Automatic Extension - Evergreen Clauses

Associated Capital encourages our clients to look for and avoid contracts that make use of automatic extension without modification. We also advise our vendor partners to identify whether or not their lending partners make use of this language in their finance contracts.

Automatic extension or the evergreen clause is a technique that extends a finance contract beyond the term by several months to 12 months. It must be noted that most if not all lease contracts will have extension language as this is part of convention and legal differentiation between lease and loan contracts. The critical question is the language of that specific clause and whether or not it is modified or superseded by the presence of a separate buyout letter, e.g. $1 or 10% buyout. AC provides a buyout letter with nearly all contracts that supersedes standard extension language. Many contracts make use of extension language that may result in months of additional, non-refundable payments.

Further Explanation:
Buried in the language of the finance documents there will be a clause requiring 30 days, 60 days, or 90 days written notice that the client intends to end the contract at the end of the term. This letter needs to be sent to a certain address as stipulated by the original contract. If the client does not send the letter, the clause stipulates how the contract will be extended. The clause may allow for up to 12 months of additional payments as part of the original contract. If the client fails to send the necessary letter, the lender may simply continue monthly billing.

Automatic Extension / Evergreen clauses present several problems to the business owner. It is unlikely that the presence of the clause will be disclosed to the client by the lender, and it is unlikely that the lender will explain that the letter must be sent and under what conditions. It is difficult for most individuals to remember to send this letter as is required by the specified date 3, 4, or 5 years in the future.

Many businesses set up automatic payments or have a person do the billing who is not familiar with the original terms of each finance contract. If written notice is not sent to the lender, the lender will likely continue to auto charge payments or send invoices to accounts payable. Accounts payable is unlikely to know exactly when the contract should end and thus will generally pay the beyond-term invoices. In each scenario, lenders that use the evergreen clause generally anticipate that the customer will pay extra, non-refundable payments.

Contracts that have a Fair Market Value (FMV) or Option residual will nearly always contain automatic extension language. In these cases, it is the responsibility of the client to track the contract and to notify the lender at the appropriate time of the end-of-term intention (return, purchase, refinance, etc). The primary problem is that many companies and lenders will use extension language on fixed residual contracts such as 10% Put/Buyout and $1 residual terms.

AC's Commitment:
Associated Capital seeks to educate our clients on the truths of the finance industry. With nearly all contracts we provide a fixed buyout addendum that supersedes the standard extension language. Our clients get a set term and payments without the risk of extension. Any exceptions are discussed with the client. Further, AC tracks all client relationships and will discuss buyout decisions with clients with FMV or option contracts.