The California Supreme Court issued the highly anticipated CEQA decision: Berkeley Hillside Preservation v. City of Berkeley. The case addresses whether the "unusual circumstances" exception to CEQA's categorical exemptions is subject to either "fair argument" or "substantial evidence" review when evaluating if unusual circumstances exist for a real estate development project and whether those circumstances could cause one or more significant environmental impacts. The Court ruled that whether unusual circumstances exist was subject to the more deferential substantial evidence test. Accordingly, a lead agency's determination that a project does not present any unusual circumstances will be upheld in the courts as long as there is evidence to support that decision, notwithstanding conflicting evidence submitted by project opponents. Significantly, however, if a lead agency determines that unusual circumstances are, in fact, present, whether those circumstances will cause a significant environmental effect is determined under the less-deferential "fair argument" standard, making it easier for project opponents to challenge the project.

Background and Lower Court Opinions

Berkeley Hillside involved a discretionary permit to construct a single-family home in the Berkeley Hills community. The proposed home consisted of a 6,500 square-foot residence with a 3,400 square foot garage, for total structures totaling over 9,800 square feet. The City of Berkeley determined the project was categorically exempt under the Class 1 and Class 32 exemptions in CEQA Guidelines, sections 15303, subdivision (a) and 15332 .

A group calling itself "Berkeley Hillside Preservation" ("BHP") brought an action against the City and the developer, claiming the proposed home fit within the "unusual circumstances" exception to the exemptions, thus removing the project from the exemption and effectively re-triggering the need for traditional CEQA review – i.e., a negative declaration, mitigated negative declaration, or full EIR. In support of its argument, BHP claimed the proposed home was significantly larger and required substantially more grading (due to seismic risk) than the typical homes in the community, of which only around 1 percent were larger than 6,000 square feet. BHP also submitted evidence from a geotechnical engineer who claimed the project could not be built as planned without additional construction, resulting in significant environmental impacts.

The City countered BHP's argument by pointing to contrary evidence in the record, including the report of BHP's geotechnical engineer. The trial court determined that BHP had made a "fair argument" that the project would have one or more adverse impacts, but nevertheless concluded that the proposed construction did not trigger the unusual circumstances exception because the possible impacts were not due to the unusual circumstances.

The Court of Appeal reversed the trial court's decision. First, the Court of Appeal determined that "the fact that [the] proposed activity may have an effect on the environment is itself an unusual circumstance," precluding the City's reliance on CEQA's exemptions. The Court of Appeal then asked whether there was a reasonable possibility those circumstances may have one or more significant environmental impacts, holding that the "fair argument" standard, not the "substantial evidence" standard, applied to this inquiry. Thus, because BHP submitted sufficient evidence to the City to show a fair argument that the unusual circumstances created a risk of one or more significant environmental impacts, the project was no longer exempt under CEQA. In doing so, the Court of Appeal "split" with other Courts of Appeal, and joined those Courts which determined that the "fair argument" test applied when evaluating whether there was a reasonable possibility of adverse environmental effects. (See Banker's Hill, Hillcrest, Park West Community Preservation Group v. City of San Diego (2006) 139 Cal.App.4th 249, 546 (Fourth District) [discussing the split].) 

The Supreme Court's Decision: A New Two-Part Test

In Berkeley Hillside, the California Supreme Court resolved the split by holding that the unusual circumstances exception – specifically whether there was a reasonable possibility of adverse environmental impacts – is subject to the substantial evidence test. As a threshold issue, the Court determined the Court of Appeal erred in finding the presence of a possible environmental effect was "itself" an unusual circumstance. The Court reasoned that this violated the well-settled rule that statutes are construed to avoid surplus language. Thus, it is not enough to claim the project – as a whole – will have a substantial effect on the environment. Rather, a project opponent must show that the specific unusual circumstances themselves will potentially cause that substantial effect.

From here, the Court determined whether, in evaluating whether a project presents unusual circumstances, the project should be reviewed in the courts under the substantial evidence or far-less-deferential "fair argument" standard. On this point, the Court determined "it would be inappropriate for an agency to apply the fair argument standard to determine whether unusual circumstances exist. That standard is intended to guide the determination of whether a project has a potentially significant effect, not whether it presents unusual circumstances." Accordingly, if a lead agency determines a project does not present unusual circumstances, that determination will be upheld if it is supported by substantial evidence, notwithstanding contrary evidence.
Critically, however, once a lead agency determines that a project does, in fact, present unusual circumstances, the fair argument standard determines whether those circumstances present a "reasonable possibility" of a substantial environmental impact. As a result, a determination that a project presents unusual circumstances diminishes the deference to lead agencies. Then the question becomes whether there is a fair argument that the unusual circumstances will cause a significant environmental impact.

In the end, the Supreme Court remanded the case to the lower courts, finding the Court of Appeal and the trial court had not applied the Court's two-step analysis. Notably, in a concurring opinion, two justices disagreed with the Court's two-step approach to the unusual circumstances exception, preferring a simpler test that applied the "fair argument" standard to both whether unusual circumstances exist, and whether there is a reasonable possibility those circumstances would cause a significant environmental impact. 

How to Proceed Post Berkeley Hillside

In addition to resolving a long-standing dispute, the Berkeley Hillside case is significant and provides important guidance for California developers. First, the decision provides (or in some jurisdictions, returns) considerable deference to lead agencies in evaluating whether a project presents "unusual circumstances," thus triggering a need for further CEQA review for an otherwise exempt project. Because the "fair argument" standard is deferential to project opponents, a finding that the fair argument standard applied when evaluating the existence of unusual circumstances could have served to eliminate the primary effect of the categorical exemptions, which relieves certain classes of qualifying projects from traditional CEQA review because such projects normally do not have a significant effect on the environment.

Second, once an agency determines there are, in fact, unusual circumstances, it will be much easier for the project opponents to challenge the project to require more comprehensive CEQA review. In this regard, the Supreme Court's decision can be viewed as "frontloading" the unusual circumstances issue, making it critical for project applicants to persuade a lead agency that a project does not present any unusual circumstances. Prevailing on that question should insulate project approvals, as long as there is some substantial evidence to support it. If, on the other hand, the lead agency determines that the project does present unusual circumstances, and if there are known or expected project opponents, it will is imperative for project applicants to seriously consider asking the agency to prepare a negative declaration, mitigated negative declaration, or EIR. Otherwise, project opponents need only show a fair argument that the project's unusual circumstances will cause a significant environmental impact.