I am often asked about what type of legal entity an owner should set up to operate a self storage business. The answer depends on the situation of the owner/operator. I would not recommend anyone operate a self storage business as a sole proprietor because of the uncapped exposure to personal liability. It is a relatively uncomplicated task to form a limited liability company but you will need an operating agreement. There are some tax and filing obligations that accompany the formation of an entity. For high value properties, it sometimes makes sense for the land and improvements to be owned by one entity and the business to be owned by another. This type of relationship necessitates a master lease because the rents are flowing into the operating entity and it is the land owning entity which is primarily liable for financing. You should implement a legal structure that gives you liability protection but is not so complicated that it creates administrative headaches for you. Please note that, if you have financing in place, you cannot change ownership entities without pre-approval from your lender.
Under Section 1911 of the Self-Service Storage Facility Act, commonly known as the Lien Law, a “good faith” purchaser of property sold at a sale takes the property free of any rights of persons against whom the lien was valid (the occupant of the unit whose property was sold at auction), despite noncompliance by the storage facility owner with the requirements of that section. What is good faith? Think of “good faith” as the absence of the intent to defraud. So, if a purchaser were to conspire with the self storage owner (the owner of the facility) to purchase goods at an improperly noticed auction, that purchaser would not qualify for the protection of Section 1911 and the occupant of the unit can make a claim against the purchaser. A “good faith” purchaser does qualify for Section 1911 protection and the occupant of the unit whose property was sold has no right to make a claim against the party that bought the contents at a sale.
Many and probably most storage leases contain a “waiver of subrogation” clause. So what is subrogation? It is basically the right of a party who has paid a claim to recover against the at-fault party. A simple example would be the situation where an insurance company pays a claim to an insured and then to recover, sues the party that caused the damage. Basically, the insurance company stands in the shoes of the insured and collects against the party that did the harm. Imagine an insurance claim where an apartment building owner made a claim against his insurance company for water damage to an apartment. The insurance company pays the claim to the apartment building owner but then sues the upstairs tenant who left the water running, causing it to overflow.
A typical storage lease clause would look something like this:
WAIVER OF SUBROGATION: Occupant agrees to waive its rights and the rights of its insurance company for any claim for loss or damages against Owner.
In the clause, the Occupant is agreeing that if the tenant whose contents are harmed recovers a claim against its own insurance company, the insurance company will not sue the self storage facility owner to recover what it paid out as a claim.
An Auction Price Greater Than What is Owed (Including Costs) Does Not Benefit a Self Storage Operator
The TV show “Storage Wars” has greatly increased interest in sales and auctions conducted at self storage facilities. Interesting characters and active bidding makes the show a lot of fun to watch. But who gets the money? Does the storage facility owner get to keep the money? Do you have to turn any of the money over to the tenant? What if a unit owner owes $500 (including unpaid rent plus costs and expenses associated with collection) and the contents are sold for $2,500? The Pennsylvania lien law is clear on this point and provides:
§1913. Excess balance from sale
In the event of a sale under this section, the owner may satisfy his lien from the proceeds of the sale but shall hold the balance, if any, for delivery on demand to the occupant. If the occupant does not claim the balance of the proceeds within six months of the date of the sale, such balance shall be deemed to be abandoned and the owner shall pay such balance to the Secretary of Revenue who shall receive, hold and dispose of same in accordance with Article XIII.1 of the act of April 9, 1929 (P.L. 343, No. 176), known as “The Fiscal Code.”
So what does all that mean? It means that any monies paid over and above the amount owed the self storage operator (unpaid rents plus costs and expenses associated with collection) is owed to the unit tenant. In our example, the self storage operator cannot pay itself more than $500 and has to hold the $2,000 initially for the benefit of the unit owner. That begs a couple of questions. First, do you have to track down the occupant? I think the answer to that is no, but you do have to hold the money. Second, what do you do with the money? After six months, you pay it to the Commonwealth of Pennsylvania Secretary of Revenue as abandoned. The bottom line is that driving up the price at auction over and above what the self storage operator can legally claim is not a windfall for the operator.
“Easement” is a term you may have come across in acquiring or developing a self storage facility. What is an easement? In short, an easement is an interest in land which is in the possession of another person. The longer definition is as follows:
An easement is an interest in land in the possession of another which,
(a) entitles the owner of such interest to a limited use or enjoyment of the land in which the interest exists;
(b) entitles him to protection as against third persons from interference in such use or enjoyment;
(c) is not subject to the will of the possessor of the land;
(d) is not a normal incident of the possession of any land possessed by the owner of the interest, and
(e) is capable of creation by conveyance.
Why would someone have an easement? If someone needs to cross your property to access their property or if you need to cross someone else’s property to get to your property, that is an easement. Easements can be created and they can be extinguished. In certain circumstances they can arise by necessity for example in the case of a land locked parcel. They need to be taken seriously. If you are acquiring a parcel, make sure you know whether it is subject to any easements.
Who bears the “risk of loss” during storage? The short answer is the occupant of the unit. The exception is for loss due to the negligence of the owner of the self storage facility.
Okay, so what is negligence? Negligence is a legal concept that assigns responsibility for the breach of a duty owed to someone where that breach results in damages. So, if the roof leaks from failure to maintain it properly and ruins stored contents, who do you think is responsible? I would argue that is the responsibility of the self storage facility owner, because the owner had a duty to properly maintain the roof. The failure to adequately maintain the roof was, in fact, a breach of a duty owed to the tenant. If unit contents were harmed as a result, the breach of the duty resulted in damages and the self storage operator is responsible.
On the other hand, if stored items are harmed for any reason other than the negligence of the owner, the risk of loss is on the occupant. To read the language of the Pennsylvania lien law statute that covers this issue, take a look at §1914.
The Pennsylvania Self-Service Storage Facility Act provides that a self-service storage facility owner has a lien on stored property for rent, labor or other charges, present or future, incurred for storing the property, and for expenses necessary for its preservation or expenses reasonably incurred in its sale or other disposition. The lien attaches as of the date the property is placed in storage at the self-storage facility.
Why is having a lien important? Well, it’s important because it makes the facility owner a secured as opposed to an unsecured party. A simple example of secured debt is a mortgage. If you don’t pay your mortgage, the bank can foreclose on your home. The home is the collateral for the debt. If the borrower fails to make mortgage payments, the bank has security. A simple example of unsecured debt is credit card debt. There is no collateral to protect a credit card company although that changes once the debt is reduced to a judgment.
The lien takes priority over any other lien or security interest except for a lien that existed before the date the property was placed in storage. So, if someone places in storage a piece of equipment that was financed and therefore has a secured debt against it already, the self storage lien is behind that first lien in terms of priority. Why is that important? Well, because you have to honor the lien that is in first position. The moral of the story is that you have to be careful not to sell property that has a lien against it. We will talk later about how you can check for liens.
I recently presented the PA lien law statute to the members of the PASSA at their owners and managers conference in Harrisburg. The review of the statute led to in-depth discussions in which I was able to assist the owners with their legal issues. Please review the statute below and contact me with any questions or concerns you may have at email@example.com.
Welcome to the Legal Issues Affecting the Self Storage Industry blog! The purpose of the blog will be to share information about legal issues in the self storage industry. I have represented storage operators in Pennsylvaniafor close to twenty years and have run into a myriad of legal issues on the acquisition and operations side. The vast majority of the questions I receive from operators concern default enforcement, conducting sales and compliance with the lien law. If you are acquiring or selling a self storage facility or have any questions about lien enforcement, do not hesitate to contact me at firstname.lastname@example.org.