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Avoid Legal Exposure in 2008

March 1, 2008

13 Min Read
Avoid Legal Exposure in 2008

During 2007, operators learned they are prime targets for claims that would not have been brought against them five years ago. Increasing numbers of operators are being sued in court, or have claims against them through arbitration groups, Better Business Bureau mandatory arbitration, and even church-based arbitration/mediation groups. The legal year in review was capped off with a $3.79 million wrongful-sale award against a self-storage facility in California. Should this send a warning signal to other facility owners that the legal system is getting out of hand?

Nooperator can afford a judgment of $3 million against him, but there’s no need to panic. In fact, we need to calm ourselves to figure out the problem, break it down and find resolutions. The way I see it, we can break the legal landscape into six issues deserving serious consideration. Evaluate each, consult a lawyer if vulnerabilities exist, review the circumstances, and address exposures now, before it’s too late.

1. Wrongful Sales

The California case reminds us that, despite “fancy” lawsuits picking on all sorts of subjects, the strength of the industry is also its Achilles’ heel: the right to sell goods in storage. Most states have a statute granting the operator a lien on the stored property, meaning he has the right to sell an occupant’s goods if the tenant defaults for a certain period of time. Then why is it so many operators still get sued for this?

Let’s look at the California case. The person who stored and won the arbitration verdict told the facility she would be out of the country for a year and pre-paid her rent for that period. She also left local contact information. A clerical error indicated the occupant had fallen behind in rent and, in short, when the occupant returned to the country, her goods had been sold.

The tenant alleged hundreds of thousands of dollars worth of belongings were lost including emotionally important, irreplaceable or valuable property such as the only copy of her Master’s thesis, antiques, etc. What was somewhat shocking about this case was the award for her loss was $152,000; the arbitration award for emotional distress along with general damages added up to $3.79 million. How does a $152,000 claim end up in a $3.79 million verdict?

Except for in Texas, we do not normally see emotional distress and other general damage-type awards in self-storage situations. Usually if a verdict is granted in favor of the tenant, the award is for the actual cash value of the property wrongfully sold or disposed. In fact, most state statutes provide some sort of limit on damages.

So, what can you, as an operator, do to avoid being the next wrongful sale verdict?

  • Before conducting the next lien sale at your facility, purchase a wrongful-sale-and-disposal insurance policy from a reputable self-storage insurance company. The $3 million verdict is the exception, not the rule, but every lien sale leaves you open to some exposure. You’ve invested heavily in your facility. Wrongful sale/disposal insurance protects that investment; yet it’s not expensive coverage and is definitely worth it.

  • Include a value limitation for stored property in your rental agreement. A good, modern self-storage agreement provides a value limit and prohibits the storage of emotional, sentimental and irreplaceable property. I don’t know if a clause of this type was in the California rental agreement, but my guess is no.

Value-limitation clauses are regularly upheld by courts. While not appropriate for every self-storage relationship (for example, a $5,000 value limit would not fly with a half-million-dollar RV-storage contract), the average arrangement should have a cap/limit on in dollar value and in terms of storing “irreplaceable property at the facility.”

Have a well-documented lien-sale procedure including many opportunities for “gut checks” before the sale. Operators have often sold property at a lien sale and then wondered if a partial payment accepted at some point during the process, an occupant bankruptcy, restraining order, an occupant in the military etc., should have stopped the sale. Post lien sale, after the property is gone, is the wrong time to be asking these questions. A good lien sale plan/flow chart is essential.

Here’s what you need and why you need it:

The Questions. A good flow chart asks the hard questions you might, for whatever reason, overlook. I’ve seen cases in which software conversions have messed up payment history and the manager simply didn’t notice. Weekend managers may have accepted a “forbidden” partial payment the Saturday before a Monday sale and not updated the computer. Or a manager may not have double-checked the computer before the sale to see if a payment has been made.

Some of the key “gut check” questions include:

  • Is there any chance you've applied a payment to the wrong unit?

  • Does the occupant have other units that are current? Maybe a payment that came in was meant to be applied to the delinquent unit?

  • Is it possible someone other than the occupant has property in the unit you're proposing to sell?

  • Have there been any partial payments precluding the sale? as anyone checked the manager’s “inbox,” which may have received bankruptcy notices, restraining orders or other correspondence affecting the sale?

The Answers. The second reason to have a lien-sale checklist or flow chart is to show a court that even if you made a mistake, you didn’t act recklessly or vindictively. This can help you avoid punitive damages that are sometimes imposed by a court and becomes an excellent defense tool in a lawsuit.

What other strategies will keep you out of lien-sale disaster? One option for avoiding exposure is to forget the sale altogether. If you have any communication with the occupant and you’re getting close to the sale, do not be afraid to, as Jim Chiswell would say, “play Monty Hall and make a deal.”

A partial payment with a full settlement release from the occupant, in every instance, is better than proceeding to a sale. You get your space back for a paying occupant, and the current tenant loses any real claim against you because he still owns his property and signed a release to you. If you don’t have one already, have your attorney prepare a standard settlement release for a partial payment with move-out; keep it ready to be used anytime you make a deal.

Another choice is to evict a tenant, but this is not applicable in every state. Check with your state law or consult an attorney.

Finally, as always, don’t forget a mediation requirement. Facing an occupant in a non-adversarial manner (not in a binding arbitration, where everything depends on how one hearing goes) often eases tensions and leads to resolution. Sometimes settlements are not desirable; but mediation at least gives you an opportunity to size up your occupant and his claim and understand how your occupant feels before you find yourself in an arbitration hearing or court.

2. Military Status

If you haven’t asked a tenant if he’s involved with the military and, if so, how to reach him, including a commanding officer’s name and phone number, you’re setting yourself up for a Soldiers and Sailors Civil Relief Act (SSCRA) violation claim if you sell property while the renter is overseas in active duty. This happened to soldier Patrick Roegalin in 2007 at a St. Louis Public Storage location. Roegalin set up self-storage payments via auto debit from a checking account, but somehow, account information got corrupted and the auto withdrawals stopped. Roegalin returned from duty to find Public Storage had sold his stuff.

Whether Public Storage was right or wrong to sell the property is of little concern if one weighs it against the press and public-relations nightmare imposed on the business. The story was picked up by USA Today, other news sources and several morning national news shows. Average citizens were outraged, legislators got involved, and people even offered to pay the legal bills to sue Public Storage.

You don’t want to be in that situation. Make sure you understand your responsibilities under the SSCRA and, moreover, verify if tenants are in military service. Knowing your obligations of serving military personnel avoids legal wars on the home front.

3. Climate Control

Do you use the term, “climate control”? If so, how do you control the climate? You may control temperature and humidity, but you don’t control earth, wind and fire. Rethink your self-storage terminology for 2008. For example, if you provide heating or cooling, consider the term “temperature controlled.” If you control humidity, think about saying it’s “temperature- and humidity-controlled storage.”

Nevada has a statute on the books penalizing an operator’s failure to properly advertise what is meant by “climate control.” Once one state enacts a statute, it’s not long before many others follow suit. Several states are seeking to define what climate control means at a self-storage facility. Don’t forge ahead in 2008 without giving serious consideration to what you mean if you use the term. To be concise, add a clause to your rental agreement defining what you mean by temperature-controlled, air-cooled, heated, etc.

4. Security

In current times, we must be aware that self-storage facilities can be used to house materials planned for a terrorist plot. Or, rented units could be used by criminals for brewing methamphetamine, contaminating the unit and the soil, and cross-contaminating other occupant’s property. Worse, irresponsible actions could result in burning down the building or polluting the soil to a point where the facility would have to be considered an environmental hazard.

Perhaps we’re forgetting some of the lessons we learned from 9/11. Sometimes you just can’t beat having a good nosy manager. While that may not be the solution to every situation, let’s talk options.

Self-storage operators often stress concerns about asking for “too much” information from new tenants, stating applicants are rebelling against providing photocopies of driver’s licenses, Social Security numbers or credit cards. The fear is that along with collecting this info comes the management’s responsibility to safeguard and dispose of it properly. While the rise of identity theft has become a convenient reason for occupants to refuse providing personal information, you still need it. If applicants fail to comply, strongly consider sending them down the street to your competition, which hopefully will also require this information.

Operators must be ever vigilant to ward off any nefarious activity that could be occurring in their facilities. The Department of Homeland Security recommends being particularly wary of customers who exhibit any of the following:

  • Insistence of paying cash, particularly large advance payments 

  • Excessive concern about privacy 

  • Visits to the storage unit at odd hours, particularly close to gate-closing time or late at night 

  • Nervousness or evasiveness when approached by employees 

  • A unit producing unusual fumes or liquid residues 

Also be on the lookout for unusual types of corrosion on the locks, handles, hinges or doors of your units, and unusual amounts of trash deposited in barrels or dumpsters at your facility. Red flags should go up if you find fertilizer bags, empty gas cans, unusual metal objects, or excessive amounts of boxes of decongestants or starter fluid, etc., that can be used to make methamphetamine.

Actually, consider any unusual trash as a red flag. For example, the 9/11 terrorists funded part of their operations by stealing luggage from airport baggage claims. The baggage was taken back to the terrorists’ apartments and valuables removed; the balance of the luggage would be disposed of in the apartments’ dumpsters. If you have any concerns, contact law enforcement immediately.

5. Sales Tax, Other Taxes and Eminent Domain

There is safety in numbers. Texas operators, particularly, have shown that having an active, financially healthy state association makes all the difference in communication with the state legislature, governor and judiciary. While this article was being written, it also appeared that Michigan operators may have temporarily stopped the imposition of sales tax on their occupants, a battle other states have lost.

It’s only a matter of time before most states try to impose sales tax on rents or additional taxes on self-storage activity. Ohio has imposed a commercial activity tax along with sales tax on rents, and other states are following. Even in Michigan, while sales tax may have been repealed on storage rents, the government is scurrying to reclaim the loss, perhaps by imposing other taxes on land ownership. Many older facilities are falling victim to eminent domain.

Many operators fail to align themselves with state associations because they think the organizations are too small, not effective, or they don’t want to share data with competitors. Additionally, they don’t want to reveal data about true ownership of the facility to have salespeople calling and peddling services and products.

Every state could—and should—have a strong self-storage association. There is no more effective voice in your state legislature than a group of facility owners who do business, pay taxes and employ people within the state. No national lobbying group, legislative watch or representative organization will represent your interests in front of your legislature better than your own state association comprised of self-storage owners/operators.

This doesn’t mean you have to serve as an officer; just join, pay your dues, lend a hand when asked, be involved when necessary. This way, if a state decides to impose a new tax or regulation (like Illinois did several times last year in various cities), your association will know about the problem early and have resources available to react quickly. Being involved in legislation at its inception is much more powerful than trying to knock something out of a bill on its second or third reading.

6. Employment-Law Issues

Employment-law issues, particularly class-action lawsuits for overtime by managers, continue to plague the industry. If you’re uncertain whether your employees are exempt from overtime, talk with your attorney and review the job descriptions. If your attorney concludes the employee may not be exempt, reach a settlement, get a written release and fix the problem on a going-forward basis. Every conference, meeting or webinar I attend always has at least 10 people who say, “Yes, I have recently been sued,” or “Oh boy! I have exposure and I am not covering myself.” Cover yourself and stand prepared.

So what about 2008? Well, I hate to say “I told you so,” but I have! Most everything suggested in this article has been in previous ISS issues, webinars and blogs in one form or another over the last five years. To get on the right track, consider 2008 as the “back to basics year.” Resolve to follow the “Six Legal Basics for 2008” to keep yourself out of trouble.

For more legal education, tune into ISS Legal Learning Webinars (see www.insideselfstorage.com/webinars for scheduling). If, after you have read this article, you think you may have exposure, get it straightened out, resolve the problem, and avoid having this issue carry over into the next new year. 

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 Greenberger practices with the law firm of Katz, Greenberger & Norton LLP in Cincinnati. He primarily represents owners and operators of commercial real estate, including self-storage. He is the legal counsel for the Ohio Self Storage Owners Society and the Kentucky Self Storage Association. His website, www.selfstoragelegal.com, contains his legal opinions and insights into the self-storage industry, as well as an article archive. For more information, call 513.721.5151; e-mail [email protected]. 

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