The Self-Storage Auction

When you're left with a delinquent tenant's goods

By D. Carlos Kaslow

Every self-storage operator, at some point in his career, is faced with the dilemma ofa delinquent tenant. When that tenant fails to resolve the issue of his past-due balanceor can no longer be contacted, an operator is left with the decision of what to do withthe goods remaining in his unit. Enter the lien sale.

Most self-storage operators conduct their lien sales in a public auction format. Manystate lien laws specifically require delinquent tenant goods be sold in this fashion.Texas is an example of a state where lien law requires that a delinquent tenant's goods beauctioned. The lien law states: "A lessor shall sell property seized under acontractual landlord's lien by public sale to the highest bidder."

A handful of states permit a more flexible approach. For example, California andFlorida require that the sale be conducted in a "commercially reasonablemanner." Under this standard, a sale may be conducted by any method reasonablydesigned to get a fair price for the property being sold. This includes the private saleof goods.

Even in states that permit non- auction sales, most storage operators use the publicauction format. The auction is the final step in a statutory process that begins when theself-storage customer stops paying rent. It is a step that should only be taken when allother attempts to resolve the problem have failed. Experienced storage operators know thatauction sales seldom cover the amount owed by the delinquent tenant. Bruce McDanials ofNational Self Storage, operating 47 storage facilities in seven Southwestern states,estimates that approximately 10 percent of the lien sales they conduct each year cover thefull amount owed.

The Lien Sale

Lien sales can be costly to hold; therefore, it is almost always better to negotiate aresolution of a delinquent account than sell the goods. However, lien sales are oftenunavoidable. Delinquent tenants frequently disappear or simply refuse to answer lettersand phone calls. When a lien sale is unavoidable, it should be conducted carefully and instrict compliance with the law that authorizes it.

Before the sale is held, a careful review of each delinquent file should be made bysomeone other than the person who created it. The person responsible for the file reviewshould look for errors. That is exactly what the attorney for the tenant whose propertyhas been sold will do after the sale. Careful attention should be given to the followingquestions:

If you find an error, do not sell the contents of that customer's unit. The error mustbe corrected, and this may require starting the lien process from the beginning.

The Auction

If you're going to hold an auction, you must have buyers. This sounds simple, but it'sa problem for many storage operators. If you run the legally required notices but fail togenerate an audience of potential buyers, you need to do more to advertise your liensales. A sale conducted without buyers will always be suspect. Storage operators who areunsuccessful at getting good attendance at the lien sales should consider hiring anauctioneer to conduct them. Professional auctioneers often have a regular following ofbuyers who attend their sales.

One aspect of an auction sale that is often neglected is determining when the sale isconsidered final. This is important because there is always the possibility that thedelinquent tenant will return on the sale date. If the tenant returns with the cash to payall back rent moments after the last bid but before the highest bidder takes possession ofhis goods, what does the facility owner do?

This very situation arose in McDonald v. The Boat Barn, 1999 Tex App. Lexis3694. The facility owner returned the space and its contents to the delinquent tenant.McDonald, the buyer, sued The Boat Barn for damages. The court ruled in favor of The BoatBarn because, under its auction procedures, the sale was not considered final until thebuyer either removed the property from the storage space or rented the space and put hislock on it.

The Boat Barn's procedures make sense. An auction sale is considered final only whenthe buyer takes control of the goods. This gives the delinquent tenant the maximum amountof time to prevent the loss of his goods. It also encourages the buyer to quickly removepurchased property from the premises or to rent the space. The rules of the auction shouldbe in writing and copies made available to every bidder.

How It Works

The mechanics of the lien sale are straightforward. Most are conducted with buyerscalling out their bids publicly and the contents of the space going to the highest bidder.Another method would be to allow bidders to submit their bids in writing. The bids wouldthen be opened in public, and the highest bidders would get the contents of the space.Some states do not permit sale by this method. Storage operators should check theself-storage lien law and other statutes concerning public sales to determine if a sale bywritten and sealed bid is allowed.

One type of auction that should be avoided is the accepting of sealed bids that are notopened in public. This type of sale is fraught with problems. When bids are not publiclyopened, it casts a cloud of suspicion over the fairness of the sale. This procedure wasrecently criticized by the Santa Cruz County, California, District Attorney's Office.Storage operators were sent letters stating that it was the position of the DistrictAttorney that a non-publicly opened, sealed-bid auction sale was not consistent with therequirements of the state's Self-Service Storage Facility Act. Storage operators who usethis method should check with their lawyer to determine if it is consistent with lien-salepractices in their state.

However a self-storage operator chooses to handle the issue of a delinquent tenant'sgoods, it is in his best interest to explore all possible options before the lien sale.Should the situation come to that point though, the appropriate precautions and compliancewill ensure the process runs smoothly.

D. Carlos Kaslow is an attorney specializing in legal issues pertaining to theself-storage industry. A frequent contributor to Inside Self-Storage and a seasonedspeaker at Inside Self-Storage Expos, Mr. Kaslow is also the editor of The Self-StorageLegal Review, a bimonthly newsletter on the legal issues pertaining to the self-storageindustry. For more information, or to obtain a subscription, Mr. Kaslow can be reached at2203 Los Angeles Ave., Berkeley, CA 94707; phone (510) 528-0630.