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Sandhill Acres MHC, LC v. Sandhill Acres Home Owners Association

Supreme Court of Delaware

May 14, 2019

SANDHILL ACRES MHC, LC, Respondent Below, Appellant,
v.
SANDHILL ACRES HOME OWNERS ASSOCIATION, Petitioner Below, Appellee.

          Submitted: April 24, 2019

          Court Below: Superior Court of the State of Delaware Case No. S17A-08-001 ESB

         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.

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

          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 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 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 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 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 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]

         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 ...


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