More than likely, you’ve heard about this scenario: A self-storage operator sells the contents of a tenant’s unit for non-payment of rent, and somehow the customer turns it around and sues the operator due to a mistake made during the lien sale. 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 Really 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 happens because an operator accepts a partial payment, which gets applied to the rent owed but not the other charges. This means the tenant’s next payment is also only partial, even if it’s on time, because he hasn’t paid the late fee or overage from the month prior. From this point, the fees stack up. Even if the customer pays his rent every month, he can accrue several hundred dollars in additional charges.
In this case, you probably shouldn’t proceed to a lien sale. You need to have the mindset that if you accept a partial payment but don’t collect the late fee, the additional charges shouldn’t continue to build every month. If you do, you run a substantial risk that the court will find the customer wasn’t delinquent and his belongings shouldn’t have been sold. By continuing to allow the tenancy and accepting the partial payments, you’ve “waived” those other fees and charges month after month. 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.
Have You Read Your State’s Lien Statutes?
When was the last time you read your lien-sale statute? I know that sounds like a simple question, but if you haven’t kept on top of updates to your state’s laws or changes in case law, or you simply perform lien sales the way you were taught several years ago, it’s likely you’re not selling the units properly.
The most common mistake is using the default notice forms that come with your management software. All of these software companies will tell you they don’t provide these forms to be used as is, as they may not be compliant with your state statute. These forms are simply placeholders to be replaced with your own statutorily compliant versions. Thus, you may be sending out the wrong notices from your software, which could lead to a potential lawsuit.
Do You Know How to Send Notices?
Failing to properly mail your lien notices is like handing the tenant the fuel for a wrongful-sale lawsuit. The national Self Storage Association has worked hard with the state associations to change the way late notices can be sent. In many states, you can now use First-Class Verified Mail. I tell my clients to rely on Verified Mail for the first mailing and then send an e-mail, if legally allowed in the state, as a secondary method of service.
Remember, to use Verified Mail and prove you mailed the notice, you actually have to go to the post office and obtain a receipt of mailing. This receipt doesn’t prove what happened to the notice after you mailed it or whether it was delivered; all it needs to do is prove the mailing. Operators who are mailing through automated systems or failing to obtain these mail receipts are at risk.
Do You Understand the Rights of Active Military Members?
You must understand what’s required if your tenant or a dependent of your tenant is in active or reserve military service. A customer in military service (including the National Guard) is governed by the Service Members Civil Relief Act (SCRA), which prevents you from taking his 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 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 sorts of 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 of 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.
Do You Take Partial Payments?
I mentioned this above, but it deserves its own section. If a tenant has made one or more partial payments since you sent your lien-sale notice, he could later argue that he thought the partial payment was taken in exchange for delaying or stopping the sale. Put yourself in the tenant’s shoes: Why would he make a payment if he 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 his payment and should’ve at least postponed the sale.
In the end, no 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 with the law firm Katz, Greenberger, & Norton LLP in Cincinnati and is licensed to practice in the states of Ohio and Kentucky. Mr. Greenberger’s practice focuses primarily on representing the owners and operators of commercial real estate, including self-storage owners and operators. His website, www.selfstoragelegal.com, contains legal opinions and insights as well as an article archive. You can send your questions, comments or suggestions for future topics to [email protected].
