Bon Ayre Land, LLC v. Bon Ayre Cmty. Ass'n

• Decision Date: 10 October 2016
• Docket Number: No. 25, 2016,25, 2016
• Citation: 149 A.3d 227
• Parties: Bon Ayre Land, LLC, Appellee Below-Appellant, v. Bon Ayre Community Association, Appellant Below-Appellee.
• Court: Supreme Court of Delaware

149 A.3d 227

Bon Ayre Land, LLC, Appellee Below-Appellant,

v.Bon Ayre Community Association, Appellant Below-Appellee.

No. 25, 2016

Supreme Court of Delaware.

Submitted: September 14, 2016

Decided: October 10, 2016

L. Vincent Ramunno, Esquire (Argued), Ramunno & Ramunno, P.A., Wilmington, Delaware, for Appellant Bon Ayre Land, LLC.

Brian S. Eng., Esquire (Argued), James G. McGiffin, Jr., Esquire, Community Legal Aid Society, Inc., Dover, Delaware, for Appellee, Bon Ayre Community Association.

Jeffrey M. Weiner, Esquire, Law Offices of Jeffrey M. Weiner, P.A., Wilmington, Delaware, Amicus Curiae for the First State Manufactured Housing Association.

Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices, constituting the Court en Banc.

STRINE, Chief Justice, for the Majority:

I. INTRODUCTION

This is a case between the owner of a manufactured homes community, Bon Ayre Land, LLC (the “Landowner”), and an association that represents the affected homeowners, Bon Ayre Community Association (the “Homeowners' Association”), about what Delaware law requires the Landowner to show to increase rent above inflation. Their dispute arises under Chapter 70 of Title 25 of the Delaware Code, commonly known as the Rent Justification Act.¹ The Act allows a manufactured home community landowner to increase rent by the rate of inflation without showing more.² But, to raise rent by more than inflation, the Act sets out three conditions a landowner must satisfy. Besides having a clean bill of health in terms of safety violations—the first condition³ —the owner must show that “[t]he proposed rent increase is directly related to operating, maintaining or improving the manufactured home community, and justified by 1 or more factors listed under subsection (c) of [§ 7042].”⁴ Subsection (c) lists eight factors including capital improvements and property tax increases; the one at issue here is market rent: “that rent which would result from market forces absent an unequal bargaining position between the community owner and the home owners.”⁵

Among its many arguments, the Landowner argues that the Superior Court erred in giving effect to the word “and” in § 7042 of the Act and that the Landowner ought to be allowed to justify a rent increase based on market rent alone. The Landowner admits that it failed to present any evidence of its proposed rent increases being “directly related to operating, maintaining or improving” the community.⁶ But, the Landowner argues that the Act cannot be read sensibly as it is plainly written and that the term “and” in § 7042(a)(2) should be read as “or.” If adopted, the Landowner's reading would enable a landowner to increase rent solely by demonstrating the existence of any factor in § 7042(c), including the sole factor relied upon here, which is that market rents are higher than the actual rents charged in the community.

In this decision, we affirm the well-reasoned decision of the Superior Court giving effect to the key word “and” in § 7042. The stated purpose of the Rent Justification Act is to “accommodate the conflicting interests of protecting manufactured home owners, residents and tenants from unreasonable and burdensome space rental increases while simultaneously providing for the needs of manufactured home community owners to receive a just, reasonable and fair return on their property.”⁷ 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. But, the Act provides constraints on increases beyond the rate of inflation by requiring that a landowner meet the test in § 7042. Contrary to the Landowner's argument, nothing is absurd about the use of “and” in joining § 7042's three conditions. Rather, 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.⁸ Only once that showing has been made is a landowner eligible, using the factors set forth in § 7042(c), to obtain the right to raise rents in excess of the statutory inflation adjustment. Consistent with proper principles of interpretation, the Superior Court gave effect to the clear language of the Act and gave it an interpretation that is consistent with the Act's stated purpose.

Because the Landowner concededly made no showing that its proposed rental increase was “directly related to operating, maintaining or improving” the community, the Superior Court properly reversed the arbitrator's ruling that the Landowner could raise rents in excess of CPI-U. Thus, we affirm.

In this decision, we also redress an issue that is likely to recur before arbitrators and the Superior Court under the dispute resolution section of the Rent Justification Act. In deciding the case on alternative grounds, the Superior Court held that a landowner may not obtain the benefit of § 7042(c)(7)'s market rent factor except by producing evidence of actual rents charged in other rental communities.⁹ This ruling was erroneous because the Act does not impose this restriction and does not by its terms foreclose a landowner from relying on other evidence of prevailing market rent. The ruling is also problematic because the Act does not provide for parties or the arbitrator to use compulsory process to obtain evidence from third parties.¹⁰ As a result, the Act does not give landowners (or homeowners for that matter) the tools to compel third parties to provide sensitive information, such as the actual rental agreements in place between landowners and homeowners in other communities. As a general matter, the Act provides that the arbitrator is to use the Delaware Uniform Rules of Evidence “as a guide,”¹¹ and, therefore, parties may support their position about market rental rates with any evidence meeting the traditional standards for relevance and reliability. Thus, landowners may use any evidence in keeping with the Act's provisions for arbitration found in § 7043(d)–(g) to prove that their situation meets the justification.

II. BACKGROUND¹²

A. The Rent Justification Act

This dispute arises under Subchapter III of the Delaware Manufactured Home Owners and Community Owners Act, which is officially titled “Affordable Manufactured Housing” but has apparently come to be known more commonly as the “Rent Justification Act.” Among other things, the Act governs rent increases in manufactured housing communities by requiring a landowner to comply with certain statutory requirements before raising the rent above the average annual increase in the Consumer Price Index For Urban Consumers in the Philadelphia-Wilmington-Atlantic City area—referred to as CPI-U—for the thirty-six months preceding the proposed increase, which in this case was 1.6%.¹³

A landowner that wishes to raise the rent above the CPI-U must engage homeowners in a regimented process under § 7043 involving notice and a meeting with the homeowners. Any homeowner who does not accept the proposed increase after the meeting has 30 days to “petition the [Delaware Manufactured Home Relocation] Authority to appoint a qualified arbitrator to conduct nonbinding arbitration proceedings.”¹⁴ The central issue in this case is what a landowner must show the arbitrator to raise the rent above the CPI-U.

B. The Parties

The Landowner owns a housing community for 50-and-over residents called Bon Ayre. The community is located in Smyrna, Delaware and consists of 194 manufactured homes. The Homeowners' Association is a non-profit corporation organized to represent the interests of the individuals who own the manufactured homes and lease the underlying plots of land from the Landowner. In this case, the Homeowners' Association represents four sets of homeowners.

C. The Current Dispute

In December 2014 and January 2015, the Landowner notified four sets of homeowners that it wanted to raise their monthly rent in excess of CPI-U. The Landowner met with the homeowners to explain the increase as required under § 7043(b). The Homeowners' Association challenged the proposed rent increase in part on the ground that it was not “directly related to operating, maintaining, or improving the community,” which the Homeowners' Association argued was required under § 7042(a)(2). An arbitrator heard the challenge.

D. The Arbitration

After hearing from both sides, the arbitrator issued a decision on April 23, 2015, granting a rent increase above the CPI-U but not to the amount sought by the Landowner. The arbitrator addressed the statutory interpretation issue in this case by finding that “the only way to logically interpret ... § 7042 is that if the rent increase is not being sought for capital improvements, ordinary wear and tear or changes in operating and maintenance expenses then it must be justified by market rent.”¹⁵ In other words, the arbitrator read the word “and” out of § 7042 and held that market rent alone may justify a rent increase above inflation, even if the Landowner presented no evidence of the increase being related to “operating, maintaining or improving” the community.¹⁶ The Homeowners' Association appealed the arbitrator's decision to the Superior Court, as permitted under § 7043(c) of the Act.¹⁷

E. The Superior Court's Decision

The Superior Court disagreed with the arbitrator's interpretation of § 7042(a)(2) and held that the language of the subsection established “a compound condition” requiring both parts to be met.¹⁸ The Superior Court also disagreed with the arbitrator's finding that it is redundant to read the Rent Justification Act as requiring a proposed rent increase based on market rent to also be directly related to costs within the community. The Superior Court read the Rent Justification Act as a whole, including the section giving landowners the unrestricted right to raise...