Lapse of restrictions: Overview, definition, and example
What is lapse of restrictions?
Lapse of restrictions refers to the expiration or removal of limitations, conditions, or prohibitions placed on an asset, contract, or legal right after a specified period or upon meeting certain conditions. This commonly applies to restricted stock, property use restrictions, or regulatory requirements that no longer apply after a set timeframe.
For example, an employee who receives restricted stock as part of a compensation package may have to wait a few years before the restrictions lapse, allowing them full ownership and the ability to sell the shares.
Why is lapse of restrictions important?
Lapse of restrictions provides clarity on when certain conditions will no longer apply, helping businesses and individuals plan for future rights and obligations. This concept is particularly important in financial agreements, real estate, and employment contracts.
For businesses, clearly defining when restrictions lapse prevents disputes and ensures compliance with regulatory and contractual obligations. Employees, investors, and property owners also benefit from knowing when they gain full control over assets or rights.
Understanding lapse of restrictions through an example
Imagine a company grants restricted stock to an executive as part of a long-term incentive plan. The stock agreement states:
"The restrictions on selling these shares shall lapse after three years, provided the Employee remains employed by the Company during that period."
This means that after three years, the executive can sell or transfer the shares without restrictions.
In another scenario, a piece of land is purchased with a restriction preventing commercial development for five years. Once the five-year period ends, the restriction lapses, allowing the owner to build a business on the property.
An example of a lapse of restrictions clause
Here’s how a lapse of restrictions clause might appear in a contract:
“Any restrictions on the transfer, sale, or use of the Restricted Assets shall lapse upon the completion of [X] years from the Effective Date or upon the occurrence of [specific condition]. Upon lapse of restrictions, the Holder shall have full and unrestricted rights over the assets.”
Conclusion
Lapse of restrictions defines when certain contractual, financial, or legal limitations expire, allowing individuals and businesses to exercise full control over assets or rights. Clearly outlining lapse conditions in agreements helps prevent misunderstandings and ensures all parties understand when restrictions are lifted.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.