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

Bailment

What it is:

Bailment is a transfer of custody of a piece of property rather than a transfer of ownership of a piece of property.

How it works (Example):

For example, let's say John Doe owns a big piece of farmland on the eastern shore of Maryland. His adult son wants to move to the area and farm the land.

Rather than transferring ownership of the property to his son, John Doe (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 only receives 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 in 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.

Bailment happens every day: at the bank, when we put things in a safe deposit box, at a restaurant when we give the car to the valet, and at the dry cleaners when we leave a dress to be cleaned. The person managing your stock portfolio, and the person managing your rental property also are bailees in a sense.

In bailment agreements, the concepts of "reasonable care" and "entrustment" are crucial. Because the bailee does not own the property, he or she must take reasonable care of the bailed property that the bailor has entrusted to the bailee. Failure to do so can lead to a variety of legal consequences. A bailment ends when the parties agree to terminate the agreement or the purpose of the agreement has been achieved. At that point, the bailee returns the property to the bailor.