An evergreen clause is a clause within a contract that automatically renews without amendment at the time of, or immediately after an expiration date. An evergreen clause either provides for an expiration date with an automatic renewal until termination, or there is no expiration date and the contract renews indefinitely. An evergreen clause also typically expressly states that any party to the agreement can terminate the evergreen clause through notice to the other parties.
Key points about evergreen clauses
- Evergreen clause laws can vary by state, especially in California, Illinois, Florida, New York, or Michigan.
- An expiration date in the contract is not required
- The term “automatically renews” may signal an evergreen clause, or possibly automatic renewal clause (see discussion below comparing both clauses)
- Evergreen clauses are generally enforceable in every state
Examples of evergreen clauses
Evergreen clauses can be used in a rental lease, purchasing contract, employee stock options, retainer clauses, and various types of service agreements.
Generic evergreen clause
Example: “Each Term shall automatically renew for [a] subsequent period of the same length as the initial Term unless either party gives the other written notice of termination at least (30) days prior to expiration of the current term.” [1]
Rental lease evergreen clause
Example: “The initial term of this lease agreement is for one year. At the expiration of the initial term, this Agreement shall continue from month to month under its existing conditions unless and until the Tenant gives Landlord 30 days notice in writing of the termination prior to the expiration of the initial term.”
One of the most common evergreen clauses are found in lease agreements. The lease agreement may state that the lease is valid for one year, wherein after the one year, it automatically rolls into a month to month lease. There is no termination of the month to month contract other than by notification, for example, thirty days prior to the last day of the month in writing by one party.
Purchasing contract evergreen clause
Example: “At the end of your [membership] which is the initial term of two years, this Agreement shall continue from year to year under the then existing conditions previously agreed to under this Agreement unless and until a party hereto gives the other no less than 90 days written notice of termination prior to expiration of the initial term or of the one year extension then in effect.”
A contract to purchase goods or services may have an evergreen clause where the contract automatically renews after a period of time. This is often seen in the purchase of memberships such as to Amazon, a gym, or something similar. In this type of contract, it will automatically renew the membership after a period of time unless it is terminated by one party.
Employee stock options evergreen clause
Example: “XXX will receive yyy shares for the entire first year that XXX is employed with this Company. After one year, and following each additional year, 2% of the stock already acquired will be automatically included into the plan. XXX and the Company expressly agree that the Evergreen provision applicable to options/warrants granted to XXX shall continue to apply only to options or warrants granted to XXX prior to the effective date and the reissuance of such warrants/options and that any options/warrants granted following the execution of this Agreement shall not be subject to the Evergreen provision. The Evergreen provision remains active until the board of directors by a majority vote terminates it.”
An employee of a company that has a stock option contract may have an evergreen option where additional shares are included in the plan annually or bi-annually.
Evergreen retainer clause
Example: “Client and Attorney agree to a retainer in the amount of $. Client agrees that such amount owed may be paid to Attorney from the retainer amount. Client then agrees to replenish the retainer in the amount of the invoice within 30 days, so that the retainer amount remains at the agreed upon amount stated above.”
An evergreen retainer clause is usually found in an agreement where the client pays a fee into a separate trust account for an attorney. The lawyer then earns the money once services are provided. The client puts more money into the trust account if the balance dwindles down to a predetermined minimum balance.
Automatic renewal clause versus evergreen clause
An evergreen clause renews automatically and can do so indefinitely while an automatic renewal clause only renews for the specific number of times expressly stated in the agreement.
For example, an automatic renewal clause may state that the automatic renewal shall take effect for one year. So, after the initial expiration of the automatic renewal clause year, the agreement automatically renews for only one year. An evergreen clause, on the other hand, may state that the agreement shall automatically renew indefinitely.
Perpetual versus evergreen contracts
A perpetual contract allows parties to sell or buy something at a fixed price without an expiration date or an execution date. This is different from the evergreen contract that automatically renews after a specified period of time. Some states, such as Illinois, have held that perpetual contacts violate public policy and are therefore unenforceable. [2]
Evergreen contract termination
The most common way to terminate an evergreen contract is by mutual agreement by both parties in writing. Another way to terminate an evergreen contract is by one party defaulting on the terms of the contract, thereby voiding the contract. The latter is not ideal but can occur. For example, your business contracts with a waste management company that is supposed to pick up trash. The contract clause states that the contract renews year-to-year with an automatic payment option. Suddenly, the company stops picking up your trash for a period of time. The contract is now terminated.
State to state variation of the evergreen contract
States vary in the regulation of an evergreen clause. Florida, New York, Michigan, California, and Illinois have enacted statutes governing the evergreen clause. All of the other states do not have evergreen-regulating statutes.
California, for example, regulates evergreen clauses by regulating the enforceability of such clauses in subscription service contracts by stating the clause must be clear and conspicuous which means large in size in type, font, and color. [3]
Illinois created the Automatic Contract Renewal Act to govern evergreen and automatic renewal clauses. The Act specifies that any contract that “automatically renews unless the consumer cancels the contract, shall disclose the automatic renewal clause clearly and conspicuously in the contract, including the cancellation procedure.” The company is also mandated to notify the consumer in writing of the automatic renewal when the period is longer than twelve months. [4]
References
[1] Thomson Reuters. Practical Law: Evergreen Clause. https://ca.practicallaw.thomsonreuters.com/w-009-0672?contextData=(sc.Default)&transitionType=Default&firstPage=true (Canadian definition of “evergreen clause” is identical to U.S. definition).
[2] Jespersen v. Minn. Min. & Mfg. Co., 183 Ill. 2d 290 (1998).
[3] Cal. Bus. & Prof. Code § 17600.
[4] 815 ILCS 601.
