Many state statutes governing self-storage have a section on auctioning goods. Generally, sales are required to be commercially reasonable. Many operators dont understand just what those two words mean, and they conduct their lien sales in different ways.

For example, facilities might transfer stored items to an offsite auction house to sell in mass with other goods. Some owners take sealed bids rather than solicit bids from the public. Or they may dispose of property on the day of sale, rather than sell it. Another example is a private sale where a hauler or auctioneer buys all the goods for $1 to sell at subsequent auctions.

These options arent necessarily wrong in every state. But Im trained to take all words in statute seriously and consider what they mean.

The term commercially reasonable is not one you can simply look up in a law dictionary to get a definition. The majority of states with self-storage statutes have also adopted the Uniform Commercial Code (UCC), which addresses the buying, securing, and selling of goods and commercial paper.

The UCC sets out a 12-part test on what makes a sale commercially reasonable. Remember, this test has nothing to do with self-storage in particular; it looks at the sale of any type of collateral or liened propertyfrom a repossessed car to commercial equipment. But it gives us a good glimpse into what a judge may consider in the event a tenant sues you for an improper sale:

1. The nature of the collateral, including its fair market value 
2. The resale price of the collateral 
3. The nature and amount of advertising to get buyers to a sale 
4. The use of genuine, reasonable efforts to reach the appropriate market best able to use the collateral 
5. Whether the secured partys efforts are reasonably calculated to reach a reasonable number of bidders or potential purchasers in the appropriate market 
6. The method used to solicit bidders or potential purchasers 
7. The number of potential buyers contacted prior to the sale 
8. The nature of the sale (Was it public or private? Was it conducted in a reasonable manner under normal business conditions using standard business practices?)
9. Were the services performed by an experienced, professional auctioneer?
10. The number of bids actually received 
11. The presence of collusion or self-dealing 
12. The good faith of the secured party

Testing, Testing

What can we learn from this test? Part 1 is of concern if the stored property has some real value and isnt bags of garbage. Perhaps selling a unit with a $5,000 fair market value to a sealed bid for $1 cant be defined as commercially reasonable. The same is true for test part 2. If someone else resells the collateral for a lot of money, your price to the bidder may make your sale unreasonableand expose you to liability.

Test parts 3 and 4 relate to your advertising and its reach. While many self-storage statutes require advertising in a paper of general circulation for two consecutive weeks, some opt for less-expensive and less-circulated newspapers. However, if you open a unit and see items of potential value, like antiques, it would seem the test imposes upon you a duty to reach antique dealers, above and beyond advertising in your local newspaper.

Test part 8 addresses whether the sale was public or private. Could a private sale expose you to additional liability? Perhaps, if the sale was not really open to all bidders who may show up that day and have an opportunity to drive up the price. In other words, you sell to your hauler and he is the only bidder because there is no real auction or public sale. One bid is taken for an amount agreed on in advance, and that bid is the winner. A judge could say that your practice violates test part 8. An auctioneers services are the topic of part 9. Apparently, the UCC considers that auctioneers raise more money than selling it yourself in the format of a public sale. Again, not every one of these tests is iron-clad; using an auctioneer isnt necessary to prove you conducted a reasonable sale, but its a factor to consider.

The biggest concern is test part 11: collusion or self-dealing. This comes into play if you, as the operator, are the only or winning bidder. Or perhaps a certain person usually wins because you or your manager helps that bidder understand the value of a units contents. If a unit contains valuable items that havent been disclosed in the inventory or cant be seen from the outside, this could be a violation of the test and expose you to liability.

We certainly hear stories of managers taking more formal inventories or rummaging through units to know whether its worthwhile for the owner or a friend to bid. When they dont disclose the information in the inventory or advertisement for the unit, everyone isnt dealing with equal and fair information and that could violate the test.

Sale Advice

The purpose of this column is to set off an alarm bell with you. Many operators are highly aggravated with a tenant by the time they have moved to auction. Usually, months of rent have accumulated, the tenant has been uncooperative or uncommunicative, and the sale seems like a complete waste of money, adding advertising, certified mail, auctioneer fees, etc., to an uncollectible delinquency.

In some cases, the sale is a big waste of time and money. Unit contents are frequently valueless to anyone but the tenant, and it may be hard to get a single bid no matter how much you invest in advertising. That doesnt mean you disregard the sale. Just one lawsuit by a tenant claiming you didnt sell his goods in a commercially reasonable manner could cost more than youll spend on auction advertising for the next 20 years. Thus, I urge extraordinary caution when planning a sale and strongly recommend you speak with your legal counsel to review your sale strategies. You need to determine whether your sales process crosses the line of commercially reasonable in your jurisdiction.

As always, its best to avoid a sale at all costs, at any time, under any circumstance. I always urge my clients to find any other way to settle, even if its for less than full value. Selling property in a commercially reasonable way is almost too difficult for self-storage operators. A lot of effort, expense and risk is involved. So, think long and hard about your sales pre-procedures and sale-day procedures.

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 is for the purpose of providing 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 [email protected].