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Looking Forward to Another Year: Contract Law Reminders

With the end of the year often comes the opportunity to renew or re-negotiate contracts with vendors, partners and sometimes even landlords. To make the contract renewal process easier on you and your employees, make sure that these files are organized, and be sure to mark the relevant renewal/termination dates on your calendar. That will help you keep track of when you need to take action to either renew or cancel a contract.

 

Types of contracts: Opt-in and opt-out

When you review each contract, one of the first items to note is the type of renewal clause. Is it an opt-in or an opt-out contract?

An opt-in renewal means you must affirmatively notify the other party to the contract in order to renew for another term.  The advantage of this type of renewal clause is that you will not automatically be on the hook for another successive contract term without your consent. However, on the other hand, if you do not take action to renew the contract in a timely manner, you may lose services that are important to your business, or lose beneficial pricing.  This is especially important with regard to leases.  If you want to stay in the space, but forget to take timely action to exercise your renewal rights, you may find yourself searching for new space to rent for your business.

An opt-out renewal means the contract automatically renews unless you take the necessary steps to terminate it. This means you will be on the hook for another term even if you were expecting the contract to expire.  This sort of renewal clause is becoming more and more common.  Depending on the contract, the window of time to opt out could be very small, or may close months before the contract is set to renew / expire, which is why it is important to take note of these dates when the contract is signed, and to put multiple reminders on your calendar. If you plan on changing vendors, it is also important to check the type of notice that must be given in order to opt out of a contract, and the manner in which it must be sent to the other party.

 

Negotiation opportunities

Regardless of whether the contract contains an opt-in or opt-out renewal clause, the renewal period is a good time to negotiate favorable changes to the contract terms. Many times the vendor (or landlord) is more receptive to making changes when faced with the prospect of the contract expiring. The terms you might want to consider negotiating with your vendor during contract renewal include:

  • Changing the contract renewal terms
    • Changing a contract from opt-in to opt-out or vice versa
    • Altering how often the contract needs to be renewed, such as changing it from a one-year term to a multi-year term
  • Better defining roles and responsibilities for services
    • Who’s responsible for maintenance fees, rental fees or insurance related to services?
  • Payment terms and late fees
    • Perhaps you want to change payment from the 1st of the month to the 15th, or you want to negotiate when you will be charged a late fee or the amount of the late fee?

 

Start negotiations now

If you know a contract is set to expire Dec. 31, it’s important to review the renewal provisions now, before it is too late. If you plan to negotiate a change in contract terms, remember that it is risky to wait until late in the year to do so. In addition to the timing deadlines imposed by the contract itself, key personnel at your vendor may take extended holiday vacations or may be negotiating multiple contracts during the year-end rush. Either can cause frustrating delays in the process which could cause you to miss an important renewal deadline.

If you start negotiations now:

  • You’ll have more time to create or revise a contract that’s in your business’s best interest.
    • This includes the opportunity to shop around with similar vendors offering the same services, potentially at a lower price or with better contract terms.
    • This also ensures if you’re opting out of a current contract, you’re checking how much notice you need to provide ahead of the opt-out and ensuring you give that required notice. Some vendors might require as much as five to six months’ advance notice.
  • If you determine you cannot successfully negotiate amended terms with your vendor, this ensures you have enough time to find another quality vendor before your current contract expires.

A Stock and Leader Business & Employment attorney can review your vendor contracts and leases to ensure they’re working in your best interest. Contact Stock and Leader’s experienced contract law team today.

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