Pot-Nets Lakeside, LLC v. Lakeside Community Homeowners Assoc., Inc.

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
POT-NETS LAKESIDE, LLC, )
)
Appellant, )
)
)
v. ) C.A. No. S22A-10-001 MHC
)
LAKESIDE COMMUNITY )
HOMEOWNERS ASSOC., INC., )
)
Appellee. )
Submitted: July 8, 2024
Decided: July 23, 2024
Upon Appeal from the Decision of the Arbitrator,
AFFIRMED
MEMORANDUM OPINION AND ORDER
David C. Zerbato, Esquire, Morton, Valihura & Zerbato, LLC, 3704 Kennett Pike,
Suite 200, Greenville, Delaware 19807, Attorney for Appellant
Anthony V. Panicola, Esquire, Community Legal Aid Society, Inc., 840 Walker
Road, Dover, Delaware 19904, Attorney for Appellee
Conner, J.
INTRODUCTION
Before the Court is the appeal of manufactured home community owner Pot-
Nets Lakeside, LLC (“Landlord”) from rent increase justification arbitration under
the Manufactured Homes and Manufactured Home Communities Act (the “Act”).
Appellee, Lakeside Community Homeowners Association, Inc. (“HOA”), takes the
position that the arbitrator correctly decided the issues appealed by Landlord. For
the following reasons I affirm the decisions of the arbitrator.
FACTS AND PROCEDURAL HISTORY
Pot-Nets Lakeside (the “Community”) is a manufactured home community
with 466 lots located in Millsboro, Delaware. Landlord sought to enhance and
improve the Community’s lake walk, a boardwalk surrounding the Community’s
six-acre lake, via a capital improvement project (“Project”). The Act permits
manufactured home community owners like Landlord to pass the cost of capital
improvements onto residents of manufactured home communities in the form of a
beyond CPI-U rent increase.1 These types of rent increases are heavily regulated by
the Act and often challenged by residents.
Landlord informed the Community’s residents of the Project resulting in a
monthly rental increase of $7.86 beyond CPI-U.2 The direct cost (actual
1
25 Del. C. 7052.
2
The parties stipulated that “Landlord is entitled to the CPI-U portion of the rent increase, which
is 2.356%.”
2
expenditures) of completing the Project total $219,752.15, of which $5,720 was
spent on replacing the lake’s outflow drainage pipe. In addition to these direct costs,
Landlord sought an 8% return on their investment in the Project, the cost of the
Project’s depreciation over time, and the cost of income taxes that will need to be
paid by Landlord on the increased rent collected from residents (“Indirect Costs”).
Unhappy with the proposed rent increase, the HOA requested arbitration
pursuant to 25 Del. C. § 7053. Relevant to this appeal, the HOA argued at arbitration
that the outflow pipe replacement is not a capital improvement and therefore its cost
cannot be passed onto the Community residents or otherwise used to justify a rent
increase. They further argued the Act does not permit the Landlord to pass the
Indirect Costs onto the residents of the Community.
Arbitration was held April 26, 2022. On September 19, 2022, the final
decision of the arbitrator was published. The arbitrator made the factual
determination that the replacement of the outflow pipe during the project was
ordinary maintenance as opposed to a capital improvement to the community and
therefore its $5,720 in direct costs are not recoverable by Landlord under the Act.
As a matter of law, the arbitrator determined that Landlord could not pass the Indirect
Costs onto the residents, finding “the Act does not authorize a community owner
like Landlord to include in its recoverable ‘cost’ for a capital improvement or
3
rehabilitation work the costs beyond the direct costs of the work.”3 Landlord
appealed that finding of fact and findings of law.
STANDARD OF REVIEW
The Delaware Code commands “[t]he appeal shall 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 sufficient justification for the arbitrator's
decisions and whether those decisions are free from legal error.”4
Our Courts have clarified, “substantial evidence review is the appropriate
standard of review for the arbitrator's factual findings.”5 It calls on the Court to
ascertain if the record contains substantial evidence to support the arbitrator’s
findings.6 “Substantial evidence is relevant evidence that a reasonable mind might
accept as adequate to support a conclusion.”7 Deference is given to the factual
findings of the arbitrator,8 when conducting substantial evidence review:
This Court does not sit as the trier of fact, nor should the Court
substitute its judgment for that rendered by the [arbitrator]. The Court
must affirm the decision of the [arbitrator], if properly supported, even
if the Court might have, in the first instance, reached an opposite
3
Arbitrator’s Decision at 6.
4
25 Del. C. 7504.
5
Sandhill Acres MHC, LC v. Sandhill Acres Home Owners Assoc., 210 A.3d 725, 731, n.37 (Del.
2019).
6
Rehoboth Bay Homeowners' Ass'n v. Hometown Rehoboth Bay, LLC, 252 A.3d 434, 441 (Del.
2021).
7
Id. (quoting Oceanport Indus., Inc. v. Wilmington Stevedores, Inc., 636 A.2d 892, 899 (Del.
1994)).
8
Rehoboth Bay Homeowners' Ass'n v. Hometown Rehoboth Bay, LLC, 2020 WL 1316831, at *2
(Del. Super. Ct. Mar. 16, 2020), aff'd in part, rev'd in part, 252 A.3d 434 (Del. 2021).
4
conclusion. Only when there is no satisfactory proof in support of a
factual finding of the [arbitrator] may this Court overturn it.9
Additionally, the Court must determine whether the arbitrator’s findings are
free from legal error. “Freedom from legal error exists when the [arbitrator] ‘applied
the relevant legal principles.’”10
ANALYISIS
“The Rent Justification Act is effectively a rent control statute.”11 Subchapter
VI of the Act governs rent increase justifications, its purpose is to “accommodate
the conflicting interests of protecting manufactured homeowners, residents, and
tenants from unreasonable and burdensome space rental increases while
simultaneously providing for the need of manufactured home community owners to
receive a just, reasonable, and fair return on their property.”12
Section 7052(d) exhaustively lists the factors which may justify a rent increase
beyond CPI-U. “The completion and cost of any capital improvements or
rehabilitation work in the manufactured home community” is one such justification
for a beyond CPI-U increase in rent.13 “The Act permits a rent increase which fully
compensates a community owner for the cost of capital improvements.”14
9
Donovan Smith HOA v. Donovan Smith MHP, LLC, 2017 WL 6507188, at *1 (Del. Super. Ct.
Dec. 19, 2017), aff'd on other grounds, 190 A.3d 997 (Del. 2018).
10
Id.11
Bon Ayre Land, LLC v. Bon Ayre Cmty. Ass'n, 149 A.3d 227, 234 (Del. 2016)
12
25 Del. C. § 7050.
13
25 Del. C. § 7052(d)(1).
14
Rehoboth Bay Homeowners' Ass'n, 252 A.3d 434, 437 (Del. 2021).
5
A Landlord may not increase rent beyond CPI-U for the costs of ordinary
repair, replacement, or maintenance.15 Our Supreme Court has recently explained
the distinction between capital improvements and ordinary repair, holding “…it
makes sense to characterize an ‘ordinary repair, replacement, and maintenance’ as
a regular, normal, and usual repairing of property, while a ‘capital improvement’ is
to acquire a long-term, nonrecurring asset or improve or enhance such an asset
already in existence.”16
I. Substantial evidence exists to support the arbitrator’s finding that the
outflow pipe replacement was ordinary work as opposed to a capital
improvement.
The record indicates that the outflow pipe replacement was not an integral (let
alone planned) part of the Project. Landlord’s witness, Robert Tunnell, III, testified
“[w]ithout [pumping the pond], we wouldn’t be able to do work on this pipe et cetera.
So it was done in conjunction with the rest of that project.”17 It appears from the
record that the Project required the draining of the lake which provided Landlord
with a convenient opportunity to replace the already existing pipe.
15
25 Del. C. §7052(d)(1).
16
Rehoboth Bay Homeowners' Ass'n, 252 A.3d 434, 442 (Del. 2021)
17
Arbitration Tr. at 124.
6
Mr. Tunnel further testified “… we’ve always replaced section of the pipe that
would then allow the water to leave the pond more normally than it was before.” 18
This testimony that the Landlord has “always replaced” portions of the pipe support
the arbitrator’s finding that the new pipe is not an improvement or enhancement, but
instead “ordinary” non-compensable repair “occurring in the regular course of
events.”19
II. The arbitrator did not err as a matter of law in holding that Landlord
may only recover the direct costs incurred on the project.
Section 7052 specifically enumerates what may be used to legally justify a
beyond CPI-U rent increase and noticeably does not include the Indirect Costs
sought by Landlord.20 While § 7050 admittedly recognizes the rights of
manufactured home community owners to a “fair return on their property”, this
language exists more broadly in the context of the Act’s purpose section.21 When
read as a whole it is clear that subchapter VI’s intent is to strike a balance between
the legitimate business interests of the community owners and the equally
legitimate concerns held by the residents over living costs.
18
Arbitration Tr. at 118-119.
19
Rehoboth Bay Homeowners' Ass'n, 252 A.3d 434, 442 (Del. 2021) (quoting ORDINARY,
Black's Law Dictionary (11th ed. 2019)).
20
25 Del. C. § 7052.
21
25 Del. C. § 7050.
7
“As a general rule of statutory construction, when a specific statute is enacted
that appears to conflict with an existing general statute, the subsequently enacted
specific statute is controlling.”22 Not only is § 7052 more specific than § 7050, but
it has been amended more recently.23 Section 7050 cannot be read to guarantee
manufactured home community owners a right to a return on all investments they
make in their communities as appellant seems to broadly argue. Therefore, the
Court agrees with the arbitrator that “the slender reed that is Section 7050 cannot
support the substantial weight of the landlord’s argument….”24
Additionally, I find it compelling that despite the Act’s frequent amendments
no language permitting Landlord to recover Indirect Costs has been included in
§ 7052 or anywhere in the Act. If the General Assembly would like to permit
community owners to pass the costs of their increased income taxes, the
depreciation of their investments, as well as a return on those investment onto
community residents in the form of a monthly rent increase, they may freely amend
the Act. However, absent any express language in § 7052 permitting Landlord to
earn a return on investment in a capital project I find the Arbitrator has fully
compensated Landlord for the costs of the Project.
22
Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 494 (Del. 2000).
23
The current version of § 7050 took effect on December 10, 2019. The current version of
§ 7052 took effect July 1, 2022. This action was appealed to this Court in October of 2022.
24
Arbitrator’s Decision at 7.
8
CONCLUSION
It is easy to see why appeals from rent justification arbitration have been
referred to as trivial by his Court in the past.25 This appeal is over a rent increase so
small that it was referred to as “peanuts” by the only Community resident who
testified for the HOA at arbitration.26 However, lurking in the background of this
appeal are divergent parties seeking to set the Act’s common law interpretations in
ways that suit their interests. Therefore, no matter how nominal an appeal under the
Act may appear, a faithful review is necessary to ensure the facilitation of effective
justice. After an exhaustive review of the record before the Court and relevant law
I find the final decisions of the arbitrator below are supported by substantial evidence
within the record and were made in consideration of the relevant legal principles,
therefore I AFFIRM.
IT IS SO ORDERED.
/s/ Mark H. Conner
Mark H. Conner, Judge
cc: Prothonotary
25
“Arguments regarding the interpretation of the Act sometimes border on batrachomyomachy.”
Rehoboth Bay Homeowners' Ass'n, 2020 WL 1316831, at *1 (Del. Super. Ct. Mar. 16, 2020), aff'd
in part, rev'd in part, 252 A.3d 434 (Del. 2021).
26
Arbitration Tr. at 264.
9