HUD Prevented from Abating Section 8 HAP Contract

Facts: A resident association of a Section 8 site asked a court to set aside HUD’s decision to abate the site’s Housing Assistance Payments (HAP) contract. When HUD abates and terminates a project-based Section 8 contract, residents living at the property are given the opportunity to apply for a tenant protection voucher. Once a tenant who’s affected by abatement receives a voucher, he receives relocation benefits from HUD in the form of assistance from a relocation contractor who helps find a new unit that accepts vouchers, provides assistance in coordinating relocation benefits, assists the tenant with application problems, arranges for transportation to potential units, and assists in negotiation with landlords and rental applications. The tenant also receives financial relocation benefits to compensate for transportation costs and expenses, application fees, security deposits, moving expenses, and utility deposits or transfer fees. However, not everyone qualifies for vouchers. Further, landlords are not required to accept vouchers.

In early 2013, over the objection of the city and the residents association’s counsel, HUD allowed the purchase and transfer of the site and a portfolio of nine other multifamily properties from a local owner to New York-based company. At the time, the city’s Director of Community Development wrote to HUD and warned about potential disadvantages of allowing the site to be transferred to an out-of-state entity with no intention of investing in the local neighborhoods and no plans for capital improvements or rehabilitation. Despite this, HUD allowed the Section 8 HAP contract to be assigned to the New York company.

The HAP contract provides that “[i]f the Government notifies the Owner that he has failed to maintain a dwelling unit in Decent, Safe, and Sanitary condition and the Owner fails to take corrective action within the time prescribed in the notice, the Government may exercise any of its rights or remedies under the Contract, including abatement of the housing assistance payments, even if the Family continues to occupy the unit.”

In April 2015, HUD’s REAC inspected the site and found a myriad of deficiencies, including tripping hazards, cracks and gaps in the walls, exposed electrical wires, inoperable auxiliary lighting, damaged hardware on locks and doors, and roach and insect infestation. The inspection also identified health and safety deficiencies that required immediate attention and repair. In June 2015, HUD issued a notice of default of the HAP contract to the new owner.

In December 2015, HUD’s REAC performed a second inspection to confirm that the owner had made the necessary repairs. The inspection resulted in a score of 21 out of 100 and identified over 80 exigent health and safety deficiencies, including water leaks near electrical equipment, inoperable smoke detectors, exposed wires, and missing and damaged fire extinguishers. HUD then notified the owner that all funds allocated to the site from HUD were to be used for the operations and repairs at the site until the default was remedied.

HUD claimed it was then “prepared to commence enforcement action, including the potential abatement and termination of the HAP contract,” but didn’t take any formal enforcement action because the city filed a nuisance lawsuit. For the nuisance lawsuit against the owner, the city and the residents association asked the state court for the appointment of a receiver for the site due to the ongoing failure of the owner to make repairs following the filing of the state court lawsuit. In December 2015, the lenders filed their own motion for the appointment of a receiver. And in February 2016, the state court granted these motions and appointed a receiver for the site.

The parties disagreed as to the success of the receivership. The resident association claimed that the lenders adequately funded the receivership and that nearly $750,000 had been used at the site for repairs and capital improvements, including the roof, elevators, and electrical system. HUD saw it differently. In March 2017, HUD staff visited the site, observed fire and electrical damage, and determined that the receiver hadn’t made sufficient progress in remedying the default of the HAP contract.

In June 2017, HUD completed a REAC inspection that resulted in another failing score. HUD asserted that the inspector identified “numerous health and safety deficiencies” and confirmed that the property wasn’t “decent, safe, or sanitary.”

HUD didn’t consult the residents regarding the June 2017 inspection, nor did it provide notice or a copy of the inspection to them. In July 2017, HUD informed the residents’ counsel that it had begun “abating the Housing Assistance Payments (HAP) contract of the Project due to the defaults of the owner.” Another inspection was done in September 2017, and HUD claimed it found significant life-threatening exigent health and safety deficiencies.

Ruling: An Ohio district court prevented HUD from abating the HAP contract and ordered HUD to make rental subsidy payments to the receiver while state court litigation is pending.

Reasoning: Section 223 of the 2017 Consolidated Appropriations Act provides HUD with enforcement authority in the event a site with a Section 8 contract fails inspection and the owner fails to correct the deficiencies. It states, “The Secretary shall also take appropriate steps to ensure that project-based contracts remain in effect, subject to the exercise of contractual abatement remedies to assist relocation of tenants for major threats to health and safety after written notice to the affected tenants.”

Accordingly, abatement shall be used only: (1) in the event of major threats to health and safety; and (2) after consultation with the tenants and the local government. Here, the court found that there were no major threats to health and safety. The evidence showed that all exigent health and safety items identified by HUD in the two most recent REAC inspections (June 2017 and September 2017) had been remedied. Also, there was evidence that none of the tenants were consulted about HUD’s decision to abate the HAP contract.

Furthermore, the court found that allowing HUD to abate the HAP contract while the state court case is ongoing would be detrimental to the public interest. Specifically, it would be detrimental to the city’s well-documented objective of using the site as affordable housing for its low-income citizens. The city has devoted time and resources attempting to ensure that the site remains affordable low-income housing, including advocating against the initial transfer to the New York-based company and prosecuting the state court litigation. The court saw that allowing HUD to abate the HAP contract at this juncture would render the city’s efforts useless, increase the number of citizens who require low-income housing while decreasing the supply of low-income housing, and result in a vacant structure that will contribute to blight.

• Alms Residents Associations v. HUD, October 2017