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 the notice to terminate it.
- An evergreen contract is one that automatically renews after its initial term expires.
- The parties agree that the contract rolls over automatically and indefinitely until one gives the other notice to terminate it.
- Evergreen contracts are found in rental leases, service agreements, and purchasing contracts.
Understanding Evergreen Contracts
One of the details the parties sign off on in a contract is the term, or the length of time the contract will remain in force. The contract duration varies widely, and all parties are required to fulfill their obligations for as long as the contract outlines. If neither party terminates it on the expiry date, they are all bound to abide by the contract policy for another similar duration.
Most evergreen contracts come with a 60 to 90 day renewal period before it renews.
Evergreen clauses can be used in different kinds of contracts, including employee stock option schemes, dividend reinvestment plans (DRIPs), rental lease agreements, guaranteed investment certificate (GIC), healthcare plans, insurance coverage policies, magazines subscriptions, and revolving loans.
How to Cancel an Evergreen Contract
Evergreen contracts can be canceled in several ways. They can be ended the same way they are drafted—through the mutual agreement form of the parties involved. If the parties want to make changes to the original agreement, they can draft a new contract, which outlines the alterations. This new contract voids the original one. The other option may be for one party to default on the agreement. Although this is an undesirable choice, it still nullifies the contract.
Considerations with Evergreen Contract Provisions
While an evergreen clause provides convenience for either party because they don’t have to renegotiate the terms of the contract on the expiry date, one party may feel stuck and unsatisfied. In a case where a dissatisfied party forgets to cancel the agreement when it expires, they may be locked in for another period of time.
For example, an investor with a 2% investment vehicle may have plans to roll over the invested funds into another vehicle with a different company offering 5% on the maturity date. If they fail to give termination instructions within the timeframe stipulated in the policy, the investment may be automatically renewed with the same fund company for the lower 2% rate. Parties should do their due diligence to know how and when to dissolve an evergreen contract.
Examples of an Evergreen Contract Provision
Many different contracts contain evergreen clauses. These examples are by no means an exhaustive list of evergreen contracts.
Some employee stock option plans provide an evergreen option where additional shares are automatically included in the plan annually. These plans are used to attract and retain quality employees who are incentivized to grow the company. Evergreen options are renewed every year and remain active unless the board of directors decides to terminate them.
An evergreen rental lease term is structured to renew automatically at the end of the term. It is then rolled over to another term with a similar period or activated on a month-to-month basis. For example, a tenant who signs an evergreen lease with their landlord must live in the property for a year, after which the contract becomes an indefinite month-to-month live-in arrangement. During the monthly auto-renewal period, both parties can break the agreement.
Many insurance contracts have evergreen clauses. When a policyholder takes out a car or home insurance policy, the insurer typically renews the policy for another year, unless the insured person indicates otherwise. If any terms of the policy are set to change in the new term, the provider would notify the insured.
A borrower with a revolving loan can use the funds, repay it in full, and use the funds all over again. Borrowers have indefinite access to the loan amounts unless they fall out of good standing with the bank. If this occurs, the bank may opt to withdraw the loan at the end of the contract period.