Stay In The Know!

Lien Sale Legislative Updates

Lien sales are an unfortunate part of the self-storage industry that no one enjoys. Delinquent tenants lose their stored goods, which could include anything from irreplaceable family heirlooms to units chock-full of business tools. On the flip side, self-storage operators lose both income and time dealing with the lien sale process and un-rentable units. However, there is much more at stake than a few months of rent if an operator doesn’t follow the state statutes from start to finish: the possibility of a lawsuit.

Without a doubt, many tenants who lose their belongings via lien sales are unhappy about the situation. Some may even become so enraged that they seek revenge by filing a grievance against the facility, stating that the sale was invalid. While most tenant claims are not multi-million dollar claims, it is still in everyone’s best interest to avoid possible litigation at all costs.

Although organizations, such as the national and individual state self-storage associations, are attempting to modernize and standardize the statutes that govern lien sales, their beneficial progress is meaningless if operators do not acknowledge nor adhere to the updated laws. As a matter of fact, according to Jeffrey Greenberger, a partner in the Cincinnati, Ohio-based law firm Katz Greenberger & Norton, LLP, the claims that come across his desk “always come down to not understanding requirements of statutes or sloppiness”. For that reason, operators need to “be very well informed,” he says.

Scott Zucker, a partner in the Atlanta, Ga.-based law firm Weissmann Zucker Euster Morochnik P.C., concurs. “If people don’t keep up to date, they are at risk of not being in compliance,” he says. “There is an obligation for operators to use the available technology to reduce liability.”

The Seven Changes
The Self Storage Association (SSA) has a list of seven lien law changes that it’s trying to enact in every state. All of these changes are meant to create efficiencies for self-storage operators as well as establish industry standards. In addition, many of these changes can dramatically reduce the costs associated with lien sales.

1. Certified mail – This modification enables operators to send lien sale notices via verified mail instead of certified mail. The term “verified mail” refers to any method of mailing offered by the U.S. Postal Service that provides proof of mailing. It is less expensive and oftentimes more effective than certified mail.

• Email notifications – For even more cost savings, storage associations are requesting that email be permitted to send lien sale notifications. Of course, similar to verified mail, operators are still required to verify that the email notifications were delivered to the intended recipients through either read receipts or responses from the tenants.
  
  
• Newspaper advertising – In an effort to make lien sales more “commercially reasonable,” this initiative enables storage operators to publicize the auctions through online advertising instead of costly and repetitive newspaper advertisements.

What’s more, the archaic requirements for newspaper advertisements may not be very clear. “Most operators don’t realize that they may be running an ad in the wrong paper,” says Greenberger.

Despite the fact that the newspaper advertising requirement has always been somewhat ambiguous as there are many areas without local newspapers of general circulation, this is the legislative effort that’s being met with the most resistance. “Newspaper is the trickiest one,” says Mark Dunn, the SSA’s director of government regulations. “The costs hurt customers and operators, but there is lobbying against the provision.”

Online advertising has the potential to reach a larger number of potential bidders for the sales since operators within states that allow online advertising can list auction information on their facility websites, on auction websites, on newspaper websites, and on other publicly accessible websites. However, wherever you decide to advertise your auctions, be sure to provide that information to your tenants and include it in your rental agreements, leases, and facility signage.

• Towing rights – Also known as the “right to tow” law, this particular piece of legislation is intended to provide operators with the ability to have an abandoned motor vehicle or water craft removed from the premises. The amendment grants self-storage operators the right to remove them from units when rent is 60 days past due. Dunn states that the SSA is currently lobbying for a towing provision in Washington state that would include trailers on the list of towable vehicles.
  
  
• Value limitations – To help thwart exaggerated loss claims, this provision allows operators to set value limitations for stored items. Usually stated in the lease and/or rental agreements, this protects operators from paying more than the tenant’s contents are worth in the event of a loss or wrongful sale claim.

Greenberger reminds operators that “After a sale, you can’t prove the condition or value of the contents. All the evidence is gone.”    

• Late-fee requirements – Although this one varies by state, the initiative aims to establish set late fees of either a fixed amount or specified percentage of the rent amount. For example, New Jersey is $18 or 18 percent; the typical amount is $20 or 20 percent.
  
  
• Online auctions – While most state statutes have no mention of the Internet nor specify that a lien sale has to be “live”, therefore making online auctions permissible, the SSA and state storage associations are still seeking to amend the verbiage within the laws to ensure that online lien sales are legally sound.

Postal Problems
As mentioned earlier in the article, one of the SSA’s main legislative efforts focuses on the use of verified mail. Although verified mail is certainly more cost effective than certified mail, there are several items that require further explanation. For starters, Greenberger reminds operators that, as defined by the United States Postal Service (USPS) code, verified mail must be physically received by the post office. This means that it must be actually handed to an attendant of the U.S. Post Office in order to receive a stamped receipt.

“It must be taken to the post office,” says Greenberger. “You need proof that it left from the post office. Verified mail doesn’t eliminate the trip to the post office. It needs stamped.”

Greenberger also advises against simply handing your “verified” mail to the familiar mailman when he/she drops off your mail on their daily route. He asks, “What happens if they forget to stamp the mail?”

Without a doubt, lien sale notices must be handled with attentiveness. The same is true for address changes as delinquent tenants can claim that they never received the lien sale notices. Therefore, Greenberger recommends that self-storage operators be very strict about how an address is changed within the rental agreement.

“I’ve heard everything from the ridiculous to the sublime,” says Greenberger in regards to excuses used by tenants as to how they made their change of address known. From addresses handwritten on checks to new Hello Kitty address labels, he has heard enough excuses to write a book!

“Don’t rely on the yellow change-of-address labels either,” Greenberger adds. “It’s best to receive them in person.”

Online Auctions
Similar to eBay, online auctions serve as an operational tool to increase efficiency and profitability when selling delinquent storage units. Moreover, utilizing auction websites can lower the operational costs associated with lien sales as many provide marketing on behalf of the operators. “The recovery rate of bad debt is higher,” says Yehuda Leon Benghiat, president of iBid4Storage. This is true for two reasons. First of all, there are more online bidders to bid on the units. Bidding wars often ensue, which can dramatically increase the final sale price at the end of the online auction. In addition, facility operators can send links for the online auctions to delinquent tenants. This serves as a motivational tool, prompting tenants to pay their debt and terminate the auction.

“There has been no litigation yet concerning the use of online sales versus live sales,” says Zucker. “I think the reason you’re not seeing any pushback from online sales is because I’m seeing greater revenue derived from online sales. The tenant gets the benefit of excess proceeds from the sales and there’s a greater audience of bidders so the sale becomes more commercially reasonable because of a larger audience of online buyers.”

Benghiat adds that online auctions allow operators to have sales on an individual, per unit basis; therefore, facilities can re-rent units more quickly than a “live” auction where several units are auctioned off in one day to make paying for an auctioneer financially feasible.

While online auction websites offer numerous benefits, such as a streamlined bidding process away from the facility, operators must recognize that they are merely public platforms for the sales. In other words, it’s every operator’s responsibility to abide by their state’s lien sale laws.

“They are only an extension of the state statutes,” says Jim Grant, president of StorageTreasures.com. “You still have to follow the process and be aware of your state’s lien laws.”

One item that operators using auction websites must take into account is the fact that delinquent tenants have the right to pay their debts and claim their belongings at any time until the sale is final. This means that units may need to be pulled from the auction website.  

“A sale is not valid until the winning bidder shows up at the facility to pay,” Greenberger says. “So tenants still have time to recoup units. This can result in angry bidders.” Therefore, Greenberger suggests using an auction website that has clear and specific site rule for bidders.

“Read the operating rules with the online auction company,” he adds. “You have to agree to the terms. If they aren’t several pages long, don’t do business with them. They must match up with your state’s statutes.” 

Expert Advice
With any lien sale, live or virtual, operators must keep in mind that there are certain items that cannot be sold under any circumstance. There are four classes of protected property: firearms, alcohol, prescription drugs, and documents that include personal information such as financial or medical records.

Of course there are exceptions, and some states allow operators to legally dispose of these items. However, Casey Jones, CEO and lead auctioneer of Glendale, Ariz.-based BC Cole Auctioneers, recommends contacting the medical board, bar association, or other prevailing association within your state prior to any disposal.

“They may come retrieve those records,” says Jones. “Or they may want proof of the disposal. Be sure to document the destruction of documents.” He adds that this can be simply done by taking before and after photographs of the shredding of the documents.

Then there is the question of personal property. While there is no law requiring operators to keep photographs or other personal items, Jones says that you can ask bidders to return them as a courtesy. “Tenants only own those items till the auctioneer says ‘sold’, but I tell operators to hold those items for 30 days,” he adds. “However, 90 to 95 percent of the time no one comes to pick up the stuff.”

Seek Coverage
There’s no denying that lien sales are the most potentially dangerous aspect of the storage business. While every effort should be made to avoid unit auctions, at the end of the day, operators still need to cover their assets. Here are a few surefire ways to keep your self-storage facility in compliance with the state-specific lien laws:

• Hire an attorney. Long before you get served, it’s beneficial to have legal guidance available for your self-storage facility. “Don’t assume you know your statute that well,” Greenberger says. “Lawyers know terms, and statutes are loaded with little juicy terms.”

Because some terms are not clearly defined, all the words used within statutes must be read and deciphered very carefully to ensure compliance. For example, shall and may mean two completely different things.

“They can help you keep up with the changes,” says Zucker. “There are dangers for operators who have not updated their leases, lien documents, etc., to keep up with the current laws.”

• Purchase insurance. Another necessary form of protection is wrongful sale and disposal insurance coverage. Sold as a separate “rider” coverage, this insurance is worth the minimal monthly premium should a lawsuit arise.

“No one should ever sell a unit unless they have insurance to back up a sale,” says Greenberger. “If you don’t have enough, buy enough.”

According to MiniCo Insurance Agency, which offers limits of up to $1 million, sale and disposal policies provide coverage as well as legal defense for negligent acts arising from the lockout, sale, removal, or disposal of customers’ property when reclaiming rented space for which rental or other charges are delinquent or unpaid.

• Get active! One great way to stay abreast of the lien law changes taking place in your state is to join the SSA and your state self-storage association. The SSA and many state storage associations offer various legal membership benefits. For example, the SSA provides its members with access to its “Self Storage Legal Network,” a legal hotline service for obtaining accurate and reliable industry-related legal information. The SSA also distributes a bimonthly legal publication, Self Storage Legal Review, to its members. Moreover, the SSA and state storage associations are the ones lobbying for improved lien laws for you, the storage operators. Because their lobbying benefits your business, it’s in your best interest to support their legal efforts.

• Outsource your sales. Even with legal advice and a good game plan, the lien sale process can be an intimidating task. Thankfully there are services available for those who are not comfortable with the procedure or do not have the time to deal with lien sales. For starters, there are systems and programs such as Late2Lien and Self Storage Auction Pro that provide automation for the lien sale process based on your state’s statute.

In addition, licensed self-storage auctioneers have a vast amount of knowledge and can offer industry-specific guidance for smooth sales. “Hire a consultant who knows the laws,” says Jones. “It’s worth the money!”

Erica Shatzer is the editor of Mini-Storage Messenger, Self-Storage Now!, and Self-Storage Canada.