Resolving Self-Storage Defaults and Avoiding Lien Sales

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Based upon economic forecasts, 2009 will shape up to be a year of higher unemployment and lower wages, which will undoubtedly have an impact on all businesses, including self-storage. Although the accompanying transitions that come with job changes, residential moves and commercial downsizing all can have a positive impact on the use of storage, there is a related risk that rent delinquencies, lease defaults and property foreclosures will increase.

Based on that expectation and the underlying risk of liability that goes with holding personal property foreclosure sales, more emphasis has been given to finding resolutions to avoid the eventual sale of tenant’s property.

Finding a Solution

There are now 48 states (plus the District of Columbia) with self-storage lien laws that entitle the storage operator to sell a tenant’s goods at a public sale when rent is not paid. However, a self-storage lien foreclosure sale should always be considered the remedy of last resort. Aside from the anxiety that most self-storage operators have with auctioning their tenants’ stored property, there is a real legal risk when choosing to complete the foreclosure process.

Since the auction sale is typically a self-help remedy, requiring no approval by the courts and no “due process” protection for tenants, pressure is on operators to follow the sale procedure without error. Accordingly, each step of the foreclosure timeline found in most self-storage lien laws must be handled with precision.

An unhappy tenant whose property has been sold may claim the sale was conducted improperly even if everything is done perfectly. Therefore, it has always been an appropriate alternative to reach a resolution with a tenant short of completing a lien sale.

It is equally important that operators understand how to “close the deal” when reaching settlements with their tenants. Here are some possible solutions to avoiding a lien sale when dealing with a tenant in default:

  • Operator agrees that in lieu of payment a tenant can reclaim property and move out immediately.
  • Operator agrees to accept a partial payment to stop the sale, allowing the tenant to move out before the sale date.
  • Operator agrees to allow the tenant to move out, in consideration for an agreement to pay later.
  • Operator agrees to accept the “abandonment” of the property in the unit in lieu of the payment of the debt.

Of course, there are many ways to resolve a tenant default in order to avoid a sale. The possibilities all depend on the willingness of the operator who is owed the unpaid rent.

All of these agreements must be in writing and include a “what if” provision addressing what happens to the tenant’s property if the tenant does not move out as agreed. In other words, if you’re going to negotiate a deal that includes the tenant moving out, you need to consider how you will deal with the tenant who does not hold up his end of the bargain. (See the "Settlement and Release Agreement" at the end of this article.)

The easiest approach is to include an “abandonment” provision with each settlement and move-out agreement. With an abandonment provision, the tenant agrees to release all “right, title and interest” to stored property if the property is not removed from the facility by the negotiated deadline. Such an agreement creates an “end game” for the situation. If the tenant does not uphold the agreement, he abandons his property that has not been removed. The storage operator then claims ownership of the abandoned property and can sell it, dispose of it or donate it without the risk of the tenant claiming a conversion of the property.

If a tenant fails to move out later and claims the operator did not have the right to take possession of the property, the court could look at the agreement and would recognize that the abandonment was given in consideration for the operator’s agreement not to proceed with the sale. The fact that the tenant failed to meet the deadline would not remove the operator’s right to take possession.

The tenant may decide he wants to just leave the property in the unit. In that case, the operator could choose to accept a direct abandonment of the property. The abandonment must be in writing signed by the tenant. Verbal abandonments are not sufficient.

Other Strategies

Certainly, if a tenant has a history of delinquencies, an operator always reserves the right to terminate that tenant’s lease. Storage operators must always remember that self-storage leases are month-to-month tenancies.

Operators should make clear in their documents that both parties have the mutual right to terminate the lease. Tenants can always choose to move out at the end of their monthly term, and storage operators have the right to notify their tenants that the next month’s rent will not be accepted. Lease termination may be the best way to stop a problem tenant before a lien sale arises.

However, storage operators need to remember two things. First, if they accept the next month’s rent any prior lease termination notice will be voided. Second, if the tenant does not move out in response to the termination notice, the remedy for removal is a court-ordered eviction, not foreclosure.

The last recommendation to avoid sales is to stay ahead of delinquencies by keeping track of non-paying tenants. Storage operators need to be wary of bounced checks, denied credit card charges and calls from repossession companies. These are all red flags of impending problems with the tenant and may be the proper alarm to begin the process of negotiating a move-out agreement, property abandonment or a lease termination.

Ultimately, a lien sale may be necessary, but as long as you endeavor to resolve the debt for the benefit of the tenant before the sale is held, you will always be able to say that it was the last resort.

This article is not intended as specific legal advice and should not be substituted for the advice of an attorney who specializes in the self-storage industry. Speak with your legal counsel and insurance agent to gain further insight into your particular state’s consumer protection laws so you may map out your strategy in advance of a sales and disposal situation.

Scott Zucker is a partner in the law firm of Weissmann Zucker Euster P.C. in Atlanta. He specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. Zucker is a frequent lecturer at national conventions and author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers.” He is also a partner in the Self Storage Legal Network, a subscription-based legal service for self-storage owners and managers. To reach him, call 404.364.4626; e-mail scott@wzlegal.com.

 

SETTLEMENT AND RELEASE AGREEMENT

This Agreement, entered into this ______________ day of _____________________, 20__, between _________________(“Tenant”) and _____________________(“Owner”) is as follows:

1. Owner has made a claim for rent and other charges due by Tenant totaling $__________

2. Tenant cannot pay the full amount due but requests the return of its stored property.

3. Tenant has agreed to pay Owner $________ no later then __________________ and has agreed to remove all of his contents from the storage unit no later then the close of business on __________________.

4. Tenant agrees and understands that access to the storage unit will be denied until payment is made. Tenant also agrees and understands that all property in the unit is to be removed and the unit is to be left in a clean, broom-swept condition. Finally, Tenant agrees and understands that any property left in the unit after the close of business on ____________________ shall be considered abandoned by the Tenant and Tenant accepts that said abandonment means the release of all right, title and interest to all of its property to the Owner. Owner may dispose of said abandoned property at its discretion with no obligation of any kind to the Tenant.

5. Tenant hereby forever releases and discharges Owner from any and all claims, demands and actions concerning Tenant’s occupancy and the storage of Tenant personal property.

Tenant: ___________________________________________

Owner: ___________________________________________

By: _______________________________________________

Title: _____________________________________________

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