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What Is an Automatic Renewal Clause?

An automatic renewal clause, often used during commercial leases, renews a contract at the end of its term unless notified otherwise by a party involved.
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  • Written By: Lainie Petersen
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  • Last Modified Date: 25 June 2014
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An automatic renewal clause is a contract provision that renews a contract at the end of its term unless one party to the contract notifies the other by a certain date. These clauses are used in a variety of business contracts, including commercial and residential leases, subscriptions for consumer goods, and vendor contracts. Some consumer advocates have questioned the fairness of these clauses, leading some jurisdictions to make such clauses illegal or to require the issuers of these contracts to make an automatic renewal clause obvious to a purchaser of goods or services.

Many contracts set a definite time limit during which the contract is in force. One typical example for such a contract is a building lease, in which the landlord agrees to allow a tenant to use the premises for a specific length of time, often a year or more, as long as the tenant pays his rent and continues to obey the other provisions of the lease. Neither landlord nor tenant is at liberty to terminate the lease unilaterally unless the lease has somehow been violated. At the end of the lease, however, the tenant is free to move elsewhere, just as the landlord is generally able to not renew the lease and can then find a new tenant for the premises. The law treats other types of contracts similarly, and both parties are expected to fulfill their contractual applications during the time period established in the contract.

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Some businesses insert an automatic renewal clause into their contracts as a way of attempting to hold on to their customers and to continue generating revenue. Customers who sign these contracts are obligated to inform the business of their decision not to extend the contract within a certain amount of time prior to the contract's end. If a customer or client fails to send this notification in time, the contract can be renewed even though the customer client did not explicitly agree to its renewal. A common example of an automatic renewal clause includes those used in the user agreements offered by many websites and online service companies that automatically charge a user's credit card at the end of each billing cycle unless the customer requests cancellation.

Consumer advocates and lawmakers have argued that some businesses use an automatic renewal clause in an abusive manner. These clauses may be buried in what may appear to be boilerplate contracts, and the customer or client may not be aware of the automatic renewal clause until the contract comes to an end and he is informed that he is obligated to continue paying for goods or services on an automatically renewed contract. These laws may also prescribe civil or even criminal penalties for businesses that fail to abide by these consumer protection laws.

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