DEFINITION of 'Grandfather Clause'

A grandfather clause is an exemption that allows persons or entities to continue with activities or operations that were approved before the implementation of new rules, regulations or laws. Generally speaking, a grandfather clause only exempts people or entities engaged in specified activities prior to new rules being put in place, while all other parties must abide by the new rules — however, these clauses effectively place two sets of rules or regulations on otherwise similar businesses or circumstances, which can create unfair competitive advantages for grandfathered parties. In these situations, grandfather clauses may only be granted for a set period of time.

BREAKING DOWN 'Grandfather Clause'

The origin of the term refers to statutes put in place after the Civil War by seven southern states in an attempt to block African Americans from voting while exempting white voters from taking literacy tests and paying poll taxes required to vote. In the statutes, white voters whose grandfathers had voted prior to the end of the Civil War were exempt from taking the tests and paying the taxes under the Grandfather Clause. The statute was deemed to be unconstitutional by the Supreme Court in 1915 because it violated equal voting rights, but the use of the term indicating rights prior to rule changes carries on.

Types of Grandfather Clauses

Depending on specific circumstances, grandfather clauses can be implemented in perpetuity, for a specified amount of time or with specific limitations. In situations where this clause creates a competitive advantage for the grandfathered party, exemptions are usually granted for a specified period of time to allow existing businesses to make the changes necessary to comply with new rules and regulations. Clauses with specific limitations may also be put in place to prevent unfair competition, such as prohibitions on the expansion, remodeling or retooling of an existing facility.

Examples of Grandfather Clauses

One of the most common uses of grandfather clauses is found in changing zoning laws. For example, in situations where changes in zoning laws prohibit new retail establishments, the existing stores are typically granted grandfather clauses allowing them to stay in business as long as they abide by specified limitations. A common limitation in these circumstances is the sale of a business, which can void the grandfather clause.

Grandfather clauses are also common in the embattled coal industry. For example, new regulations on carbon emissions are being applied to proposed plants while grandfather clauses for specified time frames have been granted to existing coal-powered facilities. In part, the clauses are being put in place to allow coal-powered plants time to integrate emission controls. The clauses are also being put in place to allow workers and communities enough time to transition away from the industry.

RELATED TERMS
  1. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible ...
  2. Grandfathered Health Plan

    A health insurance policy created or purchased on or before March ...
  3. Contingency Clause

    A contract provision that requires a specific event or action ...
  4. Escalator Clause

    A contract provision allowing for one to pass an increase in ...
  5. Honorable Undertaking

    A reinsurance treaty clause indicating that the agreement should ...
  6. Acceleration Covenant

    A clause included in certain debt securities and swap agreements ...
Related Articles
  1. Financial Advisor

    Fiduciary Rule Grandfathering Gray Area for FAs

    Advisors who change companies after April 10th may lose the grandfathering exemption under the DOL's fiduciary rule.
  2. Investing

    Corporate Bonds and the Importance of Covenants

    Any type of investor, private or institutional, should be acquainted with the significance of covenants in corporate bond agreements.
  3. Insurance

    Life Insurance Clauses Determine Your Coverage

    Understanding these key parts of your policy will help you to ensure that your family will be covered.
  4. Insurance

    What is a Force Majeure?

    A force majeure clause frees both parties in a contract from fulfilling their obligations in the event of some catastrophic or unexpected occurrence.
  5. Investing

    Contingency Clauses In Home Purchases Contracts

    Real estate contracts often contain contingency clauses, which are conditions or actions that must be met for a contract to be binding.
  6. Small Business

    Netflix Stands to Benefit From Rate Hike (NFLX)

    Netflix plans to raise prices next month, but will customers remain loyal and stick around?
  7. Personal Finance

    Soon, You Can Sue Your Bank Again

    Americans are going to regain the right to sue a bank or credit card company – but not in all cases. We explain what changes and what doesn't.
  8. Investing

    Netflix Raises Price for Grandfathered Subscribers

    Netflix (NASDAQ: NFLX) handled raising prices as well as any company possibly could. Rather than simply announcing a hike and then implementing it a month or two later, the company used a multi-tiered ...
  9. Investing

    Contingency Clauses In Home Purchase Contracts

    Here, we introduce widely used contingency clauses in home purchase contracts and how they can benefit both Buyers and Sellers.
  10. Taxes

    Are You Missing Out On These Tax Exemptions?

    To lower your tax bill, make sure that you're taking all the exemptions that apply to you.
RELATED FAQS
  1. What is an alienation clause?

    Whether used in reference to insurance policies, mortgages or commercial loans, an alienation clause stipulates that should ... Read Answer >>
  2. What is a "force majeure"?

    A force majeure is derived from the French term meaning "greater force" and refers to any natural and unavoidable catastrophe. ... Read Answer >>
  3. Can you ask your landlord to remove a waiver of subrogation clause from your lease?

    Learn how to remove a waiver of subrogation clause from a lease. Find out also why you might not want to strike this clause ... Read Answer >>
  4. How is the consumer price index (CPI) used in market escalation contracts?

    Understand the purpose of market escalation contracts and learn how the consumer price index (CPI) is often used to make ... Read Answer >>
Hot Definitions
  1. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  2. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  3. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  4. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  5. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  6. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
Trading Center