Court Opinion

ID: 4396523
Source: CourtListenerOpinion
Date Created: 2019-05-14 17:02:22.469399+00
Date Added: 2024-06-11T07:49:52.194298
License: Public Domain

IN THE SUPREME COURT OF THE STATE OF DELAWARE

SANDHILL ACRES MHC, LC,    §
                           §                No. 525, 2018
    Respondent Below,      §
    Appellant,             §                Court Below: Superior Court
                           §                of the State of Delaware
    v.                     §
                           §
SANDHILL ACRES HOME OWNERS §
ASSOCIATION,               §                Case No. S17A-08-001 ESB
                           §
    Petitioner Below,      §
    Appellee.              §

                          Submitted: April 24, 2019
                          Decided:   May 14, 2019

Before STRINE, Chief Justice; SEITZ and TRAYNOR, Justices.

Upon appeal from the Superior Court. REVERSED and REMANDED.

Nicole M. Faries, Esquire, BAIRD MANDALAS & BROCKSTEDT, LLC,
Wilmington, Delaware, for Appellant, Sandhill Acres MHC, LC.

Daniel S. Atlas, Esquire, Steven D. Adler, Esquire, and Brian S. Eng, Esquire,
COMMUNITY LEGAL AID SOCIETY, INC., Wilmington and Dover, Delaware,
for Appellee, Sandhill Acres Home Owners Association.

Michael P. Morton, Esquire, and Robert J. Valihura, Jr., Esquire, MORTON,
VALIHURA & ZERBATO, LLC, Greenville, Delaware, for Amicus Curiae First
State Manufactured Housing Association.

STRINE, Chief Justice:
      This appeal concerns a manufactured housing community owner’s attempt to

raise the rent for its homeowner–tenants after installing a new water filtration system

and commissioning a report on market rents for comparable manufactured housing

communities. After the homeowners petitioned for an arbitration under the Rent

Justification Act,1 which places certain limitations on a community owner’s ability

to raise its tenants’ rents, the arbitrator concluded that the rent increase was justified.

On appeal, however, the Superior Court reversed on the grounds that the community

owner did not establish that the installation of the water filtration system “was an

increase in its costs” or that the expenditure caused “its original expected return [to]

decline[].”2 The community owner appeals from the Superior Court’s decision.

      Under the Rent Justification Act, a community owner need only show that

there were no relevant health or safety violations and that “[t]he proposed rent

increase is directly related to operating, maintaining or improving the manufactured

home community” to open the door to a rent increase based on market rent.3 Instead

of adhering to this understanding of the statute, as explained in precedent, the

Superior Court overruled the arbitrator’s order allowing the rent increase, finding

that the community owner “would have had to offer evidence about its original costs

1
  25 Del. C. §§ 7040 et seq.
2
  Sandhill Acres Home Owners Assoc. v. Sandhill Acres MHC, LC, 2018 WL 4613716, at *5 (Del.
Super. Ct. Sept. 18, 2018).
3
  25 Del. C. § 7042(a), (b).
and original expected return and how the expenditure . . . altered that relationship.”4

Because that reasoning grafted onto the Act a requirement that the statute does not

contain, we reverse the Superior Court’s judgment and remand the case for the entry

of a judgment affirming the arbitrator’s order.

                                            I.

       In the world of mobile homes—often called “manufactured houses” because

they are in fact not so easy to move—many homeowners own their houses but rent

the land on which the houses are located. That dynamic, the General Assembly

found, gives the “community owner” that owns the underlying land

“disproportionate power in establishing rental rates” due to “the difficulty and cost

of moving the home.”5 To mitigate that power imbalance and protect homeowners’

“substantial investment” while also ensuring that community owners can earn “a fair

return” on their own investment,6 the General Assembly passed the Rent

Justification Act.7 Under the Act, to raise homeowners’ rent above inflation, a

community owner must “demonstrate the increase is justified” for three

“conditions”: first, that there were no relevant health or safety violations; second,

that “[t]he proposed rent increase is directly related to operating, maintaining or

4
  Sandhill Acres, 2018 WL 4613716, at *5.
5
  25 Del. C. § 7040.
6
  Id.
7
  Id. §§ 7040–7046.
                                            2
improving the manufactured home community”; and third, that “[t]he proposed rent

increase is . . . justified by” at least one of several factors enumerated in the statute,8

one of which is “market rent.”9 This Court has interpreted the “directly related”

requirement to mean that the community owner must have “seen its costs increase

for ‘operating, maintaining or improving the manufactured home community,’” the

idea being that the community owner’s expected returns must have declined due to

that increase in costs.10

       In this case, a manufactured home community owner, Sandhill Acres MHC,

LC (“Sandhill Acres”), sent written notice to its homeowner–tenants that it wanted

to raise their rent to the market rent of $455 per month. At a community meeting

about the proposed rent increase, Sandhill Acres told residents that it was relying on

its installation of a new water filtration system, which cost $12,185, to satisfy the

“directly related” requirement,11 and it was relying on “market rent” as the additional

factor needed to justify the rent increase.12          Sandhill Acres also showed the

8
  Id. § 7042(a)(2).
9
  Id. § 7042(c)(7). “Market rent” is defined to mean “that rent which would result from market
forces absent an unequal bargaining position between the community owner and the home
owners,” with relevant considerations “includ[ing] rents charged to recent new home owners
entering the subject manufactured home community and/or by comparable manufactured home
communities.” Id.
10
   Bon Ayre Land, LLC v. Bon Ayre Cmty. Assoc. (Bon Ayre II), 149 A.3d 227, 234–35 (Del. 2016)
(quoting 25 Del. C. § 7042(a)(2)).
11
   See App. to Opening Br. at A-150 (Sandhill Acres 2017 Rent Increase Presentation).
12
   Id. at A-146.
                                              3
homeowners an invoice stating the new water filtration system’s cost,13 photographs

of the installed system,14 a market rent report by Colliers International that supported

the $455 figure,15 and a slide stating that three new tenants moved into the Sandhill

Acres community at a monthly rental rate of $455.16

       Several homeowners objected to the rent increase and formed the Sandhill

Acres Homeowners Association (the “Association”) to seek arbitration under the

Rent Justification Act as to whether the increase is justified under the Act. Finding

for the community owner, the arbitrator held that the water filtration system

expenditure satisfied the “directly related” requirement and that the Colliers study

and evidence of new Sandhill Acres tenants’ rental rates together justified the

increase to $455 per month under the market rent factor.17

       The Association appealed to the Superior Court, and the Superior Court

reversed on the grounds that the “directly related” requirement was not satisfied.18

As we read its opinion, the Superior Court relied on two alternative bases to reach

that conclusion: first, that Sandhill Acres did not establish that the water filtration

system expenditure “was an increase in its costs”; and second, that “Sandhill Acres

13
   Id. at A-151.
14
   Id. at A-152–53
15
   Id. at A-158–70 (slides from report in presentation); id. at A-215–72 (Colliers International Fair
Market Rent Analysis).
16
   Id. at A-171 (Sandhill Acres 2017 Rent Increase Presentation).
17
   Id. at A-457–68, A-471–72 (Arbitrator’s Decision).
18
   Sandhill Acres, 2018 WL 4613716.
                                                 4
also did not establish that because of this expenditure its original expected return has

declined.”19      Ultimately, the Superior Court submitted, the community owner

“would have had to offer evidence about its original costs and original expected

return and how the expenditure . . . altered that relationship.”20 In other words, the

Superior Court understood the “directly related” provision to require the community

owner to affirmatively show, by opening up its books regardless of whether the

homeowners requested them, both that its overall costs are higher than they

previously were and that its original expected return had declined. Because Sandhill

Acres made neither of those two showings here, the Superior Court held that the

arbitrator had erred in applying the law.

                                            II.

          On appeal, Sandhill Acres argues that the Superior Court erred by

misinterpreting the Rent Justification Act and this Court’s precedents to require a

greater showing by the community owner as to the “directly related” requirement

than the statute calls for, and that the arbitrator’s decision permitting a rent increase

19
     Id. at *5.
20
     Id.
                                            5
to the market rent of $455 should be affirmed.21 We review the Superior Court’s

interpretation of the Rent Justification Act de novo.22

       Under the plain language of the Act, to increase rent above inflation, a

community owner need only show that there are no relevant health and safety

violations and that “[t]he proposed rent increase is directly related to operating,

maintaining or improving the manufactured home community,” at which point the

door is opened to a rent increase based on a range of statutory factors, including

“market rent.”23 Tying this language to the Act’s purposes as framed by the General

Assembly, we previously interpreted the “directly related” requirement to mean that

the community owner “must show that its original expected return has declined,

because the cost side of its ledger has grown.”24 We also noted that this requirement

“is a modest one, which only requires the landowner to produce evidence suggesting

that the ‘return’ on its ‘property’ has declined.”25

21
   In the alternative, Sandhill Acres argues that the Superior Court erred by not allowing at least
some portion of its proposed rent increase—the portion that can be attributed to the cost of the
water filtration system, which Sandhill Acres contends amounts to $7.93—and that it should
therefore be allowed to increase the rent by at least $7.93, even if it cannot use the market rent of
$455. Because we hold that the Superior Court should have affirmed the arbitrator’s decision to
allow a rent increase to the full market rate of $455, we need not reach this issue.
22
   Bon Ayre Land, LLC v. Bon Ayre Cmty. Assoc. (Bon Ayre II), 149 A.3d 227, 233 (Del. 2016).
23
   25 Del. C. § 7042(a), (b); see also Bon Ayre II, 149 A.3d at 234 (“To impose an increase beyond
CPI-U, the landowner must . . . show that the increase is ‘directly related to operating, maintaining
or improving the manufactured home community.’ . . . If a landowner can show that its costs have
gone up, that opens the door to a rent increase based on § 7042(c)’s factors, including market rent.”
(quoting 25 Del. C. § 7042(a)(2)).
24
   Bon Ayre II, 149 A.3d at 234.
25
   Id. at 235–36.
                                                 6
       With that background in mind, we hold that the Superior Court misinterpreted

the Act by imposing a requirement on the community owner that the statute does not

contain. Under the Superior Court’s reading of the Act, any community owner that

proposes to rely on capital improvements it has made to the community to satisfy

the directly related requirement would have to affirmatively “offer evidence about

its original costs and original expected return and how the expenditure . . . altered

that relationship.”26 There is no basis in the Act to infer such a requirement. Rather,

the proposed rent increase need only be “directly related to . . . improving the

manufactured home community.”27 To make a prima facie case that a rent increase

is directly related to improving the community—a requirement that we have

previously described as “modest”28—it suffices for the community owner to offer

evidence that in making some capital improvement, the community owner has

incurred costs that are likely to reduce its expected return. Although a homeowner

would be entitled to rebut that prima facie case by offering evidence of her own that

the expenditure did not in fact reflect any increase in costs—for example because

the expenditure was offset by reduced expenses in other areas—the homeowners in

this case do not argue that they offered any such evidence below.29

26
   Sandhill Acres, 2018 WL 4613716, at *5 (emphasis added).
27
   25 Del. C. § 7042(a)(2).
28
   Bon Ayre II, 149 A.3d at 235–36.
29
   On appeal, Sandhill Acres asserts that the Association “neither requested Sandhill’s books and
records nor made a demand to the Arbitrator for such materials.” Opening Br. at 34. The
Association does not deny this; rather, its main arguments focus on whether the evidence that was
                                               7
       To be clear, we do not mean to imply that any increase in costs, no matter how

small relative to the proposed rent increase, will necessarily satisfy the directly

related requirement. The requirement may be modest, but it is not toothless. For

example, if a community owner were to spend $1,000 on touching up aspects of the

community, and then sought a much larger rent increase disproportionate to those

costs (e.g., $25,000 annually), an arbitrator would be justified in concluding that the

proposed rent increase was not directly related to operating, maintaining, or

improving the community. To satisfy that requirement, there should be a material

capital expenditure or increase in operational or maintenance expenses that has a

substantial relationship to the rent increase sought.                 Here, for example, the

community owner spent $12,185 on a new water filtration system, which was at least

a material percentage of the proposed annual rent increase of about $53,760.30 But,

once the community owner has shown that the rent increase satisfies the directly

related requirement, then the Act allows the community owner to seek, and the

arbitrator to grant, a rent increase that is justified, in the sense that the proposed

before the arbitrator was sufficient to justify his decision. See Answering Br. at 18–24 (arguing
that Sandhill Acres “failed to prove that its original expected return declined because of increased
costs”).
30
   According to the Association, “on average the rent increase was $35 per lot, per month,” and
there were 128 lots in total. Opening Br. at 7–8.
                                                 8
increase is reasonable based on the consideration of one or more of the relevant

statutory factors, including market rent.31

       This understanding of the Act and its application to the record in this case

follows from our decision last year in Donovan Smith HOA v. Donovan Smith

MHP.32 In Donovan, the community owner had sought to use its installation of

driveways and painting of a maintenance building to satisfy the directly related

requirement, and it had used market rent as the additional factor.33 Finding for the

community owner, the arbitrator rejected the homeowners’ argument that “the

evidence was not sufficient because the [community owner] ‘hasn’t proven that he’s

had increased expenses . . . [or] shown any data where we’re . . . balancing his books

so that he can make a profit and continue his business in a way.’” 34 Both the Superior

Court and this Court affirmed, with this Court reasoning that “[a]lthough the

31
   See 25 Del. C. § 7042(a)(2), (c). Because market rent is defined as “that rent which would result
from market forces absent an unequal bargaining position between the community owner and the
home owners,” with “relevant considerations includ[ing] rents charged to recent new home owners
entering the subject manufactured home community and/or by comparable manufactured home
communities,” id. § 7042(c)(7), the market rent factor serves not just the interests of community
owners in securing a rent increase, but also the interests of homeowners by focusing the inquiry
on the rent paid by new entrants not subject to the compromised bargaining position of existing
homeowners. By defining market rent not in terms of what the community owner would be able
to force on a stuck-in tenant—who would have to incur substantial costs to move her manufactured
home to another community—but rather in terms of what the marginal prospective tenant would
pay, the Act attempts to mitigate the “disproportionate power in establishing rental rates” that the
community owner would otherwise have, id. § 7040. In this appeal, the Association does not
challenge the substance of the market rent analysis the arbitrator employed in determining that the
increase was justified.
32
   190 A.3d 997, 2018 WL 3360585, at *2 (Del. July 10, 2018) (TABLE).
33
   Id. at *1–2.
34
   Id. at *1 (quoting the Arbitrator’s Decision).
                                                 9
[community owner] did not present evidence on what these improvements cost, the

arbitrator was charged with addressing the evidence in front of him and making fair

inferences from it,” with “[o]ne fair inference” being “that adding a driveway to each

unit involved a substantial cost, and that repainting the maintenance building also

involved a cost, and that without an increase in rent, the [community owner’s] rate

of return would have been reduced.”35

       Here, like in Donovan, Sandhill Acres provided evidence that its costs had

increased—in the form of photographs and an invoice for the new water filtration

system—and the Association did not present any evidence of its own to contest

Sandhill Acres’s claim that its costs had increased. And like in Donovan, the

arbitrator correctly followed the Rent Justification Act’s standards to conclude—

based on the evidence that was before him—that the increase in costs satisfied the

directly related requirement.36 That conclusion was supported by substantial record

evidence, and the Superior Court erred by refusing to “accord deference to the

arbitrator.”37

35
    Id.
36
    See 25 Del. C. § 7043(g) (“The arbitrator will render a decision employing the standards set
forth in § 7042 of this title.”); id. § 7042(a) (“A community owner may raise a home owner’s rent
[above inflation] . . . provided the community owner can demonstrate the increase is justified for
the following conditions [including the directly related requirement and an additional factor]
. . . .”).
37
    Donovan, 2018 WL 3360585, at *3. The Rent Justification is somewhat unclear about the
appellate standard of review, stating that the reviewing court must determine “whether the record
created in the arbitration is sufficient justification for the arbitrator’s decisions and whether those
decisions are free from legal error.” 25 Del. C. § 7044. Considering substantially similar language
                                                 10
       Of course, the Superior Court was correct to the extent that it held that both

sides of the community owner’s financial statements bear logically on whether and

to what extent a rent increase is “directly related to operating, maintaining or

improving the manufactured housing community” under the Act.38 But, as in any

matter, the parties to a case should shape the record by exchanging requests for

information; a community owner seeking a rent increase would not be in any

equitable or legal position to resist a reasonable request for information about its

costs and profit margins.39             As in any adversarial proceeding, legitimate

in a prior version of the statute, we previously observed that this language sounds somewhat like
substantial evidence review. See Bon Ayre Land LLC v. Bon Ayre Cmty. Assoc. (Bon Ayre I), 133
A.3d 559, 2016 WL 747989, at *2 n.11 (Del. Feb. 25, 2016). Since that observation, the General
Assembly has amended the Rent Justification Act without materially changing the language in the
appeals section, and every Superior Court decision reviewing an arbitrator’s decision under the
Rent Justification Act has applied substantial evidence review. See December Corp. v. Wild
Meadows Home Owners Assoc., 2016 WL 3866272, at *2–4 (Del. Super. Ct. July 12, 2016); Bon
Ayre Land, LLC v. Bon Ayre Cmty. Assoc., 2016 WL 7036580, at *2–3 (Del. Super. Ct. Dec. 2,
2016); Pot–Nets Lakeside, LLC v. Lakeside Cmty. Homeowners Assoc., 2017 WL 3168969, at *6
(Del. Super. Ct. July 17, 2017); Sandhill Acres Home Owners Assoc. v. Sandhill Acres MHC, LLC,
2018 WL 4613716, at *1 (Del. Super. Ct. Sept. 18, 2018). Donovan suggests a similar view, with
its conclusion that “[t]he arbitrator’s findings were justified by the substantial record evidence”
and its willingness to “accord deference to the arbitrator.” 2018 WL 3360585, at *3. We therefore
conclude that substantial evidence review is the appropriate standard of review for the arbitrator’s
factual findings.
38
   25 Del. C. § 7042(a)(2).
39
   See Donovan, 2018 WL 3360585, at *2–3. In Donovan, we affirmed the arbitrator’s order
permitting a rent increase, but noted that our decision did not mean that a community owner “may
seek an above-inflation rent increase without any worry that the homeowners could examine the
underlying business records necessary to test whether the proposed rent increase” satisfies the
directly related requirement. Id. at *2. Thus, “in a later case, the outcome could be quite different,
especially if the homeowners fairly demand discovery of the landowner’s books and records
relevant to the question of whether the proposed above-inflation rent increase is ‘directly related
to operating, maintaining or improving the manufactured home community’ and the arbitrator fails
to require production of those records.” Id. at *3 (internal footnotes omitted).
                                                 11
confidentiality and proprietary concerns should be addressed by the arbitrator

through the imposition of use restrictions, and any excessively burdensome requests

for information may be denied. As a bottom-line matter, the community owner must

make a choice. Refrain from seeking an increase above inflation and thus be able to

keep its financial information to itself, or seek an increase and be willing to incur the

concomitant requirement to justify that increase. On a complete record, that allows

the tenants to make fair arguments and the arbitrator to assess whether the proposed

increase satisfies the directly related requirement in view of a balanced record taking

into account both key factors: revenues and costs.

      Ultimately, the case presented to us on appeal is not a discovery dispute, but

rather is about the Superior Court’s interpretation of the directly related requirement

and whether the record adequately supports the arbitrator’s determination that the

proposed rent increase satisfies that requirement. Focusing on those key issues, we

hold that the Superior Court misinterpreted the statute and that there was sufficient

record evidence to support the arbitrator’s decision.

      The Superior Court’s decision is reversed, and the case is remanded for the

entry of a judgment affirming the arbitrator’s order.

                                           12