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Hoa v. Donovan Smith MHP, LLC

Supreme Court of Delaware

July 10, 2018

DONOVAN SMITH HOA, Appellant Below, Appellant,
v.
DONOVAN SMITH MHP, LLC, Appellee Below, Appellee.

          Submitted: June 13, 2018

          Court Below: Superior Court of the State of Delaware C.A. No. S17A-06-001 MJB

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

          ORDER

          Leo E. Strine, Jr. Chief Justice

         In this appeal, the principal issue raised by the appellant, Donovan Smith HOA (the "Homeowners"), is whether Donovan Smith MHP, LLC (the "Landowner") satisfied its obligation under the Rent Justification Act to show that its proposed rent increase is "directly related to operating, maintaining or improving the manufactured home community" as a prerequisite to being able to obtain an above-inflation rent increase.[1] In Bon Ayre Land, LLC v. Bon Ayre Community Association, [2] we made clear that "the landowner must show that its original expected return has declined, because the cost side of its ledger has grown. 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."[3]

         Before the arbitrator in this dispute, neither party was represented by counsel. The Landowner presented evidence in support of its argument that its costs had increased in a manner that satisfied § 7042(a)(2), [4] including testimony that "in 2016 driveways were installed in every unit," and that "the [Landowner] painted the maintenance building . . . ."[5]

         In their closing argument, the Homeowners argued that this evidence was not sufficient because the Landowner "hasn't proven that he's had increased expenses. . . . [or] shown any data that says that he is having trouble with his . . . books where we're . . . balancing his books so that he can make a profit and continue his business in a way."[6]

         But before the hearing, the Homeowners had not sought information about the Landowner's regular costs of operations, and at the hearing, did not dispute that the Landowner had added a driveway to each unit and repainted the maintenance building.[7] Although the Landowner did not present evidence of what these improvements cost, the arbitrator was charged with addressing the evidence in front of him and making fair inferences from it.[8] One fair inference is 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 Landowner's rate of return would have been reduced.

         On appeal to the Superior Court, the Homeowners argued that the arbitrator erred in deciding that the Landowner had shown that "its profits were down because its costs were up, "[9] and thus by granting a rent increase of $29.90, or 6.7%, and in deciding that the Landowner's rent increase was justified by the market rent factor of § 7042(c).[10] But the Homeowners acknowledged that "it is fair to assume that [the Landowner] incurred some expenses by installing driveways," despite their contention that "the record lacks any evidence as to what that cost might be."[11] And the arbitrator's conclusion that the Landowner satisfied the market rent factor was based on his review of the entire record and his observation that even with the $29.90 rent increase, the Homeowners' rent "is still far below the rents of Donovan Smith's competitors."[12] The arbitrator's findings were justified by the substantial record evidence of the market rents at comparable communities.[13]

         In the course of affirming, the Superior Court made statements that are inconsistent with the very structure of the Rent Justification Act, [14] and our decisions interpreting it.[15] To that point, the Superior Court suggested that a landowner 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 is "directly related to operating, maintaining or improving the manufactured home community"[16] when it stated:

Nothing in the statute, however, requires that the private owner expose its financial information to public scrutiny. While the intent of the statute is to maintain the same relative return on the property that the owner was satisfied to receive before the statute took effect, there is no requirement that it be a penny for penny or dollar for dollar analysis, at least in these circumstances, when the owner is seeking to justify the increase based on market rent.[17]

         That statement was erroneous, and based on a logic that is in general inconsistent with the principles underlying all litigation in our courts. To the extent that there is a legitimate basis for claiming confidentiality as to any business record-a status that has to be proven-the Superior Court, or the arbitrator in the first instance, may condition discovery and use of the document on appropriate conditions.[18] But it is not the case that a landowner may proceed under the Rent Justification Act to argue that it is entitled to an above-inflation rent increase without also being willing to produce documents to contesting homeowners that allow them to fairly test that assertion.[19]

         For present purposes, we affirm the arbitrator's decision on the case-specific, narrow basis that on the record before him, the arbitrator had a rational basis to reach his finding that the Landowner's return had declined because of its increased cost of adding a driveway to each unit and repainting the maintenance building.[20] We see no basis in the record to conclude that the Homeowners fairly presented the arbitrator with a request to require the Landowner to produce copies of its underlying books and records, or that the Homeowners argued before their closing argument, when the record was closed, that the Landowner was obligated to do so.[21]

         Evidentiary hearings are critical to the efficient procession of justice, and appellate courts are rightly hesitant to second-guess the initial fact finder on the basis of arguments not fairly presented. That guides our result here, where we accord deference to the arbitrator, while making clear that 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 ...


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