The Pitfalls of 'Borrowing' Lease Agreements
By Jeffrey Greenberger
Editor's Note: This column provides general insight into the legal aspects of self-storage and should not be substituted for the advice of your own attorney.
As a new addition to Inside Self-Storage, this column will focus on legal issues I see every day as a practicing attorney representing self-storage owners and facilities. I will focus on issues emerging in the industry nationwide, state or regional trends, and the challenges my clients reveal to me from their day-to-day operations. I welcome your e-mails, letters or phone calls with questions or suggestions for other topics you would like to see covered.
This first column is devoted to all of you who have "borrowed" your lease, or even one or two lease clauses, from another operator or facility. The question is, how do you know that the person from whom you "borrowed" knew what he was doing when he drafted (or worse, borrowed) his lease? When lease terms and clauses are borrowed, it's like the childhood game "Telephone," in which the original message becomes more and more jumbled as it gets passed along from person to person.
Most of the leases that come to me for review have at least one or two provisions that, upon careful analysis, make absolutely no sense. Or they contain typographical errors that create some kind of ambiguity that hurt or destroy the lease's original intent. Ambiguity can certainly affect your ability to enforce a lease. If ambiguity exists in an important paragraph of your lease, such as payment of rent, default or remedies upon default, it can cause serious problems. Let's take an example from a provision of a lease I was given recently:
Defaults; Lessor Remedies: If Lessee breaches any term or condition of this Agreement, Lessor, in addition to such other rights it may have under this Agreement, shall have the right to terminate this Agreement. If Lessee fails to pay any rent or other charges when due, Lessee may: (i) remove Lessee's lock and access the space; (ii) overlock the space to prevent Lessee access until all amounts outstanding are paid in full; (iii) inventory and/or take possession of the property located in the space; (iv) sell the property stored in the space as permitted by law; or (v) pursue any and all remedies available, at law or equity, including a forcible entry and detainer action against Lessee.
Obviously, the problem with this provision is that somebody mistyped one word--"Lessee" instead of "Lessor" in the second sentence (in bold). Thus, your tenant has the right to remove his own lock and access the space, overlock the space, and inventory, take possession and sell the property stored in the space. With literal enforcement of this provision, the operator would have none of those rights. While you may think this is a simple typographical error and any court would understand you meant to take these rights for yourself, that is not necessarily the case.
A common rule of contractual interpretation is that ambiguity in a contract is resolved in the favor of the person who did not draft the contract--in this case, the tenant. Thus, the court could claim this provision ambiguous and resolve in favor of the tenant. In the worst case scenario, the court could say the provision is not ambiguous at all; the landlord does not have the right to overlock or sell the property. Either way, the result is the same--the landlord loses!
If you make an error like this, it could put your business in serious jeopardy. Some states' self-storage statutes permit the right to overlock and lien the property only if it is provided for in the lease agreement. With this small, single error in your agreement, you might forfeit your right to overlock and sell the possessions stored on the premises. A lengthy lease-modification process would then begin, requiring you to give month-to-month tenants 30 days notice of the change. Tenants still under a lease would not be affected by the change until the end of their term. Any attempt to make the change would certainly call attention to your mistake.
This particular lease clause was an expensive mistake for the person who came to see me after an attorney representing one of his tenants, whose property he sold at auction, reviewed the rental agreement. This error loomed as a possible class-action lawsuit by all tenants who had their property sold at lien sale by this facility any time during the last 10 years. The settlement was far greater than the legal fees any owner could ever spend on having their lease reviewed and revised.
Review Your Agreement
Industry experts always encourage operators to make an annual review of occupancy rates, rental rates, competition, etc., to ensure they are competitive in the market and keeping up with current trends. The same should be done for your rental agreement. Once a year, at a minimum, you should review your lease to ensure several things: 1) the policies you enforce at your facility are clearly stated in your rental agreement, so your tenants know what to expect from you as well as what you expect from them; 2) you understand what each and every term of your rental agreement says and means; 3) there are no ambiguities either in language or terms in your agreement; and 4) that you have not borrowed duplicative provisions that say the same thing in slightly different ways.
I see leases all the time that were prepared from a form book or by an attorney, but the landlord liked another default or provision from someone else's lease so much he cut and pasted it into his own. Now the lease has, for example, two default provisions providing two inconsistent remedies. Guess in whose favor the ambiguity will be resolved?
Also be certain the terms used throughout the lease are consistent. If you are referred to at the beginning of the lease as "landlord," you should not also refer to yourself in other parts of the lease as "lessor" or "owner." Similarly, tenants should not be inconsistently or interchangeably referred to as "tenant," "lessee" and "renter" throughout the agreement. Finally, make certain the facility itself and the particular unit being rented are referred to consistently throughout the lease, each by its own identifying term.
Your best peace of mind will come from an annual review of your lease by a competent attorney. You should especially consider having your lease reviewed if: 1) you have modified any of the provisions in your lease since it was written by an attorney or service; 2) you have recently borrowed or substituted a provision in your lease agreement; or 3) you have changed operation policies. The cost of reviewing or modifying the lease will be a fraction of the cost of the first settlement (if the case can even be settled) in the event an inconsistency or ambiguity in your agreement is construed against you.
Remember, if you can't understand what a provision in your lease says, you should not expect a court, which doesn't know anything about the industry, to understand it for you. Further, if there is ambiguity present in the agreement, the court is obligated to make an interpretation in favor of the non-drafting party--in this case, your tenant. There is no reason a self-storage rental agreement cannot be written in plain, easy-to-understand English. If yours is not, or if there are provisions you are unsure about, make a slightly late New Year's resolution to have that lease reviewed. If changes are necessary, distribute new leases to your tenants at the beginning of the next month or as soon as their term expires.
I look forward to seeing you at the Inside Self-Storage Expo in Las Vegas, where I will be conducting a seminar on late-fee litigation and legislation, as well as a roundtable session on lease agreements and clauses. Please feel free to come to me at these events with any questions or suggestions you have.
Jeffrey Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati, which represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger, licensed to practice law in Ohio and Kentucky, is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association, as well as a regular presenter at Inside Self-Storage Expos. Questions, comments or suggestions for future topics can be sent to Jeffrey Greenberger c/o Katz, Greenberger & Norton LLP, 105 E. Fourth St., Suite 400, Cincinnati, Ohio 45202; call 513.721.5151; e-mail JJG@kgnlaw.com.