Managing the Risk of Wrongful Self-Storage Lien Sale: 5 Strategies to Reduce Liability
Lien sales are among the biggest contingent liabilities that loom over self-storage operators. With the unique benefit of a legally permitted “self-help” remedy to deal with delinquent tenants comes the burden of ensuring the process is handled correctly. Any misstep can turn your right to enforce a lien against a renter for non-payment into a “per se” statutory violation that subjects you to liability for damages. Following are five strategies to help you stay out of legislative trouble and reduce your wrongful-sale liability.
1. Stay Current on the Law
Get a current copy of your state lien law and make sure your rental agreement is properly updated. Over the past decade, the national Self Storage Association has partnered with self-storage operators and many state associations to modernize local lien laws. It has managed to create industry statutes in areas where none existed previously and reform older legislation. Updates have included:
- Changes to the approved methods of communication with delinquent tenants, such as the use of e-mail in lieu of certified paper mailing
- The right to charge late fees for delinquency
- The ability to tow vehicles in lieu of sale
- The ability to conduct lien sales via online platforms
- Specific protections to limit the value of claims that can be asserted by tenants for loss or damage to their property
Due to these alternations, it’s essential to stay informed and adjust your operation to keep pace with the statutory rules. This includes amending your rental agreement to match the letter of the law. For example, in certain states, if the limitation-of-liability provision isn’t in bold type or underlined, it would be unenforceable. Even without state changes, it’s extremely important to review and update your agreement every few years to consider applicable case decisions or strategies to reduce potential liability in areas other than lien enforcement.
2. Ask About Military Status
When tenants rent with you, ask if they’re active-duty military, or the spouse or dependent of someone else who is. Your lien right can be blocked if the customer is granted certain federal protections, such as those in the Servicemembers Civil Relief Act (SCRA). In part, this law provides that if a tenant is active-duty military (which includes the reserves), or the spouse or dependent of someone who is, you can’t enforce your lien without getting court approval. This means that instead of simply sending notices and publishing advertisements before the sale, you must file an action with the local court to obtain permission to sell.
The risk of selling while someone is covered under SCRA is why many self-storage operators have had to update their rental agreements. For example, Michigan law provides that rental agreements must include the following language:
IF YOU ARE A MEMBER OF THE ARMED FORCES, A RESERVE BRANCH OF THE ARMED FORCES OR THE MICHIGAN NATIONAL GUARD, TENANT MUST PROVIDE WRITTEN NOTICE TO OWNER. If you are a Service Member, and you are transferred or deployed overseas on active duty for a period of 180 days or more, you may notify the Owner of the transfer or deployment. The Tenant shall provide written evidence of the transfer or deployment with the notice. Upon notice, Tenant is entitled to protections under governing law staying the enforcement of the Owner’s lien
Some states also require you to add SCRA verbiage to your lien letters and notices. For example, Texas law requires that operators add “a statement underlined or printed in conspicuous bold print requesting a tenant who is in military service to notify the lessor of the status of the tenant's current military service immediately.”
If you know or discover that your tenant is in the military, or is the spouse or dependent of someone who is, at any time during the lien process, don’t proceed.
3. Follow State Requirements
Make sure your lien notices and advertisements are correct and sent pursuant to the timeline stated in your state statute. Part of every lien process is the obligation to send at least one notice to the delinquent tenant notifying him that he’s in default and indicating his right to cure. Similarly, there’s typically the duty to notify the public of the lien sale (which should permit the tenant to receive a secondary notice) to entice potential buyers.
Not only must the content of these letters and advertisements be correct, they must be sent according to a specific schedule. One process must occur before the other, and certain periods must be observed between each step. This is generally where most mistakes occur. Either the facility operator fails to include all the required elements in the lien notice, or the required timeframe isn’t given for the tenant to “cure” his delinquency before the next step in the process.
4. Trust Your Instincts
Forget all the legal stuff for a second. Not all delinquency cases are the same. Sometimes you have a tenant with a unique story or come across unusual property when inspecting a unit. Perhaps there’s something out of place that makes you wonder whether the sale would be appropriate. With special circumstances, you may have a gut feeling that you just shouldn’t sell.
Well, trust your instincts! Once you sell a unit, it’s almost impossible to turn back the clock and recover the property or replace the items that were removed. So, if you hear from a tenant about a specific circumstance that prevents him from paying rent or retrieving his property, or you observe something in the unit that appears out of the ordinary, remember that you have the choice not to sell even though you may have the legal right to do.
Don’t feel pressured to move forward with a sale, even if you’ve completed all the required steps in the lien process. Even bidders who choose to attend your auction can’t insist that the sale be conducted. To protect yourself, include in all your advertisements that the sale is “With Reserve,” meaning you can pull the unit at any time. At worse, you may only have to restart the process and wait another 30 to 60 days to sell. Sometimes, it may be worth the postponement.
5. Carry the Right Insurance, in Sufficient Amounts
Make sure you have sufficient sale-and-disposal insurance. At the end of the day, no matter the circumstances or your good intentions, there’s still a risk that a sale can go wrong. Mistakes are simply a part of doing business. It could be that a unit is sold without full compliance with the applicable statute, or perhaps a payment was incorrectly applied and an innocent tenant’s unit was sold. If these actions aren’t intentional or malicious, sale-and-disposal coverage can help mitigate the damages.
The amount of coverage you need may depend on the number of units at your facility, the level of experience of your site managers, the percentage of delinquencies that occur at the property, and whether you’re using a professional management company. Since the potential for a wrongful sale is a risk of the self-storage business, you need insurance, even if the coverage you purchase is limited.
It’s important to understand that sale-and-disposal insurance isn’t generally included in a standard, commercial general-liability policy. Self-storage is a unique business, so you must talk to your insurance agent about the types of specialized coverages you need.
Scott Zucker is a partner in the law firm Weissmann Zucker Euster Morochnik & Garber P.C. in Atlanta, which specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He’s a frequent speaker at self-storage industry events, author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers,” first and second editions, and a partner in the Self Storage Legal Network, a subscription-based legal service for storage owners and managers. He’s also the deputy general counsel for the Self Storage Association. For more information, e-mail email@example.com; visit www.wzlegal.com.