National Housing Law Project Housing Law Bulletin

Federal Circuit Court of Appeals Rejects Section 8
Landlords' Claims for Higher Rents

The Federal Circuit Court of Appeals has recently rejected across the board a series of claims for higher rents brought by Section 8 project-based landlords in a long-running set of cases. National Leased Housing Association v. United States, 105 F.3d 1423 (Fed. Cir. 1997). The claims were not that the tenants should be paying more rent, but that the government should be paying a higher subsidy. The first case had been filed 10 years ago; the landlords lost in the trial court, the Court of Federal Claims, and now again in the Federal Circuit.

Background

The Federal Circuit Court's decision came in a proceeding in which four cases brought by 190 plaintiffs had been consolidated in the Court of Federal Claims. The plaintiffs were current or former owners of Section 8 New Construction, Substantial Rehabilitation and State Housing Agency projects and their association, the National Leased Housing Association. The claims brought by the plaintiffs related to the way HUD was calculating the maximum contract rents they were allowed to collect. Under the Section 8 statute, initial contract rents are set at the time of development and adjusted annually according to HUD's annual adjustment factors, with an overall cap on rents that assures that they are not materially higher than rents charged for unsubsidized units. The case centered on the way HUD applied that cap to rents that otherwise would have been higher if the annual adjustment factors alone had been used.

There had been a series of prior cases relating to HUD's application of the overall cap. In one, Ranier View Associates v. United States¹, the Ninth Circuit held that under the statute, once HUD adopted the Annual Adjustment Factor system, it could not switch to the overall cap to reduce rents below the level produced by the annual adjustment factors. Although that case never reached the Supreme Court, another one presenting the same issue, Cisneros v. Alpine Ridge Group,² did. The Supreme Court disagreed with the Ninth Circuit and held that HUD had the power, both under the statute and the contracts, to limit contract rents to levels below the annual adjustment factor rents in order to keep subsidized rents comparable to unsubsidized rents.

Because the Supreme Court had ruled against the landlords on the basic question of whether HUD could limit contract rents beneath the annual adjustment factor levels, the landlords shifted their challenge to the procedures used by HUD to set the limits. HUD determines the maximum contract rents for particular Section 8 projects by analyzing the rents in comparable projects in the same market. The landlords in National Leased Housing Association claimed that HUD's comparability studies were done in a shoddy manner and produced inaccurate results.

The landlords' first theory for attacking HUD's shoddy determinations was that their due process rights had been violated when HUD did these studies. The claim was not that they were entitled to be heard when particular studies were done but, rather, that the studies had to be governed by fixed, national standards and that there were no such standards for local officials to follow. The court, however, rejected that argument on the grounds that the plaintiffs had to challenge particular rent studies, not the guidelines for doing them.

Next, the landlords presented an argument that HUD had contracted to comply with all applicable regulations when administering these Section 8 contracts and that two sets of HUD regulations, its mini-Administrative Procedure Act and its Freedom of Information Act regulations, obliged it to use notice and comment rulemaking when doing comparability studies and to publish the results in the Federal Register. HUD had done neither. The Court, however, concluded that the contracts obliged the parties, including HUD, to abide only by the Section 8 program regulations, not other HUD regulations. Because the plaintiffs were suing in the Court of Federal Claims, they could not sue under the APA and FOIA directly, but only as incorporated into the contracts that they were enforcing.

The landlords' third claim was that HUD had no authority to use the comparability studies to reduce one year's contract rent below the contract rent that had been approved for the previous year. In essence, their argument was that the overall limit capped only the increases being made in any one year, not the rent to be charged that year. That argument, however, flew in the face of the Supreme Court's opinion in Alpine Ridge³ which included the observation that comparability studies could be used to reduce not only adjustments but even the rents themselves. The Federal Circuit Court of Appeals rejected the landlords' argument for that reason.

The final landlord argument related to the system for adjusting rents increases in which subsidized housing may be more expensive than unsubsidized housing. When HUD initially approved rents for these Section 8 projects, it sometimes allowed them to be have higher rents than the rents for comparable unsubsidized projects. That difference became known as the "initial difference" and continued to be allowed when calculating rent increases over time. Much to the owners' displeasure, however, HUD allowed the increased rents to exceed the rents for comparable units in the private market by only the absolute dollar amount of the initial difference, not by the same percentage that the initial rent exceeded that of the comparable units. The dollar amount of the initial difference is always less than the percentage that the difference represented multiplied by the new comparable rent levels. For example, if the initial contract rent was $500, $100 more than comparables at the time of initial approval, the initial difference in percentage terms would be 25 percent. Ten year later, if the comparables' rents had risen to $600, the landlords wanted to be allowed 25 percent of that (i.e., $150) as the initial difference, not the $100 that HUD was allowing.

The court again rejected the landlords' position. In its view, using the percentage instead of the absolute dollar difference was not consistent with the ordinary and common meaning of the contract's language. It was also considered inconsistent with the purpose of the initial difference allowance. Since most of the extra costs of Section 8 projects are of a capital nature and thus are fixed, they should remain fixed over time.

The court also had to address the question of whether the landlords who had contracted with State Housing Agencies (SHAs), instead of contracting directly with HUD, could bring a claim in the Court of Federal Claims at all. The court concluded that they could not. In its view, the SHAs were not agents of HUD, and thus the landlords could not claim to sue HUD for breach of a contract entered into by HUD's agents. The court similarly concluded that the landlords could not sue as third-party beneficiaries of the Annual Contributions Contracts between HUD and the SHAs because they were not third-party beneficiaries. If anyone was a third-party beneficiary, the court concluded, it was the tenants.

1. 848 F.2d 988 (9th Cir. 1988).
2. 508 U.S. 10 (1993).
3. 508 U.S. at 20, n.2.