How to Conduct a Lien Sale

Joseph D. Joiner Comments
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This article could have been titled “How to Conduct a Lien Sale (Not!)." Though the title presupposes you are actually going to conduct a sale, it's probably the last thing you want to do, for many reasons. Let’s examine the whole process, asking ourselves the really relevant questions.

Why the heck do I want to conduct a lien sale?

Until you can answer this question (and it shouldn’t take but a few important minutes), I suggest you don't. When I was learning to fly, my instructors uniformly taught one preliminary step to take if I thought something was going wrong with the aircraft: “Wind your watch.” Yep, that’s it. Take a moment to figure out what’s going on before leaping into action.

When trying to decide on a lien-sale process, first analyze the situation. Was a payment made but not recorded? Have you tried making telephone contact? Is there some information the manager missed, such as a change of address? Is there someone other than your customer you can contact? Does someone know whether something catastrophic has happened to your customer? (A good example: One cautious operator waited several months to start a lien-sale process because she had a hunch something might be wrong. She was right—the eternally grateful customer had been in a coma after an accident, and when she came to, contact and payment were promptly made.)

Have all notices (and anything else I routinely require) been properly sent?

This is a very important question. Every state lien law has notice and timing requirements. If these are not met and you conduct a sale, you’re on the hook for damages. Every manager should have a pre-sale checklist and be tested on it regularly. Heck, every pilot has a checklist; your lawyer uses checklists when he interviews clients; your doctor uses checklists when he sees patients. Most everyone uses lists when they engage in an important decision-making process.

Your checklist should be designed by you. It’s a great way to learn your lien law, by the way, and you and your managers should know that law cold. By all means, run the checklist by your lawyer, but only after you have made the effort to draw it up. Then verify everything has been done correctly and documented in the tenant file. Before even thinking about conducting a sale, this verification should be done by a fresh set of eyes, not the manager who sent the notices.

What am I proposing to sell here?

I know, I know—the typical customer’s space is a jumble of stored stuff, and it takes some effort to find out what’s in there. However, you can change this by providing packing materials that help your customer store things neatly, like boxes and box labels. What about a storage “map” that can be pasted to the inside of the unit door? Moving companies provide special boxes for storing clothing, dishes, glasses, etc., so why can’t you? These items are also a profit center for your business, you know.

Beyond that, you can easily categorize what’s in a unit. Household goods are the most common and least worrisome items. You should pay attention to special items, such as boxed retail inventories, electronics and tools, for example. Of course, this means you have to dig around a bit. Unfortunately, many operators don’t go this far and, as explained below, their reluctance can generate problems.

Given what I intend to sell, how should I sell it?

This depends on the requirements of your state lien law, but even those that call for only a public sale by auction are flexible enough to account for the sale of items that have some real value. In those cases, contact someone who specializes in the type of item that concerns you and auction that stuff separately. (Knowledgeable buyers will quickly outbid the amateurs.) Many state lien laws call for a “commercially reasonable” sale, which really does require you to know what you are selling and sell it in a manner likely to bring the best price. It’s a good idea to try to be commercially reasonable, even if your lien law doesn’t include that language. So what does “commercially reasonable” mean? Adequate exposure to folks who are likely to be interested in whatever is being sold; adequate notice of the time, place and manner of sale; adequate opportunity for potential buyers to examine the merchandise; and a fair bidding process.

OK, I hear you: “But my auctioneer won’t do that. He just lets people look in the space from the outside, and that’s it. Besides, if I handle the goods, doesn’t that expose me to liability?” Most operators, if not 90 percent of them, take just that position. Here are the answers:

  1. Unless your lien law requires an auction, you don’t have to have one. How about getting sealed bids from interested parties? All you have to do is advertise the particular type of sale and time frame.
  2. You should have already made the determination as to whether just a look from the outside is sufficient, and you control the sale, not your auctioneer.
  3. You are not exposing yourself to liability by handling the goods at this point. It could even be persuasively argued that you have an obligation under your lien law to handle them.

Timidity (or laziness) can be expensive if you mistakenly sell something of extraordinary value in an unreasonable manner (and for a pittance). Even if you follow your lien law to the letter, you may face a claim for damages.

What happens if the bidding gets wild and I think I’m about to make a mistake?

Ah—a question most folks actually do not ask. As I said, you control the sale. Even if the sale is by an auctioneer, you can stop it anytime before the hammer falls—it’s in the Uniform Commercial Code, and your auctioneer (if you use one) should know that. Of course, you can’t stop the sale if you're not there, so you or a trusted staffer should be present at every lien sale and have guidelines to follow.

You should also use a “bid sheet” everyone must sign to be allowed to bid. On that sheet, reserve the right to stop the sale, or reject any bid for any reason, in your sole discretion.

Another good reason to stop the sale: Your customer shows up offering to pay. Don’t argue about the form of payment tendered. Stop the sale and try to honor your customer’s offer. You can always reschedule, but you can't undo a finalized transaction.

What if I think my customer, or someone representing my customer, is bidding in an attempt to get the property back for less than what is owed me?

This is not an unusual situation really. Except in those states where your lien law forbids the self-storage owner to participate in the auction, you yourself can bid all or any portion of the amount of your lien just as though it were cash. You can also establish a reserve (a minimum bid) in the bid sheet that you can drop or reduce at any time. Needless to say, you can do the same in a sealed-bid situation. Remember, you control the sale—so long as it is done within the requirements of your lien law.

Is that it? There's nothing to worry about after the sale?

There’s plenty to worry about—that’s another reason you don’t want to conduct a lien sale unless you have to. First, you must have complete information about your buyer from the bid sheet. Second, you must ensure the buyer has agreed to remove the purchased property from your premises in a timely manner. Some operators even build in a safety net by making the sale conditional on picking up the property on a deadline. Better and safer yet, some provide that the sale is not final for 48 hours, just in case the customer shows up with proper payment. If some of the property is not sold or not saleable, your rental agreement should provide that you can dispose of it any way you choose.

Don’t forget that nagging problem of excess proceeds—that is, you get more at the sale than your lien amount. You must strictly follow your state lien law in handling those profits, which means you have accounting chores to do. Even if there is no excess, some states require you to account to your customer for what happened. It’s not a bad idea to always do that, whether the lien law requires it or not.

Remember: You are not in the lien-sale business! A lien sale is a last resort. It represents an unequaled opportunity to make expensive mistakes and may generate headaches for you even if you do everything right. Communicate and compromise; only if that turns out to be impossible should you go through your lien-sale process. Finally, if you think you might have made an error, STOP! You can always start over, but you can’t “unring the bell” of a wrongful sale.

Joseph D. Joiner has been giving self-storage operators legal advice for more than 25 years. A real estate and business lawyer doing litigation and transactional work, he practices in California and New Mexico. He and D. Carlos Kaslow are co-authors of the "Rental Agreement Handbook," sold through the Self Storage Association (SSA). He is also is a partner with Kaslow and Scott Zucker in the Self Storage Legal Network, a subscription consulting service for members of the SSA. For more information, visit www.selfstorage.org.

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