News & Insights

A Look at the Offner-Dean Exception

With rising costs and competing uses for shrinking available resources, municipalities may opt to lease rather than purchase real estate assets, freeing up capital to fund public services and more. However, there are nuances and pitfalls for landlords to be aware of when negotiating a traditional lease with a municipality, especially in California.

One of the most significant ways that a lease to a municipality differs from a typical commercial lease is the California Constitution’s prohibition (and possibly a prohibition by the charter or governing documents of the municipality) against incurring certain types of indebtedness or liability by a municipality.  Municipal governing documents frequently will mirror the California Constitution’s prohibition.

Article 16, Section 18(a) of the California Constitution states that “[n]o county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose . . .”  

 There is ample case law, however, that exempts a lease from the requirements of Section 18(a), so long as certain conditions are satisfied.   The exceptions created by case law are often referred to as the “Offner-Dean exception,” which provides that a long-term lease obligation entered into by a municipality will not be considered an indebtedness or liability under Section 18(a) if the lease meets certain criteria.

Landlords need to know that under current case law, if the representative of a municipality argues that the California Constitution prohibits the payment of rent on a multi-year lease without the contingency of annual appropriations, then it is not an issue of “cannot,” but an issue of “does not want to.”  Those are two entirely different things.  The case law clearly supports the multi-year leasing of premises by a municipality, without conditions for future budget appropriations. 

Read more about the Offner-Dean exception and learn what California landlords should be aware of when negotiating a traditional lease with a municipality in Law360 (subscriber only).