Encumbrance in real estate, explained

If you’re a homebuyer or seller, you may have come across the term encumbrance. Any restriction or limitation can be seen as an encumbrance, but an encumbrance in real estate has to do with the transfer or use of property. To better understand encumbrances in real estate, let’s take a look at how they function, the types of encumbrances you may come across and why encumbrances may not necessarily be a bad thing for buyers, sellers or owners.

What is encumbrance in real estate?

In real estate, an encumbrance refers to a claim against an asset from someone other than its owner. This third party could be a debt collector or even a utility company. Encumbrances can be temporary or permanent and vary in severity, but most encumbrances do have the potential to impact the property’s title or its owner’s ability to fully enjoy their property. Because of these considerations, it’s important to understand who might be responsible for these restrictions, as well as the types of encumbrances you may encounter.

Types of encumbrances in real estate

Encumbrances come in many shapes and sizes. To better understand the variety of limitations that may be placed on your property, here are some examples of encumbrance in real estate:

• Easement: Easements are encumbrances that grant a third party access to your home for a specified purpose. This could be a property owner, a neighbor or even a utility company representative walking onto your property to read the meter.
• Encroachment: Ever have a neighbor whose weeds, trees or fence crept onto your property? That’s technically considered encroachment, a type of encumbrance that involves a structure, like a fence, or even a living object like a tree, extending beyond its legal boundary. While some encroachments may be intentional, they can also be the result of a property surveying error or an innocent mistake.
• Lien: A lien is a legal claim placed on your property as a form of collateral. The most common type of lien in real estate would be a mortgage, which is a voluntary lien agreed upon by both parties. There are also financial liens due to unpaid debt and mechanical liens meant to account for unpaid work that may be involuntarily placed upon you.
• Lease: Because a lease restricts what a tenant is permitted to do with or to a property, it’s considered an encumbrance. Leases are one of the more common examples of an encumbrance in real estate you might come across.
• Restrictive covenant: When a deed has a clause that limits how a property is used, it’s considered a restrictive covenant. These encumbrances cover a range of restrictions, and their intention is to preserve the value and enjoyment of the adjoining land. Restrictive covenants are generally enforced by lot owners or homeowners associations.

Who is responsible for encumbrance in real estate?

There are a handful of different parties that could be responsible for an encumbrance on your property, ranging from government authorities to conservation organizations. Here are some examples:

• Government authorities: The government may be able to impose encumbrances on your property in a few different ways, including the use of zoning laws, building codes, eminent domain and tax liens. All of these encumbrances dictate how you may (or may not) treat or use your property. 
  • Zoning laws and building codes are dictated by the government, and these encumbrances will dictate what owners are able to do with their property or how they can build on their land.
  • In the case of eminent domain, the government converts private property for public use (with compensation to the owners). An example might be exercising eminent domain to facilitate the construction of a new expressway through a residential area.
  • If you neglect to pay government taxes, you could find yourself facing a tax lien. These liens are specifically tax related, and probably won’t go away until the taxes owed have been paid.
• Lenders: If you borrowed money from a bank or mortgage company, the lender might impose a lien on the property as collateral.
• Creditors: Even if you own your property outright, a creditor could place a lien on the property if you’ve incurred debts that result in a court judgment.
• Leaseholders:If you’re leasing a property, the owner may impose an encumbrance that restricts the way you’re able to use the property or dictate how you maintain it.
• Easement holders: Easement holders such as utility companies, neighbors or property owners, may be granted access to your property for various purposes.
• Homeowners associations: If your property is under the jurisdiction of a homeowners association, the group may have rules and regulations you must adhere to.
• Conservation organizations: If your home or property is in an environmentally sensitive area or close to important natural resources, conservation groups may place an encumbrance on your property in the interest of environmental protection.

How to find out if a property is encumbered

While finding out if a property is encumbered involves a bit of work and research, this guide to navigating the process might take out a bit of the guesswork.

1. Title search: Doing a title search through a real estate attorney or a title company may be a good place to start. This search will go through public records to confirm a property’s ownership history and any types of encumbrances or restrictions that may currently be on the property.
2. Look online: Depending on where you live, there may be online databases with records pertaining to deeds and encumbrances. Check with your local government to see if they can point you in the right direction.
3. Locate the property deed: If you can get your hands on a copy of the property deed from your local county recorder’s office, it may provide some insight as to whether or not the property is encumbered.
4. Title insurance: Lenders often require buyers to obtain title insurance. This type of insurance helps protect you should any new claims come up after you’re legally the owner. The companies that handle this process do their own research to determine whether a property is encumbered or facing any other issues.
5. Look into your homeowners association: As homeowners associations often impose restrictions on property, it’s a good idea to familiarize yourself with their governing documents. They should reveal any possible encumbrances and may help prevent any surprises.
6. Inspect the property: Doing a thorough property inspection may highlight any encroachments from an adjoining property.
7. Survey the property: Like an inspection, a professional land survey may reveal encroachments or boundary disputes that may not be reflected in a deed or other documentation.

As always, if any of these steps are confusing — or if you just want some peace of mind — it's helpful to contact a real estate professional. They may be able to  provide valuable insight regarding your unique situation.

Is an encumbrance a dealbreaker?

There are many types of encumbrances you might come across as a home buyer, owner or seller, and not all of them are necessarily dealbreakers. In fact, some encumbrances, like mortgages, may be necessary to buy a home and are entered into voluntarily. The best way to figure out if an encumbrance will or won’t have an effect on your day-to-day property use is by doing your due diligence.

In summary

Navigating encumbrance in real estate may take a bit of research here and some professional guidance there, but these restrictions need not stand between you and your property goals. Whether encumbrances are imposed by the government, a creditor or even your neighbor’s apple tree, understanding their unique nature can help anyone make an informed decision regarding these restrictions.

FAQs

1. What happens to an encumbrance when the property is sold?

While many encumbrances are removed when the property is sold or when ownership is changed, this often ultimately depends on the type of encumbrance you’re dealing with. For example, mortgages and liens generally need to be paid off at the time of sale, but easements usually remain attached to the property. Because each encumbrance is unique, it’s best to do some research or consult with a qualified real estate professional to learn more about what applies to your situation.

2. How do I get rid of an encumbrance?

In the case of a mortgage or lien, you’ll have to pay your debt to have an encumbrance removed. In an easement, encroachment or restrictive covenant, chances are you’ll have to put your negotiation skills to work and come to an agreement with the party that’s imposed the encumbrance.

3. Is an encumbrance inheritable?

Yes, encumbrances are inheritable. Most types of encumbrances can pass from owner to owner. That said, there are certain situations, such as tax liens, that may not transfer. Contact your local government or a real estate professional to learn more about how to navigate an encumbrance that may not have started with you.