No matter how well a self-storage business seems to be going, there’s always a nagging fear in an operator’s mind about regulatory compliance. If it’s not the statutory laws that apply to our industry, then it’s whether a facility complies with the Americans With Disabilities Act. Owners worry about whether they’re meeting wage-and-hour regulations, and whether their tenant-insurance program meets state licensing requirements. Add to that the federal laws that protect military service members who rent self-storage, and concerns over whether your text messages are in violation of the Telephone Consumer Protection Act. Are you anxious yet?
We haven’t even discussed the enforceability of limitation-of-value provisions, contractual time limitations on tenants bringing lawsuits, the privacy of your tenants in response to government subpoenas, the legality of protection plans, or the threat of cyber-liability and tenant-identity theft. Then we still have the question of whether disputes should be handled through courts or via arbitration, and if your facility’s online advertising could be deemed deceptive. Let’s not forget the possibility that illegal activity could be occurring on your property. And you wonder why you have your lawyer on speed dial!
If I were to try to narrow that extremely long list to what may be the top legal threats to self-storage operators this year, I would point to these three:
- The risk of class actions relating to charges, leases and lien actions
- Liability arising from lack of compliance with new lien laws
- Claims involving tenant privacy, government rights and identity theft
Let’s look at each of these legal risks and how you can better protect your storage business against them.
Class-Action Lawsuits
Recently, we’ve seen a strong increase in class-action filings against self-storage operators. In fact, the top self-storage real estate investment trusts have all faced them in the last year.
A class actions is different from other lawsuits. It doesn’t involve a single plaintiff bringing an individual action against one corporate defendant. Instead, a “class” is assembled from similarly situated parties who all have “common” claims. It’s not surprising that class actions are starting to surface against self-storage operators; our industry is a perfect breeding ground for this type of litigation.
Let me explain. Every facility has a large number of tenants, each using the same lease, paying the same fees and charges, and being processed for lien under the same procedure. If a claim can be developed against a self-storage operator, a class can easily be determined based on the tenants who occupied the facility during the same period under which the alleged wrong occurred.
We’ve seen a significant number of cases being filed in New Jersey, essentially due to the interpretation of the consumer-protection law, known as the New Jersey Truth-in-Consumer Contract, Warranty and Notice Act. However, class actions against self-storage operators have also been filed recently in California and Florida. These lawsuits have focused on the issue of fairness to the customer, such as whether the contract provisions are clear and unambiguous, if the fees charged are reasonable, whether proper notices are being sent, and if denial of access is timely.
Class actions have also been brought to challenge protection plans and how revenue is shared in tenant-insurance programs. Fortunately, some of these claims have been defeated and others have been settled. But the advent of class-action litigation has only begun and more lawsuits are likely to arise.
Changing Lien Laws
Over the past decade, the effort made by the national and state self-storage associations to “modernize” the self-storage statutes in almost every state has benefitted the industry as a whole. Instead of having to send certified letters for lien notices, operators in many states now have the ability to use verified mail or e-mail for such notices. Similarly, rather than publishing advertisements of lien sales in printed newspapers, many states have adopted the use of online advertisements and sales.
In some states, legislators have permitted the enforcement of value limitations in rental agreements as well as the ability to tow cars and boats in lieu of conducting a lien sale. But with these changes, operators must be prepared to follow and comply with any additional steps, for example:
- Operators intending to use verified mail must obtain proof of sending.
- If sending lien notices via e-mail, operators must be prepared to obtain a verification of “delivery.”
- When using alternative methods of advertising the sale, operators should have a verifiable number of “independent bidders” to demonstrate the sale was commercially reasonable.
- If including value limitations in leases, operators need to make sure the language is clear and unambiguous.
- If self-storage operators intend to tow away cars and boats, they must send the requisite notice and also use legitimate licensed towers.
Even though you’ve been given all of these statutory enhancements, the burden remains to prove compliance with these rules to avoid liability to your tenants. Unfortunately, these types of statutory changes often occur quickly and without the full understanding of the businesses affected. In self-storage, especially when it comes to the self-help remedy of lien sales, it’s critical that you learn about your state laws and begin to implement the right procedures. Otherwise, there’s a great risk of lawsuits arising from failure to comply.
Tenant Privacy, Government Rights and Identity Theft
Concern over tenant privacy rights has existed for years. There have been numerous instances in which tenants have claimed identity theft arising from a business owner’s failure to protect their information, whether contained in hard files or on a computer. We’ve also witnessed cases in which government inspections of self-storage units have been challenged as illegal searches. All of these issues create growing liability for self-storage operators.
For example, what liability do you have if your online rental portal gets hacked, releasing tenant credit card and personal data? What risks do you have when the government demands access to a storage unit without a search warrant under the banner of “homeland security”?
These privacy and identity issues have started to appear more often in self-storage, increasing your risk of liability. The solution might simply be an increased investment in hardware and software to prevent outside hacking; but that doesn’t protect you from the criminal acts of your employees. Another solution could be insuring against the risk with an increase in general-liability and cyber-liability coverage. Regardless of the steps you take, you’re at risk of being caught up in these types of claims.
Are there other liability threats to facility owners? Of course. As owners of real estate and landlords renting space, you assume many legal risks. Yet those dangers are measured against the benefits of the income-producing business and real estate equity. Self-storage isn’t necessarily riskier than other commercial-property types. In fact, due to the lack of residential tenants, the overall liability may be less.
Even so, to safeguard your business, you should prepare yourself for these threats. Take a strong look at your business operation and insurance coverages, and ensure that you’re protected from all angles.
Scott Zucker is a partner in the law firm Weissmann Zucker Euster Morochnik P.C. in Atlanta, where he specializes in business litigation with an emphasis on real estate, landlord-tenant and construction law. He’s a speaker at industry events, author of “Legal Topics in Self Storage: A Sourcebook for Owners and Managers,” and a partner in the Self Storage Legal Network, a subscription-based legal service for storage owners and managers. To reach him, call 404.364.4626; e-mail scott@wzlegal.com; visit www.wzlegal.com.
