Managing Self-Storage Delinquencies, Bankruptcies and Abandonment

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Although language might be contained in the rental agreement that suggests abandonment can occur simply by the tenant taking off the lock and skipping the rent, it’s often more prudent to consider property as abandoned only where the tenant has confirmed his intent in writing. Although the tenant may truly intend to abandon his goods by removing the lock and not paying the rent, the operator’s best solution without approval in writing is to proceed with the lien procedure as set forth under state law. 

Tenant Bankruptcy

It would be unusual to find a self-storage operator whose occupancy hasn’t dropped over the last year or who hasn’t seen an increase in delinquencies. It would also be uncommon to find an operator who hasn’t experienced a tenant bankruptcy filing. It’s not atypical for a tenant who has become significantly behind in his bills or facing the public sale or disposal of property to file for bankruptcy with the knowledge that any filing (even if later dismissed) will stop the lien sale from proceeding.

A tenant who has filed bankruptcy will typically be one who has been in arrears for months, was scheduled for sale and has continued to store property even after filing bankruptcy. This tenant will typically not pay rent, knowing the operator is precluded from continuing the sale process without permission from the court. This situation can often be the tenant’s “checkmate” against the storage operator, leaving him no option but to continue to lose rent.

Although the strategy of filing to avoid a lien sale may be commonplace, it’s also typical for an operator not to take any action, assuming the bankruptcy court will protect the tenant’s interests. Unfortunately, due to the number, priority and size of other creditors involved, the self-storage operator may not receive any attention regarding his claim unless he makes a concerted effort to alert the court regarding the situation.

If the operator is vocal with the court, trustee and even the tenant’s attorney, it’s unlikely the tenant will be permitted to maintain the storage unit without paying for the benefit. Ultimately, if the operator doesn’t get cooperation from the tenant to pay rent, he can enlist counsel to file a motion to “lift stay,” which is a method of requesting the court to permit the lien foreclosure of the tenant’s property if the tenant doesn’t vacate the space or pay the outstanding rent obligation.

When it comes to self-storage debt and bankruptcy, it’s likely the operator will not only lose the unpaid past rent but future rent as well. That’s why it’s so important for him to advocate with the court, especially the trustee assigned to the bankruptcy, to ensure he’s not taken advantage of during the bankruptcy process.

No operator wants to lose tenants, but the loss of occupancy is minimized when operators realize they’re giving away value with non-paying tenants. The key to self-storage profit isn’t just occupancy but “economic” occupancy. Your facility can be full with tenants who don’t pay any rent or 50 percent occupied with tenants who pay on time and in full. The choice is obvious.

Take this opportunity to review your rent files and address tenants who are failing to offer fair compensation for the value your rental space provides. A proactive approach will clearly help to avoid later conflicts and more lost rent. 

Scott  Zucker is a partner in the law firm of  Weissmann Zucker Euster P.C. in Atlanta. Mr. Zucker specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He is a frequent lecturer at national conventions and the author of Legal Topics in Self-Storage: A Sourcebook for Owners and Managers. He’s 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.

Related Articles:

Determining How Long to Keep Tenant Files and Abandoned Records in Self-Storage

Resolving Self-Storage Defaults and Avoiding Lien Sales

Self-Storage Sale and Disposal: Know the Law Before Acting

Six Things to Disclose to Tenants About Your Self-Storage Rental Agreement

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