05/02/2017

Two Spaces: One Lease

By Richard Marmor, Esq.
Legal & Legislative Chair

Although this is something I have talked about in my workshops, a recent article in one of our trade magazines suggests that I also write about it to avoid any confusion.

Some 40 years ago, a draft self-storage lien statute circulated around the country and became the model for the lien laws that were adopted in various states. This line in that draft was incorporated into most of the states’ versions, including Arizona's:

“Leased space” means the storage space at the self-storage facility that is rented to an occupant pursuant to a rental agreement.

Notice that it is written in the singular, the storage space. This gave rise to a practice common in our industry of putting every space that is rented under its own, individual lease. This, in turn, has created a special class of problems unique to multi-space renters. Some examples:

• A two-space tenant decides he no longer needs two spaces, so he moves all the things he wants to keep into space 101, and all the junk he no longer cares about into space 102. He then informs you, “I no longer want the stuff in space 102. I’m abandoning it. You can sell it.” He just made it your problem, and you have little leverage to prevent it. (Besides, here in Arizona we no longer accept abandonments - see 1, below)
• A two-space tenant is in good standing in space 101, but is in default in space 102. As a result of the default, you over-lock space 102 and lock the tenant out of the gate. However, space 101, which is not in default, is under a separate lease agreement with you. But you have locked the tenant out of the gate. In effect, you are now in default under space 101's lease for denying the tenant access to the space. 
• A tenant rents space 101 from you, and later adds space 102. Your rental policy granted him a multi-space rent discount on space 102. Later the tenant advises you that he is vacating space 101. Besides vacating him from space 101, you have to remember to re-adjust the rent on space 102 to remove the multi-space discount. (This problem becomes that much more complex the more spaces the tenant has.)
• A tenant rents two spaces from you for a rent of $100 apiece. I don’t know why tenants do this, but we’ve all experienced it: instead of sending you the $200 due, he sends some odd amount like $160. What should you do?
  • Apply $100 to space 101, putting it into good standing, and apply the remaining $60 to space 102, putting it into default?
  • Split the money and apply $80 to each space, putting both into default?

In either case, some space ends up in default. Who put the tenant into that situation, you or the tenant? Clearly, lease language addressing apportionment of payments between multiple spaces would serve well here. But in the absence of such a provision you could be in trouble.  A case can be made that you created the default by electing the manner in which the payment was applied.

Recognizing these problems, in 2010, when AZSA successfully got our Arizona lien statute modernized, the problematic line in the law was changed to:

“Leased space” means the storage space or spaces at the self-storage facility that are rented to an occupant pursuant to a rental agreement. [emphasis added]

Now the definition applies to both the singular or plural. In practical terms, that means that multiple spaces can be rented under a single lease document. The “leased space” designated on the lease now reads “101 & 102.” The total rent due is $200, so that regardless of the number of spaces rented, the tenant has only one account with you (see 2, below).  Now consider the same problem situations:

• The two-space tenant consolidates the junk he no longer wants into 102 and seeks to abandon it. If he stops paying rent on it, he is jeopardizing space 101 which is under the same lease and account. You have plenty of leverage to force the tenant to vacate the space instead.
• Likewise, the tenant cannot end up with one unit in good standing and the other in default. It’s all or nothing, both over-locked or not, total gate lock-out or not.
• When a multi-space tenant vacates spaces, thereby removing not only the rent on the vacated space, but multi-space discounts as well, there is no need to remember to adjust the rest of the tenant’s accounts, as he only has the one account with you encompassing all the spaces. You are automatically considering all the rents that will be due.
• The total rent due is $200 on the single account. Sending $160 is a default on the whole account, period.

In other words, none of the problems arise. Life just became simpler.

How to do it

Suppose the tenant has rented space 101 for $100/month and comes to you seeking a second, similar space. You have two options. You could— 

1. Fire up your software and issue a new lease showing both spaces 101 and 102 on it as the “leased space” or “unit number,” for a total rent of $200, or
2. You could take out the lease for space 101, pencil in “& 102" next to where is says "101," draw a line through the old rent of $100 and change it to $200, and then both you and the tenant initial the changes.

Legally, there is no difference (see 3, below).

Confusion

In a recent article appearing in the periodical Self-Storage NOW! (see 4, below), writer David Lucas quotes attorney Scott Zucker in recommending that any time a tenant rents a space, including when adding additional spaces, you should always issue a new lease. At bottom, their logic is that the regimentation of going through the formal lease issuance process better assures accuracy in terms of entering correct space numbers and rent amounts for the many benefits accuracy confers.

That does not preclude, however, putting multiple spaces under one lease as I recommend. In effect, all that suggests is a rejection of the hand-modification approach “b,” above, as the means of documenting the transaction in the interest of accuracy. That’s fine; I certainly advocate accuracy, although accuracy is part of your job description, regardless of the methodology.

Later in the article, one storage operator implies that one lease per space makes auditing the facility easier. Perhaps, but the one-lease approach solves a bevy of day-to-day problems. Sacrificing that to simplify a once-a-year task is not worth the trade-off in my view. Besides, a simple piece of paper in the space 102 file that says “Rented with space 101" is actually better. When auditing, it explains why space 102 may show a lower, non-standard rent due to a multi-space discount.

Cross-Default Provisions

A cross-default provision is still a good thing to have in your lease, e.g.:

If Occupant has multiple leases with Operator, a default under any one of them constitutes a debt owed and a default under all of them.

That’s certainly better than nothing. It solves some of the problems, but not all. For example, it fails to address the discounted rent adjustment problem. The one-lease-one-account solution addresses all the issues.

And for the record, the AZSA standardized lease has a cross default provision – of course.

Notes:

1. See "Abandoned Isn't Abandoned" in the Members Area under Legal & Legislative Resources.
2. There would now be only one late fee, but it would be twice as much, since it would be calculated against the total, combined rent. Arizona's "safe harbor" rule for late fees is the greater of $10 or 20% of the monthly rent.
3. A recent caller who had received a new lease completed in red ink asked me if that was legal. Ink colors make no difference.
4. "Sorry, Wrong Number, Why Tenants Should Sign New Leases for New Units"; Self-Storage Now!; MiniCo, Inc.; first quarter 2017.

Richard Marmor is a self-storage consultant, facility owner and former facility operator in the Phoenix area. He is also an AZSA board member.

[This article deals with a law related subject at a general level and is not intended for you to rely on. You should consult a lawyer before making a final decision in a situation involving any legal issue.]