Encumbrance
An encumbrance is a claim against a property by someone other than the owner. This term encompasses a range of claims, some of which affect the value of a property and others that do not. Encumbrances may be financial or non-financial, and may affect a property’s sale, how it’s able to be used, and its marketability.
There are numerous types of encumbrances in real estate, each with its own application, but all meant to specify claims and ensure they are met. Nearly every property in the United States has at least one encumbrance, which real estate investors should take into account when analyzing investments.
Examples of Encumbrance
Encumbrances come in many forms, including the following:
- Mortgage: Mortgages are one of the most common types of liens on residential properties. It serves as an encumbrance in the way that the lender, usually a bank, has an interest in the title of the property until the debt is paid off.
- Easement: Easements refer to a party’s right to use or improve portions of another party’s property (affirmative easements), or to prevent the owner from using or improving the property in certain ways (negative easements).
Examples of affirmative easements include the ability of a land-locked neighbor to put an access road on the property or utility companies having the right to install and service equipment on the property. People and organizations may only utilize easements for their limited and specific purposes.
Negative easements often prevent property owners from building structures that would block a neighbor’s light or view.
- Encroachment: Encroachments occur when one party that is not the property owner intrudes on or interferes with the property, either by ignoring property boundaries or by being unaware of them. Encroachments create encumbrances on both party’s properties until resolved.
Examples include building a fence or allowing trees to grow beyond property boundaries, as well as extending structures or landscaping onto public domain (such as gardens that intrude on the sidewalk).
- Lease: A lease is considered an encumbrance because it gives rights to a party other than the owner to use the property in certain ways. The tenant’s rights to the property are unaffected by its sale, and the lessor’s ability to use their property is constrained by the lease agreement.
- Restrictive Covenant: Restrictive covenants are agreements made upon the sale of a property that the buyer must adhere to. They may require or restrict actions taken on the property by the encumbered owner. Common covenants include HOA regulations that dictate maintenance standards or paint colors and limitations on leasing. They can be as specific and arbitrary as the parties are willing to agree to.
- Property Tax Liens: Tax liens are imposed by the government against an individual or business that fails to pay their taxes. Federal tax liens trump all other claims on a debtor’s assets. If property owners do not pay their due property tax, the government may place a tax lien on the property, serving as an encumbrance affecting its title.
Depending on the classification, encumbrances may affect property owners in different ways. Because they can impact a property’s value and cause problems down the line, it is important for buyers and investors to know the encumbrances that come with its sale.