Here’s an unfortunate scenario that occurs regularly in the self-storage industry: A tenant fails to pay their rent and ignores communication. The facility operator sells the contents of the unit to reclaim the space. Then the customer sues the operator due to a technical mistake made during the lien sale and somehow gets a settlement!
Whether an error was actually made is often determined in court; however, the situation can be avoided altogether. Below are six questions to ask yourself before conducting an auction to help you avoid a wrongful sale.
Is the Occupant Truly Delinquent?
Occasionally, we see self-storage lawsuits arise from a lien sale in which the majority of the amount due isn’t from rent but late fees. This usually happens because the operator accepted a partial payment, which was applied to rent owed but not other charges. Then even if the tenant makes his next payment in full and on time, they still aren’t caught up, because most of that payment goes toward the overage from the previous month. From this point, the fees stack up. It’s a vicious cycle.
In this case, you probably shouldn’t proceed to a lien sale. If you accept a partial payment and don’t collect the corresponding late fees, don’t continue to pile on additional charges. If you do, you run a substantial risk that the court will find the customer wasn’t delinquent and their belongings shouldn’t have been sold. By continuing to allow the tenancy and accepting a partial payment, you’ve essentially “waived” additional monthly charges unless the tenant legitimately pays late. You should only sell the unit if the tenant is delinquent on rent and hasn’t paid for the period prescribed in your state statute.
Do You Take Partial Payments?
Let’s look at this in more detail. If a self-storage tenant has made one or more partial payments since you sent your lien notice, they could later argue that they thought the partial payment was taken in exchange for delaying or stopping the sale. Put yourself in their shoes: Why would they make a payment if they thought you were going to sell the property anyway? This is, at some level, the worst kind of wrongful-sale and disposal lawsuit because it gives the appearance that you were deceptive and took advantage of the customer.
Work with an attorney to determine what conditions allow for partial payments in your state. If you simply accept a partial payment that was left in your drop slot or mailed to you without any other understanding or written agreement behind it, and you sell that unit, you’re running substantial risk. The tenant can claim you cashed their payment and should’ve at least postponed the sale.
Have You Read Your State’s Lien Statute?
When was the last time you read your state’s self-storage lien statute? I know that sounds like a simple question, but if you haven’t kept on top of updates to local laws or changes in case law, or you simply perform lien sales the way you were taught several years ago, it’s likely you aren’t selling units properly.
The most common mistake self-storage operators make in this area is using the default notice templates that come with their management software. Any software provider will tell you they don’t provide these forms to be used as-is, as they may not be compliant with your state statute. They’re simply placeholders to be replaced with your own legally compliant versions. Thus, you may be sending out the wrong notices, which could lead to a potential lawsuit.
Do You Know How to Send Notices?
Failing to properly mail your self-storage lien notices is like handing the tenant the fuel for a wrongful-sale lawsuit. The national and state self-storage associations have worked hard to change the way late notices can be sent. In many states, you can now use First-Class Verified Mail or even email, though the latter may require consent from the tenant within your rental agreement. If you’re going to rely on email only, make sure you understand the requirements that allow you to use it and what the law demands if the email isn’t properly delivered.
If you’re using snail mail, it has to be verified so you can prove you sent the notice. You actually have to go to the post office and obtain a receipt of mailing. This doesn’t prove what happened to the notice after you mailed it or whether it was delivered; but at least it proves it was sent. Operators who are mailing through automated systems or failing to obtain mail receipts are at risk.
Do You Understand the Rights of Active Military Members?
You must understand what’s required if your self-storage tenant or one of their dependents is in active or reserve military service. A customer in military service (including the U.S. National Guard) is governed by the Service Members Civil Relief Act (SCRA), which prevents you from taking the unit directly to sale. You can’t sell these units without a specific court order. If you’re not checking for military service when people move in, especially when you commence the sale process, you’re taking extraordinary risk because there are civil and criminal penalties if you violate the SCRA.
Do You Ignore Other Notices?
On occasion, self-storage operators will proceed to a lien sale based solely on emotion (normally anger), even though they’ve received a restraining order or some other notice that would stop the sale, such as the commencement of a bankruptcy. In these cases, not only are you potentially exposing yourself to a wrongful-sale lawsuit but possibly a contempt finding by a judge.
If you receive this type of notice, don’t ignore it thinking you have superior lien rights. All these types of notices must be reviewed by your attorney, who can tell you whether it applies to you or if you can proceed to sale.
In the end, no self-storage operator wants to sell a customer’s goods. You would rather be paid or work out an arrangement through which the tenant leaves and, hopefully, pays some money. Emotion and lack of knowledge can take our industry’s rather simple and smart remedy of a lien sale and turn it into a nightmare. Review your lien-sale policies and procedures with your attorney to ensure you’re up-to-date and understand the “stops” that would make you not proceed to sale.
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 J. 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 513.698.9350; e-mail [email protected].