PHA Not Liable for Breach of HAP Contract

Facts: A group of Section 8 owners sued the local PHA for breach of their housing assistance payment (HAP) contracts. Under these contracts, the tenants are required to pay a percentage of their income to the owners, the housing agencies pay the remaining rent, and HUD reimburses the housing agencies.

Section 8 provides that the HAP contracts will establish the maximum monthly rent that property owners are entitled to receive for each dwelling unit. In addition to setting standards for the initial rent for subsidized units, Section 8 also dictates how rents may be adjusted in order to reflect changes in fair market rental values over time. The statute provides that a HAP contract “shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units or, if the Secretary determines, on the basis of a reasonable formula” [42 U.S.C. § 1437f(c)(2)(A)]. But Congress also imposed an overall limit on any increases, providing that rent adjustments “shall not result in material differences between the rents charged for assisted units and unassisted units of similar quality, type, and age in the same market area, as determined by the Secretary” [42 U.S.C. § 1437f(c)(2)(C)].

Even with these measures in place, the automatic rent increase system sometimes pushed rents well above market rates for comparable unsubsidized housing units. When HUD tried to rein in the excess increases, lawsuits followed. In response to this litigation over HAP contracts, Congress amended Section 8, first in 1988 and again in 1994. As a result of the 1988 amendments, HUD or a public housing agency could deny an automatic annual rent adjustment at a Section 8 site by submitting a comparability study to the property owner at least 60 days before the adjustment was to take effect. Under the 1988 provision, HUD had the burden of producing a comparability study whenever it sought to withhold an automatic adjustment. The 1994 amendment shifted to the property owners the burden of demonstrating that adjusted rents would not exceed the market rent for comparable unassisted units.

As part of the Section 8 program, each year, HUD publishes “annual adjustment factors” for specific geographic areas that reflect changes in the Consumer Price Index for rents and utilities over the prior year. Before the 1994 amendments, HUD published a single table to apply to all housing stock. After the 1994 amendments, HUD began publishing two tables each year, one for “turnover units,” and one for “non-turnover units.” The turnover rates apply to units occupied by a new tenant since the last annual contract anniversary date. The non-turnover rates apply to units occupied by the same tenant at the last contract anniversary date. The tables presume that the costs to the owner are lower when the same tenant stays in the unit, and so the non-turnover rates are 1 percent (.01) lower than the turnover rates.

In this case, the owners argued that the local PHA breached its HAP contracts by requiring rent comparability studies or by applying a 1 percent reduction for non-turnover units when calculating rent adjustments because at the time each owner’s HAP contract was initially executed, the statute provided only that the adjustments reflect fair market rents in the housing area for similar types and sizes of dwelling units. The owners asserted that the later-implemented 1 percent reduction for non-turnover units wasn’t based on fair market rents. Rather, they characterized the reduction as arbitrary and in breach of the HAP contracts.

Ruling: A Seventh Circuit appeals court ruled in favor of the PHA.

Reasoning: The court pointed out that the owners didn’t take into account that, although a different version of the statute was in place at the time the HAP contracts were originally executed, all of the original contracts expired and were renewed before the time period for which the owners were now claiming damages. The 1994 amendments went into effect in 1995, and therefore each owner renewed its HAP contract after the 1994 amendments and before the first date for damages under the statute of limitations.

Because laws that exist at the time of contract signing enter into and form a part of it as fully as if they had been expressly referred to or incorporated in its terms, the 1994 amendments became part of each contract that was renewed after the 1994 amendments became effective. This means that the local PHA did nothing more than apply the law that was in effect when the HAP contracts were renewed. Because that law was incorporated into the contracts, the PHA’s implementation of the statute’s 1 percent reduction for non-turnover units could not breach any of the contracts.

Moreover, the PHA didn’t breach any HAP contracts by requiring rent comparability studies in certain circumstances or by applying a 1 percent reduction for non-turnover units. In each instance, the owners’ contracts were renewed after Congress amended Section 8 to include these provisions, and the provisions became part of the new contracts.

• Evergreen Square et al. v. Wisc. Housing and Development Authority, February 2017