The meaning of the term Encumbrance in Real Estate can be understood as a legal claim, liability, or any restriction that affects the use, value, or transfer of property. There are various reasons for the rise of Encumbrances, those circumstances include unpaid debts and zoning regulations. These Encumbrances are not always detrimental or against the owner of the Real Property, still as a student of Real Estate, one should be aware of the concepts of Encumbrance and their effects on the property, while buying, selling, or owning property. Here in this blog, we will be exploring the in depth meaning of the term Encumbrance, types of Encumbrances and their implications in Real Estate Transactions.
Definition
The Glossary Definition of the term Encumbrance is –
- A cloud against clear, free title to the property which does not prevent conveyance, such as unpaid taxes, easements, deed restrictions, mortgage loans, etc.
- Any claim, lien, charge, or liability that attaches to, or burdens, real property.
- Anything which affects or limits the fee simple title to or value of property, e.g., mortgages or easements.
What are Encumbrances
Simply saying, an Encumbrance is any limitation on a property that may restrict the full ownership of or reduce the market value of any property. Encumbrances do not put any barrier on or prevent the transfer of Real Property, but Encumbrances do make the process and work of transfer of ownership, ownership rights and the Real Estate transactions complicated.
Encumbrances are the limitations attached to the Real Property, and they are not attached to the owner. Therefore, when the Property is sold, the Encumbrances attached to the Real Property do get transferred along with the Real Property to the new owner.
Types of Encumbrances in Real Estate
Encumbrances are broadly classified into two viz., (1) Monetary Encumbrances and (2) Non-Monetary Encumbrances. Both have been described below –
1. Monetary Encumbrances
It is often we see that there remain financial claims against a property. These financial claims include:
i. Mortgages: The most common of the Encumbrances is the Encumbrance in the form of Mortgage. Mortgage is basically a kind of a loan secured by the property under which the lender holds an interest in the property until his loan is fully repaid to him.
ii. Liens: Liens are those kind of claims on the Property which are created by the Creditors on it to secure repayment for debts by their debtors (i.e. the owner of the Property) or any other person who is duty bound to pay any amount to any authority or to any other person. In such case the liens may be imposed on the Real Property.
Some of the most common liens include:
Tax Liens on the Real Property
These liens are claims filed by the government on the Real, thereby creating an Encumbrance on the Real Property. The Government do generally file these liens to secure the payment of taxes by the person on whom the tax amount is due (i.e. and who is the owner of the Real Property).
Judgement Liens:
Judgment Liens on the Real Property do result from the court judgment on the property into litigation, whereby the judgment has been passed against the owner of the Real Property and thereby creating an Encumbrance on the Real Property. For example, if there is litigation in the court between A and B, whereby A wants the right of way over B’s land to enter into his land. And the Court has passed the judgment in A’s favour. In such case A has got the right of way over B’s land which is an Appurtenance in the form of Easement for A’s Land (Dominant Heritage) and it is an Encumbrance on B’s land (Servient Heritage). In conclusion, such a judgment has created a Judgment Lien over A’s Land.
2. Non-Monetary Encumbrances:
Non-Monetary Encumbrances are the benefit to some another person or any claim by the person who is not the owner of the Real Property on the Real Property. These Encumbrances affect the usage or transfer of the Real Property but do not involve financial claims. These Non-Monetary Encumbrances include:
i. Easements: An easement grants the owner of the dominant heritage, the right to use a portion of the servient heritage for specific purpose only. Easements would include Utility Easements for electric or water lines, and Accessory easement for shared driveways.
ii. Encroachments: Encroachments occur when a structure intrudes onto another property. For instance, a neighbor’s fence or garage extending onto your land can be considered an encroachment.
iii. Restrictive Covenants or Deed Restriction: Restrictive Covenants or Deed Restrictions are the rules that govern the use of the Property. These covenants and restrictions do contain the terms and conditions which restrict the use of the Real Property.
iv. Zoning Restrictions or Local Government: Zoning laws are those which determine whether within a particular area, does the Government allows the residential, commercial, or industrial use of the Real Property or not.
The impact of Encumbrances on Property Transactions
a. Disadvantages of buying a Property with Encumbrance
If the purchase of a property with an Encumbrance is made, the buyer inherits the associated limitations. So, if a Property with lien over it means the lienholder could claim the property if the debt remains unpaid.
b. Disadvantages of Selling a Property with an Encumbrance
Encumbrances can prevent the will of the potential buyers to buy the property as it reduces the value of the Property. And it is the duty of the seller to disclose all encumbrances before finalizing a sale.
I am a Commerce Graduate and Real Estate Consultant.