By now, you’ve read dozens of articles recapping or reminiscing about the state of self-storage in 2004, and New Year’s resolutions may have come and gone. Nonetheless, I would be remiss in my duties as this publication’s legal columnist if I did not summarize some of the big issues in the industry and address possible matters arising in 2005.
Looking back, I will always think of last year as the one in which self-storage finally rose above the “low fly” zone and ended up on many legislators’ and regulators’ radars. I fear more government interference is on the way; but let’s start by looking at where the industry stands.
Forty-six states now have some sort of statute that at least, in part, discusses the lien rights of a self-storage operator. Some have full chapters devoted only to self-storage, while others still lump it in with other lien rights. Only Alaska, Montana, Nebraska and Vermont do not have some sort of industry ruling. However, many of the current laws are in need of a good overhauling and modernizing. In some cases, they’re more than 30 years old and fail to reflect what the industry has become since they were written.
Eight states—Arizona, California, Maine, Maryland, Missouri, North Carolina, Ohio and West Virginia—have some type of law governing the late-fee amount that can be charged in a self-storage owner/tenant relationship. Most of these bills are favorable to the industry, and self-storage associations of the remaining states recognize the value of legislation to set a reasonable late-fee law that will protect operators from potential litigation. Several states have introduced legislation to impose sales tax on rents charged by self-storage operators. A few, including Ohio, have even been successful in passing on this new tax to industry consumers.
Storage operators have continued to receive nonspecific warnings from the Department of Homeland Security that their facilities might be used to store materials that could be unleashed in a terrorist attack or stolen property intended to raise money to fund terrorist organizations or opportunities. As a result, many have begun to use employee and tenant screening, sometimes in the form of credit reports but more often criminal histories.
In late 2004, the Self Storage Association introduced its first attempt at a criminal-screening package known as “Counter Measures.” Several vendors are also making screening tools available that will allow operators to instantly check criminal and credit backgrounds.
Many software providers are working to meet the demand by integrating screening abilities into their programs. I sincerely applaud those who have heeded the warnings of industry experts and the Department of Homeland Security, not only because it’s smart from a business perspective, but because it’s our patriotic duty to make sure we know who is renting at our facilities.
Last year, the government revised its overtime regulations. However, as many states have policies that are stricter than federal guidelines, the new rules do not apply. Further, the new law doesn’t really answer questions about whether a selfstorage manager is an exempt or nonexempt employee, nor does it clarify the definitions of these terms.
We at least know that any full-time employee earning less than $455 per week cannot be exempt and is entitled to overtime. There are many storage operators concerned they may be facing a potential overtime claim because of having treated their managers as exempt employees. I have seen a small number of class-action suits by employees against midsized operators claiming back overtime and other damages. A great summary from the U.S. Department of Labor is available at www.dol.gov/esa/regs/compliance/whd/fairpay/side-by-side_PF.htm.
Zoning and Eminent Domain.
Zoning also continues to be an issue for new and expanding facilities around the country. Now that zoning boards tend to lump mobile-storage facilities in with self-storage, it is becoming increasingly difficult to get approval. Part of the problem is when the industry started, it gravitated toward high-visibility areas such as expressway exits or large intersections. This normally wouldn’t be an issue, but unfortunately, there are some unattractive or poorly maintained facilities out there, and public perception is hard to change.
I have even seen cases in which self-storage was challenged through eminent domain to be taken and redeveloped by the government or private developers for a “higher and better use.” Eminent domain is also taking part of the yards, driveways or corners of storage sites for the widening of a road or to add a new highway ramp.
Finally, as the industry has proliferated, we are seeing more negative media coverage about the industry pertaining to burglary, property damage or misuse, and drugs. I see more articles than ever about the use of self-storage units to house methamphetamine labs, hide stolen propertyand gain access to a site with the intent of theft. I’m also seeing articles about people trying to live in what are often unheated, unventilated units or using them for some other inappropriate purpose.
Hot Issues in 2005
Looking ahead, in June we expect reinstatement of the do-not-fax regulations (similar to the National Do-Not-Call List) that were placed on hold earlier in 2004. If you don’t have a provision in your lease agreement, you should immediately insert language that allows you to fax and email current tenants from the date they sign their lease until final move-out (including full payment of all amounts due). If you don’t, you will lose opportunities for marketing and lease enforcement/collection that you are probably already using.
For existing leases, do as banks, insurance companies and other providers have been doing—send out a notice amending your lease to include this language effective 30 days after the next rent payment is due. I predict that some time in the next several years, a facility that fails to make these changes will end up charged with a do-not-fax violation. Enforcement of spam will be tightened too, so also include e-mail language in your new permission clause. Do-not-call regulations are generally not an issue, however, because of the definition of “business relationship” they contain. In this case, there is no permission clause necessary.
One trend I can predict with some certainty is the continuing and spreading litigation regarding the size of rented space. Particularly in California and Maryland, class-action lawsuits have already been filed against several operators. The filing tenants have claimed that while they thought they were renting a certain size unit, in actuality, it contained less rentable square feet than advertised, stated in the lease or shown on a floor plan, and they’re looking to recoup a certain amount of money in back rent, plus other fees and legal costs.
While we may be talking about a small amount of money per each individual tenant, when the amount is multiplied by several tenants over many years, the bottom line becomes significant. Further, attorney’s fees are often awarded as part of the judgment, so while a claim may settle for little or no actual money to the customer, there may be a large payment in attorney’s fees to the class-action law firm.
There are several obvious ways to fix your potential exposure in this issue, including making sure all information that discloses the size of a space (leases, brochures and floor plans) clearly says the size is approximate and the tenant is not entitled to a rent adjustment if the unit contains more or less square footage than stated. You may also want to stop referring to units by size (i.e., 10x10) and refer to them instead as a “one-room unit,” “two-room unit,” “small-house unit,” etc. This is a bizarre concept, but it will protect against this ridiculous litigation. Adding language about approximate size is another change you must consider making to your lease, as I think we will find a lot more of these space-size lawsuits before they run their course.
I foresee more lawsuits relating to advertising. Many storage operators use statements in their marketing they cannot support in a court of law. For example, looking through the Yellow Pages, I have seen statements such as “Manager on site—24-hour monitoring of the premises.” While the facility may have a manager on site, he is not really watching out his window 24/7. Similarly, if the manager goes on vacation or the facility is without a manager at one point for any reason, the owner cannot back up his claim.
In past columns, I have discussed use of the words “safe,” “security,” “secure” or others that imply a facility is more safe, more secure or better protected than its competition. Unless these claims can be fully documented and supported, they can come back to haunt a self-storage operator.
I also continue to see questionable advertising, particularly in the offering of specials. If a promotion is too good to be true and has a catch, or if a facility is not really offering exactly what the public believes it to be, an operator may find himself in a lawsuit or charged by the state’s Attorney General for deceptive sales practices. For example, I have seen offers for “first month free” with no footnotes or restrictions stated, and it turns out the first month is only free with the signing of a six-month lease. Now that the industry is on the legislative radar, these sorts of advertising tactics are going to be judged with greater scrutiny.
Which brings us to the discussion of “reliance,” an argument being used more frequently in lawsuits against self-storage operators. The basic line of reasoning goes something like this: Because of something said, done or implied by the agent at the facility, or the advertising or marketing materials of the facility, the tenant relied on the facility to (fill in the blank): have more security, maintain a climate that would prevent mold, prevent theft, etc.
The reliance argument has multiple applications, but there are two significant ones pertaining to self-storage. First, if a facility’s advertising implies or states it is “safe and secure,” and a tenant’s unit is burglarized, the site owner may find himself in a lawsuit that alleges he is liable. The assertion is that because of statements made in the facility’s advertising, the tenant relied on the facility to be secure and chose to rent a unit.
Implied activity is the second area where storage owners run into trouble. For example, if you have dummy or nonfunctioning video cameras on your property, you could find yourself in the midst of a reliance argument that goes something like this: “Because of all thevideo cameras I saw on the property, I relied on the fact that my goods would be safe or, if it they were stolen, there would be a videotape to help police find the culprit. Therefore, I want to hold you liable for the loss, even though your lease says you are not otherwise responsible.”
In the upcoming year, you are likely to see more state and federal restrictions on the disposal of business records that contain tenant information, such as leases, applications and credit-card forms. Eventually, shredding will be required for disposal of almost all records.
You will see more requirements imposed on pay-with-rent and mail-order tenant-insurance programs by state insurance-licensing departments. Some industry insurance companies have stopped writing new pay-with-rent policies and are even withdrawing existing policies in states where it is unclear whether an insurance license is required to collect premiums. Several states, including California, have begun providing guidance or issuing limited licenses for the purposes of allowing a self-storage operator to offer pay-with-rent insurance. I expect to see more of this type of licensing in other states.
My final fearless prediction for 2005 is we will see more legal advocacy by the state associations. We’ve already seen a good bit of fighting on the issue of sales tax in a few states as well as industry-sponsored late-fee bills. I think the associations will become more active in lobbying for industry rights, including updated self-storage statutes and changes to the lien-sale notice requirement. For example, several associations are already pushing for a switch in their state statutes that allows for a post office-issued certificate and proof of mailing rather than a signed certified-mail card when contacting delinquent tenants. This makes sense, as certified-mail notices are not only expensive, tenants rarely accept them.
Finally, I think the state associations will offer more local training and certification classes to self-storage managers and employees. They may also start issuing standards of practice and other guidelines.
Of course, if I had a working crystal ball, I would be playing the lottery from a beach in the Caribbean. But one fact remains: This is a relatively straightforward industry that can do a lot to self-regulate, keep operations simple and resolve tenant situations fairly. If you conduct business in a clean, careful, honest manner and support your state association in its endeavors to educate owners, members of state legislature and the public, 2005 should be a year of continued progress and growth for the industry.
This year, I will focus my columns on issues discussed in this article. Please keep your suggestions coming, and I will write about that which interests the majority.
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
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