Contending With Tenant Bankruptcy: Important Do’s and Don’ts for Self-Storage Operators
Tenant bankruptcy can be a real stumper for self-storage operators, especially if they’ve never encountered it before. If this situation arises at your facility, you need to know what to do (and not do), and when, to avoid getting yourself in legal hot water. This article shares important things you need to know, so you can protect your business and potentially recover outstanding debt.
It isn’t uncommon for a self-storage tenant to file for bankruptcy. Often, the customer has gone into delinquency status with your facility. It can even happen on the eve of a pending lien sale of their stored goods.
As a self-storage operator, there are things you must do—and avoid doing—as soon as you learn of a tenant’s bankruptcy status. Proper handling of the matter will ensure you comply with the law and allow your debt-collection efforts to continue (if applicable). Following are some things you need to know and steps to follow.
Stop Any Lien-Sale Proceedings
When you first learn of a self-storage tenant’s bankruptcy status, you must immediately stop any pending lien sale of the their stored goods. At the moment of filing, a “stay” is imposed, which pauses all actions by creditors. Foreclosing on a self-storage lien is considered a creditor action. The stay prohibits you from sending notices, placing advertisements and conducting the auction. If you go forward with the sale, you could be found liable for violating the law.
Even though the lien-sale process may be paused, you can still charge ongoing rent for the tenant’s continued use of the space as well as any applicable late fees. The money owed prior to the bankruptcy is the “pre-petition debt.” The rent accruing after the filing is the “post-petition debt.” The distinction is important, especially if the tenant fails to pay the post-petition rent on time.
Determine the Tenant’s Intentions
Once any self-storage lien-sale proceedings have been halted, communication with the tenant—likely through their attorney—is crucial. The lawyer’s contact information should be on the bankruptcy petition filed with the court and served to you as one of the debtor’s creditors. The objective is to determine the tenant’s intentions in regard to their storage unit and any debt owed to you.
Their options are to continue to rent with you and pay the rent, or they can terminate the lease and vacate the space. If they choose to leave, you have to let them go; you can’t demand payment to release their stored property. You can, however, file a proof of claim for the pre-petition debt.
If the tenant elects to keep their self-storage lease, this is known as “assuming an executory contract.” They must continue to pay monthly rent. This post-petition debt is considered an administrative cost of the bankruptcy and should be paid to you throughout the process. The tenant must also pay off their past-due rent. If they don’t, you can contest their right to continue the lease.
Address Refusal to Leave or Pay
Challenges can arise during the bankruptcy process that impact you as the self-storage operator. For instance, if the tenant decides to keep their lease but stops paying rent, they’re breaking their agreement. In this case, you may request to lift the legal hold (stay), allowing you to foreclose on their stored property.
You can also ask the court to order the bankruptcy trustee to abandon the tenant’s property. The request must show that the goods are a financial burden on you as the self-storage operator and of little value to the tenant. If the court agrees, you’ll be allowed it to sell the stored items to recover the unpaid rent and clear the space.
Sometimes, instead of letting a tenant keep their stored goods, the court may require you to hand them over to the court or a bankruptcy trustee, so the court can collect the debtor’s assets for distribution to other creditors. In this case, you’ll receive a notice that requires a response. While you can challenge the request, it often isn’t worth the cost, especially if legal fees exceed the amount of rent owed.
Focus on Reality
The most difficult and expensive aspect of a self-storage tenant bankruptcy is you must retain a lawyer to represent your business. These matters are handled in federal court, and you can’t represent yourself. This is the primary reason why most facility operators don’t pursue debt in these situations.
Typically, if a self-storage renter files for bankruptcy to stop a lien sale (and yes, it happens), they’ll collect their belongings and vacate the unit. You can pursue the unpaid rent with the court, but it’s usually recognized as an unsecured claim, meaning there are insufficient funds available to pay the debt. The silver lining is the space is empty and can be rented to someone else who’ll hopefully pay on time.
Watch the Court Filings
Another important tip is to keep a close eye on the court filings. Bankruptcies can be dismissed if the debtor misses critical deadlines. If that occurs, the legal stay is lifted, and you can resume foreclosing on the delinquent renter’s self-storage unit.
Dealing with tenant bankruptcy can be difficult for a self-storage operator, but understanding the process helps reduce risk. Once you become aware of a filing, pause any pending lien sale and keep open communication with the renter or their attorney. Be aware of the options available to the tenant. If they stop paying rent, you have ways to seek relief through the court, though this often requires legal assistance. By staying informed and proactive, you can effectively manage the situation and protect your business.
Scott Zucker is a founding partner in the Atlanta law firm Weissmann Zucker Euster + Katz P.C., where he specializes in real estate and business litigation. He represents self-storage owners and managers on legal matters such as employment policies, foreclosure and lien sales, lease preparation, property development, and tenant-claims defense. He’s also legal counsel to several state associations and a partner in the Self Storage Legal Network, a subscription service for legal information. To reach him, call 404.364.4626 or email [email protected].
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