Have you ever signed a contract and then wondered when the terms of the contract become enforceable? For many of us, the answer to this question is probably “no”. It’s a common misconception that a contract becomes valid the day it’s signed. This is not necessarily the case.
To understand the difference between signing a contract and a contract coming into effect, there are two terms that are important to know: effective date and execution date.
What is the execution date of a contract?
The execution date is the day both parties sign the contract. It’s when both parties agree to terms and conditions as the contract outlines. However, this isn’t necessarily the same day the contract comes into effect. So, what is the effective date of a contract?
The day when the contract becomes effective is known as the effective date (or contract effective date), which may be different from the execution date. This date cannot precede the execution date, meaning a contract cannot be in effect until after all parties sign it. By signing the contract, all parties are stating that they agree upon the effective date.
The effective date is when your obligations outlined in the contract begin. If you fail to meet your obligations to the contract after this date, the other parties involved can now sue you for breaching the contract. It’s important to note the effective date of the contract because you need to know when your obligations begin.
Contract effective date vs. execution date
In many circumstances, the execution date of a contract occurs before the effective date. In these circumstances, the date on which all parties sign the contract is different from the date the contract comes into effect.
For example, if you’re moving into a new apartment, you may sign the Residential Lease in advance. Often, a landlord and tenant will sign the contract weeks or sometimes months in advance. Though you may sign the lease well before you officially move into your new rental property, you are not bound by the terms of your lease until after the effective date. For most leases, this is the first day of your fixed term or automatic renewal lease agreement. It’s also often the day you get the keys and can start moving in.
This means even if you signed your lease months before moving in, you’re not obligated to keep the unit clean, pay rent, or anything else until your lease actually begins (unless something in your contract specifies otherwise). Conversely, you are also not allowed to live on the premise until the effective date either.
That being said, a contract isn’t considered valid until all the necessary parties sign it. For example, if the effective date of the lease is September 1st but today is September 3rd and the required parties haven’t signed the contract, it isn’t valid.
Depending on the contract, the effective date and the execution date can be one and the same. Carefully read your contract to determine exactly when it starts. However, keep in mind that there are different ways of writing an effective date into a contract.
Sometimes an effective date is a fixed date that is explicitly stated. However, the contract might not begin on a fixed date and may be conditional instead. If a contract begins on the date all parties sign it, that is a conditional effective date. A contract could also start after important documents have been filed with the state or the date on which a license is issued.
What is the difference between effective date and commencement date?
A commencement date is the day on which activities in the contract commence. This is basically another term for an effective date. While we recommend using the term effective date, you might see the term commencement date from time to time, especially in residential leases.
When signing your next contract, take the time to read the document thoroughly. Now that you know the difference between an effective date and an execution date, pay attention to the document to see exactly when it comes into effect.
Knowing the difference between the two dates is critical to ensuring you handle your contracts properly. You’ll understand when your role in the contract comes into effect, and protect yourself from potential legal action.
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