Court Protects CEQA Categorical Exemptions by Limiting Unusual Circumstances Exception

Real estate developers who have opponents alleging that CEQA exemptions are unavailable to them because the environmental impacts of their projects alone are unusual won an important victory this week in the California Supreme Court.  Even if a project has negative environmental impacts, a categorically exempt project is spared from CEQA review so long as the project itself is consistent with the class of projects that typically qualify for the exemption, the Court held.

The Court’s holding is an important victory for developers and public agencies. Both will have an easier time relying on so-called “categorical exemptions,” which exempt a proposed project from California’s Environmental Quality Act (“CEQA”).  Categorical exemptions are classes of projects that are exempt from complying with the environmental study procedures of CEQA because, as a policy matter, the projects are unlikely to have a significant impact on the environment.  Developers and public agencies rely on categorical exemptions to streamline the processing of projects and more efficiently use public resources on other projects that are likely to have significant environmental effects.  Project opponents, on the other hand, often seek to disqualify a project from using a categorical exemption so that CEQA review is required.

Berkeley Hillside Preservation v. City of Berkeley concerns a property owner who sought approval to build an almost 6,500 square foot house with a separate 10-car garage on a steep, wooded slope in the hills of Berkeley, California.  The homeowner claimed that the project was exempt from environmental review because it qualified for two “categorical exemptions:” one for single family residences and another for in-fill development projects.  The City of Berkeley agreed with the owner and approved the project.

Opponents of the project sued, arguing that the homeowner’s claimed categorical exemptions could not be used because an “exception-to-the-exemption” in the state’s CEQA regulations says:  “A categorical exemption shall not be used for an activity where there is a reasonable possibility that the activity will have a significant effect on the environment due to unusual circumstances.”  This “unusual circumstances” exception-to-the-exemption attack is frequently used by project opponents in an attempt to “backdoor” a project into CEQA review.

In this case, the argument was over how to interpret the text of the unusual circumstances “exception-to-the-exemption.”  Opponents were able to persuade the lower courts to hold that the fact that a proposed project may have a significant impact on the environment is itself an unusual circumstance that renders a categorical exemption inapplicable.  Fortunately, the California Supreme Court did not accept that interpretation, reasoning that opponents and the lower courts did not give meaning to all of the words in the exception:  the significant effect must be due to unusual circumstances.

Going forward, if a project opponent sues arguing that the “unusual circumstances” exception applies, a reviewing court must apply a two-step inquiry. First, a court must determine whether a particular project presents circumstances that are unusual for projects in the class described in the categorical exemption.  In making this evaluation, the court applies a “substantial evidence” standard of review.  After resolving all evidentiary conflicts in the public agency’s favor and indulging in all legitimate and reasonable inferences to uphold  the finding, the court must affirm the agency’s decision if there is any substantial evidence, whether contradicted or uncontradicted, to support it.

In light of this first prong, developers and public agencies will do best to place in the record evidence and reasoning showing how the project under consideration is typical for its class.  Project opponents may introduce evidence in the record that the environmental effects of the proposed project tend to show that the project is unusual for its class; however, that evidence alone is not dispositive of the issue. Therefore, it is crucial for the public agency to make a specific finding of fact that the project does not present “unusual circumstances.” A specific finding made by a public agency in light of the evidence in the record will be entitled to great deference at this step in the analysis. This is important, because if a person relying on a categorical exemption prevails on the first prong of the test, the inquiry ends.

The second prong of the test is whether there is a reasonable possibility that the unusual circumstance will produce a significant effect on the environment.  In making this evaluation, the court reviews the record.   If substantial evidence supports a “fair argument” that there is a reasonable possibility of a significant effect on the environment due to the unusual circumstance, then the “exception to the exemption” would be triggered.  The claimed categorical exemption cannot be used to exempt the project from CEQA review.

The “fair argument” standard should be familiar to CEQA practitioners. It is the same standard under which an agency must prepare an EIR whenever substantial evidence in the record supports a fair argument that the project may have a significant effect on the environment.  The “fair argument” standard has killed many negative declarations prepared by public agencies that may not have relied on a carefully prepared record of decision.

The Court’s decision in the Berkeley Hillside Preservation case was eagerly awaited by CEQA practitioners.  Its impact will be felt not only in the single family residential and urban infill context, but also in every case in which a categorical exemption is relied upon by a project applicant and a local government body.