Introduction

Simply put, an encumbrance is a claim against a property by a party that is not the owner. This claim can impact the transferability of the property and restrict its free use until the encumbrance is lifted. The most common types of encumbrances that apply to real estate include mortgages, easements, and property tax liens. It's important to note that not all forms of encumbrance are financial. As an example, easements are a type of non-financial encumbrance. Encumbrances can also apply to personal property, not just real estate.

Additionally, the term is used in accounting to refer to restricted funds inside an account that are reserved for a specific liability. 

Encumbrances can have a big impact on the transferability of a property and can restrict the use of the property. In some cases, encumbrances can even make a property unmarketable. This can enable a buyer to back out of a transaction despite having signed a contract, and even seek damages in some jurisdictions.

Understanding Encumbrance

When a property is encumbered, it means that there is a claim against it by someone other than the current titleholder. This claim can come in the form of a lease, lien, easement, or a mortgage. Some claims don’t affect the value of the property, which is usually seen in commercial cases.

Encumbrances can impact the transferability of a property by making it difficult for the current owner to exercise unencumbered control over the property. In some cases, the property can even be repossessed by a creditor or seized by the government.

Encumbrances might impact the marketability of a property. An easement or a lien can make a title unmarketable. While this doesn't necessarily mean that the title cannot be bought and sold, it can make it more difficult to find a buyer and can enable the buyer to back out of a transaction despite having signed a contract.

Other encumbrances, such as zoning laws and environmental regulations, may not affect the marketability of a property, but they can prohibit specific uses for and improvements to the land.

It's also worth noting that in some jurisdictions, the seller of a property is legally required to inform the real estate agent about any encumbrances against the property in order to avoid any problems later on in the sales process. In this case, the real estate agent will provide the buyer with a land search document that will have a list of any encumbrances.

Types of Encumbrances

Let's take a closer look at some of the most common types of encumbrances:

• Mortgages: A mortgage is a type of financial encumbrance that is placed on a property when the owner borrows money to purchase the property. The mortgage lender has a claim on the property until the loan is paid off.

• Property Tax Liens: Property tax liens occur when the owner of a property fails to pay their property taxes. The government will then place a lien on the property, which remains until the taxes are paid.

• Easements: An easement is a non-financial encumbrance that gives a party the right to use or improve portions of another party's property. This can include things like a utility company running a gas line through a person's property, or pedestrians having the right to use a footpath passing through that property. Easements are further separated into affirmative and negative easements.

• Encroachments: An encroachment occurs when a party that is not the property owner intrudes on or interferes with the property, like when someone builds a fence over the lot line.

Importance of Being Aware of Encumbrances

When you're buying a property, any encumbrances on the property will transfer to you along with ownership of the property, could affect the value of the property, or could restrict your use of the property. They can also make the property unmarketable, which can enable a buyer to back out of a transaction despite having signed a contract.

That's why it's crucial to research encumbrances before buying a property. You should also be aware of the legal requirements for disclosing encumbrances in the sales process, as this can vary depending on your jurisdiction.

Conclusion

Be sure to research encumbrances and familiarize yourself with the legal requirements for disclosing encumbrances in the sales process. At the end of the day, the key takeaway here is that encumbrances can have a big impact on a property. It's important to be aware of them, and to research them before buying or selling a property. So next time you're looking to buy or sell a property, remember to keep encumbrances in mind - it just might save you a headache down the line.

We trust that this post has provided you with valuable information. The Unreal Estate team is always available to assist you in confidently navigating the realm of commercial real estate. If you have additional inquiries, please do not hesitate to contact us, or consider following our blog for additional real estate management tips and tricks.

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