Lack of Comparability Studies Doesn’t Bar Rent Hikes

Facts: The Illinois Housing Development Authority (IHDA) subsidized the rents under HAP contracts between HUD and the owners of two Section 8 sites: Greenleaf Apartments and Sandburg Village Apartments. Both the Greenleaf and the Sandburg contracts establish rent amounts that obligate IHDA to make assistance payments in amounts equal to the difference between the contract rents and the payments made by residents.

In 1987, Congress amended Section 8 to permit the use of comparability studies to enforce the Overall Limitation Clauses—that is, to limit the rent increases the government could be liable for. Those amendments state that if HUD or an appropriate agency does not complete and submit to the owner a comparability study within 60 days before the anniversary date of the assistance contract, the automatic annual rent adjustment factor shall be applied.

HUD subsequently issued Notice H 95-12, which specifically stated that that rent increases “would only be allowed if owners submitted comparability studies prior to the HAP contract anniversary dates” [italics added].

Before Notice H 95-12, rents at Greenleaf Apartments and Sandburg Village Apartments increased annually. However, since March 1995, IHDA has approved only one rent increase at Greenleaf Apartments, effective Oct. 1, 2002. At Sandburg Village Apartments, IHDA approved rent increases in 1998, 2000, 2001, and 2002, but has not approved any other increases since 1994.

IHDA has not performed a rent comparability study or made any determination of the rents charged for units comparable to those at Greenleaf Apartments since at least 2002, and has not performed any such study or made such a determination with respect to Sandburg Village Apartments since 1991.

The owners of Greenleaf and Sandburg Village sued the IHDA, claiming that the agency breached their HAP contracts by failing to increase contract rents or by increasing contract rents by less than the amount called for in the HAP contract, and by requiring the owners to submit rent comparability studies.

Decision: The federal district court sided with the owners, ruling that IHDA cannot invoke the Overall Limitations Clause to limit damages that might be awarded for breach of contract for the years when it did not submit comparability studies.

Reasoning: The court noted that it is impossible to tell whether IHDA would have paid to perform a comparability study, and if that study would have shown a material difference between comparable unit rents and the adjusted rents, which would have obligated it under the Overall Limitation Clause to pay more than the automatic annual adjustment.

The court not only stated that it had no way of knowing what position the owners would have been placed in if the alleged breach had not occurred, but performance of comparability studies is the exception rather than the rule. It is presumed that automatic annual adjustment factors are normally in play under the contract, the court concluded. In addition, the court stated, it is highly unlikely that IHDA would have performed a comparability study to fulfill its burden under the Overall Limitations Clause. But IHDA was liable to approve and pay rent increases calculated by the automatic annual rent adjustment factor.

• Greenleaf Limited Partnership and Sandburg Village Apartments v. Illinois Housing Development Authority, December 2009