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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Bailee

What it is:

A bailee is a person who has been entrusted with custody of a piece of property. A bailee does not have ownership of the property.

How it works (Example):

Let's say John Doe owns a big piece of farmland on the eastern shore of Maryland. His adult son wants to farm the land.

Rather than transferring ownership of the property to his son, John Doe (the bailor) transfers possession or custody of the farmland to his son (the bailee). The son might pay rent or a lease fee in return. The son receives only custody and control of the property, but John still owns it. John is thus responsible for paying the property taxes and is liable for what happens on the land (unless the bailee failed to care for the land properly).

In general, there are three kinds of bailments:

  • Service agreement bailments, whereby the bailee agrees to perform a service for the bailor (such as park or store a car).
  • Constructive bailment, whereby the bailee agrees to protect the bailor's asset (such as with a safe deposit box).
  • Gratuitous bailments, whereby the bailor doesn't receive payment from the bailee for the bailment (such as free coat checks at a restaurant).

Bailment almost always involves a written contract. Sometimes, that contract is printed on the back of a coat check stub or a claim ticket for valet parking. Bailment can occur without compensation, however.

Why it Matters:

When we entrust our property or assets to others, we are often putting those things in bailment. In this sense, the concept is similar to that of fiduciary duty. In both cases, someone is being entrusted with others' assets and must act to protect those assets while in their custody.

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