The New Jersey lien law is, in some respects, similar to PA’s lien law but the laws are not identical (the Act is entitled the Self-Storage Facility Act and the citation to the NJ statutes is 2A:44-187) In contrast to PA, NJ has a provision which permits facility owners to give notice to tenants by electronic mail. PA facility owners are currently pushing for the addition of that permission in the proposed legislation I wrote about in earlier blog entries. Clearly, giving Notice by electronic mail is easier than giving mailed notice. I was involved with the closure of one facility where we had a very difficult time tracking down some of the tenants because of changes of physical address. The ability to give notice by email is a benefit to facility owners.
When you are considering the purchase of a self storage facility one of the due diligence items you want to pay particular attention to is the rent roll. The rent roll should include security deposits. Make sure you are not being asked to give credit for uncollected old rents. In other words, old rent should not be treated as an asset. For example, if a tenant owes $1,000 for rent 30 days past due you should not be asked to give credit at closing for that amount. It should be deemed uncollectible. I usually account for the rent roll right on the HUD1 settlement sheet. The agreement of sale should include specific language regarding the treatment of uncollected rents. Also include language that the seller has no right to collect past due rent. You want to cut the cord and not have the seller trying to chase down old money. If you, as purchaser, are able to collect old rents after closing that should be a bonus and you should have no obligation to pass along those old rents to the seller. Make sure the agreement of sale is clear on this issue!
Senate Bill 799 unanimously passed through the House Consumer Affairs Committee on June 10, 2014. The bill amends the Self-Storage Facility Act to provide for notification of default via verified mail or electronic mail and shortens the amount of time an occupant needs to be in default before an owner may deny access and enter the space and remove personal property. The bill limits the liability of a facility owner for damage that occurs while towing a motor vehicle or watercraft and provides for contract terms limiting the value of property that may be stored in a self-storage facility.
Click here to view SB799 and the proposed changes to the lien law.
Senate Bill 799 which addresses lien laws for self storage facilities may go for a full vote by the Pennsylvania Senate as early as this week. The following message is posted on Senator Robert Robbins’ webpage to give you some background on SB 799:
In the near future, I will be introducing legislation that addresses Pennsylvania’s archaic lien laws for self storage facilities protecting both consumers and storage facility owners. These amendments to the “Self-Service Storage Facility Act” will revise the notice requirements relating to lien enforcement, address limitations on liability and allow modernization for both tenant notification and auction announcements.
More specifically, the bill establishes provisions that:
- Allow for first class mail and email notifications to tenants
- Address the issue of access by a tenant if a tenant is in default of payment
- Address the issues of towing if property is vehicle or watercraft
- Address limitations of value of contents
- If you have questions regarding this legislation, please contact my office at 7-1322.
Best practice is to follow the procedure set forth in the Act, which includes giving notice and exposing the contents to sale. I would warn against discarding property without exposing the contents to sale simply because you feel it is trash. I would advise against making a determination that the contents have no value, because that is a subjective opinion and the tenant will very likely claim otherwise (“there was a priceless lamp in there!”). If you find yourself holding junk, follow the Act, take your lumps and upgrade to a better tenant.
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.