Avoiding A Wrongful Sale

Scott I. Zucker Comments
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Although the industry has seen some tremendous changes over the last few years in the area of construction design, management software and security, there have also been a few significant legislative changes concerning the lien laws that impact the operation of self-storage facilities. There are now 47 states that have self-storage lien laws, with only Alaska, Nebraska and Vermont waiting in the wings to implement their own. In fact, there have recently been self-storage lien laws proposed in Alaska and Vermont, yet neither was enacted.

As it stands, of the many self-storage lien laws on the books throughout the country, each has its differences--although operators can usually find some similarities in the laws of neighboring states. Unfortunately, even with those likenesses, an operator with facilities in different states may not be able to use the same lease form, since some lien-law statutes require special language included as part of the rental agreements used in the state. Some call for certain font sizes, some require particular language be bolded, and some require specific provisions. All in all, as the self-storage industry has grown, the lien laws that govern these businesses have remained antiquated and appear to ignore the more modern issues that challenge "third-generation" self-storage operations.

For example, certain state statutes call for denial of access to the storage unit after 30 days of default, whereas some statutes enable the operator to overlock immediately. Some statutes address the foreclosure and sale of vehicles and boats while others remain silent on these issues. Unfortunately, as the industry has grown and added features to facilities, such as perimeter fencing and gate-control access, and amenities like car and boat storage, many state legislatures have not been properly reactive to address the operational issues encountered with these changes.

Sale of Vehicles

Currently, only a handful of state self-storage laws address the procedures for processing vehicles with title for foreclosure and sale. Some states--North Carolina, for example--outline specific notice procedures for dealing with the foreclosure of a vehicle as compared to nontitled personal property. Recently, efforts in Arizona and New York have resulted in improving the foreclosure and sale process for their states. The New York Self Storage Association, with the cooperation of the New York Department of Motor Vehicles, has acted to create new regulations for the transfer of title to bidders at self- storage vehicle sales. In Arizona, self-storage owners helped enact House Bill 2116 to simplify the procedures for conducting lien sales. The new law gives owners access to title and registration records for cars and boats through state agencies, and simplifies the process for selling vehicles and boats while providing title to buyers.

Denial of Access

Similarly, there have been changes in some state laws to deal with issues such as denial of access. In recent years, Georgia has reduced its denial of access time for default from 30 to 10 days. Michigan completely revamped its lien law last year to model itself after Florida's self-storage lien law. In addition to reducing the time for the denial of access to five days, the new law deleted a provision that allowed an occupant to vacate without paying the rent and now confirms landlords do not have care, custody or control over their tenants' property.

Notifications

A continuing challenge of many lien laws has been the issue of mailing vs. delivery when it comes to sending the certified foreclosure letter. Once the demand letter is sent regarding payment, the tenant is entitled, by statute, to a certain period of time in which to cure his default and pay the outstanding rent (in addition to late charges). One of the common questions from storage operators is when does the time to cure begin?

Some states start the time period after the mailing of the demand letter, others after receipt. If the statute requires receipt of the certified mail letter, most identify receipt as either the actual signing of the green card or the impossibility of delivery (usually after the third attempt by the post office). The best approach for a storage operator is to be as conservative as possible to determine when the time period begins. That way, it cannot later be questioned by the court on a claim for wrongful sale if the storage facility waited an additional amount of time before it sold a tenant's goods.

Due to the questions surrounding the delivery of certified mail, it always makes sense to send the certified-mail letter along with a letter for regular delivery. That way, if the letter sent regular delivery is not returned, it will confirm the original address sent for certified-mail delivery was accurate.

Inventory

An additional area of dispute has been the requirement to actually cut a tenant's lock before the sale to conduct an inspection and inventory. Again, state laws differ on the requirement for self-storage owners and operators to physically inspect and inventory a tenant's property prior to sale, rather than relying on the general description given by the tenant himself. Certainly, an owner who cuts a lock and inspects a tenant's goods assumes the risk that if the tenant reappears and pays the overdue rent prior to the sale, he will complain property has been taken or damaged. The best solution to this problem is to photograph or videotape the inspection before the unit is relocked. If a physical inspection is not required by the self-storage statute for the state, a facility may want to weigh the benefits of such an inspection as compared to the potential risks.

Lien Searches

One of the other ongoing issues that remain a part of many self-storage lien laws involves the requirement for operators to conduct lien searches prior to their action to sell a tenant's property. Although the investigation of prior liens may actually enhance an operator's chances of getting paid the outstanding rent (assuming an interested party is located), the statutory obligation to perform the search adds another layer of potential liability to self-storage operators who fail to perform the search before the sale is held or perform it incorrectly, thereby failing to notify a proper party before the property is sold.

Although most self-storage statutes reference the issue of lien priority as part of their language, many include provisions that specifically require self-storage operators to perform the lien searches before the sale process can be completed. For example, states such as Alabama, Colorado, Connecticut, Florida and New Hampshire all require self-storage operators to conduct these lien searches by reviewing the financing statements filed by parties with secured interests in the county where the debtor is located. Whether the state law requires these lien searches or not, such searches can be an effective tool for rent recovery and are undoubtedly an important ingredient of an operator's due diligence before any property with title is sold at an auction.

Employing a Licensed Auctioneer

Over the last few years, the self-storage industry has seen some developments in the area of using licensed auctioneers to conduct self-storage sales. Whereas many states are silent on the question of whether self-storage operators are required to use licensed auctioneers to conduct their sales, some states have specifically addressed this issue. For example, last year, a bill was proposed in California requiring self-storage facilities to use licensed auctioneers at their sales. However, that bill was defeated. In Georgia a number of years ago, the operators sought a change in the law to exempt self-storage facilities from having to use licensed auctioneers for their sales. That bill was passed.

Certainly, there are benefits to using an auctioneer service for self-storage sales. For example, auctioneers who are good at their jobs will have bidders who follow them from sale to sale. With more traffic, these auctioneers may potentially get more dollars for each unit sold. Licensed auctioneers are also presumed to know their state's auction laws and, if an auction is found invalid, the facility may be able to pass their liability on to the auctioneer. The obvious disadvantage to using an auctioneer is a facility will have to pay some percentage of the dollars recovered in the sale as a commission or some other amount as compensation for the auctioneer's services, which will lower the facility's bottom line recovery.

Proposed Law Changes

In the last few years, there have been legislative efforts to change and update some existing self-storage lien laws throughout the country. Some proposals have been successful, but many have not. For example, Missouri and North Dakota made an effort to change their lien laws last year; however, no legislative action was taken on these recommended changes. In West Virginia, self-storage owners made an effort to improve their recently enacted lien law, but the changes did not get passed. The West Virginia bill would have shortened the waiting period for the foreclosure process from 60 days to 30, allowed late fees after five days rather than 15, and increased the amount of late fees to the greater of $25 or 25 percent of the monthly rate from $10 or 10 percent. New Hampshire was one state that changed its lien law to require tenants to designate a personal representative as part of their rent application for notification in case the tenant is unavailable or unreachable.

The bottom line about lien laws is if an operator seeks to enforce the law to sell his tenant's property, he must understand and follow his state statute. Courts have generally found in favor of operators who follow the law. For example, in the recent case of Seaforth v. Public Storage Management, Inc., a tenant failed to pay rent, and Public Storage complied with the lien law by sending the certified letters and publishing the advertisements prior to the sale of the property. The notice letters were not received by the tenant because he had moved and had not notified Public Storage of his change of address. The trial court dismissed the plaintiff's lawsuit for wrongful sale. The tenant appealed, but the court upheld the lower court's dismissal based on the finding that the facility had complied with the lien law. The message from the court's decision is clear. When you follow the law and do the sale right, you will be protected.

Unfortunately, a majority of wrongful-sale claims arise from simple ministerial mistakes vs. intentional acts. Although a facility's records may indicate nonpayment or proper mailing of notices, the actual documents may indicate otherwise. To protect a facility from wrongful-sale claims, it is vital to allow a second person--whether a manager or other facility representative--to review all aspects of a tenant's lease before the property is sold at auction.

Lien-law education and training are essential elements in every self-storage operation. As long as the state statutes remain antiquated and confusing, self-storage operators and managers must be trained to understand the laws and follow their procedures if they intend to foreclose on a tenant's property. Without a clear understanding of the law and the requirements for foreclosure, wrongful sales will be unavoidable.

Scott I. Zucker is a partner in the law firm of Weissmann & Zucker P.C. in Atlanta. He specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. Mr. Zucker is a frequent lecturer at self-storage national conventions and is the author of Legal Topics in Self-Storage: A Sourcebook for Owners and Managers. He can be reached at scott@wzlegal.com.

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