Pandemic Lien Sale Restrictions: Going Forward After Commercial Eviction Bans

Posted by Poppy Behrens on Sep 23, 2020 12:00:00 AM

The self-storage industry has not gone through the COVID-19 crisis unscathed, especially in regions where moratoriums on lien sales have prevented operators from evicting non-paying tenants to free up those units. The right to conduct lien sales was hard-won in the industry; and in many states, this is an operator’s only remedy for non-payment. As we enter into fall, some self-storage professionals are uncertain how the restrictions might play out for the remainder of 2020 and beyond.

Scott Zucker, an expert in self-storage law with Atlanta, Ga.-based Weissmann Zucker Euster Morochnik & Garber P.C., explains that a number of states issued moratoriums on evictions and mortgage foreclosures in the spring when stay-at-home orders and shut-downs left many Americans unable to work. Although primarily directed at protecting residential tenants, some orders also included commercial tenancies, under which self-storage is included.

“Since self-storage lien sales are primarily non-judicial, most of these restrictions do not impact the rights of self-storage operators to enforce their lien rights on tenants that fail to pay their rent,” Zucker says. “However, there are a handful of states and a number of local municipalities (cities and counties) that have issued executive orders that would include restrictions on self-storage liens.”

Not all states have been affected, so in some areas lien sales have proceeded as usual. Zucker says it’s important for operators to carefully review their specific state and local orders to make sure that they have the right to proceed with all of their usual collection efforts on non-paying tenants. “There are areas in the country, like California, Oregon, North Carolina, and Massachusetts, that are specific areas of concern and operators should delay their sales until they have considered these orders and, in some cases, waited for them to expire before continuing their enforcement actions,” Zucker says.

An Unprecedented Challenge
Some self-storage associations in states that were not under specific orders restricting lien sales took a proactive approach anyway. Richard Marmor, chair of the Legal and Legislative Committee of the Arizona Self-Storage Association, says they took this approach early on when the Arizona governor issued moratoriums on commercial evictions, even though they probably didn’t apply to self-storage.

“We did this to avoid being singled out as an industry,” Marmor explains. “The association suggested to our members that they stop lien sales, rent increases, and late fees.” The association also stayed in contact with the governor’s office to let them know what stance the industry was taking. Marmor says self-storage operators in Arizona predominantly complied with the suggestion with only a few outliers.

The unique situation created by the pandemic left many operators uncertain how to proceed. Similar freezes on evictions and late fees have occurred during states of emergency in various locales; however, these have affected self-storage owners for only a short period. It’s the length of time these eviction moratoriums have lasted, the broad scope of the current orders, and the unknown future that has been perplexing for some.

Jeffery Greenberger, a self-storage attorney with Cincinnati, Ohio-based Greenberger & Brewer LLP, says part of the problem is that the lien sale bans are overly broad. He believes the wording of some orders seems to deny operators the right to evict tenants for any reason, even if they are engaging in dangerous activities. Greenberger says these restrictions hit the industry from several directions. “You can’t get rid of anyone, you can’t sell, you can’t charge late fees, you can’t raise rents,” he says. “I respected that when we had the stay-at-home orders, but now people are going out and can go back to work at a certain level.”

Letting Them Go
Although self-storage lien sales are an operator’s only recourse in some areas, they recover only a fraction of the unpaid rent the facility has lost. “Auctions are a necessary evil, but not an income source,” Marmor says. “Operators are lucky to get 50 cents on the dollar.”

Greenberger agrees. “No operator ever wants to do a lien sale. It’s how we get our space back when somebody doesn’t pay,” he says. “Lien sales are our last, worst hope. No operator makes money on them.” Nonetheless, Greenberger acknowledges that it’s a cherished remedy because it’s a non-court-supervised process. “We’re one of the few industries that still have that. It’s something we take seriously, because if we screw it up, state governments could come along and say you can’t do that anymore because you’re not doing it right.”

With that said, in today’s unusual circumstances, most experts agree that it’s best to forego lien sales while bans on commercial evictions remain in place. Marmor says the Arizona association just doesn’t think it’s worth the risk of repercussions for the operator or worth drawing attention to the industry, which could result in more restrictions on lien sales. “Just give them back their stuff and free up the unit,” he recommends. He also advises working with tenants on past-due rent if their hardship is COVID-related. If you can get them to pay 50 cents on the dollar, great; but if you can’t get anything, just let them go.”

Greenberger also thinks that’s the best course of action, adding that it is important to require that they sign a release. “You don’t want them to go home and say, ‘They forced me out under duress, and when I got home, all my stuff was moldy and ruined,’ or that something was missing,” he says. “Without holding the evidence anymore, you can’t prove anything.”

Greenberger suggests operators try to collect some part of what is owed or work out a payment plan, but don’t let it become a sticking point. “For optics, for politics, and just to have some inventory, let them go,” he says. “Let’s do good in the industry and make it a policy: If you can’t pay right now and you’ve communicated with us, we’ll let you go for cheap or maybe nothing. We’d rather have the inventory back because there are a lot of people who do need storage right now.”

Proceed With Caution
For those who have been able to start lien processes again after a few months of restrictions, Greenberger sees most operators taking it slowly. “We don’t see any eviction avalanches in self-storage,” he says. “The number of lien sales aren’t five times what they were in February. Owners are being very conservative about who’s going to lien sales. The people who are being sold now are the ones who have been completely non-communicative.”

Zucker recommends that operators take some precautions if they decide to proceed with lien sales until the industry can return to business as usual. “In the interim we are recommending that operators’ lien notices include COVID-19 language so that tenants who have been impacted by the pandemic can reach out to the facility to resolve their debt and arrange to vacate their unit in lieu of a lien sale,” he says. “The type of language that might be added would be something like: ‘If you are unable to pay your account in full because you were financially impacted by the COVID-19 pandemic, please contact us to discuss your situation. Please note that in order to assist you, it will be necessary for you to provide us with medical confirmation if you or a family member had the virus or employment records if you became unemployed.’”

Although the industry has been affected by the recent restrictions, Greenberger notes that there has been steady demand and a number of new facilities were coming on the market before the pandemic. “There’s still pent-up demand,” he says. “It may have dropped during the pandemic, but there may be pent-up demand due to the natural attrition that wasn’t happening. I think facilities were pretty full before the pandemic and have stayed pretty full during.”

Greenberger doesn’t believe most facilities have a high percentage of units in default status. “Close to what they have on average anyway, but it’s been in limbo,” he says. “I don’t think this is a massive disaster for the storage industry.” Putting a ban on lien sales might have looked good on paper for policymakers but, in his opinion, “All it did was empower people who wanted something for nothing to not pay.”

As to whether these moratoriums might have given some municipalities a foothold to begin chipping away at the industry’s hard-won rights to the lien sale remedy, Greenberger hopes that isn’t the case. “That’s a real possibility,” he says. “We’ve worked so hard to move forward, and something like this could erode the ground under our feet.”

Marmor can’t predict what might happen going forward. “No one knows what’s going to happen in October or November,” he says. “If it’s temporary, if it’s for a few months, operators whose facilities are otherwise stable can recover from that. If it lasts several more months, that might be another story. We’ll just have to wait and see, and we’ll advise our members based on the circumstances.”