IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

REHOBOTH BAY

HOMEOWNERS' ASSOCIATION,
C. A. No. S18A-03-003 CAK

Appellant,

HOMETOWN REHOBOTH BAY, LLC,

Appellee.

Submitted: February 17, 2020
Decided: March 16, 2020

Upon Appeal from the Decision of the Arbitrator

AFFIRMED

MEMORANDUM OPINION AND ORDER

Olga K. Beskrone, Esquire, Baird, Community Legal Aid Society, Inc., 100 W. 10"
Street, Suite 801, Wilmington DE 19801, Attorney for Appellant

Michael P. Morton, Esquire, Morton, Valihura & Zerbato, LLC, 3704 Kennett Pike,
Suite 200, Greenville, Delaware 19807, Attorney for Appellee

KARSNITZ, J.
Statutes are often the product of widely divergent interests. As a result,
statutory schemes are often laced with contradictory or, more commonly,
ambiguous requirements. The Rent Justification Act! (the “Act”) is one such statute.
The requirements of the Act are delivered with such parisology that the reader is
never certain as to where it stands. Arguments regarding the interpretation of the
Act sometimes border on batrachomyomachy. Fortunately, our Supreme Court has
on a number of occasions given fair meaning to the provisions of the Act, thereby
giving me guidance to sort through the issues.

Appellee, Hometown Rehoboth Bay, LLC (“Landowner”), is the owner
of a manufactured housing community located on its namesake Bay. Landowner
sought to raise its lot rent and initiated the process set forth in the Act. Landowner
presented evidence it believed satisfied the mandates of the Act. Appellant,
Rehoboth Bay Landowners’ Association (“Homeowners”) was not convinced that
the rent increases had been justified, and asked that the issues be arbitrated as
allowed by the Act.

An extensive arbitration proceeding was conducted, including post-

hearing submissions. The Arbitrator issued his findings and decision” that

 

125 Del. C. §7040 et seq.
* See generally the Arbitrator's Letter Opinion and Order dated March, 2018 (the “Arbitrator’s
Decision’).
Landowner had met the conditions required for a rental increase, but had not
justified the full amount requested. The Arbitrator did approve a rental increase of
$74.85 per month plus the Statutory Consumer Price Index amount.

Homeowners appealed the Arbitrator's Decision. The matter was
stayed pending decision of the Delaware Supreme Court in a different case
addressing the Act.’ After Sandhill was decided, the parties briefed all issues. Oral
Argument was held on February 17, 2020 and I reserved decision.

Homeowners provided certain documents which were not part of the
record. Landowner moved to strike the records and Homeowners moved to

expand the record. I deferred decision on this issue as well.

THE ARBITRATION PROCEEDING
AND THE ARBITRATOR'S
DECISION

25 Del. C. §7042 (a)(1) and (2) are colloquially called the "door opener"
provisions of the Act. In order to seek a rent increase, a landowner must first show
that the landowner was not in violation at any health or safety regulations for the
previous twelve months. This provision is rarely at issue, and was not at issue here.
The parties stipulated that Landowner satisfied it. The other door opener, frequently

litigated, is that the landowner must show that the proposed increase "...is directly

 

> Justification is not required for this increase.
4 Sandhill Acres MHC, LC y. Sandhill Acres Home Owners Association, 210 A.3d 725 (Del. 2019)

(“Sandhill”).
related to operating, maintaining or improving... "> the community. If the door
opener requirements are met, the landowner must still meet one of the factors set
forth in 25 Del. C. §7042 (c). The Arbitrator determined Landowner met the

"directly related" requirement:

..with proof of improvements to the community
that cost $20,646.00 and for which it is not seeking
recovery through rent increases.°

These costs included expenditures for maintaining a shop floor, adding
beach sand, maintaining lift stations, maintaining wells, fixing a drainpipe and
repairing a sea wall. Landowner asserted that these expenses satisfied the “directly
related” requirement, and then presented evidence it argued satisfied § 7042 (c)(1),

which reads in full:

The completion and cost of any capital improvements
or rehabilitation work in the manufactured home
community, as distinguished from ordinary repair,
replacement and maintenance.

The evidence consisted of particularized costs for a number of items,
most particularly a bulkhead stabilization expense of almost a half million dollars.

The Arbitrator reviewed all of the items, rejected some, and accepted others,

 

525 Del. C. §7042.
© Arbitrator's Decision, pp. 8, 9.
including the bulkhead expense. The Arbitrator then calculated the per lot increase
for the items allowed and permitted a rent increase of $74.85 per month to recapture

the allowed expenses.

Landowner has not appealed the Arbitrator's Decision denying certain
of its expenses. With respect to §7042(c)(1), Homeowners challenge only the
bulkhead expense. Homeowners also challenge the decision that Landowner met the

"directly related" requirement.

The Act requires that I give deference to the factual findings of the

Arbitrator and review his rulings on questions of law for "legal error".’

THE "DIRECTLY RELATED" STANDARD

In Bon Ayre Land, LLC v. Bon Ayre Community Association,® (often

called “Bon Ayre II’), the Delaware Supreme Court articulated:

by requiring a showing that above inflation
rent increases were related to community
expenses, the General Assembly has simply
said that a landowner must show that its
costs of operation have increased in a
manner that has caused the landowner's
‘Just, reasonable and fair return on their
property’ to decline ? (Internal citation
omitted)

 

7 25 Del. C. §7044.
8149 A.3d 227 (Del. 2016).
9 Id. at 234.
This language steered parties litigating rent increases to focus on an
accounting analysis. In Sandhill Acres Homeowners Association v. Sandhill Acres
MHC, LLC,'° this Court imposed a requirement imbedded in the “directly related”
standard that a landowner must not only show that it has incurred some costs, but
that costs increased and the landowner's expected return had declined. On appeal our
Supreme Court reversed.'’ The Court defined the standard as follows:

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.’? (Internal citation omitted)

In Sandhill, the landowner proved it had had additional costs of
$12,185 for installation of a new water filtration system to satisfy the “directly
related” requirement.

In his decision in the current case, the Arbitrator found that Landowner
had proved that its costs relating to operating, maintaining and improving the

community increased by $20,646. Homeowners argue that the Arbitrator's Decision

is wrong as a matter of law because the costs incurred were not for improvements

 

102018 WL 4613716 (Del. Super. September 18, 2018).
"| Sandhill Acres MHC, LLC v. Sandhill Acres Homeowners Association, 210 A. 3d 725 (Del.
2019).

12 Td. at.729.
but for maintenance. In making this argument, Homeowners rely upon language
from Sandhill Acres in which the Court said the following:

...1t 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.'?

Homeowners focus narrowly on the "capital improvements” language
and argue the costs were not “capital improvements." In my view, Homeowners
read the quoted language out of context, and too narrowly. The statutory language
of §7042(a)(2), the "directly related" language, allows costs for "...operating,
maintaining or improving" the community. The quoted language was a shorthand
description and did not foreclose consideration of costs within the statutory
categories. On this topic, the Arbitrator was correct, and I affirm his view.

Homeowners also challenge the Arbitrator's Decision as not supported
by the evidence of record. As I read their argument, Homeowners contend that, to
meet its burden, Landowner must provide evidence that the increased costs result
in lower returns or profits. For me, this is inconsistent with the Sandhill decision.

In the Superior Court Sandhill decision, the Court engaged in the accounting

analysis suggested by Homeowners. This accounting approach was rejected in the

 

13 Sandhill Acres, 210 A.3d. at 729.
Supreme Court Sandhill decision. To me, Sandhill, despite language that may
suggest inquiry into the effect of costs on profits, takes a narrower view. The
Supreme Court in Sandhill ultimately described the low bar set by the "directly
related" standard. In my view, the bar was met here as a matter of fact. There is
substantial evidence to support the Arbitrator's factual determination.

I address a related issue. Homeowners sought to supplement the record
with correspondence from a prior "rent justification" case between the parties. The
correspondence is offered to show that, in that prior case, Homeowners sought
financial data from Landowner to examine the effect of any costs to improve the
manufactured home community. Landowner opposed the request to expand the
record. Homeowners now want me to remand the case to the Arbitrator so that the
additional evidence can be adduced, and factored into the Arbitrator's decision.

I reject Homeowners’ request. First, litigation must come to an end.
Second, the Act limits me to an analysis of the record made.'* I also adopt the
reasoning of the Court in Jacona v. Hometown Rehoboth Bay, LLC’ on this very
issue, which denied a similar request.

I recognize that Sandhill gave a breath of life to Homeowners’ position

that the accounting analysis is relevant. I also recognize that pre-Sandhill efforts to

 

14 See 25 Del. C. §7044..
15 Tacona v. Hometown Rehoboth Bay, LLC, C.A. No. S17A-04-001RFS, Stokes, J. (Del. Super.
September 27, 2019 (ORDER), 2019 WL 4740522 (September 27, 2019).

7
obtain the information were routinely rebutted by landowners. While I have
concerns about the predicate described by Homeowners (whether an accounting
analysis is ever appropriate), their choice dictates the result here, as it did in the
lacona case. I deny Homeowners’ request to either supplement the record or remand

the case to the Arbitrator.

THE ADDITIONAL REQUIREMENTS OF §7042(c)

 

Once a landowner has satisfied the "directly related" requirement, it
must also prove one or more factors listed in 25 Del. C. §7042(c) to get to the
promised land of rent justification. The most common factor seems to be "market
rent."'© Here, Landowner chose a different path and primarily relied upon 25 Del.
C. §7042 (c)(1),"” which reads in full:

The completion and cost of any capital
improvements or rehabilitation work in
the manufactured home community, as
distinguished from ordinary repair,
replacement and maintenance.
The challenged claim involved the repair and almost complete

replacement of a bulkhead at a cost of close to one-half million dollars. Homeowners

vociferously argue that the work on the bulkhead is “ordinary repair” and thus does

 

1695 Del. C. §7042(c).
17 Landowner also made claims under 25 Del. C. §7042 c(2) and c(3), but they are not disputed.
not meet the §7042 (c)(I) standard. The short answer is that there was more than
sufficient evidence in the record to support the Arbitrator's Decision that the expense
did qualify. The bulkhead in the community was in poor shape and it was replaced
by an alternate construction method. I agree with the Arbitrator's Decision that this
cost was for capital improvements or rehabilitation work, and not ordinary repair,
replacement and maintenance.

All other items found by the Arbitrator to be within the boundaries of
§7402(c)(1), (2) or (3) are supported by substantial evidence and I affirm his
findings. I also note that the Arbitrator rejected some of Landowner’s claims, and
no appeal was taken as to these determinations. The Arbitrator's mathematical
calculations are accurate.

The Arbitrator held the appropriate hearing and issued a thoughtful and

factually supported decision. I differ to a degree with respect to his "different

reading" of §7042(a)(2),'® but that difference does not affect any of Homeowners’

claims.

 

18 See Arbitrator's Decision, p. 11.
For the reasons set forth in this Opinion, I affirm the Arbitrator's

Decision.

IT ISSO ORDERED.

Craig AKarsnitz ey

 

cc: Counsel of Record
Prothonotary’s Office

LS V 41 UVH Ou02
, ALNNOS X4SSNS
_ABVLONOHLOUd OT

10
