This week on the podcast, we interviewed Henry Glover of Red Rock Insurance Group. In that episode, we discussed contracts. Henry, being in insurance, deals with contracts on a regular basis (even more regular than most other business owners). Henry is no stranger to making sure he understands all of the ins and outs of the contracts he signs. One of the items we focused on, and I discussed in more detail after the interview, is the renewal of contracts.
The renewal clause of a contract is such an important clause to read and understand. I can’t tell you how many times I have been called when a client realized a contract they signed (and subsequently forgot about) had renewed for another term. This happened either because they didn’t pay attention to the renewal clause, they forgot about the contract altogether, or they neglected to calendar the dates on the contract.
You see, if you neglect your contract renewal, you can run yourself into a new contract term that can cost you money. Even if you are able to settle it and stop the contract, you had to pay something to settle it. Something you would not have had to pay if you had simply paid attention to the dates in the contract.
So, with an automatic renewal, you need to keep up with two primary issues:
1. When does it renew?
2. How do you stop it from renewing?
If you want the contract to continue, an automatic renewal is a great thing, you don’t have to do anything. But, you still need to pay attention to when it renews. When does each new term begin? The reason is that if you ever want to terminate the agreement, you need to know when and how you are supposed to do it. It doesn’t matter if you are in term 1 or term 10, the termination will be the same. That means you always need to know where you are in a given term.
That brings us to the termination of contracts.
With any type of contract, there are provisions that allow you to terminate the contract. In some instances, like contracts for a specific period of time with no renewal options, a contract terminates at the end of the period (often with no other options). However, if you have a contract that automatically renews, you will be required to give some kind of notice that it will not renew. That means, you must give some kind of written indication (that will be defined in the contract) during a certain time frame to let the other party know the contract does not renew. If you miss this time frame, the contract will automatically renew for the period defined in the contract. That means, you will be obligated to pay the required fees under the contract during this time.
Let’s look at an example:
You sign a contract you believe to be a three year capital lease of some equipment. The contract is for monthly lease payments. You do this all the time in your business, so you just sign the document without thinking much about it (or reading the contract). You get to the end of the lease term (at least you paid attention to some dates in the contract), and you expect to pay $1 to purchase all of the equipment. In month 13 a new lease payment is taken by automatic debit from your bank account. You call to see what is going on.
You missed the automatic renewal clause in the contract:
If no default exists or has occurred under this Lease, you may, at the end of the original or any renewal term, purchase all (but not less than all) of the Equipment. At least 180 days but no more than 270 days prior to the original Lease term, you must give us written notice, via certified mail, that you will purchase the Equipment for its fair market value, which we shall determine in our reasonable judgment, or that you will return the equipment to us. If you do not give us such written notice or if you do not purchase or deliver the equipment in accordance with the terms and conditions of this Lease, the this Lease shall automatically renew for a 12 month term, and thereafter renew for successive 6 month terms until you deliver the Equipment to us. During such renewal(s), the Rent shall be the highest monthly rate set forth in this Lease. We may cancel the renewal by sending you written notice 90 days prior to such renewal term…
(Normally the important language isn’t bolded, just wanted you to see it for this discussion)
That means, according to the contract you signed, you OWE the money for the next term. The contract renewed because you didn’t send the required notice. So, even if you call to dispute the charges, the conversation starts from the position that you OWE them that money. The law presumes that you are capable of understanding a contract you have signed. It also presumes you read the contract before signing. That means, you are dependent on them being reasonable. You may have some good arguments for this. In some cases, they will settle. But, like Henry said in the episode, there is always a revenue model in a contract. In a lot of these contracts with automatic renewals, the entire goal is to get you to pay something more than the term you signed up for. That means they make something more than they otherwise would have. It costs you money.
This gets even worse if you have to hire a lawyer. Even if a lawyer can get you out of it for nothing (which rarely happens) you have to pay the lawyer, so it still cost you something.
As a side note, most of these types of contracts require you to bring any court case against the company in their state and the odds of that being the same as yours is SLIM. So, on top of knowing you owe the money because you made a mistake, you are also in the horrible situation of not only needing to call your lawyer, but of hiring a lawyer in a different state if you decide to take further action. Action that you will likely lose because you signed the contract that automatically renewed. This seriously limits your options.
Do you see the revenue model here.
To keep this from happening to you, do the following with every contract you read:
1. Check the term (how long will the contract last)
2. Check the termination (how do you make the contract end)
3. Calendar any important dates (especially any notices you need to give to keep the contract from renewing).
If you have to give notice between 6 months and 9 months before the automatic renewal on your 5 year agreement, make sure you put that on the calendar. Make sure you know how to send the item (certified mail in this case). If you let that renewal happen because you want the contract to continue, calendar the next time you have to give notice to stop the renewal for another term. That way, you will never be caught by surprise and you will never be required to pay money you didn’t otherwise have to pay. These simple actions over the life of 20 contracts could save you THOUSANDS. All because you made sure to put that important date on the calendar.
I will talk to you next week, unless you talk to me first 😉