The self-storage industry recently suffered another high-dollar wrongful-sale verdict in the case of Dubey v. Public Storage, the third lien-sale case in a year with a notable verdict or high award.  It’s time to conclude that lien sales, if not done properly, pose a huge risk of exposure to your business, both financially and from a consumer-relations standpoint. If you don’t know how to do a lien sale correctly, you need to learn.

Easier Said Than Done

Properly conducting your lien sale is not as easy as it sounds. Many state self-storage statutes have inconsistencies that make it difficult, even if you follow the statute closely. For example, several require that you send a notice to the tenant via Certified Mail, including a demand for payment within X number of days of notice receipt. This is easier if delivery is presumed in your state statute; however, delivery is not presumed in most states when a notice is mailed. It’s almost impossible to make a demand for payment within any number of days after delivery because you don’t know when or if delivery actually happens.

There are other problems with your state statutes that are more subtle. For example, your statute may have a presumption of delivery for your Certified Mail notice, but can you really presume it delivered when you get it back marked “undeliverable”?

There are also problems simply because many statutes are creatures of the ’70s and ’80s and have not been modernized. How can you run an ad in a newspaper of general circulation in a city or town in which the facility is located when the local newspaper has folded? All of these issues come together to make lien sales more difficult to conduct, and courts seem to be losing patience with self-storage operators who make mistakes in their sales.

Please note: Courts seem to be awarding the largest verdicts for sales that shouldn’t have occurred at all, such as when the tenant was current at the time of sale. But there are decisions creeping up, such as in the Cook v. Public Storage case, in which the tenant was delinquent and should have been sold, but the operator made mistakes in the sale and a large verdict was awarded.

So how do you protect yourself? A lien sale or threat of a lien sale is still the strongest and, in some cases, only option for dealing with a tenant who isn’t paying rent. While this article can’t address state-by-state concerns, here are several general suggestions:

• Make sure your tenant is actually in default.
• Know, understand and follow the technical requirements of your statute.
• Have insurance to protect against any errors.
• Know what kind of sale you can have.

Tenant Default

In both of the $1 million-plus cases for wrongful sale cited above, the tenant was not actually in default. In one case, the tenant had pre-paid rent for a year; in the other, the facility manager misassigned the tenant’s name to a unit not occupied by the tenant. There have been countless other cases in which the tenant wasn’t actually in default when his unit was sold. Those are the stories that grab the court’s and media’s attention and tend to vilify the self-storage industry.

Self-storage lien-sale statutes are remarkably similar to Uniform Commercial Code liens a bank might use to protect its equipment. But because ours is an industry that deals more with consumers than businesses, it’s easier to paint a negative picture of storage-related litigation. People care more about wrongfully sold wedding photos than a wrongfully sold forklift.

What should we take from the two recent large verdicts for wrongful sale? It seems courts have no tolerance for an operator’s mistake in selling the belongings of someone who isn’t in default. Plus, they are finding ways to make sure operators are punished handsomely for these errors, including awarding punitive damages well in excess of the value of the property sold.

While there’s no absolute way to guarantee you’re right about every defaulted unit you sell, you should have a solid set of crosschecks that ensures the unit you’re selling belongs to the tenant, and the tenant is actually in default, not a victim of a misapplied payment or other error on your part.

Know Your Statute

Many operators don’t regularly review their state statutes regarding lien sales. You can’t conduct a lien sale safely without frequently reviewing your statute. Almost every default presents some wrinkle that, read in light of the statute, might change your view of the statute or how to handle the default.

Your best option is to have your attorney prepare a checklist and timeline summarizing your statute’s various stipulations to properly comply with the law. These should include your company’s policies such as reaching out to the tenant to settle the debt before a lien sale. Many people think they can simply follow the procedure from one state, but this is incorrect. While many statutes are similar, they’re not identical.

As an example, take the notice that generally must be sent by you to the tenant before exercising your lien-sale rights. Many operators refer to this as the “certified letter.” Most statutes that require some type of certified letter have some similarities, like requiring the letter to include the owner or manager’s contact information, and the date, time and place of sale. However, there are differences in the 49 statutes.

In some states, the letter must be delivered via general mail and Certified Mail. Some statutes require certified or personal delivery, others registered mail. Some require that you mail the notice to any alternate contact in the rental agreement, to all lien holders, or even the Department of Taxation before it is valid.

Some statutes require that the notice include an itemized statement of all charges due, others do not. Some require you include all charges you expect to incur up to the date of sale, others do not.

The failure to review and understand your statute may cause you to use a notice that’s not appropriate or correct for your state, thereby creating a potential defect. If you’re going to perform lien sales, you have to do them properly to avoid the possibility of someone raising a defense or claim of improper sale that could result in a judgment against you.

Insurance

You should not conduct any lien sales unless you have self-storage insurance coverage for wrongful sale and disposal. This is specialty insurance not included in your liability policy―it’s a rider you have to purchase.

Given the recent large judgments for wrongful sales, you should buy as much coverage as you can possibly afford. Even if you have not wrongfully sold, most of these policies provide a defense to the claim. Do not think that because you have insurance you can be sloppy about your sales. The insurance company will likely review your lien-sale process before issuing coverage.

Know the Kind of Sale You Can Have

Common questions asked by operators include: Do I need an auctioneer? Can I sell it myself? Do I have to sell at the facility? Can I sell it in lots, or do I have to sell it piecemeal? Can I have a garage-style sale instead of a true lien sale? The answer to these questions is found in your state self-storage statute.

If your statute refers to an auction, you must conduct an auction with a licensed auctioneer, or somebody else acceptable under the auctioneer statute in your state. This information is never found in your self-storage statute. The requirements of an auction are always found in the auctioneer statute in your state.

Do you have to sell the items at your facility? This is almost always required by your statute. There are some exceptions, such as if the facility is not suitable, the statute may require the sale be conducted at the closest appropriate location. Those who allow a dealer to pack up everything and take it to an auction house 20 miles away to combine with other property for sale are likely violating their state statute.

Can the items be sold in piecemeal or lots? Generally, the statute doesn’t speak to this, and you can sell either way. However, holding a garage-style sale is usually not acceptable because you’re setting a price for the items rather than letting the free market set their price or value.

If you’re uncomfortable about how you’re conducting lien sales or if this article raises questions or concerns, you need to get answers before your next sale. Consult with your attorney, your state self-storage association or other experts in the industry. Learn how to correctly conduct lien sales or you many find yourself on the losing end of a wrongful-sale lawsuit.

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 of Katz Greenberger & Norton LLP in Cincinnati and is licensed to practice in Kentucky and Ohio. Mr. Greenberger primarily represents the owners and operators of commercial real estate, including self-storage owners and operators. To reach him, call 513.721.5151; visit www.selfstoragelegal.com.