I recently had lunch with a friend who is an insurance adjuster, and his company handles a lot of self-storage claims. He told me about a new type of insurance scam that relates to self-storage lien sales.
The scam looks like this: A person moves into a unit at a facility that offers the first month for free or at a very low charge. The renter moves in with virtually nothing, usually some type of garbage, and then intentionally fails to pay rent when it comes due. His motive is not to use the facility as a dumpster; rather, he waits for the facility operator to sell the contents of the unit, and then hopes to discover the operator did something wrong during the lien-sale process. If he finds any kind of glitch, he sues for wrongful sale.
These cases, while more prevalent in states like California and Nevada where lien-sale statutes are more complicated, are happening all over the county. The goal is not necessarily to regain the value of the junk in the unit, but to sue for an incorrectly performed sale. Some renters claim to have lost many thousands of dollars in property. Others are just looking for the statutory damages that get awarded in some states, regardless of the property’s value.
Lien Sales by the Book
The best way to avoid being a victim of this scam is to be ever vigilant, perform your lien sales carefully and accurately, and steer clear of emotion during the sale. The state statutes that discuss lien sales are loaded with technical requirements, and this article cannot begin to cover all of them. But every day, operators make simple mistakes when conducting sales that can cost them dearly.
For example, let’s say the statute requires a detailed inventory, but the operator doesn’t even cut the lock and simply uses “household goods” to describe the unit contents. Here’s another example: Many statutes require an itemization of your claim in your default notice. This means you have to list by date and amount what is owed to you. Many operators put rent due, late fees and other charges without itemizing them.
Also, there are limitations―mostly minimum time requirements―in state statutes. Operators often ignore those time frames, or put the right length of time in their notice and advertisement, but then sell on a different date altogether.
Finally, many operators allow the emotional aspect of a sale to get in the way of logic. For example, one operator had a tenant who moved in on a first-month-free special, and then filed bankruptcy shortly after the second month’s rent came due. The operator was upset that he couldn’t conduct a lien sale until obtaining a relief from stay from a court, and believed the tenant was taking advantage of the situation.
If you aren’t sure if you should proceed with a lien sale, don’t move forward until you are. Many operators get swept up in their views of right and wrong vs. the views of the judge who will be looking at this case, detached from emotion, down the road.
Another way to avoid being scammed is to avoid the offer of free or cheap rent. I won’t discuss the evils of self-storage concessions, because I’m certain everyone is doing what they can to survive in these tumultuous economic times. But consider this: Instead of offering a discount on your rates, offer something else, such as waiving the administration fee, giving a free lock, etc.
If you do offer free rent, give it later in the lease term, after the initial period of the lease is completed. For example, offer the sixth month of rent for a dollar rather than the first month for free. This way, the tenant has to fulfill five months of your lease before the concession. This alone should discourage these types of shenanigans at your facility.
Learn the Law
If it’s been three months or longer since you reviewed your lien-sale statute, it’s time for a refresher. If you never understood your state’s statute, it’s time to get educated. If you’re doing something that doesn’t seem right under the law but you do it because it’s the way you’ve been trained, or you’ve always done it that way and it’s never come back to haunt you, consider yourself put on notice. There are people out there looking to make an easy buck. The next time, it could be at your expense.
There are many ways to learn more about lien sales. Consider attending the legal seminars at the upcoming Inside Self-Storage World Expo in Las Vegas, March 1-3, researching the topic online, or contacting your state self-storage association. Another option is to sit down with your attorney and address your questions and concerns.
As tenants get smarter, you have to get smarter, or these types of suits are going to continue. Once someone finds a way to make money and discusses it on the Internet, you can bet others are going to copy.
Whether you change your concessions or their timing, at the end of day, what will rid you of this problem is making sure you conduct your lien sales properly and to the letter of the law. If you can’t, find other ways to remove tenants from your units through settlements, evictions or another avenue. Given what is going on in this day and age, if you’re not sure you can do your lien sales correctly, you should not be doing them at all.
This column 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.