By D. Carlos Kaslow
Every self-storage operator, at some point in his career, is faced with the dilemma of a delinquent tenant. When that tenant fails to resolve the issue of his past-due balance or can no longer be contacted, an operator is left with the decision of what to do with the goods remaining in his unit. Enter the lien sale.
Most self-storage operators conduct their lien sales in a public auction format. Many state 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 be auctioned. The lien law states: "A lessor shall sell property seized under a contractual landlord's lien by public sale to the highest bidder."
A handful of states permit a more flexible approach. For example, California and Florida require that the sale be conducted in a "commercially reasonable manner." Under this standard, a sale may be conducted by any method reasonably designed to get a fair price for the property being sold. This includes the private sale of goods.
Even in states that permit non- auction sales, most storage operators use the public auction format. The auction is the final step in a statutory process that begins when the self-storage customer stops paying rent. It is a step that should only be taken when all other attempts to resolve the problem have failed. Experienced storage operators know that auction sales seldom cover the amount owed by the delinquent tenant. Bruce McDanials of National Self Storage, operating 47 storage facilities in seven Southwestern states, estimates that approximately 10 percent of the lien sales they conduct each year cover the full amount owed.
The Lien Sale
Lien sales can be costly to hold; therefore, it is almost always better to negotiate a resolution of a delinquent account than sell the goods. However, lien sales are often unavoidable. Delinquent tenants frequently disappear or simply refuse to answer letters and phone calls. When a lien sale is unavoidable, it should be conducted carefully and in strict compliance with the law that authorizes it.
Before the sale is held, a careful review of each delinquent file should be made by someone other than the person who created it. The person responsible for the file review should look for errors. That is exactly what the attorney for the tenant whose property has been sold will do after the sale. Careful attention should be given to the following questions:
- Did all notices go out on time and in proper form?
- Was the sale advertised properly? Most states require that the sale be advertised once a week for two consecutive weeks in a newspaper of general circulation.
- Was the right information about each tenant included in each notice and advertisement?
- Is there any indication that the tenant gave someone a change of address?
If you find an error, do not sell the contents of that customer's unit. The error must be corrected, and this may require starting the lien process from the beginning.
If you're going to hold an auction, you must have buyers. This sounds simple, but it's a problem for many storage operators. If you run the legally required notices but fail to generate an audience of potential buyers, you need to do more to advertise your lien sales. A sale conducted without buyers will always be suspect. Storage operators who are unsuccessful at getting good attendance at the lien sales should consider hiring an auctioneer to conduct them. Professional auctioneers often have a regular following of buyers who attend their sales.
One aspect of an auction sale that is often neglected is determining when the sale is considered final. This is important because there is always the possibility that the delinquent tenant will return on the sale date. If the tenant returns with the cash to pay all back rent moments after the last bid but before the highest bidder takes possession of his goods, what does the facility owner do?
This very situation arose in McDonald v. The Boat Barn, 1999 Tex App. Lexis 3694. 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 Boat Barn because, under its auction procedures, the sale was not considered final until the buyer either removed the property from the storage space or rented the space and put his lock on it.
The Boat Barn's procedures make sense. An auction sale is considered final only when the buyer takes control of the goods. This gives the delinquent tenant the maximum amount of time to prevent the loss of his goods. It also encourages the buyer to quickly remove purchased property from the premises or to rent the space. The rules of the auction should be in writing and copies made available to every bidder.
How It Works
The mechanics of the lien sale are straightforward. Most are conducted with buyers calling 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 would then 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 the self-storage lien law and other statutes concerning public sales to determine if a sale by written and sealed bid is allowed.
One type of auction that should be avoided is the accepting of sealed bids that are not opened in public. This type of sale is fraught with problems. When bids are not publicly opened, it casts a cloud of suspicion over the fairness of the sale. This procedure was recently criticized by the Santa Cruz County, California, District Attorney's Office. Storage operators were sent letters stating that it was the position of the District Attorney that a non-publicly opened, sealed-bid auction sale was not consistent with the requirements of the state's Self-Service Storage Facility Act. Storage operators who use this method should check with their lawyer to determine if it is consistent with lien-sale practices in their state.
However a self-storage operator chooses to handle the issue of a delinquent tenant's goods, 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 compliance will ensure the process runs smoothly.
D. Carlos Kaslow is an attorney specializing in legal issues pertaining to the self-storage industry. A frequent contributor to Inside Self-Storage and a seasoned speaker at Inside Self-Storage Expos, Mr. Kaslow is also the editor of The Self-Storage Legal Review, a bimonthly newsletter on the legal issues pertaining to the self-storage industry. For more information, or to obtain a subscription, Mr. Kaslow can be reached at 2203 Los Angeles Ave., Berkeley, CA 94707; phone (510) 528-0630.