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Avoid Legal Exposure in 2008

Jeffrey Greenberger Comments

During 2007, operators learned they are prime targets for claims that would not have been brought against them five years ago. Increasing numbers of operators are being sued in court, or have claims against them through arbitration groups, Better Business Bureau mandatory arbitration, and even church-based arbitration/mediation groups. The legal year in review was capped off with a $3.79 million wrongful-sale award against a self-storage facility in California. Should this send a warning signal to other facility owners that the legal system is getting out of hand?

Nooperator can afford a judgment of $3 million against him, but there’s no need to panic. In fact, we need to calm ourselves to figure out the problem, break it down and find resolutions. The way I see it, we can break the legal landscape into six issues deserving serious consideration. Evaluate each, consult a lawyer if vulnerabilities exist, review the circumstances, and address exposures now, before it’s too late.

1. Wrongful Sales

The California case reminds us that, despite “fancy” lawsuits picking on all sorts of subjects, the strength of the industry is also its Achilles’ heel: the right to sell goods in storage. Most states have a statute granting the operator a lien on the stored property, meaning he has the right to sell an occupant’s goods if the tenant defaults for a certain period of time. Then why is it so many operators still get sued for this?

Let’s look at the California case. The person who stored and won the arbitration verdict told the facility she would be out of the country for a year and pre-paid her rent for that period. She also left local contact information. A clerical error indicated the occupant had fallen behind in rent and, in short, when the occupant returned to the country, her goods had been sold.

The tenant alleged hundreds of thousands of dollars worth of belongings were lost including emotionally important, irreplaceable or valuable property such as the only copy of her Master’s thesis, antiques, etc. What was somewhat shocking about this case was the award for her loss was $152,000; the arbitration award for emotional distress along with general damages added up to $3.79 million. How does a $152,000 claim end up in a $3.79 million verdict?

Except for in Texas, we do not normally see emotional distress and other general damage-type awards in self-storage situations. Usually if a verdict is granted in favor of the tenant, the award is for the actual cash value of the property wrongfully sold or disposed. In fact, most state statutes provide some sort of limit on damages.

So, what can you, as an operator, do to avoid being the next wrongful sale verdict?

  • Before conducting the next lien sale at your facility, purchase a wrongful-sale-and-disposal insurance policy from a reputable self-storage insurance company. The $3 million verdict is the exception, not the rule, but every lien sale leaves you open to some exposure. You’ve invested heavily in your facility. Wrongful sale/disposal insurance protects that investment; yet it’s not expensive coverage and is definitely worth it.
  • Include a value limitation for stored property in your rental agreement. A good, modern self-storage agreement provides a value limit and prohibits the storage of emotional, sentimental and irreplaceable property. I don’t know if a clause of this type was in the California rental agreement, but my guess is no.

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