What Is an Evergreen Contract?
An evergreen contract automatically renews on or after the expiry date. The parties involved in the contract agree that it rolls over automatically until one gives notice to terminate it.
Evergreen contracts are used for various purposes, including rental leases, purchasing contracts, and service agreements.
Key Takeaways
- An evergreen contract automatically renews after its initial term expires.
- The contract rolls over indefinitely until one party gives the other notice to terminate it.
- These contracts can be found in rental leases, service agreements, and purchasing contracts.
Understanding Evergreen Contracts
One of the key details parties agree upon in a contract is the term or the length of time the contract remains in force. Contract durations can vary widely, and all parties are required to fulfill their obligations for the specified period. If neither party terminates it by the expiry date, they are bound to the contract for another similar period. Most evergreen contracts come with a 60-to-90-day renewal period before renewing.
Evergreen clauses can feature in a variety of contracts, such as employee stock option schemes, dividend reinvestment plans (DRIPs), rental lease agreements, guaranteed investment certificates (GIC), healthcare plans, insurance policies, magazine subscriptions, and revolving loans.
How to Cancel an Evergreen Contract
Evergreen contracts can be canceled in several ways. They can be terminated through a mutual agreement of the involved parties. Changes to the original agreement can be laid out in a new contract, thereby voiding the original one. Another way to cancel an evergreen contract is through a default by one party, which—though undesirable—also nullifies the contract.
Considerations with Evergreen Contract Provisions
While an evergreen clause offers convenience by eliminating the need to renegotiate terms, it can also leave one party feeling stuck if they forget to cancel the agreement by its expiry. For example, an investor with a 2% investment vehicle planning to switch to a different company offering 5% may face automatic renewal at the lower rate if they miss the termination deadline. Due diligence is crucial in knowing how and when to dissolve an evergreen contract.
Examples of an Evergreen Contract Provision
Multiple contracts, such as perpetual futures, contain evergreen clauses. Below are various examples:
- Employee Stock Option Plans: Some include an evergreen option, where additional shares are automatically involved in the plan every year. This is aimed at attracting quality employees incentivized to grow the company.
- Evergreen Rental Lease: This structure renews automatically at the end of the term, converting to a month-to-month basis afterward unless otherwise stated. A tenant agreeing to an evergreen lease agrees to a year residency followed by a month-to-month setup post-initial-term.
- Insurance Contracts: Many of these, like car or home insurance, contain evergreen clauses. Unless otherwise stated by the policyholder, the insurer typically renews the policy for another year, giving prior notification if any terms change.
- Revolving Loans: Borrowers can use and repay the loan funds indefinitely, as long as they remain in good standing with their bank. If the borrower defaults, the bank may decide to withdraw the loan at the end of the current period.
Related Terms: Expiry Date, Lease Agreements, Service Agreements, DRIPs, GIC, Insurance Policies, Revolving Loans.
