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What is a Term Clause?

Patrick Shaunessy • January 12, 2023 • 10 minute read

What is a term clause?

The term clause is a contractual provision that serves the simple, yet critical function of defining the period over which a contract has legal effect. In other words, it establishes when the contract begins and how long it will last. As the examples below illustrate, term clauses may be found in a wide variety of legal agreements, and they can range from simple one or two sentence provisions to more comprehensive paragraph-length provisions that may include (i) renewal or extension rights, (ii) termination rights, and/or (iii) rights that arise on or obligations that survive termination/expiration.

Why does the term clause matter?

When businesses enter into contracts, they know they will obtain certain benefits and have to fulfill certain obligations. The term clause clarifies how long these benefits and obligations will last, allowing these businesses to allocate resources appropriately, plan for future needs and account for risks. Businesses don’t always know, however, what the ideal term length should be when negotiating a contract, and the term selected will depend on a number of factors, including the nature of the contract, the parties’ relative bargaining power, their respective business objectives, and the prevailing economic conditions. As time passes and circumstances change, businesses may need to reevaluate their contractual commitments, including deciding which to extend, which to cut short, and which to let expire. In such cases, timing is important as exercising any one of these options may, for example, require a certain amount of notice to be given before the end of the term. The information in the term clause can help businesses determine how much time is left before the current term expires so that they can take appropriate action. Furthermore, as noted above, the term clause (or other sections of the agreement) may contain termination rights or renewal rights, which provide flexibility when it comes to cutting the term short or extending it, as the case may be.

How do you review the term clause in contracts?

Here are some key things to focus on when reviewing a term clause:

  1. Start date (and end date). Term clauses don’t always specify an end date for a contract’s term, but they will always specify a start date. Sometimes, as in example 1 below, the term clause may identify a particular date as the start date. Other times, it may refer to a Commencement Date, Effective Date or similar defined term as being the term’s start date (see examples 2, 3, 4 and 5 below), in which case it’s also necessary to refer to the applicable defined term to confirm the exact start date. Note that, in some cases, the start date may be contingent on the occurrence of one or more events. Example 7 below, for instance, states that the term commences on the date “the Certificate of Limited Partnership is filed in the Office of the Secretary of State of Colorado.” Example 6 below adds further complexity by stating that the “Commencement Date” of the lease term is the earlier of (i) the date on which the tenant commences operations at the leased premises and (ii) the date on which the landlord receives a permanent certificate of occupancy. When these kinds of contingencies determine when a contract term begins, it is important to obtain copies of any supporting documents, etc. that can confirm the exact start date. Once the start date has been ascertained, it can be combined with information about the contract’s duration to determine the term’s exact end date (if not already specified in the contract).
  2. Duration. Many contracts have a finite duration, where the length of the term will be stated in terms of months or years (or possibly even days or weeks). When considering duration, be sure to note any renewal language in the term clause or elsewhere in the contract (see examples 2, 4 and 8 below), including any automatic renewal language (see example 3 below), as this can affect the total duration of the term. Some contracts have an unlimited duration (see example 1 below), and in those cases be sure to check the applicable termination provisions (including any that may be in the term clause) to confirm when and how the contract can be terminated should that become necessary.
  3. Defined Terms. Take note of any defined terms - particularly those that divide the term into more discrete periods of time. In agreements that include renewal rights, for example, the term clause may include defined terms such as “Initial Term”, “Initial Period”, “Renewal Term”, “Additional Term”, and/or “Term” (which, as example 3 below illustrates, may mean the initial term plus any renewal terms). Being aware of the periods covered by these various defined terms will help with interpreting other provisions in the agreement that reference them.

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Examples of the Term Clause

Below are some examples of term clauses from different kinds of agreements. While these examples do not necessarily cover the full range of term clauses one may encounter, they are meant to illustrate the degree to which these provisions can vary from contract to contract.

Example 1: From a Supply Agreement

2.1. Term. This Agreement shall commence on July 1, 2006 and continue in effect until terminated pursuant to Sections 2.2 or 2.3.

Example 2: From a Supply Agreement

  1. Term and Termination. This Agreement shall become effective on the Effective Date and shall remain in full force and effect until December 31, 2021 (the “Initial Term”), unless earlier terminated in accordance with the terms herein. The Initial Term may be renewed for two consecutive two (2) year periods (each an “Additional Term”) upon mutual agreement of both parties by giving written notice to the other party at least 180 days in advance of the expiration of the Initial Term or any Additional Term. Either party may terminate the Agreement for any reason with twelve (12) months prior written notice to the other party, provided that as a condition to such termination by Supplier, Supplier shall be obligated to provide Purchaser, upon Purchaser’s request, with Products at the amount equivalent to the previous year’s total amount of Products sold to Purchaser in addition to the Products to be sold during the last year of the Agreement; such Products, to be sold and delivered under the terms of this Agreement. In the event that either party materially breaches the Agreement, the breaching party upon 30 days prior written notice shall make a good faith attempt to cure the breach. If the breaching party fails to cure the breach during the 30-day cure period, the non-breaching party may terminate the Agreement. Articles 3, 4, 5, 6, 7, 8, 9, 10, 14 and 16 shall survive termination of this Agreement. This Agreement shall also be terminated in accordance with the provisions of Article 13 below (Revocation of Product License). Upon termination for any reason, all Products ordered under any purchase orders issued by Purchaser prior to such termination shall be supplied to Purchaser.

Example 3: From an Employment Agreement

Term: The term of this Agreement shall commence on the Effective Date and continue for a period of five (5) years (the “Initial Period”). Unless Executive’s employment has otherwise been terminated in accordance with this Agreement, following the Initial Period this Agreement shall be extended automatically for up to two (2) additional one (1) year periods (each a “Renewal Term”), unless either party gives written notice in the manner specified herein at least six (6) months prior to the expiration of the Initial Period or any Renewal Term of such party’s decision not to renew this Agreement, in which event the Term shall end at the conclusion of the then-current year of the Initial Period or Renewal Term. The “Term” of this Agreement shall be the Initial Period plus any Renewal Terms. Upon any such expiration of the Term, on termination of Executive’s employment at such time or thereafter, Executive shall receive Accrued Amounts, any amounts or benefits due under any benefit or payroll plan or program and, subject to Section 4(b) hereof, a Pro Rata Bonus (as defined in Section 10(a) below) and have at least one (1) year thereafter to exercise any vested stock options or, if less, the remainder of the Term of the grant, provided that if such expiration is the result of the Executive giving notice of nonrenewal, such expiration shall be treated as a resignation other than for Good Reason by the Executive. Any employment of Executive after expiration of the Term shall be at will employment terminable by either party at any time with or without Cause or with or without Good Reason, except as may otherwise be specifically provided in a written agreement.

Example 4: From a Commercial Lease

3.1 Initial Term. This Lease shall be for a term of twenty (20) years plus, if the Commencement Date (as hereinafter defined) is not the first day of the month, the number of days from the Commencement Date to the end of the month in which the Commencement Date falls (any such period, the “Partial Month Period”). The Lease is effective as of its execution and delivery by Landlord and Tenant; however, the Lease Term shall commence on the “Commencement Date,” which shall be the earlier to occur of (a) the date on which Tenant begins to operate its business from the Leased Premises or (b) the date on which Landlord has obtained a permanent certificate of occupancy for all of the Leased Premises from the City of Portland and an architect issues an AIA G704-2017 Certificate of Substantial Completion (“Substantial Completion”). For the purposes of clause (a), Landlord acknowledges and agrees that the installation of Tenant’s telecommunication wires and equipment and/or the installation of Tenant’s furniture, fixtures and other equipment do not constitute the operation of its business. The “Rent Commencement Date” shall be the date that is thirty (30) days after the Commencement Date. Tenant shall have no rent payment obligations hereunder until the Rent Commencement Date, but shall be allowed to take possession of the Leased Premises following issuance of said certificate of occupancy (or prior thereto with the consent of Landlord). Landlord and Tenant agree to enter into a Term Commencement Agreement at the request of either after the Commencement Date, for purposes of confirming the Rent Commencement Date and the termination date of this Lease and any other pertinent items the parties agree to include.

Example 5: From a Maintenance Agreement

  1. Duration of Agreement. This Agreement shall commence on the Commencement Date and shall continue for an initial period of five years until terminated in the manner described in Clause 16 below.

Example 6: From a Non Disclosure Agreement

H. This Agreement shall be binding as of the date of execution by Company. The terms of this Agreement shall terminate twelve (12) months from that date.

Example 7: From a Limited Partnership Agreement

(a) Term. The term of the Partnership shall commence on the day on which the Certificate of Limited Partnership is filed in the Office of the Secretary of State of Colorado, pursuant to the provisions of the Act and shall end upon the first to occur of the following:

(i) December 31, 2035

(ii) receipt by a General Partner of an election to dissolve the Partnership at a specified time by Limited Partners owning more than 50% of the Interests then outstanding, notice of which is sent by registered mail to the General Partner not less than ninety (90) days prior to the effective date of such dissolution;

(iii) withdrawal (including withdrawal after suspension of trading), admitted or court decreed insolvency or dissolution of the General Partner;

(iv) termination of the Partnership pursuant to Paragraphs 10 or 17; or

(v) any event which shall make it unlawful for the existence of the Partnership to be continued or requiring termination of the Partnership.

If the Partnership is dissolved as the result of subsection (a)(iii) above, the Partnership may be re-constituted by the Limited Partners pursuant to the provisions of Paragraph 17 of this Agreement.

Example 8: From an Equipment Lease

Term. The term of this Agreement shall begin on the Effective Date and unless renewed or terminated as expressly provided herein, shall expire on the last day of the month during which occurs the third (3rd) anniversary of the Effective Date (“Term”). Lessee shall have an exclusive option to renew this Agreement by providing Lessor written notice of its intent to renew within thirty (30) days of the expiration of the Term.

Example 9: From a Franchise Agreement

1.29 Term. “Term” means the period during which the rights granted by this Agreement are in effect, which starts on January 1, 2013, and (unless terminated early as allowed by Section 18) ends on the day before the 30th anniversary of this Agreement, or any succeeding renewal term if this Agreement is renewed. The Term of this Agreement may be renewed in accordance with the provision of Section 2.8.

Example 10: From a Noncompetition Agreement

  1. Term of the Agreement. The term of this Agreement shall begin on the Effective Date and shall continue for a period of six (6) years thereafter (the “Term”); provided, however, that, notwithstanding the foregoing, the Term shall automatically terminate upon the consummation of a transaction involving (a) the sale of more than 50% of the outstanding common stock of Purchaser to a third party, or (b) the merger of Purchaser into another company which results in the shareholders of Purchaser owning less than 50% of the combined entity.

Example 11: From a Development and Supply Agreement

5.1 Term of this Agreement. This Agreement shall commence on the Effective Date and, subject to the provisions for termination herein, will remain in force for 5 years (the “Term”). The term will be automatically extended for a further 3 years after the initial term unless agreed otherwise by the parties.

Example 12: From an Agency Agreement

11.1 This Agreement shall come into effect on the Commencement Date and, subject to sub-clause 11.2, shall continue in force for an initial term of 2 Years and indefinitely thereafter until terminated by either party giving prior written notice in accordance with sub-clause 11.4 to expire on or after the expiry date of the initial term.

Example 13: From a Nondisclosure Agreement

  1. Term. The foregoing commitments of each party shall survive any termination of the Relationship between the parties, and shall continue for a period terminating five (5) years from the date on which Confidential Information is last disclosed under this Agreement.

Example 14: From a License Agreement

18.1 Term and Expiration. This Agreement shall become effective as of the Effective Date and shall continue in effect until such time as Licensee no longer owes any royalty payments to Licensor under this Agreement, unless earlier terminated in accordance with this Article 18 (Term and Termination) or Section 19.4 (Force Majeure). On the expiration of this Agreement, that is when Licensee no longer owes any royalty payments to Licensor under this Agreement, the provisions of Section 3.7 shall come into effect.

Example 15: From a Supply and Service Agreement

3.01 Term. This Agreement, unless terminated earlier in accordance with Section 3.02 or Section 3.04 below, shall terminate on:

(1) the sale of all, but not less than all, of the IP; or

(2) the later of:

(i) the last to expire of the patents and patent applications set out in Schedule A hereto, including any corresponding provisional or other applications for patent filed in any jurisdiction based upon or claiming priority from any such patents or patent applications, and all divisionals, continuations, continuations-in-part, reissues, extensions, substitutions, re-examinations, renewals, supplemental protection certificates, patents of importation or patents of addition to any of the foregoing; or

(ii) the last to expire of any licence or sublicense agreement whose subject matter is the IP or any part of it.

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