Whenever a self-storage operator calls me to discuss the legal aspects of their business, they’re often surprised to get barraged with some hardball questions. I must ask them, though, because there are many components that must come together to ensure an operation is properly protected. Following are five questions I ask and why they’re important. Consider what your own answers would be.
1. What Is Your Business Entity?
The first question I always ask is whether the self-storage operator has worked with an attorney to establish their business under an appropriate ownership entity. The right answer here is yes, however, the entity can vary. It might be a partnership, limited-liability company, corporation or even a trust.
Failure to think through entity formation can be a nightmare. In fact, it can expose your self-storage operation and its assets to loss in the event of a lawsuit or claim. Perhaps more important, it could allow a claim to “spill over” and attach to your personal assets if the business assets are insufficient to pay the judgment. Bottom line: Make sure your business is set up in the appropriate ownership entity.
2. Who Provides Your Property Insurance?
It almost sounds as if I’m yelling a question at a red-carpet event here, but I’m not. Self-storage is a unique business, and it requires specialized insurance policies and riders. Proper coverage is one way to ensure that any legal claims don’t affect your personal assets, and that you’re able to rebuild or reopen your facility in the event of a loss.
There are actually several insurance coverages you may not know you need, including extended business income, pollution liability with appropriate limits, and ordinance or law coverage. These are in addition to regular coverages you’d expect such as sale and disposal liability, employee theft, and flood insurance, if appropriate.
I like to make sure that every self-storage operator with whom I work partners with an insurance agent who concentrates their practice in this industry, so the coverage is appropriate for the specific business. I’ve received too many calls over the years from owners who find out after a loss that they could’ve had a coverage like pollution mitigation but didn’t, and then must pay a large bill out of their own pocket.
3. How Familiar Are You With Your State Statute?
The next thing I ask is how familiar the operator is with their state’s self-storage statute. Regardless of whether your company regularly works with an attorney, you need to have a basic working knowledge of your local laws.
Self-storage statutes generally set forth only a few operator rights. Mostly, it’s your right to have a lien against the personal property stored in the unit and to sell it in the event the occupant goes into default. There may be a few others, such as a safe-harbor late fee. Whatever is in that legislation, it’s important that you understand it, if for no other reason than to ensure your employees are properly performing their legal responsibilities.
You should also be able to have effective communication with your self-storage tenants about these laws. Further, you need to understand what isn’t contained in your state statute, so you know what needs to be in your self-storage rental agreement.
4. Tell Me About Your Rental Agreement
The responses to this request vary widely. Sometimes, if a self-storage owner is new, they don’t even have a rental agreement yet. Some “borrow” one from their competitors, their state self-storage association or a company that sells these kinds of contracts. Others simply inherit one as part of an acquisition. I’ve seen operators use everything from index cards to 10-page agreements. Some of the contracts I’ve seen are excellent, but many are poorly written.
Once I know what the self-storage operator is already using, I ask if they understand the terms and conditions in the agreement and whether they follow them. More often than not, the answer is absolutely not.
If you don’t understand your rental agreement, or you don’t adhere to it, or you’ve cobbled together your version from several other leases in an effort to make it look “official,” you aren’t helping your business or the industry. Chances are, some of the provisions you’ve grabbed create ambiguity. They might be unenforceable and could even violate some state laws.
In addition, many self-storage statutes require you to put specific language in your rental agreement. In some cases, if these requirements aren’t met, you forfeit your lien rights. You certainly don’t want to make a wrongful sale of tenants goods or void your lease.
These issues concern all self-storage operators. It’s why I’m such an advocate of the national and state associations and encourage operators to attend their meetings, which provide an opportunity to hear and understand the various requirements of the state statute. To keep current with local laws, sign up for association newsletters, too, as they regularly report this kind of information.
5. What Is Your Estate Plan?
If the self-storage operator with whom I’m speaking hasn’t hung up on me by this point, I venture one last question: Do you have an estate plan? As morbid as it may seem to ask this during a first meeting, it’s critical to ensure there’s an end game should the business owner die suddenly.
In our industry, we commonly deal with deceased tenants. It’s complicated to figure out who should get access to the unit contents when there’s no probate to guide us. Meanwhile, an owner might complain mightily about the inconvenience a deceased customer has caused, yet they haven’t taken the time to put their own affairs in order with a multi-million-dollar asset in play. It does seem a bit hypocritical. You must have a plan for your business in case something unexpected happens.
Maybe this doesn’t sound like a fun conversation to have with a self-storage attorney. However, I feel it’s my job to ensure I bring these important matters to the attention of any new client. I wouldn’t want any of you to think that that just because you have a good rental agreement, your business is protected. That may not be the case.
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 is a partner in the Cincinnati law firm of Greenberger & Brewer LLP. Licensed to practice in Kentucky and Ohio, he focuses primarily on representing the owners and operators of commercial real estate, including self-storage. His website, selfstoragelegal.com, contains legal opinions and insights as well as an article archive. To reach him, call 513.721.5151 or email [email protected].