C.A. No. 12771Court of Chancery of Delaware, New Castle CountySubmitted: October 14, 2003
Decided: November 17, 2003

Michael J. Isaacs, Esquire, Sheldon K. Rennie, Esquire, FOX ROTHSCHILD, LLP, Wilmington, Delaware, Attorneys for the Plaintiffs.

Richard E. Franta, Esquire, Wilmington, Delaware, Attorneys for the Defendants.

LAMB, Vice Chancellor.

The plaintiffs are a group of tenants who hold 99-year leases on lots in Lynn Lee Village (the “Village”), a small waterside mobile home community in Sussex County, Delaware. The defendants are Key Box 5 Operatives, Inc., (“Key Box 5”). Candice A. Casey, Kathaleen McCormick, William G. Lloyd, Oak Associates, LLC, Rivers Edge, LLC, and James Gabriel and Alma K. Gabriel.[1] Key Box 5 purchased the Village from Lynn Lee Limited Partnership (“LLLP”) in September 1988, in a transaction that was largely financed by the sale of the 99-year leases. As a part of that transaction, the plaintiffs paid in advance for their leasehold interests; accordingly, the tenants pay no annual rent but are responsible for an annual maintenance fee.[2]

Key Box 5 recently contracted to sell the Village to a third party that plans to develop the property as a single-family residential community. By letter dated May 2, 2003, purporting to act in reliance on authority found in 25 Del. C. § 7010(a)(4), Key Box 5 notified the tenants of its intention to terminate the 99-year leases on November 14, 2003, due to the change in land use associated with this proposed sale. The plaintiffs sued to enjoin the termination of the leases and for the imposition of a resulting or a constructive trust on the Village. Their complaint also claimed retaliatory eviction as grounds for avoiding the notice of termination. The defendants counterclaimed on several grounds.

In its recent memorandum opinion, the court granted the defendants’ motion for partial summary judgment, finding that the lease termination provision found in Section 7010(a)(4) is applicable to the 99-year leases, as a matter of law.[3] The court rested that decision on several bases. First, the court found that the parties to the 99-year leases understood (and the leases themselves provide) that Chapter 70 (“Mobile Homes and Mobile Home Parks”) would, in general, govern those agreements. Second, the court concluded that, although the General Assembly made no express provision for just compensation in the event of termination, it did not intend to exclude long-term prepaid leases from the scope of Section 7010(a)(4). And, finally, the court recognized that, to fill the gap in the statute, it has the inherent power to “fashion a suitable compensation mechanic, by reference to appropriate valuation methodologies . . . .”[4]

The court’s summary judgment decision did not address the plaintiffs’ claim for the imposition of a resulting or constructive trust. Instead, those and related matters were set down for an evidentiary hearing that was held on October 14, 2003. At that time, the parties presented testimony and documentary evidence on those issues. The court also heard evidence on the claim that the defendants’ plan to change the land use of the Village is retaliatory and, therefore, should be enjoined.

In this opinion, the court concludes that the plaintiffs have not met their burden of showing that the circumstances surrounding the 1988 transaction warrant the imposition of a resulting trust on the legal ownership of the Village. Nor have they shown an entitlement to the creation or imposition of a constructive trust. Nevertheless, the record quite clearly shows that, at the time of the 1988 transaction, all parties involved understood that persons who purchased 99-year leases would have the right occupy the premises for 99 years. They also understood that right to be both transferable (subject to a right of first refusal) and capable of being passed to ones heirs. For these reasons, when valuing the leasehold interests at issue in this case, the court will strive to compensate the tenants for the loss of the right to the use and enjoyment of the property as a mobile home park for the balance of the term of the 99-year leases. In other words, to fully and fairly compensate the tenants, the court will value the remaining leaseholds without consideration of the fact that Key Box 5 retained the legal power to terminate pursuant to Section 7010(a)(4).

The plaintiffs presented the testimony of four tenants who hold 99-year leases.[5] Each witness testified to the process by which Key Box 5 marketed the 99-year leases as a means of acquiring the park. Lynn Lee Village was first established in 1965 and now consists of 87 mobile homes sites. In 1985, LLLP bought the park, but, by the beginning of 1988, LLLP was itself in serious financial distress. LLLP first explored the possibility of transforming the park into a cooperative, in which units or shares would be offered for sale, initially to the park tenants and then to the public. Susan Whetstone, a local real estate sales person, became involved in this effort.[6] On May 21, 1988, acting as a representative of LLLP, she sent the tenants of the Village a letter proposing a cooperative agreement to purchase the Village and maintain the park for the current tenants.[7] As proposed, the plan was to offer 87 shares, the first 15 at $28,500 and the remaining 72 at $29,500. If all 87 shares had sold at these prices, the total amount paid to the cooperative would have been $2,551,500. Several people, including at least one of the trial witnesses, paid the required $500 down payment to buy into this scheme.

Soon thereafter, the proposal to form a cooperative ran into serious timing obstacles associated with the likelihood that it would be considered a “conversion” subject to Chapter 71 of Title 25 of the Delaware Code, and was abandoned in favor of a plan to finance the purchase of the park by an entity to be formed by Whetstone through the offer and sale of 99-year leases. The economic terms of the proposed leases were essentially the same as had been proposed for the cooperative.[8] Whetstone and her sisters eventually became the stockholders of that new entity — Key Box 5. This plan avoided the timing problems associated with a “conversion” by guaranteeing that any tenant who chose not to buy a long-term lease would be entitled to remain as a tenant on the property for three years.[9]

After the 99-year leasehold concept emerged, Whetstone personally assured the tenants at an informal meeting on her father’s porch in the Village that the tenants were buying an interest that would last 99 years.[10] The witnesses testified how the terms of the new 99-year lease arrangement were substantively the same as that of the initial cooperative agreement. Specifically, Gouge testified that his initial $500 deposit for the cooperative agreement was transferred to the purchase of the 99-year leasehold and that he was assured that the terms and conditions would be the same.[11] Additionally, the witnesses testified that Whetstone and Casey repeatedly assured the tenants that they were getting the equivalent of a deed that would be recorded at the courthouse.[12]

Key Box 5 (along with Whetstone and Casey), as the purchaser, was closely involved in facilitating the process of selling, financing, closing and recording these leaseholds.[13] The witnesses testified that they took out mortgages on the leaseholds, recorded their leases and paid a transfer tax on the property. Whetstone and Casey were not mere observers to this process but, rather, prepackaged the deal for the tenants. Acting on behalf of Key Box 5, they arranged attorney representation at settlement,[14] and secured the participation of Sussex Trust as a source of mortgage money for the deal.[15] The tenants bought into Key Box 5’s plan thinking that they (and Key Box 5) were “saving the park.”[16] In doing so, the tenants honestly and reasonably relied on representations made by Whetstone and Casey, on behalf of Key Box 5.[17]

The record also shows that more or less all of the money used to purchase the park came from the sale of 99-year leases. On June 29, 1988, Whetstone[18] and LLLP executed an “Agreement for Purchase and Sale” that expressly stated that the purchase price was premised on the sale of the leases.[19] By the September 30, 1988 closing, $1.5 million had been raised in the sale of the 99-year leaseholds, more than was needed to clear LLLP’s mortgage liability to Wilmington Savings Fund Society.[20] By June 1989, $2,230,000 had been raised by the sale of the 99-year leaseholds. At most, Key Box 5 had to come up with $13,787.65 from its own funds at the time of closing.[21]

A court will impose a resulting trust “when a legal estate is purchased with surrounding facts and circumstances giving rise to the inference that the beneficial interest is separate from the legal title.”[22] The resulting trust is used “to give effect to the presumed intention of the parties.”[23] “[T]he court presumes, absent contrary evidence, that the person supplying the purchase money for property intends that its purchase will inure to his benefit, and the fact that title is in the name of another is for some incidental reason.”[24]

The current case is a difficult one for the imposition of a resulting trust. While the overwhelmingly important source of funding for Key Box 5’s purchase of the Village was the sale of 99-year leaseholds, there is no evidence that the parties ever understood or intended that the purchasers of those leaseholds would individually or as a group acquire any beneficial ownership of the park as a whole. On the contrary, the evidence is clear that the parties always understood and intended that Key Box 5 would become the legal and equitable owner of the fee simple interest in the park, subject only to however many long-term leases were sold. This is to say that the record does not support an inference that legal title to the park was taken in the name of Key Box 5 for “some incidental reason.” This leads the court to conclude that no resulting trust is warranted.

The court reaches this conclusion even though there is ample reason to find that the 99-year leaseholds were sold on the basis of a mistaken understanding of the possible limitation on their duration resulting from Section 7010(a)(4). Nevertheless, neither that fact nor the fact that Key Box 5 purchased the park with the proceeds of the sale of the leaseholds is enough to support the imposition of a resulting trust. Instead, both of those facts will weigh importantly in structuring the appropriate mechanism to fully and fairly compensate the tenants for their loss of the right to occupy the land for the full 99-year term of the leases.

The court also concludes that the record does not reveal evidence of fraud or overreaching necessary to the imposition of a constructive trust, either at the time of the creation of the leaseholds or in the later troubled history of the Village.[25] Quite simply, the tenants got what they bargained and paid for when they bought the 99-year leases. While neither they nor Key Box 5 appear to have contemplated the potential application of Section 7010(a)(4) to the 99-year leases, this is not evidence of fraud. As discussed in the recent summary judgment opinion in this case, the possible application of that section of the law to these leases was, in fact, brought to the attention of the tenants before the September 30, 1988 closing.[26] Apparently, neither they, nor Key Box 5, nor the legal professionals involved adequately explored this question. Had they done so and reached a satisfactory resolution of the issues involved, the current dispute might have been avoided entirely. The fact that they did not is not a basis for the court to impose a constructive trust on the defendants’ legal ownership of the Village.[27]

Although the court rejects the claims based on theories of resultant and constructive trust, it is mindful that the fair application of Section 7010(a)(4) to these 99-year leases depends upon the court’s fashioning an appropriate mechanism to compensate the tenants for the property interests that will be taken from them when the leases are terminated. The defendants have conceded that they must compensate the tenants, but their announced intention is to reimburse the “prepaid rents” in proportion to the remaining term of the leases.[28] The problem with this suggestion is that it might not, in fact, compensate the tenants for the value of what they bought. Many reasons suggest that this is so, most importantly the trial testimony of Casey that the sale price for the park is nearly $7 million, or more than triple the 1988 purchase price. From this, the court infers that the value of an 84- or 85-year lease on a portion of the land may also substantially exceed the amounts paid to buy the 99-year leases in 1988. If this is so, merely refunding a portion of the 1988 purchase price will not provide adequate compensation.[29]

As discussed in the summary judgment opinion, the court intends to refer this matter to the Master promptly for a determination of the value of the 99-year leases. In that reference, the court intends to advise the Master to engage the services of a court-appointed neutral expert for the purposes of preparing a detailed appraisal of the leaseholds in issue. In that connection, it is the court’s expectation that the appraiser will value those leaseholds on the basis of the current use of the premises as a mobile home trailer park. At the same time, however, the appraiser should value the property as though that park were in a good state of repair. The court solicits the parties’ views as to the proper wording of the order of reference and the charge to the appraiser. The cost of the appraiser will be borne by the defendants, since it is their decision to terminate the leaseholds that gives rise to the need for a valuation.

[1] Defendants Casey and McCormick are sisters and defendant Lloyd is their father. Casey and McCormick are agents of Key Box 5 and Lloyd, who is also a tenant of the Village, conducts regular maintenance at the Village. Oak Associates, LLC and Rivers Edge, LLC formed by McCormick and Casey, respectively, are title owners of two-thirds of the Village. The Gabnels are title owners of the remainder portion of the Village. All current holders of legal title will be referred to as Key Box 5, except where the context otherwise requires.
[2] The maintenance fee has been the subject of much contention between the parties and litigation in this court. See Dolby v. Key Box 5, C.A. No. 12771, 1994 WL 507881, at *3 (Del.Ch. Sept. 7, 1994) (determining that Key Box 5 had unfairly and without authorization diverted funds from the maintenance fund to itself and providing a remedy by imposing a set of governance rules for the parties to prevent such ongoing abuse). Former Chancellor Allen issued another opinion in this action concerning the accounting for the assessment and collection of maintenance fees after the parties were unable to reach settlement on the issue of the maintenance budget. See Dolby v. Key Box 5, C.A. No. 12771, 1996 WL 741883 (Del.Ch. Dec. 17, 1996). Former Chancellor Allen later referred to binding arbitration the issue of a boat dock fee and whether default maintenance fees would be awarded. The arbitrator denied both the defendants’ request for default maintenance fees and a boat dock charge. See Dolby v. Key Box 5, C.A. No. 12771, Final Report and Decision of Arbitrator (Del.Ch. Aug. 1, 1997).
[3] 99-Year Lease Tenants of Lynn Lee Village v. Key Box 5, 2003 WL 22332173 (Del.Ch. Oct. 10, 2003).
[4] Id. at *3.
[5] The first two witnesses were Linda K. Hanna, who purchased her lease in September 1988, and her father Lewis Musser, who has lived in the Village since 1975. The third witness, Bob Gouge, a retired police officer, has rented at the Village since 1981 and bought a 99-year lease in 1988. Linda Leed, the final tenant to testify, purchased two lots in August 1988, and later purchased a third lot in June 1990 and sold the other 2 lots.
[6] Susan Whetstone, now deceased, is a key player in this story. She was initially involved as the agent of LLLP and later as the real estate agent and promoter of Key Box 5. She was Lloyd’s daughter and the sister of Casey and McCormick.
[7] “In order to maintain park status, which will protect your future security, shares will be offered to you for purchase. . . . Lynn Lee Village will be formed into a Cooperative. . . . In exchange for your share, you are given the right to occupy a prescribed piece of land for the life of the Corporation.” Letter from Susan Whetstone, Agent for Lynn Lee Limited Partnership, Inc., to Tenants of Lynn Lee Village (May 21, 1988) (“May 21 Cooperative Letter”).
[8] 25 Del. C. § 7101 et seq.
[9] “In order to transform Lynn Lee Village into a cooperative it would take a considerable amount of time. Since time is of the essence a 99-year leasehold is being offered. Briefly a 99 year leasehold is a 99 year lease which is recorded at the recorder of deeds. This entitles the lessee to hold a recorded document for a 99 year period allowing said tenant to use and possess the leased land.” Letter from Susan Whetstone, Agent for Lynn Lee Limited Partnership, Inc., to Tenants of Lynn Lee Village (June 18, 1988).
[10] Hanna and Gouge testified that they were present at this meeting and that Whetstone personally guaranteed that the term of the lease was for 99 years. Trial Tr. at 16, 77.
[11] Trial Tr. at 76-78.
[12] Both Gouge and Leed testified that Whetstone told them the following: “Listen, this is for 99 years. You’re not going to live that long. This is recorded at the courthouse. This is real estate. You’re getting the equivalent of a deed. You’re not going to live that long. It is going to pass to your children. You can resell it because it is recorded at the courthouse.” Trial Tr. at 76-78 and 120-121.
[13] “Candice and Susan set it up. They set up everything for us. They made sure that we had the lawyer and that we had the financing . . . they said they went to Sussex Trust and got a deal for the land. . . .” Testimony of Hanna, Trial Tr. at 21.
[14] “Many lending institutions require the purchaser to have an attorney present at settlement. For your information . . . Attorney Harold E. Dukes, is representing the majority of purchasers of the (99) year leaseholds in order to expedite settlements.” Letter from Susan Whetstone, Agent for Lynn Lee Limited Partnership, Inc., to Tenants of Lynn Lee Village (Sept. 15, 1988) (“Sept. 15 Settlement Letter”).
[15] “I would like to remind you to please check the valid date of your mortgage commitment in order to assure your mortgage commitment does not expire. For those of you who are financing through Sussex Trust please be advised although the interest has risen to 10 ½% — 10 ½% [sic] Sussex Trust is currently holding mortgages for Lynn Lee Village at 9 ½%.” Sept. 15 Settlement Letter.
[16] “Finally, it is of your interest to know that if this particular action does not come to pass, a family from Virginia has approached Mr. Goldberg concerning purchase of property, presumably for development purposes. We have been informed that upon their purchase a 2 year evacuation notice will be served to all residents.” May 21 Cooperative Letter. “I would like to extend a special thank you to everyone for their support.” Sept. 15 Settlement Letter. “As I understand, the purpose of the group is to try and save the park as it is, and a group of people are willing to put up money in the form of $30,000 and get a (99) year lease.” Excerpt from telephone call to Mr. Charles Oberly, III, Attorney General for the State of Delaware printed in Letter from Susan Whetstone to Tenants of Lynn Lee Village (Sept. 12, 1988). “Linda . . . Thank you for ALL of your support.” Personalized handwritten note to Ms. Linda Leed on the bottom of the July 25, 1988 Notice to the Village tenants that the leases were ready to be signed.
[17] Leed testified that she sold her first two lots in the Village in order to buy a third lot for $110,000. In fact, the second lot was purchased by Key Box 5 in 2002, after being on the market for over 10 years. It is therefore undisputed that Key Box 5 knew that Leed was making an investment in the Village based on the belief that the lease was valid for 99 years. Trial Tr. at 120-123. Musser sold his permanent residence and moved into the Village in January 2003. Trial Tr. at 56, 61-62. A parallel can be drawn between the 99-year tenants that paid in advance for their leaseholds on the belief that they would own the property for 99 years and on a tenant who makes improvements on the land or other expenditures in advance of the landlord terminating the lease agreement. In both scenarios, the tenant is investing under the reasonable belief that the leasehold is valid for the specified time period and the landlord should reasonably have foreseen this reliance based on the actions by the tenant. See Restatement (Second) of Property § 10.2 (1977).
[18] Whetstone signed the document as a “promoter for a corporation to be formed.” Key Box 5 was formed on June 22, 1988.
[19] The document provided that:

(a) LLLP was the seller;
(b) Susan Whetstone was the buyer;

(c) The price was $2,200,000.00 (paragraph 2) to be paid as follows:

(i) a down payment in the form of a confessed judgment note;

(ii) Susan Whetstone, as agent for LLLP, was to offer 99-year leases and that LLLP would be bound by the leases;
(iii) Susan Whetstone was to sell a sufficient number of 99-year leases to payoff LLLP’s then existing mortgage to WSFS, estimated to have been $1,400,000.00, plus the sellers settlement costs;
(iv) upon the sale of sufficient leases to satisfy $1,400,000.00 mortgage indebtedness, LLLP would give a Deed to Susan Whetstone in return for a purchase money mortgage in the amount of the total sales price minus the amount received from the sale of the 99-year leases;
(v) Susan Whetstone was to continue to sell the 99-year leases on her own behalf after the delivery of the Deed and turn over the proceeds of such sale to LLLP who would then release that particular lot from the lien.

[20] Trial Tr. at 205.
[21] The cash amount needed for closing by Key Box 5, as indicated on the Settlement Sheet, was $188,877.65. Since the payment for the 99-year leaseholds exceeded the mortgage liability by $175,090.00, Key Box 5 only needed to put in $13,787.65 ($1,531,000 — $1,355,910.69) of its own money for the closing on the purchase of the Village. Trial Tr. at 203-04.
[22] Everett v. Lanouette, 1994 WL 681106, at *6 (Del.Ch. Nov. 10, 1994) (citing Subt v. Subt, C.A. No. 1233, Mem. Op. at 11 (Del.Ch. Feb. 16, 1990)).
[23] Hudak v. Procek, 727 A.2d 841, 843 (Del. 1999) (citing Adams v. Jankouskas, 452 A.2d 148 (Del. 1982)).
[24] Everett, 1994 WL 681106, at *6 (citing Adams, 452 A.2d at 152).
[25] The record does not indicate that the Key Box 5 representatives were deceitful in procuring the 99-year lease arrangement. Key Box 5 representatives themselves bought 99-year leases and, at least initially, intended to “make a go” of owning and operating the park. As the long history of this litigation shows, however, dissention arose within the first few years after 1988. Nothing that this court has been able to do or the parties have been willing to agree to has restored the Village to satisfactory operation. On the contrary, the record is replete with evidence that the park is substantially dysfunctional and its infrastructure rapidly deteriorating.
[26] 99-Year Lease Tenants of Lynn Lee Village v. Key Box 5, 2003 WL 22332173, at *2 (Del.Ch. Oct. 10, 2003).
[27] In addition, the plaintiffs failed to prove their claim that the decision to sell the property was retaliatory in nature. Quite simply, there was no credible evidence at trial tying this decision to any act done by the plaintiffs or any other tenant. Instead, the facts of record in this matter suggest that the decision to abandon the park and change the land use was taken for the reasons stated in the May 2, 2003 letter sent to the tenants.
[28] “[I]t is the present intention of Rivers Edge, L.L.C., to reimburse to you, upon the satisfactory and timely removal of your mobile home and tenant improvements, the proportionate amount of prepaid rent assigned to periods after November 14, 2003.” Certified Letter Notification to Park Lessees from Candice A. Casey, Managing Member, Rivers Edge, L.L.C., to Tenants of Lynn Lee Village (May 2, 2003).
[29] The amount of rent paid is normally used to determine the fair market value of a standard lease. The 99-year leases, however, did not have stated monthly or yearly rent payments and therefore do not fit that standard valuation model. There is significant case law on the issue of valuation of leaseholds in the context of eminent domain. The question most often presented to the court is how to apportion the value of the condemnation award between the landlord and the tenant. Long-term leases present specific valuation problems in condemnation awards. See Victor P. Goldberg, Thomas W. Merrill Daniel Unumb, Bargaining in the Shadow of Eminent Domain: Valuing and Apportioning Condemnation Awards between Landlord and Tenant, 34 UCLA L. Rev. 1082, 1090 (1987) (“. . . the difficult issues surrounding the condemnation of leased property are almost exclusively a by-product of long-term leases”).