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Brookchester Community Association, Inc. v. Brookchester Inc.

Decided: December 13, 1956.


Clapp, Jayne and Francis. The opinion of the court was delivered by Francis, J.A.D.


[43 NJSuper Page 36] The plaintiffs instituted a rather novel injunction action in the Chancery Division. The complaint recites that between 1948 and 1950, the defendants, Brookchester, Inc., Sections 1 to 10 inclusive, each "Section" being a separate corporation, built a certain housing project in New Milford, New Jersey, pursuant to the provisions of Section 608 of the National Housing Act, 12 U.S.C.A. ,

§ 1743 (1945). It alleges also that funds used in the construction work came from mortgages which were insured by the Federal Housing Administration; further, that the rents to be paid by tenants were fixed by the Federal Housing Administrator (now Commissioner; 12 U.S.C.A. , § 1702 (Supp. 1955)), and thereafter on March 31, 1954 increased with his approval, as provided by the act. It charges that the increase in rents was obtained by fraud practiced upon the Administrator through misrepresentations made by defendant corporations that the building costs "were far in excess of the actual cost," that to permit collection of them would be inequitable, and that no provision exists under the Federal regulations for review of their validity. The individual plaintiffs as tenants sought judgment enjoining defendants from collecting the increases "unless and until the defendants shall, in good faith, call to the attention of the Federal Housing Administration the fraudulent representations made by them to [it] concerning the actual cost of the erection of the * * * dwellings, and ask the * * * Federal Housing Administration to reexamine the defendants' application for an increased rental based on the actual facts * * *." The alleged fraud was not specified beyond what has been stated. See R.R. 4:9-1.

Defendants moved to dismiss the complaint for lack of jurisdiction. The motion was granted on the ground that the action was premature since (admittedly) no proceedings had been brought in the federal agency to vacate or void the increase order.

On this appeal it is undisputed that the Housing Commissioner has the statutory authority to set maximum rentals for these housing accommodations. See: Brookchester, Inc., v. Ligham , 17 N.J. 460, 465 (1955); 12 U.S.C.A. § 1743(b)(1) (1945). Such rentals are adjusted by him so as to provide moderate rentals and a reasonable financial return to the investor. Stuyvesant Town, Inc., v. Ligham , 17 N.J. 473, 480 (1955). The return contemplated has a broad connotation. The Housing Administration has insured the mortgage on the project, the principal sum of which is not permitted to exceed 90% of

"the amount which the Commissioner estimates will be the necessary current cost of the completed property or project, including the land; the proposed physical improvements; utilities within the boundaries of the property or project; architects' fees; taxes and interest accruing during construction; and other miscellaneous charges incidental to construction and approved by the Commissioner: Provided, That such mortgage shall not in any event exceed the amount which the Commissioner estimates will be the cost of the completed physical improvements on the property or project, exclusive of off-set [off-site?] public utilities and streets, and organization and legal expenses: * * *." 12 U.S.C.A. § 1743(b)(3)(B) (Supp. 1955). (Emphasis added.)

So the Commissioner, having exposed the government to liability as an insurer in a sum based upon his cost of construction or replacement estimates, fixes the quantum of the rentals with an eye to the proper and reasonable amortization of the mortgage debt as well as to a fair return to the owner and reasonable rents for the tenants. Justice Heher put it this way in his dissent in Stuyvesant Town, Inc., v. Ligham , 17 N.J. 473, 487, 488, 111 A. 2 d 744, 752:

"The regulation of the rent ceiling for accommodations afforded by housing projects financed by Government-insured mortgages under the National Housing Act, 12 U.S.C.A., section 1743, is committed to the Federal Housing Commissioner for a reasonable containment of the rental charges and the amortization of the Government's mortgage security; and there can be no state interference with the fulfillment of what has been made exclusive federal policy.

The federal act, section 1743, also 1713(b), empowers the Commissioner to regulate and restrict rents, rate of return and methods of operation; and the corporate structure itself is so molded and conditioned. The Government's reserved rent control has the three-fold object of providing reasonably priced tenancies yielding also a fair return to the operator of the housing facility, and the Government's exonerative protection under its insurance undertaking, all to serve an urgent essential public need.

Thus, by preemption, rent control itself becomes to this extent the Government's exclusive province. * * *"

Accord Fieger v. Glen Oaks Village, Inc. , 309 N.Y. 527, 536, 132 N.E. 2 d 492, 496 (1956).

Thus, broadly speaking, Congress must be said to have been interested in an economically sound rental structure. In establishing such a structure through rental ceilings, the Commissioner is necessarily motivated by three factors, ...

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