ViewPoint: What do you see as the most pressing legal issue currently facing the self-storage industry?

Posted by msmessenger on Jun 1, 2016 12:00:00 AM

Question: What do you see as the most pressing legal issue currently facing the self-storage industry?

David R. Bluestone – Sr. VP Operations Morningstar Properties

David R. Bluestone
Sr. VP Operations
Morningstar Properties

At Morningstar one of our company’s key principles is: ”We believe that the core driver of value and competitive differentiator in our business is the property manager.” Because of this principle and belief, we are carefully evaluating the pending rule changes regarding minimum wage and exempt employee status.

Property managers throughout the storage industry are routinely classified as exempt and paid a salary. To be considered exempt (from overtime), an employee must meet tests established in the FLSA (Fair Labor Standards Act). There are a number of tests and these include items such as the employee must be paid a salary above $23,600 per year; regularly supervises two or more employees; has management as their primary duty; interviews, selects, and trains employees; sets rates of pay and hours of work; plans budgets for work; and more as detailed in the FLSA. At Morningstar, like other storage owners and operators, property managers have been classified as exempt as they are truly the business managers of their locations. They have responsibility for budgeting, profit and loss, all personnel decisions, property maintenance, and local store marketing.

With that in mind, storage owners and operators should carefully evaluate how to address the upcoming rule changes going into effect in December. The most significant change is that the salary threshold of $23,600 is being increased to $47,476. Our goal is to continue to compensate our managers fairly and to make certain, government designation aside, that we and our managers continue to see this position as a “manager” and not just an hourly employee who watches and punches a clock. While the Federal Government may decree that by salary qualifier these employees are no longer managers, our goal is to make certain that they remain business managers and drivers of their sales and profitability. Over the upcoming months, our goal is to comply with the new regulations and to be able to properly compensate and retain our existing property managers and additionally to attract the best possible candidates for management at our new locations.

At the same time, we are mindful of state, and possible federal, legislation regarding minimum wage. Clearly there is a movement to increase the minimum wage, and many states have already acted in this area. Here again, we feel strongly that we need to pay fairly and possibly to “pay up” to get the kind of quality associates we need to meet the demands of our business and our customers. We have no trouble doing that as long as we feel that it maintains our position as a high value supplier.

All that said, we are mindful of overall wage and benefit costs. To us, it looks like we may be looking at increases in these costs. We just want to make certain that we are always recruiting, training, and retaining the best possible associates to give the highest level of customer service and help us meet our revenue and NOI goals.

Richard Marmor -Legal & Legislative Chair Arizona Self Storage Association (AZSA)

Richard Marmor
Legal & Legislative Chair
Arizona Self Storage Association (AZSA)

What do I feel is the most pressing legal issue currently facing the self-storage industry?Two words: outdated leases.

I often think that the last original lease was drafted during Roman times. If you read different self-storage leases, you find many to be startlingly similar, this owing to the fact that so many have been copied from other operators. I suppose the hope there is that if you steal the lease from an apparently solid operator, then you likely get a solid lease in the bargain. Maybe. The trouble is that even if that lease started out as solid, it was stolen years ago and hasn’t kept up with the times. Besides, you don’t know where your source stole his lease. This is one case, too, where, indeed, size doesn’t matter.

Storage operators loathe to pay attorneys to review their leases. It means legal fees plus potential reprinting or software implementation costs, so they ignore it.

But times change. New technologies emerge; legal cases won and lost have changed the landscape, yet the leases don’t keep pace.

Moreover, in recent years, there have been a flood of modernizations to old self-storage lien law statutes sweeping the country. Many of those updates require leases to feature specific language and/or disclosures on the part of both operators and tenants.

And here’s the catch: such modernizations generally appear in the statutes that grant the storage liens. Therefore, the right to a lien is dependent upon meeting those requirements. Fail to comply and the result is that the operator arguably has no lien rights.

The implications are enormous. An operator with an outdated lease could theoretically have no right to auction any unit, leaving that operator potentially liable for the full value of all the contents sold from every unit that was auctioned! 

That makes the cost of a lease legal review sound a lot more reasonable, doesn’t it? Some state associations have come to the rescue, publishing and periodically updating a standardized state lease form. “But,” you object, “there’s no way I could get all my tenants to sign new leases!”

There are ways around that, but that’s a subject for another article.

Marc M. Smith -President Shader Brothers Corp dba Personal Mini Storage

Marc M. Smith
Shader Brothers Corp dba Personal Mini Storage

The most pressing legal issue facing our industry is class action lawsuits. As the self-storage industry continues to mature, our increased visibility has resulted in greater scrutiny from regulators and other entities seeking to take advantage of our growth. There are many legal issues facing our sector including, but not limited to, a unique consumer-focused law in New Jersey which has led to class­-action lawsuits targeting self-storage as well as other industries with extensive contractual elements. The New Jersey cases have the potential to influence how contracts can be drafted for all self-storage operators in the Garden State.

Elsewhere, in California, another class-action suit has been referred to the state’s Supreme Court relating to a distinct business practice which is often referred to as a “protection plan” or “warranty program”.  Although the well-respected operator has already spent considerable time, energy, and money over the last few years, efforts that have thus-far been successful, the decision by the Supreme Court to hear the case has the potential to extend the legal battle and creates uncertainties as to the future of this type of program for both the operator and the program provider.

The above cases, along with others targeting tenant insurance sales practices, demonstrate that all operators, particularly those with a large footprint, can be targets of costly legal circumstances due to the copious number of consumers served and contracts involved. It also is an indication that public companies are not the only industry participants vulnerable to lawsuits with questionable legitimacy.

These issues also provide a “call­ to­ action” for all of us to engage in the process of advocating for the industry. The reality is that the self-storage industry has grown up and we are no longer “under the radar”. This year the Self Storage Association has established a Best Practices Committee to understand a number of issues and encourage appropriate business practices that can help participants within our sector avoid legal pitfalls which inevitably result from scale and success.