Articles
Three Alternatives to Lien Sales
When customers do not pay rent most self storage operators rely upon the state lien law as their primary collection tool. If the delinquency persists the tenant’s property is sold to satisfy the owner’s lien on rent and other charges. The lien remedy is an especially effective remedy when self storage operators lose contact with their customers. A lien sale is the only practical alternative when the delinquent tenant is no longer at the last known address, telephones are disconnected and e-mails are ignored.
Self storage operators also deal with delinquent customers that they continue to be in contact with. While a lien sale may be the best alternative when delinquent customers simply do not have the resources to pay back rent and charges; the lien remedy, however, is not the self storage operator’s only option. There are two problems with lien sales. The first is that the property left in a storage space may have little or no value and the sale may generate little or no revenue. The second is that there is always a risk to the operator when selling a customer’s property. Even when the storage operator does everything right, a tenant whose property has been sold can bring a suit for wrongful sale. While the owner may win, such suits can be costly and time consuming. Here are three strategies for resolving payment problems without sale.
Sale in Lieu of Foreclosure. A sale in lieu of foreclosure is the purchase of the property from the delinquent customer for all or a portion of the outstanding balance. A written sales form must be executed by the customer. Once the sale is completed the contents of the customer’s space belong to the storage operator and may be disposed of in anyway the operator chooses. For example, the contents could be included in the next lien sale, the operator could sell individual items on E-Bay or the owner can simply have the contents hauled away. The property belongs to the facility operator who is free to deal with it however he or she chooses.
The advantage of this method is that the delinquent tenant has voluntarily relinquished his interest in the property and there is little risk of subsequent litigation. It also gives the facility owner greater freedom of action in how to dispose of the contents than provided for in the state lien laws, which in most situations require the property to be sold at auction.
Come Get Your Property. Another option for the owner is to simply permit the delinquent customer to pick up his property. This is not something an owner would do early in the collection process. It is an offer that is made when all other collections efforts have failed and a sale seems likely. Facility owners should always keep in mind that the value of a self storage lien may be very little when the property is offered for sale. Permitting the customer to come pick up the property will not have a significant impact on revenue, will empty the space and eliminate the possibility of a subsequent wrongful sale lawsuit. The owner can do this without giving up his right to collect on the outstanding rent. This can be accomplished by sending the delinquent tenant a letter 15 days before the sale. The letter would offer the delinquent tenant the opportunity to pick up the property while specifically retaining the right to collect rent by any other remedy available by law. This could include a suit on the rent in small claims court or simply turning the rent claim over to a collection agency.
Even if the tenant does not respond to such an offer, it has a benefit to the storage operator. A jury or a judge will review the lien sale file when determining liability and damages. If included among documents is a copy of a letter to the delinquent tenant giving him the opportunity to pick up his property without paying the outstanding rent, it changes their reaction to the owner’s conduct. Even if there is a defect in the lien sale procedure, a jury will be less likely to believe the property had great value (Why didn’t he come get his stuff?) and unlikely to award punitive damages (the facility owner gave him the chance to get his property without paying anything). The owner’s position is better no matter what action the delinquent tenant takes.
Partial Payment and Leave. The last method is to simply offer a delinquent tenant the opportunity to make a partial payment on the rent and pick up his or her goods. This offer would typically be made when the debt is low and gives the facility owner the opportunity to avoid spending a lot of time on collections that may never be fruitful. A facility operator might give their delinquent customer a chance to pay 50% of what is owed provided the tenant immediately vacates the space. If the offer is accepted, revenue is realized; a lot of work preparing the space for sale is avoided; the space is returned to rentable status; and there is no chance of a wrongful sale lawsuit. Keep in mind that the owner only accepts the partial payment if the delinquent tenant vacates the space. This option is designed to end the relationship with the customer who is having payment problems.
All Lien Sales are Risky. All three options are designed to achieve a voluntary resolution of the delinquent customer’s payment problem and avoid the necessity of a lien sale. There is a litigation risk with every lien sale and these options eliminate that risk. While few self storage lien sales result in litigation, when something goes wrong the cost to the facility operator can be very high. On April 14, 2009, an Illinois jury returned a $755,000 verdict ($5,000 for the property and $750,000 for punitive damages) against a self storage operator for wrongful sale of property. The judge reduced the total verdict to $462,429. Such verdicts are rare but they do occur and are reason enough to avoid conducting lien sales when an alternative resolution is possible. Unfortunately, many delinquent tenants will not take advantage of such offers and the storage operator will still have to conduct a lien sale. However, it is an effort worth making if the facility owner is able to resolve payment problems without sale.
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