Report 2010-125 Recommendation 24 Responses

Report 2010-125: State Lands Commission: Because It Has Not Managed Public Lands Effectively, the State Has Lost Millions in Revenue for the General Fund (Release Date: August 2011)

Recommendation #24 To: Lands Commission, State

To ensure that as few leases as possible go into holdover, the commission should consistently assess the 25 percent penalty on expired leases.

Annual Follow-Up Agency Response From October 2016

In assessing the 25 percent penalty on expired leases, the standard lease language for future leases was updated in 2014 to clarify that the penalty "may" be assessed, rather than "shall". At that same time staff developed a protocol to evaluate each expiring lease to determine whether to assess the penalty. Staff continues to believe that a lessee should not be penalized for delays in the processing of a lease application that are outside the lessee's or the Commission's control, such as issuance of permits or approvals from other agencies and completion of consultant studies or environmental documents necessary for Commission authorization. If staff were to assess the 25 percent penalty for circumstances outside the lessee's control, the lessee could appeal to the Commission. If the Commission finds in favor of the lessee, the penalty would have to be refunded. In cases where staff determines the lessee to be at fault for not paying rent on time or is resisting efforts to renew, the 25 percent penalty is consistently being applied to the billings. Staff believes this is the fairest way to address potential holdover leases. For these reasons staff believes it is in full compliance with this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

This recommendation is resolved because the commission changed its standard lease language and provided documentation that describes the rationale for assessing the 25 percent penalty for certain leases in holdover. However, as we indicated in our 2011 and 2014 audits, to the extent that the commission charges 25 percent penalty on certain lessees who are in holdover, but does not do so for others, the commission exposes itself to criticism that it is selectively enforcing penalties. In addition, by inconsistently charging penalties, lessees who may otherwise have paid may choose to negotiate with the commission and not pay the penalty. The commission should continue to strive to protect the State's financial interests by enforcing the terms of lease agreements.

Annual Follow-Up Agency Response From September 2015

Response: In assessing the 25% penalty on expired leases, the standard lease language for future leases has been updated to clarify that the penalty "may" be assessed, rather than "shall". For current leases, staff has developed a protocol to evaluate each expiring lease to determine whether to assess the penalty. Holdover leases are being billed on a monthly tenancy basis as specified in the lease. . In cases where the lessee is resisting efforts to renew, the 25% penalty is being applied to the monthly billings.

Staff is continuing to look into this issue to explore a more definitive resolution. Staff continues to believe that a lessee should not be penalized for delays in the processing of a lease application that are outside the lessee's or the Commission's control, such as issuance of permits or approvals from other agencies and completion of consultant studies or environmental documents necessary for Commission authorization.

For these reasons staff believes it is in partial compliance with this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

Annual Follow-Up Agency Response From September 2014

In assessing the 25% penalty on expired leases, the standard lease language for future leases has been updated to clarify that the penalty "may" be assessed, rather than "shall". For current leases, staff has developed a protocol to evaluate each expiring lease to determine the whether to assess the penalty. Holdover leases are being billed on a monthly tenancy basis as specified in the lease. Staff is continuing to look into this issue to explore a more definitive resolution. Staff continues to maintain that a lessee should not be penalized for shortcomings of the Commission staff or other permitting agencies in processing leases.

California State Auditor's Assessment of Annual Follow-Up Status: Not Fully Implemented

All Recommendations in 2010-125

Agency responses received after June 2013 are posted verbatim.