What is an automatic renewal clause in my contract? It's a clause in your contract that you don't always pay attention to, but one that can be really expensive if it's ignored or you don't understand how it operates. When clients come to me with long contracts, one of the first things we want to look at is what's called the "Term" of the contract - meaning how long does the contract last? And when you look in that section of your contract, you're often going to see whether or not there's what's called an automatic renewal provision. It's a provision that says, if notice is not given by one party or the other by a certain date, this contract automatically renews for a period of time and the contract should tell you how long that time period is. It should also tell you what other provisions it affects, maybe payment goes up in the next term, or how the business relationship is going to continue after that. The reason we use these is that it makes an ongoing business relationship a lot easier from a contractual basis.
If you're working with a client, and we have a great relationship and the contract is beneficial to everyone, we don't want to have to go back and renegotiate that contract every month, you don't want to have to renegotiate at the end of every month. Now there may be situations where you do prefer to negotiate at the end of each contract. But for many businesses, it's a lot easier to have an auto-renewal provision.
Who Uses Automatic Renewal Clauses?
These provisions are used in a variety of industries and different types of contracts. For example,
- Business contracts ~ if you have an ongoing relationship with a supplier or a customer, it may be in the contract.
- Leases ~ it is very common, whether it's a residential lease where you're living, or whether it's a commercial lease where you're renting space for your business, it's very convenient, and it's very often present in those leases.
- Employment agreements ~ a lot of employees and employers frankly don't want to have to negotiate employment agreements every year with their employees. So we have an ongoing employment relationship under that agreement that just renews year after year. Now that's not to say you don't get raises or don't have bonuses, but there's usually an underlying contract and underlying employee agreement that was used that automatically renews and allows for you to make modifications at the end of each contract.
- Vendor agreements ~ just like with other business contracts if you're working with a vendor and you want to continue working with them, that auto-renewal provision is an easy way to have that relationship continue.
Issues with Automatic Renewal Clauses
If you've got an automatic renewal clause in your contract, there are some issues you should pay attention to:
- How do you opt-out of renewing the contract? You usually need to provide some kind of notice and the question is, what form does that notice have to take? Is it an email? Is it a mailed letter? Is it a letter sent by certified mail return receipt requested? Is it personal delivery? Each contract can have a different way of renewal? Maybe it's even a phone call, although often a contract will require that it be in writing.
- When do you need to opt-out? You know what kind of notice you need and you need to figure out when do you need to send that notice? It's pretty often in a yearly contract that you have to give 30, 60, or 90 days' notice before the end of the contract term, about renewal.
- Do not overlook these items in your contract. Because if you forget about them, or if you renew too late, you can be caught in another year. So I've had a variety of business clients over the years and it tends to happen in the software industry where they've licensed software for the business. What happens is they forget to renew it, or they've tried to terminate it within the last 30 days of the contract and now they're stuck with another year of software that they might not be using anymore. Now all they really had to do was make sure they sent the right notice at the right time, and then the software would just stop working on a certain date. So you want to make sure you know when to cancel or renew your contract and make sure that the form you're using is correct.
This is one of those things where you can really do it yourself. You want to keep an eye on your contracts and make sure any contract you signed you understand when the renewal date is. What I like to do when I have this contract is put a note in my calendar that says "Jones Contract Expiring - 45 days." So I know I have about a two-week window before that 30-day notice kicks in about whether or not I want to terminate the contract or not. You can also work with software online that will manage all these different expirations on your contracts. So they will essentially remind you on your calendar (but you pay for these services). So you may or may not want to pay for it if you're pretty organized and able to keep these things on your calendar.
If you're not sure about that automatic renewal clause if you need more help with it or you aren't sure what it really says or means feel free to set up a Legal Strategy Session. We can set up a short phone call to review your Automatic Renewal clause and make sure you understand what you're signing and when and where it's implicated. As far as renewing or terminating your contracts, this is one of the most important clauses to help you avoid getting stuck with unnecessary fees on a contract you didn't plan on renewing.