PHA Not Required to Submit Rent Comparability Study

Facts: An owner leased a rental housing facility for elderly residents to a local public housing authority (PHA). The PHA in turn entered into a housing assistance payment (HAP) contract with HUD to provide low-income housing under an amendment enacted in 1974 to the Housing Act of 1937. HAP contracts establish an agreed “maximum monthly rent” the property owners will charge residents, as supplemented by HUD's assistance payments to the owners. Under the Housing Act, the maximum monthly rent was to be based upon the “fair market rental” value of the dwelling unit plus an upward adjustment, determined by the application of that year's “automatic annual adjustment factor” (AAAF), to compensate for the expenses of complying with the Section 8 program. The PHA and the owner sued the government for breach of this contract.

HUD was required by law to adjust the maximum monthly rents on at least an annual basis. Such adjustments, however, were subject to an overall limitation, which dictated that “adjustments in the maximum rents … shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Secretary.”

Beginning in the 1980s, HUD began conducting “comparability studies” to enforce the overall limitation in markets in which it believed automatic annual adjustments were generating rent levels that were materially higher than those for comparable, unassisted units. After owners successfully contested HUD's action in court, Congress made amendments to the law to allow for new procedures for calculating rent adjustments. In relevant part, the 1989 Amendments required HUD to formulate “regulations for conducting comparability studies for projects where the Secretary has reason to believe that the application of the formula adjustments … would result in … material differences” and to establish modified AAAFs on that basis.

In 1994, Congress once more revised the statutory framework and shifted to owners the burden of proving that the adjusted rent for their units would not exceed the rent for a comparable, unassisted unit. HUD thereafter issued guidance on the 1994 Amendments in a notice that said if current project rents on a contract are above the published fair market rent for the area, then in order to receive a rent increase, the owner must submit a rent comparability study at least 60 days prior to the HAP contract anniversary date.

The PHA claimed that HUD breached the HAP contract when it failed to grant annual rent adjustments to the PHA as required by the terms of the contract. HUD argued that the contract at issue required the PHA to request annual rent increases, and the PHA consequently lacked any “entitlement” to adjustments under the contract. Alternatively, HUD asserted that even if the HAP contract was breached, the PHA's failure to request a rent adjustment for the years 2001 through 2003 prevents it from recovering damages for those years.

Ruling: A U.S. Court of Federal Claims ruled in favor of the PHA.

Reasoning: The government breached the contract with the PHA since the government enacted and implemented legislation requiring the PHA to provide rent comparability studies with its requests for annual rent adjustments for its low-income housing that were not contractually required. The owner and the PHA continued to meet all of their substantive obligations under the contract, providing safe, clean, and affordable housing to low-income residents. And HUD's refusals to grant rent adjustments in 1996, 1997, and 1998 after they had made rent adjustment requests support the fact that HUD's refusals led the PHA to stop asking for adjustments because of futility. Therefore, the breach of contract includes the years for which no request was made.

• Haddon Hous. Assocs., LLC v. United States, June 2011