What is Forfeiture?
Forfeiture refers to surrendering an asset or cash flow without compensation, usually resulting from a breach of contractual commitments or legal penalties. In contractual scenarios, forfeiture occurs when a party fails to meet its obligations, leading to the forfeiture of asset rights or income as a corrective measure for the aggrieved party. On the other hand, legal forfeiture is initiated through a court order mandating a party to forfeit an asset or its associated income as a disciplinary measure for engaging in unlawful or prohibited financial activities. The application of forfeiture spans both financial criminal proceedings and civil actions, depending on the complexity and seriousness of the financial offenses involved.
Forfeiture Explained
Forfeiture is a contractual recourse allowing the injured party to seize assets or funds from the defaulting party as damages. In the context of financial markets, forfeiture occurs when an investor fails to meet obligations under an option contract, resulting in the loss of shares to the counterparty, who subsequently liquidates them to regain the funds. Additionally, investors may face forfeiture of shares for violating trading restrictions set by the issuer.
In corporate affairs, forfeiture occurs when companies grant employees equity-based incentives like stock options or restricted stock units. These incentives typically come with vesting conditions, necessitating that employees remain with the company for a specified duration before being able to divest their shares. Departure before the vesting period concludes leads to the forfeiture of unvested shares back to the company.
Real estate contracts, particularly in installment sales, often incorporate forfeiture clauses. These clauses specify that the buyer must make regular payments until the property's full price is settled. Failure to meet payment obligations authorizes the seller to terminate the contract and reclaim possession of the property. However, it differs from foreclosure, where a lender takes over a property due to mortgage nonpayment.