Looming Legal Issues

Jeffrey Greenberger Comments
Posted in Articles, Insurance
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When you first get involved in self-storage, there are so many things to think about and so many decisions to make, you may forget all about the legal issues facing you. Presuming you have survived the buying of a facility and the process of obtaining zoning approval; selected your builder, vendors, management software, and form of your business; had a Yellow Pages ad designed; and started operating or taking over operation of a facility, there are some legal issues you must consider immediately.

Your Lease

First and foremost is your rental agreement. It is not a good idea to borrow another facility's rental agreement, as it is unlikely the borrowed agreement is accurate, unambiguous, consistent and compliant with your state's self-storage statute. A visit to your attorney or the purchase of a self-storage contract from a reputable producer will save you thousands of dollars in legal fees, guaranteed.

At a bare minimum, ensure your rental agreement has the following basic elements:

1. A basic identity of the space being leased with an approximate size, and language providing there is no reduction in the price of the space if it is bigger or smaller than that stated in the lease.

2. State self-storage statute language exactly and conspicuously displayed within or at the top of the lease where required. Do not miss this requirement.

3. The term of the lease (i.e., monthly), including whether the lease renews on the date executed or the first day of each month. The lease should also outline how much notice you require to terminate the lease at the end of a term.

4. A limitation on the type of items stored in the premises. You want to prohibit antiques, collectibles, items with sentimental value or those with no immediately determinable replacement value from being stored at your facility.

5. A limitation on the dollar value of stored property. While you may not be able to require self-storage insurance from your tenants, you can protect yourself from large losses by having a contractual limitation setting forth the value of the property stored in a particular unit.

6. A "no hazardous waste" provision. Most mortgages or insurance policies require you make a reference to the Comprehensive Environmental Response Compensation and Liability Act (CERCLA). In many cases, if you do not specifically address CERCLA by using its language in your lease, you may be in violation of your mortgage or insurance requirements.

7. A requirement that the unit is to remain locked. The lease should also indicate how many locks you permit and what type of lock you require. Do not agree to maintain a key to any lock.

8. A release from liability from the tenant for any personal injury or death, and a separate release for loss of or damage to the property stored.

9. A definition of climate-controlled space, where offered. Do you intend to maintain a temperature between 40 and 80 degrees, or are you trying to keep the premises at 72 degrees at all times?

11. A provision advising all other fees you may be charging, i.e., late, lock-out, clean-up, etc. Make certain your charges do not violate the limits set forth in your state's self-storage statute.

12. A default provision. This states that in the event the tenant violates any of the provisions of the lease, the tenant is in default. The default clause should then give you certain remedies. Some of those remedies should always be those provided under your state's self-storage statute, but also retain the right to evict the tenant from the premises.

13. A governing-law provision, especially if you are close to the border of another state. You do not want residents of other states renting in your facility and suing you in a state in which you do not do business.

14. A statement that the written agreement is the final word, that no oral representations have been made, and the lease may only be modified in writing.

15. A statement against bailments. Most states' self-storage statutes are very clear that self-storage is not a bailment and not warehousing. We should continue to emphasize that distinction in our lease agreements.

Your State's Self-Storage Statute

You must be familiar with your state's self-storage statute. While you may need an attorney to help you interpret the specific requirements of the statute, you should at least be familiar with the basic deadlines and types of notices required to give a tenant before you can exercise your lien rights. For your convenience, a chart identifying the section containing your state's self-storage statute follows.

StateSection
Alabama8-15-30
Arizona33-1701
Arkansas18-16-401
California21700
Colorado38-21.5-101
Connecticut42-159
Delaware4901
Florida83.801
Georgia10-4-210
Hawaii507-61
Idaho55-2301
Illinois770 ILCS 95/1
IndianaIC26-3-8
Iowa578A.1
Kansas58-813
Kentucky359.200
Louisiana9:4756
Maine10:1371
Maryland18-501
Massachusetts105A
Michigan570.520
Minnesota514.970
Mississippi85-7-121
Missouri415.400
Montana70-6-411
Nevada108.4733
New Hampshire451-C
New Jersey2A:44-187
New Mexico48-11-1
New York33-8-180
North Carolina44A-40
North Dakota35-33-01
Ohio5322.01
Oklahoma42-191
Oregon87.685
Pennsylvania73-PS-1901
Rhode Island34-42-1
South Carolina39-20-10
South Dakota44-14-1
Tennessee66-31-101
Texas59.001
Utah38-8-3
Virginia55-416
Washington19.150
West Virginia3814-7
Wisconsin704.90
Wyoming29-7-101

Tenant Issues

You need to determine whether you are going to perform any sort of tenant screening before leasing to a customer. If you are going to do screening, you must perform the same sort of screen on every single person who applies to lease from you. Otherwise, you will buy yourself a discrimination lawsuit. Also note that if your tenant is in the United States legally, but not to work, he can no longer be issued a Social Security number. He should then have an individual-taxpayer identification number (ITIN).

An ITIN is a nine-digit number, similar a Social Security number, that always begins with the number nine. These numbers can be run through criminal-background and credit-screening services, although the prospective tenant may not have been in the country long enough to have developed a credit or criminal profile.

Office Procedures

You need to make a decision about in-house/office procedures for various scenarios. Some of the biggest are:

1. Package acceptance. When you accept packages for tenants, you have created a bailment, at least while you are holding the packages in the office. A bailment is a legal relationship by which you have agreed to hold and care for the item belonging to another--in this case, your tenant--until he claims it from you. With a bailment, you incur certain additional duties to care for the delivery until it is picked up. Some operators keep keys to the locks of their tenants' units so delivery persons can deliver directly to the unit. This situation is worse, because while holding a key, it is arguable you have created a bailment over the entire unit. The best solution is to have the delivery driver retain a key or know the combination to the lock and keep you completely out of the loop.

2. Dumpsters. Dumsters appear to be a constant source of problems for self-storage operators. Tenants appear to think part of their rent is license to dump as much from their self-storage unit or home as they want into the facility's dumpster. This raises costs for you. One solution is to lock the dumpster. However, some owners wish to provide the dumpster because it reduces the number of spaces left to clean out each month. An appropriate policy regarding dumpsters and the fees for using the dumpster should be in place.

3. Procedures for allowing large trucks onto the property. While not everyone will move in and out with an 18-wheeler, there will inevitably be some tenants who will be operating a truck larger than anything they have ever driven before. If your space is tight or if you use a loading dock, a semi- or large-truck policy is necessary. The roofs, gutters and bollards at your loading docks will thank you.

4. Security systems. Tenants must be specifically told what the security systems on the property do. Are they to protect the facility or monitor individual units? If they are to monitor individual units, are they wired to the police? How are the authorities notified if an improper person enters a unit?

The problem is, if you advertise a security system, a tenant may rely on it for the protection of his property. If the system fails to protect the property, was not designed to protect the property or is not monitored, you will find yourself with a lawsuit by the tenant claiming reliance on the system.

5. Procedures for disasters. Disasters, be they natural or man-made, can cause buildings or vehicles to be damaged or lost and bring a facility horrible publicity. A plan must be in place so employees of the property know how to deal with these types of emergencies. They must know how to respond to requests for information from the press and how to handle investigations or search warrants from police.

Delinquencies and Collections

This may belong under the "procedures" section, but it is so important it deserves to be addressed as a separate issue. There is a careful balance that must be maintained between good tenant relations and delinquencies. There is no magic number of days or weeks your tenant should be delinquent before you start to take collection action. However, there are various preemptive measures you can take when someone becomes past-due on rent.

For example, there should be policies and procedures about the day on which managers make phone calls to all delinquent tenants to ensure the nonpayment wasn't an oversight. The first appropriate late-notice letter must go out promptly so tenants know you are serious about collecting rent. Some operators require their tenants provide a credit card. Thus, if the rent is not paid by a certain day of the month, the credit card is charged.

This also avoids a potential litigation problem involving late fees. There have been several class-action lawsuits regarding late fees. If you can avoid charging them altogether by debiting tenants' credit cards, you may lose a profit center, but all of your rent will be paid each month without a lot of collections efforts by your manager.

Note that your state's self-storage statute may specify a date before which you may not start your lien-sale procedures. This does not mean you cannot send late notices, make calls, etc., but you may not start certain prescribed statutory lien-sale actions until the tenant is at least so many days delinquent.

Also watch out for partial payments, which may reset the time calculation under your state's statute for when you may proceed with your lien-sale activities. Be careful not to call your sale an "auction" unless you are using a professional auctioneer. If there is no auctioneer, you must call it a "public sale" or "lien sale." Before selling a tenant's goods, ensure you have complied with all of the prerequisites of your state's statute and waited the minimum number of days between each action as required.

Even if you believe you have sold the goods legally, you may get a wrongful-sale lawsuit. It is important to have a plan in place for how you review the file to ensure everything was done as required by the statute, and you must know your insurance policy's limitations on coverage. Additionally, your insurance policy requires you notify the insurance company within a certain number of days of a claim being asserted, or you waive coverage. Be careful to adhere to the time limit. If you are nervous about wrongful-sale-type lawsuits, remember you have the right to evict the tenant and conduct a court-ordered set-out of the property.

Damage Claims

Inevitably, a tenant will eventually blame you for damage that occurs to property he has incorrectly packed in his unit, or for damage due to humidity, flood, water infiltration, pests, etc. While your lease should contain a release from all of these losses, you should strongly recommend renter's insurance to all tenants. Still, some will insist on pursuing a claim against you. Have a proper procedure in place for auditing the situation to determine whether you actually have liability to the tenant. This inquiry should occur with your attorney and, perhaps, your insurance company.

If it is possible you have some exposure to liability, and if you deal with the case appropriately from the beginning, it is often possible to settle these types of claims for little or no money out of pocket in exchange for some type of barter--if offered early. Some people are really only looking for sympathy and an opportunity to vent their frustrations. You should not let a situation like that develop into a full-blown piece of litigation if you can avoid it.

Also, never lose sight of the fact the appropriate measure of compensation for lost, damaged or stolen property is actual cash value--the depreciated value of the property, not replacement cost. Replacement cost is an insurance term. Insurance companies offer this sort of extra protection for a fee. You do not, so do not lose sight of the appropriate calculations. You may also want to consider a mandatory arbitration clause in your lease, if permitted, to avoid lengthy lawsuits.

Insurance

First, understand and know your own insurance policy. What kind of coverage do you have? What are your limitations? What is your deductible? What is your deadline for notifying insurance companies of a claim?

Second, if you offer tenant insurance at your facility, be careful. There is a line of thinking that if you offer only one of an insurance company's many products, you are implying this product is better than the others it offers. For example, if you offer a policy that does not include coverage from a sewer backup and such an instance occurs, a tenant may sue you under the theory of reliance--you judged this policy to be better than the rest, even if you did not sell it. If other self-storage policies include coverage for sewer backup, you could be held liable.

I am a strong advocate of offering pamphlets for insurance, but offer several policies from which to choose. Also be careful not to sell or collect premiums for insurance. This act may violate your state's insurance statute because you may be acting as a broker without a license to sell. If you give a discount for insurance, you can ask to be named as a second insured or additional noticed party so you can know if your tenant cancels, does not renew, or modifies the insurance policy covering the property.

Employee Issues

Once you have considered all of the above, you must also be concerned about employment-law issues--that is, the people working for you can also sue you if you do not do things properly. It is important to invest some money in a good employment manual that sets forth, at a minimum, the following:

1. The type of employment. If your state permits employment at will, you certainly wish to declare this to be the term of your employment with each employee.

2. A statement regarding equal opportunity employment, as well as a statement denouncing unlawful discrimination and sexual and other harassment in the workplace.

3. A conflict-of-interest provision, where appropriate. For example, you may not want your manager managing a different facility in the evenings.

4. Prohibition against drug use and the right, if desired, to do appropriate drug testing randomly as a condition of continued employment. The manual should also include a statement that the failure to take a test or a positive test result will be grounds for termination.

5. Requirements for appearance, including any uniform requirement.

6. Hours of employment.

7. Other terms of employment: what is expected from a full-time vs. part-time employees, vacation benefits, holiday benefits, sick and personal leave, health benefits, etc.

8. An agreement to arbitrate any claim arising out of a dispute involving the employment or arising from a termination of the employment, if appropriate in your state.

This is only a sketch of what an employment manual must, at a minimum, contain. There are requirements for the execution and consideration of an employment manual. There are also requirements to change the terms and conditions of an existing manual. These must all be done with an attorney.

Further, employees can sue you for overtime if they believe you have violated the Fair Labor Standards Act. Many self-storage facilities give the title of "manager" to a person working at the facility, considering them an exempt employee and failing to pay them overtime for more than 40 hours worked in any given week.

The test for whether an employee is exempt is actually more stringent. It requires the employee have actual managerial supervision of other employees, with the right to make decisions regarding hiring and firing, or an administrative position with actual responsibility for the success or failure of the business. An article in the June 2002 issue of Inside Self-Storage covers this issue in detail if you wish to read more. You should also consult an attorney or tax advisor.

Outdoor Storage

Finally, if you are going to allow the outdoor storage of cars, boats, motorhomes or other vehicles, you must have a separate section in your lease that provides for the differences involved in outdoor storage. These include parking spaces rather than locked units, how you wish for parking to occur, and requirements for keeping the vehicle in good condition, registered and insured. There is also additional information you may need to perform a title transfer, sale or tow of the vehicle in the event of a default and, if appropriate, the requirement to maintain a drip pan under any parts of the vehicle that may contain hazardous substances, such as gasoline, oil or other chemicals.

You must also be familiar with your state's parking or livery and towing laws so you have an alternative remedy, if available under your state laws, to remove the vehicle from your property in the event of a default without trying to do a lien sale. In many states, lien sales with vehicles are much more complicated than they are with other personal property.

This is just a survey of some of the legal issues you must consider in an operation of a self-storage facility. Many of these issues have been addressed in much greater detail through articles in this magazine or at ISS expos. The best advice is to consult with an attorney about these issues as soon as possible, and make sure you are in full compliance with your state's statutes, labor and employment laws, with sound self- storage principles of operation.

Jeffrey Greenberger practices with the law firm of Katz Greenberger & Norton LLP in Cincinnati, which primarily represents owners and operators of commercial real estate, including self-storage. Mr. Greenberger is licensed to practice in the states of Ohio and Kentucky, and is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. He is a regular contributor to Inside Self-Storage magazine and the tradeshows it sponsors. For more information, call 513.721.5151.

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