Owner Can’t Sue HUD for Cancellation of Rent Subsidies

Facts: An owner financed the construction of an apartment building in 1968 with a mortgage insured under the National Housing Act. In 1992, the owner and the United States, acting through HUD, entered into a Housing Assistance Payment (HAP) contract. Under the contract, in exchange for rent subsidies and other benefits, the owner agreed to maintain its property in a decent, safe, and sanitary manner. The original HAP contract expired in 1997, but it was periodically renewed.

In 2000, the owner sought to prepay its mortgage. It had to enter into a “use agreement” with HUD under which the owner was allowed to prepay its HUD-insured mortgage in exchange for its promise to maintain the property as low-income housing until June 1, 2009.

In October 2004, the owner entered into a HAP renewal contract. This contract listed the Oklahoma Housing Finance Agency (OHFA) as the contract administrator and was signed by OHFA's executive director and one of the owner's partners. HUD was neither a named party nor a signatory on the renewal contract.

The following month, HUD's Real Estate Assessment Center (REAC) inspected the owner's units and gave the physical condition of the property a failing score. The owner corrected the deficiencies. But in February 2006, HUD sent the owner a certified letter stating that because it had been unable to re-inspect the site due to unforeseen circumstances, it was closing its review of the site's November 2004 REAC physical inspection score.

In August 2006, REAC inspected the units again and gave the site a failing score. The owner corrected the deficiencies and subsequently requested an adjustment of the REAC score. In October and again in November of that year, the owner called HUD to check the status of its appeal, but was unable to obtain any information. A week after these calls, HUD informed the owner that the appeal would not be considered because it was untimely.

In March 2007, HUD asked the owner for a letter stating its intent to comply with the inspection requirements; HUD later assured the owner that it would grant it another REAC inspection. No further REAC inspections occurred. And on June 20, 2007, HUD informed the owner that it was terminating its Section 8 HAP payments to the owner because of its August 2006 REAC failing score. The owner sued the United States to stop HUD from abating the HAP payments.

Ruling: The U.S. Court of Federal Claims dismissed the owner's claim against the U.S., but allowed the owner to amend its lawsuit to be able to sue HUD on another legal theory.

Reasoning: Individuals are not allowed to sue the government under the doctrine of sovereign immunity, unless the United States consents to it. Under the Tucker Act, the United States has consented to be sued only by those with whom it has “privity of contract.” Privity of contract means that a contract cannot impose obligations arising under it on any person or agent except the parties to it. In other words, only parties to contracts should be able to sue to enforce their rights or claim damages as such.

Here, the court ruled that HUD was not a party to the 2004 HAP renewal contract. Nothing in the contract hinted that OFHA signed the contract with the owner as HUD's agent. With regard to the use agreement signed with HUD in 2000, the court decided that the owner was wrong in suggesting that this agreement incorporated all the terms of the pending and future HAP contracts. In particular, the use agreement, unlike the HAP contracts, makes no assurances that rent subsidies will be provided if the owner maintains the site in safe and habitable condition.

• Normandy Apartments v. The United States, August 2011