It is crucial that a self-storage owner takes all the appropriate steps when advised that a tenant is bankrupt. Handling this matter properly will ensure that the owner is not in violation of bankruptcy law and can proceed in his/her efforts to collect the unpaid debt. What follows are the steps a self-storage owner should take upon notification of a tenant’s bankruptcy and possible strategies to recover the debt or simply make the occupied unit available for rent.
STEP 1 - STOP THE SALE
If the facility is contemplating, or in the process of, a foreclosure sale, all sale efforts must immediately cease. This includes any pre-foreclosure notices, placing any ads and, of course, selling the tenant’s property. Even though the sale process may be halted, the facility retains its right to continue to charge ongoing rent.
STEP 2- CONTACT THE DEBTOR’S ATTORNEY AND/OR THE BANKRUPTCY TRUSTEE
The contact information for the above-referenced individuals is listed on the bankruptcy petition. The objective of this initial contact is to determine the intent of the tenant. The tenant may choose to stay or leave at this juncture. If they leave, the facility cannot demand payment, but must file a proof of claim for its unpaid rent (assuming assets exist to pay the rent). The debtor can ask the bankruptcy court to allow it to assume the contract. This is called assuming an “executory contract.” If the debtor assumes the contract, the monthly rent gets paid while the case is pending, and the outstanding past due rent must get paid to get the debtor out of default. This situation moves the self-storage owner to the front line of priorities. Nonetheless, if the trustee does not believe that it will benefit the debtor to keep the property in storage, the trustee will reject the contract.
STEP 3- DEALING WITH THE COURTS
If the tenant does not vacate the space and refuses to pay its ongoing debt, it will be necessary to get the court involved. Action through the Court could involve some of the following:
Relief From Stay or Adequate Protection
A creditor may request a “Relief from the Stay” which, if granted, would allow the facility operator to enforce its lien rights to foreclose on the property. A request for Relief from the Stay is filed with the Court in the form of a motion and requests that the Court “lift the stay.”
Certain creditors may be required to "turn over" property of the Debtor to the Bankruptcy Trustee. This allows the Bankruptcy Court to collect the assets of the Debtor in order to distribute those assets to all the creditors. If the Bankruptcy Court requires the storage facility to turn over the stored property to the Trustee, the storage facility will receive a Notice of the request in the form of a Motion for Turnover, which will require the storage facility’s response.
Another approach under a bankruptcy is to file a Motion with the Bankruptcy Court requesting that the Court order the Trustee to "abandon" the tenant's property. The Motion to the Court requesting such abandonment must demonstrate to the Court that this property is burdensome and of "inconsequential value and benefit" to the Debtor. If the Bankruptcy Trustee is ordered to, or chooses to, abandon the property, the property will be released to the storage facility, the stay will be lifted, and the property can be sold by the storage facility in an effort to recoup monies owed on the storage facility’s claim. If nothing else, an abandonment would allow the storage facility to remove the property from the storage facility to rent the space to new tenants and to begin obtaining new revenue.
This article was originally published in Self Storage Legal Monthly Minute by Scott Zucker, May 2022