Resale restrictions: Overview, definition, and example
What are resale restrictions?
Resale restrictions are contract provisions that limit how, when, or to whom a product, asset, or security can be resold. These restrictions are commonly used in real estate, stock agreements, and franchise contracts to control ownership transfers and maintain market stability.
For example, a company issuing stock to employees might include a resale restriction preventing employees from selling their shares for a certain period. Similarly, a homeowners' association (HOA) may impose resale restrictions on properties within a community to maintain property values and ensure compliance with community rules.
Why are resale restrictions important?
Resale restrictions help businesses and organizations maintain control over ownership transfers, protect brand value, and comply with legal regulations. They are particularly important in:
- Stock agreements: Preventing early sales that could affect share prices.
- Franchise agreements: Ensuring that new owners meet company standards.
- Real estate transactions: Protecting community rules and affordable housing initiatives.
For SMBs, resale restrictions can prevent unauthorized transfers of business assets or intellectual property, ensuring that buyers comply with agreed-upon conditions before reselling.
Understanding resale restrictions through an example
Imagine a startup issues stock options to early employees but includes a resale restriction that prevents them from selling shares for five years. This ensures that employees remain committed to the company’s growth and prevents rapid sell-offs that could impact the company’s valuation.
In another case, a small business purchases a franchise, and the contract includes a resale restriction stating that the franchise owner cannot sell the business to an outside party without prior approval from the franchisor. This protects the brand by ensuring that new owners meet the company’s standards.
An example of a resale restrictions clause
Here’s how a resale restrictions clause might appear in a contract:
“The Purchaser agrees that any transfer, sale, or assignment of the Asset shall be subject to the approval of [Company Name] and shall comply with all applicable resale restrictions, including but not limited to [specific limitations, timeframes, or conditions].”
Conclusion
Resale restrictions are essential for controlling how assets, securities, or businesses are transferred, protecting value, and ensuring compliance with contractual and legal requirements. Whether in stock agreements, real estate, or franchise contracts, these restrictions help businesses maintain stability and prevent unauthorized sales.
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.