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