Avoiding Wrongful-Sale Lawsuits in Self-Storage: Doing Lien Sales by the Law
Copyright 2014 by Virgo Publishing.
By: Scott Zucker
Posted on: 05/01/2012



 

Enforcing a lien and selling a tenant’s property in a public sale is one of the most anguishing parts of a self-storage operator's job. It’s also one of the greatest areas where an operator can find himself accused of making a mistake. Even though an error is unintentional, it can still result in a claim by a tenant for a “wrongful sale.” The impending risk is why self-storage operators frequently want to know, “Am I following the lien process correctly?”

The following is a road map to certain issues that apply to lien enforcement in self-storage. When traveling down the path of a lien sale, there’s nothing better than knowing which way you’re going and being prepared for some of the obstacles that may arise along the way.
 
Understanding Your State Statute

Of course, the first thing operators need to understand is the right to seize and eventually sell tenants’ stored property is given to them under their state law. So not only must they be familiar with the law, they must be up to date on any legislative changes. In the last few years, several states have updated their lien laws and, therefore, altered the way notices are sent to tenants, military service members are protected, sales are advertised and late fees are charged. It’s imperative that facility operators know their current law.

Once operators know the law, they must understand and follow the timeline for lien enforcement. For example, states have different laws regarding when units can be overlocked, when the lien notice is sent, how long the tenant has to cure his default before advertisements are published, how many ads are published, and how long the operator must wait to hold a sale after the ads are published. These requirements are crucial to ensure full compliance with the state law.

But it’s not only the timeline that must be followed. Most state lien laws address what needs to be in the notices, what information needs to be in the advertisements, and even what notices must be posted in the facility office. Again, for a sale to be valid and a wrongful-sale claim avoided, these requirements must be followed.

Tenant Objection to the Sale

During the lien-enforcement process, there’s always the possibility that the tenant will “object” to the lien sale and seek to stop it. Some state lien laws include a mechanism that allows a tenant to object to a sale by written notice to the facility operator, which obligates the operator to file an action in the courts to receive permission to proceed with the sale.

However, contained within the tenant right of objection comes certain other requirements for that tenant, for example, sending proper notice within the appropriate period of time and, in some states, providing a justifiable basis for the objection. Without meeting these requirements, the tenant’s objection can be overruled and the lien process can continue.

Unfortunately, there are many other ways a tenant can stop a sale, including the filing of an injunction with the court or, as is seen on a more frequent basis recently, the filing of a bankruptcy action. Either of these court filings will typically stay the enforcement of the lien sale, pending a resolution through the court to proceed. Unfortunately, that court action can often be time-consuming and expensive, and even if the operator ultimately prevails, much is lost by having to participate in the process.

Impediments to the Sale

In addition to the tenant's right to stop a lien sale, there are other actions that could derail a sale. One is the death of the tenant, which can delay the process while the probate court appoints an executor or administrator of the estate to sort out the tenant’s debts and other obligations. Another is when the tenant or his dependent is in the military. Under the Servicemember’s Civil Relief Act (SCRA), a lien foreclosure cannot proceed against a tenant, the tenant’s dependent who is in the military, or a reservist without approval from the court. Either of these situations would give rise to a delay and force an operator to involve himself in the court process.

However, these circumstances will not stop a sale if notice is not handled timely and correctly by the tenant. For example, the death of a tenant will not prevent a sale indefinitely, as it doesn’t stop the obligation of the tenant’s estate to pay its bills. If the rent is not paid for a deceased tenant, the property in the unit can eventually be sold through the lien process. Similarly, a tenant on active duty is not entitled to avoid the obligation to pay rent. The SCRA only delays the process.

Holding and Documenting the Sale

The last risk faced by an operator in the lien-sale process is the actual sale itself. A self-storage operator running a public sale must require all bidders to present identification and agree to the sale rules (preferably by executing a bidder’s rule sheet). The identification is important in case the bidder needs to be contacted. The rules are significant since they prevent the possibility of misunderstanding as to:

  • How the sale is to be conducted (with reserve)
  • The rights of the facility operator in running the sale (cash only, no warranties)
  • When a sale is completed (payment and removal of property from the facility)

It’s through these rules that operators can avoid disputes and sale-related claims, not only from tenants, but from disappointed bidders.

Finally, the other area to consider is documentation of the lien-sale close out. It’s here a facility operator needs to prepare the proper sales receipt to the high bidder to acknowledge the sale and, when appropriate, handle the transfer of title when the sale includes a car, boat or RV. The operator must also calculate the sale proceeds against the tenant’s debt for unpaid rent and lien charges. If the tenant is entitled to receive proceeds from the sale (meaning the amount recovered is greater than the amount owed), many states will require operators to notify the tenant in writing. Further, if the tenant still owes the facility money after the sale monies have been applied, the facility is entitled to notify the tenant of the deficiency and seek to recover the balance.

Wrongful sales are a risk of running a self-storage business. But the number and severity of such claims can be diminished if the self-storage operator knows the law and prepares for expected obstacles. Of course, it must be said that, sometimes, the best sale is no sale. An operator should always feel empowered to hold a sale if he wants, but also to stop a sale if he feels inclined. You can’t be sued for a wrongful sale if you don’t sell your tenants’ property.

Scott Zucker is a partner in the law firm Weissmann Zucker Euster Morochnik P.C.  in Atlanta, where he specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He’s a frequent lecturer at national conventions and the author of Legal Topics in Self-Storage: A Sourcebook for Owners and Managers. He is also a partner in the Self-storage Legal Network, a subscription-based legal service for self-storage owners and managers. He can be reached at 404.364.4626; e-mail scott@wzlegal.com.