What is lock-in period in a contract and what is its sanctity?

Lock-in period is a very important clause in the contract that indicates the time period within which the parties cannot terminate the contract. Usually, such contracts are accompanied by penalty clauses that have to be borne by the party that chooses to discontinue the contract by terminating it within the lock-in period.

Every Lock-in period clause has the following-

  • Duration: This clause describes the time period till when the lock-in clause will apply.
  • Remedy clause: In case one of the parties discontinues their contract, this clause will prescribe the remedy/ compensation they have decided already. Remedies offered under this clause are similar to the damages and specific relief offered under contract law. Hence they would have to adhere to conditions of stipulating compensation. It should not create an excessive burden on the other party who wishes to terminate the contract otherwise it will defeat the purpose of the clause. A compensation clause is not for retribution but to make sure that the party who decides to stay is made good of the loss that would occur due to the termination of the contract.
  • Notice Period: Even after the “lock-in” period has ended, this clause ensures that the party who decides to discontinue the contract awards the other party a reasonable notice. What is reasonable can be pre-determined by the parties or they can follow the common industry practice.It has been observed that the idea of what is reasonable has been debated in the Court. Hence, the parties should not play foul and force the other party to pay or stipulate a very long notice period for the termination of the contract. For example- A landlord (lessor) should not demand 34 months’ rent and notice for termination of lease from his/ her lessee if the common practice is to ask for 3 months rent and notice.

When can a party discontinue the contract without any penalty?

In case a party defaults on the terms and conditions of the contract in general, the other party has the right to terminate the contract within the lock-in period and without any repercussions. In such cases usually, the remedy clause and the notice clauses become in-applicable. 

In order to understand the lock-in period clause let’s look at a few samples of lock-in period clauses-

Example 1-

Lock-in Period. Except as provided in this Deed, the LESSEE and the LESSOR shall not be entitled to terminate the Lease for an initial period of Sixty (60) months from the Rent Commencement Date (hereinafter referred to as “Lock-In Period”). In the event of the LESSEE being desirous to terminate the Lease during the Lock-In Period for reasons other than the breach on the part of the LESSOR, or the LESSOR terminating the Lease due to the default of the LESSEE, the LESSEE will become liable to pay the Rent with respect to the Scheduled Premises for the remainder of the Lock-In Period. If termination is caused due to breach by the Lessor of its obligation under this Deed, the Lessee will not be required to pay any amounts for the remainder of the Lock-in period. If the LESSEE does not propose to continue the Lease at any time after the expiry of the Lock-In Period then in that event the LESSEE shall give three (03) months’ advance written notice to the LESSOR.

This clause contains the duration of the lock-in period, which is Sixty Months, and also specifies the date from when the period is supposed to be calculated.

This clause also contains the remedy to be implemented in case one of the parties decides to terminate the contract during the lock-in period. Here, the remedy decided is the payment of Rent according to scheduled premises (list of rent amounts that have been pre-determined and are drafted as a common schedule for all the other clauses of the contract).

The clause mentions the situation wherein one party defaults on any other terms of the contract, the other party is not required to pay the rent in case they wish to continue the contract. 

Finally, the clause contains the notice period. Here, it is a three months advance and a written notice.  

Example 2-

Lock-in Period. 1) The Licensee shall not terminate the License till the expiry of 24 months (Lock-In Period) from the date of the License Agreement. In case the Licensee terminates the License Agreement prior to the expiry of the Lock-in period, the Licensor shall forfeit the Performance Security Deposit deposited by the Licensee in addition to all applicable charges/sums stipulated under this License Agreement herein(2) In case of termination by the licensee during the lock-in-period the Licensee shall give two (02) months’ prior notice in writing to the Licensor or by payment of proportionate equivalent License fee in lieu of the notice period stipulated and shall have to pay all other charges/sums stipulated under this License Agreement herein.(3) The Licensee may choose to terminate the License and vacate the premises after the lock-in period by giving two (02) months’ prior notice in writing to the Licensor or by payment of proportionate equivalent License fee in lieu of the notice period stipulated and after paying all other charges/sums stipulated under this License Agreement herein.

This clause contains the duration of the lock-in period, which is twenty – four months, and also specifies the date from when the period is supposed to be calculated.

This clause also contains the remedy to be implemented in case one of the parties decides to terminate the contract during the lock-in period. Here, the remedy decided is forfeiture of performance security deposit.   

The clause contains the notice period. Here, it is a two month prior written notice or a two months license fee in case they do not give prior notice.

When can a “Lock-in” be waived off?

There are certain situations when the lock-in period can be waived off-

Force Majeure Clause: In case of an unforeseeable and uncontrollable incident takes place that makes the performance of one or both the parties impossible then the force majeure clause allows the parties to exit/ discontinue the contract. If such an event happens during the lock-in period, the lock-in period will be waived off.

Government Announcement/ Party’s own decision: In a few cases, the government realizes that in light of some new information, the contract holders of a certain industry should be allowed to exit the contract even during the lock-in period. This usually is the case when the contracts are between citizens and the government such as government bonds etc. In other cases, both the parties to the contract can mutually decide to waive the lock-in period. 

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