It's ironic that while this industry reaps the benefit of customers who practice "spring cleaning," sorting through their possessions and moving items into storage, most self-storage owners fail to do a spring cleanup of their own. Many do not perform an annual review of their businesses— legal policies and procedures, insurance, etc.—except for sitting with an accountant toward year end to do tax planning. This article will help you understand why a yearly "cleanup" is critical and provide precautionary measures to avoid liability and save money in legal fees.
The Court, the Law, Your Lawyer
As a self-storage owner, you need to be educated in law as it relates to the industry. In the event you face litigation, you may be the only one schooled in this area, as many courts and lawyers are not familiar with it. So arm yourself with as much information as possible. Most state self-storage associations can provide you a copy of your state's lien law, the self-help measure to remove nonpaying customers from your facility. In addition, you can read legal articles in industry trade publications and research past case law involving self-storage companies. There are also dedicated newsletters that can be of help, such as Carlos Kaslow's "Self Storage Legal Review."
If you find yourself called into small-claims court in which you represent yourself, make copies of all applicable legal documentation and present them to the judge as well as your opponent. You can respectfully say, “I am certain the court knows the law; however, I have taken the liberty of providing copies of various self-storage laws and verdicts.” In some situations, the presiding judge may not even be aware that self-storage does not constitute a bailment but involves a landlord-tenant relationship. Your case will be infinitely stronger if you provide supporting materials.
If you face a case that requires the service of a private attorney or one assigned to you by your insurance company, give him copies of your information as well. You can expand your legal professional's knowledge, even if the material you've gathered is not state-specific. For example, self-storage law in North Dakota is not that different from the law in Virginia. The bottom line is, no one knows the self-storage business like a facility owner, so take a proactive role in assisting with the education process of those who will be supporting (or judging) you in a lawsuit.
Many operators don't realize they are entitled to choose their own lawyer in the event of a lawsuit that falls under a covered insurance claim. You can ask your insurance company to retain a particular lawyer's services. If he has expertise in self-storage, most carriers will hire him to defend you at their expense. This saves you headaches, time, trouble, education of your personal attorney and, of course, money on your deductibles.
The self-storage occupancy agreement (it’s pleased not to be called a "lease") is a dynamic document that should go through a metamorphosis every year or two. I often hear owners foolishly stating they want to wait until they run out of copies of their current agreement before reviewing, modernizing and reprinting it. As new self-storage cases are decided by Appellate Courts, creating corresponding need for updates in disclaimers and limitation of liability, your agreement must be consistently changed with the times.
While most agreements have a severability clause—stating that a single invalid provision does not nullify the entire contract—it is not always enforced. For example, a $1,000 limitation of liability was upheld in one of the first appellate cases of memory. That was satisfactory for the times. The recent trend, however, has been a set limitation of $20 per square foot. If your agreement isn't in tune with more recent court cases, your stated limitation of liability could be found all-together void.
There are various model occupancy agreements in use throughout the country, and many of them are just fine. But you can never be certain you have a good one unless it has been viewed and modified by a pair of experienced eyes, namely yours or that of an experienced lawyer. Most legal professionals will provide an annual review of all documents, forms, contract, etc., for their regular retainer clients at no additional charge.
The attitude of some self-storage owners toward their business-insurance policy is apathetic, and the question "Are you sufficiently covered?" is often left unanswered until it's too late. Do any of the following statements sound like you? If so, you may want to find a renewed interest in your insurance coverage.
- My insurance broker tells me I'm covered.
- I'm covered, so I don't need to think about it.
- I just glance at the declaration page.
- I toss the policy in the drawer or safe and don’t look at it again until renewal time.
- Most of my insurance policies renew on my birthday so I don't forget about them.
If you take a lawsuit to your insurance carrier and discover it's not a covered loss, not only are you stuck with the expense of the tenant's claim (should he receive a judgment), you are also on your own for any and all legal costs. Even if your tenant files his claim under his own tenant-insurance policy, his insurance company might still sue you for damages. I have seen many instances in which an insurance carrier "cross claimed" against a storage facility, even though the facility sold the exact policy on which the claim was originally made—talk about an ironic situation!
The classic insurance coverages used to guard storage owners against tenant claims are customers' goods and sale-and-disposal legal liability, which protect you from claims arising from damage to customers' property as well as the improper or inadvertent sale of tenant goods. What you must bear in mind is when you unlock and enter a customer's unit, you transform your owner/tenant relationship into that of a bailment transaction, which does not afford you the same protection as when you merely rent space.
Once your attorney or other legal professional has examined and modified your occupancy agreement to jive with the times, make sure your insurance broker has presented it to your underwriter. If you don't, you are relying on your broker to describe your limitation of liability, exculpatory clauses, etc., which does not give the underwriter sufficient information to understand your risks (as well as those of the insurance company). In some cases, your premiums may actually be lower after disclosing the particulars of your occupancy agreement.
Even though the most litigated self-storage legal issue is bankruptcy, the vast majority of cases that go to trial have to do with lien enforcement, i.e. auction sales. This is surprising, as there are a multitude of things owners can do to avoid finding themselves in hot water. All it takes is strict conformance to your state's self-storage statute and some careful planning. Before conducting a lien sale, consider the following:
- Do you use checklists to ensure your lien procedures are uniform?
- Have you checked with your state or the national self-storage association for current trends in the process?
- Do you have an outside party who conducts auctions on your behalf? Is the manager or other facility representative present at every sale? Have you considered using the services of a licensed auctioneer?
- Do you properly advertise every sale per your state self-storage statute?
- Do you take an inventory of the unit before you sell? Is such an inventory required in your state?
- Do you send the customer sufficient notices prior to auction pursuant to local regulations? Do your sale notices comply with most recent legislation?
- Does your manager understand the difference between a late notice and sale notice?
I have often seen new facilities defer the issue of lien sales until it's absolutely necessary to conduct one. Auctions require forethought and strict compliance to the law. Owners who fail to plan and attempt the process without proper documentation, personalized for their specific facility, are leaving the door open to potential liability. Your spring legal cleanup should include many items, but they all share a common goal: getting the nonpaying customers out and keeping the paying customers in—with the intention to properly handle any enforcement measures.
A few simple acts of legal upkeep will save you enormous expense—not to mention headaches—in years to come. The most difficult tasks come with a brand-new facility preparing to open, as it requires a great deal of effort to ensure all policies, procedures, contracts, documents, etc., are in compliance with local and state laws. After a facility is up and running, however, it's easy to perform an annual review to ensure you have every legal protection available to avoid pesky litigation.
The risk involved with neglect of these issues is astounding, especially when compared to the "cleanup" cost. I encourage all operators to take a close look at their legal dealings and perform maintenance measures moving forward.
Kenneth M. Piken, a practicing attorney, has been in law for more than 25 years and is the senior partner in New York-based Kenneth Piken & Associates. The firm encompasses all aspects of law, with a concentration on real estate and logistics matters. It has participated in or handled virtually every appellate New York case affecting self-storage operators, all with favorable results. Mr. Piken was general counsel for the New York Self Storage Association for more than 15 years and participated in drafting and lobbying a New York lien law. He has lectured throughout the country and written articles involving self-storage in every major trade publication. For more information, visit www.pikenlaw.com.