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.

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