California Supreme Court Strengthens CEQA’s Categorical Exemptions

The California Supreme Court has issued its long-awaited decision in Berkeley Hillside Preservation v. City of Berkeley,^[1] a case with important implications for developers and public agencies on a wide variety of projects.  The decision clarifies the meaning of the “unusual circumstances” exception to CEQA’s categorical exemptions and the applicable standard of judicial review.  In doing so, the Court’s decision fortifies CEQA’s categorical exemptions and should encourage greater reliance on them. 

Full Effect to Categorical Exemptions

Categorical exemptions are applicable to certain classes of projects, such as smaller in-fill developments and alterations to existing facilities, that are normally exempt from environmental review under CEQA (and thus do not require preparation of an initial study/negative declaration or an environmental impact report) unless an applicable exception applies, such as “unusual circumstances” that could lead to significant environmental effects. 

The “unusual circumstances” exception provides:  “Significant Effect. 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.”  CEQA Guidelines Section 15300.2(c).  The project opponents in Berkeley Hillside argued that the “unusual circumstances” exception is triggered if a proposed activity has a potentially significant effect on the environment and that, by definition, a significant effect presents “unusual circumstances.”  In their view, the mere fact that a proposed activity may have an effect on the environment triggers the exception to the categorical exemption. 

The Supreme Court rejected this view, reversing the Court of Appeal and holding that the exception’s application requires both (a) unusual circumstances for projects in the exempt class and (b) a potentially significant effect on the environment due to those unusual circumstances.  The Court noted that the opponents’ reasoning was circular and inconsistent with principles of statutory construction:

[A]ppellants’ proposed construction, which mirrors that of the Court of Appeal and which the concurring opinion would adopt, would give no meaning to the phrase “due to unusual circumstances.”  *  *  * [U]nder appellants’ view, categorical exemptions would serve no purpose; they would only apply when the proposed project is, by statute and [regulations], already outside of CEQA review.  *  *  *  Accordingly, the Court of Appeal erred by holding that a potentially significant environmental effect itself constitutes an unusual circumstance. 

Clarified Standard of Review

The Supreme Court’s decision also clarifies the standard of review applicable to judicial review of agency determinations on the application of the “unusual circumstances” exception to categorical exemptions.  The Court held that a bifurcated approach applies.  First, the “unusual circumstances” part of the test is reviewed under the deferential substantial evidence standard.  If unusual circumstances are found, then the reviewing court proceeds to part two of the test.  This prong—the determination of whether the unusual circumstances result in “a reasonable possibility that the activity will have a significant effect on the environment”— is reviewed under the project opponent-friendly “fair argument” standard. 

Under the substantial evidence standard applicable to the first prong, a court must uphold the agency’s determination on whether there are unusual circumstances if there is any substantial evidence supporting it, even if the record contains conflicting evidence or could support a different conclusion. 

In contrast, the fair argument standard applicable to the second prong provides a lower threshold for challenges to agency determinations.  Under the fair argument standard, the “unusual circumstances” exception applies if any substantial evidence supports a fair argument that the proposed activity may have a significant effect on the environment due to the unusual circumstances, regardless of whether other evidence in the record supports a conflicting conclusion. 

The Supreme Court explained:

While evidence of a significant effect may be offered to prove unusual circumstances, circumstances do not become unusual merely because a fair argument can be made that they might have a significant effect.  *  *  *  Judicial review of such determinations is limited to ascertaining whether they are “supported by substantial evidence.”  On the other hand, when unusual circumstances are established, *  *  * [a]n agency must evaluate potential environmental effects under the fair argument standard, and judicial review is limited to determining whether the agency applied the standard “in [the] manner required by law.”

Lessons for Future Projects and Early CEQA Planning

As a result of the Court’s bifurcated standard of review, on projects for which the lead agency relies on a categorical exemption to satisfy CEQA, project applicants should ensure that (1) the lead agency makes an explicit finding that the project lacks “unusual circumstances,” and (2) the agency’s finding is supported by substantial evidence in the record.  This is because a robust finding supported by substantial evidence that there are no unusual circumstances is the only way to avoid the opponent-friendly standard of review that applies to the second prong of the test. 

Where an agency finds the project presents unusual circumstances and that significant environmental effects are possible because of those circumstances, the project applicant should also consider urging the agency to conduct further CEQA review to avoid the risk of the project being delayed by CEQA litigation and potential remand to the agency under the fair argument standard of review.

This case also illustrates how long CEQA challenges can delay projects and thus highlights the importance of early CEQA planning.  Berkeley Hillside stems from a use permit application for a large single family home approved by the City of Berkeley nearly five years ago.  Regardless of what type of CEQA document is prepared in connection with a project—whether a categorical exemption, a negative declaration, or an environmental impact report—significant time and money can often be saved by investing a little more CEQA planning and risk assessment at the project permitting stage.