What is an Evergreen Contract?
An evergreen contract renews itself after the deadline or expiration date. It will continue to renew itself until both parties agree to terminate the notice.
Evergreen contracts are used for the following:
- Rental leases
- Purchase contracts
- Service agreements
- Dividend reinvestment plans
- Guaranteed investment certificates
- Healthcare plans
- Magazines subscriptions
- An evergreen contract automatically renews itself and rolls over after the expiration period passes.
- Both parties must continue to follow the evergreen contract until one or all sides agree to terminate it. Termination can occur through either failure to comply with the obligations listed within the contract or a mutual agreement between both parties.
- Evergreen contracts can be used in stock options, revolving loans, rental leases, insurance contracts, and more.
Understanding Evergreen Contracts
When signing evergreen contracts, the parties are aware of the outlined expiration date. Each party is obligated to fulfill all duties mentioned in the contract during the time that the notice is enforced.
If neither of the parties terminates the contract on the stated expiration date, they will both be bound to continue to abide by the obligations highlighted within the contract for a duration similar to when it was first issued.
How to Cancel an Evergreen Contract
1. Drafting a mutual agreement
The parties involved can make changes to the original agreement if they draft a new contract that outlines the alterations. By doing so, the new contract will void all that is outlined in the original contract.
2. One of the party members defaults on their obligations
Cons of Evergreen Contracts
In a scenario where the dissatisfied party forgets to cancel their agreement before the expiration date, they would be locked up and forced to meet the obligations within the contract for an additional period of time.
For example, Joey entered into a contract dated August 21, 2020, to pay Jon $100 every week in exchange for three boxes of donuts. The contract expires in the following month on September 21, 2020. Throughout that time, Joey realizes that he dislikes the boxes of donuts that Jon gives him; therefore, he does not wish to extend the contract any longer.
As time passes by and the expiration date arises, Joey might have forgotten to mention to Jon that he would like to cancel the contract. But by then, it may be too late – the contract would’ve already renewed for another month.
Pros of Evergreen Contracts
On the upside, if both parties are satisfied with the contract’s terms and conditions, they do not need to renegotiate their terms repeatedly when the expiration date arises. It ultimately saves time for both sides.
Thus, evergreen contracts are convenient and predictable, with longer-term certainty, especially in the context of supplying goods and services.
Examples of Utilizing Evergreen Contract Provisions
1. Employee stock option plans
There are various instances when an evergreen contract would be used. For example, employee stock option plans inherently act under an evergreen contract, where the additional shares received are automatically included within the plan annually. The evergreen options are renewed every year and continue to remain active unless the board of directors decides to terminate it.
An individual who issues a revolving loan is capable of borrowing funds from this credit source, repaying it, and then reusing it again. Generally, revolving loans allow indefinite access to loan amounts unless credit ratings begin to lower, and banks become significantly more concerned. In the worst scenario, if it indeed occurs, the bank may decide to withdraw the loan at the end of the contract period rather than automatically renewing it.
2. Evergreen rental lease term
Another example is an evergreen rental lease term. The lease is structured to renew automatically and roll over at the end of the term, with a similar duration issued. For example, a tenant that signs an evergreen lease must live in that property for the designated amount of time mentioned within the contract. If unaddressed by the time the deadline arises, that contract may automatically be renewed.
On another note, the leases can also have an indefinite month-to-month live-in arrangement as well, rather than automatically re-issuing a similar duration as the original issuance. By doing so, during the month-to-month intervals, both parties are given the option to break the contract.
3. Insurance contracts
Evergreen clauses are also evident in insurance contracts. When an individual purchases home insurance, for example, the insurer would automatically renew the contract for another year unless specified otherwise by the opposing party.
CFI offers the Commercial Banking & Credit Analyst (CBCA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful: