The Self-Storage Self-Help Remedy: An Overview of the Lien-Sales Process

One of the most unique elements to running a self-storage operation is the lien sale, a legal remedy for when a tenant fails to pay rent. Compared to the processes involved in other real estate businesses, this is unusual.

As a self-storage operator, you can use this self-help process to remove a delinquent tenant’s stored goods from your property simply by sending them a notice or notices (depending on the state) and posting a public advertisement of sale (not required in all states). That’s basically it. Though there are situations in which a tenant can seek judicial intervention, for the most part, the customer agrees via the execution of their rental agreement that you have a lien over their stored items. If rent isn’t paid, you have the right to foreclose on that lien, with the choice to sell it (if someone will buy it) or dispose of it (if no one wants it).

That said, you must carefully follow specific guidelines for lien foreclosure as defined by the state law in which your facility is located. Lien laws vary from state to state. Though many are similar, they can be significantly different. Thus, you must pay careful attention to the form and substance of required notices, and provide sufficient time for the requisite cure periods contained in them. You must also follow the prescribed rules for advertisements prior to the sale as well as abide by the requirements for the sale itself.

Since compliance is key to avoiding liability for a wrongful sale, let’s take a closer look at the key components connected to the self-storage lien-sales process.

Lien Notices

Lien notices must contain the specific language set forth in the applicable state self-storage statute. This typically includes:

If your lien notice fails to contain these elements, there’s a chance the sale could be found insufficient. State law will also stipulate how these notices must be sent, such as by postal mail, email, verified mail, or a combination of these methods.

Though not specified in most states, the ultimate goal is for the tenant to receive the notice and pay their debt to avoid the auction. Therefore, tracking any notice to verify delivery is important. The significant benefit to using email (when allowed) is the ability to confirm delivery to the electronic address the tenant provided and, in certain circumstances, to prove that the email was opened. Email also speeds up the process vs. mailing through the postal service, which can take days or even weeks for delivery.

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State laws also provide specific guidance as to how a self-storage lien sale should be advertised. Most states focus little on using the advertisement as a way to provide notice to the tenant and seem more concerned with drawing a sufficient number of bidders to the auction. This helps ensure the property being sold obtains a “commercially reasonable” value that’s sufficient to repay you as the facility operator for lost rental income as well as perhaps generate surplus funds (proceeds) to be paid to the tenant.

Keep in mind, it’s uncommon to derive proceeds from a self-storage unit auction. Like any foreclosure sale, it’s a distressed situation, so low bids are common. But since state statutes require sale advertisements, you must follow the specific instructions as to what information they should contain, when they need to be placed, and how much time should pass between when the ads are published and the lien sale can be held. The good news is many jurisdictions are shifting away from public advertisements in local newspapers in favor of other methods to ensure a minimum number of bidders participate in the sale.

The Auction

Thanks to technology and the internet, there’s been an evolution in the self-storage lien-sale process. Historically, these auctions have been held live at the facility in front of the unit up for bid. This activity has now largely moved online to auction websites, with significant benefits for you as the operator and your bidders. For one, it removes the threat of bad weather from the equation. Online bidding also widens the geographical area for any buyers who want to participate. Plus, no one has to travel to the facility unless they win the unit contents.

In many states, to prove an auction was commercially reasonable, you must verify that there were three or more “independent bidders” present. This is regularly defined in state statutes as “a bidder who is not related to and who has no controlling interest in, or common pecuniary interest with, Owner or any other bidder.” But these buyers don’t always need to be there physically; online participation often suffices. More bidders creates a better chance for a fair, competitive effort to receive the highest and best offer for the stored property.

In all states, it’s inherently true that the delinquent self-storage tenant has until the time of the auction to pay the accrued amount due to avoid the sale and reclaim their property. However, the sale closes when the highest bid is accepted and payment is made. Thus, if a tenant wants to avoid the sale of their belongings, they must pay their outstanding debt as far in advance of the auction as possible. Waiting until the last minute may not prevent the sale.

Post-sale rules also differ from state to state. Many jurisdictions outline how the funds from an auction are to be divided, including the priority of distribution to the self-storage facility, tenant and any lien holders of the sold property. Many states require you to send a post-sale notice to the tenant, especially if there are auction proceeds. Other laws include specific guidance on how proceeds should be handled if they go unclaimed. This can include turning the money over to the state treasurer or reverting it to the facility operator after a specific period (six months to two years).

Prevention Is Best

It’s often said that the “best sale is no sale,” and this is true with self-storage delinquency. Notwithstanding the excitement and glamour of a public auction that includes competing bids and the possibility of finding hidden treasures, the basic truth is that facility operators are in business to rent units, not sell tenant property.

If you and your delinquent tenant can resolve your dispute over unpaid rent, it’s best to do so. In the long run, if the customer can reclaim their property and vacate the unit, you’ll be better off. You’ll get your space back and won’t need to worry about claims of statutory violations, which are common in wrongful-sale lawsuits, even if they’re unjustified.

Self-storage is a unique business, but the self-help lien remedy might be the industry’s most significant nuance. Tenants must be made aware of this unique right to foreclosure, as non-payment risks the loss of their personal property—in some cases less than 60 days into delinquency. They also need to understand that the use of a landlord’s property to store their goods is a privilege, not a right.

Scott I. Zucker is a founding partner in the Atlanta law firm of Weissmann Zucker Euster + Katz P.C. Practicing law since 1987, he represents self-storage owners and managers on legal matters including property development, facility construction, lease preparation, employment policies and tenant-claims defense. To reach him, call 404.364.4626, or email [email protected].