All About Renewal Agreements
A renewal agreement is a contract to essentially extend the term of a previously executed contract. Sometimes the renewal agreement is a new contract in itself and sometimes it is an amendment to the original contract. These agreements are usually low risk contracts because it is likely that the underlying business relationship is viable and that there is little uncertainty that would persuade the parties to consider alternatives. These agreements are usually entered into with shorter notice periods. For example , a one year software license agreement may have a three month termination notice period. A renewal agreement may not provide for a termination right and be for a term that is shorter than the original agreement (i.e., 9 months). The renewal agreement usually is to preserve the business relationship while the parties finalize a new contract covering a longer term.
Key Elements of a Renewal Agreement Template
The renewal agreement template must contain all of the terms and conditions of the master agreement with the addition of the effective date and the period of renewal.
The renewal agreement template should include all of the following provisions:
Promulgated Form Number. If this is a Texas real estate contract, indicate the promulgated form number.
Effective date. The date upon which the renewal commences. This is commonly the "Renewal Date," which will be evidenced by use of the word "including but not limited to," meaning that the renewal date can change.
Renewal period. The period of renewal which has been agreed to by the parties. Common renewal periods are 1 month, 6 months, and 12 months. This is often called the "Extended Period." "Extended Period" can also include extensions if one is available per terms of the master agreement.
License Number. The license number of the broker for the lessor and the lessee.
Advantages of Using a Renewal Agreement Template
A major advantage to using a renewal agreement template is the ability to save time. Many sales people, particularly in an industry such as the retail industry with a high volume of agreements, simply copy the old agreement and make appropriate modifications. By using a renewal agreement template, the boilerplate text can always be left the same and the same text can be reused. Individual clauses can be copied, but only those that are uniquely specific to the situation. There is no need to worry about having completely forgotten a provision because all of the language based on a standard template is embedded in the body of the renewal agreement.
The second advantage to using a renewal agreement template is legal compliance. Many times, the original agreement governs any modifications of the agreement or may even prohibit making any changes of an existing agreement. In most instances, it is advisable to avoid amending the original agreement and to simply renew the existing agreement with a new renewal agreement.
The third advantage to using a renewal agreement is that all of the agreements will always have the same font, size, spacing, structure, and overall look. This may not seem like a big deal, but all of this provides for a very pleasing page layout. For example, if at some point in the future a major lawsuit litigation was filed and one was required to look back upon a potential class action, a smaller size font might exclude certain clauses and provisions. It may even be possible that a specific provision was duplicated but upon inspection it has slightly different wording. The less variation there is in each agreement, the more consistent and accurate documentation will be.
Common Errors in Renewal Agreements
A frequent pitfall is simply having a renewal timeline be too long. If you set renewal timelines that are too long, like saying a non-renewal notice has to be provided at least 120 days prior to the end of the term, you are encouraging the other party to not re-enter into the agreement. We recommend that if you have 1 year and then you combine it with 120 days, that can potentially be 14 months, but we have rarely seen even a 30 day period so that can be a disaster.
Another common mistake is that agreements incorrectly assume that the original agreement terminates. You want the renewal period to apply as closely as possible to the same business terms and conditions as the original agreement, and you want to define when a renewal notice or intent is not provided as the end of the agreement.
Another mistake is failing to think through how you maintain the confidentiality of the renewal and the ability to market the renewal to other parties. You may want to allow at least 2 months and up to 4 months for good faith negotiations. Finding a new partner or vendor can take 2 months, and then the partners have to negotiate the terms and conditions.
Next, you may not want to continue with the same partner or vendor during the renewal, and you don’t want to automatically extend the existing relationship to do that. You want to provide either a month by month or a rolling 30 day agreement, so the other party cannot rely on the original agreement.
Another mistake is allowing the "original" terms to apply during the renewal. The other side will try to argue that it is the same agreement, and that is typically one of their main arguments. You can fix this by saying all terms and conditions of the original contract will not apply. The only terms and conditions that will apply are the confidentiality language, the indemnification language, and the dispute resolution requirements, letting the parties fight it out as opposed to disrupting the parties day to day business operations or being involved in litigation during the renewal term because it’s the same terms and conditions as the original agreement and it’s just not working out.
And finally, be aware that many contracts ask for a notice to terminate, and it asks for it to be in writing. Be aware that a notice given on January 1st for example, for a 30 day notice period, can be very problematic for everyone’s purposes because nobody knows what the date is because even if I get it on January 5th, I still have to look at the contract and figure out how many days are in the notice period. You have to make sure that it’s calculated based on the number of calendar days or business days.
Ways to Modify a Renewal Agreement Template
The process of personalizing a renewal agreement template to align with the precise requirements of a business or a particular client is a task that may initially seem daunting, but when broken down into manageable increments, can be completed swiftly and smoothly.
The first step in customizing a renewal agreement template is to carefully review the document to identify the sections that are relevant to your business or client. Often, a renewal agreement template will contain clauses addressing various aspects of the renewal process – payment schedules, delivery terms, scope of work, expiration dates, and so forth. It is important to determine which of these provisions will remain unchanged and which will need to be altered to meet specific requirements.
Once you have identified the relevant sections, the next step is to insert any specific information about the parties involved and the subject matter of the renewal. This could include things such as specific dates, monetary values, delivery information, and individuals’ names and titles .
The final step in the customization process is to review the new draft of the renewal agreement to ensure that all new information has been successfully inserted and that the overall document is a coherent whole. It can be beneficial to have someone else – such as an advisor or colleague – review the document to ensure that you are satisfied with the renewed terms and conditions. Once you and your reviewer have signed off on the renewed agreement, you are ready to present the document to the other party for review, signature, and to give effect to the renewal.
By following this simple guide to organizing and customizing a renewal agreement template, you will know how to make alterations while retaining the necessary clauses. The primary objective is to include as much relevant and specific information as possible so as to effectively communicate the precise intent of the parties and avoid disputes in the future.
Legal Aspects of Renewal Agreements
The master renewal agreement template should be reviewed carefully by your legal counsel to consider any specific jurisdictional laws or statutes that may impact its enforceability in the various states or countries where the business has operations. For example, your legal counsel should review if the renewal term would be deemed a "contract of adhesion" which generally is deemed to be an unacceptable contract form if it unduly advantages one party. Another consideration addressed by your legal counsel would be whether to require "conspicuous" notification to your clients on "auto-run" renewals that a renewal is being processed under that specific client agreement.
Just as important, your legal counsel should also review your commercial contracts with your specific customers to make sure that the renewal master agreement template complies with those contractual requirements. For example, if one of your commercial contracts provides for a 60-day notice period to notify a specific customer that a new renewal rate will be applicable, then the renewal template should have such a notice provision so as to later maintain compliance with the requirements of that specific commercial contract. Similarly, you should also review and ensure that any renewal term would not violate any law specific to a particular category of goods or services that would require your business to set specific prices during that contract and prevent extending a discount from the standard pricing for that particular category of goods or services. Your legal counsel should review other specific contract considerations as appropriate.
Guidelines for Applying for Renewal Agreements
To maximize the efficiency and productivity of negotiating renewal agreements, there are several best practices that merchant-acquirers and ISOs can implement and use when preparing to enter into a renewal agreement. First, in order to assess whether a merchant is a good candidate for a renewal agreement, it is important to look at the transaction history associated to the merchant through the initial term of the agreement. Whether the merchant has transactional volume makes the renewal contract a valuable opportunity to renegotiate and, therefore, provides common ground between the merchant and the acquirer or ISO. In addition to transaction volume, a default renewal term should also be tied to the number of locations associated to the merchant. For example, many QSR or fast-food chains have multiple locations, but the locations are all individually owned by a franchisee. In this case, a default renewal term of at least one (1) year with a minimum number of locations is more appropriate than a contractual term that applies to each location as a distinct merchant and therefore may have multiple different renewal terms expire at staggered times. Further, even if a merchant only has one (1) location, it provides more negotiation leverage for both parties if the renewal term defaults to multiple years as opposed to a six (6) month or 180 day term. While it may seem convenient to just align the renewal terms if multiple renewal contracts expire at different times, it does not set the tone of a mutually beneficial business relationship. While the renewal contract may not appear different than the initial contract in some instances, the unsolicited initial contract is designed to bring the merchant onto the processor’s platform quickly. After working through the initial term of the contract, many merchants will look to renegotiate any unfavorable terms. Therefore, when negotiating the renewal contract as a subsequent term following the initial term, the merchant will ideally be armed with information and leverage to negotiate a revised contract that is more beneficial. Further, if the merchant has several thousand or tens of thousands of locations, the acquirer or ISO may agree to a longer renewal term to avoid renegotiating with the merchant at the end of the then-current renewal term. Nevertheless, the default renewal term should be a minimum of three (3) years, with one year as the minimum to renew. As it relates to the default renewal term, the length of the renewal contract as well as the length of time to exercise the renewal is not something that requires either party to wait indefinitely to determine if the contract will continue to renew as a standard procedure. In negotiating the renewal contract, it is important to treat the negotiation more like an initial contract negotiation rather than an addendum to a prior contract. While the merchant and acquirer or ISO will want to maintain a mutually beneficial business relationship, most of the focus in the negotiations should be on the provisions assigned to the renewal itself. For example, during the negotiation, the parties should focus on establishing the rate of liquidated damages, upfront conversion costs, and in some cases additional modifications to the agreements, such as assignment rights, implementation and compliance timelines, and overall business relationship enhancement. While the underlying terms and conditions may be standardized by most acquirers or ISOs, the negotiation does present the ability for the parties to discuss implementation timeframe and protocols to provide for a smoother transition to the renewal term. In these instances, the parties should look at the expiration date and not the expiration date of the initial agreement. The renewed contract therefore cannot be modified or ignored just because the parties did not execute a new contract by the expiration date for the initial contract. Here again, focusing on the latter half of the initial term provides a better opportunity for the parties to negotiate the renewal without having to "pick up where you left off" years down the line and hopefully provides for a more meaningful outcome. Finally, it is imperative that renewal agreements be treated as they would be, regardless of the location they are appended to. While there are occasions when the renewed contract will be treated as an addendum to the initial contract, such as when there are no provisions modifying the terms and conditions of the underlying contract, there are still occasions when the merchant, acquirer, ISO or processor would be better served by treating the renewal agreement as a new, stand-alone agreement.
Resources and Tools for Creating Renewal Agreements
Depending on the underlying structure of the business, there may be tools to manage the expiration and renewal of the business arrangements directly (such as through an expirations calendar or a dashboard tool to track important dates). Resources under contract management tools can help with tracking options and renewal terms, and record important contacts and their responsibilities for facilitation of the renewal or expiration process. For the vast majority of relatively simple commercial arrangements with a limited number of parties, maintaining an expirations calendar and a mailbox folder for the renewal or expiration correspondence is sufficient . However, for more complex arrangements, there are cloud-based software solutions and enterprise resource planning (ERP) systems that can be customized to meet the needs of the business for the management of expirations, renewals and the corresponding information. In addition, there are professional services and managed service opportunities to oversee the management of renewals and expirations for the business as a whole or specific departments thereof. The decision on what tools or resources to utilize should be made in the context of the priorities of the business and the resources available to support this function.