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The years of automatic rent payment increases may be over for landlords. With the last housing market collapse, landlords may be denied their annual rental payment increases for their Section 8 housing units. Even though their contract with MHA may state they will get these increases automatically every year, the contract may have a limitation clause within it that allows MHA to deny increases should it lead to a windfall for landlords.
This week, the U.S. Court of Appeals for the First Circuit has affirmed that MHA properly denied landlords their "otherwise-automatic" annual payment increases. It's all written in their housing assistance payment contracts with the landlord plaintiffs.
A limitation clause prevents these landlords from collecting rental rates that exceed what are fair market rates for their area and similar units. In other words, landlords can complain all they want, but the MHA did not breach their contract in this way. MHA can determine and deny increases, through reasonable methods, where the difference between the contract rental rates and the market rates would result in a "material difference."
Many of us know a bit about subsidized housing, better known as Section 8. It has been around for decades. Under the administration of the U.S. Department of Housing and Urban Development, housing assistance payments contracts are made between state and local agencies and private landlords. Section 8 provides low-income applicants assistance with their housing payments. Households pay thirty percent of their rent while HUD reimburses the rest.
In this week's case, the plaintiff landlords attempted to argue that the MHA failed to properly "determine" (by multiple dictionary definitions) the comparable rates using their method of calculation. The plaintiffs argued that MHA's method focused on the comparable market too broadly, but the Court was not amused by their argument's word play with "cherry-picked dictionary definitions" of what determine means.
The Court found that so long as MHA's method was a reasonable assessment of comparable unassisted units it would be proper under the contract. MHA's method included consideration of common characteristics such as age, unit size, physical configurations, amenities, and utilities.
Attorneys representing Section 8 landlords should review clients' housing assistance payments contracts for limitation clauses similar to the contracts under review in this case. Look for language like "otherwise automatic" or other discretionary language giving the housing authority a bit of freedom to decide whether or not payment increases are justified. Landlords should be aware of these clauses. They allow the housing authority to determine that the current rental market does not lend itself to an increase in payments that particular year, but that can differ from year to year.
Landlords working with the Maine Housing Authority should also be aware that there is at least a procedural mechanism in place to challenge their calculations by submitting their own separate appraisal estimate of market rate for consideration. Landlords of other areas should check with their local housing authority for similar procedures.
It is best for attorneys and their clients to stay apprised of the current market rates for their area and be prepared that even though you can increase the rent in your unassisted units, payments may not increase on a similar Section 8 unit.