Daily Development for
Friday, August 30, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

FAIR HOUSING; OCCUPANCY LIMITS; "COMPELLING BUSINESS JUSTIFICATION:" Ninth Circuit refuses to apply HUD "compelling business justification test" to landlords' occupancy restrictions, spanks HUD. Pfaff v. U.S. Dept. Of Housing and Urban Development, ---- F.3d ---- , 1996 WL 363513 (9th Cir. 1996) Landlords had a very small two bedroom house for rent. One of the bedrooms was 10x10. There was a "den" consisting of an alcove opening into the living room. There was "very little yard," no basement, and an "undersized garage." The house had 1200 total square feet. They instructed their rental agent to restrict rentals in this house to no more than four persons. They had other rental houses which they rented to larger groups, including families with children and non-traditional family groups. They concluded that this house, however, would suffer economic deterioration if occupied by more than four residents.

The agent nevertheless showed the house to a family of five, with three young children. When the landlords told the agent that the four occupant limit was firm, the agent argued with the landlords that their policy violated the Fair Housing Act. The landlords fired the agent and the tenants had to look elsewhere. Tenants claimed that they sufferred considerable inconvenience in identifying substitute housing, that this experience led to the breakup of their marriage and that they felt "demeaned" the imposition of the occupancy limits upon them.

Ultimately, a HUD hearings officer found that the Fair Housing Act imposed liability on landlords for occupancy limits regardless of whether the landlords intentionally discriminated against families with children. The impact, not the intent, matters. The Fair Housing Act permits the landlord to nevertheless rebut the prima facie case of discrimination by showing a business justification for its policy. But the hearings officer concluded that he was bound by the HUD adjudication in HUD v. Mountain Side Mobile Home Estates (Mountain Side I), 2 Fair Housing-Fair Lending (P-H Para. 25,053 (HUD Sec'y July 19, 1993).

In the Mountain Side administrative adjudication, the Secretary of HUD established what the court referred to as the "Mountain Side Doctrine." Under this Doctrine, the hearing officer determined that if a facially neutral occupancy limitation disproportionately discriminates against families with children, the landlord has a duty to establish a "compelling business necessity to justify the policy, and to show that the policy was "the least restrictive means" to that end. The officer commented that he viewed the HUD policy in this area as akin to a "compelling state's interest test" in Constitutional civil rights cases.

The officer then assessed the landlords with $20,000 in damages for emotional distress, $8,000 civil penalty, $4200 in compensatory damages, issued an injunction and (presumably) also socked the landlords for attorneys' fees.

On appeal: reversed. The court "admonished" HUD for its "heavy-handed conduct," characterizing its regulatory policy in this area as "fundamentally unfair . . . appalling conduct."

The Ninth Circuit panel upheld the hearing officer's ruling that HUD had established a prima facie case of discrimination. Intent to discriminate is unnecessary, he ruled, and the court affirmed. As to impact, the court pointed out that the Pfaff's counsel had "astonishingly `stipulated'" that a policy of excluding households of five from a rental property would disproportionately impact families with children. (Although the court later concludes that this likely is the case and the editor is not really astonished that this would be so.) In short, after the court ruled that intent was not an issue, then this case, and virtually any case in which there is an occupancy limit imposed, will satisfy the prima facie test. HUD is virtually in the position where it can pick and choose.

Where the court took issue with HUD was over the application of the Mountain Side Doctrine, which had been established as a policy without rule-making through the process of announcing a binding policy as part of decision in a prior case. Although the Supreme Court has upheld such a practice in NLRB v. Bell Aerospace Co., 416 U.S. 267 (1974) among other cases, the court held that it is unfair for the agency to engage in it when the agency has already announced a different policy as part of a widely circulated regulatory pronouncement. It concluded that there were circumstances in which agencies are precluded from establishing policies on through case law:

"Such a situation may present itself whre the new standard, adoped by adjudication, departs radically from the agency's previous interpretation of the law, where the public has relied substantially and in good faith on the previous interpretation, where fines or damages are involved, and where the new standard is very broad and general in scope and prospective in application."

HUD had earlier issued an interpretation of the Fair Housing Act that provided that the Act did not embody Congressional intent that "an owner . . . would be unable in any way to restrict the number of occupants . . . in a dwelling. . . in appropriate circumstances, owners . . . may develop and implement reasonably occupancy requirements [although] the Department will carefully examine any such nongovernmental restriction to determine whether it operates unreasonably to limit or exclude families with children."

The court held that this expressed policy (not itself a rule) was so inconsistent with the rigid demands of the Mountain Side Doctrine as to mislead landlords into activity that HUD would conclude was worthy of civil sanction and significant damage awards, as in this case.

In any event, the court concluded, the Mountain Side Doctrine was developed after all of the events in this case, and could not possibly have been anticipated by the landlords.

Comment 1: A victory for these landlords, but Mountain Side is still out there lurking. Are occupancy limits dead?

Comment 2: What do DIRTers think of the discussion of the relationship between occupancy limits and discrimination against families? Is it possible to argue that occupancy limits are not prima facie discriminatory? Isn't the impact necessarily going to be harder on families with children than other likely tenant groups? Or would it be possible to argue that a landlord who willingly leased to families with small numbers of children but did not lease to larger groups is not imposing a disparate impact on families with children?

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last five years, these Reports annually have been collated, updated, indexed and bound into the Annual Survey of Developments in Real Estate Law, volumes 1-5, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Laprica Mims at the ABA. (312) 988 6233.

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