ENCUMBRANCE IN REAL ESTATE

There are a number of types of encumbrances, but in real estate they all largely mean the same thing. “An encumbrance is a claim that someone [a non-owner] has on a property of another,” according to Benjamin Dixon of the New York City-based Mackay Dixon Team at Douglas Elliman. “Encumbrances can arise due to taxes owed, amounts owed to mechanics or other vendors, or even the prior owner’s mortgage.”

If a property has an encumbrance, it can mean there is a limit on how the owner of that property can use it. Some encumbrances are implemented by the state or municipality in the form of zoning laws or environmental regulations. These often restrict certain types of construction on a property, or other uses of/operations within it (like if you rent it out or run a business from it).

However, when they refer to “encumbrances,” real estate pros usually mean some sort of financial claim, often stemming from financial troubles: a lack of payment of a debt, for instance. These can create different challenges, affecting the transferability of a property.

As a result, they make it more difficult to sell and less appealing to buy, because they often turn into the buyer’s responsibility to deal with. “They often transfer with the property, so it is important to ensure they are cleared prior to taking ownership,” explains Dixon. “No one wants to buy someone else’s problems.”

Key Takeaways

• An encumbrance is a third party’s right to or interest in a property and can be included in the property deed or title.

• Common types of encumbrances include liens, deed restrictions, easements, and encroachments.
• Certain types of encumbrances, including liens and easements, give another party a claim to or right to use your property.
• A deed restriction, rather than giving someone else a claim to your property, simply limits the way you can use it.

• An encroachment is an intrusion onto your property, but unlike other types of encumbrances, it’s unauthorized.

Types of Encumbrances

Encumbrance when it comes to real estate, due to its many applications, has many different types. Each type is meant to both protect parties and specify exactly what each claim entails—and is entitled to.

Easement

An easement refers to a party’s right to use or improve portions of another party’s property, or to prevent the owner from using or improving the property in certain ways. The first category is known as an affirmative easement. For example, a utility company may have the right to run a gas line through a person’s property, or pedestrians might have the right to use a footpath passing through that property.

It is important, from the buyer’s perspective, to be aware of any encumbrances on a property, since these will often transfer to them along with ownership of the property. 

An easement in gross benefits an individual rather than an owner of a property, so that Jennifer might have the right to use her neighbor’s well, but that right would not pass on to someone who bought Jennifer’s property. A negative easement restricts the title-holder, for example, by preventing them from building a structure that would block a neighbor’s light.

Encroachment

Encroachment occurs when a party that is not the property owner intrudes on or interferes with the property, for example, by building a fence over the lot line (a trespass), or planting a tree with branches that hang over onto an adjoining property (a nuisance). An encroachment creates an encumbrance on both properties until the issue is resolved: The property housing the encroachment has its free use encumbered, while the owner of the encroaching improvement does not have title to the land it’s built on. 

Lease

A lease is an agreement to rent a property for an agreed-upon rate and period of time. It is a form of encumbrance because the lessor does not give up title to the property, but one’s use of the property is significantly constrained by the lease agreement. 

Lien

A lien is a type of security interest, an encumbrance that affects the title to a property. It gives a creditor the right to seize the property as collateral for an unmet obligation, usually an unpaid debt. The creditor can then sell the property to recoup at least a portion of their loan.

A tax lien is a lien imposed by a government to force the payment of taxes; in the U.S., a federal tax lien trumps all other claims on a debtor’s assets. A mechanic’s lien is a claim on personal or real property the claimant has performed services on. An example is if a contractor made adjustments to your property that were never paid for. Judgment liens are secured against the assets of a defendant in a lawsuit. 

Mortgage

A mortgage is one of the most common types of security interests. Essentially, it is a lien against a real estate property. The lender, generally a bank, retains an interest in the title to a house until the mortgage is paid off. If the borrower cannot repay the mortgage, the lender may foreclose, seizing the house as collateral and evicting the inhabitants.