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Save Tara Case Provides Guidance on Agreements for Development Contingent Upon Subsequent CEQA Review

In a decision relevant to redevelopment agencies and other public entities involved in the disposition of land for development, last week the California Supreme Court issued a ruling that addresses when public agencies are permitted to approve development and financing agreements that are contingent upon subsequent CEQA review.

In Save Tara v. City of West Hollywood , the court examined the issue of what constitutes sufficient agency commitment to a defined project such that CEQA review is necessary prior to execution of disposition, development and financing documents. The court concluded that the City of West Hollywood’s “conditional agreement to sell land for private development, coupled with financial support, public statements, and other actions by its officials committing the city to the development, was, for CEQA purposes, an approval of the project that was required… to have been preceded by preparation of an EIR.”

The court declined to adopt a bright line test for determining when prior CEQA review is mandated, but instead describes a standard for “commitment” and “defined project” that is fact-specific and will have to be applied on a case-by-case basis. However, the court did provide some guidance on the types of agreements that do not require prior CEQA review, and acknowledged that there are some circumstances under which “preliminary” agreements do not trigger CEQA review, noting that public agencies often negotiate “purchase option agreements, memoranda of understanding, exclusive negotiating agreements, or other arrangements with potential developers, especially for projects on public land, before deciding on the specifics of a project.” The court noted that “such preliminary or tentative agreements may be needed in order for the project proponent to gather financial resources for environmental and technical studies, to seek needed grants or permits from other government agencies, or to test interest among prospective commercial tenants,” and acknowledged that requiring public agencies to “engage in the often lengthy and expensive process of EIR preparation before reaching even preliminary agreements with developers could unnecessarily burden public and private planning.”

However, the court stated that “CEQA review was not intended to be only an afterthought to project approval” and emphasized that prior to completion of CEQA review for a proposed project, the agency must not take actions that would foreclose consideration of mitigation measures and alternative projects in order to address environmental impacts, noting that “a CEQA compliance condition can be a legitimate ingredient in a preliminary public-private agreement for exploration of a proposed project, but if the agreement, viewed in the light of all surrounding circumstances, commits the public agency as a practical matter to the project, the simple insertion of a CEQA compliance condition will not save the agreement from being considered an approval requiring prior environmental review.”

The balancing test formulated by the court in Save Tara is a middle ground between the bright-line tests sought by the parties. The court characterized the approach as “practical” acknowledging the cost and time of CEQA compliance. The court ruled that CEQA review should occur after there is enough information about a proposed project to allow meaningful evaluation of environmental impacts, but early enough to serve CEQA’s intended function of informing decision makers. Importantly, the court said the test was a legal question for the courts to independently review, without the deference to the agency’s conclusions allowed under the substantial evidence test.

Under the court’s balancing test, a CEQA compliance contingency may be permissible if the agreement itself and the circumstances surrounding its approval, do not as a practical matter, foreclose meaningful alternatives to going forward with the proposed project. In applying this test to the West Hollywood agreement, the court found that the agreement and surrounding circumstances triggered CEQA review, and therefore, the City’s action approving the agreement in advance of CEQA review violated the law. Factors the court identified included: City public statements that it would proceed with the project; City actions in preparing tenants for relocation; the City’s substantial financial contribution to the project; and agreement terms binding the City to convey property to the developer if CEQA requirements were satisfied “as determined by the City Manager.” The court found that these factors demonstrated that the agreement committed the City to a definite course of action regarding the project before fully evaluating its environmental effects.

Since the court articulated a fact-specific, rather than bright line rule which the courts independently apply, agreements that are executed in advance of CEQA review are potentially subject to challenge. The court ruled that preliminary agreements that do not articulate project details and that do not bind the agency to approval of a specific project (e.g. purchase option agreements, MOUs, and exclusive negotiating agreements) are necessary to obtain financial resources and test interest in proposed projects before public agencies and private developers commit to move forward; therefore, they should not be burdened with the time and cost of prior CEQA review. On the other hand, CEQA review will be required prior to approval of agreements that address the development of projects that have a defined and specific scope.

Based on the Save Tara decision, we recommend that agreements proposed for approval prior to completion of CEQA review should be formulated to avoid public agency commitments that foreclose meaningful consideration of project alternatives, including the option not to proceed. It also will be very important to avoid creating a record that demonstrates agency commitment to a proposed project prior to CEQA review. Overall, the use of future CEQA compliance conditions in development agreements must be carefully evaluated in light of the facts surrounding the proposed project, the degree to which the scope of the project has been defined, and the degree to which the agreement will bind the agency to a particular course of action.