LEGAL PERSPECTIVES 5478

This month's column is inspired by the question I am most asked by readers: "How do I know if I am performing my lien sales correctly?" My response is if you live in a state with a self-storage statute (47 of the 50 states), the statute outlines the exact requirements you must follow to perform a lien sale. Unless I remember to give the inquirer a statutory citation, the follow-up question is always "Where do I find my state's self-storage statute?" It frightens me to think there are operators in our business who have never learned what their state's self-storage statute requires or whether they are complying with its lien-sale requirements.

Most of the case law you read in this column, the Self Storage Legal Review or elsewhere is applied to self-storage by analogy. For example, a court recently upheld a subrogation provision in a construction contract in Virginia. While the case had absolutely nothing to do with self-storage, we can look at that kind of case and assume if the court would uphold a waiver of subrogation clause in a construction contract, it would also uphold such a waiver in a self-storage contract. However, the one place where self-storage always makes its own law is in lawsuits involving improper lien sales.

An example is the case involving Rome Hilliard Self-Storage in Ohio. Rome Hilliard was sued for wrongfully disposing of a tenant's property. In this particular case, the tenant had moved and not provided the facility a forwarding address. The facility sent a letter via certified mail to the last known address advising the tenant of the time and date it intended to sell the property if he did not pay.

In the Ohio statute (as the court reviewed quite carefully), there is a requirement that the written demand for payment must be conspicuous, and the pay-by date must not be less than 10 days after the delivery of the notice. The court examined the notice used and found the facility had used the same type size and face as on other standard notices and, thus, the demand for payment was not conspicuous. The court also found the sale did not occur more than 15 days after the advertisement ran, also a violation of the Ohio statute.

The court awarded and an appeals court upheld actual damages, compensatory damages and punitive or punishment damages against Rome Hilliard in excess of $5,500, plus costs and attorney fees. It sounds like a bunch of technical violations, but the statute is clear as to what the owner had to do to sell the property. The owner did not follow the statute and paid the price.

The Rome Hilliard case is not news to the self-storage industry. It does, however, point out the importance of following your state's statute in performing a lien sale. In the accompanying chart, I have given you the starting point to locate the statute in your state code. You can get a full copy of your state's self-storage statute from numerous sources, including your state's self-storage association, the national Self Storage Association's website (if you are a member) or elsewhere on the Internet. One particularly easy source to use is the Cornell Law Library website, www.law.cornell.edu.

I encourage you to discuss the requirements of your state's statute with your legal counsel and ensure you have a complete understanding of what is required. All of the 47 self-storage statutes give at least some direction regarding the performance of a lien sale. The owners who think they are doing it "close enough" without having read the statute, or those who decide to ignore a requirement under the statute because it is difficult or inconvenient, are going to continue to be highlighted in case-law updates involving judgments for tenants.

General Requirements

It is not possible in one column to discuss the requirements of each state's statute. Suffice it to say every statute includes some, if not all, of the following requirements:

1. The tenant must be in default. In some states, default is defined in the statute as some number of days after rent is past due. Other states require that default be defined in your lease agreement. In most of these circumstances, a well-drafted lease agreement with a properly defined "Event of Default" will carry the day.

2. You must send out some sort of warning or initial-contact, late-fee notice letter.

3. You must send some type of certified-mail notice that advises the tenant of his default and your intent to sell, and includes a date and location for the sale of the property. This notice should also include some indication of the balance due to avoid the property being sold. There is always some length of time that must pass between the sending of the notice and the sale.

4. There is often an advertising or posting requirement.

5. Some states have other requirements, such as checking for other liens and putting those lien holders on notice. For example, you open the unit and find a whole bunch of furniture. You then check UCC filings (as may be required by some statutes) and find out that X Finance Co. has a lien on all household goods and furnishings. You may be required to put the company on notice so it may come and pay the amount due and remove its possessions.

Alabama, Colorado, Connecticut, Michigan, New Hampshire, Ohio and Utah require this kind of lien check and notice to lien holders. Some other states where it is arguable that liens should be checked are Arizona, Florida, North Carolina and South Carolina. If you give appropriate notice to the lien holders and they do not pay, their lien is extinguished or inferior to yours. If you do not give this notice, however, you are potentially liable to the lien holders for the amount you earn from the sale of the property, up to the amount of their lien. I cannot tell you how many times I find self-storage operators in states with a lien-check requirements are not checking liens with their local or state authority before proceeding to sale. This creates bad exposure for the industry.

A Last Resort

The cases I see reported mostly involve owners' failure to properly follow the statutes' requirements. Common errors include not giving the required notices in the style and manner prescribed, not providing advertising, not holding an appropriate public sale, declaring default too early, or not giving enough time from the date of the letter or the advertisement until the date of sale.

Selling a tenant's property is obviously a last resort. No owner should cherish the opportunity to perform a lien sale. Most of my clients prefer to do anything to avoid selling, including giving people access to the property to remove their items. I have even seen owners go so far as to declare an unofficial "amnesty day" where near lien-sale victims can enter the property, hassle-free, to remove their goods. This does not get the facility paid, but does allow the manager to re-rent the unit sooner.

Self-storage is, by most accounts, a relatively straightforward industry. Facilities rent space. When they rent space and the tenant does not pay, operators have specific rights allowing them to remove tenant's property and sell it. You might be surprised to learn your state's self-storage statute, in its entirety, is only four to six pages long. If you read it, you will learn the procedure for a proper lien sale. All of the dates, deadlines, times, and type-face and advertising requirements are included.

Taking time to understand the statute and making a conscience decision not to ignore the difficult stuff will not only help you avoid potential liability for a wrongful sale, but will also help the industry maintain its image. Too many operators performing improper lien sales leads to involvement by the legislature. When this happens, state and national associations have to fight like the dickens to avoid a change in the law that is disadvantageous to self-storage operators. Please help preserve the simplicity and straightforward nature of the industry by observing the requirements of the lien sale in your state statute.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, Mr. Greenberger can be contacted at Katz Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, OH 45202, or by calling 513.721.5151.

LEGAL PERSPECTIVES