I wrote this article at the close of 2010, a time when many of us were taking stock of our blessings and making New Years resolutions. For me, its also a time when I look at the self-storage industry and think about what looms ahead legally for the upcoming year. Using David Lettermans 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. Dont jump ahead and peek!
Legal Threat No. 5: Selling the Unit of a Tenant in Active Military Service
Many operators still dont know or understand the requirements of the Servicemembers Civil Relief Act (SCRA), formerly called the Soldiers and Sailors Civil Relief Act. Many still dont 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 isnt in the service when he actually is. However, it doesnt 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, youve broken a federal law, which comes with civil and possibly criminal penalties. Second, you have on your hands a public-relations nightmare once youre 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 dont understand SCRA requirements, particularly if youre 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, Ive had several owners tell me they simply have their military-personnel tenants waive their SCRA rights. Ive looked for a provision that allows you to get a waiver of rights under SCRA and have yet to find one. Ive 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 dont think you can. Regardless, dont 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 years 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 were coming to the end of the seven-year cycle in which everyone rushed to file.
It turns out Chapter 7 didnt go away, and even after the Reform Act, the number of Chapter 7s filed has continued to grow. Theres a gigantic crop of people coming up on their seven-year filing anniversary that youll find are poised and ready to file again. These are your tenants.
If you dont understand your obligations under the bankruptcy law, nows the time to get educated about what you can and cannot do if your tenant files. Its my experience that operators who hadnt 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 its sort of written like Alices Adventures in Wonderland. Anything that would seem right or make sense to you is the opposite under bankruptcy law. Its easyalmost too easyto accidentally violate bankruptcy laws because you proceeded in a logical manner rather than whats required under the code.
If you violate the bankruptcy laws, particularly a judges Automatic Stay Order, youre facing the possibility of monetary sanctions, some of which can be severe against you and in favor of your debtor/tenant. Think in terms of contempt of court. Judges dont like to have their orders ignored or violated. You may say its innocently ignored, but remember, in bankruptcy world, innocently ignoring an order is not much of a defense.
You also need to learn how to use PACER, or have someone that knows how to use it, to check bankruptcies before you send lien notices and conduct your sales. PACER is the Federal Courts docketing system, which allows you to quickly get a good idea about whether your tenant has filed a bankruptcy. Some would argue that youre obligated to check PACER before you begin a lien sale.
Legal Threat No. 3: Missing a Change in Your State Lien Laws or Lien-Sale Procedures
Many states have undertaken changes in lien laws over the last year or two. Many more are eyeing these types of changes in 2011 and 2012.
First, get involved with your state associations to make sure the lien-law changes they propose are in your businesses best interest. Dont let a committee of 12 make these decisions for you. Second, if and when your lien laws change, make sure you have a way of being aware of those changes so you dont sell or serve notices by a method thats no longer permitted under your state statutes.
Legal Threat No. 2: Wrongful Sale Verdicts
Wrongful-sale lawsuit verdicts rendered against self-storage owners and some courts refusal to enforce the value and negligence limitations in your rental agreement continues to be of great concern. Most of the large-dollar verdicts have come from cases in which the tenants property shouldnt have been sold in the first place. Some cases over the last few years have had verdicts ranging from $1 million to almost $4 million. Many other cases that resulted in lower-dollar verdicts$50,000 to $900,000were for other types of technical violations. Perhaps the tenant was delinquent but the operator didnt follow the statute exactly. All of these cases are alarming. (You can read more about cases such as Dubey v. Public Storage in the article archives at InsideSelfStorage.com.)
If youre going to conduct lien sales, you must have a system of checks and balances to avoid making a mistake, and you must really and truly understand how to properly conduct a lien sale. Note: Understanding how to properly conduct a sale doesnt include, I learned to do it that way from the previous manager. There are statutes that must be followed exactly to properly perform a lien sale.
If you havent read your state statute in a long time, you dont believe youre selling properly, or youre ignoring parts of the statute because theyre inconvenient or difficult, then buy yourself some legal advice and learn how to do sales properly by having your attorney create a protocol for you. Or you can buy a set of prepared protocols from an industry expert, customized to your state and preferably to your particular operation. If youre not going to do this, get out of the business of conducting lien sales.
Legal Threat No. 1: The TV Show Storage Wars
Much has been written recently about the new A&E Entertainment TV series Storage Wars, but from the perspective of an industry attorney, it represents a great threat to our industry in 2011. First, if youre one of the facilities where the show is filming, youre creating Exhibit A in a wrongful-sale triala videotaped, nationally televised copy of this particular lien sale for the tenant and his lawyer to pick apart.
As an lawyer, I see errors made in these sales, and it drives me crazy. I keep wondering, when is a tenant going to watch his own goods being sold on national television, recognize the facility did something in error, and file a lawsuit for violations, using the taped raw or edited footage of the sale as proof positive? That is perhaps the smaller of my two concerns.
My larger concern is judges and potential jury members, as well as self-storage tenants, are beginning to believe every self-storage unit is a treasure trove for which youll get so much more than what you paid (i.e., the operator never sells a unit for its full value). Ive had many judges ask if Im enjoying the show because they are. I politely answer this question affirmatively. However, I know they are starting to believe self-storage units are full of nifty and expensive items. This has bad implications.
Lets consider a theoretical wrongful sale at a self-storage facility. The tenants (victims) sue and allege all sorts of missing valuable property. (For the purposes of this example, you can substitute for wrongful sale other incidents such as theft while your overlock is on the unit, building fires, wrongful access, etc.). In the old days, we would at least have an argument that a tenant who was habitually late in paying his $75 a month rent probably didnt have $100,000 worth of antique guns in his unit. Judges simply didnt believe that people who struggle to pay their bills every month would have such valuable property, with the exception of emotional and sentimentally important items.
Now judges and juries are going to think differently. Were going to allege that what was sold at lien sale or what was in the unit when we inventoried it and put our overlock on it was a mattress, box spring and some old clothing. Tenants are going to allege items such as fishing poles, antique guns and commemorative coins, all of which have been featured on Storage Wars. From now on, were going to be in a battle to disprove the value of every item instead of trying to make the tenants prove there was value to their items.
Storage Wars has done some wonderful things for the industry, however. If nothing else, its put a lot more people on notice, in case they missed it when signing the rental agreement, that if you dont pay your rent, your goods are eventually sold to pay off your bill. Thats actually a great development.
The show should also encourage you to hire an independent third party like an auctioneer, even if your state doesnt require one, to cut the lock, inspect the goods, evaluate the value of the goods, and sell them for what somebody else other than you deems to be fair market value, lest you be in court someday with a judge who has developed what I will now coin Storage Wars Bias toward the value of the property in the unit.
As this industry has grown and matured, its clear the freedom to run your self-storage business exactly the way you want it to is gone. You must be a smart, savvy and aware businessperson with more policies and procedures as well as checks and cross-checks to avoid what have become obvious legal pitfalls to the industry in 2011. Good luck!
This article 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.
Jeffrey J. Greenberger is a partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati and is licensed to practice in Kentucky and Ohio. Mr. Greenberger primarily represents the owners and operators of commercial real estate, including self-storage owners and operators. To reach him, call 513.721.5151; visit www.selfstoragelegal.com .