The April, 2007 Legal Learning with Jeffrey Greenberger Webinar raised one question so much, that it seemed to create a topic for this column.
Our Webinar topic of the month was late fees. The crux of the discussion was that a late fee is, by definition, a liquidated damages clause to a contract. Liquidated damage clauses are acceptable in contracts when three (3) conditions exist, specifically: (a) damages are uncertain as to the amount of difficulty to prove; (b) the contract, as a whole, is not so manifestly unconscionable, unreasonable, and disproportionate in amount as to justify the conclusion that it does not express the true intentions of the parties; and (c) the contract is consistent with the conclusion that it was the intention of the parties that the damages and the amount stated in the contract should follow a breach of such contract. If these three (3) factors do not exist the liquidated damage clause is most likely to be construed by a court as a penalty. I have previously written on the issue of late fees in self storage in ISS Magazine, if you wish to go back and review that article (April 2001 issue). The point we were making in the Webinar was that unless you are in one of the states that had a statute which fixed a reasonable late fee (Arizona, California, Kansas, Maine, Missouri, Ohio, North Carolina, West Virginia, Wisconsin, and maybe Maryland) and/or you were charging late fees multiple times per month, or that as a percentage of rent were very high, you, as a self-storage operator, may be exposed to risk of a lawsuit from the tenant who will claim that the late fees you have charged are a penalty and file a class action lawsuit.
To my readers and attendees of the Webinar, this is nothing new to you. The question that seems to be bothering most of you, however, is “What about other charges that I impose as a result of a late payment?” Several examples I received, in the form of questions, were:
1. I impose a late fee on the 5th of the month and I impose an overlock fee when I overlock the unit on the 15th of the month;
2. I charge for a pre-lien letter on the 20th of the month;
3. I charge a $25 NSF fee when a check bounces.
Other charges you mentioned were for sending certified mail, advertising, and the costs of sale. Further, you questioned what happens if your tenant comes in and makes a payment and then becomes delinquent again the next month; can you charge these same types of fees again and again each month? There are some definitive answers and some of the questions are darn good questions without a definite answer.
The first thing you need to understand is that a late fee (a liquidated damage clause) occurs without your providing a service. You have your leases set up so that on a certain date if a tenanta has not paid their rent by that date, you are going to automatically assess the charge without doing anything further to “earn” that charge. The questions above involve providing a service in exchange for imposing a fee. That is, if you are imposing an overlock charge, I hope it is because you are actually going out and putting on an overlock on the unit, checking the unit to make sure it is not empty if it is unlocked, entering the information into your computer, logging all of your activities. You actually have to take time out of your day to prepare the overlock list, to go out to inspect, to overlock, you probably also send out an overlock letter, and you have a lot of information to log back into the computer. This is actually real time you spend. You are providing a service in exchange for the fee, as opposed to simply sitting on your hands, and collecting a late fee. The same is true when sending out a pre-lien notice, inventorying the unit, advertising, etc. You are often incurring not only the costs in postage, certified mail fees, advertising fees, etc., but you are also providing a service (required or not) for that fee.
I haven’t answered the question yet, have I? Can you charge these fees and, if so, how much? The answer to that question depends on different factors:
1. Did you list and clearly disclose that the tenant might have to pay these fees in the event of late payment in your rental agreement?
2. Are your fees reasonably related to your actual costs for performing these services or adding these?
3. What does your state statute say that you are allowed to pass through to your tenant, if you have a state self storage-statute? And
4. Are there any legal opinions to the contrary in your state?
Let’s look at two different state statutes to demonstrate what the issue might be. First, Florida, Section 83.805 provides that “the owner of a self-service storage facility … has a lien upon all personal property, whether or not owned by the tenant, located at the self-service storage facility … for rent, labor charges, or other charges, present or future, in relation to the personal property and for the expenses necessary for its preservation or expenses reasonably incurred in its sale or other disposition …” This statute is broad and appears to give broad discretion to charge for the types of services that operators provide for preservation of property and expenses reasonably incurred in the sale or other disposition. While I am not a Florida licensed attorney, it would seem that this includes the costs of overlocking, relocating, sending late notices, and certainly includes the costs of advertising and sale so long all of those expenses are “reasonably” incurred. How to define “reasonable” is not the subject of this article today and you are naturally encouraged to discuss this type of language with your state licensed attorney. However, I hear from so many operators charging high fees for sending out an ordinary mail, pre-lien letter. This is where I think the industry will hurt itself. If it costs you a few dollars in time and materials to send out an ordinary mail letter and you are charging $25.00 for it, I am afraid that will eventually come back to haunt you and the rest of the industry. Certainly, people have freedom to make contract and if you have listed that item in your contract as a fee that the tenant agrees to pay in the event that you have to get that far in the default process, you certainly have an argument that there was a meeting of the minds for that fee. Unfortunately, a judge always can rule the fee unconscionable. Thus, we have discussed that the fee needs to be clearly delineated in the contract, it should be reasonably related to your costs, and your state statute needs to say it is okay.
Now, look at the West Virginia statute, Section 38-14-11(a) provides “the Owner has a self-service storage lien on all personal property stored within each leased space for agreed rent, labor, or other charges and for expenses reasonably incurred in the sale or destruction pursuant to this Article.” Does not sound that much different, does it? However, the State Attorney General in West Virginia has interpreted that section to inform a large self storage operator in the state that this section is limited. In the interpretation of the Attorney General’s office this section means you are only allowed to charge the costs that you pay for the actual storage rent and labor and for those expenses reasonably incurred in the sale, such as the hiring of an auctioneer, maybe the advertising. The State Attorney General has said agree that you cannot include pre-lien letter charges, certified mail charges, overlock charges, etc., because the State Attorney General has taken the position that these are not “expenses of the sale or other destruction.” Thus, even though this West Virginia operator had disclosed a pre-lien fee, overlock fee, etc., on his lease and the tenant had agreed to it, and the state statute was just slightly different in language than Florida’s, the difference in the language appears to be monumental.
We do not have state attorney general or case law interpretations in many states expressing opinions whether these types of “other fees” that you may charge are enforceable, but it would not surprise me to see other attorney generals following West Virginia in their own states against operators who charge other fees that are not well disclosed, not rationally related to the expense you incurred in providing the service, and, of course, if you are in a state with a state statute and your state statute is more narrow Florida statute I provided above, then you may not be entitled to collect these sorts of fees.
The second question was “Can I impose these fees every month?” If you are in fact in a situation where a tenant ends up in default and you charge a pre-lien fee, if the tenant then comes in, pays the rent, and then if he becomes delinquent again the next month, if your fees are otherwise permissible, it would seem to be permissible to charge them each time there is a default. Please notice the number of “ifs” in that sentence. What I think is very clear is that you should not be charging these types of default fees more than once per event of default. It may seem obvious that you are only going to impose one overlock fee per default, though it does seem that some operators may operate differently. I think I can say safely that is not well advised.
As always, this is a technical legal issue, one that is really well-worth sitting down with your local licensed attorney who understands self-storage law to help you. Make sure that you are acting, to the best of everyone’s knowledge, within the parameters of your lease and your state statute, if you have one. A little money spent at this time, on this issue, could result in a remarkable savings against future litigation over these types of fees.
Jeffrey J. Greenberger is a Partner with the law firm of Katz Greenberger & Norton LLP in Cincinnati, Ohio 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.
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’s new website, www.selfstoragelegal.com, contains Jeffrey’s legal opinions and insights into the self-storage industry, as well as an article archive.
Jeffrey is the legal counsel for the Ohio Self-Storage Owners Society, Inc., and the Kentucky Self-Storage Association, Inc., as well as a regular presenter at Inside Self-Storage Trade Shows. You can send your questions, comments, or suggestions for future topics to Jeffrey J. Greenberger at firstname.lastname@example.org, or mail them to Jeffrey J. Greenberger, c/o Katz Greenberger & Norton LLP, 105 E. Fourth Street, Suite 400, Cincinnati, Ohio 45202, or you can reach Mr. Greenberger at (513) 721-5151.