An Acquisition Nightmare: How to Clean Up the Books and Get Back on Track

by Mallory Scott, TSSA

Picture this—you just purchased an existing facility that was previously owned and operated by someone else. You assumed the facility was a well-oiled machine with pristine documentation and sound business practices, but instead you inherited an operational mess that needs some cleanup. Although you may have walked into an acquisition nightmare, it’s never too late to get your facility back on track. Let’s review some scenarios.

TENANTS ON A NON-TSSA LEASE—HOW TO MAKE THE SWITCH

A tenant is delinquent and you discovered that the previous owner used a non-TSSA lease. If your tenants have signed a non-TSSA lease that may or may not have the proper statutory language for foreclosure and Texas-specific laws affecting self storage, you should consider having your tenants sign a TSSA lease. If you do not want to switch your existing tenants to a new lease, you should contact your attorney to review your current rental agreement to ensure that you can (legally) pursue appropriate remedies should a tenant stop paying rent.

To switch to the TSSA lease, you can use TSSA form BUS-4, “Notice of Switch from Non-TSSA Lease to the TSSA Lease,” which can be found in the Members Only section of txssa.org. You can either: 1) Mail the notice, along with a paper copy of the TSSA lease and a return envelope to your tenants’ last known address on file so that they can sign the new lease and return it; 2) Contact your tenants via phone, email or mailed notice requesting that they come into your office to sign a new lease; or 3) If you are subscribed to the TSSA e-Lease, depending on your management software’s functionality, you may be able to email your tenants new leases to e-sign and return electronically.

If your tenants refuse to come in and sign or return a signed copy of the TSSA rental agreement, then you can send them a notice with a gentle reminder stating that if they do not sign a new lease by a specified date, that you will be forced to terminate their contract and they will have to move out. If they still do not sign a new lease, you can hand deliver, mail or email TSSA form E-1, “15-day Notice of Termination of Storage Space Rental Agreement.” Please note: If you do not have a lease, you should give your tenant a minimum of 30 days to vacate the space. You can still use form E-1, but you'll need to extend the date of move out to 30 days instead of 15 days. This is obviously a last-ditch effort as you don’t want to have to ask a paying tenant to move, but sometimes that is your only option. You do not want to end up in a situation where your tenant becomes delinquent, but you can’t exercise your lien because you don’t have the required statutory language in your lease.

NO LEASE, NO NAME, WHAT TO DO?

After an acquisition, you may find a unit that is locked, but you are not receiving rent and have no record of who is leasing the space.

The practical solution is to follow a set of steps to find out who the tenant is and to document a case for “abandonment” by the tenant. TSSA legal counsel recommends: 1) Ask previous owners, managers, employees or tenants who rent near the unit if they know who the tenant is. 2) After at least two months of delinquency, overlock the space and leave a notice in an all-weather sleeve attached to the door asking the tenant to come to your office to discuss the matter. 3) If the tenant shows up, ask them to sign a lease and pay any back rent. If the tenant refuses to pay back rent, you can hand-deliver TSSA form E-2, “Notice to Vacate Storage Space for Non-Payment of Rent or Other Sums.” Since the tenant does not have a written lease, you should alter the form to remove any references to a “written” lease, as it is technically an “oral” agreement. Refer to the Eviction tab in the TSSA Goldbook© for step-by-step eviction instructions. 4) If the tenant does not show up to your office after you have left a notice on the door of the unit, you can cut the lock to take an inventory of the contents. You should either have a witness with you or record yourself cutting the lock and entering the space. If you find any clues as to the identity or contact information for the tenant, you should pursue them. 5) If you don’t find any clues (such as documents or mail), overlock the unit and keep it locked for at least three months. As a practical matter, you can move and store the contents in another unit with other property as long as it doesn’t get mixed up. 6) At the end of three months, if no one has come to claim the property, it can be considered “abandoned” property under the common law definition, in TSSA legal counsel’s opinion. 7) You can now donate the contents to a charitable organization. Obtain a receipt. Please note: If the contents appear to have great value, consult an attorney prior to donating to charity.

SOME TENANTS HAVEN’T PAID IN MONTHS OR YEARS

You have three options…foreclosure, eviction or abandonment.

Let’s start with the safest and simplest remedy, which is foreclosure. There is one question you MUST ask yourself before starting the foreclosure process—do I have a signed lease with the required statutory lien language for this tenant? The TSSA lease (all versions) contains the necessary lien language, which consists of 1) a reference to Chapter 59 of the Texas Property Code, 2) a reference to Lessor’s priority lien on the contents of the property to secure unpaid fees by your tenant, and 3) the text in conspicuous bold or underlined font. If you have a non-TSSA lease and are uncertain if your rental agreement fits all the criteria, you should consult with an attorney prior to proceeding with foreclosure. If you use a TSSA lease or are sure that your non-TSSA lease checks all the legal boxes, then you can follow the step-by-step foreclosure procedure, which is detailed in a legal article in the TSSA Goldbook.

If you find out that your non-TSSA lease does not contain the required statutory lien language, then a viable option is eviction. The eviction process starts with notifying the tenant that you are terminating their contract. You can use TSSA form E-1, “15-day Notice of Termination of Storage Space Rental Agreement.” (See previous note about 30 days notice for a non-TSSA lease.) Hopefully the tenant will move out and you can rent the unit to a new paying tenant. However, it doesn’t always work out that way. So, if the tenant does not move out within the allotted timeframe, you can send one final notice for holding over. You can use TSSA form E-4, “Notice to Vacate Storage Space for Holding Over.” If the tenant does not move out after the three-day notice expires, then the next step is to file for an eviction at your local justice court. To learn more about eviction, read the legal article in the TSSA Goldbook that details the step-by-step eviction process.

There are several other situations when eviction is the best option including, but not limited to:

*You don’t have a signed rental agreement for a tenant who stopped paying rent.
*You have a tenant sleeping in their unit.
*You have a paying tenant who is engaging in illegal activity or causing trouble at your facility.

ABANDONMENT

Abandonment is another option if you have a tenant who is severely delinquent. Using this option hinges on whether the tenant is willing to communicate with you or not. If the tenant is responsive, you can send them TSSA form BUS-23, “Authorization and/or Release by Tenant.” You’ll want to check box number five, which states that by signing the form, the tenant is abandoning all contents to you/your facility. If the tenant is willing to sign this form, you can then dispose of the contents of the unit as you see fit. You can donate the items, sell them in your next auction (without having to pay for the newspaper ad, etc.), sell them at a garage sale or have them hauled off and thrown in the trash.

There is another type of abandonment, which is detailed in Paragraph 26 of the TSSA lease. The tenant has “abandoned” the storage space if ALL the following occur: a) the tenant has given written or oral move-out notice; b) the lock has been removed by someone other than the Lessor; and c) the move-out date or termination date must have expired. The tenant has also “abandoned” the storage space if ALL the following occur: a) the tenant has not paid rent or other sums due; b) the lock has been removed by the Lessor during the foreclosure process; and c) the space contains nothing of value to the ordinary person. This one can be tricky. Something you might not see as having value may hold great value to the tenant, so proceed with caution in deeming contents as having no value to the ordinary person. A good practice is to ask yourself if you would donate the items to Goodwill or The Salvation Army. If the answer is yes, then there is some value you are assigning the contents, but if the answer is no (i.e., the contents are clearly “junk” and have no value, sentimental or otherwise), there is probably minimal risk involved in considering the items abandoned. The next step is to send the tenant TSSA form MISC-3, “Notice of Abandonment,” and give them a reasonable amount of time to come and retrieve the contents. If the contents are not removed by the allotted timeframe, then you can dispose of them as you see fit.

RAISING RENT

It is typical for new owners to raise the rent and other fees after acquiring a previously owned facility. The previous owner may have been charging the same amount for rent since 1982, and in that case, it’s just a good business practice to raise the rent to an amount that is reasonable within your local market. The previous owner may have a minimal late fee that you feel should be increased. They may have also not been assigning fees to all the items listed in paragraph 4 of the TSSA lease. You may not think you need a fee for having to judicially evict or a charge per hour for cleaning or removing contents left behind today, but you may one day. To increase the rent and/or other fees, you can use TSSA form BUS-5, “Notice of Rental Increase and Switch to the Most Recent TSSA Lease.” You MUST give at least 30-days notice to your tenants prior to raising the rent or other fees. If you are using the TSSA lease the tenant does not have to sign or accept a new lease for these changes to take effect.

PREVIOUS OWNER WASN’T COLLECTING SALES TAX

You should be collecting sales tax on the rent for applicable spaces, including those that contain vehicles and trailers, whether the space is designated for vehicles or just a regular self-storage unit. The exception to this rule is a trailer with a boat on it—you should NOT collect sales tax on a trailer if it has a boat on it. You should also be charging sales tax on personal property sold at your facility, such as boxes, locks, keys, packing materials, etc. If the previous owner was not collecting sales tax, it’s quite simple to get back on track. Apply for a sales tax permit with the state Comptroller at https://comptroller.texas.gov/taxes/permit. You can call (800) 525-5555 with questions. For more detailed information on sales tax, see the legal articles in the TSSA Goldbook.

DOCUMENTATION ISSUES

Maybe the previous owner or manager just didn’t keep good records, or maybe there were even some questionable business practices going on behind the scenes. Cleaning up messy documentation can be a process, but it will be well worth the work because precise records can help you stay out of legal trouble.

Signed Lease, Wrong Unit Number
Scenario: You have a signed lease, but then discover that the unit number is incorrect. It’s possible that when the tenant originally signed the lease, they moved into the correct unit, but then moved into a different unit later on and the lease was not updated. You have a few options: 1) Contact the tenant and ask that they come to the office to amend the current lease. You can change the unit number on the lease and have the tenant initial and date next to the changes, and then have a facility representative initial and date next to the changes as well; 2) Complete TSSA form MISC-7, “Rental Agreement for Change in Unit(s)”, and put the signed form in the tenant’s file; or 3) Execute a new lease. Any of these options will work just fine, so choose the one that works best for you. If you are using the TSSA e-Lease, executing a new lease and having the tenant e-sign is probably the safest option.

Multiple Units on One Lease
Scenario: You notice that there are multiple units listed on a single lease. This can actually work in your favor. If the tenant stops paying on one of the units, but continues to pay on the others, you can deny access to all the units listed on the lease until the balance on the account is paid in full. Sometimes tenants will stop paying on a unit containing items that aren’t of great value but continue to pay on units that they need to access frequently. Because all units are listed on one lease, any amount left unpaid is considered a balance on the account, and until paid in full, access can be denied, and the foreclosure process can begin.

There are endless scenarios that you can face when purchasing a facility that has been run by someone else. The main thing to remember is that there are resources available to you through TSSA.

 

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