Contract Renewals: Don't Let the Deadline Make the Decision for You

When did you last check when your key commercial contracts renew?

For many businesses, the answer is only when a renewal notice arrives, a price increase appears on an invoice or someone decides they want to terminate an agreement.

By then, it may already be too late.

The Risk of Automatic Renewal

Many commercial agreements contain provisions allowing them to renew automatically.

For example, an agreement might run for an initial period of 12 months before automatically renewing for further 12-month periods unless either party gives notice.

Automatic renewal can be convenient. Businesses do not need to renegotiate agreements every year and important services can continue without interruption.

The problem arises when nobody is monitoring the relevant dates.

A business may decide in September that it wants to leave a supplier at the end of December, only to discover that the contract required six months' notice.

The agreement may already be committed to another renewal period.

Know Your Notice Period

The contract expiry date is therefore only part of the picture.

Businesses should also understand:

• whether the agreement renews automatically;

• how long each renewal period lasts;

• how much notice is required to prevent renewal;

• how notice must be served;

• whether there are restrictions on when termination can take effect; and

• whether pricing changes at renewal.

  
  

These provisions can have significant commercial consequences.

Watch Out for Price Changes

Renewal provisions may also allow suppliers to increase prices.

Some contracts specify a particular annual increase or link pricing to an index. Others give the supplier a right to revise charges subject to certain conditions.

A renewal review is therefore a useful opportunity to look beyond whether you want the agreement to continue.

Consider whether the pricing remains competitive, whether service levels are being met, whether the scope is still appropriate and whether the contract continues to offer value to the business.

Create a Contract Calendar

One of the simplest ways to manage this risk is to maintain a central record of important contract dates.

For each significant agreement, consider recording the expiry date, renewal mechanism, notice period and the date by which a decision needs to be made.

Importantly, set the internal review date well before the contractual notice deadline.

If a contract requires three months' notice, reviewing it three months before expiry leaves very little time to assess alternatives or negotiate new terms.

Review Before You Renew

A renewal should be a commercial decision, not something that happens because nobody noticed a deadline.

Taking a more proactive approach gives your business time to review performance, negotiate changes, consider alternative suppliers and decide whether the agreement still meets your needs.

If you have contracts approaching renewal or are unsure about your termination and notice provisions, Lawpoint can review the relevant terms and help you understand your options.