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Perfecting Your Lien Sale Process

The right of non-judicial foreclosure and the sale of tenant's property is a unique attribute of the self storage business and provides a self storage owner or operator with a powerful tool in collecting its rent or recovering its storage space from a delinquent tenant. Yet, the right of repossession also comes with the tremendous responsibility of following the rules for that foreclosure. Although many states have self storage statutes which identify the foreclosure rights of a self storage owner, each statute must be reviewed depending on the state in which the property to be sold is located. All required notices must be sent, and all time periods for demand, notice, publication and sale must be observed. The failure to follow any of those requirements exposes the self storage facility to tremendous liability and explains why there is specific insurance in the self storage industry for "wrongful sales." The conservative approach to foreclosures is that if there are any questions relating to compliance with the statutory procedures, the self storage facility should redo the process. The slogan for foreclosure should be if there are any questions as to whether it’s been done right, do it again.

Again, under most state laws, a statute exists which provides the basic rules for responding to a tenant's delinquency. Regardless of the statute involved, each of the self storage statutes contains the same essential elements required for foreclosure which are: default; written notice to tenant of default; written notice to lien holders or other parties with secured interests in the stored property; time for a tenant to cure its default (pay the outstanding rent); and sale of the tenant's property.

Default. Default is usually defined within the state law, but commonly occurs at the time the tenant breaches its obligation to pay its rent. However, when the tenant “defaults” does not necessarily trigger the time when the foreclosure process begins. In many instances, the foreclosure process can only start when the tenant has been in default for thirty or forty days or even longer. Again, the time for beginning foreclosure will be based upon the terms of the specific state law where the facility is located. Although many storage owners proceed with over- locking a unit after five or ten days, many states specifically restrict a landlord from limiting the tenant's access to its space until the foreclosure process has actually started.

Notice. Following default, the storage owner must provide proper notice to the tenant of its default. The majority of state statutes simply require that one demand letter be sent to the tenant via certified mail, which notice allows a tenant to pay the outstanding rent within a certain time. Although a storage facility must send that required notice, it benefits the facility to go beyond the minimum requirements of the statute and attempt to give additional notice to the tenant prior to proceeding to foreclosure. It is recommended that facility managers take the time to make follow up phone calls, and even send additional letters, giving the tenant notice of the default. Certainly, after a limited time and effort, it may become obvious that further efforts are useless.

Under certain state statutes, notice must also be sent to any lien-holders or parties with a secured interest in the property stored in the unit. Some statutes do not require such notice at all; some statutes require such notice if the tenant discloses the lien-holders in its lease; and still other statutes require that a storage owner do a separate search to determine who the lien-holders may be by reviewing county records.

Time to Cure Default. Once the demand letter is sent regarding payment, the tenant is entitled, by statute, to a certain period of time in which to cure its default and pay the outstanding rent (in addition to its late charges).

One of the common questions from storage operators is when does the time to cure begin? Some states start the time period after the “mailing” of the demand letter, others after “receipt” of the demand letter. If the statute requires receipt of the certified mail letter, most statutes identify receipt as either the actual signing of the green card or the impossibility of delivery (usually after the third attempt by the post office). The best approach for a storage operator is to be as conservative as possible in determining when the time period begins to run for the tenant to repay its rent. That way, it cannot later be questioned by the Court on a claim for wrongful sale if the storage facility waited an additional amount of time before it sold the tenant's goods. Due to the questions surrounding the delivery of certified mail, it always makes sense to send the certified mail letter along with a letter for regular delivery. That way if the letter sent regular delivery is not returned, it will confirm that the original address sent for certified mail delivery was accurate.

Payment. Obviously, if a tenant pays the outstanding rent, the delinquency is cured and the default stops. Similarly, if the tenant fails to pay anything in response to the demand, the process continues toward sale. However, what is a storage operator to do regarding partial payments? A storage operator simply has two choices with respect to partial payments. It can either choose not to accept any partial payments, or it can accept partial payments, so long as certain conditions are met. A storage facility that accepts partial payments must do the following: (1) provide notice in the lease that acceptance of partial payments will not stop the sale of the tenant's goods; (2) if the tenant brings in a partial payment, the tenant should sign a form acknowledging that the payment will not stop the sale; (3) if a tenant mails in a partial payment, the facility should send a letter to the tenant confirming that the payment will not stop the sale. If a facility accepts partial payments, and it does not meet the above conditions, it should not sell the tenant's goods.

Publication. If a tenant has not paid the money due within the time allotted, the property is then scheduled for auction. However, prior to the auction occurring, most statutes require that a notice of the sale be published in a paper of general circulation in the area where the facility is located. Commonly, this publication must occur at least twice prior to the sale date. A facility should obtain some written verification from the paper that the notices have been published and should keep those confirmations in the tenant's file for later proof, if necessary.

Inspection and Inventory. Again, state laws differ on the requirement for self storage owners and operators to physically inspect and inventory a tenant's property prior to sale, rather than relying on the general description given by the tenant itself. Certainly, an owner that cuts a tenant's lock and inspects a tenant's goods assumes the risk that if the tenant reappears and pays the overdue rent prior to the sale that the tenant will complain that property has been taken or damaged. The best solution to this problem is to photograph or videotape the inspection before the unit is re-locked. If a physical inspection is not required by statute, a facility may want to weigh the benefits of such an inspection compared to the potential risks.

Auctions. How the auction is handled is an important part of a facility's foreclosure process. States differ on the mandatory use of licensed auctioneers to run storage auctions. Certainly, there are benefits to using an auctioneer service. For example, auctioneers who are good at their jobs will have bidders that follow them from sale to sale. With more traffic, those auctioneers may potentially get more dollars for each unit sold. Licensed auctioneers are also presumed to know their state's auction laws and, if an auction is found to be invalid, the facility may be able to pass on its liability to the auctioneer. The obvious disadvantage to using an auctioneer is that a facility will have to pay some percentage of the dollars recovered in the sale as a commission or some other amount as compensation for the auctioneer’s services which will lower the facility's bottom line recovery.

Bid Rules. Whether or not a facility uses an auctioneer, it is important that the bidders all follow uniform rules and understand those rules in bidding on the particular units. It is recommended that all of the bidders sign an attendance sheet in advance of the auction which includes their name, address and phone number. It is also important that each bidder sign a form which indicates their understanding of the rules of the auction relating to payment (i.e. cash or certified funds) and removal of the property (i.e. 48 hours or it is considered abandoned). Again, the bidders should be required to sign these rule forms to avoid later disputes by the bidders relating to the sale.

Finally, the highest bidder should be required to sign a winning bid form, showing that party's name, address, phone number, unit number and the dollar amount of the bid. This winning bid form should state that the bidder must remove the property within 48 hours. If the property is not removed within that time, the form should state that the property will be deemed abandoned and that the facility owner will be allowed to remove and dispose of the property without any claims of “trespass or conversion.” The only exception would be if a delay was approved in writing by the facility owner or its authorized representative prior to the termination of the 48-hour period. Certainly, the bidder may choose to become a tenant in the facility and hold the property in the unit for a certain period of time. If so, the bidder should be required to sign a lease as would any other tenant for the unit.

Bidder's Liability for Bad Sale. The Uniform Commercial Code, as well as many state storage statutes makes it quite clear that good faith purchasers (winning bidders) can not be held liable to tenants for any wrongful sales. A bidder is presumed to purchase the property in good faith unless there is some evidence to show that the bidder knew that the sale being held was wrongful. Although these laws make it clear that third party bidders cannot be held liable for good faith purchases, it will not prevent a disgruntled tenant from suing that purchaser in an effort to reclaim its property.

Commercially Reasonable Sale. In many jurisdictions, a facility owner is required to obtain "commercially reasonable" bids to ensure that a unit gets its best price for the type of property stored. Although not all state laws have this requirement, where valuable items are discovered in a storage unit (i.e., collectibles, jewels, antiques), it is prudent for a storage owner to attempt to have bidders interested and knowledgeable about such property appear at the auction so that the bidding for the property can match the reasonable market value of the property being sold. This benefits both the facility owner and the tenant where a bidder, who recognizes the true value of the property, will bid accordingly. If it is found that the facility owner did not seek to obtain commercially reasonable bids, it may be determined that the sale was improper and may expose the facility owner to liability for the difference in value received for the property.

Proceeds of the Sale. Certainly the goal of any foreclosure sale is to recoup as much money as possible so as to re-pay the facility for its lost rent. If an owner is still owed money after the sale, it should have a provision in its Lease Agreement allowing the owner the legal right to seek collection for the difference. If so, the facility would have the right to sue in a court (most commonly a small claims court) for the difference between the amount obtained in the auction sale and the amount owed under the rent.

Once a facility has obtained a judgment from the Magistrate Court, it can use a collection service or attorney to recover the dollars owed. Certainly, it is the best philosophy not to throw good money after bad and, depending on the amount of the judgment; it may not be worth it to go after the additional money. Depending on which state the facility is in, it may be wise to include an attorneys’ fees provision allowing you to collect attorneys’ fees for having to bring suit against a tenant to collect the remaining debt. However, be careful. Certain states enforce mutuality provisions which would allow the tenants to seek attorneys' fees against a facility where the tenant brings its own claim against the facility.

Although it is not too common, occasionally facility owners are left with surplus funds from the sale of a tenant's property. Commonly the state’s self storage facility law will dictate specifically what needs to be done with such proceeds. Many times a facility's first obligation is to contact the tenant concerning the excess funds. If the tenant does not claim the funds within a certain period of time (sometimes two years), some states will direct the facility owner to deposit the monies with its County Court or County Treasurer. In other states the facility owner is entitled to retain the funds unless the tenant makes a timely claim on the excess funds. It is important to learn and observe the state's laws concerning surplus funds (if not found under the self storage statute, they may be explained under the abandoned property section of the state law). A failure to abide by these laws may subject the facility, and its officers, to criminal sanctions.

Practical Advice. The best sale is no sale, but if you have to do it, do it right. Unfortunately, the majority of wrongful sale claims arise out of simple administerial mistakes as compared to intentional acts. Although a facility’s records may indicate non- payment or proper mailing of notices, the actual documents may indicate otherwise. In order to protect a facility from wrongful sale claims, it is vital to create a procedure at the facility to allow a second person, whether it be a manager or other facility representative, to review all aspects of a tenant's lease before the property is sold at auction. Once the property is sold a facility can not turn back the clock and recoup the tenant's property. A tenant whose unit has been disturbed will unlikely say that everything has been replaced in the unit. Instead, it is more likely that the few items that are claimed to be missing by the tenant will be antiques or jewelry or other items which will increase the value of the wrongful sale claim against the facility. Therefore, if a checklist is created which requires two parties to review the documents and approve the sale, errors in the paperwork and other missteps can hopefully be avoided. It may take additional time to perform this double-checking routine but it will save the facility in the long run.

It cannot be said enough that the goal of self storage is to rent units and not to sell property. Unless a facility owner or operator has tried all other avenues to resolve the outstanding balance with its tenant, the sale of the tenant's property should be the last resort. By recognizing the risks of foreclosing on tenant's property, a facility owner or operator should be more inclined to resolve delinquencies as conservatively as possible. The industry has witnessed an increase in tenant claims for wrongful sales over the past few years and based upon the risks involved, any sale of a tenant's property should be handled cautiously and carefully.