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The Top Five Legal Threats for All Self-Storage Operators in 2011

By Jeffrey Greenberger Comments

I wrote this article at the close of 2010, a time when many of us were taking stock of our blessings and making New Year’s resolutions. For me, it’s also a time when I look at the self-storage industry and think about what looms ahead legally for the upcoming year. Using David Letterman’s famous “top 10” format, I offer up the top five legal threats faced by every self-storage operator in 2011. I start with number five and work my way to the leading menace. Don’t jump ahead and peek!

Legal Threat No. 5: Selling the Unit of a Tenant in Active Military Service

Many operators still don’t know or understand the requirements of the Servicemembers Civil Relief Act (SCRA), formerly called the Soldiers’ and Sailors’ Civil Relief Act. Many still don’t have a question in their lease agreement that asks about military-service status. At a minimum, this lets you know whether to check if a tenant is still in the military, or worse, stationed overseas, before you enforce your lien rights.

SCRA is a federal law that requires you to know about the military service of your tenants. The statute protects you if someone lies and tells you he isn’t in the service when he actually is. However, it doesn’t allow you to bury your head in the sand, forego asking about military service, and then claim no knowledge.

There are two large problems with SCRA violation. First, you’ve broken a federal law, which comes with civil and possibly criminal penalties. Second, you have on your hands a public-relations nightmare once you’re identified by the media and the public as an operator who sold the goods of a soldier overseas. This might be worse for your business than the potential of going to prison.

If you don’t understand SCRA requirements, particularly if you’re not even asking about military service on your rental agreement, make the change today. This threat is too big and risky to ignore.

While those with facilities nearby military bases will probably laugh at this one, I’ve had several owners tell me they simply have their military-personnel tenants waive their SCRA rights. I’ve looked for a provision that allows you to get a waiver of rights under SCRA and have yet to find one. I’ve asked people in the military whether these rights can be waived, and they laugh at me. Until someone shows you where in the law a service member can waive his rights under SCRA, I don’t think you can. Regardless, don’t take the chance.

Legal Threat No. 4: Bankruptcy

In No. 5 I made no prediction about the number of brave men and women who will be serving overseas in 2011 and beyond. I will now make another bold prediction, but an easy one, about bankruptcies: The number of your tenants filing bankruptcy will skyrocket between now and 2012.

How can I say such a thing? If you remember, bankruptcy reform went into effect in October 2005. There was about a year’s advanced notice that reform was coming, and the rumor was that Chapter 7 bankruptcies were probably going to go away or be impossible to file. Therefore, everyone who even thought about filing bankruptcy did so before the Bankruptcy Reform Act of 2005 went into effect. You can only file one Chapter 7 bankruptcy every seven years, and we’re coming to the end of the seven-year cycle in which everyone rushed to file.

It turns out Chapter 7 didn’t go away, and even after the Reform Act, the number of Chapter 7s filed has continued to grow. There’s a gigantic crop of people coming up on their seven-year filing anniversary that you’ll find are poised and ready to file again. These are your tenants.

If you don’t understand your obligations under the bankruptcy law, now’s the time to get educated about what you can and cannot do if your tenant files. It’s my experience that operators who hadn’t seen a bankrupt tenant until the last three or four years are now seeing several. Facilities that once had several bankruptcies are now seeing many. That number is going to skyrocket over the next few years. Everyone is going to have a bankrupt tenant.

The problem with bankruptcy is it’s sort of written like Alice’s Adventures in Wonderland. Anything that would seem right or make sense to you is the opposite under bankruptcy law. It’s easy―almost too easy―to accidentally violate bankruptcy laws because you proceeded in a logical manner rather than what’s required under the code.

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