Article

Self-Storage & The Law

We live in a social climate in which a person can successfully sue a fast food company for serving coffee that it too hot. Coffee…too hot.

If ever a self-storage owner, operator or manager was looking for motivation to learn more about the law, his or her legal rights and how the law can affect our industry, the above example should do the trick. If, in our country's increasingly litigation-minded culture, a company can be brought in to a courtroom for making hot coffee, do you think your business is completely immune to such incidents?

Although, to my knowledge, no one has brought a lawsuit against a self-storage facility for providing units that were too secure, or providing customer service that was too helpful, the members of our industry are certainly not strangers to legal action. Unfortunately, customer legal complaints, both valid and questionable, are essentially an unavoidable part of doing business. However, the more you know about the laws that affect your business and the legal rights of yourself, your employees and your customers, the less likely you will be to fall victim to lawsuits of any kind. In this spirit, to help further your self-storage legal expertise, we at the Mini-Storage Messenger have brought together three of the most respected and knowledgeable self-storage attorneys to answer the most pressing legal questions facing this industry. Here are our participants:

Scott I. Zucker is a partner in the Atlanta law firm of Shapiro, Fussell, Wedge, Smotherman and Martin, LLP, and specializes in self-storage law and construction litigation.

Vin A. Fichter practices law in Woodland Hills, California in the areas of real estate law and civil litigation. He is a member of the Western Region Board of Directors of the Self Storage Association and represents numerous self-storage companies.

Kenneth M. Piken Esq., is senior partner of Piken & Associates, a law firm specializing in commercial litigation and real estate transactions.

Messenger: There has been some talk and concern regarding the fragility of the self-storage lien and late fees. What does the future hold for these important business elements?

Zucker: I think the concept of a landlord's lien, whereby a self-storage facility maintains a secured interest over its tenants' stored property, is well entrenched in the law and would be difficult to overturn. The lien law has withstood a number of legal challenges in the past and I believe the courts have answered, at least parenthetically, that a self-storage lien, as based upon commercial law, is an appropriate right for a landlord to have and the foreclosure and sale of a tenant's goods, even without a court hearing, follows acceptable due process. I certainly don't see the lien rights of storage owners changing in the near future.

Late fees are another story. We're starting to see some recent challenges by state legislatures claiming that self-storage late fees are excessive. Even though such legislation has so far failed, there is a danger that we might see some more legislation attempting to limit the amount of these fees.

Fichter: First, it must be clear what we are talking about here. A "late fee" is a charge separate and apart, and in addition to, the charges for sending the legal notices to the tenant required by the procedures of the state's applicable Self-Service Storage Facility Act. The late fee is supposed to be a reimbursement to the self-storage company for internal administrative costs and expenses incurred by the facility solely because the tenant is late in paying the rent and other related charges for services provided by the facility (utilities or whatever). My experience as an attorney representing self-storage companies with facilities in California is that I have yet to see a situation in which one of my clients has charged an outrageous late fee. The law is gradually getting to the point at which late fees should bear a reasonable relation to the cost incurred by the storage facility in "carrying" the tenant's delinquent account. If they do not, someone is going to cry "excessive." Who will do this? The tenant, lawyers filing suit on behalf of the tenant, a district attorney or state attorney general or even a legislature.

Of course, what is a "reasonable" fee s the crux of the matter and is open to dispute. A late fee calculated as percentage of the delinquent rent is immediately suspect, however, for the tenant might well argue that it costs the facility no more to carry on its books a delinquency of, say $10,000, than one for $100. Are the costs the same? Each facility owner must ask him or herself what extra costs and expenses he or she incurs or pays out as a direct result of the tenant's being delinquent. A collection letter? Does it cost the facility more to mail out a collection letter for $10,000 then one for $100? Invoicing? If the facility does not invoice the tenant except when the tenant is delinquent, then a reasonable additional charge for administrative time, paper, etc. would be justified. But if invoices go out to all tenants, whether they're delinquent or not, can an extra charge be justified if there is no additional cost incurred by the facility? Probably not. However, special manual handling of such invoices can justify such a charge.

The safest policy is to charge a flat amount as a late fee, and one which covers all the extra costs which a facility incurs merely because a tenant is delinquent in payment of rent. Under no circumstances should the charge be called "interest" for this subjects the storage company to compliance with strict federal, and, in most states, state disclosure requirements regarding the effective rate, annual rate, etc., and other requirements. The Rental Agreement should state that the tenant will be charged a late fee to reimburse the facility for all costs and expenses which are necessitated by the tenant's failure to pay the monthly rent (and other charges per the agreement) by the due date each month.

Piken: The fragility of the self-service storage lien, particularly in New York, does not seem to be a great issue. Most recently, the new appellate term cases have come down unanimously reversing the decision of a lower court as well as dismissing a complaint for conversation. This now makes a third or fourth substantial appellate case in the state of New York upholding the validity of the lien and/or the validity of limitations of liability. There are no decisions against mini-storage entities, to my knowledge, at any appellate level in New York.

As for late fees, as much of the country is aware, there is substantial litigation going on as to usurious late fees being charged in class action suits. Most recently, the New York Self Service Storage Association revamped its uniform occupancy agreement in part in an attempt in an attempt to have a uniform system of late charges geared particularly to the actual administrative expenses rather than penalties or exorbitant, if not usurious, interest rates. The New York Self Service Storage Association, for which I act as general counsel, is very proactive in protecting both the lien and late fees. Provided all state associations and national associations and national associations safeguard these important business practices in the future.

Messenger: The new, often talked about, innovation of portable self-storage has been a hot topic of discussion in the mini-storage industry. What legal concerns go along with this new direction in storage?

Zucker: First and foremost, a self-storage owner must recognize that portable storage is not the same as self-storage, even though the customer may lock the unit and keep the key. Once the facility takes care, custody and control of the box during its shipment and storage at the facility, they become the bailee of that property. That is vastly different from the legal relationship and responsibilities of a self-storage owner with conventional self-storage. I think the convenience factor of offering portable storage to customers is wonderful, but their needs to be a clear understanding that portable storage is not the same as self-storage. The same rental agreements cannot be used, different insurance must be considered, and possibly certain state regulations may become involved to the extent that portable storage falls within the definition of "moving and storage."

Fitcher: storage companies which have adopted this creative method of serving their customers have attempted to cram what many in the industry think is a square peg into a round hole self-storage, by lobbying for approval of this method as being included within the definition of "self-service storage" in states' laws. Truly, the only part of the process that is "self-service" is that the customer loads the container him or herself. The rest of the process simply does not fit into the concept of self-storage. When the storage company picks up the filled container, that ends the self-service part of the process. Once the storage facility takes possession of the container, the legal relationship is that of a "bailment" of the container and the property within it. Bailment law involves a whole different set of rights and responsibilities than self-storage. The facility is now responsible for the safety of the container and the property within, whereas in a fixed location storage, normally the tenant is responsible for the safety of the property within. Calling a rose a chrysanthemum…you know the punchline.

Rather than trying to hacksaw its way into the self-storage definition, that part of the industry which uses the portable container service for customers would better serve the industry if it would simply lobby for new legislation dealing solely with that concept in the context of bailment law. Then, it would not muddy water for the true self-storage part of the industry.

Piken: Portable self-storage has been a hot topic of late, although it has been utilized for many years in the New York metropolitan region. The history of the "portable vault" traditionally goes back to the days of cruise ships where a locker was dropped off at a passenger's home, the recipient loaded his or her clothing, and it was picked up and brought to his or her stateroom. Question has arisen, although not to my knowledge in the courts, as to whether a bailment exists. Public warehousing has been utilizing what's been known as pallet boxes for many years and there has never been a question that these palate boxes constitute custody and control, and therefore a bailment. Certain safeguards can be put in and an argument can and should be made that they are analogous to any other mini-storage is the rental of real property. I therefore, have personal concern about the future of the legality of portable storage other than a true mini-storage transaction.

Messenger: What suggestions do you have for a mini-storage professional concerned and lessening his or her legal liability?

Zucker: I think the key to lessening legal liability in the operation of a self-storage facility in the operation of a self-storage facility primarily falls into three areas. The first involves the quality of the rental agreement being used. It is imperative that the rental agreement contains language confirming that the self-storage facility is not a bailee of the tenant's property and does not take care, custody and control of the tenant's good. There must also be a provision in the agreement whereby the tenant is obligated to obtain insurance to protect his or her property and that the facility owner does not maintain insurance for the tenant's contents. Based upon strength of the nonbailment and insurance provisions of the lease agreement, most tenant loss or damage claims can be defeated. The second area involves the facility operator's knowledge and understanding of his or her state's self-storage act. Only if a facility operator understands the rules and procedures of foreclosure and sale can he or she protect the business from future claims arising from the wrongful sale of a tenant's goods. The last area concerns the maintenance of the facility. If a facility is well maintained, a mini-storage professional can better protect him or herself from claims arising from the loss or damage to tenant's goods, as well as personal injury which may occur at the facility.

Fichter: This is very broad topic on which I could expound for hours. Happily for the reader, I will not. I offer this most critical suggestion: If the state in which the facility does business has a self-storage act, and most now do, follow that act religiously. And, above all, do not dispose of any personal property belonging to a tenant unless you have perfected a statutory lien against the property belonging to a tenant unless you have perfected and have followed all of the steps and procedures required by the law. Do not assume anything. If you are not sure what might happen under given set of circumstances, spend a little money to seek advice from a qualified attorney knowledgeable in the area of self-storage. It will be money well spent. Also, I would strongly urge any facility that can afford it, to purchase insurance covering mistakes such as "wrongful disposition" of tenants' property and negligent damage to, or loss of, tenants' property.

Piken: As stated above, the New York Self Service Storage Association has recently revamped its occupancy agreement, giving the mini-storage facility operators a variety of choices on a limitation of liability. The appellate courts in New York have upheld two different types limitation of liability. The first of which is per square foot. The second is the lump sum limitation of liability. Being aware of court decisions, current trends in the law and availing one's self of all options depending upon the necessity of proper business practices, would significantly lessen legal liability.

Messenger: In your opinion, what is the most significant legal issue facing the mini-storage industry?

Zucker: I think one of the most significant legal issues facing the self-storage industry is the growth of lawsuits against facilities where claims include emotional distress and sentimental loss. I think these types of claims have developed as an intangible result of the consolidation of the self-storage industry through REITs and the overall growth of the industry in general. Self-storage facilities are no longer considered small mom-and-pop operations. Many are now run by large corporations, which makes them bigger targets for tenant claims. I think, generally, that is why most facility operations have moved toward increasing their insurance coverages on customer goods and wrongful sale policies.

Fichter: The 1997 six-figure judgment against a San Diego self-storage company that turned over the contents of a delinquent tenant's storage space to an imposter and failed to follow the state's lien sale procedure law, is just the tip of the Titanic's iceberg. I think we are going to see more and more plaintiff attorneys jumping on the bandwagon, bringing lawsuits against self-storage companies for violating their state's self-service storage facility act. I see example after example in which, for the sake of expediency and to save some small expenses, a self-storage company will discard the personal property of a tenant without following the easy "safe harbor" procedures in the state's law. This is sheer folly and eventually will land the mini-storage facility in a lawsuit-one which might even affect the financial ability of the facility to survive. Plaintiff attorneys have a way of smelling money, and will take such cases on contingency if there is "gold in them thar hills." Then the mini-storage tenant has no risk because he or she pays nothing if the attorney does not recover anything. Don't be penny-wise and pound-foolish. Follow the Self-Storage Act. It's easy.

Piken: If you asked me that same question a year or two ago, I would have told you that the most litigious area of law that I had seen was change of address/proper notification. This is easily re-vamped by including a strong provision in an occupancy agreement stating that no change of address is valid unless it is acknowledged in writing by the facility (i.e. the equivalent of a bank receipt). Most recently, insurance issues seem to be popping up. I'm referring to issues such as declination of coverage and failure to provide legal defense due to the inadequacy and lack of talented of brokers who are truly knowledgeable in the industry. While there are some brokers who are knowledgeable in our industry, failure to have adequate and proper insurance, whether it be sale and disposal, or in some instances warehouseman's legal liability, could be one of the most damaging aspects to a self-storage facility.

Personal injury claims are also on the rise, as our society becomes more and more litigious and under most state laws there is no ability to contact the way liability for personal injury. I recently wrote an article for the May 1998 issue of the Mini-Storage Messenger magazine claiming a recent trend in the law which is yet to take full force nationwide, whereby the question of having the superior lien could be at issue. Losing the superior lien could, for all intents and purposes, take away whatever equity you may have in the property, rendering any auction sale virtually moot. I don't believe there is one single most significant issue facing the industry. However, safeguarding against the items enumerated above in the totality is paramount in protecting the significant investment in a mini-storage facility.

Kenneth M. Piken, ESQ, is a practicing attorney and senior partner in the New York based law firm of Kenneth Piken & Associates. Mr. Piken was General Counsel for the New York Self Storage Association for over 15 years, has lectured throughout the country, and has written numerous self-storage-related articles for major trade publications.

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This article is provided courtesy of Kenneth J. Piken with the permission of Mini-Storage Messenger magazine. © MiniCo, Inc. All Rights Reserved. It is not intended for further reproduction/distribution without the exclusive permission of MiniCo, Inc. www.minico.com

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