There’s nothing worse than realising a few days too late that your contract with a particular vendor has automatically renewed, and you’re locked into an expensive arrangement for another year. Fortunately, there's a way to prevent this from happening, and it all starts with tracking contract renewal dates and better visibility into existing agreements.
In this page we’ll explore the mechanics of contract renewal, including autorenewal of contracts, and how to manage those obligations more effectively.
What is contract renewal?
Contract renewal is the process through which the initial term of a contract expires, and the parties agree - either actively, or passively, through automatic renewal - to 'renew' the term of the contract so that the arrangement continues, and the contract remains enforceable for the new period.
Contract renewal is a good opportunity to renegotiate the contract's terms, if you'd like to change your commercial relationship ahead of the next period during which you're under contract.
Commercial contracts, like NDAs, MSAs or vendor agreements, typically include explicit language to define the length of the contract term. This might be a fixed date or, as is common in subscription agreements, the contract might have an initial term and then a provision that means it will automatically renew if neither party takes action. This is called a contract renewal date.
A contract renewal date is a specified date that parties will need to have expressed their intention to opt out of an automatic contract renewal by, if they wish to. If a contract renewal date passes without such notice, a new contract will be created automatically and parties will continue to be bound by the terms described.
The specific details of an automatic contract renewal will be covered in a contract renewal clause. You can see an example of the language used in these below:
This isn’t unique to the business world, of course - as individuals we encounter the same kind of arrangement with our cellphones, streaming providers, or other services that we buy on a subscription basis.
If the contract renewal date, as specified in the contract, passes, then both parties are effectively bound to the same terms for another year (or whatever term is specified in the contract).
Contracts might also be renewed ‘manually’ - each side might realise that the agreement is set to expire soon, and discuss the terms of a new arrangement, or decide to mutually terminate.
Why is contract renewal important?
Contract renewals are important as they provide businesses with the opportunity to extend commercial relationships, renegotiate payment and delivery terms, and address any updates in each party's circumstances. By doing this, a contract renewal can improve an existing contract and ensure that businesses continue to receive goods and services without any friction.
Contract renewal vs extension
Contract renewals are different from contract extensions as a contract renewal usually results in the creation of a new contract, whereas a contract extension typically seeks to extend the duration of an existing contract.
Since both contract renewals and contract extensions result in the continuation of a commercial relationship, it's common for the terms to be used interchangeably. However, they have very different implications in practice, and they're created in different ways. For example, a contract extension will usually mean that the exact terms agreed previously within a contract will apply for a longer period of time. Meanwhile, a contract renewal will require a new, but often identical contract to be created, and this can include contract amendments and tweaks to reflect changes in circumstance or priorities.
What is automatic contract renewal?
Automatic contract renewal is the process whereby a contract is renewed without manual input, usually after a certain period of time has passed. The specific terms of this renewal and period will be outlined in a contract renewal term within the original contract. An auto-renewing contract will be automatically renewed unless one of the parties to the contract issues a notice of their decision not to extend the contract.
But the automatic renewal of contracts has advantages and disadvantages, as we’ll discover below. It also represents a particular challenge to those tasked with managing the renewal of contractual relationships in a business - typically legal and procurement teams, or a contract specialist, although others may be affected too.
Advantages of automatic contract renewal
Setting up contracts to auto renew has advantages for both parties.
- Less friction: there’s no paperwork to worry about, so services should be contracted faster than if there were to be manual renewal
- Less negotiation: if parties are happy with the current terms then letting the contract auto-renew avoids them having to go through negotiation and redlines - which means more speed and fewer meetings
- No service interruption: automatic renewal means services can remain available throughout, without a break for parties to work out their future arrangements
- Easier revenue capture: this is obviously an advantage mainly for the vendor, but autorenewal of the contract means they can guarantee another year of revenue without having to deploy the sales team
- Easier forecasting: again, for the vendor, once the notice period has passed for termination, they’re able to forecast revenue for the year ahead without needing to worry about the contract terminating
However, there are downsides too 👇
Disadvantages of automatic contract renewal
An automatic contract renewal process can lead to headaches for both parties if managed poorly.
- The lock-in: the most obvious pain point is that if you miss a renewal deadline, or the notice period before it, you can get locked into an expensive contract for another year (or longer) without realizing
- This can be painful for the vendor as well as the customer - nobody want to be stuck in a commercial relationship, knowing the other side is there against their will
- Inflexible terms: both parties might have been happy to continue the relationship, but on different terms, and now the contract has renewed, they’ll need to negotiate and vary it in order to make changes
- Volumes: a business can easily find itself managing dozens or even hundreds of contractual relationships, depending on the stage and size of the company - making it difficult and unwieldy to keep track of upcoming contract renewals
These difficulties can lead to the souring of relationships between contract parties, as well as unwanted costs and obligations.
Fortunately, modern contract automation platforms have developed features that help you to manage the contract renewal process and avoid nasty surprises. By managing your contract renewals more effectively, you'll be able to track key renewal dates and escape unwanted automatic contract renewals. Here's how:
How to get out of an auto-renewal contract
You can get out of an auto-renewal contract by serving a written notice to the other contracting party to inform them of your decision not to renew your existing contract. This must be before by the automatic renewal date and within the notice period outlined within the renewal clause. Failing this, you'll need to get consent from the other party to stop the contract from renewing, which can be a challenge if it isn't within their interests to provide that.
That's why it's important to keep control of upcoming renewal dates from the offset, rather than treating them as an afterthought. Here are a few steps on how you can do just that:
How to manage the contract renewal process
To manage automatic contract renewals, so you always stay ahead of forthcoming deadlines, you should set up automated reminders that will notify you well in advance of your renewal deadline. This enables you to decide whether or not you'd like to renew, renegotiate, or even terminate the agreement, rather than that decision being forced upon you. The best way to achieve this is by implementing contract reminders, like you can in Juro.
To manage contracts easily, you need a Juro workspace for your business contracts. Watch below to see how simple renewal management is in Juro 👇
How do you do it?
Tagging the contract this way means that the relevant field contains metadata, which is searchable and can be leveraged in different ways across the application.
In this case, by clicking on the date, you can activate date reminders:
By sliding the green dot to the appropriate point on the slider, you can choose how far in advance of the relevant date you'd like a reminder to be sent - whether that's a week, three months, a year, or whatever notice period works for you.
You can also select and add the parties who'll get the email reminder. In this case, Tom will receive a reminder email on the 4th of August 2021, three months ahead of the contract renewal in November of 2021.
If we switch to the table view in Juro, where teams can get a broader picture of the contracts they manage, we can add a 'Renewal date' column to the table, and see which contracts are scheduled to renew and when:
This allows the users and collaborators in the workspace to stay on top of renewal dates at scale. It also means that the relevant individuals will be emailed regular email reminders, allowing them to stay in the loop.
Frequently asked questions about contract renewals
Is non renewal of a contract the same as termination?
Non-renewal of a contract is not the same as contract termination, as when businesses decide not to renew a contract, they are still bound to the terms of their existing contract under that contract has expired. Contract termination, on the other hand, occurs when a contract is ended prematurely before the outlined contract duration is over.
How do I ask for a contract renewal?
If your contract isn't renewed automatically, you'll have to ask request a contract renewal. This can be done by engaging with the counterparty's customer success or sales team and expressing your interest to continue your existing arrangement. Likewise, if you're an employee seeking to renew your contract, you can discuss this with your manager or people and talent team.
Is contract renewal a new contract?
A contract renewal typically involves the creation of a new contract. If a new contract hasn't been created then it's likely that the contract has been extended rather than renewed.
Keep on top of contract renewals with Juro
If keeping track of contract renewals is becoming difficult for your team as the business grows, you might benefit from automated renewal reminders that prevent any nasty surprises. If you'd like to make managing your contract renewals a breeze, fill in the form below to get in touch today.