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Warehouse occupancy across the United States hit an all-time high of 96.7% in 2022, and is projected to hit 96% by the end of 2023, according to the research department of Prologis, Inc., a San Francisco-based real estate investment trust that invests in logistics facilities.

More than 400 million square feet of warehouse space was purchased in both 2021 and 2022, 85% higher than 2020. Occupancy rates will continue to outpace new construction of warehouse development, which Prologis projects to hit a seven-year low of 175 million square feet in 2023.

As there is increased competition to procure warehouse space amidst the growth of e-commerce services and prolonged supply-chain issues, warehouse owners/managers/operators need to be aware of the more common legal considerations and top legal checklist items to consider when drafting, reviewing, and negotiating warehouse contracts.

It is crucial to have a clear understanding of the legal considerations related to your management services and logistical requirements. By addressing these issues proactively, you can avoid potential disputes and costly litigation in the future. Some of the more pertinent legal issues that our law firm encounters when it comes to warehouse contracts and the transportation industry revolve around liens, insurance, and indemnification.

Liens: Understanding the types of liens that are in place is imperative. This helps avoid any disputes and allows parties to negotiate the proper scope of liens that are favorable to their needs. One of the most common liens covering goods in a warehouse is created under state UCC laws, and is known generally as a warehouseman’s lien. Many states have similar UCC laws, and by default, the scope of the warehouseman’s lien that is created by statute is typically limited.

In Tennessee, for example, § 7-209 of the state UCC provides that “a warehouse has a lien against the bailor on the goods covered by a warehouse receipt or storage agreement or on the proceeds thereof in its possession… in relation to the goods…” That is, by default the warehouseman has a “specific” lien covering charges and fees relating only to the freight that is currently in the warehouse. This type of specific lien can be insufficient where the warehouse in question is operated as a fulfillment center. In that scenario, the goods are constantly being replenished as inventory is sold, and the goods associated with specific storage charges have often left the building by the time the customer gets billed, leaving no goods in the warehouseman’s possession to impose a specific lien upon. In effect, a specific lien is wholly ineffective as a safeguard against financial losses by the time a customer becomes delinquent in their payments.

To avoid this particular issue, the parties can create a “general” lien by contract, which at a high level means the warehouseman could use any of the customer’s freight currently in its possession to satisfy charges even if those charges relate specifically to items that have already left the warehouse. Again, this underscores the importance of being familiar with the types of liens that apply by default and those that can be created by contract.

Trucking companies and warehouse owners, managers, and operators should understand which liens exist by default and which should be expanded by contract. Warehousing contracts and intake documentations should then be tailored to best suit their particular needs.

Insurance and Limitations of Liability: Another essential contract topic when working with a warehousing or fulfillment provider is insurance as it relates to overall limitation of liability. The key is to ensure that the parties understand where the liability resides, and how to effectively shift and mitigate risk.

Consider, for example, a warehouse-friendly contract that limits the warehouseman’s liability except where the damages are caused by the warehouse’s own negligence, and further limits the warehouseman’s overall liability to a set dollar amount. Alternatively, consider a more owner-friendly contract that simply states that the warehouseman is responsible for all damage except those caused by the owner’s negligence.

From there, identifying the risk exposure is only half of the equation. Once the parties determine where the risk exists, that risk can be effectively mitigated through insurance. And this brings the focus back to the terms of the contract. Specifically, if a contract has properly shifted the risk of loss away from the warehouse and onto the depositor, the contract should also require the depositor to obtain insurance covering that risk and naming the warehouseman as additional insured. This way, the parties can avoid unnecessary disputes over an uninsured loss.

While there is a different business case for each set of circumstances, these somewhat oversimplified examples illustrate how contract provisions can determine which party bears the bulk of the risk. Properly identifying those nuances can be critical to effectively mitigating risk.

Indemnification: Indemnification is another critical area in warehousing agreements. Limitation of liability is generally considered when allocating risk between the contracting parties, where indemnification primarily deals with risk involving third parties. For example, a contract may state that the depositor will indemnify the warehouseman if the warehouseman gets blamed by a third party for something the depositor did. Warehouses and warehouse owners need to pay close attention to the details of indemnification clauses, which identify and allocate the risks and potential liabilities parties pass onto each other.

 Warehouse owners and fulfillment center operators should take as many preventative measures as possible when entering into warehouse contracts and working through the complex, myriad world of state and federal regulations affecting the transportation industry.

Protect your company’s interests by familiarizing yourself and negotiating favorable terms related to liability, indemnification, and limitation of liability.

About Rob Breunig: Adams and Reese Partner Rob Breunig is a middle market M&A and finance attorney with an emphasis on serving as strategic counsel to transportation and alcohol businesses in their transactions, corporate matters, and other legal representation needs. Rob serves as outside general counsel for Nashville, regional, and national transportation companies, including trucks, jets, motor carriers, and air carriers. He drafts and negotiates transportation agreements between air carriers, motor carriers, shippers, freight forwarders, and third-party logistics providers. He also advises aviation clients on the entire spectrum of aircraft finance and corporate services, including taxation, transactional, and regulatory compliance issues. In addition, he assists clients in warehousing contracts, management services, and logistical needs, including contract drafting, review, and negotiation.

About Taylor Brooks: Adams and Reese Nashville Office Associate Taylor Brooks has a diverse practice advising clients with transactional legal work in public finance and economic development. She assists clients involved in complex financings, including local government projects, professional sports facilities, and multifamily housing developments. She is also a member of the firm’s Intersection of Business and Government practice team. Prior to joining the Adams and Reese team, Taylor was a research assistant at Vanderbilt University. She earned her J.D. at Vanderbilt University Law School, and a B.S. in Psychology and General Business from the University of Alabama.