Automatic renewal clauses promise to set your commercial contracts on autopilot, ensuring a recurring revenue stream.

But are there hidden costs underneath "set it and forget it" contracts?

This guide discussed automatic renewal clauses, potential pitfalls, and mitigation strategies to protect your business from lawsuits.

What is an automatic renewal clause?

An automatic renewal clause states that a contract will automatically renew unless one of the parties provides prior notice to discontinue the partnership. Such clauses are used in recurring contracts such as house leases, vendor agreements, subscriptions, and memberships.

An auto-renewal clause specifies the length of the subsequent renewal term, the notice period required for termination or non-renewal, and any other conditions that may apply.

Let's say an agreement contains a provision that says “the contract will automatically extend 12 months from the effective date, unless earlier terminated by one party through a written advance notice at least 30 days prior to the end of the then-current term,” in this case, if the party fails to terminate the contract, they may get stuck in another 12-month cycle.

Also Read: Contract Renewal Process: Strategy + Best Practices

Examples of an autorenewal clause

Source: Jacqueline Burton via LinkedIn

What’s contained in an automatic renewal provision will ultimately vary according to the nature of the agreement. But they typically follow the same format. We’ve provided a couple of examples below.

Scenario 1: A software subscription services agreement

“Following the licensee's receipt of the enterprise software, this Agreement shall automatically renew for successive periods of the same length, at the end of the initial term and each renewal term, unless either party provides the other party written notice of non-renewal at least thirty (30) days before the end of the then-current term. Such notice must be duly signed and sent via email. The subscription fees for any subsequent term will be as stated in the pricing schedule unless otherwise agreed upon in writing by the parties. Either party may terminate this Agreement in accordance with the termination provisions outlined herein.”

Scenario 2: Maintenance services agreement

“At the end of the initial one-year anniversary, this Agreement shall automatically renew on a month-to-month basis unless either party gives the other written notice of non-renewal at least one calendar month prior to the end of the initial term. During any renewing period, all terms of this Agreement shall remain in full force and effect unless amended by mutual written agreement. Either party may terminate the Agreement during the renewing period by providing thirty (30) days written advance notice.”

The advantages of automatic renewal clauses

Source: John Ferrel via LinkedIn

Autorenewal clauses ensure that business agreements renew automatically, preventing interruptions at the end of each contractual period. Such renewal mechanisms (in contrast to manual methods) save time, reduce costs, and provide financial stability. More details below:

#1 Delivering essential goods and services without interruption

This is particularly important if you deal with the logistics of goods and services. Automatic renewals mean your subscriptions or services continue after the initial period, without the need for manual renewal, which you might overlook.

#2 Maximizing time and cost efficiency

Automatically renewing a contract saves time and resources that would otherwise be spent renegotiating or signing a new agreement. This benefits both parties in a long-term engagement, reducing administrative burden for everyone.

#3 Securing revenue stability for strategic growth

For businesses, autorenewals provide predictable cash flow, helping to stabilize revenue and financial planning. Consistent revenue streams from autorenewals enable businesses to forecast their financial status more accurately, plan for future growth, and invest in expansions without the uncertainty of fluctuating income.

#4  Enhancing customer loyalty and lifetime value

Autorenewal clauses can help businesses maintain a steady customer base by reducing churn. You are more likely to continue using a service if it renews automatically, rather than having to actively renew your subscription. This passive retention strategy can lead to higher customer lifetime value and stronger contractual relationships.

#5 Simplifying renewal management for all parties

Both businesses and consumers benefit from the reduced complexity of managing extensions. For businesses, it simplifies billing and reduces the likelihood of service interruptions due to lapses in contract terms. For customers, it means continued access to services without the need to remember deadlines or manually renew subscriptions.

Also read: How to Resolve Contract Disputes - SpotDraft

What are the alternative options for autorenewal?

Generally, automatically renewable agreements are expected to just renew without extra efforts from the contracting parties. But in reality, there are other ways to incorporate elements of autorenewal in extending a contract term.

Let’s look at a few:

#1 Required notice

In this case, renewal only occurs if either party makes a move in that direction. While it does require advance notice, the process is much simpler as it removes the need for renegotiation of terms. That way, the contract automatically renews once the initial term expires, provided there’s notice from the relevant party.

#2 Right to extension

This allows the customer to request some extension before the renewal period, during which they can renegotiate the terms of the current contract. That way, the contract will run with fresh terms and conditions once renewed.

#3 Renewal proposal

Some agreements contain contractual provisions that require a proposal to be issued at a specified date prior to the current term's expiration, if there’s a need to continue the relationship. This option offers significant flexibility as it allows parties to renegotiate specific terms while retaining the bulk of the original contract.

How to create an autorenewal agreement

Here’s a quick step-by-step process for creating an autorenewal agreement:

#1 Define the initial term

This is where you clarify the contract's initial term (i.e. how long the original contract will last before the renewal). This can be a six-month or a one-year period, depending on your arrangement with the other party.

Example: "The initial term of this Agreement will be for 12 months, starting from the effective date."

#2 Specify the automatic renewal term

Clearly state how long the agreement will be renewed. If the contract will renew for another one year period, clarify that.

Example: "After the initial term, this Agreement will automatically renew for successive one-year periods."

#3 Include requirements for written notice

The counterparty should know they must provide written notice ahead of time if they do not wish to renew the agreement. You can stipulate in your terms that such party must notify you X days in advance, depending on the nature of the agreement. Notice transmission can be via email, or any other method agreed between both sides.

Example: "Either party may cancel the automatic continuation by providing written notification to the other party at least 30 days before the end of the then-current term. This advance notice shall be received in person or by certified mail."

#4 If applicable, address fee adjustments

Will there be any fee changes, or will the original fees stay the same? Make sure you clarify that.

Example: "The renewal fee will be based on the current pricing schedule, unless otherwise agreed by both parties in writing."

#5 Talk about how renewing process will happen

Since it’s supposed to automatically continue, state that no further action will be needed when the maturity date arrives.

Example: "Unless a notice of non-renewal is provided, the Agreement will be deemed renewed automatically under the same terms."

Understanding the risks of automatic renewal clauses

Automatic contract renewal clauses, while beneficial, come with certain considerations that must not be overlooked. From unexpected expenses and legal repercussions, automatic renewal clauses can pose significant risks for businesses and customers alike.

Here are some key issues to note:

#1 Unplanned financial commitments

Autorenewal clauses can lead to unexpected financial commitments. If a party is unprepared for the renewal and fails to cancel in time, they may be obligated to continue paying for goods or services they no longer require. This culminates in unnecessary expenses, with negative impacts on budgeting and cash flow.

Source: Dean Katz via LinkedIn

#2 Inability to adapt to changing circumstances

Business needs, economic conditions, and industry trends are constantly changing. However, if autorenewal clauses do not account for these changes adequately, parties can be locked into contractual obligations that no longer align with their current objectives.

#3 Loss of flexibility and control

Autorenewal clauses limit a customer's ability to opt-out or make changes to their subscription or service agreement. This lack of flexibility can be frustrating for consumers who may want to switch to a different provider, scale down their subscription level, or simply discontinue the service. As a service provider, you may also find it challenging to adjust pricing or terms in response to changing market conditions.

#4 Customer dissatisfaction and negative reputation

Autorenewals can sometimes be controversial and not sit well with customers, especially when they're no longer satisfied by the status quo. When customers feel trapped in an engagement they no longer wish to be a part of, they're bound to feel negative about it and possibly dissuade others from doing business with the company.

#5 Compliance and legal issues

Contracts are created in accordance with specific legal and regulatory standards. These are also constantly evolving alongside the ever-changing business ecosystem. Thus, when automatic renewal provisions are left to trigger an extension of partnership without proper compliance checks, parties could fall into non-compliance and face legal consequences.

Also Read: Tracking Contract Compliance: Best Practices + Tools

How to mitigate risks associated with automatic renewal clauses

“Get in fast, flag the biggest risks, manage those risks, and move on to the next thing.”

~Jonathan Franz, Head of Legal, Crunchbase
Navigating Economic Turbulence and Thriving in Chaos‍

To deal with the consequences of automated renewal clauses, the right mitigation strategies are crucial. Here are some steps you can take:

#1 Thoroughly review the automatic renewal clause

The first step to making an automatic renewal clause safe for business is to closely examine it. Dissect its language and ensure the terms and conditions pertaining to renewal are transparent and well-understood by all. This may include details about the effective date, required notice periods for cancellations, renewal fees, or any limitations on the right to terminate the contract at any point.

If you find any potential pitfalls or unfavorable terms, ensure you renegotiate such terms before committing to the contract.

#2 Establish clear notice and cancellation procedures

Notice periods and cancellation procedures are the major causes of disputes related to automatic renewal contracts. Setting a reasonable notice period ensures that customers are informed ahead of time before a renewal takes place, so they have sufficient time to make informed decisions. Also, it ensures that customers are aware of the need to inform their service providers ahead of time if they wish to refrain from renewing an agreement upon expiry.

Additionally, you should ensure that the contract contains convenient cancellation procedures alongside accessible communication channels. That way, the chances of getting trapped in a renewal cycle are substantially minimized.

“I’ve often faced clients complaining about how they end up renewing unwanted contracts because nobody told them whether the contract was supposed to be terminated. I recommend SpotDraft to them because it allows you to set up renewal reminders weeks ahead of the last date of contract.”

~Mohammad Moiz, Vice President, Customer Success, SpotDraft

#3 Implement effective recordkeeping and tracking systems

Managing multiple contracts puts you at a higher risk of getting caught in automatic renewals, especially when your contracts are siloed in different departments and disjointed storage systems.

Fix your recordkeeping to ensure you stay on top of renewal dates and deadlines. One way to do that is to consolidate your contracts in a centralized location so you can easily access and track them.

Also, set reminders for upcoming renewals and record all interactions and contract modifications from the execution to renewal.

To make the process even smoother, use a Contract Lifecycle Management (CLM) platform like SpotDraft. It helps you

• Manage all your contracts in a secure and searchable cloud storage 
• Set automated reminders to keep track of important dates
• Establish an audit trail that monitors changes throughout the contract's lifecycle

By following an organized approach to contract management, you can track renewal dates, terminate contracts on time, and save time and resources.

#4 Maintain transparency and healthy communication

Source: Fred Haskett via LinkedIn

Half of the issues associated with automatic contract renewals can be solved through transparency and healthy communication. It strengthens trust between contracting partners and opens the door for more business opportunities.

To boost communication and maintain transparency, follow these tips:

• Ensure your partners are proactively informed on upcoming renewals 
• Be transparent about renewal terms and any associated price changes.
• Establish reliable communication lines and respond promptly to customer inquiries and concerns.

All of this becomes even easier when you have a contract management system. It acts as a single source of truth for contract negotiation, reviewing, and maintenance. Through built-in collaboration features, you can invite stakeholders (both internal and external) and share updates without switching between multiple apps.

“Leveraging a CLM has been key because it has reduced a lot of friction from handoffs between legal and business. Rather than going back and forth over email, Slack, Word, Zoom, DocuSign, and a whole tech stack, the CLM acts as a single source of truth.”
‍~ Jonathan Franz, Head of Legal, Crunchbase
Navigating Economic Turbulence and Thriving in Chaos

#5 Evaluate customer satisfaction and retention

Your goal here is to identify ways to ensure your contract partners are happy to renew their contracts with you, and the best way to do this is to dive into data.

• Has there been any dispute regarding your automatic renewals? 
• What have customers complained about the most? 
• What percentage of existing partners churn before renewal?

You can get such information through surveys, direct communication, and your CLM analytics. SpotDraft, for instance, offers an analytics tool for various metrics to determine whether your customers are happy with your contracts.

Furthermore, ensure you optimize your renewal strategies according to data and feedback generated from this evaluation. That way, you’ll record more renewals and less churn over time.

#6 Take note of legal and regulatory requirements relevant to autorenewals

Get familiar with current consumer protection laws, including laws related to contract formation, notice periods, consent, privacy, and cancellation rights.

For example, businesses in many parts of Europe are subject to the Unfair Contract Terms Directive. This regulation renders your automatic renewal clause void if it causes a significant imbalance that’s detrimental to your consumer.

“Take inputs from legal heads of various jurisdictions. The more you talk to them, the better you understand changing laws and regulations.”

~Bhavna Singh, GC & DPO, Subex Limited
‍Elevating Legal: Fostering Transparency and Accountability in Large Tech Enterprises

Also Read: The Ultimate Guide to Contract Compliance

Source: Fred Haskett via LinkedIn

What’s the difference between autorenewal and evergreen contracts?

While autorenewal and evergreen agreements share close similarities, they are fundamentally not the same.

An autorenewal deal extends a partnership for a specified number of times over a stipulated duration.

Let's say your company owns a rental property it wants to lease for an annual payment of $40,000. If you enter an agreement with a tenant to lease this property for four years, the lease agreement will automatically renew every year for a stipulated duration unless the tenant offers a termination notice prior to the renewal, in accordance with your terms and conditions.

Here’s an example of an automatic renewal clause:

"This agreement shall automatically renew for an additional one-year period unless one party gives the other party written notice of termination at least X months prior to the end of the current term. In the absence of a termination notice, the contract shall be renewed with the company pursuant to the same terms and conditions."

On the other hand, an evergreen agreement is simply meant to run on autopilot until one party decides to call it off. The evergreen clause is common in joint ventures where two businesses remain in partnership indefinitely, as long as both parties remain satisfied. When there's an intention to terminate an evergreen contract, the terminating party is required to give notice within a specified period ahead of the intended termination date.

Here’s an example of an evergreen clause:

"This agreement shall remain in effect indefinitely until either party submits a written termination notice at least X days before the intended termination date. In the absence of a termination notice, the Agreement shall continue in perpetuity."

Are autorenewal clauses enforceable?

Autorenewal clauses are generally enforceable, but they must meet specific legal requirements designed to protect consumers.

#1 Yes, if the automatic renewal terms are clearly disclosed

The renewal terms must be prominently disclosed in the contract. ABCmouse, an online learning company, faced significant enforcement action by the Federal Trade Commission (FTC). They were fined $10 million for automatic renewal clauses in their contracts that were not clearly disclosed, leading to consumer charges without explicit consent and a difficult cancellation process.

#2 Yes, if explicit consumer consent is obtained

The consumer must give explicit consent to the automatic renewal. If you're embarking on a long-term relationship with a consumer or business partner, there must be explicit consent to important mechanisms like automatic renewals.

#3 Yes, if the renewal terms provide straightforward cancellation methods

The contract must provide easy ways for the consumer to cancel the renewal. For example, a clause stating, "This contract shall automatically renew for an additional one-year term unless either party provides a written termination notice at least 30 days prior to the end of the initial contract period," ensures that the renewal terms are clear, requires explicit action to cancel, and sets a reasonable notice period for termination.

Track automatic renewal contracts with SpotDraft

Keeping track of auto-renewable contracts is paramount to avoid legal ramifications. For this purpose, SpotDraft offers an array of contract management features.

With its smart filtering and sorting functionality, you can easily find auto-renewable contracts, add renewing dates, and get timely reminders. Also, its AI-powered contract editor allows you to flag confusing terms to avoid future repercussions. But, there's more, and we can't possibly explain all the features in a few paragraphs.

Want to see it in action? Click here to request a free demo.