SLJPE;RioR COURT

oF THF_
STATE OF DEI_AWARE

E. SCOTT BRADL_EY SUSSE)< COuNTY COuRTHOuSE
moss 1 THE CiR<:LE, SuiTE 2
GEORGETOWN, DEL_AWARE 19947
TELEPHONt-; (302) 856-5256

September 13, 2018

Brian S. Eng, Esquire l\/liehael P. l\/lorton, l§squirc
Community legal Aid Society, lne. Nicolc l\/l. Faries, l~isquire
840 Walker Road David C. Zerbato, Esquire
Do\/er, DE 19904 l\/liehael P. l`\/lorton, P.A.

3704 Kennett Pil<c` Suite 200
Green\/ille, DE 19807

RE: S¢mdlzill Acres Home Owners Associati()n v. Sandhill Acres MHC, LLC
C.A. No: Sl7A-08-001

I)ear Counsel:

'l`his is my decision on Appellant Sandhill Acres llome Owners Association`s
("SAHOA”') appeal ot`Arbitrator James P. Sharp`s decision that /\ppellee Sandhi|l
Aeres l\/lHC, LLC ("Sandhill Aeres”) is entitled to increase its monthly lot rent to the
market rate ot` $455 per lot because Sandhill Aeres spent 312,l85 to improve the
water Jfiltration system for the Sandhill Acrcs l\/lanuf`actured llomc Community.
Sandhill Aeres is the owner of the l28 lot Sandhill Aeres l\/lanul`aetured Home
Community located in Sussex County, Delaware. The community is subject to the
Rent Justilieation Aet (the “Aet”).' ln communities like Sandhill /\eres, the residents

purchase their homes but rent the land on which their homes sit. S/\HO/\ is the

 

' 25 l)t'/.(`. §§ 7()4()-7()4().

 

homeowners association representing the 16 residents opposed to the proposed rent
increase

Sandhill Acres sought to increase its monthly lot rent to the market rate 0f`$455
per lot per month as established in a market rent survey. This increase would
represent an increase above the rate of` inflation Sandhill Acres sent out notices of`
the rent increase and held meetings with the residents At the meetings, Sandhill
Acres presented the market rent survey. Sandhill Acres also disclosed that it spent
312,185 to upgrade the water filtration system in the community. SAH(_)A did not
agree to the rent increase and filed for arbitration An arbitration hearing was held
on l\/Iay 23, 2017. The Arbitrator ruled that Sandhill Aeres was entitled to increase
its monthly lot rent to the current market rate of`$455 per month because Sandhill
Acres had spent $ l 2,1 85 to upgrade the water filtration system SAHOA now appeals
that decision to this Court.

STANDARD OF REVlEW

“The Delaware Supreme Court strongly signaled that the scope of` review by

the Superior Court in appeals pursuant to the Act requires a substantial evidence and

error of` law review as opposed to a de novo consideration of` the record.”2 'ic

 

3 Br)n Ayre Laml, I,Ir(`, v. /)’r)n /fyre ('()mmuni!_t/' A.\',s'r)ciulirm. 2016 Wl, 7036580. al *2
(Del. Super. Dee. 2. 2016).

id

 

 

Delaware Supreme Court noted that the “appeal provision provides that any review
by the Superior Court will be “on the record and the Court shall address written
and/or oral arguments of`the parties as to whether the record created in the arbitration
is sufficientjustification under the Code f`or the community owner`s proposed rental
increase in excess ofthe CPl-U. That usage, although loose, is associated with the
kind of`review that is given to determinations by administrative agencies Under that
form of`review, ifa factual finding of`the initial tribunal is supported by substantial
evidence, that finding must be given def`erenee."”"`
The Apnlicable Statutory Law

Sandhill Acres seeks to increase the lot rent in its community by more than the
consumer price index. The Rent justification Act allows a manufactured home
community landownerto increase the lot rent by the rate of`infiation without showing
more.4 However, to raise the lot rent by more than inflation, the Act sets forth three

conditions a landowner must satisf`y.5 'l`he first condition a landowner must satisfy

is a clean bill of`health during the preceding 112-month period.“ There is no allegation

 

" Br)n A_t'rr» l,cmd, 1.[/( `. \'_ Br)n /f.vrc ('r)mmwzi!~t."-*f.\'.s'c)t'iulion` 133 A.}d 55‘). at f`n_ l l (l)el.
l"eb. 25. 2016)("[`able).

* 25 pete § 7042(3).
525 r)t~i.c. § 7042(3)<1).

(` /d.

'v.)

 

that Sandhill Acres did not meet this obligation. The landowner must then show that
the “proposed rent increase is directly related to operating, maintaining or improving
the manufactured horne community, and justified by l or more factors listed under
subsection (c) of[§'/'O¢lZ].”7 Sandhill Acres argues that the proposed rent increase is
based upon installing an improved water filtration system and is directly related to
improving the community. Subsection (c) lists eight f`actors.g 'l`he one at issue here
is market rent.° l\/larket 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...”'ll The first six factors relate to capital improvements and changes
in taxes, utility charges, insurance and financing costs, reasonable operating and
maintenance expenses, and repairs other than for ordinary wear and tear. As such, the
first six relate to the cost side of`operating, maintaining or improving a mobile home
park. The seventh factor is market rent and it too must relate to operating,
maintaining or improving a manufactured home park. The eighth factor involves

rental assistance provided by the community owner to the residents

 

7 25 t)t»/_c'_ § 7042(3)(2).
“ 25 D@/_c", § 7042(¢)(1)-(8).
" 25 De/.(‘, §7042(¢)(7).

m /d_

 

The Arbitration llearing
The Delaware l\/lanufactured Home Rehabilitation Authority appointed James
P. Sharp, Esquire, to serve as the Arbitrator. 'l`he Arbitration hearing was held on
l\/lay 23, 2017. The following five witnesses testified at the arbitration hearing:
l. Gar_v Creppon
Creppon has worked at Sandhill Acres for 28 ycars. Creppon is now the
property manager for Sandhill Acres. Creppon described the water system at
Sandhill Acres.
2. Bob Ruais
Ruais is the Director ofOperations for Areap, LLC, the management company
for Sandhill Acres. Ruais testified (l) about the water filtration system cost
and the increase in others costs; (2) that the market rent is $455 per lot; (3)
that costs were going up and the return on the property had declined; (4) that
the sewer costs and other operating expenses had gone up; (5) that the
improved water filtration system cost 3 l 2, l 85; and (()) that the water and sewer
costs were up $83 per lot and net operating earnings were down $57 per lot.
3. Rovee Ashton Rowles
Rowles works for Colliers lnternational as a commercial real estate appraiser

Rowles testified that market rent is $455 per lot.

 

4~&@€££§¥

Ray has been a tenant in Sandhill Acres for 26 years Ray testified about the

conditions in Sandhill Acres.
5. c_ha_riamag@

Dodge is a tenant in Sandhill Aeres. Dodge testified about the conditions in

Sandhill Acres.

At the arbitration hearing, Sandhill Acres relied on the $l2,l85 cost of the
improved water filtration system as proof`that the proposed increase to market rent
was directly related to operating, maintaining or improving the community as
required by 25 De/.C. § 7042(a)(2). The cost ofthe improved water filtration system
divided between all of the residents in Sandhill Acres equaled $7.93 per lot per
month. Although there was some testimony about an increase in other expenses since
the beginning of 2012, nothing was provided in writing about those expenses at the
meetings with residents or at the arbitration hearing. 'l`heref`ore, the only expense
received into evidence and provided to SAl lOA in writing was for the water filtration
system.

The Arbitrator’S Decision

There were three issues at the arbitration hearing:

l. Whether the rent increases were related to operating, maintaining or

6

 

improving the manufactured home commonly.
2. Whether the market rentjustified the rent increases, and
3. Whether the required information was provided at the community meetings

l. Whether the rent increases were related to operating maintaining or
improving the manufactured home communitl.

The Arbitrator concluded that the $12,185 cost to improve the community`s
water filtration decision was related to improving the community, reasoning that the
community had experienced problems with the water and that the improved water
filtration system addressed those problem and thus benefitted the community. The
Arbitrator further decided, based on one of the Supreme Court’s statements in Bon
Ayre Il, that “[i]f`a landowner invests in its development, and therefore has improved
the ‘community,’ it can also reap the reward from that investment through higher than
inflation rent increases,” that Sandhill Acres could raise its rent to market rent~ not
just the rent that would cover the cost ofthe improved water filtration system.

2. Whether the market rent iustified the rent increases.

The Arbitrator decided that the market rent survey prepared by Rowles was
properly done and, as such, established that the monthly market rent was $455 per lot.

3. Whether the required information was provided at the community meetin,<§.

The Arbitrator found that since both the Rowles report and invoice for the cost

of`the improved water filtration system were disclosed to the residents at the meetings
that the Act`s disclosure requirements were Satisfied. The Arbitrator, in reaching his
decision. did not rely on Ruais` generalized testimony regarding increases in various
costs and the decline in net operating income for Sandhill Acres. l\/lorcover, those
items were not disclosed to the residents at the meetings

B()n /fyrc //

The sole issue on appeal is whether the expenditure by Sandhill Acres of
$l2,185 for the improved water filtration system is sufficient to allow it to charge its
existing residents market rent of $455 per lot.ll What a community owner must
establish in order to charge its existing residents market rent was addressed by the
Supreme Court in Bon A_w'e [l.'l In B()n A,i'rc ll, the community owner sought to
justify a rent increase based on market rent alone. 'l`he Superior Court rejected that
rationale and the Supreme Court affirmed the Superior Court`s decision. In doing so,
the Supreme Court examined the language, purpose and structure of the Act and
addressed how a community owner could justify an increase to market rent for its

existing residents The Supreme Court noted that the relationship between a

 

" The lack ofdisclosurc at the required meetings with the residents about what Ruais
would testify to at the arbitration hearing regarding increases in various costs and the decline in
the net operating income for Sandhill /\cres is not an issue on appeal because the /\rbitrator did
not re|}v on those matters to reach his decision.

|_‘.

149 /\.3d 227 (l)el. 201()).

 

community owner and its residents placed a disproportionate amount ofpower in the
community owner’s hands in establishing rental rates because a resident could not
easily or cheaply move his home from one community to another. The Supreme
Court also noted that the Act protects residents by preserving the initial relationship
between them and their community owner by limiting the manner in which a
community owner can raise the existing residents` rent. The Supreme Court further
noted that in order for a community owner to raise its rent for existing residents above
the consumer price index the community owner must show that its costs have
increased This is all reflected in the following statements by the Supreme Court:

The market rent factor appears seventh in § 7042(c)’s list of
factors and is categorically distinct from the other factors in that it is not
measured solely by tangible costs inside the community but rather by
external ‘“market forces.” But, the language, purpose, and structure of
the Rent Justification Act require more than just that factor for a
landowner to raise rent above CPI-U.13

>l<>l<>l<>l<>l<>l=>l<>l<>l<>l<>l<

The Act protects homeowners by preserving the initial
relationship between themselves and the landowners, which presumably
takes into account the landowners’ costs and expected profits, unless the
landowners’ circumstances change in specific ways. 'l`o take into
account ordinary inflation, the Act allows a landowner to raise rent by
the average annual increase ofCPl-U. To impose an increase beyond
CPl-U_ the landowner must prove more. ln particular, it must show that
the increase is “directlv related to the operating, maintainingior

 

"" /d. at 234.

improving the manufactured home coinmunity.” That is the landowner
must show that its original expected return has declined` because the
cost side of its le_dger has_grown. lfa landowner can show that its costs
have ggte ups that opens the door to a rent increase based on §7042(c)’s
factors, including market rent. lf a landowner invests in its
development, and therefore has “‘improv[ ed]" the comm unity, it can also
reap the reward from that investment through higher than-inflation rent
increases But, unless the landowner has seen its costs increase for
“operating, maintaining_or impro\@g the manufactured home
cominunitv"’ the Rent .lustification /\ct preserves the initial relationship
the landowner creates between its revenue and its costs.”"1 (Emphasis
added.)

>l<>l<>l<>l<>l=>l<>l<>l<*>l<>l<

But there is nothing illogical about the General Assembly’s
determination that ifa landowner is to raise rates for homeowners above
the rate of inflation, a landowner must show some increase in the costs
on its income statement This statutory requirement is a modest one.li

***********

Taken together, these statements show that the Supreme Court requires a
community owner to show that its costs have increased in order to justify an increase
to market rent for its existing tenants. lt is not merely enough for a community owner
to show that it has incurred some costs. 'l`he community owner must show that its
costs have increased lndeed, in the portions ofthe Bon Ayre ll decision that l have

quoted, the Supreme Court four times stated, in one way or another, that the

 

 

14 hi at234-235.
" hfat235

10

 

community owner must show that its costs have increased."`
The Supreme Court made clear its ruling on this issue again in Do//)ov¢m,‘7
stating:
In Bon Ayre lsand, L[JC v. Br)n Ay)'e Commzmity As.s‘()ei`uti`()n, we
made clear that "the landowner must show that its original expected
return has declined, because the costs side of its ledger has grown. lfa

landowner can show that its costs have gone up, that opens the door to
a rent increase based on § 7042(c)`s factorsq including market rent.""‘

*>l=*>i<>l<>l<>f<=l<>l<>l<>l<

I find that the Arbitrator’s decision that Sandhill /\cres was entitled to an
increase to market rent for its existing residents is not in accordance with the
applicable law or based upon substantial evidence in the record because Sandhill
Acres did not establish that its costs increased in such a manner that caused its
original expected return to decline The Arbitrator relied on the following statement
in Borl Ayre ll to support his decision:

lf a landowner invests in its development, and therefore has
improved “improv[ed]” the community, it can also reap the reward from

 

"‘ (1) "...because the cost side ofthe ledger has grown." (2) "lfa landowner can show
that its costs have gone up." (3) "But. unless the landowner has seen its costs increase." and (4)
"a landowner must show some increase in the costs on its income stateinent." ((,`itations
omitted).

‘7 l)r)m)\'¢m .S'milli l[()/f \.’. Dom)vun .S`mt`lh MH}’. 20|8 WL 33()()585 ([)cl. .luly l(). 2()18).
m ]d. at * l.

ll

 

 

)»l*)

that investment through higher than inflation rent increases

The Arbitrator used this isolated statement to reason that a mere investment,
regardless ofthe amount, by the community owner can form the basis for an increase
to market rent. However, this is an incomplete statement on the issue. The Supreme
Court added the following right after this statement:

But, unless the landowner has seen its costs increase for

“operating, maintaining or improving the manufactured home

community,” the Rent Justification Act preserves the initial relationship

the landowner creates between its reserves and eosts.z"

The Supreme Court in Bon Ayre 11 recognized that a community owner incurs
costs each year in operating, maintaining or improving a manufactured home
community. The Supreme Court also recognized that a community owner’s costs and
expected profits are used to establish the initial relationship between a community
owner and its existing residents To alter that relationship and raise the rent above
the consumer price index, the Supreme Court has made it clear that the community
owner’s costs must increase in such a manner that has caused its original expected

return to decline Otherwise, the Act preserves the initial relationship between the

community owner and its existing residents

 

w Bon Ay)'e Lcmd. L[/(`. 149 /\.3d at 234.
3" ld. at 234-235.

12

Sandhill Acres only established that it spent 812,185 to improve the water
filtration system. Sandhill Acres did not establish that this was an increase in its
costs Sandhill Acres also did not establish that because of this expenditure its
original expected return has declined. ln order for Sandhill tojustify an increase to
market rent for its existing tenants it would have had to offer evidence about its
original costs and original expected return and how the expenditure of $12,185
altered that relationship 1 would expect, as the Supreme Court also expected, that a
community owner incurs costs each year in order to operate, maintain or improve a
mobile home community. That is not enough. A community owner must show an
increase in its costs such that its expected return has declined in order to move to
market rent for its existing residents Sandhill Acres did not show that.

CONCLUS|ON

The Arbitrator’s decision is REVERSED.

lT lS SO OR[)ERED.

Very truly yours,

W

E. Scott Bradley

ESB/sal
cc: Prothonotary

13

