A Guide to Evergreen Agreements: What You Need to Know

Evergreen Agreement Defined

Evergreen agreements are a type of contract, often found in employment agreements, licensing agreements or commercial leases, that automatically renew for another term unless one party notices the other that it does not wish to renew the contract. The terms of the initial agreement govern the renewal, unless the parties renegotiate the terms .
The name comes from the concept that the agreement or contract is designed to be evergreen, or last indefinitely, unless one party gives notice of cancellation. The notice period is usually defined in the initial contract, and varying lengths are found, with 30-day notice being common.

Defining Characteristics of Evergreen Agreements

Any experienced business lawyer or attorney will likely have a shelf filled with agreements that are certain to "go on and on, and on," irrespective of the parties’ desires. This article discusses the common features of "evergreen contracts."
Automatic Renewal Clause: Although a recurring term is often included in these types of agreements, the most heavily negotiated provision is frequently the renewal clause. It may be simple and state: "on the expiration of the initial term of this Agreement, as that term may have been extended, this Agreement shall automatically renew for successive 12 month terms unless terminated by either party upon at least 90 days written notice prior to any automatic renewal anniversary date." Or the agreement may include an elaborate renewal procedure that includes notice and consideration.
Right to Terminate: Often, most commercial agreements permit any party to terminate by providing some specified period of written notice. And although the agreement may restrict the right to terminate in certain circumstances, basically all contracts allow for termination. These provisions often take the form of a specific cure period and specify that if the other party fails to cure any default identified in a notice during the cure period within another defined period, the non-defaulting party has the right to terminate. Other examples of a right to terminate clause are typically a mutual right to terminate; the inability to agree on the renewal period; an assignability default; and a change in control or merger default. Some companies may negotiate taking the right to terminate even further and include a right to terminate for convenience.
Duration: Of course, almost all agreements have some kind of duration. And that can mean anything from a one-month advertising campaign with a one-month extension option to a lease with a 30-year initial lease term and three five-year renewal options. In a construction contract context, the parties should understand not only the duration of the contract, but the duration of a warranty obligation as well. There are also certain factors that can accelerate a contract, such as a bankruptcy filing, a lawsuit seeking declaratory relief and obtaining a verdict on non-infringement or invalidity.
There are a few other items to keep in mind when negotiating an evergreen agreement, including additional consideration, the length of notice periods, indemnification and default provisions, and governing law. For example, in the indemnification context, if the intellectual property rights are important, the parties should consider adding a novel indemnification provision that includes the extent to which the departing party will indemnify the other party for infringement, the geographic scope of an indemnity and the payment of attorneys’ fees. Similarly, sometimes clients will want to include a right to indemnification in joint venture contracts in the event of a breakup between partners.

Advantages of Evergreen Agreements

Evergreen agreements offer a host of benefits to both businesses and consumers who use their products or services. For businesses, having an evergreen agreement in place can essentially guarantee continuity of services for a set period of time. This provides a steady amount of expected business for the company, ensuring financial health.
Another advantage is that the entity can avoid the administrative overhead related to continually signing and renegotiating new contracts. Conducting business under a long-term evergreen agreement eliminates the need to constantly review the details and update it. This is especially useful for a large corporation with multiple departments that must sign, modify and review contracts frequently.
Finally, having an evergreen agreement helps to establish strong, long-term relationships with clients. You can typically discount these agreements in order to keep the client for a longer time. If that client has a history of paying promptly, you can discount the agreement even more. You receive a benefit by getting a guaranteed customer, but the client also receives a cost advantage for being a loyal customer.

Potential Downsides of Evergreen Agreements

"evergreen" meaning something that remains fresh and appealing to customers (such as the evergreen subject of friendship). The first potential drawback of evergreen agreements is an overall lack of flexibility. Commitments usually span months or even years. However, communities change over time. Key employees come and go, property management companies alter their focus. And the needs of your community may be altered as well. All of that requires flexibility – something that can be difficult to achieve when a long-term contract locks you into a particular service model. Another drawback is the difficulty that ultimately arises when it comes time to end a relationship with a service provider. Since evergreen agreements basically act as a perpetual renewal until one of the two parties gives notice, emerging leaders may find themselves in a tricky situation if they do not realize the company they engaged last year is actually locked in for another season. It is also worth noting that evergreen agreements mean little more than an arbitrary extension if the terms are vague or poorly worded. In some instances, a company may assume a contract is up for renewal but upon further inspection it actually violates a residents rights or the Fair Housing Act. An evergreen allows the offending contract to go on for yet another year, when it may otherwise have been revoked immediately.

Legal Implications and Compliance Issues

As with every contractual relationship, evergreen agreements may have some legal implications that warrant consideration. Particularly in the B2B context, Canadian courts have generally taken the position that the "freedom of contract" principle should govern, so long as the terms and conditions are clear and unambiguous, and the parties have meaningful choices.
Despite the freedom of contract principle, abiding by the specific requirements of a provincial Consumer Protection Statute is something that should not be taken lightly. Once the legislatures have spoken in respect of mandatory provisions in a Consumer Protection Statute, companies must seriously consider the factors that motivated the legislature to legislate in the first place. These motivations almost always relate to ensuring compliance in relation to the information supplied or the nature of the relationship with the consumer.
Whether the CCSPA (Ontario), the CMA (Alberta) or any other provincial Consumer Protection Statute applies to evergreen agreements must also be considered . The applicability of these statutes will depend on several interpretive factors, including the nature of the agreement itself, as well as where the agreement is sold, the sale process employed, and the status of the recipient of the good or service. In other words, consideration must be given to both the substance and process elements of entering into an evergreen agreement with a consumer.
In addition to statutory requirements, companies should also consider whether any specific licensing, registration or ministerial approval requirements under industry-specific legislation apply to evergreen agreements entered into by their affected entities. While this bullet point has been included above under the general context of statutory requirements, it bears additional emphasis for regulated companies. While the general consumer protection principles noted above would seem to allow companies operating in different jurisdictions on a consistent basis (as to how they deal with consumers) as a means to facilitate cross-border trade free from unnecessary barriers, the reality is that these principles do not always make clear from the outset (at least without close examination of the regulatory context) which particular statutes and regulations apply to evergreen agreements.

How to Create an Evergreen Agreement

The process of structuring an evergreen agreement will differ depending on the parties involved, the services provided, and the industry. There is no single correct evergreen format, and there often is (and in some cases, should be) significant relativity to what is most advantageous and acceptable to the parties. The key is to pay attention to the terms under which the initial term can be extended, under the circumstances for what duration it can be extended, and any parameters on the negotiation of the new terms.
An evergreen agreement typically is drafted in the following way: The initial term shall be one year commencing on . Upon the expiration of the initial term, the term shall automatically renew for successive one-year terms unless either party provides written notice to the other at least 30 days prior to the expiration of the term that the this Agreement shall be terminated upon expiration of such term.
For example: This Agreement shall have an initial term commencing on January , 20 with an expiration on December , 20 The term of this Agreement shall automatically renew for a consecutive one-year period unless one party gives the other a 90-day written termination notice from the date of expiration of the then-current term.
To assist parties with being deliberate in their decisions, I recommend that the parties consider advance notice. Notice provisions provide an opportunity for the parties to evaluate the evolving business relationship and the associated service provisions to determine whether it still meets the parties’ expectations, with the mutual benefit of avoiding any undue disruption and expense.
I also recommend that there be conditions precedent to the exercise of the right to terminate and/or be included as an additional business consideration when negotiating alternative provisions to non-renewal and/or termination provisions, in order to discourage improperly exercised rights to terminate based on the status quo under the agreement. A few examples include: In structuring the evergreen agreement provisions, the parties must be aware of the impact of the provisions on the law of different states and industries. For example, under Florida law, if an evergreen provision is deemed to be an automatic renewal clause, the parties probably will be required to reduce the automatic renewal term to one year or less in order to comply with Fla. Stat. § 501.395. Florida’s consumer protection statute, Fla. Stat. § 501.231, imposes additional restrictions on automatic renewal provisions, including consumer contracts for services or equipment purchased for personal, family, or household use. With the covered service or equipment, the renewal or extension will automatically renew unless: The statute includes the right to cancel the automatic renewal provision without a penalty at any time after the term is ended. A business seeking to avoid potential liability under the statutes frequently offers renewal provisions through an opt-in format.

Evergreen Agreements & Fixed-Term Agreements

When it comes to evergreen agreements, there is often confusion when comparing their characteristics to those of fixed-term contracts. While both types of agreements place binding commitments on the parties involved, the nature of these commitments and the scenarios in which each is suitable can vary widely.
An evergreen agreement, unlike a fixed-term contract, generally does not have a predetermined end date. This means that unless one or both parties give notice to terminate, the agreement continues indefinitely. In some cases, an evergreen agreement can also be renewed indefinitely if both parties agree to do so automatically.
In contrast, a fixed-term contract is only valid for a certain amount of time and does not automatically renew unless otherwise indicated. For example, if an employer entered into a 5-year employment contract with an employee, that contract would end exactly 5 years after it was signed unless a separate clause within the agreement provides a reason for an extension. If no such reasons are supplied and both parties wish to continue the relationship, then they will need to enter into a new contract to ensure the relationship continues.
Certain situations call for the use of evergreen agreements over fixed-term contracts. Organizations that work on unpredictable timelines—such as advertising and entertainment agencies—may find that either type of contract doesn’t suit their needs, but evergreen agreements may be more beneficial than fixed-term given the often-broad nature of the services they provide. Additionally, industries that involve overtime or freelance work without a clear rate of pay may utilize evergreen contracts.
Above all, the decisiveness in choosing which agreement type is suited to your needs should be determined by the specific requirements of the roles within your company. Some will benefit from flexibility; others will prefer the commitment associated with fixed-term contracts.
Consulting with an employment attorney can help you decide which type of agreement is best for your organization.

Industries That Commonly Use Evergreen Agreements

Evergreen agreements are prevalent across a wide array of industries due to their adaptable features that serve the needs of both renewed usage and renewed negotiations. Below are a few examples:
Software Companies
SaaS (Software as a Service) companies often use evergreen agreements to retain subscribers while giving them the option to cancel at any time. Many of these software businesses offer tools that require regular updates or use cloud storage which requires constant subscription payments. Their evergreen agreements usually include a 12-month initial term followed by month-to-month renewals. While making it convenient for users, this agreement structure is built to retain them as long-term customers.
Media Outlets
A large media outlet such as a cable, digital, or print news service will likely have a large network of channels across various regions. When signing a content licensing agreement, they may want to make sure they aren’t tying themselves down to short-term agreements for the various channels, as they might want to renegotiate the terms later. Many media outlets target their networks to certain demographics which often requires revamping agreements with those networks every 6-12 months. This leads to a significant number of content licensing contracts . Having short-term license agreements will only add up to a lot of work as they will need to go through each channel’s license in order to evaluate the terms. Evergreen agreements allow them to go through all channels and do extensive evaluations when setting up the deal, but then conveniently avoids this repetitive process when it comes to renewing or terminating a license agreement.
Commercial Real Estate
For property owners that lease commercial properties to tenant businesses, the renewable rental agreements often function as evergreen agreements. These agreements tend to typically include an initial 5-10 year term followed by options for renewal on a year-to-year basis. Because real estate properties are typically a long-term investment there’s a good chance that the tenant will want to stay at the location for several years, but there’s also a possibility that they may outgrow their space or that the landlord may wish to repurpose the property. Because of the long-term nature of the property investment, the landlord will want the flexibility to sell or repurpose a property when the time is right. They may not know if the tenant will be able to expand within their property to continue to create revenue for them over longer terms, and so commercial real estate often leads to the creation of such evergreen agreements.