A Renewal Clause dictates if, when, and how a contract continues beyond its initial term - whether automatically (auto-renewal), by mutual agreement, or on a month-to-month “evergreen” basis - plus any price adjustments and opt-out notice windows.
Referred to as "renewal options" or "option to renew" clauses, these contractual provisions confer the right upon one or both parties to extend or renew the terms of an existing agreement upon its expiration.
Defines if and how the contract extends beyond its initial term. Common types: Auto-renewal (e.g., 1-year term that automatically renews for successive terms unless a party gives notice of non-renewal), or Renewal Option requiring affirmative action (e.g., tenant has right to renew lease for another 5 years by giving notice 6 months before end). Key drafting: specify renewal period (month-to-month? same length as original? one-time renewal or perpetual?), any change in terms on renewal (sometimes price may increase by CPI or a set percent), and how notice must be given to stop or exercise renewal. Many jurisdictions for consumer contracts require clear disclosure of auto-renewal and perhaps customer consent; even in B2B, clarity avoids surprise.
A well-drafted Renewal Clause contains:
Renewal Term: Specifying the duration of each renewal period, which can be fixed or variable.
Renewal Options: Defining the number of renewals permitted and whether they are automatically exercised or require affirmative action.
Renewal Notice: Establishing procedures and timelines for providing notice of intent to renew or non-renewal.
Renewal Conditions: Outlining any prerequisites or conditions that must be met for renewal, such as performance metrics, payment of fees, or absence of material breaches.
Renewal Terms and Conditions: Clarifying whether the renewed agreement will retain the same terms and conditions or allow for modifications.
Sample renewal clause language:
Commercial Lease Agreement: "This Lease shall have an initial term of five (5) years. Tenant shall have the option to renew this Lease for two (2) additional terms of five (5) years each, provided that Tenant delivers written notice of its intent to renew at least one hundred eighty (180) days prior to the expiration of the then-current term. The renewal shall be on the same terms and conditions as the initial term, except for the Base Rent, which shall be adjusted to the then-prevailing market rate."
Software Licensing Agreement: "The Initial Term of this Agreement shall be three (3) years. Upon expiration of the Initial Term, this Agreement shall automatically renew for successive one (1) year Renewal Terms unless either party provides written notice of non-renewal at least ninety (90) days prior to the end of the then-current Term. The terms and conditions of this Agreement shall remain in full force and effect during any Renewal Term."
Service Contract: "This Agreement shall have an initial term of two (2) years. Either party may elect to renew the Agreement for one (1) additional one (1) year term by providing written notice to the other party at least sixty (60) days prior to the expiration of the initial term. Any renewal shall be subject to the parties mutually agreeing upon revised pricing and service levels at least thirty (30) days prior to the renewal date."
Contract types where renewal language is critical:
Common structures and market practices:
Key drafting notes for a Renewal Clause:
Unilateral or Mutual Renewal: Evaluating whether the renewal option is unilateral (exercisable by one party) or requires mutual agreement, and ensuring fairness and protection for both parties.
Notice Periods: Assessing the adequacy of notice periods for renewal or non-renewal to allow for proper planning and decision-making.
Automatic Renewal: Considering the potential risks and benefits of automatic renewal provisions, which can lead to unintended extensions if not carefully monitored.
Renewal Conditions: Carefully reviewing any conditions or prerequisites for renewal to ensure they are reasonable, measurable, and aligned with the parties' intentions.
Modification of Terms: Analyzing whether the renewal clause permits modifications to key terms, such as pricing, service levels, or other obligations, and ensuring a fair process for negotiating any changes.
Jurisdiction specific notes:
U.S.: Auto-renewals are allowed, but several states (e.g., California) have laws requiring consumer contracts to have clear and conspicuous auto-renewal terms and easy cancellation mechanisms. In business contracts, they’re common and enforceable; one must follow the contract exactly to terminate (e.g., a 60-day notice prior to term end). If a party keeps performing and accepting performance after term without formally renewing, an implied renewal or at least an at-will continuation might be found.
U.K.: Auto-renewal (evergreen) clauses in B2B are fine (subject to Unfair Contract Terms for consumers, which might consider unexpected auto-renewals unfair). The UK CMA has pushed companies to make auto-renewal opt-outs easier (e.g., gym memberships).
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