The Pitfalls of 'Borrowing' Lease Agreements

By Jeffrey Greenberger

Editor's Note: This column provides general insightinto the legal aspects of self-storage and should not be substituted for theadvice of your own attorney.

As a new addition to InsideSelf-Storage, this column will focus on legal issues I see every day as apracticing attorney representing self-storage owners and facilities. I willfocus on issues emerging in the industry nationwide, state or regional trends,and the challenges my clients reveal to me from their day-to-day operations. Iwelcome your e-mails, letters or phone calls with questions or suggestions forother topics you would like to see covered.

This first column is devoted to all of you who have "borrowed" yourlease, or even one or two lease clauses, from another operator or facility. Thequestion is, how do you know that the person from whom you "borrowed"knew what he was doing when he drafted (or worse, borrowed) his lease? Whenlease terms and clauses are borrowed, it's like the childhood game"Telephone," in which the original message becomes more and morejumbled as it gets passed along from person to person.

Most of the leases that come to me for review have at least one or twoprovisions that, upon careful analysis, make absolutely no sense. Or theycontain typographical errors that create some kind of ambiguity that hurt ordestroy the lease's original intent. Ambiguity can certainly affect your abilityto enforce a lease. If ambiguity exists in an important paragraph of your lease,such as payment of rent, default or remedies upon default, it can cause seriousproblems. Let's take an example from a provision of a lease I was givenrecently:

Defaults; Lessor Remedies: If Lessee breaches any term orcondition of this Agreement, Lessor, in addition to such other rights it mayhave under this Agreement, shall have the right to terminate this Agreement. IfLessee fails to pay any rent or other charges when due, Lesseemay: (i) remove Lessee's lock and access the space; (ii) overlock the space toprevent Lessee access until all amounts outstanding are paid in full; (iii)inventory and/or take possession of the property located in the space; (iv) sellthe property stored in the space as permitted by law; or (v) pursue any and allremedies available, at law or equity, including a forcible entry and detaineraction against Lessee.

Obviously, the problem with this provision is that somebody mistyped oneword--"Lessee" instead of "Lessor" in the second sentence(in bold). Thus, your tenant has the right to remove his own lock andaccess the space, overlock the space, and inventory, take possession and sellthe property stored in the space. With literal enforcement of this provision, theoperator would have none of those rights. While you may think this is asimple typographical error and any court would understand you meant to takethese rights for yourself, that is not necessarily the case.

A common rule of contractual interpretation is that ambiguity in a contractis resolved in the favor of the person who did not draft the contract--in thiscase, the tenant. Thus, the court could claim this provision ambiguous andresolve in favor of the tenant. In the worst case scenario, the court could saythe provision is not ambiguous at all; the landlord does not have the right tooverlock or sell the property. Either way, the result is the same--the landlordloses!

If you make an error like this, it could put your business in seriousjeopardy. Some states' self-storage statutes permit the right to overlock andlien the property only if it is provided for in the lease agreement. With thissmall, single error in your agreement, you might forfeit your right to overlockand sell the possessions stored on the premises. A lengthy lease-modificationprocess would then begin, requiring you to give month-to-month tenants 30 daysnotice of the change. Tenants still under a lease would not be affected by thechange until the end of their term. Any attempt to make the change wouldcertainly call attention to your mistake.

This particular lease clause was an expensive mistake for the person who cameto see me after an attorney representing one of his tenants, whose property hesold at auction, reviewed the rental agreement. This error loomed as a possibleclass-action lawsuit by all tenants who had their property sold at lien sale bythis facility any time during the last 10 years. The settlement was far greaterthan the legal fees any owner could ever spend on having their lease reviewedand revised.

Review Your Agreement

Industry experts alwaysencourage operators to make an annual review of occupancy rates, rental rates,competition, etc., to ensure they are competitive in the market and keeping upwith current trends. The same should be done for your rental agreement. Once ayear, at a minimum, you should review your lease to ensure several things: 1)the policies you enforce at your facility are clearly stated in your rentalagreement, so your tenants know what to expect from you as well as what youexpect from them; 2) you understand what each and every term of your rentalagreement says and means; 3) there are no ambiguities either in language orterms in your agreement; and 4) that you have not borrowed duplicativeprovisions that say the same thing in slightly different ways.

I see leases all the time that were prepared from a form book or by anattorney, but the landlord liked another default or provision from someoneelse's lease so much he cut and pasted it into his own. Now the lease has, forexample, two default provisions providing two inconsistent remedies. Guess inwhose favor the ambiguity will be resolved?

Also be certain the terms used throughout the lease are consistent. If youare referred to at the beginning of the lease as "landlord," youshould not also refer to yourself in other parts of the lease as "lessor"or "owner." Similarly, tenants should not be inconsistently orinterchangeably referred to as "tenant," "lessee" and"renter" throughout the agreement. Finally, make certain the facilityitself and the particular unit being rented are referred to consistentlythroughout the lease, each by its own identifying term.

Your best peace of mind will come from an annual review of your lease by acompetent attorney. You should especially consider having your lease reviewedif: 1) you have modified any of the provisions in your lease since it waswritten by an attorney or service; 2) you have recently borrowed or substituteda provision in your lease agreement; or 3) you have changed operation policies.The cost of reviewing or modifying the lease will be a fraction of the cost ofthe first settlement (if the case can even be settled) in the event aninconsistency or ambiguity in your agreement is construed against you.

Remember, if you can't understand what a provision in your lease says, youshould not expect a court, which doesn't know anything about the industry, tounderstand it for you. Further, if there is ambiguity present in the agreement,the court is obligated to make an interpretation in favor of the non-draftingparty--in this case, your tenant. There is no reason a self-storage rentalagreement cannot be written in plain, easy-to-understand English. If yours isnot, or if there are provisions you are unsure about, make a slightly late NewYear's resolution to have that lease reviewed. If changes are necessary,distribute new leases to your tenants at the beginning of the next month or assoon as their term expires.

I look forward to seeing you at the Inside Self-Storage Expo in Las Vegas,where I will be conducting a seminar on late-fee litigation and legislation, aswell as a roundtable session on lease agreements and clauses. Please feel freeto come to me at these events with any questions or suggestions you have.

Jeffrey Greenberger practices with the law firm of Katz, Greenberger& Norton LLP in Cincinnati, which represents owners and operators ofcommercial real estate, including self-storage. Mr. Greenberger, licensed topractice law in Ohio and Kentucky, is the legal counsel for the Ohio SelfStorage Owners Society and the Kentucky Self Storage Association, as well as aregular presenter at Inside Self-Storage Expos. Questions, comments orsuggestions for future topics can be sent to Jeffrey Greenberger c/o Katz,Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, Ohio45202; call 513.721.5151; e-mail [email protected].