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Delinquencies, Collections and Liens

March 1, 2000

6 Min Read
Delinquencies, Collections and Liens

Delinquencies, Collections and Liens

By D. Carlos Kaslow

Ultimately,self-storage is about collecting rent. The overwhelming majorities of customers pay theirrent when it is due and cause very few problems for facility owners and site managers. Arelatively small number (3 percent to 7 percent) of the customers are collection problems.Collection problems can frequently turn into legal problems if not handled carefully. Thelargest verdicts against self-storage operators have been awarded in wrongful sale cases.Just consider the sheer size of the three highest verdicts:

  1. $1.2 million (reduced to $750,000 by the trial judge) by a Texas jury

  2. $590,000 by a Los Angeles jury

  3. $342,000 by a San Diego jury

These verdicts are startling because they are large and because they are rare. It isunusual for tenants to recover six-figure verdicts, though such verdicts are becoming morecommon. A judgement of this size can cripple a business. Yet, it is possible toeffectively handle delinquencies without undue risk. It begins with the operator'sattitude toward non-paying customers.

After leading a seminar on the potential pitfalls of overly aggressive lienenforcement, I was addressed by a storage operator who gave his view of the matter:"I can't mess around too long with customers who won't pay," he said. "If Idon't get the money, I don't have a business." I thought for a moment beforeresponding, "Any one customer is less than 1 percent of revenue. You can afford to becareful."

One reason storage operators can afford to be careful is that 45 state legislatureshave enacted lien laws that provide a low-cost remedy for evicting customers and disposingof the stored property. Self-storage operators have an advantage over most other landlordsin that they don't have to go to court to evict non-paying tenants.

The effective handling of delinquencies begins with understanding the stateself-storage lien law. Only Alaska, Montana, Nebraska, Vermont and West Virginia have notenacted lien statutes specifically for self-storage. Operators in these states usuallyrely on contractual liens, which give them a remedy similar to that provided by thestatutory liens.

It is generally simple for a storage operator to enforce his lien rights but care mustbe taken to avoid mistakes. The storage operator and all personnel who have responsibilityfor collecting delinquent rent should be familiar with their state lien law. It is goodpractice to have a copy in the rental office.

It is also imperative for storage operators to understand that there is an importantdifference between complying with the state lien law and developing sound rent collectionprocedures. For example, many state lien laws only require that a single written notice besent to a delinquent customer before property is sold. While the law may permit sale aftersending a single notice, a smart storage operator would have collection procedures thatinclude sending out several notices and making telephone calls to delinquent customers.Storage operators who follow just a few simple rules can effectively manage theirdelinquent accounts and reduce their exposure to large wrongful-sale verdicts.

1. CREATE A DELINQUENT ACCOUNT PROCESSING PLAN

This is one of the most important aspects of your overall business operations plan. Itshould cover every step from the date rent is late to the eventual sale of the delinquentcustomer's goods and an accounting of the proceeds. A good delinquency plan begins withreading the state lien law. All required statutory steps must be integrated into the plan.Remember that all the steps provided for in the lien law must be followed, but the lienlaw does not provide all the steps that should be followed. A good plan is designed toallow the operator to establish contact with the delinquent customer and should providethe tenant a reasonable time to pay delinquent rent.

2. DOCUMENT EVERYTHING

A storage operator who sells a delinquent tenant's property will have the burden ofproving compliance with the law. Failure to keep clear records is one of the most commonmistakes that self-storage operators make. It is not enough to do everything right. Youmust be able to prove you did everything right. Compliance is proved by thoroughand clear business records that document each step that was taken leading up to the sale.When a telephone call is made to a delinquent tenant, the person who made the call shouldrecord when the call was made and the result of the call. When a letter is sent, it shouldbe copied and filed. If a notice is returned by the post office, it should be filed.Storage operators who keep clear and detailed records are also less likely to make amistake when processing delinquent accounts.

3. REVIEW BEFORE SALE

This step can virtually eliminate mistakes by an operator who is implementing a soundcollection plan. Before holding a sale of any storage space, the tenant file should begiven a fresh look. This should be done by someone who does not have direct collectionresponsibility. The review should be detailed and designed to pick up little mistakes.Bookkeepers and accountants are very good at this type of review. What kinds of mistakescan such a review pick up? A few years back a storage operator sold all the property of atenant whose rent was not delinquent. At some point during the collection process, anincorrect space number was used on one of the notices. This incorrect space number wascarried through the process, and the contents of the wrong space were sold. A detailedfile review prior to the sale would have disclosed this inconsistency and saved thestorage operator $20,000.

CONCLUSION

Storage operators who have a collection plan, document their actions and reviewcustomer files before a sale cut down on most of the potential legal pitfalls associatedwith processing delinquent accounts. Dealing with delinquent customers is never easy, butit helps to keep things in per spective. The goal is to avoid selling your tenant's goods.You may have to do this, but it's not the goal. The goal is to get paid what is owed or aslarge a percentage of the debt as is reasonably possible.

Selling your customer's property is just one method of reaching the goal and it is themethod that creates the greatest potential legal risk for the storage operator. Keep inmind that any one space represents less than 1 percent of the typical storage facility'smonthly revenue. The property inside the storage unit may be everything the customer owns.Storage operators can afford to be careful.

D. Carlos Kaslow is an attorney specializing in legal issues pertaining to theself-storage industry. A frequent contributor to the magazine and a seasoned speaker atInside Self-Storage Expos, Mr. Kaslow is also the editor of The Self-Storage Legal Review,a bimonthly newsletter on legal issues pertaining to the self-storage industry. For moreinformation or to obtain a subscription, Mr. Kaslow may be reached at 2203 Los AngelesAve., Berkeley, CA 94707; phone (510) 528-0630.

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