Early termination fee clause

Sample clause

a 24 month gym membership agreement between Granite Loft Climbing and a member, on standard terms, both fictional

1. Early Termination. The Member may end this agreement before the end of the Minimum Term by giving 14 days written notice and paying the Early Termination Fee. 1.1 The Early Termination Fee is one month of the then current monthly fee, plus the unamortised balance of the joining fee calculated on a straight line basis over the Minimum Term. 1.2 The Early Termination Fee is not payable if the Member ends this agreement because of a serious illness or injury certified by a medical practitioner, because the Member has moved more than 25 kilometres from the Premises, or because Granite Loft Climbing has breached this agreement. 2. Refunds. Any fee paid for a period after the effective date of termination must be refunded within 10 business days. 3. No Other Charge. Granite Loft Climbing may not charge any other amount for ending this agreement early, including an administration or processing fee.

Sample wording, not legal advice.

Variants

What to negotiate

• What the fee is actually recovering

  A fee tied to a real cost is defensible and a round number is not. Suppliers should be able to point to the equipment, the setup labour or the discount the fee recovers. Customers ask for the calculation to be written into the clause or a schedule. Doing that once at drafting is far cheaper than explaining the number to a regulator or a tribunal later.

• Whether the fee reduces over time

  An unrecovered cost falls as the term runs, so a fee that stays the same in month twenty three as it was in month one looks like a punishment rather than a recovery. Customers ask for a sliding scale or a straight line amortisation. Suppliers accept it readily where the underlying cost really is being recovered month by month.

• The exceptions that should apply

  Most consumer facing contracts carve out termination for the supplier's breach, and many add hardship grounds such as serious illness, relocation or loss of income. Suppliers want the grounds evidenced, usually by a certificate or a document. Agreeing the evidence at drafting avoids the situation where a customer in genuine difficulty is arguing about proof.

• Whether other charges can be added

  An administration fee stacked on top of a termination fee is the kind of detail that attracts attention, because it is rarely tied to any real cost. Customers ask for a sentence saying the stated fee is the only charge for ending early. Suppliers who have priced the fee properly lose nothing by agreeing, and the clause reads better for it.

The risk of leaving it out

Without the clause a supplier that has bought equipment or discounted its price for a long commitment has no contractual way to recover that outlay when the customer leaves early. It has to prove its loss as damages instead, which is slower, uncertain, and often ends below what a properly drafted and properly explained fee would have delivered.

The penalty test applies to exit fees

A sum payable on ending a contract early is measured the same way as any other agreed sum. It is enforceable while it protects a legitimate interest of the party charging it, and it becomes an unenforceable penalty when it is out of all proportion to that interest. The High Court set out that approach in Paciocco v Australia and New Zealand Banking Group Ltd in 2016, following Andrews v Australia and New Zealand Banking Group Ltd in 2012, which confirmed the doctrine is not limited to sums payable on breach. That second point matters here, because an early termination fee is usually payable on the exercise of a right rather than on a breach at all. A fee built from a recorded cost survives that test far more comfortably than a round figure.

Unfair contract terms and consumer contracts

For standard form consumer and small business contracts, the unfair contract terms regime in Schedule 2 of the Competition and Consumer Act 2010 adds a second test. A term can be unfair where it causes a significant imbalance, is not reasonably necessary to protect a legitimate interest, and would cause detriment if relied on. The Australian Competition and Consumer Commission publishes guidance on the kinds of term it examines, and exit fees that bear no relation to the supplier's actual loss appear in that territory. Since the 2023 changes a term found unfair can attract a penalty rather than simply being declared void, which has changed how these fees are set.

Where it sits in a generated document

The document generator writes an agreement as numbered content, so an early termination fee usually appears as a sub clause under the termination right it applies to, with the calculation and the exceptions as further sub clauses. The generated text is written from the description it is given and it never prints citations, so any figure or formula in a draft has to be checked before the document is used. Describing how the fee is calculated, rather than naming a bare amount, produces a clause a reader can follow.

Documents that carry this clause

Service agreementBeacon Systems supports Harlow Freight’s IT for an initial 24 months from 1 October 2026 at $8,400 a month plus GST, with 40 hours included and $220 an hour beyond them. Twelve numbered clauses cover the services, a four level severity table, client duties, fees with a CPI adjustment, confidentiality, privacy, IP, a liability cap, termination and a three step dispute ladder.Monthly retainer agreementA studio sells a physio practice twenty four hours a month. Almost every clause exists to answer one question that ordinary contracts duck: what happens to the hours nobody used.Master services agreementA data consultancy and an insurer sign this once and then buy work under it for three years. It is the rare contract whose whole purpose is to make the next twenty contracts short.

Questions people ask