Do Your Contracts Contain Evergreen Clauses?

Buyers' Training
August 8, 2012 — 1,426 views  
Become a Bronze Member for monthly eNewsletter, articles, and white papers.

When a business enters into a financial purchase or lease agreement, it is common for the agreement to contain what is called an evergreen clause. This is the industry term for language within the contract that automatically renews a financial obligation or a lease after the original lease agreement is complete. Automatic renewals can be applied to a variety of obligations.

A simple example of this might be a monthly payment that is required throughout the contract, but automatically renews for additional periods of time unless the organization notifies the company by a certain date. Unfortunately, many evergreen clauses will lock a company into an additional period of time that is lengthy, often 12 months. For this reason, purchasing professionals must be especially diligent in understanding which evergreen clauses are included in purchasing contracts. The obligation is rarely emphasized and many customers don't realize what they are agreeing to when signing contracts.

However, Adams Kessler professional law corporation explains that evergreen clauses will typically include a notice period of 45, 60 or 90 days before automatic renewal. A customer or organization might get a notice that states the terms of the agreement will extend automatically for 12 months unless written notice is given that the services should not be renewed. A notice statement should also include how early notice must be given in order to avoid penalties or automatic renewal. The law firm suggests purchasing professionals and businesses do their best to eliminate evergreen clauses from all contracts in order to avoid this. Before entering into a purchase, lease or any other type of contract agreement, they should look for the evergreen clauses and replace them so they become month-to-month after the initial term.

Purchasing professionals and their companies would do well to put together a binder of all existing contracts and highlight all evergreen clauses. The source recommends they set a calendar with reminder dates at least 60-90 days prior to the renewal notice. By being aware of this clause before the notice comes, a purchasing department has the opportunity to review the vendor or services and decide if they would like to give notice of non-renewal. Finally, before signing anything, purchasing professionals should obtain a contract checklist that includes legal review.

Buyers' Training