Renewal Clause

Written by: Patrick Shaunessy

20 minute read

What is a renewal clause?

A renewal clause is a contractual provision that gives one or more parties the right to renew or extend the term of an agreement. Renewal clauses can be found in a wide variety of contracts and can be a valuable way to introduce flexibility into legal arrangements. While the particulars of these clauses may vary from contract to contract, many will require a party seeking to renew or extend the term to provide notice of its intent to do so - see, for instance, examples 1 and 3 below. Alternatively, in some cases, like example 2 below, the clause may state that the contract will renew automatically at the end of the current term, unless one of the parties gives notice of its intent not to renew. In either case, the renewal clause provides information about how and when a contract may be continued beyond its original term.

Why does the renewal clause matter?

When negotiating a contract, businesses don’t always know what the ideal term length should be, and the term selected depends on several factors, including the nature of the contract, the parties’ relative bargaining power, their respective business objectives, and the prevailing economic conditions. As time passes, because of the ongoing value some contractual arrangements provide, businesses may decide that they want to continue these arrangements beyond their original term. Having to negotiate an entirely new agreement to replace the existing one can be costly in terms of both time and money. As mentioned above, the renewal clause can provide one or more parties with the flexibility to continue an existing agreement, while having the added benefit of minimizing or possibly even eliminating the cost of renegotiating its terms.

In certain agreements, such as commercial lease agreements, the distinction between a right of renewal and a right of extension may have important legal implications for other contractual rights and obligations, and it is important for businesses to be aware of this distinction when reviewing a renewal clause. Applicable law may provide, for example, that renewing a contract implies an instantaneous break between the end of the original term and the beginning of the renewal term with the result being the creation of a new contract between the parties; whereas, with an extension, the original agreement may be deemed to continue without interruption. Because exercising a right of renewal in this scenario creates a new contract, rights that are personal to, say, a tenant under a commercial lease (e.g., its right of first offer to purchase the premises) may be invalidated by renewal, meaning the tenant would lose the benefit of these rights simply by exercising its renewal option. Accordingly, businesses contemplating exercising a right of renewal or a right of extension, as the case may be, will want to ensure they have thoroughly considered how the exercise of this right may affect other rights and obligations under the contract in question.

How do you review the renewal clause in contracts?

In some contracts, the renewal clause may appear in its own section, in which case it will be relatively easy to find. Note, though, that alternative section headings such as “Extension” (see example 1 below) or “Extension of Term” (see example 4 below) may be used to indicate a standalone renewal clause. In other contracts, the renewal clause may be part of the term section (see example 3 below). There may even be cases like example 5 below where the renewal clause appears in a seemingly unrelated section of the contract, increasing the risk that a reviewer scanning through the document might overlook it.

After locating all the renewal language in each agreement, important information to focus on when reviewing these provisions includes:

  1. Whether the clause provides for a right of renewal or a right of extension. The words “renew” and “extend” are easily conflated, and in some cases they may not have a meaningful legal distinction. However, as mentioned above, in other cases, the distinction can be quite important when it comes to certain rights or obligations. How important this distinction is to a particular contract depends on applicable law. It is therefore important to check the governing law section of the agreement as well to confirm what jurisdiction’s laws apply in order to evaluate fully the consequences of renewing or extending, as the case may be.
  2. Whether the rights are unilateral, mutual or automatic. In the case of unilateral rights, where only one party has the option to renew or extend the contract, take note of who has this right and how often it may be exercised. The party without the renewal or extension right should also check whether the agreement contains an option to terminate for convenience, giving it some flexibility in the case of an unfavorable renewal. Note that some agreements may provide each party with a separate right of renewal or extension. Renewal by mutual agreement, such as in example 6 below, gives both parties a say in the renewal process. There can also be hybrid cases like example 1 below where the customer has a unilateral right to request an extension of the statement of work, but the parties must reach a mutual agreement on the terms and conditions of that extension. Automatic renewal makes the renewal process seamless, but it can also be a trap for the unwary. Careful attention must be paid to the notice requirements in the case of automatic renewal to ensure that any party desiring to opt out of this arrangement does not miss the window for giving notice of its intention not to renew.
  3. Notice requirements. The notice period for the renewal clause will generally be stated as a number of days or months (though some agreements may specify a notice period of one year or more) prior to the expiration date of the then current term (or, alternatively, the commencement date of the subsequent renewal term). When considering the notice requirements, be sure to check the notice section of the agreement as well for details about how and to whom the notice needs to be given to be legally binding. Also, be on the lookout for less common notice language, such as example 3 below, where failure to give notice (and the other party’s failure to terminate) results in the agreement remaining in effect for both parties. Finally, in cases where there is a mutual renewal right, rather than a notice requirement, the contract may specify a deadline by which the parties need to have negotiated and agreed on the terms of the renewal. Example 6 below, for instance, states that the parties must renew by written agreement at least 6 months prior to the end of the then current term.
  4. Number of renewal periods and their duration. Some contracts may provide for an indefinite number successive renewal periods (see, for instance, examples 3 and 6 below), while others may limit the number of renewal periods. Each renewal period will often be for a duration of one or more years, though some agreements may stipulate a shorter renewal term. Where mutual agreement is required, such as example 1 below, the clause may state that the terms of any renewal, including the length of the renewal period, are up to the parties to decide.

As with the review of any contractual provision, it’s also important to be aware of other provisions that may affect the interpretation of renewal clauses. The governing law section, for example, was mentioned in point 1 above and the notice section in point 3 above. 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 should the current term of the contract expire without renewal. Even outside of termination, it’s also critical to note whether any rights or obligations survive or are extinguished following a renewal or extension of the term. In commercial lease agreements, for example, this would include rights such as purchase options, rights of first offer and rights of first refusal, which may be personal to the tenant, and which therefore may not survive renewal in cases where that event is deemed to create a new agreement.

Software that uses AI to identify and extract renewal clauses (as well as other terms that may affect their interpretation) can accelerate the work of finding these provisions and enable a more comprehensive review than can otherwise be done manually.

Examples of the Renewal Clause

Below are some examples of renewal clauses from different kinds of agreements. While these examples do not necessarily cover the full range of renewal clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract. Where an example includes broader contextual language, the renewal clause is highlighted in bold.

Example 1: From a Statement of Work

6.3 Extension. If Customer desires to extend this Statement of Work beyond the Initial Term, Customer shall give Service Provider written notice thereof not later than 60 days prior to the expiration date of the Initial Term. If Customer desires to extend this Statement of Work beyond any such subsequent extension term, Customer shall give Service Provider written notice thereof not later than 60 days prior to the expiration date of such term. Upon receipt by Service Provider of any such notice from Customer, the parties shall then negotiate in good faith for a mutually agreeable extension term and, if they reach mutually acceptable terms and conditions for such extension, the parties shall execute a written agreement for such extension.

Example 2: From an Administrative Services Agreement

8.2 Renewal. This Agreement shall be automatically renewed upon expiry of the Initial Term for additional successive terms of one year each (each a “Renewal Term”), unless at least thirty (30) days prior to the expiry of the Initial Term or any Renewal Term, as the case may be, the Administrator provides the Fund, or the Fund provides the Administrator, with written notice indicating that the Agreement shall not be renewed at the expiry of such Initial Term or applicable Renewal Term, as the case may be.

Example 3: From a Distribution and Supply Agreement

9.1 Term. The term of this Agreement shall commence on the Effective Date and shall expire on the fifth anniversary of the Effective Date, unless earlier terminated pursuant to this Section 9 (the “Initial Term”). Distributor shall have the right to renew the Agreement for additional one (1) year periods (each such one (1) year period, together with the Initial Term, the “Term”) by providing at least six (6) months written notice to Avivagen prior to the expiry of the then current Term. Should Distributor not provide such written notice of renewal and Avivagen does not elect to terminate this Agreement under any of the relevant provisions of this Agreement, this Agreement will remain in full effect for both Parties. For clarity, any renewal is likewise subject to the other termination rights described herein.

Example 4: From a Exporter Services Agreement

  1. Extension of Term. Provided Exporter’s goods and services are in demand and Exporter is processing sales generating Transaction Fees, as set forth in Section 6, within fifteen (15) years from the Effective Date, Exporter shall have an option to (a) continue with its membership under Section 2 at no additional fee, or (b) option of developing single point of sales, distribution, networking, and logistics facilities separate and distinct from AmericaTowne for a mutually agreeable reduced rate, which shall be agreed upon in writing prior to thirty (30) days from the termination of fifteen (15) years from the Effective Date. The Exporter has the option of choosing option (b) above at its discretion.

Example 5: From a Distribution Agreement

4.0 Distribution Rights. In recognition of the investment to be made by the Distributor in connection with its marketing and distribution of the Products, the parties agree to the following: The Supplier hereby grants the Distributor the exclusive right to distribute the Products in all countries in the world in which it is legal to sell the Products, subject to the limitations below and in Section 4.1. The Distributor shall distribute the Products to any and all wholesale and retail outlets, chains, franchises, one stops, individual stores, or specialty stores or any store who normally and traditionally sell audio and video products embodying the performances of musical, literary or theatrical talent. These outlets include, without limitation, any “Internet,” “On-line” or new technological sales outlets now known or developed in the future.

The exclusive distribution rights granted to the Distributor pursuant to this Agreement expires Twenty-Four (24) months (the “Primary Contract Period”) from the date first written above. Notwithstanding anything in the previous sentence, the Supplier controls the exclusive right to extend and renew this Agreement by exercising options (“Option Periods”) as defined in this Paragraph. The length of each consecutive option shall be for a period of One (1) year commencing upon the expiration of the Primary Contract Period or the then current Option Period. Each option will be deemed automatically exercised by Supplier unless Supplier delivers notice to the Distributor of its intention to terminate. Said notice to terminate shall be delivered to the Distributor no later than Thirty (30) days prior to the expiration of the current Primary Contract or Option Period. It shall be made in writing and mailed to the Distributor by Certified or Registered mail, return receipt requested in order to be deemed delivered. The Supplier agrees to not sell any products or compete with the rights and responsibilities granted herein to the Distributor.

Example 6: From a Program Agreement

16.1 Term. This Agreement shall continue in full force and effect from the Effective Date until June 30, 2016 (the “Initial Term”). The Agreement shall be renewed by mutual written agreement of the Parties for successive one (1) year terms (each, a “Renewal Term”) at least six (6) months prior to the expiration of the Initial Term or current Renewal Term, as the case may be. If the Parties do not agree to renew the Agreement at least six (6) months prior to the expiration of the Initial Term or the current Renewal Term, as the case may be, the Agreement shall automatically terminate (i) at the expiration of the Initial Term or then current Renewal Term, provided that such termination shall not occur until the waiver in writing or expiration of BAR’s right to provide notice of its election to purchase the Program Assets, or (ii) if BAR timely gives notice that it is exercising its right under Section 17.2 to purchase the Program Assets, upon the date on which the closing of the purchase by BAR or the Nominated Purchaser of the Program Assets pursuant to Section 17.2 shall take place.

Example 7: From a Franchise Agreement

2.8 Renewal Rights.

A. Unless terminated as herein otherwise provided, Franchisee shall have the option at the expiration of the initial Term to renew the franchise granted hereunder for a renewal period of 20 years by executing Franchisor’s form of Franchise Agreement as described in Section 2.8.B, provided that:

1. Franchisee gives Franchisor written notice of its election to renew not less man 2 months nor more than 9 months prior to the expiration of the initial Term;

2. Franchisee executes a general release under seal, in a form prescribed by Franchisor, of any and all claims against Franchisor, its affiliates, subsidiaries, shareholders, directors, officers, and employees;

3. Franchisee, at the time of notice of election to renew and at the end of the initial Term, is not in default of any of the terms or conditions of this Agreement or any other agreement between Franchisee and Franchisor and its Affiliates, and has substantially complied with the terms and conditions of all such agreements during the Term;

4. All of Franchisee’s accrued monetary obligations to Franchisor, and its Affiliates, have been satisfied prior to renewal, and timely met throughout the Term; and

5. Franchisee is in compliance with the standards set forth in Franchisor’s then-current Manual and has made such modernization and renovations (including, without limitation, signs, furnishings, interior and exterior decor, fixtures, equipment, and structural changes) and repairs and maintenance to Franchisee’s System Restaurants as Franchisor may have required and may require pursuant to Section H of Appendix I.

B. The franchise agreement to be executed at renewal may be different from this Franchise Agreement, to the extent that current business conditions warrant changes. No Initial Franchise Fee will be due upon renewal.

Example 8: From an Exclusive Distribution Agreement

  1. Term

2.1 This Agreement shall be for an initial period of three years, commencing on the Effective Date (" Initial Period “), unless sooner terminated in accordance with its terms. It may be terminated at the end of the Initial Period by either party giving to the other not less than six months' written notice of termination prior to expiration of the Initial Period.

2.2 In the event of such notice not being given, this Agreement shall automatically renew and continue for further successive periods of two years (each a “ Renewal Period ”) unless and until (a) either party gives to the other not less than six months' written notice of termination, prior to the end of the then current Renewal Period or (b) this Agreement is sooner terminated in accordance with its terms. The Initial Period and any Renewal Period(s) are hereafter referred to as the “ Term ”. If the Term of this Agreement is not renewed pursuant to Section 2.1 or this Section 2.1, then during the six month period prior to termination of this Agreement, Supplier may ship Products into the Territory to establish, directly or indirectly with a third party, a warehouse or distribution outlet in the Territory, but Supplier, directly or indirectly with a third party, shall not make, seek to be made or procure to be made any Active Sales of the Products in the Territory during this six month period.

Example 9: From an Indefeasible Right of Use Agreement

  1. Term and Renewal

8.1 The IRU with respect to the User Dark Fibers shall become effective on the relevant Acceptance Date for the User Dark Fibers in such Service Order (the “IRU Effective Date”). Subject to Sections 8.2, 8.3 and 8.4 and Articles 11 and 19, the IRU shall extend for the period thereafter that is set forth in the applicable Service Order (the “Term”).

8.2 User may extend the Term with respect to the User Dark Fibers in each Segment that is part of a Ring (as delineated in Exhibit B) so that the Term of the IRUs granted with respect to the User Dark Fibers in all Segments within such Ring expire contemporaneously with the Term of the IRU with respect to the User Dark Fibers in the last Segment comprising such Ring. In the event that User desires so to extend the Term of the IRU with respect to the User Dark Fibers in any Service Order, User shall deliver to Company, at least six (6) months but no more than twelve (12) months prior to the expiration of the Term respecting such IRU, written notice of its election to so extend the Term for such IRU together with an additional IRU Fee (prorated for the duration of the extension allowed) to compensate for the extension of the Term. For example, if the Term of an IRU for the User Dark Fibers in a Service Order is twenty (20) years, and is extended by one year, then the additional annual IRU Fee would be 1/20th of the amount of the IRU Fee for the User Dark Fibers in that Service Order.

Example 10: From a License and Manufacturing Agreement

  1. Term and Termination

This Agreement shall come into force as of the Effective Date and shall remain in force for a period of Fifteen (15) years from the date of the Product launch date in one the countries in the Territory. Unless terminated by one Party giving to the other at least twelve (12) months’ prior written notice prior to the expiry of the Initial Term or any Renewal Term, this Agreement shall automatically renew for further twelve (12) month periods (a “Renewal Term”).

Example 11: From a Statement of Work

  1. Term

The Services shall commence on the Aug 1, 2008 and shall continue until July 31, 2010 (“End Date”). Customer and Provider may agree to extend this SOW as mutually acceptable.

Example 12: From a Franchise Agreement

B. Franchisee may, at Franchisee’s option, obtain renewal of this franchise for one period of ten (10) years upon compliance with the following terms and conditions:

1. Franchisee shall not then be in default of any material provision of this Agreement, any amendment hereof or successor hereto, or any other agreement between Franchisee and Franchisor or its subsidiaries or affiliates and Franchisee shall have substantially complied with all the material terms and conditions of such agreements during the term thereof;

2. Franchisee shall have satisfied all monetary obligations owed by Franchisee and Franchisor or its subsidiaries or affiliates and shall have met these obligations on a reasonably timely basis throughout the term of this Agreement;

3. Franchisee shall submit a renewal application to Franchisor not less than twenty-four (24) months nor more than thirty-six (36) months prior to the end of the initial term and shall pay with its renewal application a renewal fee of one-half (1/2) of the then-current initial application fee being charged by Franchisor; and

4. Not less than twelve (12) months prior to the end of the initial term, Franchisee shall execute Franchisor’s then-current form of franchise agreement, which shall require as conditions precedent to its being effective, among other things, that Franchisee’s General Manager, department managers (as determined by Franchisor) and other employees comply with Franchisor’s then-current training requirements and that Franchisee upgrade, at Franchisee’s expense, the Hotel to conform to the then-current standard and specifications of Franchisor as applied to all System hotels, including, without limitation, such structural changes, remodeling, and redecoration and such modifications to existing improvements as may be necessary to do so. Upon expiration of the initial term of this Agreement and provided Franchisee has complied with the upgrading and other requirements specified in the replacement franchise agreement, Franchisor shall authorize Franchisee to continue operating the Franchised Business for a ten (10) year renewal term. The replacement franchise agreement shall supersede in all respects this Agreement and the terms may differ from the terms of this Agreement, including, without limitation, higher royalty and marketing fees.

Example 13: From a Consulting and Distribution Agreement

2.2 Renewals.

Subject to prior agreement in writing this Agreement shall be renewed automatically, after expiration of the original term, on a continuing Quarterly basis, unless the Party wishing not to renew this Agreement provides the other Party with written notice of its election not to renew (“Termination Election Notice”) on or before the 30th day prior to termination of the then current term.

Example 14: From a Statement of Work

FAR 52.217-9 Option to Extend the Term of the Contract (March 2000)

(a) The Government may extend the term of this contract by written notice to the Contractor within 7 days; provided that the Government gives the Contractor a preliminary written notice of its intent to extend at least 30 days before the contract expires. The preliminary notice does not commit the Government to an extension.

(b) If the Government exercises this option, the extended contract shall be considered to include this option clause.

(c) The total duration of this contract, including the exercise of any options under this clause, shall not exceed 5 Years.

Example 15: From a Resort Management Agreement

ARTICLE 2 - TERM
The “Term” of this Agreement shall consist of an Initial Term and the Renewal Term. The “Initial Term” shall begin on the Effective Date and shall continue until 11:59 p.m. (local time at the Managed Facilities) on the fiftieth (50th) anniversary from the date of issuance of the Investment Certificate. Thereafter, this Agreement shall automatically, and with no further action required by Owner or Manager, be renewed on the same terms and conditions for an additional successive twenty (20) year term (the “Renewal Term”) if, and only if, Owner is able to extend the original fifty (50) year term of the Investment Certificate for an additional twenty year period.