A hydrolapse is a rapid change in moisture with height. This occurs in cases with differential advection. A common differential advection pattern is to have moist air in the boundary layer capped with dry air in the mid-levels. Sometimes it is the opposite, a dry PBL with higher amounts a moisture aloft (termed inverted-V).
Moist air in the PBL with dry air in the mid-levels creates convective instability. As the atmosphere is lifted by a dynamic lifting mechanism, the low-level moist air cools at the MALR while the dry air cools at the DALR. This causes the lapse rate of temperature to increase (temperature decreases more rapidly with height after troposphere is lifted).
See the following webpage for a hydrolapse example: http://www.theweatherprediction.com/habyhints/214/