Automatic Renewal

What is an automatic renewal clause?

An automatic renewal clause (sometimes referred to as an evergreen or self-renewal clause) is a contractual provision that operates at the end of a contract’s current term to automatically extend the term for a specified period of time, unless one of the parties provides notice of its intent not to renew. This arrangement may be limited to a set number of automatic renewal periods (see example 2 below) or it may continue indefinitely.

Automatic renewal clauses are found in many different kinds of commercial contracts and are perhaps most prevalent in SaaS and other subscription-based service agreements. These clauses can be desirable when parties contemplate a long-term relationship. The convenience of having the contractual period extend automatically saves both time and money that would otherwise be spent renegotiating the agreement each time it expires. The automatic renewal clause also introduces an element of certainty to the relationship. It gives purchasers the peace of mind of knowing that critical goods or services will continue to be available for their business without interruption. Similarly, it helps vendors stabilize revenue, giving them more predictable cash flow and the flexibility to make important strategic and operational decisions over the medium to long term.

Why does the automatic renewal clause matter?

Changing business needs, prevailing economic conditions and performance issues are all reasons why companies might decide that preserving the status quo no longer makes commercial sense. In such circumstances, they may want to renegotiate or even terminate an existing business relationship. Where that relationship is governed by a contract with an automatic renewal clause, getting out of it can be challenging and even costly.

The notice period for opting out of automatic renewal is typically phrased as a number of days, months or even years prior to the end of the current term (or, alternatively, prior to the beginning of the subsequent renewal term). If a company misses this notice window, it may find itself locked into another renewal period. At that point, the company may need to consider other termination options in the contract that may be far more costly than simply opting out of auto renew.

How do you review the automatic renewal clause in contracts?

In some contracts, the automatic renewal clause may appear in its own section (see example 2 below), making it relatively easy to find. Other times, the clause may be buried in the term section of the agreement (see examples 1 and 3 below), which can make it more difficult to spot when scanning through the document. Note, as well, that automatic renewal may be indicated by alternative wording such as “automatically extended”, “continue automatically”, or even a phrase like “thereafter for successive one-year periods, unless…” where any mention of “automatic” is absent. Even worse, some contracts may contain clauses that require careful review before they can be identified as automatic renewal clauses - see, for instance, example 4 below, where automatic renewal is implied by the deemed exercise of the extension options absent timely notice from Tenant of its intention to terminate the contract. There is a good chance that someone might overlook the deeming language on a scan of this provision and think that notice is required only if Tenant wants to exercise one or more of those options (which is a more typical way of drafting these kinds of extension provisions).

Once located, the key pieces of information to focus on in the automatic renewal clause are as follows:

  1. The amount of notice required. As the examples below illustrate, the notice period is typically stated as a number of days (often between 30 and 90 days) but may also be stated in months or even years.
  2. The timing of when that notice needs to be given. The timing of the notice will generally be measured with reference to the end of the current term (see examples 1 and 3 below) or the commencement of the next renewal term (see example 2 below).
  3. The duration of the renewal period. In most contracts, the renewal period will be measured in years (though it may have a shorter duration), and it’s not uncommon for it to be the same length as the original term (see examples 1 and 3 below). Pay particular attention to cases like example 4 below. Not only is the automatic renewal clause in that lease agreement difficult to identify, but the duration of each renewal term is also very long, making the cost of failing to provide timely opt-out notice that much greater.

When reviewing an automatic renewal clause, it’s also important to be aware of other contractual provisions that affect its interpretation. The notice section of the agreement, for example, details how and to whom notice needs to be given to be legally binding. The term section of the agreement provides useful information about when the initial term begins and how long it lasts. There may also be important information in the termination section about obligations that either arise on or survive the termination of the contract. Finally, the contract may contain a price adjustment clause (see example 3 below), which provides a mechanism for altering the economic terms of the contract. Where a party is considering opting out of automatic renewal for economic reasons, a price adjustment clause may provide a better alternative for addressing those concerns without disrupting what is otherwise a productive business relationship.

Examples of the automatic renewal clause

Example 1: From a SaaS Agreement

a. Term of Agreement. The initial term of this Agreement will commence as of the Effective Date and will continue for a period of one (1) year. The initial term will automatically renew for successive one (1) year terms unless either Party notifies the other in writing, not less than thirty (30) days prior to the expiration of the current term, of its intention not to renew. Both the initial term and any renewal term are subject to earlier termination as otherwise provided for by this Agreement. Either Party may choose not to renew this Agreement without cause for any reason.

Example 2: From an Outsourcing Agreement

2.2. Renewal. This Agreement shall be automatically renewed for two (2) successive two (2) year periods, unless one Party provides the other Party with written notice of its desire not to renew this Agreement at least ninety (90) days prior to the commencement of each such two-year period.

Example 3: From a SaaS Agreement

6.1. Term. Unless set forth otherwise as part of the SaaS Subscription Order Form, this Agreement will come into force upon the Service Commencement Date for an initial period of one (1) year (the “Initial Term”). Following the Initial Term, this Agreement shall auto-renew by consecutive one (1) year periods (each period called a “Renewal Term”), unless either party provides the other with a written notification of non-renewal at least sixty (60) days prior to the expiration of the then current term. The Initial Term, together with any Renewal Term, is referred to as the “Term” of this Agreement. The per-unit pricing during any automatic renewal term will be the same as that during the immediately prior term unless We have given You written notice of a pricing increase at least 60 days before the end of that prior term, in which case the pricing increase will be effective upon renewal and thereafter. Any such pricing increase will not exceed 7% of the pricing for the applicable Service or Content in the immediately prior subscription term, unless the pricing in the prior term was designated in the relevant SaaS Subscription Order Form as promotional or one-time.

Example 4: From a Lease and Operating Agreement

4.2 Extension of Initial Term. Tenant shall have the option of extending the Term for up to two (2), ten (10) year extension terms, followed by one (1), six (6) year extension term (each, an “Extension Term”). Tenant shall be deemed to have exercised its option to extend this Agreement unless at least two (2) years prior to the end of the then current Term or any subsequent extension term, Tenant shall have notified Landlord in writing of its intention to terminate this Agreement at the conclusion of such Term.

Example 5: From a Custodial Services Agreement

10.5 Term. This Agreement shall be effective from the Effective Date and shall have an initial term ending seven (7) years after Effective Date (the “Initial Term”), unless it is terminated in accordance with Section 10.6. This Agreement shall automatically renew for successive one-year terms (each a “Subsequent Term”) at the end of the Initial Term or at the end of a Subsequent Term, unless written notice is provided by either the Manager, on behalf of the Clients, or the Custodian no less than 90 days prior to the end of the Initial Term or Subsequent Term (as appropriate) of such party’s intention to not renew this Agreement for a Subsequent Term.