Rental Agreements Help Self-Storage Operators Limit Liability Exposure
Copyright 2014 by Virgo Publishing.
By:
Posted on: 07/08/2012



 

By Anita Byer and Martin Salcedo

Like owners of any other business, self-storage owners must take affirmative steps to protect the bottom line. Unfortunately, too many operators overlook perhaps the most important and effective step of all—using the rental agreement to limit their liability exposure.

Though it’s virtually impossible to completely insulate a business from liability, there are contractual provisions designed to eliminate, or at least limit, the exposures faced by self-storage operators. The challenge is to ensure provisions are drafted in a manner that comports with a facility’s particular situation and business practices, as well as any applicable laws. Though situational and jurisdictional variations typically undermine the effectiveness of boilerplate or one-size-fits-all templates, operators should consider incorporating some or all of the following protections in their rental agreements.

Limitation and Release of Liability

A limitation of liability clause is designed to contractually allocate each party’s risk in reasonable proportion to the benefits derived from the contractual relationship. Without such a clause, a self-storage facility may suffer liabilities that far exceed revenue. The overall purpose of the clause is to clarify and establish that the property is being stored at the sole risk of the tenant.

Depending on the circumstances, different approaches can be taken when drafting a limitation of liability clause. For example, a clause may place a maximum limit on the value of property a tenant may store in a unit, or it may provide that the parties agree to a fixed value for the property, which can be based on weight, size or some other factor. Another option is to limit the liability of a self-storage facility to the amount of rent paid by the tenant.

In addition to limiting liability, a rental agreement should stipulate that the tenant has agreed to release the facility from liability in the event of loss or injury. A release provision must be drafted clearly and state the release of liability applies to the tenant and any person authorized to enter the premises by the tenant. To provide the broadest applicability, the release of liability should cover injuries or losses regardless of who or what is involved.

It’s important to understand that the extent to which a party may contractually limit or be released from its liability may be restricted or otherwise governed by various state laws. Contractual provisions designed to release a party from the damages caused by its own negligence or exculpatory clauses illustrate this point.

Florida and Connecticut courts, for example, have held that although exculpatory clauses are disfavored, they’ll be enforced if properly drafted. An exculpatory clause must clearly and unequivocally state that it releases a party from liability for its own negligence so an ordinary and knowledgeable party will know what he is contracting away. Though some courts state using the word “negligence” is not necessarily required, it’s advisable to do so.

For example, in enforcing an exculpatory clause in a personal-injury case, the Supreme Court of Connecticut relied on the fact that the agreement refers to the negligence of the defendants three times and uses capital letters to emphasize the term “negligence.” In New York, however, a state statute requires such a provision be treated differently by the courts when a contract involves real property. Pursuant to this statute, a contractual provision exempting a landlord from liability for the landlord’s negligence is deemed to be void as against public policy. So, even if the lease contained an exculpatory clause addressing the facility’s negligence, it would likely be deemed unenforceable in New York.

The lesson here is that since exculpatory clauses are disfavored, they must be tailored to apply to each specific situation and comply with any applicable laws. Thus, the use of templates or boilerplate language increases the likelihood that such a clause will be unenforceable.

Indemnification and Hold Harmless

An indemnification provision requires a tenant to compensate the self-storage facility for any damages or losses caused by the tenant in which the facility owner may be required to pay. For example, if a third-party is injured by a hazardous condition created by a tenant, or anyone authorized by the tenant to be on the premises, then the self-storage owner may be liable to that injured party. An indemnification provision would typically require a tenant to compensate the self-storage operator for whatever amount the facility is liable to the injured party.

A hold-harmless provision stipulates that a tenant agrees not to hold the facility owner responsible for any loss, injury or legal liability caused by the tenant, or anyone invited on the premises by the tenant, or which is otherwise related to the tenant’s occupancy. If, for example, a tenant is injured while using a dolly made available by the self-storage facility, then the hold-harmless provision would prevent the tenant from recovering against the facility.

Since indemnification and hold-harmless provisions have been described as different sides of the same coin, it’s not uncommon for them to be combined into a single, contractual provision. Accordingly, they should be drafted with care and in a manner that’s consistent with applicable laws.

Insurance Mandate

Including a requirement that tenants insure their property accomplishes two goals. First, it provides a tenant with a primary source of compensation in the event of a loss. Second, it places the burden on the tenant to see that he’s adequately protected in the event of a loss.

An insurance clause within a rental agreement may stipulate tenants are required to obtain sufficient insurance to cover the value of all property stored at the facility. To the extent a tenant fails or is unable to insure his property, the tenant would be deemed to have self-insured, thereby making the tenant solely responsible for the loss. To increase the likelihood of protection in cases involving high-value property, a rental agreement may require a tenant to show proof of insurance if the value of the tenant’s stored property exceeds a specific amount.

To maximize the protection afforded by an insurance clause, the tenant must agree to waive any subrogation rights, thereby preventing the tenant’s insurance company from coming after the self-storage owner to recover amounts paid out for the tenant’s loss. Whenever a tenant obtains insurance, self-storage facilities should require and confirm that the tenant obtained a waiver of subrogation agreement from the insurance company.

Disclaim Existence of Bailment

Bailment is the temporary placement of control over, or possession of, personal property by one person (the bailor) into the hands of another (the bailee) for a designated purpose upon which the parties have agreed. Under the law of bailment, the bailee owes a duty of care to the bailor with regards to the property, and depending on the type of bailment, the duty of care owed to the bailee can be quite strict.

To avoid being held to a potentially strict standard of care, self-storage owners should disclaim the existence of a bailment in their rental agreement. Since a bailment is a consensual transaction requiring mutual agreement by the parties, which can be created either expressly or impliedly, a rental agreement should expressly stated that no bailment is created under the agreement.

Additionally, since a general requirement of bailment is that the bailee obtains the right to exclusive use and possession of the property, a rental agreement should state the self-storage facility does not take care, custody or control of the tenant’s property. In a typical situation, a tenant should have exclusive control over his property, and provided the tenant is not in breach of the agreement, laws or rules, the facility is not concerned with the kind of property stored by the tenant.

Disclaim Warehouseman Status

A warehouseman, or warehouse, is an individual who’s regularly engaged in the business of receiving and storing goods of others in exchange for compensation. As with bailment, carrying the distinction of warehouseman establishes a standard of care that’s owed to the owner of the property.

To avoid being held to such a standard of care, a rental agreement should expressly state the self-storage facility is not a warehouse or a warehouseman engaged in the business of storing goods for hire. A self-storage facility should also refrain from acting in a manner that would be consistent with that of a warehouseman, such as issuing documents of title for the personal property.

In addition to the foregoing clauses, there are various other contractual provisions which are designed to limit the liability exposure faced by a self-storage facility, including clauses which:

  • Prohibit the storage of heirlooms or other property with sentimental value
  • Restrict the types of property or uses of storage space to exclude inherently dangerous items or activities
  • Disclaim warranties
  • Clearly establish a facility’s rights in the event of a default
  • Incorporate a facility’s rules and regulations into the rental agreement, including any modifications
  • Waive the right to a jury trial in the event of a lawsuit

When a lawsuit results from a tenant’s loss of property or bodily injury, a court will typically start with the rental agreement when determining each party’s respective rights and obligations. Thus, it’s important to draft the rental agreement so it provides the maximum protections allowable under applicable law.

However, since contractual provisions that limit a party’s liability are often the primary focus of litigation, courts will examine them closely before enforcing them against a tenant. Accordingly, it’s best for a self-storage owner to retain an experienced attorney who’s licensed in a particular jurisdiction to draft or review his rental agreement.

Anita Byer is president and CEO, and Martin Salcedo is general counsel and self-storage risk management group member of Setnor Byer Insurance & Risk. Headquartered in Plantation, Fla., the company is an independent insurance agency dedicated to developing comprehensive insurance and risk-management solutions for clients throughout the United States. For more information, call 888.253.8498; visit www.setnorbyer.com.