Auction Rules

Jeffrey Greenberger Comments
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It always surprises me when self-storage operators don’t have written rules about conducting their statutory lien sales. They all seem to have guidelines in mind, but very few prepare and disclose them to their auction buyers. Having a well-planned, written set of rules will protect you from potential litigation in three significant ways:
  • It will prevent former tenants whose goods were sold from claiming you failed to follow proper lien-sale procedures.
  • It will prevent lawsuits filed by buyers who claim your auction was unfair or inappropriately handled.
  • It will help prevent other claims that could result from having buyers as guests of your facility.

Technicalities

Unless your state statute provides differently, an “auction” requires the use of a licensed auctioneer; but that doesn’t mean you have to sell via an auction. If you choose not to use an auctioneer, you should refer to your lien sale in all advertisements and other materials by the same term used in your state’s storage statute, usually “public sale.”

Most statutes also require the sale occur at the facility, unless that is somehow impossible. Some operators enter contracts with auction companies that pick up the goods and sell them at the auction house. This sort of arrangement could represent a violation under your state statute, so proceed with caution. When you take possession of property by turning it over to an auctioneer or moving it to an auction site, you accept the responsibility of a bailment, which is an unnecessary risk.

Avoiding Tenant Claims

To avoid claims of wrongful sale from tenants, there are a multitude of bases to cover before you get to the sale, such as including the right provisions in your rental agreement and following your state self-storage statute to the letter. But let’s talk about the sale itself and how to ensure it is fair to the customer whose goods are being sold.

Most state statutes require property to be sold in a commercially reasonable manner. They also proclaim the tenant has the right to redeem his property and stop the sale until the time it is “finalized.” For everyone’s benefit, your written materials should address why the sale is occurring and how it will be handled, as well as articulate when a sale is final. When drafting your auction rules, consider the following:

  • A statement advising the public why the sale is being conducted, i.e., the tenant is in default pursuant to your self-storage statute.
  • A statement, to the best of your knowledge, regarding whether the property is subject to a lien superior to yours (for example, in the case of a vehicle).
  • A rule that gives a tenant the right to pay off his debt and reclaim his property right up until finalization of the sale.
  • A rule indicating whether the owner, manager or employee, or any of his relatives, can bid on the items being sold.
  • A statement identifying the final authority and decision-making process regarding auction winners.
  • A rule excluding personal items found in the unit, such as photographs, letters, diplomas, etc., from the final sale.

Avoiding Buyer Claims

In addition to the above, you need rules and disclaimers to protect yourself from accusations of wrongful sale leveled by buyers. First, indicate whether you are selling the contents of single or multiple units. Also define bidders’ ability to inspect the units prior to sale. For example, will you allow them to look into the space? Will they be prohibited from rummaging through the contents?

Consider preparing a statement that says storage units were inventoried, photographed and sealed, and you have not touched them since. Bidders should know the spaces are in the same condition left by the tenants. You might also clarify if inventory was taken only visually by standing outside the unit and looking in. If this is permitted by your statute, it may reduce your liability if you missed any items at the back of the units. Finally, make it clear that goods are purchased “as is, where is,” and you do not guarantee the condition of any items.

Explain how the sale will be conducted and how a bidder participates. For example, you might require he register with you and leave a credit-card number on file. You might issue paddles or bidder numbers. You might even require a deposit.

Clarify what the opening bid will be, in what increments bids can be raised, and whether there is a reserve. Based on the guidelines of most state statutes, you should avoid sealed or closed bids—an open bidding procedure must be part of the sale. Disclose the indicator for the final bid, i.e., what you will say to let bidders know it’s their last chance. Make it clear that the buyer is not permitted to touch or move any of the items until the sale is declared closed. Finally, give yourself the right to pull items from the sale if a reserve is not met or some strange circumstance arises.

Be clear about when you expect payment and in what form (cash, credit card, check, etc.). Also state whether you require a specified deposit that will be held until the unit is emptied and swept, and inspected by the facility manager. If sales tax or auction premiums are included in the final sale price, the buyer should sign a statement to that effect.

Keep in mind payment isn’t the final step. Many operators deem a sale complete only when the buyer removes the goods from the premises, with a rule for when that can occur. What if you conduct a sale in the morning, only to have the tenant’s overdue payment arrive via mail in the afternoon? You want to protect yourself from potential litigation, especially if the tenant may be trying to set you up. Therefore, consider a rule that says the sale is not complete and the goods cannot be removed until X number of hours after the sale or even the next day.

From time to time, illegal items are found among the contents of an auctioned unit. You need a rule stating that buyers should carefully inspect their purchase for illegal goods, such as drugs, guns, etc., before leaving the facility. Once the property is in a buyer’s possession, he is liable for any goods in the lot.

Most important, make sure bidders sign a copy of your written rules before they enter the site to attend the sale. Your written guidelines will have no value if they aren’t read, understood and abided by each participant.

Problem Buyers

Every now and then, you’ll get a troublemaker among your bidders. For example, you might get someone who buys the contents of a unit and is later uncooperative if the rightful owner turns up. He may refuse to return the items or demand a substantial markup. Can you exclude this person from future sales? While you’d like to think it’s within your rights to ban difficult bidders, state statutes claim each sale must be reasonable. This means you must sell to the highest bidder, mitigating the tenant’s debt as much as possible. Theoretically, that person could be your problem buyer; and if you exclude him, the tenant whose goods you sold could cry foul.

However, this may be a risk worth taking. The fact of the matter is you’re usually not going to collect the balance due from the tenant anyway. A claim of failure to mitigate damages is unlikely, because there will be nothing for the tenant to gain from it. This is an issue to discuss with your attorney, management company or ownership.

But if you do decide to exclude eligible bidders at will, do so consistently and address the policy in your auction rules. For example, state that you will not accept checks from any bidders whose checks have previously bounced, or you reserve the right to refuse bidding privileges to anyone who fails to follow the auction rules.

Avoiding Lawsuits

Operators go to an enormous amount of trouble to avoid liability for tenants’ damaged property or personal injury. But what do you do about auction bidders, who haven’t signed a rental agreement but still spend time on your property? If one of them was to be injured or suffer property damage or loss while on site, you could find yourself facing a lawsuit.

For this reason, your auction rules should include releases of liability for anyone with interest in the property—you, your staff, the management company and ownership—and anyone else involved in the sale. The rules should also include an indemnity clause for any injury or damage a bidder may cause. If a bidder does something on the premises that results in a lawsuit, you want to be indemnified by that bidder, who hopefully has insurance.

Your attorney can help you define terms and draft rules to protect your business. Every state will handle claims made by tenants and buyers differently. But if you have a clear, well-written set of rules including releases of liability, you have a much better chance of avoiding tricky situations and beating potential lawsuits.

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. This column provides general legal insight into the self-storage field and should not be substituted for the advice of your own attorney. 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; e-mail jjg@kgnlaw.com.

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