The owner of an affordable apartment complex in Sacramento may pursue a breach of contract lawsuit against the state Department of Housing and Community Development over a rent increase that the state rejected, the Third District Court of Appeal has ruled.

The unanimous three-judge appellate panel overruled a Sacramento County Superior Court judge, who had tossed out the lawsuit because of technical uncertainties in the suit.

The for-profit developer 300 DeHaro Street Investors acquired the 67-unit Castle Garden Apartments in the unincorporated Arden-Arcade area in 1989. The following year, the developer received a $1.9 million, low-interest loan from Housing and Community Development (HCD) to fund apartment rehabilitation. The loan agreement requires DeHaro Street to provide 54 units to low-income households, and permits HCD to set rents for those units based on a formula.

In 2002, the property owner sued HCD, arguing that HCD had breached the contract by not approving a requested rent increase. The sides went back and forth over technical aspects of the suit before Superior Court Judge Loren McMaster finally dismissed the suit.

McMaster's decision was based on Code of Civil Procedure § 1094.5, which concerns challenges of administrative orders and decisions. The state agency contended that statute applied to this case because HCD denied the proposed rent increase after conducting a "paper hearing."

However, the Third District determined that § 1094.5 did not apply here. "[E]ven assuming the department's review of plaintiff's request could be characterized as a hearing, it does not trigger § 1094.5 review unless the hearing was required by law, which was not the case here," Justice Richard Sims wrote.

Instead, the court ruled that 300 DeHaro Street may press forward with its breach of contract claim because the property owner "does not challenge a mere administrative decision, but an administrative decision concerning a provision of a contract," Sims wrote. "That the contract incorporated statutes and regulations does not strip it of its contractual nature, because all contracts necessarily and implicitly incorporate all applicable laws in existence when the contract is entered."

The Case:
300 DeHaro Street Investors v. Department of Housing and Community Development, No. C053033, 08 C.D.O.S. 4233. Filed April 10, 2008
The Lawyers:
For 300 DeHaro Street: Jay-Allen Eisen, (916) 444-6171.
For HCD: Teri Ashby, attorney general's office, (916) 445-9555.