1. About Evergreen Contracts
2. The Difference Between Auto Renewal and Evergreen Contracts
3. How to Terminate Evergreen Contracts

An evergreen contract is an agreement between parties that automatically renews (or rolls over) after each maturity period or completion, unless one of the parties gives notice to terminate or defaults.

About Evergreen Contracts

There's usually a renewal period of 30 to 60 days before the agreement renews. Unless one party chooses to terminate the contract during this time, the agreement automatically renews. Renewal continues until cancellation.

Many organizations and attorneys try to avoid evergreen contracts, but evergreen clauses are still in a number of the following:

  • Service agreements
  • Leases
  • Purchasing contracts

These types of contracts can create sizable long-term risk.

One of the terms contractual parties sign off on is the length of time each side is bound by the agreement. A contract's duration varies widely. The parties are expected to fulfill their duties for as long as the agreement is in force.

Some contracts include an evergreen or automatic renewal clause. This means that if neither side terminates the agreement on the expiration date, the contract continues for another similar time period.

Evergreen clauses may take one of the following forms:

  • The contract provides that it expires on a specific date with automatic renewal for an indefinite period until one of the parties provides notice of termination.
  • Alternatively, it may provide that the agreement simply continues indefinitely until one of the parties cancels.

Evergreen clauses are found in many types of contracts, such as the following:

  • Employee stock option schemes
  • Health care plans
  • Dividend reinvestment plans
  • Insurance coverage policies
  • Revolving loans
  • Magazine subscriptions

The Difference Between Auto Renewal and Evergreen Contracts

Given the definition, it should be noted that evergreen and auto-renewal contracts aren't the same.

An auto-renewal contract renews automatically only for a specific number of times. For instance, an auto-renewing five-year lease might include a one-year renewal provision. This provision gives the tenant the opportunity to continue living in the building for another year without renegotiating the lease terms. When the renewal period ends, the lease expires.

By contrast, evergreen contracts go on indefinitely until one of the parties provides notice.

How to Terminate Evergreen Contracts

There are a few ways to terminate evergreen contracts:

  • By agreement
  • By default
  • By other terms

Because contracts are mutual, voluntary agreements, they can be terminated by mutual agreement. This includes evergreen contracts.

If both parties want to alter or terminate the agreement, they generally draft a separate termination agreement. Once signed, the original contract is terminated and not enforceable. In its place, the termination agreement — which is considered a separate contract — applies.

If a party defaults on the agreement, this usually voids it. For instance, if you run a business that contracts with a waste management company and the company stops picking up your trash, you can terminate the contract for cause.

Some contracts include clauses that outline how long after default they can be terminated. Other contracts are governed by the termination laws in their jurisdiction. For example, home loan contracts fall under laws that determine when foreclosure sales can occur.

Another way to terminate an evergreen contract depends on the terms outlined in the agreement. If one party won't agree to void the contract and neither side has defaulted, it's possible to negotiate a new, slightly amended agreement.

If it's not possible to renegotiate, the only other option might be to hire an attorney and try to figure out if any part of the contract gives you the right to cancel it. Sometimes, contracts have provisions that are illegal and unenforceable. An attorney can help you figure out if there's a way you can terminate an evergreen contract.

In some cases, a party can notify the other party in writing of its intention to terminate. There may be a cancellation fee. When a contract includes specific termination provisions, it usually trumps local laws. You may be able to get out of a contract by taking the case to court since many courts don't look favorably on automatically renewing contracts.

You don't want to end up being stuck in a situation that you eventually need to get out of, so make sure you don't agree to auto-renewal terms unless that's what you want. Consult with a legal professional to help you understand all of a contract's legalese.

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