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Business Law

Beware of Contracts with Automatic Renewal Provisions

As individuals and business operators, you may enter into contracts for various services, such as waste removal, laundry facilities, landscaping, snow removal, maintenance, etc. Some of those contracts may contain automatic renewal provisions, often buried in the fine print. Typically, if such a provision is present, the contract will automatically renew for another term unless you give the vendor a written notice of termination not less than a certain period of time prior to the expiration of the current term. Although an automatic renewal provision may not be problematic for short‑term contracts, such provisions potentially can have dire consequences for contracts that are long term, such as one year or longer.

Oftentimes you do not expect to find an automatic renewal provision in a contract. Therefore, you do not look for such a provision at the time you are signing the contract. Unfortunately, some customers have been shocked when they give the vendor notice of cancellation and are abruptly informed that their notice is not timely and that the contract already renewed for yet another term.  To make matters worse, if you have previously entered into a different contract with another vendor, anticipating that the existing contract would be terminated, there is a possibility that you may be sued by one or both vendors.

I have encountered various types of contracts that contain automatic renewal provisions. In once case, the contract automatically renewed for an additional ten (10) year term (yes, you read that correctly) and the customer missed the cut off date to give a notice of non‑renewal. The customer had purchased a rental property subject to a service contract that was in the middle of the contract term. The customer had not noticed that the contract had an automatic renewal provision until it was too late. Fortunately, some carefully planned negotiations were able to resolve the matter. However, the goal is to never get in such a predicament.

From a timing standpoint, it is easy for a person to forget to calendar a renewal cutoff date that may be a year or more in the future. People who are not comfortable with their ability to calendar such matters in the future may want to take a different approach. For example, you could require the vendor to strike out the automatic renewal provision, or add language stating that the contract can only be renewed upon mutual agreement of the parties, in writing. If you have already entered into a contract containing an automatic renewal provision, and if you are concerned that you may fail to give timely notice of non‑renewal prior to the renewal date , it may be possible to give the notice of non‑renewal at the present time, even if it is months or years in advance of the expiration/renewal date, to help ensure that you will not miss the cut‑off date. The non‑renewal notice can inform the vendor that even though you are not renewing the existing contract, you will remain interested in discussing a new contract with them as the term of the contract nears expiration. By proceeding in such a manner, you can protect itself from an automatic renewal, yet keep the door open for future dealings with the same vendor.

Lastly, when purchasing an existing business, a purchaser needs to carefully review, or have their attorneys review all existing contracts as part of the due diligence process. Such a review helps to avoid assuming long‑term contracts that automatically renew.

This article was originally published in 2008.

 
          

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