Appeals Court Decision Extends Government's Liability to Section 8 Owners

On March 22, the U.S. Court of Appeals for the Federal Circuit ruled in case filed by a housing authority against the United States, alleging that the government breached a low-income housing assistance payments contract by requiring the authority to submit rent comparability studies to receive annual rent adjustments [Haddon Housing Assocs. v. U.S.]. This decision represents the first U.S. appeals court decision on whether a 1994 statutory provision was a breach of an original Section 8 HAP contract.

                In the case, the housing authority had entered into a 30-year HAP contract with HUD in 1980. And the contract provided that “[u]pon request from the owner to the CA [Contract Administrator], Contract Rents will be adjusted on the anniversary date of the Contract in accordance with 24 CFR 888 and this Contract.” However, in 1994, Congress revised the Housing Act and shifted the burden to building owners to prove that the adjusted rents do not exceed rents of comparable unassisted units. The statute requires an owner of a Section 8 project, where the rent exceeds the HUD-published Fair Market Rent, to show that the project’s annual rent adjustment would not result in a new contract rent that exceeded the market rent for comparable unassisted units in the area. The statute also reduced the adjustment factor by .01 for each unit that didn’t turn over during the previous year.

                In response to the 1994 Amendments, HUD issued Notice 95-12, which provides that a building owner must submit a rent comparability study at least 60 days before the HAP contract anniversary date if the adjusted rent should exceed the published fair market rent for the area.

                In the case at hand, HUD provided rent adjustments to the owner from 1982 to 1987, but no adjustments for 1988 and 1989. From 1990 through 1995, HUD granted all of the owner’s requests for rent adjustments. HUD, however, denied the owner’s requests for rent adjustments from 1996 through 1998, for failure to include an attendant rent comparability study in compliance with recently issued Notice 95-12. The owner didn’t submit requests for rent adjustments or conduct rent comparability studies from 1999 to 2001 and in 2003. In 2002, the owner conducted a rent comparability study, but decided not to submit a request for a rent adjustment based upon its belief that the request might result in a downward adjustment of contract rents. The owner again submitted requests for rent adjustments from 2004 through 2006, all of which HUD denied for lack of an accompanying comparability study. From 2007 through 2010, the owner accompanied its rent adjustment requests with rent comparability studies, and HUD accordingly granted the adjustments. Despite the parties’ disagreement regarding rent adjustments, they continued complying with all other duties and obligations under the contract: HUD continued paying subsidies to the owner, while the owner maintained and provided housing to its elderly residents.

                The U.S. Court of Appeals eventually ruled that requiring the comparability studies, which were not required by the contract, was clearly a breach of the contract. However, in this case, the HAP contract required the owner to request an annual rent adjustment and so, if an owner did not do so, under the Federal Circuit’s decision, the owner wouldn’t be entitled to damages. Here, without a showing that HUD took some action that prevented or hindered the owner’s ability to submit its requests, the prevention doctrine doesn’t apply to excuse the owner’s failure to submit rent requests in 2001 and 2003. Those owners that still have original HAP contracts in effect with this requirement should protect their claims by filing requests for rent adjustments, even though HUD will deny those requests.