Managing Self-Storage Delinquencies, Bankruptcies and Abandonment
|Copyright 2014 by Virgo Publishing.|
|By: Scott Zucker|
|Posted on: 01/13/2010|
To some, self-storage is an expected expense, like a utility bill, a necessary and routine cost of running a household or a business. To others, it’s unexpected, the need to store property as the result of a sudden crisis—a marital separation, foreclosure, relocation or natural disaster. Whether the use is temporary or long term, self-storage is a solution to a problem of needing to store property when you have nowhere else to put it.
But the need for storage doesn’t always translate into the ability to pay it. In the current competitive world of dollar move-ins, waived security deposits and no credit checks, the cost of moving property into a storage unit is only a fraction of the cost of actually maintaining the occupancy past the first month. Self-storage is popular and its use has grown exponentially over the last few years. However, it’s no surprise in this economic climate that the level of delinquencies, bankruptcies and abandonments has also grown. It’s important for self-storage operators to be aware of these trends and be prepared to respond to them.
Encouraging a Move-Out
As rent defaults increase, it’s extremely important for operators to be proactive in working toward the quick resolution of troubled accounts. Sometimes, even though the operator is permitted to deny access and enforce a lien over the stored contents in the space, the best solution is to simply negotiate a reduced “move-out” price (some discount on the debt owed), and close the account upon the tenant vacating the space. Another option, for those tenants who want to move out but don’t have money to pay now, is to allow a move-out and negotiate a future payment plan for debt owed.
The key to both of these deals is the move-out. If the tenant doesn’t move out, the operator has simply negotiated a discount without the benefit of removing the delinquent tenant. Therefore, it’s essential that the discounted move-out agreement be in writing and include a “what if” clause.
This clause simply provides that in consideration for the operator’s agreement to reduce the rent and permit the move-out, the tenant must vacate the space by a certain date. If the tenant doesn’t move out as agreed, the agreement provides that the property in the space is abandoned to the facility and can be sold or disposed. The language would be something like the following:
Tenant has agreed to remove all of his contents from the storage unit no later than the close of business on ________________. Tenant agrees and understands that all property in the unit is to be removed and the unit is to be left in a clean, broom-swept condition, and that any property left in the unit after the close of business on ____________________shall be deemed abandoned by the Tenant and may be immediately disposed of by the Owner.
Under any of these agreements, if the tenant leaves—which avoids further lost rent for the operator and the unrecoverable costs of foreclosure—but doesn’t pay, the operator can decide whether to pursue the debt through various means of collection. However, the most important aspect of such a resolution is the operator’s ability to avoid the loss of further time and expense on a tenant who wants to stay but just can’t afford to.
Delinquency resolution can be through tenant voluntary move-outs as well as voluntary property abandonment. Certainly, there will be times when the tenant cannot pay the rent but decides it’s no longer important to keep his property. In such a case, in lieu of a move-out or lien foreclosure, the tenant can simply abandon the property in the unit to the facility operator—typically in consideration for the waiver of his account balance. To avoid misunderstandings, the abandonment should be in writing and contain language such as:
My signature on this form will constitute my release in full of any claims or demands against [self-storage company name] concerning the use of the storage space or the contents of the storage space, and I release all rights, title and interest to any personal property located in the unit. I understand that any personal property remaining in the unit may be disposed of by [self-storage company name] in any manner at the discretion of [self-storage company name].
Although language might be contained in the rental agreement that suggests abandonment can occur simply by the tenant taking off the lock and skipping the rent, it’s often more prudent to consider property as abandoned only where the tenant has confirmed his intent in writing. Although the tenant may truly intend to abandon his goods by removing the lock and not paying the rent, the operator’s best solution without approval in writing is to proceed with the lien procedure as set forth under state law.
It would be unusual to find a self-storage operator whose occupancy hasn’t dropped over the last year or who hasn’t seen an increase in delinquencies. It would also be uncommon to find an operator who hasn’t experienced a tenant bankruptcy filing. It’s not atypical for a tenant who has become significantly behind in his bills or facing the public sale or disposal of property to file for bankruptcy with the knowledge that any filing (even if later dismissed) will stop the lien sale from proceeding.
A tenant who has filed bankruptcy will typically be one who has been in arrears for months, was scheduled for sale and has continued to store property even after filing bankruptcy. This tenant will typically not pay rent, knowing the operator is precluded from continuing the sale process without permission from the court. This situation can often be the tenant’s “checkmate” against the storage operator, leaving him no option but to continue to lose rent.
Although the strategy of filing to avoid a lien sale may be commonplace, it’s also typical for an operator not to take any action, assuming the bankruptcy court will protect the tenant’s interests. Unfortunately, due to the number, priority and size of other creditors involved, the self-storage operator may not receive any attention regarding his claim unless he makes a concerted effort to alert the court regarding the situation.
If the operator is vocal with the court, trustee and even the tenant’s attorney, it’s unlikely the tenant will be permitted to maintain the storage unit without paying for the benefit. Ultimately, if the operator doesn’t get cooperation from the tenant to pay rent, he can enlist counsel to file a motion to “lift stay,” which is a method of requesting the court to permit the lien foreclosure of the tenant’s property if the tenant doesn’t vacate the space or pay the outstanding rent obligation.
When it comes to self-storage debt and bankruptcy, it’s likely the operator will not only lose the unpaid past rent but future rent as well. That’s why it’s so important for him to advocate with the court, especially the trustee assigned to the bankruptcy, to ensure he’s not taken advantage of during the bankruptcy process.
No operator wants to lose tenants, but the loss of occupancy is minimized when operators realize they’re giving away value with non-paying tenants. The key to self-storage profit isn’t just occupancy but “economic” occupancy. Your facility can be full with tenants who don’t pay any rent or 50 percent occupied with tenants who pay on time and in full. The choice is obvious.
Take this opportunity to review your rent files and address tenants who are failing to offer fair compensation for the value your rental space provides. A proactive approach will clearly help to avoid later conflicts and more lost rent.
Scott Zucker is a partner in the law firm of Weissmann Zucker Euster P.C. in Atlanta. Mr. Zucker specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He is a frequent lecturer at national conventions and the author of Legal Topics in Self-Storage: A Sourcebook for Owners and Managers. He’s also a partner in the Self-Storage Legal Network, a subscription-based legal service for self-storage owners and managers. To reach him, call 404.364.4626; e-mail firstname.lastname@example.org.