Shelter rule
Encyclopedia
The shelter rule is a doctrine in the common law
of property under which a grantee who has received an interest in property from a bona fide purchaser
will also be protected as a bona fide purchaser, even if the grantee would not legally qualify for this status. The grantee is "sheltered" from other claims by the grantor's status as an actual bona fide purchaser.
This rule comes into play in situations under a number of circumstances. For example, where a bad actor agrees to convey the same real property
to multiple other parties. For example, if Oscar conveys Blackacre by deed to Andrew on Monday; before Andrew records the conveyance, Oscar conveys Blackacre to Bob, who is a bona fide purchaser and who is unaware of Oscar's previous conveyance of the same property. Bob then conveys Blackacre to Charles, but before the conveyance, Andrew notifies Charles of the deed conveyed from Oscar to Andrew. Since Charles has notice of the prior conveyance, Charles does not qualify to be a bona fide purchaser. However, under the shelter rule, Charles will receive the same treatment as Bob, and will prevail over Andrew in a legal contest over the ownership Blackacre.
The rule has several purposes. One is to allow a bona fide purchaser, who is entitled to hold and enjoy the property, to have a congruent entitlement to sell that property. Another is to prevent the use of the property from being held up in litigation.
There are two exceptions to the shelter rule:
The shelter rule also applies to the transfer of negotiable instrument
s. If the recipient of a negotiable interest is a donee (that is, a person who receives by gift
), that person would generally not have the rights of a holder in due course
- that is, a person who received the instrument for value and without notice of other claims. However, if the gift was received by a qualifying holder in due course of the same instrument, the shelter rule gives the donee the right to recover on the instrument.
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
of property under which a grantee who has received an interest in property from a bona fide purchaser
Bona fide purchaser
A bona fide purchaser referred to more completely as a bona fide purchaser for value without notice is a term used in the law of real property and personal property to refer to an innocent party who purchases property without notice of any other party's claim to the title of that property...
will also be protected as a bona fide purchaser, even if the grantee would not legally qualify for this status. The grantee is "sheltered" from other claims by the grantor's status as an actual bona fide purchaser.
This rule comes into play in situations under a number of circumstances. For example, where a bad actor agrees to convey the same real property
Real property
In English Common Law, real property, real estate, realty, or immovable property is any subset of land that has been legally defined and the improvements to it made by human efforts: any buildings, machinery, wells, dams, ponds, mines, canals, roads, various property rights, and so forth...
to multiple other parties. For example, if Oscar conveys Blackacre by deed to Andrew on Monday; before Andrew records the conveyance, Oscar conveys Blackacre to Bob, who is a bona fide purchaser and who is unaware of Oscar's previous conveyance of the same property. Bob then conveys Blackacre to Charles, but before the conveyance, Andrew notifies Charles of the deed conveyed from Oscar to Andrew. Since Charles has notice of the prior conveyance, Charles does not qualify to be a bona fide purchaser. However, under the shelter rule, Charles will receive the same treatment as Bob, and will prevail over Andrew in a legal contest over the ownership Blackacre.
The rule has several purposes. One is to allow a bona fide purchaser, who is entitled to hold and enjoy the property, to have a congruent entitlement to sell that property. Another is to prevent the use of the property from being held up in litigation.
There are two exceptions to the shelter rule:
- Where the property is reconveyed by the good faith purchaser to an original grantor who had notice of an outstanding interest in the property.
- Where the property is conveyed by the good faith purchaser to a person who had violated a trust or duty with respect to the property.
The shelter rule also applies to the transfer of negotiable instrument
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
s. If the recipient of a negotiable interest is a donee (that is, a person who receives by gift
Gift (law)
A gift, in the law of property, is the voluntary transfer of property from one person to another without full valuable consideration...
), that person would generally not have the rights of a holder in due course
Holder in due course
The Holder in Due Course doctrine is a rule in commercial law that protects a purchaser of debt. The doctrine insulates the purchaser of debt, or other obligation to pay, against charges that either party to the original transaction might have had against the other.-Example:Suppose A promised to...
- that is, a person who received the instrument for value and without notice of other claims. However, if the gift was received by a qualifying holder in due course of the same instrument, the shelter rule gives the donee the right to recover on the instrument.