Recently I had lunch with a friend who is an insurance adjuster, whose company does a lot of self-storage claim adjustments. He told me a story of his West coast counterpart who was reporting a large number of a new type insurance claim that he has had to adjust recently. These new claims had the following fact pattern: A person moves into a self-storage space at a facility with a concession where the first month is free or a low charge. The renter moves in virtually nothing, usually some type of garbage, and then intentionally does not pay the rent when the next month is due. The renter’s motive is not to use the self storage facility as a cheap dumpster for one or two bags of garbage, rather these people are waiting for the manager or owner to sell the unit and then look to see if you did anything wrong in the lien sale process. These cases, while more prevalent in the West, especially in places such as California and Nevada which have complicated lien sale statues, are apparently happening all over the County. The object of the insurance claim is not necessarily for the value of the property that was in the unit, rather the claim is simply one for failing to properly follow the lien sale statue essentially, “messing up” the lien sale. This fact pattern takes diverging paths after that, some allege many thousand of dollars worth of valuable property, some are just looking for the statutory damages that some statues award if the sale is not performed correctly, regardless of the value of the property. Call me crazy, but I am sensing a trend.
This column could go on to discuss the evils of concessions, but I am certain all of you are doing what you can to survive in these tumultuous economic times. I would however like to take just a few sentences to use my story above to convince you (if possible), to either avoid concessions on your lease rates, i.e., the wave the administration fee, or give a free lock, etc., or give a rent concession later in the lease term assuming the initial period of the lease is completed, for example the sixth month for a dollar rather than the first month for free, thus the tenant has to fulfill five months of your lease before the concession. This alone should discourage these type of shanagans at your facility.
What is more notable however, is the fact that tenants have come up with this new way of scamming owners and insurance companies out of money. I say scamming because most people who are filing these claims are going into the transaction with the intention of storing virtually nothing in the unit and cash in if you make a mistake in your lien sale, if you do not make a mistake, the tenant lost a bag of garbage.
The ultimate solution to this problem is that you must be ever vigilant to perform your lien sales carefully, accurately, and avoid emotion in a lien sale.
What do I mean? The 49 statues that discuss lien sales in the 48 states and the District of Columbia, while short, are loaded with technical requirements. This article can not begin to cover all of them, however, as example almost daily I see speak to an operator who is making a simple mistake in conducting his/her lien sales. Examples include, if the state statue requires a detailed inventory the operator uses the term “household goods” as the inventory and does not even cut the lock off to inventory the unit at the appropriate time. Another example is many state statues require an itemization of your claim in your default notice. This would mean you would have to list by date and amount what is owed to you. Many operators put in the default notice the grand total due of rent, late fees and other charges and do not itemize them. Also, there are limitations mostly minimum time requirements in state statues. It seems operators often ignore those times, or they may put the right length of time in their notice and advertisement but then sell on a date not listed in the notice or advertisement. While I am writing this article I am looking at a newspaper ad for a self storage auction from Pennsylvania. I see two major mistakes, the newspaper ad is run in a local “traders newspaper” not the newspaper of general circulation for the county, and the ad reads “private auction by invitation only”. The Pennsylvania Statue requires a public sale.
Finally, I see many operators that allow the emotional aspect of a sale to get in the way of logic. I recently had a client who had a occupant move in on a first month free special, then after the first month of rent became due, filed bankruptcy. My client did not want to hear that they could not sell when they had scheduled the sale because they had not obtained relief from the automatic stay. My client’s position was emotional and stoic that this person was cheating the system and it was not fair that this person should get away without paying rent for several months while we obtained relief from the stay especially after the tenant took the first month free. While I disagree with whether or not the tenant “took” the first month free rather than it being offered and accepting it, the issue for me really was the emotion of my client’s insistence on going forward with the lien sale even though the client, on a better day, would know better. I eventually got the situation rectified but it reminded me that although I lecture often that if you are not sure if you should proceed with a lien sale then you should not proceed until you are sure, many people get swept up in the emotion of their views of right and wrong vs. the views of a judge who will be looking at this case, detached from emotion, someday down the road.
Again, I do believe that some of the problems in the above example could have been avoided if the first month was not the “free” month, but that is not the point of my column. What better month than the Business and Finance Issue of ISS to remind you that you are in the business of self-storage, that you must run it professionally, and you must follow the lien sale laws of the state in which you are located. If its been 3 months or more since you reviewed your lien sale statue, it is time for a refresher course. If you never understood what portion of your lien sale statue meant, you are warned that it is time to get educated. If you have done something that does not seem right under your statue but you do because that is the way you have been trained or because you have always done it that way and its never come back to haunt you, consider yourself put on notice that there are people out there in these tough economic times looking to make a easy buck, and the next time it could be at your expense.
One of the best ways to easily and efficiently bring yourself up to speed on these issues is to attend the ISS Expo either in Washington D.C. this October were I will be teaching a Lien Law class and Legal Learning Live or in Las Vegas in January, 2010, take some classes at the Self-Storage Training Institute via your computer at your leisure, attend a state association meeting when they are putting on a lien law seminar, or sit down with your attorney for an hour or so and get your questions and concerns cleared up. The point is as the tenant’s get smarter you have to get smarter or these cases are going to continue to happen. Once someone finds a way to make money and discusses it on the internet you can bet others are going to copy. Whether or not you can change your concessions or move the timing of your concessions, at the end of day what will rid you of this problem once and for all is making sure that you conduct your lien sales properly, and excuse the cliché, to the letter of the law. If you can not conduct your lien sales properly, then find other ways to remove tenants from your units whether it be settlements, evictions, or other options. If you are not sure that you can do your lien sales correctly, given what we know is going on in this day and age, you should not be doing lien sales. I hope to see you all at the ISS Expo in Washington in October.
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 website, www.selfstoragelegal.com, contains Jeffrey’s legal opinions and insights into the self-storage industry, as well as an article archive. You can send your questions, comments, or suggestions for future topics to Jeffrey J. Greenberger at email@example.com, 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) 698-9350.