California Attorney General: Brown Act Real Property Exception Does Not Authorize Redevelopment Agency to Discuss Proposed Rehabilitation Loan Agreement In Closed Session

The California Attorney General was recently asked to determine whether a redevelopment agency could discuss in closed session the terms of a proposed rehabilitatiThe California Attorney General was recently asked to determine whether a redevelopment agency could discuss in closed session the terms of a proposed rehabilitation loan for a business that subleases real property from the agency, under the “real property exception” to the Brown Act. The Attorney General in Opinion No. 07-1202 found the discussion of the rehabilitation loan could not take place in closed session, even where the loan agreement contained restrictive covenants and related to property subleased by the agency to the business.

Facts

A city’s redevelopment agency (“Agency”) leased commercial property from the property’s owner and then subleased it to a retail business for the sale of motorcycles and watercraft. The sublease required that the property be used as the business’s sole sales and leasing facility for most of its product lines. The sublease also required the business to spend a certain amount of money to improve the property. The business’s obligation to make improvements was not conditioned on receiving a rehabilitation loan from Agency.

Pursuant to the proposed Rehabilitation Loan Agreement (” RLA”), Agency would loan the business a certain sum of money to be used for renovating the interior of the leased space and constructing additional floor space to accommodate increased business and taxable sales. If the business complied with the terms of the proposed RLA, the loan would be forgiven through annual credits against the loan. The loan would only have to be repaid if the business breached a material term of the proposed RLA or ceased operation. The proposed RLA contained an operating covenant that required the business, as it had been agreed under the sublease, “to continue to operate its principal place of business within city boundaries and to report all sales receipts as sales made within the city.” The term of the RLA would extend beyond the term of the sublease. The proposed RLA would require the business “to extend its occupancy of the premises by entering into a new direct lease with the property owner after the sublease expire[d],” with additional use and operating restrictions taking effect when the sublease expires.

At one of its meetings, the governing board of Agency recessed into closed session with its real estate negotiator to discuss changes that had been proposed to the RLA. The Agency board approved the changes to the RLA in an open session later that same night. However, those changes did not appear in the final version of the RLA. A citizen complained that the discussion about changes to the RLA should not have occurred in closed session. The county district attorney’s office concluded the closed-session discussion about the RLA violated the Ralph M. Brown Act (“Brown Act”).

Decision

Agency argued that the closed session to discuss changes to the RLA fell within the Brown Act’s real property negotiations exception, but the Attorney General rejected this argument. The Brown Act provides, in part, “The people have the right of access to information concerning the conduct of the people’s business, and therefore, the meetings of public bodies and the writings of public officials and agencies shall be open to public scrutiny.” Pursuant to the Act, legislative bodies of local agencies must “hold their meetings open to the public except as expressly authorized by the Act.” Prior cases have held that the express statutory exceptions must be narrowly construed. The Act contains a “real property exception” that provides a local agency’s legislative body “may hold a closed session with its negotiator prior to the purchase, sale, exchange, or lease of real property by or for the local agency to grant authority to its negotiator regarding the price and terms of payment for the purchase, sale, exchange, or lease.” A lease under the terms of the real property exception includes the renegotiation or renewal of a lease. The Attorney General opined, however, that this provision does not authorize a legislative body to discuss in closed sessions all transactions concerning real property. “Rather, the provision authorizes a local body to hold a closed session with its negotiator ‘prior to’ the purchase or other transfer of real property, and then only ‘to the extent that the local agency wishe[s] to grant authority to its negotiator regarding the price and terms of payment for the purchase/transaction.'”

The opinion stated that although the RLA pertains to the use of real property that Agency is subleasing to the business, which is also the proposed recipient of the rehabilitation loan, and refers to and incorporates some of the terms of the sublease, the RLA “does not effectuate the acquisition, disposal, or modification of any real property rights under the existing sublease.” The real property that is the subject of the RLA has already been leased by the Agency and subleased to the business. The Attorney General opined that if Agency had been in the process of negotiating a new sublease or renegotiating the current sublease “then a closed-session discussion with its negotiator to grant him or her authority regarding the ‘price’ or ‘terms of payment’ for the lease (or sublease) would have fallen within the express statutory language and fulfilled the essential negotiation purposes” of the Act.

The opinion stated that the RLA had no effect on the sublease between Agency and the business and therefore, the discussion of the RLA in closed session did not serve “the purpose articulated in the real estate exception, i.e., to inform or develop a negotiating strategy regarding the price and/or terms of payment for the purchase, sale, exchange, or lease of real property.” The Attorney General found that “the existence or nature of the underlying sublease was [not] enough to justify a closed session.” The discussion did not occur prior to the lease of the business, the terms of the sublease did not change as a result of the RLA negotiation, and “the RLA was not a ‘purchase, sale, exchange, or lease’ in its own right.” The RLA, in fact, “was both legally and functionally distinct from the underlying leasing agreement.” The business’s obligations were the same under the sublease “despite any terms or obligations it undertook under the RLA.”

As the RLA was a loan of money from the public agency to a private business, the Attorney General found “nothing in the Brown Act that would countenance holding a discussion of this topic, which would appear to be very much a matter of public concern, in a closed session.”

The Attorney General further found that the fact the RLA provided for the Agency to acquire restrictive covenants over the property does not change the result. The Attorney General rejected Agency’s argument that the restrictive covenants amount to an interest or right in real property within the meaning of the real property exception, such that the closed session discussion would be permissible under the Brown Act. Although Agency would have the right to enforce the RLA’s restrictions, the remedy for any breach of the restrictions would not give Agency any right to the property itself. Accordingly, the Attorney General concluded the RLA could not be considered in closed session.

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Mona G. Ebrahimi | 916.321.4500

Jon E. Goetz | 805.786.4302