The self-storage business can appear pretty straightforward. Landlords provide buildings so tenants can rent space to store their personal property. Those tenants sign rental agreements and, if they don’t pay their rent, the landlords are entitled to sell the tenants’ property to regain use of the space and recoup their lost rent.
But it’s this self-help remedy where the landlord is able to sell a tenant’s property without first going to court that makes the self-storage business unique. This process, where the landlord is permitted to conduct the sale after written notice and public advertisement, certainly resolves tenant defaults more quickly than a court process. Unfortunately, it also requires strict compliance with regulations that can include complicated elements. It’s often within those rudiments that storage operators make mistakes and can subject themselves to tenant claims of wrongful sale.
Avoid Lien Sales
Historically, the wrongful-sale claim has been the largest financial risk self-storage operators assume when running their business. Although rental agreements contain value limitations and other exculpatory provisions to reduce the risk of financial liability should a tenant’s property be wrongfully sold, those contractual protections can often be overlooked by the courts if the landlord intentionally failed to follow statutory requirements. Wrongful-sale claims can include the financial value of sold items as well as punitive damages, where tenants assert the operator should be punished for non-compliance with law.
That’s why it’s often the best strategy for a self-storage operator to seek a resolution to a tenant’s default rather than sell the property. Once a sale occurs, it’s commonly impossible to reverse, especially once property has been removed from the facility. Conducting a lien sale should be viewed as an action of last resort, where the tenant simply has failed to communicate with the operator to resolve the account and otherwise ignores all efforts to avoid the sale.
In other words, no matter how hard an operator may try to avoid a lien sale, sometimes there’s just no other choice. It’s in those situations where an operator can be supported by laws that permit such sales as a landlord remedy.
Meet the Requirements
If an operator is required to pursue the enforcement of his lien and must sell a tenant’s stored property, the best way to avoid a wrongful-sale claim is to meet the statutory requirements outlined the lien law for the state in which the facility operates. Currently, 48 states and the District of Columbia have a law that governs the disposition and sale of a self-storage tenant’s property upon default.
Typically, those statutes require a notice of default to the tenant, and many states are now permitting those notices to be sent via e-mail or verified mail. After a cure period has passed, the public advertisement of the lien sale is also necessary. A number of states are now permitting the advertisements to be via “publically accessible websites” rather than local newspapers.
Unfortunately, each state lien law is different. Some require additional preliminary lien notices, some permit the option of the tenant to request a court hearing, and some require multiple public advertisements. The operator who chooses to follow his statute should also understand each action must be done within a particular time frame, with each notice or advertisement coming after certain periods have elapsed.
Acting too swiftly can itself be a violation of the statute. It’s within the unique characteristics of each state law that there can be traps for the unwary self-storage operator. It’s important to study the state lien law and even seek assistance to understand the law when necessary.
Another important part of avoiding wrongful sales is demonstrating a good-faith effort to avoid the sale. That’s why, in addition to the statutory lien notice required under most state laws, an operator should send additional default notices to tenants via e-mail and text (assuming the tenant has consented to such communication in the rental agreement). The operator should also continue to make phone calls and reach out to the tenant via social media websites. All of these actions demonstrate a good-faith effort by the operator to avoid the sale of his tenant’s property.
Hold a Commercially Reasonable Sale
Another key component to avoiding a wrongful-sale claim is to have a “commercially reasonable” sale. This can help the operator avoid the claim that he didn’t obtain enough money for the value of the items sold. This would apply if insufficient funds were recovered to pay off the tenant’s debt to the facility, which resulted in a deficiency claim against the tenant, or if the property didn’t sell at a high enough value to provide the tenant sufficient “proceeds” from the sale.
Both of these arguments can typically get dismissed if the operator has at least three independent bidders who have no relation to one another at the sale. It doesn’t mean the three bidders must actually bid on the stored property—the property may not be worth anything, for example. It only necessitates that there were three independent observers to create a true “market value” for the property being sold.
Under a number of state laws, the three-independent-bidder rule has been added as a definition of a commercially reasonable sale. For those states that don’t have the rule, it certainly provides some support for operators to reach that goal. Getting three bidders to your lien sales shouldn’t be that hard to do now that sales in many states can be done online, providing a world full of possible bidders. Getting three independent bidders to participate in a lien sale should be much easier.
Protect Yourself With Insurance
Notwithstanding all of these protections, sometimes an operator can make mistakes in the sale process, which can lead to a wrongful-sale claim. Also, even if the operator has done everything in compliance with the law, a disgruntled tenant still has the right to bring forth a lawsuit.
That’s why all operators should invest in sale and disposal insurance for their business. This specialty coverage will not only defend an operator from tenant claims for wrongful sale—whether or not he conducted the sale in compliance with the law—it will cover the losses of any successful action, with the exclusion of certain punitive-damage claims. Since wrongful-sale claims are a risk of doing business, just like property loss and damage claims, it’s extremely important that operators carry this type of insurance protection.
At the end of the day, the best sale is no sale. Self-storage operators aren’t in the business of selling their tenants’ property. They’re in the business of renting space suitable for storage. But if you have to sell, take your time and follow the law. It’s your best defense.
Scott Zucker is a partner in the law firm Weissmann Zucker Euster Morochnik P.C. in Atlanta, where he specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He’s a speaker at industry events, author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers,” and a partner in the Self Storage Legal Network, a subscription-based legal service for storage owners and managers. To reach him, call 404.364.4626; e-mail email@example.com.