Contractual "Truncation"or Shortening of Statutes of Limitation
Contractual “Truncation” or Shortening of Statutes of Limitations
Classical music compositions are frequently based upon small musical ideas called motifs. After introducing a motif, the composer will repeat it with change, keeping the motif sufficiently recognizable to create continuity within the composition.
Composers use a variety of techniques to change motifs. A motif may become more complex, through adding notes (called elaboration). Or the composer may streamline it through omitting notes while maintaining its essence (simplification).
The motif may be transposed into a different key or start on a different note in the same key. The composer may turn the motif upside down on the staff (tonal inversion). Or it may be played backwards (retrograde). The motif also may be played with longer note values (augmentation) or shorter note values (diminution).
Finally, the composer may add notes to the end of the motif to make it longer (extension). Or the composer may omit the last notes and cut the motif off early (truncation).
Changing the Length of a Limitations Period
Although statutes of limitations may not be a lot like musical motives, both motifs and limitations periods can be both extended and truncated. For instance, Statutes of limitations can be tolled (or stopped) from running, so the deadline to sue is moved to a later date.
Tolling of statutes of limitations typically is established either via statute or via case law. Tolling can occur when a potential defendant conceals a claim from a plaintiff or other facts prevent the plaintiff from discovering their right to sue. Statutes of limitations also maybe tolled when the potential plaintiff is a minor or otherwise is not legally competent to sue.
In addition to tolling or extending the limitations deadline, it is becoming more common for statutes of limitations to be shortened. To address problems quickly, parties to a contract may agree effectively to shorten the statute of limitations for filing lawsuits involving the contract or their business relationship.
Contractually shortened statutes of limitations are becoming more popular in real estate contracts. Many real estate contracts are “as-is,” and sellers don’t want to be drawn into court by a dissatisfied buyer months, much less years, years after the closing on the sale. This article discusses how to incorporate a contractual limitations period into a real estate contract and when those provisions are most likely to be enforced.
Merger Doctrine in Real Estate Transfers
Often, there doesn’t need to be a contractual limitations period in a real estate contract. That’s because of the “merger doctrine.”
Under the merger doctrine, all agreements, including the real estate purchase contract relating to the real estate transaction, are “merged” into the deed. Typically, once the deed is delivered, unless the buyer and seller agree otherwise only obligations in the deed or another document delivered at closing remain between the buyer and seller.
Frequently, the buyer and seller will agree that some contract provisions won’t be merged into the deed and will “survive” the closing. For instance, the parties might agree to a post-closing “true-up” of certain expenses when the bill isn’t available at closing. Or the buyer might agree to pay the seller if a tenant pays delinquent rent that accrued before the closing.
Why Parties Want to Shorten the Limitations Period
Even when parties agree that some obligations will survive the closing, the obligation needs to end someday. If the parties don’t agree otherwise, the state statute of limitations, frequently one for written contracts, will apply. That limitations period can be as little as three years, as it is in Maryland, or as long as 15 years, as it is in Ohio.
Parties selling real estate don’t want post-closing obligations to last for 15 years. Often, they don’t want them to last even a year.
One reason for this is because most mortgage lenders require that investment real estate be held in “special purpose entities” (SPE), and lenders usually only allow the SPE to own only one investment property.
Once the real estate, the SPE’s only asset, is sold, the SPE owners want to save the cost of continuing the SPE for several years. Typical practice after the closing is for the SPE to distribute all cash except a small amount necessary to wind-up SPE operations. Then, the SPE files any final tax documents and is dissolved. The SPE seller will want a shortened limitations period so there is certainty regarding when sales proceeds can be distributed and the SPE dissolved without risk of a later claim.
Buyers understand that the SPE won’t be solvent for long after the closing unless the contract requires post-closing solvency. However, Buyers, like sellers, also usually want certainty and finality.
How Parties Can Shorten the Limitations Period
Therefore, contracting parties frequently agree to a specific limitations period in the contract, itself. The easiest way to do this is to include a general provision that says something like:
Except as otherwise expressly provided to the contrary, the obligations under this Agreement shall survive the closing for only six (6) months unless a document signed at closing provides otherwise; provided, however, that actions for fraud shall survive for the applicable state statutes of limitations period.
This language states the parties’ intent that, absent fraud, claims under the contract are subject to a six-month statute of limitations. The parties have agreed that they must make a claim (sue) under the agreement within six months or it will be forever barred. If these parties want a specific provision to survive longer than six months, they need to expressly state otherwise elsewhere in the agreement.
When Contractual Limitations Periods in Real Estate Purchase Contracts are Enforceable
In a commercial real estate transaction, both parties typically are sophisticated. Also, both usually have attorneys. Since both parties have been well-represented and can fend for themselves, the language they negotiate should be enforced. Therefore, if a party to a commercial real estate contract containing the language above were to file a lawsuit after the six-month period, the court should dismiss it.
Interestingly, most courts also will enforce contractual statutes of limitations where the parties don’t have equal bargaining power. For instance, in Anderson v. Allstate Ins. Co, the New York Appellate Division, Third Department held that the insured has no opportunity to negotiate the language and even if she never received the final insurance policy from the insurer.
In Ceccone v. Carroll Homes Services, LLC, the Maryland Court of Appeals, enforced a reduced statute of limitations where the parties had unequal bargaining power. In that case, the shortened statute of limitations was in the boilerplate “General Terms and Conditions” language of a furnace maintenance agreement.
In New Welton Homes v. Eckman, the Indiana Supreme Court enforced a shortened statute of limitations in a manufactured home warranty contract. The Indiana Court noted that other courts had enforced contractual language shortening the statute of limitations as long as the resulting time period is reasonable.
The Maryland Court of Appeals adopted the Court of Special Appeals’ holding that contractually shortened statutes of limitations are valid if
1. There isn’t a statute prohibiting shortening that limitations period.
2. The provision is reasonable.
3. The provision didn’t result from fraud, duress, or misrepresentation.
Practice Tips for Real Estate Contracts
Although sellers usually benefit most from shortened limitations periods in real estate contracts, buyers also benefit. Best practices for real estate contracts include:
If you want a contract obligation to survive the closing, say it in the contract.
Agree upon a statute of limitations for contract obligations that survive the closing and include it in a general section.
Be sure that the shortened limitations period is reasonable, particularly if there is unequal bargaining power or one party isn’t represented by an attorney. Six months is a common period.
Confirm that the state law applicable to your contract allows shortening of the limitations period under your circumstances.
If you want the state statute of limitations (rather than the shortened contractual limitations period) to apply to a particular obligation, have all parties sign a separate document at closing reaffirming that obligation.
© 2019 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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