12 Days of Contracts – Day 3 – Term + Options + Benchmarks

On the third day of Christmas, my client gave to me, 3 option periods… (Mel’s Remix)

In honor of the holidays, I’d like to share a few tips with you to make sure you go into the new year with new knowledge. Instead of the 12 Days of Christmas, I present to you — The 12 Days of Contracts! Yes, I’m a legal nerd!

In these 12 days, I will share some contract basics, so you can be more informed on terminology and what a proper contract needs to contain to make it valid and enforceable.

IF YOU MISSED IT, SEE DAY 2 HERE | IF YOU MISSED IT, SEE DAY 1 HERE

Don’t shortchange yourself when it comes to protecting yourself, your business, and your assets!

Melanie Rodriguez

Term of a Contract

Simply put, term means the length of the contract or how long will this contract be in effect. The term can be a set time based on a number of months or years, or it can be based on performance or benchmarks. The term is not always static, meaning it can change automatically given a set of conditions.

For example, a term can start as a set number of years, let’s say 2 years as an example, but then it automatically renews for 1 more year after that. Thus, the total term is 3 years. This automatic renewal might be considered an “option” (discussion below), but not necessarily. One or both parties might have the ability to cancel at the end of the 2 years, which would mean the contract ends in 2 years. Thus, the total term of this scenario would be 2 years.

Term = Length of the Contract

At minimum, there should be a definite starting point to the contract. Does it begin the day you sign, or some date in the future? As for the end of a contract, that depends on the structure and any options. That being said, you should be able to easily calculate the end of the contract. If you can’t then make it clear beforehand!

Here’s a caveat: the term MAY end upon some form of termination. Termination will be discussed in on Day 9. If the contract has the ability to terminate, this could affect the term. This would mean that the term may end before it’s intended to if one or both parties are not meeting their part of the contractual obligation.

The term can, and should, be structured in a way that makes sense for the deal you are entering into. It should align with your goals and makes sense and cents.

Automatic Renewals

So, as we discussed in the example above, you might have a term that gets automatically renewed after the first or initial term. The contract should say “automatically renews” or something to that effect. Automatic renewals are helpful because you don’t have to give notice for it to renew.

Some contracts do not automatically renew because they: 1) end at a certain date or time period, or 2) you must give 30/60/90 day notice to extend. Unless you have a good calendar system to remind you of when your contract term is set to end, you might unknowingly let the contract lapse.

Options

To option or not to option, that is the question!

As for options, options are not always included. How they operate is included in the name. One or both parties have the “option” (not the requirement) to extend the term. It can be unilateral, meaning only one party has the option, or mutual, meaning all parties have the option.

Option Periods = Extend the term

Option are usually conditional, meaning something has to be done to effectuate the option. In other words, an action must take place to take the option to either renew or terminate. If there was no option, it would just be automatic renewal or end, as we discussed above. So what this looks like in practice is that one party, or both parties, must give a 30/60/90 day notice to take the option to renew the term. An option period only exists IF one or both parties accept the option.

Options are good because you can build in a parachute release valve to get out of a contract if it’s not working out as intended. They also give you an opportunity to renegotiate. They usually are the same length as the initial period or term. Then when you add any options, the term is the initial period + option periods.

Full Term = Initial Term + Options (if any)

Same caveat as above: the term MAY end upon some form of termination. Termination will be discussed in on Day 9. If the contract has the ability to terminate, this could affect the term AND any options. This would mean that the term may end before it’s intended to if one or both parties are not meeting their part of the contractual obligation.

Benchmarks

Benchmarks are simply stated goals within the contract. In actuality, very few contracts include these because unless it’s easy to determine, benchmarks can be very limiting. They can hamper the flow of a contract if not done well.

However, where they are useful is when you want to have a measurable performance as a means to extend the term. For example, let’s say you are a new artist starting out and are not sure you want to sign to a management company for a 5 year term. You can try and negotiate benchmarks into the contract.

Using the management company-artist example from the previous paragraph, a benchmark could look like: Artist will renew for an additional two year term if Management Company secures $100,000 in gross income for Artist in the Term. (Disclaimer: This is very general example language and not what I would use in a contract.) The management company in this example could also require some benchmark from the artist as well.

Benchmarks can flow both ways. You could also use a benchmark more generally for a performance metric, such as securing X number of appearances or selling X number of items. Again, it should make sense to do and align with your goals of the contract.

Benchmarks should be specific and measurable based on performance metric or monetary based.

Melanie Rodriguez

Questions to ask:

• 1) When is this contract going to begin? Will it start the date services are rendered, when the deal is signed, or some other date? This MUST be agreed to by all parties. If there is ambiguity in the term, this can open the door for trouble later on.
• 2) How long will this contract last and when does it end? Be able to calculate this accurately! If there’s confusion, clear it up.
• 3) Does the contract term renew automatically? This is up to the parties to include this or not. You could ask for an option to renew.
• 4) How many options will there be, if any? Automatic or must be requested? Who gets the option? Not all contracts have options included, but it is, well, an option to take!
• 5) Are there any benchmarks or metrics that must be reached? Make these specific and measurable. It can be based on some specific performance or monetary based.

While these seem like very simple questions, if you can’t answer them, you have a problem! Make sure you understand how long you are signing anything for because that can have long-ranging implications down the road.

*Disclaimer: This post is for informational purposes only and does not constitute legal advice. An attorney client relationship is not formed until there is a signed fee agreement*