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What is a Cancellation Clause?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 26 September 2016
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A cancellation clause is a section of a contract spelling out the terms under which either party can break the contract, usually as a result of special circumstances. In a simple example, a lease agreement can include a note that the property owner has the right to terminate the lease if the building is sold. While the contract can broken in other circumstances, there will be penalties, and these penalties are also discussed in the terms of the agreement so both parties know what to expect over the course of their relationship with each other.

Cancellation clauses are included to account for events that could change the nature of the contract or the business relationship. There are some special circumstances under which people might need to cancel through no fault on either side and providing a way to do that without penalty can be beneficial. For example, people may be able to provide more warning if those circumstances arise, allowing the other party to the contract to prepare ahead of time.

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In the cancellation clause, people are provided with a list of circumstances where it will be considered acceptable to break the agreement. Usually, it requires that people give advance warning and people may be required to pay a small fine, although it will not be as large as the fine paid for breaking the contract in other circumstances. For instance, a landlord may agree to help a tenant relocate if a building is sold and not enough notice is provided to move out.

Cancellation clauses should be reviewed with care. People who may need to break an agreement need to know whether their need is covered by this clause and should familiarize themselves with the procedure for legally breaking the agreement. Conversely, people who suspect that the other party is violating the terms of the cancellation clause can review it to see if a cancellation is covered or not.

Certain types of agreements come with a standard cancellation clause. This can be edited to suit the needs of both parties, ideally with the assistance of an attorney to make sure the clause is accurately and appropriately edited. It is important to be aware that illegal clauses cannot be inserted into a contract; if an attorney feels that the language of a cancellation clause violates the law or sets up a situation that could potentially be illegal, the lawyer will usually advise changing the clause to keep it within the law.

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