A question was asked at the recent Inside Self-Storage Expo in Las Vegas about using a self-storage facility for garage sales, flea markets or charitable events. One operator answered that he has had a lot of success with garage sales vs. going through the lien-sale process. I’m sure many people left this discussion wondering, Why not host a garage sale instead of a lien sale?
In my opinion, it's not legal to conduct a garage sale in lieu of a lien sale, as provided by your self-storage statute or, in states without a self-storage statute, the Uniform Commercial Code (UCC). Let’s examine why.
In summary, all self-storage statutes discuss that after a period of default and other prerequisites—such as certified mail, notices in opposition to a lien sale, advertising in a newspaper of general circulation or posting notices around the town—an owner is entitled to exercise a lien against the stored property by selling the contents of a unit.
A garage sale to me indicates that you have put the stored contents out on display, with a price tag on each item, and are willing to sell the item for a certain price. Whether or not haggling is allowed, if someone meets "your price," the item is then sold.
Unfortunately garage sales are not designed to begin and end within a short period of time like an auction or public sale where all bidders are gathered around to look at an item, then everyone gets an opportunity to bid against others until a winner (who will pay the highest price) is declared. The problem is you will never know whether you could have sold the items for more money had you waited for another buyer to come along. That’s the advantage or importance of having an auction or public sale; you know you will fetch the highest price any buyer will pay for that specified unit or item during a scheduled auction.
In California and some other states, self-storage statutes generally say that a sale must be conducted in a commercially reasonable manner. Statutes, such as in Georgia, specifically mandate the items must be sold to the highest bidder, indicating the requirement of an auction or a public sale.
Let’s Be Reasonable
In any case, all state statutes have requirements that are essentially the same: You are required to sell the items for as much money as you can reasonably fetch. What makes a sale commercially reasonable? I’ve covered this topic in great detail in a previous ISS article (July 2006). So, without reiterating all the stipulations of that piece, let me summarize: The UCC in most states sets out a 12-part test on what makes a sale commercially reasonable. Of course, the test has nothing to do with self-storage in particular; it just looks at what makes a sale generally commercially reasonable.
What Makes a Sale Commercially Reasonable?
The Uniform Commercial Code in most states weighs out the following to test the validity of a public sale:
1. The nature of the collateral including its fair-market value
2. The re-sale price of the collateral
3. The nature and amount of advertising to get buyers to a sale
4. The use of genuine reasonable efforts to reach the appropriate market best able to use the collateral
5. Whether the secured parties’ efforts are reasonably calculated to achieve a reasonable number of bidders or potential purchasers in an appropriate market
6. The methods used to solicit bidders or potential purchasers
7. The number of potential bidders contacted prior to the sale
8. The nature of the sale (was it public or private?)
9. Was the sale conducted in a reasonable manner under normal business conditions (using standard business practices)? Were the services performed by an experienced, professional auctioneer?
10. The number of bids actually received
11. The presence of collusion or self-dealing
12. The good faith of the secured party
Imagine if a car was repossessed and the bank simply stuck a "For Sale: $1,000" tag on it and sold it to the first buyer. What if it was your car and you know it should have sold for $10,000 or more? You’d probably cry, "Foul!" You’d argue the vehicle was not sold in a commercially reasonable manner, the highest amount of money was not raised for the vehicle, and thus the deficiency balance is unfair. The same holds true for a self-storage sale.
Nature of the Sale
Look at factor No. 8 on the UCC list: the nature of the sale. If the testimony in a later lawsuit indicated you put every item up for sale for 50 cents, yet somebody would have purchased each for $1, you could face a claim that your sale was not conducted in a commercially reasonable manner. The buyer wasn’t forced to pay a higher price because you pre-priced the goods. You’d be in violation of your lien sale statute or perhaps simply a claim that the tenant is entitled to money because you did not sell the goods for as much as they could have been.
Look at No. 10: the number of bids actually received. There is no bidding process at a garage sale; you put out a price tag and people decide whether or not to pay what you want. Clearly there’s a difference.
Finally, look at No. 11: the presence of collusion or self-dealing. I think this is the biggest problem. If you set the price and no one buys the item, someone is going to come along and claim that, had the actual market forces of an auction been allowed, the item would have sold for some amount of money. By pricing it, you impeded the sale from happening, thus preventing money from being raised to help satisfy the lien or even create a surplus of proceeds.
Trash and Treasures
Of course, in most self-storage lien sales, expensive jewelry, furs, gold bouillon, etc., are no where to be had. You are selling often what looks to be like abandoned property. I have said on many occasions, "One man’s trash is another’s treasures." For you to price something in a garage/yard sale setting, based on your evaluation of the property, is in clear violation of the factors described in the UCC of what makes a sale commercially reasonable and thus in violation of your state self-storage statute (or the UCC standards if you have no statute).
Thus, while a garage sale might sound like great idea, the type of garage sale you should allow at your property, if any at all, is the type where you allow your facility to be used to host one of property that is not stored at your facility, or maybe to allow people to sell property out of their own units that are not in lien status (although this seems to be self-defeating to our business model).
Unfortunately, a yard or garage sale is just not the way to dispose of property when it goes into default at a self-storage facility. Be safe, not sorry.
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].