By D. Carlos Kaslow
Ultimately, self-storage is about collecting rent. The overwhelming majority of customers pay their rent when it is due and cause very few problems for facility owners and site managers. A relatively small number (3 percent to 7 percent) of the customers are collection problems. Collection problems can frequently turn into legal problems if not handled carefully. The largest verdicts against self-storage operators have been awarded in wrongful sale cases. Just consider the sheer size of the three highest verdicts:
- $1.2 million (reduced to $750,000 by the trial judge) by a Texas jury
- $590,000 by a Los Angeles jury
- $342,000 by a San Diego jury
These verdicts are startling because they are large and because they are rare. It is unusual for tenants to recover six-figure verdicts, though such verdicts are becoming more common. A judgement of this size can cripple a business. Yet, it is possible to effectively handle delinquencies without undue risk. It begins with the operator's attitude toward non-paying customers.
After leading a recent seminar on the potential pitfalls of overly aggressive lien enforcement, I was addressed by a storage operator who gave his view of the matter: "I can't mess around too long with customers who won't pay," he said. "If I don't get the money, I don't have a business."
I thought for a moment before responding, "Any one customer is less than 1 percent of revenue. You can afford to be careful."
One reason storage operators can afford to be careful is that 44 state legislatures have enacted lien laws that provide a low-cost remedy for evicting customers and disposing of the stored property. Self-storage operators have an advantage over most other landlords in that they don't have to go to court to evict non-paying tenants.
The effective handling of delinquencies begins with understanding the state self-storage lien law. Only Alaska, Montana, Nebraska, Oklahoma, Vermont and West Virginia have not enacted lien statutes specifically for self-storage. Operators in these states usually rely on contractual liens, which give them a remedy similar to that provided by the statutory liens.
It is generally simple for a storage operator to enforce his lien rights, but care must be taken to avoid mistakes. The storage operator and all personnel who have responsibility for collecting delinquent rent should be familiar with their state lien law. It is good practice to have a copy in the rental office.
It is also imperative for storage operators to understand that there is an important difference between complying with the state lien law and developing sound rent collection procedures. For example, many state lien laws only require that a single written notice be sent to a delinquent customer before property is sold. While the law may permit sale after sending a single notice, a smart storage operator would have collection procedures that include sending out several notices and making telephone calls to delinquent customers. Storage operators who follow just a few simple rules can effectively manage their delinquent accounts and reduce their exposure to large wrongful-sale verdicts.
1. CREATE A DELINQUENT- ACCOUNT PROCESSING PLAN
This is one of the most important aspects of your overall business operations plan. It should cover every step, from the date rent is late to the eventual sale of the delinquent customer's goods and an accounting of the proceeds. A good delinquency plan begins with reading the state lien law. All required statutory steps must be integrated into the plan. Remember that all the steps provided for in the lien law must be followed, but the lien law does not provide all the steps that should be followed. A good plan is designed to allow the operator to establish contact with the delinquent customer and should provide the tenant a reasonable time to pay delinquent rent.
2. DOCUMENT EVERYTHING
A storage operator who sells a delinquent tenant's property will have the burden of proving compliance with the law. Failure to keep clear records is one of the most common mistakes that self-storage operators make. It is not enough to do everything right. You must be able to prove you did everything right. Compliance is proved by thorough and clear business records that document each step that was taken leading up to the sale. When a telephone call is made to a delinquent tenant, the person who made the call should record when the call was made and the result of the call. When a letter is sent, it should be copied and filed. If a notice is returned by the post office, it should be filed. Storage operators who keep clear and detailed records are also less likely to make a mistake when processing delinquent accounts.
3. REVIEW BEFORE SALE
This step can virtually eliminate mistakes by an operator who is implementing a sound collection plan. Before holding a sale of any storage space, the tenant file should be given a fresh look. This should be done by someone who does not have direct collection responsibility. The review should be detailed and designed to find little mistakes. Bookkeepers and accountants are very good at this type of review. What kinds of mistakes can such a review pick up? A few years back a storage operator sold all the property of a tenant whose rent was not delinquent. At some point during the collection process, an incorrect space number was used on one of the notices. This incorrect space number was carried through the process, and the contents of the wrong space were sold. A detailed file review prior to the sale would have disclosed this inconsistency and saved the storage operator $20,000.
Storage operators who have a collection plan, document their actions and review customer files before a sale cut down on most of the potential legal pitfalls associated with processing delinquent accounts. Dealing with delinquent customers is never easy, but it helps to keep things in perspective. The goal is to avoid selling your tenants' goods. You may have to do this, but it's not the goal. The objective is to get paid what is owed or as large a percentage of the debt as is reasonably possible.
Selling your customers' property is just one method of reaching the goal, and it is the method that creates the greatest potential legal risk for the storage operator. Keep in mind that any one space represents less than 1 percent of the typical storage facility's monthly revenue. The property inside the storage unit may be everything the customer owns. Storage operators can afford to be careful.
D. Carlos Kaslow is an attorney specializing in legal issues pertaining to the self-storage industry. A frequent contributor to the magazine 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 legal issues pertaining to the self-storage industry. For more information or to obtain a subscription, Mr. Kaslow may be reached at 2203 Los Angeles Ave., Berkeley, CA 94707; phone (510) 528-0630.