Government agencies that appear to commit themselves to a project through a conditional agreement and funding must first complete a California Environmental Quality Act analysis, even if the actual project approval comes later, the state Supreme Court has ruled. The circumstances surrounding the agreement matters as much as the agreement itself, the court determined.

In the case Save Tara v. City of West Hollywood, the court ruled unanimously that the city violated the California Environmental Quality Act (CEQA) by not preparing an environmental review for an affordable housing development prior to approving a conditional agreement to provide property and funding to a nonprofit housing developer. Although the agreement promised future environmental review, the court determined the city's agreement "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 decision may have major implications for redevelopment projects, new affordable housing, public-private partnerships and any other real estate project involving public participation. Public agencies might have to engage in environmental review earlier in the process or face additional litigation, even if an agreement is conditioned on subsequent environmental review.

The question for the court was this: When is CEQA triggered during a development process involving a conditional agreement? The court declined to provide a definitive answer, instead offering this guidance: "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 light of all the surrounding circumstances, commits the pubic 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."

Michael Jenkins, West Hollywood city attorney, called the ruling a setback for all cities and proponents of affordable housing projects requiring public assistance. The standard adopted by the court is "completely vague" and leaves city officials wondering what they did wrong, he said.

"We didn't have a commitment, we had a conditional agreement," Jenkins said. "A commitment is a commitment, and if it's not a commitment, it's not a commitment."

Attorney James Arnone, who represents developer West Hollywood Community Housing Corporation, wrote that the decision is "significant because it dramatically expands what courts will consider in determining whether an agency has triggered CEQA. … Courts did not previously rely on statements made by city officials to determine whether staff enthusiasm was tantamount to project approval."

In this case, though, the court cited public statements by the mayor and the city housing manager, as well as a city loan and the commencement of tenant relocation from the property in question as evidence the city "committed itself to a definite course of action."

Michael Zischke, of Cox, Castle & Nicholson in San Francisco, said the decision "will have fairly broad application" for real estate acquisition matters.

"I think it is going to make life more complicated for redevelopment projects and affordable housing projects because they often need some sort of preliminary agreement for the financing or for selecting the developer," said Zischke, co-author of Practice Under the California Environmental Quality Act.

But attorney Doug Carstens, who helped represent the Save Tara plaintiffs, described the ruling as "a cautionary note" for agencies that "live on the edge."

"They will have to get more cautious in timing environmental review. I think that will be a good thing," Carstens said. "If there's doubt, you should go ahead and do the review."

Attorney James Pannone, who provided an amicus brief on behalf of the League of California Cities, said the decision did not mark a major change in CEQA law and would impact primarily "those entities that aren't careful." Pannone was pleased the court cited his brief in concluding that "purchase option agreements, memoranda of understanding, exclusive negotiating agreements or other arrangements with potential developers, especially for projects on public land" are not automatically subject to CEQA. Justice Kathryn Werdegar wrote for the court, "CEQA review was not intended to be only an afterthought to project approval, but neither was it intended to place unneeded obstacles in the path of project formulation and development."

The case involves Laurel Place, a colonial-style mansion built about 85 years ago and divided into four apartments during the 1940s. The previous owner donated it to the city. In June 2003, the city signed an option agreement with West Hollywood Community Housing Corporation and WASET, Inc., that permitted the developers to apply for Department of Housing and Community Development (HUD) funding. Later that year, HUD awarded the developers $4.2 million to help pay for 30 to 35 units of very low-income senior housing through rehabilitation of Laurel Place and construction of a U-shaped apartment building around the mansion.

In May 2004, the city and developers signed a "conditional agreement for conveyance and development of property." A group of Laurel Place residents and project opponents called Save Tara (so named because Laurel Place slightly resembles the mansion in "Gone with the Wind") filed a lawsuit. Opponents argued the city violated CEQA by not conducting an EIR before signing the agreement. In August 2004, the city amended the agreement, partly to make clear that the city would not avoid CEQA review.
Los Angeles County Superior Court Judge Ernest Hiroshige ruled against opponents because the city had not given final approval for the housing project. In a 2-1 decision, the Second District Court of Appeal ruled the city had violated CEQA (see CP&DR Legal Digest, April 2007). The court determined the May 2004 agreement "presents a project for which the planning in practical fact is complete. … It is not a ‘land acquisition agreement,' as [the] city contends." The city should have commenced the EIR process once HUD approved the $4.2 million grant, the court ruled.

The state Supreme Court then agreed to decide whether the agreement between West Hollywood and the developers constituted project approval under CEQA. While the appellate court based its decision largely on the extent of project details contained in the HUD grant application and the conditional agreement, those details appeared to matter little to the state Supreme Court. Instead, the high court examined the agreement and surrounding circumstance.

In the May 3 agreement, the city offered to provide the property and a $1 million development loan if certain conditions were met, including compliance with CEQA. However, the city manager could waive the conditions, and $475,000 of the loan (to fund an EIR and other permit fees) would be lost if the project were not completed. The August 9 agreement eliminated the city manager's ability to waive the CEQA condition. The court also found noteworthy an email from the mayor to residents in December 2003 announcing the HUD grant and describing the project; a city newsletter that said the city and the developers "will redevelop the property" with low-income senior housing and a pocket park; statements by the city's housing manager that the city had rejected alternative uses of the property and was committed to the housing project "as long as the developer delivers;" and a city relocation consultant's contact of Laurel Place tenants. Adding up all of these factors, the court decided the city had essentially approved the project.

"A public entity that, in theory, retains legal discretion to reject a proposed project may, by executing a detailed and definite agreement with the private developer and by lending its political and financial assistance to the project, has as a practical matter committed itself to the project," Werdegar wrote. "When an agency has not only expressed its inclination to favor a project, but has increased the political stakes by publicly defending it over objections, putting its official weight behind it, devoting substantial public resources to it, and announcing a detailed agreement to go forward with the project, the agency will not be easily deterred from taking whatever steps remain toward the project's final approval."

The court specifically declined to provide a bright line test to determine when CEQA is triggered. Instead, Werdegar wrote, "[C]ourts should look not only to the terms of the agreement but to the surrounding circumstances to determine whether, as a practical matter, the agency has committed itself to the project as a whole or to any particular features, so as to effectively preclude any alternatives or mitigation measures that CEQA would otherwise require to be considered, including the alternative of not going forward with the project."

However, Jenkins, the city attorney, argued that other facts prove the city did not commit itself in 2004. In October 2006, the city certified an EIR that listed the potential effect on the historic mansion as the only significant impact. As mitigation, the city required restoration of Laurel Place to Department of Interior standards. The City Council divided 3-2 on project approval – and only after downsizing the development to 28 units, ordering a reconfiguring of the project and ensuring a chauffeur's quarters were preserved, Jenkins noted.

"That's what is supposed to happen after you do an EIR. It was not a fait accompli by any means," Jenkins said. "The City Council could have rejected the project."

The city argued that the 2006 EIR made the Save Tara lawsuit moot, but the court rejected that argument. Instead, the court ordered the city set aside the project approval, and reconsider the 2006 EIR to ensure the discussion of alternatives was not limited by the 2004 conditional agreement and to determine if circumstances have changed.

Jenkins said the conditional agreement with the housing developer was "very typical" of those used by redevelopment agencies when a developer needs assurance that the agency will provide land for a proposed project. Also typical was the city's agreement to advance money for studies, he said.

"I'm not sure how [other cities] decide how not to make the mistake that West Hollywood apparently made. There is no bright line," Jenkins said. "As long as there is no clarity, it invites people to sue, so more of these projects get delayed by litigation."

But Carstens, one of Save Tara's lawyers, said the decision "would not cause more litigation if [cities] would proceed with environmental review."

The court also decided to review the matter independently, instead of considering whether substantial evidence supported the city's actions. In a footnote, the court disapproved previous instances in which courts may not have provided independent review of a CEQA procedural question. Carstens said this standard of review is favorable to plaintiffs. Other attorneys were divided on whether the court's independent review marked a legal departure.

The Case:
Save Tara v. City of West Hollywood, No. S151402, 08 C.D.O.S. 13695, 2008 DJDAR 16389. Filed October 30, 2008.
The Lawyers:
For Save Tara: Jan Chatten-Brown, Chatten-Brown & Carstens, (310) 314-8040.
For the city: Michael Jenkins, Jenkins & Hogin, (310) 643-8448.
For West Hollywood Community Housing Corporation: James Arnone, Latham & Watkins, (213) 485-1234.