ARTICLE DETAIL

June 20, 2018

Collections: Statute of Limitations on Service Contracts and Commercial Leases

By: Jennifer L. Harris, Esquire

Most service companies, commercial landlords, or contractors will find the need to collect on unpaid fees or delinquent rent.  If your company finds itself in this situation, then be sure to first ask: when did the cause of action accrue?  This question is so important because often, as most recently explained in Morris & Ritchie Associates, Inc. v. H&H Rock, LLC, No. 1824, Sept. Term 2016 (Md. Ct. Spec. App. Jan. 30, 2018), a cause of action lives or dies based on its accrual date.

In Morris & Ritchie Associates, the Court of Special Appeals examined when a cause of action accrued under a service contract.  In this case, in 2006, H&H hired MRA to perform residential land development services based on three written proposals.  The work was ongoing and periodically completed between 2006 and 2014.  Throughout that time period, MRA frequently invoiced H&H for services performed under the three proposals.  H&H in turn, frequently failed to pay MRA.  After all work was completed in 2014, H&H failed to pay MRA $338,204.58.  Finally, on December 18, 2015, MRA filed a complaint against H&H for breach of contract and unjust enrichment/quantum meruit to recover unpaid fees from 2006 through 2014.

H&H moved to dismiss MRA’s claim arguing that the majority of the fees were barred by the statute of limitations because they began to run the day each individual invoice was due. In response, MRA argued that there was a continuing course of action between the parties from 2006 through 2014, and, therefore, the statute of limitations did not begin to run until the work was completed in 2014.

Ultimately, the Court found for H&H that the statute of limitations begins to accrue the day an invoice becomes due.  Therefore, MRA was only permitted to bring a collection claim on five of its invoices, totaling $22,285.28.

Morris, while unreported, weaves together the common threads found in Maryland law.  For example, Ely v. Science Applications Intern’l Corp., 716 F.Supp.2d 403 (D. Md. 2010) previously examined the statute of limitations for a commercial lease. The Court in Ely ultimately held that the statute of limitations begins on the date a rent payment is due.

So, how can a company avoid the scenario that MRA faced?  First, file a lawsuit within the permitted statutory period starting from the earliest date marking an interaction between the parties—usually, this is three years.  Second, draft the underlying contract to account for a longer statute of limitations by adding a “seal” to the document.

A contract under “seal” is a type of specialty that often appears in contracts or promissory notes where there is a notation (SEAL) next to the signature blocks of the parties.  In accordance with the Maryland Annotated Code, Courts and Judicial Proceedings Article, Section 5-102, a contract made under seal extends the statute of limitations to 12 years.  However, Maryland case law indicates that solely placing (SEAL) on the signature line is not enough to invoke the powers of § 5-102.  Instead, the parties must mutually assent to the extension, usually by way of a clause in the contract itself. See Ely, 716 F.Supp.2d at 406-07.  

            For example:

  1. Seal. The parties agree that they have executed this contract under seal and intend that this contract be a specialty.

Therefore, to ensure the ultimate protection, draft a contract that includes mutual assent language recognizing the seal.

 Overall, given Morris, be sure to initiate collections within three years from the earliest interaction between the parties.  Moreover, include a seal next to the signature line of the parties and also include language that adopts the seal into the contract.

Jennifer Harris is an Associate in PK Law’s Corporate and Real Estate Group.  Prior to joining the firm as an associate, she served as a summer associate and law clerk in the firm’s General Litigation Department. Jennifer’s primary areas of practice are corporate and real estate litigation (including commercial and residential), real estate transactions, landlord/tenant matters, land-use litigation, and the enforceability of land covenants.  Jennifer represents various clients in tax sale foreclosure actions, contract litigation and negotiations, and business disputes.  Jennifer’s litigation experience includes all aspects of litigation, including bench and jury trials, in state district and circuit court for individuals and companies, including pre-trial and trial practice, motion practice, fact and expert discovery, witness preparation, settlement negotiations, and providing counsel to clients regarding strategy, settlement, and future liability.