State Courts Confirm Role For Early Project-related Approvals That Precede CEQA Review

March 20, 2007 | Bulletin No. 856348.1

Compliance with the California Environmental Quality Act ("CEQA") often is time-consuming, expensive and a magnet for lawsuits that can delay or stop a project cold. Compliance counsel typically advise project proponents to do CEQA review once and do it right. For many projects, the challenge lies in determining how to do it right.

For large, complicated projects, a recurring CEQA compliance issue is determining exactly when CEQA review must be completed. Clearly, an Environmental Impact Report ("EIR") or Negative Declaration must be completed before a city, county or other lead agency adopts its final approval of a proposed project. But what about the series of early actions by lead agencies, and sometimes by other agencies, that are often necessary to define the substance and full scope of a "project" for which CEQA review must be performed?

Two recent court rulings clarify the kinds of early project-related actions that public agencies may take before completing CEQA review. The rulings confirm that a hallmark of permissible early action is the absence of an irretrievable project commitment that relegates later CEQA review to a post hoc rationalization for a project approval that, in fact, has already occurred. The rulings also confirm that early project-related action is more likely to be permissible where it helps to define the substance and scope of the project in a way that makes later CEQA review more concrete and meaningful.

Conditional Agreement Upheld Against Challenge Alleging Late CEQA Review

Often, early project-related actions involve agreements under which the parties’ obligations to perform, or do certain things, are expressly conditioned upon completion of CEQA review. In Concerned McCloud Citizens v. McCloud Community Services District (California 3rd App. Dist., Case No. C050811, Slip Op. filed January 2, 2007), a local district entered into a contingent agreement with the Nestle Corporation for the sale and purchase of local spring water. A citizens group filed a lawsuit challenging the agreement as an illegal approval of a project prior to completion of CEQA review.

The trial court agreed with the citizens group and vacated the contingent agreement for violation of CEQA. Slip Op. at 2. The local district and Nestle appealed, seeking to reverse the trial court ruling on the ground that no final project approval had occurred prior to completion of CEQA review. The appellate court agreed with the local district and Nestle, holding that it was permissible for the district to approve the contingent agreement prior to completing CEQA review.

The McCloud court focused on the issue of what constituted an “approval” under CEQA, and held that the district’s approval and execution of the agreement with Nestle was not an approval of a project within the meaning of CEQA. Id. at 15. The agreement at issue was a 50-year term agreement with a right of renewal, under which the district agreed it would not enter into negotiations with any other person or entity to purchase or use local spring water, and which set forth numerous provisions and plans for Nestle’s eventual siting and construction of a bottling plant and other facilities. Id. at 4-8.

Despite the multitude of project-specific details and clear “intent to approve” evidenced by the agreement, the court focused on provisions making the agreement’s finality conditional, or contingent. Among those provisions was the right of Nestle to cancel the agreement at any time during its first 5 years. Similarly, the agreement would be null and void if Nestle did not begin and subsequently complete construction of the new facility within seven years after signing. The court focused particularly on the agreement’s statement that “[n]either party shall be bound unless and until the District’s compliance with CEQA is completed and there is no possibility of a challenge pursuant to CEQA.” Slip Op. at 8. Finally, the agreement stated that the intended project might be changed in response to the identification, during CEQA review, of feasible mitigation measures or alternatives to avoid or reduce impacts of the proposed project.

In upholding the district’s agreement with Nestle, the court explained that “[t]he agreement, while admittedly a binding contract, is conditional (see Civil Code §§ 1434, 1439) and does not grant Nestle a vested right of use of the project.” Id. at 16. The court further explained that “the agreement is predicated on a series of ifs and commits the District to sell water to Nestle under described terms only if the described terms are successfully completed.” The court emphasized that the “district retains the right to participate in and approve or disapprove of or modify major aspects of the prospective project” and characterized the agreement as:

"temporarily holding in place a set of pre-agreed financial terms between the parties, while conceptually outlining a proposal for a project to be subjected to and conditioned upon full environmental review."

Id. The court acknowledged that Nestle agreed to make certain contingency fee payments, to pay the costs of CEQA compliance and that “clearly the District [was] favorably disposed to the ultimate success of this project . . . .” Slip Op. at 18. Nevertheless, the court concluded that the district’s “agreement [did] not preclude it from considering a full range of options depending on subsequent CEQA review.” Id.

Court Unravels Early Agreement Not Conditioned Upon Completion of CEQA Review

In Save Tara v. City of West Hollywood (California 2nd App. Dist., Case No. B185656, Slip Op. filed February 21, 2007), the appellate court held that a city violated CEQA by taking project-related actions before completing CEQA review.

There, city council entered into an option agreement granting a developer the exclusive right to purchase real property if financing were obtained. The court acknowledged that the option agreement was made to enable the developer to apply for project financing from the federal Department of Housing and Urban Development (“HUD”). But the agreement also prevented the city from backing away from the project if HUD funding were obtained. The court also noted that the HUD application was more than 700 pages long and “describe[d] in great detail” the many design aspects of the project. Slip Op. at 5.

After reviewing the administrative record, the court concluded that “[t]he HUD application and the supporting correspondence from City officials, politicians, and seniors leaves no doubt as to the plan to develop 35 affordable senior units” on the property. Id. at 4. The court found that after the HUD financing had been approved, the city continued to delay preparation of an EIR—a delay the court found too long.

The court emphasized that CEQA review must be commenced when there is enough information to allow meaningful environmental review, citing CEQA Guidelines § 15004(b). The court explained that “as of the time the HUD application was submitted . . . there was enough information about the project to provide meaningful information for environmental assessment.” An EIR was required because the city had already entered into the development agreement, essentially making a final decision on the project before CEQA was commenced.

However, the court also held that “in light of the pivotal role of HUD financing, it made sense, of course, to wait for HUD’s decision before initiating the EIR review process.” But after HUD approved the project’s grant, the city should have initiated EIR review—but did not. Slip Op. at 16.

Conclusion

The preceding two court decisions arise out of the balancing act in which public agencies must engage as they seek to develop, approve and carry out projects in compliance with CEQA. Start CEQA review too early, and an agency risks having an incomplete project description that prevents the kind of detailed environmental review that is most meaningful to the public and agency decisionmakers. Take early actions that give shape and substance to a project prior to completing CEQA review, and a public agency faces the argument that subsequent completion of CEQA review is too late. McCloud and Save Tara should help agencies chart a middle course—one that facilitates meaningful CEQA review by embracing early project-related actions that define important facts about a project’s physical substance and scope, while expressly conditioning their finality on completion of CEQA review and the potential to make changes that avoid or reduce significant impacts.

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