, § 44A (2)(D). In Andrews, the Appeals Court concluded that the City of Springfield's long-term lease agreement for the construction of an animal shelter was construction of a building by a public agency for purposes of the competitive bidding laws.

Without explicitly setting a new test to determine the application of the public construction bidding laws, the Appeals Court in Andrews considered several factors to be significant in support of its decision: 1) the length of the lease term; 2) the awarding authority's detailed design and construction requirements; 3) the degree of the awarding authority's control of the construction process; and 4) the fact that the lease payments were more than the costs of constructing the building.

In reaching its conclusion, the Appeals Court also relied on the awarding authority's express intention, as stated in its RFP, that it sought to acquire an animal control facility for its long-term use, and to ultimately purchase the property at the end of the lease term, thus obtaining ownership of the facility through public funds. While agreeing with the Appeals Court's analysis and conclusion reached in Andrews, the SJC held that no specific set of facts will be sufficient for every situation. Thus, the Court adopted a totality of the circumstances test, which takes into account the unique circumstances of each case.

The SJC found the following factors to be useful, but not dispositive, in determining the application of competitive bidding requirements to "build to lease" agreements: 1) the degree of control the public agency retains during development and construction of the project; 2) the length of the lease, including any extensions; 3) whether public funds will be expended; 4) whether payments made under the agreement will essentially cover the construction costs; 5) whether, at the end of the lease term, the public agency retains a purchase option for a nominal sum, or the property would otherwise be automatically transferred to the public agency; 6) whether the public agency, which initially owned the property, sold or leased it to the private party, or the agency had a building constructed and then leased the newly constructed building; and 7) whether the building is of such a specialized nature that it would be unsuitable for another commercial purpose without significant renovations.

The Court noted that if the terms of the RFP here were considered in isolation, then the project would not have been subject to competitive bidding. The Court expressly found many of the RFP's design requirements to be common and not indicative of a specialized level of design.¹¹ Moreover, although the RFP's provisions for the electrical system and security features were particular to meet the needs of the university, the Court noted that some level of customization of leased space is common and a tenant's involvement in that process will not convert a lease into a public construction agreement.

Nevertheless, the Court ultimately held that certain material differences between the terms of the RFP and the lease agreement which the university entered into with Brasi were critical to the determination that the public construction bidding laws applied.

The Court found several factors to be material in reaching this conclusion: 1) the project here involved creation of a new building; 2) located adjacent to the university's campus and dependent on the use of the university's own existing parking lot; 3) for which the university would grant to Brasi easements of unlimited duration; 4) the university had the right to occupy the building for 30 years, double the amount of time under the RFP; and 5) the increased degree of UML's supervision over the construction process from that provided in the RFP, specifically the university's contractual right to attend weekly construction meetings and to approve and monitor the various phases of the work in progress.¹²

Prospective impact

Brasi clearly establishes that a public agency does not fall outside of the jurisdiction of the construction bid laws merely by contracting to lease privately owned property. Underlying the legislatively mandated objectives to ensure fair and open competition for public projects, Brasi contemplates that leases which directly or indirectly use public resources to facilitate construction may be subject to the competitive procurement process.

Such competitive bid requirements may apply where an existing building will undergo extensive renovation to meet the needs of the prospective public tenant, even if the lease will not require "ground up" construction. For example, if a long-term lease requires that the landlord will make additions to an existing facility, it may be more likely deemed a construction project subject to public bidding. Conversely, it appears that when "build out" activities undertaken by the prospective landlord are limited in scope, involve only cosmetic changes, or when temporary public use is clearly intended, the lease is less likely to implicate the construction procurement laws.¹³

By adopting the attorney general's longstanding "totality of the circumstances test," Brasi requires consideration of various factors, including whether the public tenant exercises significant control over the construction process, the degree to which the lease payments are designed to recoup construction costs, and other indicia that the public agency is actually using the leasing mechanism as a means to construct a facility for its use with the ultimate objective of attaining ownership. Therefore, the particular characteristics of the public agency's RFP and resulting lease necessarily must be reviewed.

A public body otherwise subject to competitive bidding requirements would be well advised to consider whether its construction requirements as part of any lease with a private party would be deemed subject to the construction bid laws.¹⁴ To the extent to which an RFP would appear likely to implicate the construction bid laws, a public agency should integrate terms and conditions into an RFP and lease which clearly describe the public agency's obligations for procurement compliance and notify prospective landlords and developers that they must assume such obligations.

Public agencies planning to issue an RFP for the lease of office space or any other facility are encouraged to review their plans with the Office of the Attorney General well in advance of publishing their solicitation, in order to discuss the likelihood that its specifications could be found to implicate the construction bid laws.¹⁵ Such a prospective review may also involve an analysis of whether the leasing arrangements are subject to other statutory procedures governing leasing, even where no construction is contemplated. For example, cities and towns are subject to G.L. c. 30B, § 16 when acquiring rental space at a cost exceeding $25,000.

Karla E. Zarbo is an assistant attorney general in the Fair Labor Division of the Massachusetts Attorney General's Office, where she has handled civil, criminal and administrative enforcement matters for the last 12 years. She primarily focuses on appellate litigation. Previously, she specialized in insurance fraud litigation at Smith & Brink PC in Quincy.

Brian C. O'Donnell is an assistant attorney general in the Bid Unit of the Fair Labor Division of the Attorney General's Office. He handles bid protests and investigations, as well as inquiries from contractors and public officials regarding the application and interpretation of the commonwealth's public construction bidding laws.

*Karla E. Zarbo was counsel of record in Brasi Development Corp. v. Atty Gen., 456 Mass. 684 (2010). Nevertheless, this article represents the opinions and legal conclusions of its authors and not necessarily those of the Office of the Attorney General.

Opinions of the Attorney General are formal documents rendered pursuant to specific statutory authority; this article is not intended to be an official Opinion of the Attorney General rendered pursuant to statutory authority.

¹456 Mass. 684 (2010).
²G.L. c. 149, §§ 44A-44H (West 2010).
³G.L. c. 149, §§ 44D-44D½ (West 2010).
⁴G.L. c. 149, § 44D (3); 810 C.M.R. 8.03 (West 2010).
⁵G.L. c. 149, § 44D½ (West 2010).
⁶G.L. c. 149, § 44H (West 2010).
⁷Id.
⁸G.L. c. 149, §§ 44A-44H (West 2010).,
⁹See, e.g., Datatrol, Inc. v. State Purch. Agent, 379 Mass. 679, 688 n. 7 (1980) (state lottery's agreement to lease computer system was found to actually be a purchase agreement subject to the general procurement law, G.L. c. 7, § 22, where public agency retained purchase option at end of lease term).
¹⁰75 Mass. App. Ct. 678 (2009),
¹¹Cf. Andrews, 75 Mass. App. Ct. at 680-81 (city-controlled design specifications by hiring architect to develop detailed design and construction specifications, incorporated in RFP, and required bidders to comply with them).
¹²In light of the university's acknowledged urgent need for student housing, the Court found these factors to suggest that UML intended to exercise indefinite use of the dormitory.
¹³This approach is consistent with the attorney general's bid protest decisions, finding the construction bid laws inapplicable in circumstances where the lease term was capped by statute to 10 years and the facility was intended to be used temporarily while construction of the public agency's permanent facility was underway.
¹⁴Moreover, although not addressed in Brasi, the same considerations appear to apply to the long-term leasing of land for development of public works projects, typically governed by G.L. c.30, § 39M (e.g., athletic fields, running tracks, parking facilities).
¹⁵It would also be advisable to consult with the Division of Occupational Safety regarding the possible applicability of the commonwealth's prevailing wage laws, G.L. c. 149, §§ 26-27H, inclusive.