Limitations on Value and Property

Jeffrey Greenberger Comments
Posted in Articles, Insurance
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One lease clause I consistently urge storage owners to include in their leases is a limitation on the type and value of property that can be stored in a unit. There are two distinct concepts in this type of clause. One is a dollar value on the property the tenant agrees to store in the unit; the second is a disclaimer or prohibition against certain types of property that are stored.

There are three advantages to the operator in adding this type of provision. The first is its acts as a deterrent to the tenant instituting litigation, as you have essentially made shallow the “deep pocket.” Second, you will encourage more tenants to purchase insurance on their goods. Third, you may reduce your property-insurance premiums. Here is an example of how this type of provision might read:

Lessee agrees not to store property with a total value in excess of $5,000 without the prior written permission of the Lessor. If such written permission is not obtained, the value of property shall be deemed not to exceed $5,000. By this Agreement, Lessor is generally not liable for the loss of Lessee’s property. In the event any competent court of law adjudicates Lessor liable for any loss, for any reason, Lessee agrees that Lessor’s liability shall not exceed $5,000. This provision shall not constitute an admission that Lessee’s property has any value whatsoever. The Premises is not appropriate for storage of irreplaceable property such as books, writings, objects which have an unknown immediate resale market value, or objects which have a special or emotional value to Lessee, and Lessee agrees not to store such types of property in the leased premises. Lessee agrees, at his/her sole expense, to maintain insurance on all property stored in the space with actual cash value coverage against all perils, without exception. Lessee’s failure to maintain such insurance shall be a Default under this Agreement, and Lessee shall assume all risk of loss or damage that would have been covered by such insurance.

What kind of protection does this provision provide? First, it limits the dollar value of the stored property. How many times have you conducted a lien sale and had difficulty collecting $50 for the entire contents of the unit? That is because a lot of what is stored may have been expensive to buy, but once it is used or old, it not worth much any more (we will discuss actual cash value below).

In your customers’ minds, the stored property is priceless. I could spend the rest of this column quoting from newspaper stories and lawsuits over the last few years that vilify self-storage operators for expensive, if not priceless, items that were stored, then lost, damaged or stolen. Normally, the occurrence is through no fault of the operator, who refuses to pay the tenant the cost of the property, and the matter is tried in the court of public opinion.

I am a staunch advocate of keeping the dollar value in your leases as low as possible, sometimes as low as $2,500. Anyone who would store more than $5,000 or $10,000 (actual cash value) of property in a 10-by-10 space should be asked whether self-storage is the right option at the outset. In addition, you will note the above provision contains language prohibiting the storage of irreplaceable items that have an unknown resale market value or objects with special or emotional value. The operator should stop anyone who wants to store irreplaceable property.

Again, there are many stories in newspapers about storage facilities that sold off personal property in a lien sale, or about items that did not belong in storage—wedding presents, grandma’s wedding dress, baby books, photo albums, and the like—and were damaged by fire, flood, mold, etc. The most notable example of this arose more than a year ago when a storage facility properly conducted a lien sale, but ended up selling the personal papers of Malcolm X. While the sale was justified and proper, the publicity was all bad.

One legal/insurance concept you need to understand is that of replacement cost vs. actual cash value. If your facility is liable for damage, or a tenant sues you for damage, loss, or destruction of property, you should know from a negotiating position what the highest value is you will have to pay. Your maximum exposure is actual cash value, which is the depreciated cost of an item over the years of its use. Conversely, your customer will think he should start with replacement cost.

For example, your tenant purchased a bed two years ago for $1,500. It would cost him $1,600 to replace it today; but the value of the used bed is only $750. Only insurance companies offer replacement-cost coverage. Storage operators are not obligated to pay a tenant the cost to replace the item, even if he is liable for the damage. He only pays actual cash value. Therefore, when a tenant presents you a list of items that were destroyed, lost or damaged in his unit, you must always begin by explaining you are not liable for the loss; and even if you are, the amount for which you are responsible is the depreciated value of the item—the actual cash value—not the replacement cost.

Determining actual cash value can be tricky. Most states allow the owner of the property to testify its value, but require him to bring in an expert witness, such as an insurance adjuster. However, it is not that hard to come up with a round figure based on garage-sale rates, for example, to show what the actual cash value of the property would be. It is certainly appropriate to ask for copies of receipts and, if they are not available, to ask the age and condition of the items stored.

If a couch gets moldy or a stereo is ruined by a roof leak, and the item is 10 years old, it has decreased substantially in value—unless it was some sort of antique. Often, when you explain this to a tenant, he will back off a damage claim. However, you can not always avoid the folks who will claim the item has sentimental value. Hopefully, the provision suggested above, or one similar to it, will help you diffuse the argument.

Imagine the type of deposition your attorney can take on your behalf if this matter ends up in litigation. He will ask the tenant if he did, in fact:

  1. Understand the lease.
  2. Sign the provision.
  3. Understand the provision.
  4. Violate the provision by storing items of greater value than agreed.

I preach the theory of creating barriers of entry to litigation, or what I call “hurdles.” The more hurdles you throw between yourself and a tenant, the harder it is going to be for him to bring litigation or bad publicity against you and your facility. The above-suggested provision does exactly that. A limitation on the value and types of property a tenant can store is one of the first and best hurdles to litigation.

If You Are at Fault

There will be times when you are liable for a tenant’s loss—for example, when a manager or employee backs a truck into a building, causing damage to stored contents, or when the wrong unit is sold at lien sale. Even so, with the use of a limiting provision, you will not be liable for an unlimited amount of money.

Most of the time, an operator should not be liable for losses due to circumstances outside his control, such as fire, flood, earthquake, theft, etc. But if a tenant views you as a bottomless pocket of money, what does he have to lose by suing you? If you have limited your exposure to $2,500, the suit will be a lot less attractive to the tenant and any attorney who might take the case on a contingency fee.

As an added benefit, a dollar-value limitation discourages what I like to call “puffery” in a property-damage or loss claim. Without a provision to protect you, when there is loss or damage, a tenant can often “invent” items stored or conveniently restate their value. One of my favorite cases involved a carved, wood mask. It was set on its side, on top of a couch in a storage unit. It somehow fell from its precarious perch and was broken. The original claim, as described to the facility manager, was damage to a piece of art with a value of approximately $500. When the claim was denied and a lawsuit filed, it was suddenly a priceless, original woodcarving with a replacement value of $10,000!

In the discovery phase of the case, we determined the woodcarving had most likely been made in China and purchased on Ebay for $55. Had the storage owner had a limitation provision in his lease, we could have asked the tenant questions, such as: Why was an irreplaceable piece of art with a value practically impossible to determine stored in a self-storage facility when this was prohibited? Why was the tenant storing something with a value of approximately $10,000 when the limitation on the premises was $2,500? This is why I call this type of lease clause a barrier to litigation.

Insurance

The second consideration for having a value limitation is to help convince your tenants to purchase self-storage insurance. There are those of you in states that may allow a forced-placed type insurance policy, and there are those of you who require insurance and add it to the rent. However, I understand that to be the minority position among the operators in the country; most operators hope their tenants buy insurance on their own.

If you are explaining your lease and value limitation to a tenant, and he requests you raise the limit because he will be storing more valuable property in the space, you can have him sign an addendum to allow the increase in value. However, for you to vary from your standard limit, the tenant should do one of three things:

  1. Provide proof of insurance.
  2. Purchase insurance through the program at your facility.
  3. Name you as an additional noticed or insured party on his policy.

The addendum (a sample of which is included at the end of this article) provides that in the event the insurance lapses, the value limitation automatically resets to the limit stated in the lease. This allows the operator to easily deal with the objections he receives from people who want to store an item such as a boat, car, RV or other valuable property. The tenant may say, “I cannot agree my car is only worth $2,500.” Your response would be, “Very well, we have an addendum to deal with these situations. All that it required is your signature. We will amend the amount, and you will provide proof of insurance for the amount of the item being stored.”

If the tenant objects to the addendum and insurance requirement, you should let him walk. Many operators, especially those that set low value limitations in their leases, report they have much greater participation with voluntary purchase of self-storage insurance, for two reasons:

  1. With this type of provision, people have a better understanding that the landlord is generally not going to be liable in the event their property is lost, stolen or damaged in the selfstorage facility.
  2. Many people feel their stored property is worth more than the value limitations and, therefore, agree to purchase the insurance.

Risk Management

The third advantage of a limitation provision is an operator’s own risk-management issues. Imagine knowing the exact amount of liability for damage you would suffer in the event of fire, landslide, earthquake, arson, etc. Now that you have thought about it, imagine how your property-liability insurance provider would look at it.

Some owners have reported that providing this provision to their insurance agents has resulted in a reduction in their premiums because the underwriters are able to look at the overall risk and set a lower value on it. Other owners are able to reduce their overall coverage because of the limitation of value. Another result is that with fewer claims, your experience rating may improve with your insurance carrier.

I hope this article demonstrates that a short provision in your lease placing a limitation on the value and type of items appropriate to store in a facility will eliminate many frivolous lawsuits. This provision will also help your tenants understand the nature of the relationship between you, as the operator, and themselves, as customers and parties responsible for insuring against loss. It will hopefully increase your percentage of tenants who opt into their own or your insurance program, and decrease your property insurance rates.

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 selfstorage. 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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