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EVERGREEN CLAUSES

When you enter into a leasing agreement or other financial contract, it’s crucial to know exactly what you’re signing up for. While an evergreen clause may look standard and harmless, it is a loaded financial tool that can potentially harm your finances.

Protecting yourself and your business from detrimental financial deals begins with getting informed. That’s why we’re discussing what an evergreen clause is and how to examine evergreen contract language before signing on the dotted line.

Read on to learn about evergreen financing and how it affects a business.

What is an Evergreen Clause?

The evergreen clause is a masterpiece of deception used by some leasing companies, brokers and commercial lenders. Unlike a typical contract that expires after a certain date, an evergreen clause ensures that the agreement is automatically renewed after each completion maturity period until one of the parties terminates the agreement.

Each party that enters into the contract must fulfill its obligations for as long as the contract remains active. Because evergreen clauses can last for an indefinite amount of time, they pose a significant risk to the parties entering. Still, these clauses do appear in certain equipment leasing contracts.

For a deeper look into how an evergreen clause works, read below.

How Does an Evergreen Clause Work in Equipment Leasing?

In equipment leasing situations, a lender will provide the customer with a fixed price option to purchase the asset being leased once the contract’s initial term has expired, and the customer has made all payments. In other words, the customer has the option to buy the equipment once the lease period is over.

This is usually negotiated before the customer has committed to the lease and is generally part of the customer’s economic evaluation and ultimate decision. The customer is even given a separate document demonstrating that they have the right to purchase the asset for a specific price, usually $1.00.

At the end of the initial lease term, the customer will either remit a check for the additional $1.00 or other fixed-price purchase option and send it with their final payment or inquire what they must do to obtain a clear title to the asset.

This is when the BAD NEWS is usually disclosed. In either situation, they may find that buried in the fine print are requirements that the customer should have NOTIFIED the lessor of their intent to exercise their option and that notice should have been made in a very specific way and within a very specific time period.

So, a customer that believed they would be walking away owning the equipment after the leasing period is shocked to find out that they still do not legally own the equipment. But how can this happen? Let’s examine the contract language below.

Examining Evergreen Contract Language

The agreement language usually requires the customer to send a CERTIFIED letter to the lessor notifying the lessor of their intent to exercise the option. That letter must be received by the lessor less than 90 days and not more than 120 days prior to the lease’s expiration.

Typically this language is ‘hidden’ in one or two separate sections of the lease, and only when read in conjunction with each other does it become clear what must be done to exercise the option. If the customer fails to do any of those things exactly as outlined in the lease, the lease automatically renews for an additional 12 months and the customer is legally bound for 12 more payments than they originally contracted for.

Assuming the lease’s original term was between 36 and 60 months, the customer can end up paying between 26% and 38% of the original asset cost in additional payments. THAT’S IN ADDITION TO ALL THE INTEREST AND PRINCIPAL THE CUSTOMER HAS PAID FOR THE LAST 3 TO 5 YEARS.

How to End an Evergreen Contract

If you are poring over evergreen contract language and trying to find a way out of your agreement, there are a few options open to you. For details on canceling an evergreen contract, read on.

Utilize Renewal Periods

Each evergreen clause includes a renewal period that ranges from 30-90 days. During this time, a party can move to terminate the contract. However, if neither party cancels the contract during the renewal period, then both are locked in for the set length of time that the contract lays out.

In other words, the renewal period is the brief window in which an unsatisfied party may make a change. If they miss the deadline, they’ll have to wait until the next period rolls around.

It is a possibility that the other party may not agree to the cancellation. This complicates matters and may result in a legal battle to end the contract.

Work Out a New Contract

An alternative way to end an evergreen contract is to renegotiate the terms. In this case, both parties must agree to new contract terms. Then, the new contract nullifies the old one. The likelihood of negotiating more favorable terms depends on your unique financial situation.

Nevertheless, this is not a guaranteed way of getting out of the contract. If an agreement to amend the terms is not reached, the original contract will still be in effect. In the case that each party approves a new contract, you’ll still be in a binding agreement with the other party.

Risks of Evergreen Financing

Exiting a contract with an evergreen contract is seldom as simple as it seems. It is not uncommon for parties to forget the renewal period date and miss their window to exit completely.

For example, suppose the evergreen financing agreement specifies two years of enforcement before a renewal period opens. In that case, a business may file the contract away and forget when the two year period comes to an end. The business then misses the window to terminate the evergreen contract and must abide by the contract requirements for the next two years.

Another risk of entering into an evergreen financing agreement is not being aware that it is in the contract. As discussed in the previous section’s example, a business owner may believe that they own the equipment after the lease period. Unfortunately, they find out all too late that the lease automatically renews based on their failure to follow the contract’s fine print.

With so much at stake, steering clear of evergreen clauses altogether is a safe option.

Have a Financial Expert on Your Side

Finding the ideal financing solution for your business requires knowing what to look for in a contract and avoid. Evergreen clauses are one of many tools that lenders have at their disposal to rope businesses into undesirable agreements.

Fortunately, you have a valuable tool in your reach as well. Charter Capital has over four decades of experience in the equipment financing industry. Our family-owned and operated business works for you, not for the banks and lenders.

Connect with us today to discover new financing options from trusted lenders across the country. Let us put our expertise to work for your business.


We offer this informational document as our opinion based on over 40 years of experience in the commercial finance industry and suggest that you use it as a part of your decision-making process. As with all important decisions, especially financial decisions, we also suggest that you consider all aspects carefully and consult with your attorney, accountant or other party who is knowledgeable about financial matters when considering entering into a legally binding agreement.

About Charter Capital

Charter Capital is a family owned and operated commercial finance broker. Since 1977 we have been providing businesses just like yours with equipment and technology leases and loans that are right for their specific financing needs. Nothing we do is standard.