Investors and developers of commercial real estate projects requiring federal wetlands permits are in uncertain times. Parties seeking to fill certain wetlands must obtain a permit under the Clean Water Act, and the Supreme Court is currently deliberating a case expected to further redefine the scope of wetlands subject to federal permitting requirements. After nearly a decade of changes in the scope of wetland permitting, another significant change appears to be right around the corner. As we await the Court’s decision, developers and investors should consider short- and long-term implications that will arise from the changes to federal jurisdiction over wetlands that are likely forthcoming.
The Only Thing Constant has been Change
The longstanding debate regarding the scope of federal wetlands jurisdiction appears to be coming to a head. The scope of Clean Water Act jurisdiction has fluctuated considerably over the last decade as competing regulations were promulgated and litigated under the Obama and Trump Administrations. Now, the Supreme Court has recently heard oral arguments in a case[1] where landowners are seeking to dramatically reduce the area of wetlands subject to federal Clean Water Act permitting requirements.
The recent history of the shifting jurisdictional reach of the Clean Water Act begins with the Supreme Court’s 2006 decision Rapanos v. United States.[2] In that case, the Court did not reach a majority opinion, but Justice Kennedy’s opinion establishing the “significant nexus test” is generally considered to be controlling. Under the significant nexus test, wetlands situated near natural or man-made watercourses with at least occasional flow that ultimately discharge into a navigable water would be jurisdictional if, based on consideration of many scientific factors, the wetlands “significantly affect the chemical, physical, and biological integrity” of the navigable water.[3] While subsequent guidance issued by the Corps and EPA clarified this analysis needed to be performed only in limited circumstances, the application of the test was expanded under the Obama Administration.
The significant nexus test has been criticized for the burden it places on prospective permittees as well as its inherent uncertainty. Wetlands that appear isolated may be indirectly connected to jurisdictional waters via man-made conveyances (e.g., ditches) and/or small streams, and determining the extent of these connections and the effects of pollutants conveyed through them is often very resource intensive (as many developers are well aware). Further, the ambiguities embedded in the standard’s language (for example, at what point an effect would be considered “significant”) can lead to inconsistent results depending on who is reviewing an application, further heightening cost and timing uncertainties associated with the permitting process.
The above criticisms of the significant nexus test drove the Trump administration to repeal the Obama wetlands rule in 2019 and replace it with the Navigable Waters Protection Rule (the “NWPR”). The NWPR in many respects aimed to simplify and limit the jurisdictional reach of the Clean Water Act. Under the NWPR, wetlands abutting man-made conveyances that ultimately discharge into a navigable water would likely not be subject to federal permitting, nor would wetlands situated nearby but not directly abutting a navigable water. Thus, some wetlands requiring a Clean Water Act permit under the Obama wetlands rule were no longer subject to regulation.
The NWPR would prove to be short-lived. In August 2021, an Arizona federal court vacated the NWPR nationwide,[4] causing the Corps to revert to processing applications under the broader significant nexus framework. This abrupt shift significantly impacted projects that had pending permit applications because the Corps determined it would not make permitting decisions based on jurisdictional determinations under the NWPR. Therefore, entities who had obtained approved jurisdictional determinations under the narrower scope of the NWPR, but did not yet have a final permit, were forced to return to the drawing board, determine the scope of jurisdictional wetlands under the significant nexus framework, and essentially restart the permitting process.
The Supreme Court is currently reconsidering the significant nexus test in Sackett v. Environmental Protection Agency, which may result in yet another change in the jurisdictional reach of the Clean Water Act.[5] The landowners are arguing that federal jurisdiction should only cover wetlands with a continuous surface water connection to a relatively permanent, navigable waterbody. Under this approach, the presence of a berm, road, dune, or other feature between the wetland and the waterbody would defeat jurisdiction. At oral arguments on October 3rd, a majority of the Justices seemed disinclined to endorse the full thrust of the landowners’ approach, which would likely restrict federal wetlands jurisdiction even more than the NWPR. Nearly all of the Justices, however, acknowledged the practical difficulties associated with applying the significant nexus test, and many emphasized the importance of a test that a reasonable person can apply without overly technical analyses. The Court will issue a decision by the end of the term in mid-summer of 2023, if not earlier.
Implications for Commercial Real Estate Professionals
Investors and developers should take care to monitor the Court’s decision in Sackett, as it will likely have wide-reaching implications for existing and future deals. For example:
- A majority of the Court appeared inclined to set forth a clearer standard that would be simpler and less burdensome in determining whether a property contains jurisdictional wetlands.
- The Court’s new approach may result in less wetlands being subject to Clean Water Act regulation, which could decrease development costs associated with wetland permitting and mitigation.
- Many projects are likely to have wetlands permit applications pending at the time the Court issues its decision. For these projects, if the Court’s opinion results in less wetlands subject to permitting, permit applicants should conduct a cost-benefit analysis to determine whether the benefits of potentially reduced mitigation costs, due to less wetlands being subject to permitting, outweigh the associated transactional costs and time delays of restarting the wetland delineation process.
- Even if the Court establishes a simpler jurisdictional test, any such test will likely be fleshed out by federal agencies via rulemaking and issuance of guidance documents. If the past is any indication of the future, these agency actions will be challenged by various stakeholders. Monitoring these future activities should be a priority for commercial real estate professionals and their counsel in understanding the reach of wetlands permitting.
Conclusion
At this time, wetlands permit applicants are in uncharted waters. After significant changes in the reach of wetland permitting requirements over the last decade, another significant change is potentially on the horizon with the Supreme Court’s impending Sackett decision. Investors and developers considering projects that involve potential impacts to waters and wetlands must fully understand the implications of the upcoming court decision and associated agency rulemaking and guidance, and how these actions affect their anticipated project and options.
