IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
RIDGEWOOD MANOR MHC, )
LLC, )
)
Appellant, )
)
v. ) C.A. No.: K21A-10-002 RLG
)
RIDGEWOOD MANOR HOA, )
)
Appellee. )
MEMORANDUM OPINION AND ORDER
Submitted: March 8, 2023
Decided: July 3, 2023
Upon Appeal from a Final Decision
and Order of the Arbitrator – REVERSED.
David C. Zerbato, Esquire, Morton, Valihura & Zerbato, LLC, Greenville,
Delaware, Attorney for Appellant.
Anthony V. Panicola, Esquire; Olga K. Beskrone, Esquire; and Colten L. Fleu,
Esquire, Community Legal Aid Society, Inc., Dover, Delaware, Attorneys for
Appellee.
GREEN-STREETT, J.
I. Introduction
The instant appeal stems from a dispute between the owner of a manufactured
home community, Ridgewood Manor MHC, LLC, (the “Landowner”) and an
association that represents the affected homeowners of that community, Ridgewood
Manor HOA (the “HOA”). Landowner sought an above-inflation rent increase for
the homeowners in Ridgewood Manor. The HOA objected to the above-inflation
rent increase, and, under Chapter 70 of Title 25 of the Delaware Code, invoked the
statutory arbitration process.
Following an arbitration hearing and submission of post-hearing briefing, the
Arbitrator issued her Arbitration Decision (the “Decision”) in favor of the HOA. 1
The Arbitrator found that the Landowner had not satisfied the requisite statutory
preconditions to support an above-inflation rent increase. Landowner appealed to
this Court, arguing that the Arbitrator committed legal error in rendering her
Decision. This Court agrees. For the reasons set forth below, the Decision of the
Arbitrator is REVERSED.
1
See generally, Decision, Sept. 29, 2021.
2
II. Factual and Procedural Background
A. The Rent Justification Act
The Delaware Manufactured Homeowners and Community Owners Act –
commonly referred to as the Rent Justification Act (the “Act”)2 – governs, among
other things, rent increases in manufactured housing communities.3 The Act allows
a manufactured home community landowner to increase rent by the rate of inflation
without showing more.4 In order to raise rent above the average annual increase in
the Consumer Price Index for All Urban Consumers in the Philadelphia-
Wilmington-Atlantic City area (“CPI-U”), the landowner must satisfy three
conditions as outlined in 25 Del. C. § 7052.5
First, the landowner must not have been found, in the preceding 12 months,
to be in violation of any provision that threatens the health or safety of its residents.6
Second, the landowner must show that the proposed rent increase is “directly related
2
25 Del. C. § 7050 et seq.
3
25 Del. C. § 7052. The Act has been revised, effective July 1, 2022. At the time of the
Arbitrator’s Decision, an old version of the Act was in place. The Court will reference old sections
from Title 25 of the Delaware Code that were effective until June 30, 2022. 25 Del. C. § 7052 et
seq.
4
Bon Ayre Land, LLC v. Bon Ayre Cmty. Ass’n, 149 A.3d 227, 230 (Del. 2016) (hereinafter “Bon
Ayre II”). When Bon Ayre II was decided, the Act, in relevant part, was codified as 25 Del. C. §§
7040, 7042.
5
Id.
6
Id. (citing 25 Del. C. § 7052(a)(1)).
3
to operating, maintaining[,] or improving the manufactured home community.”7
Third, if the previous two requirements are met, the rent increase must be justified
by at least one of several factors enumerated in § 7052(c).8 The General Assembly
intended for the landowner to meet both the directly related test and justify the
increase with a factor under § 7052(c).9 Ensuring a landowner meets both of these
requirements is how the purpose of the Act is fulfilled.10
B. The Parties
Ridgewood Manor is a manufactured home community located in Kent
County, Delaware. Ridgewood Manor was purchased by Landowner in November
2020.11 Soon thereafter, Landowner undertook a number of community projects.
Specifically, Landowner spent $66,650.00 to renovate the property’s sales/rental
office; tear down a storage barn on the property; and fill an unused pool on the
property (“capital expenditures”).12
7
Id. (citing 25 Del. C. § 7052(a)(2)).
8
Id. (citing 25 Del. C. § 7052(c)).
9
Shady Park Homeowners’ Ass’n Inc. v. Shady Park MHC, LLC, 2023 WL 2366643 at *5 (Del.
Super. Mar. 3, 2023) (citing Bon Ayre II, at 230).
10
Id.
11
Appellant’s Opening Br., 3.
12
Id. at 8.
4
On February 25, 2021, Landowner sent a letter to each homeowner within
Ridgewood Manor, notifying them of (1) a 1.504% rent increase, based on the CPI-
U 36-month average increase; and (2) an additional monthly rent increase based on
a “market rent” analysis.13 For most homeowners within the community, the
proposed rent increase equaled approximately $50 per month. 14 At the time of
Landowner’s proposed rent increase, it had owned Ridgewood Manor for
approximately three months.
At the statutorily required community meeting to address the proposed rent
increase, Landowner provided a presentation, through which it explained the basis
for its rent increase. The homeowners and HOA rejected Landowner’s asserted
justifications for the rent increase, and, as permitted by statute, filed a petition for
arbitration. An arbitrator was appointed to hear the case. On July 22, 2021, an
arbitration hearing was held.
C. The Arbitration Decision
As an initial matter, the parties agreed, and the Arbitrator concluded, that
Landowner satisfied the first requirement of Section 7052(a)(1): the landowner had
maintained a clean bill of health in terms of safety violations for the preceding 12
13
Id. at 4.
14
Appellee’s Answering Br., 3.
5
months.15 The Arbitrator then found that the three capital expenditures benefited the
homeowners, and were “directly related to [ ] operating, maintaining[,] or improving
the community.”16
The Arbitrator’s “directly related” analysis did not end there. The Arbitrator
performed an examination of Landowner’s acquisition costs, including capital
contribution, depreciation, and goodwill amortization (“Acquisition Costs”). The
Arbitrator noted that neither the Act, nor existing case law, contained language that
would permit the landowner to “use acquisition costs on the cost side of its ledger to
prove that its original expected return [had] declined.”17 The Arbitrator further
reasoned:
that to permit acquisition costs to offset any income in
order to . . . justify a rent increase under the Act would put
both the tenants and existing community owners at an
unequitable disadvantage since the new owner would be
unlikely to ever achieve its desired rate of return using six
and seven figures for capital contribution and
depreciation.18
The Arbitrator opined that, even if such acquisition costs were permitted to be
considered under the Act, Landowner had not met its burden in producing sufficient
15
Decision, 8.
16
Id.
17
Id. at 9.
18
Id. at 10.
6
documentary evidence to prove that it had incurred such costs and expenses. She
determined that the Acquisition Costs were not directly related to the operation,
maintenance, and improvement of the community.19 Given these conclusions, the
Arbitrator did not reach the issue of whether Landowner satisfied one or more of the
factors listed under 25 Del. C. § 7052(c). As a final matter, the Arbitrator granted
Landowner’s rent increase at CPI-U.
III. Standard of Review
When reviewing an arbitrator’s decision, the Court must independently
determine (1) whether the record created in the arbitration is sufficient justification
for the arbitrator’s decision, and (2) whether the arbitrator’s decisions are free from
legal error.20 The Delaware Supreme Court has interpreted this standard to mean
that a “substantial evidence review is the appropriate standard of review for the
arbitrator’s factual findings.”21 Under this deferential standard, the Court’s review
must be limited to determination of whether the arbitrator’s decision is supported by
substantial evidence and free from legal error. Substantial evidence means evidence
that is relevant and that a reasonable mind might accept as adequate to support a
19
Id. at 9.
20
25 Del. C. § 7054.
21
Sandhill Acres MHC, LLC v. Sandhill Acres Home Owners Ass’n, 210 A.3d 725, 731 n.37.
(Del. 2019).
7
conclusion.22 However, issues of statutory construction and interpretation are
reviewed de novo.23
IV. Discussion
Since its passage in 2013, the Act imposed new requirements on landowners
who wished to increase rent above inflation in manufactured housing communities.
Unsurprisingly, given the relative newness of the Act and perceived nuances in the
statutory language, the Delaware Supreme Court was called upon to outline, with
specificity, what landowners must do to comply with the Act’s language and stated
purpose. At the heart of many of these appeals has been requested guidance on how
landowners fulfill the conditions of § 7052. That guidance exists in a trilogy of
pertinent cases: Bon Ayre Land, LLC v. Bon Ayre Community Association;24
Donovan Smith HOA v. Donovan Smith MHP, LLC;25 and Sandhill Acres MHC,
LLC v. Sandhill Acres Home Owners Association.26
22
December Corp v. Wild Meadows HOA, 2016 WL 3866272 at *4 (Del. Super. July 12, 2016).
23
Bon Ayre II, at 233.
24
Bon Ayre II.
25
190 A.3d 997 (Del. 2018) (TABLE).
26
210 A. 3d 725 (Del. 2019).
8
A. The Directly Related Standard: Bon Ayre II, Donovan Smith, and
Sandhill
1. Bon Ayre II
In Bon Ayre II, the Delaware Supreme Court recognized that “the Act is
effectively a rent control statute.”27 “Its stated purpose is to ‘accommodate the
conflicting interests of protecting manufactured homeowners, residents, and tenants
from unreasonable and burdensome space rental increases[,] while simultaneously
providing for the need of manufactured home community owners to receive a just,
reasonable, and fair return on their property.’”28 “To accomplish this purpose, the
Act allows landowners to increase their rent by an inflation measure – CPI-U –
without any opportunity for homeowners to object.”29 To increase rent above the
CPI-U, a landowner must engage the test outlined in § 7052.30 Specifically, the Bon
Ayre II court held that the § 7052 test was conjunctive: a landowner wishing to
increase rent above the CPI-U must show that the proposed rent increase is both
directly related to operating, maintaining, or improving the manufactured home
27
149 A.3d at 234 (The Bon Ayre II decision references compliance with 25 Del. C. §§ 7040,
7042.).
28
Id. (citing 25 Del. C. § 7050).
29
Id. at 230.
30
Id.
9
community, and that the increase is justified by one or more of the eight factors listed
under subsection (c) of Section 7052.31
The Bon Ayre II court interpreted the “directly related” requirement to mean
that the landowner “must show that its original expected return has declined, because
the cost side of its ledger has grown.”32 This showing was deemed to be a “modest
one,” only requiring the landowner to produce evidence to suggest its return on its
property had declined.33 Very simply, “when a landowner [had invested] in
improving [its] community, it [could] reap the benefits of increasing the rent above
inflation rates.”34
2. Donovan Smith
The ultimate instructional takeaway from Donovan Smith concerned the
discovery of landowners’ books and records for homeowners to fairly test the
landowners’ cost and financial representations. Embedded in this holding, however,
was the Delaware Supreme Court’s affirmance of what satisfies a “directly related”
cost expenditure. Although affirmed on a case-specific, narrow basis, the Donovan
Smith court reconfirmed the relatively low threshold landowners needed to meet to
31
Id. at 233-34.
32
Id. at 234.
33
Id. at 235-36.
34
Shady Park Homeowners’ Ass’n, 2023 WL 2366643 at *5 (citing Bon Ayre II, at 234).
10
trigger an analysis of the § 7052(c) factors. The addition of a driveway to each unit
of a community and repainting a maintenance building were deemed sufficient “door
opener” costs to move to the last prong of § 7052’s test.35
3. Sandhill
This “directly related,” “door opener” threshold was further clarified in
Sandhill. In Sandhill, the Delaware Supreme Court expressly disavowed any
reading of the Act that required a landowner to offer evidence of its original costs
and expected return to satisfy the “directly related” test:
[t]here 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.” 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” – 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.36
The Sandhill court then explained that some correlation between the cost
expenditure and proposed rent increase was required. Specifically, a landowner
could not expend minimal or nominal cost only to turn around and request a
disproportionate rent increase. “To satisfy [the directly related] requirement, there
35
Donovan Smith, 2018 WL 3360585 at *3 (Del. 2018) (TABLE). The Donovan Smith opinion
references compliance with 25 Del. C. §§ 7040, 7042.
36
Sandhill, 210 A.3d at 729.
11
[needed to] be a material capital expenditure or increase in operational or
maintenance expenses that [had] a substantial relationship to the rent increase
sought.”37 “If a landowner [could] show that its costs [had] gone up, that [opened]
the door to a rent increase based on § 7052(c)’s factors, including market rent.”38
Those three cases – Bon Ayre II, Donovan Smith, and Sandhill – outlined an
analytical framework for what constitutes and satisfies “directly related.” In sum,
the directly related requirement is met if a landowner “offer[s] evidence that[,] in
making some capital improvement[,] [landowner] has incurred costs that are likely
to reduce its expected return.”39 The “justification” process outlined by the Act –
and clarified by the Delaware Supreme Court – was intended to be moderate,
equitable, and balanced.
B. The Arbitrator Committed Legal Error by Misinterpreting and
Misapplying § 7052
As previously outlined, a landowner is permitted to raise a homeowner’s
rental rate above the average annual CPI-U increase if the landowner can justify the
conditions set forth in 25 Del. C. § 7052. There is no dispute here that Landowner
satisfied 25 Del. C. § 7052(a), and maintained the requisite clean bill of health in
37
Id.
38
Donovan Smith, 2018 WL 3360585 at *1 (emphasis added).
39
Sandhill, 210 A.3d at 729.
12
terms of safety violations. Accordingly, the Arbitrator found that Landowner
satisfied this initial qualifying condition.
With this first hurdle cleared, Landowner needed to demonstrate that the
proposed rent increase was “directly related to operating, maintaining, or improving
the manufactured home community.”40 The Arbitrator concluded that the three
capital expenditures, totaling $66,650.00, were directly related to operating,
maintaining, or improving the community:
Based on the testimony and evidence presented[,] there is
no doubt that the removal of the barn and swimming pool
and repairs and improvements to the sales office were
related to the operation, maintenance, and improvement
for the management of Ridgewood Manor . . . . these three
(3) capital improvements benefited the homeowners in
some manner however tenuous it may be. I, therefore,
conclude that the three (3) capital improvements, totaling
$66,650[.00] (amount claimed in PowerPoint presentation
to homeowners) are directly related to operating,
maintaining[,] or improving the community.41
With the Arbitrator’s finding that the “door opener” costs were related to the rent
increase, the next step of her review should have been to consider any relevant §
7052(c) factors – in this case, market rent. That review did not occur.
40
25 Del. C. § 7052 (a)(2).
41
Decision, 8.
13
Instead, the Arbitrator added an additional layer of “directly related” analysis
not required by the Act. She outlined the issue as one of first impression:
[t]he critical issue that I need to resolve is whether a
landowner, regardless of whether they were or were not
the purchaser of the mobile home community may claim
costs of acquisition, including capital contribution,
mortgage interest, depreciation[,] and goodwill
amortization, as costs “directly related to operating,
maintaining[,] or improving the manufactured home
community” or, put another way, use such acquisition
costs, on the cost side of its ledger, to prove that its
expected rate of return has decreased or has not been
met.42
The Arbitrator exceeded her authority with the addition of this “first
impression” layer of analysis. Contrary to the Supreme Court’s guidance, the
Arbitrator proceeded to hold Landowner to a markedly higher evidentiary standard
than required by the precedential “modest” burden outlined by Bon Ayre II and its
progeny. The Arbitrator expanded the “directly related” test to Landowner’s cost
and expense associated with the acquisition of Ridgewood Manor.
It is undisputed that Arbitrator found that Landowner met the first two
statutory requirements to raise rent above inflation: (1) it had no health or safety
violations in accordance with 25 Del. C. § 7052(a)(1); and (2) Landowner satisfied
25 Del. C. § 7052(a)(2), as it spent $66,650.00 to improve the community. The
Arbitrator, albeit with virtually no explanation, made this express finding about the
42
Decision, 9.
14
$66,650.00. This expense was a direct reduction of Landowner’s income by
$66,650.00. The next step of the established analytical and statutory framework
required the Arbitrator to analyze the § 7052(c) factors. Instead, after determining
the capital expenditures were directly related to the operation, maintenance, and
improvement of the community, she applied the same directly related standard to the
Acquisition Costs. The Arbitrator misapplied the § 7052 test – and this
misapplication constitutes legal error.
C. The Arbitrator Committed Legal Error by Creating an Analytical
Schematic Inconsistent with the Statutory Framework
Much of the briefing and oral argument in this case outlined and discussed, at
great length, Landowner’s financials, Landowner’s return on its investment, and
discovery issues below. This Court finds much of this extended discussion
superfluous to the central issue of this appeal. Hyperfocus on accounting and
business principles here misses the mark.
According to the Delaware Supreme Court, neither this Court nor an
Arbitrator can “impos[e] a requirement on the community owner that the statute does
not contain.”43 Whether application of a two-tiered “directly related” standard or
insertion of an equitable standard,44 the Arbitrator cannot superimpose requirements
43
Sandhill, 210 A.3d at 729.
44
The Arbitrator hinted at, although did not directly apply, the following: “[T]o allow such
acquisition costs to offset any income in order to create the “door opener” to justify a rent increase
under the Act would put both the tenants and existing community owners at an unequitable
15
onto the Act that are not evident in the statutory language. In 2021, the Delaware
Supreme Court reiterated that “the role of the arbitrator under the Act is to render a
decision employing the standards under § 7052.”45 Here, the Arbitrator employed a
different standard.
By not following § 7052’s analytical framework, the Arbitrator diverted from
the standards set forth by the Act. This diversion resulted in conflation of the legal
issues – and the imposition of a heightened burden on Landowner not found in the
Act. The Arbitrator found the capital expenditures to be “door opener” costs directly
related to the rent increase. To meet its prima facie burden, a landowner must offer
evidence that, in making some capital improvement, the community owner incurred
costs that are likely to reduce its expected return.46 A homeowner then becomes
entitled to rebut that prima facie case by offering evidence that the expenditure does
not, in fact, reflect any increase in costs – for example, because the expenditure was
offset by reduced expenses in other areas.47
disadvantage since the new owner would be unlikely to ever achieve its desired rate of return using
six and seven figures for capital contribution and depreciation.” Decision, 10.
45
Rehoboth Bay Homeowners’ Ass’n v. Hometown Rehoboth Bay, LLC, 252 A.3d 434, 442
(Del. 2021).
46
Sandhill, 210 A.3d at 729.
47
Id.
16
After finding that Landowner had demonstrated its prima facie case,
Arbitrator did not burden-shift appropriately – namely, require the HOA to show
that the capital expenditures were offset by reduced expenses in other areas. Rather,
the Arbitrator reutilized the “directly related” standard to analyze the Acquisition
Costs. This analysis resulted in the Acquisition Costs being carved out of
Landowner’s financials, which contributed to the Arbitrator’s finding that
Landowner could not meet its § 7052(a)(2) burden. By making this finding, the
Arbitrator recalibrated Landowner’s burden from “modest” to substantial. This
recalibration created a higher standard for Landowner to meet with no support in the
Act itself. The imposition of this burden constitutes legal error and cannot stand.
V. Conclusion
The case presented to this Court on appeal pivots around the Arbitrator’s
determination that Landowner failed to meet the statutory preconditions to seek an
above-inflation rent increase. Specifically, in denying Landowner’s proposed rent
increase, the Arbitrator concluded that it had failed to meet its burden under 25 Del.
C. § 7052(a)(2). Arbitrator substituted a legal standard and analysis inconsistent
with the current status of Delaware law. This substitution constitutes legal error.
Accordingly, the Arbitrator’s decision must be REVERSED.
17
IT IS SO ORDERED.
18