What Is an Encumbrance?

An encumbrance is a claim against a property made by a pa♚rty who is not the property owner. An encumbrance can impact the transferability of the property and restrict its free use until the encumbrance is lifted.

The most common types of encumbrance apply to real estate; these include moℱrtgages, easements, and property tax ⛄liens.

Not a🐭ll forms of encumbrance are financial. For example, easements are non-financiꦚal encumbrances. An encumbrance can apply to personal property as well as real estate.

As an accounting term, "encumbrance" refers to 澳洲幸运5官方开奖结果体彩网:restricted funds inside an account that are reserved for a spec🎃ific liability.

Understanding Encumbrance

The term "encumbrance" covers a wide range of financial and non-financial claims placed on a property by parties other than the title-holder. Property owners may be encumbered from exercising full—that is, 澳洲幸运5官方开奖结果体彩网:unencumbered—control꧋ over their property. In some cases, the property can be repossessed by a creditor or seized by a government.

Effect on Marketability

Some encumbrances involving securities 澳洲幸运5官方开奖结果体彩网:affect the marketability of those securities. For example, if an investor uses the securities in a brokerage account as collatera🍌l for a loan from the brokerage, they may not be able to sell them. The brokerage would be able to take them in case of default by the investor. Or, if the investo𒐪r can sell them, the brokerage would be entitled to enough of the proceeds to repay the loan.

An easement or a lien can make a title unmarketable. While this does not necessarily mean the title cannot be bought and sold, it can enable the buyer to back out of the transaction, despite having signed a contract. Buyers may even seek damages in so🐻me jurisdictions.

Effect on Use

Other encumbrances, such as 澳洲幸运5官方开奖结果体彩网:zoning laws and environmental regu🔯lations, do not affect a property's marketability but do prohi♑bit specific uses of and improvements to the land. 

That's why, for example, in Hong Kong, the seller of a property is legally required to inform the real estate agent and purchaser of any encumbrances against the property to avoid problems in the sales process. The real estate agent will provide the buyer with a land search document that will have a list of any encumbrances.

Types of Encumbrances

There are a various types of encumbrances, especially when it comes to real estate. This is due to real estate's many applications. Each type of encumbrance is meant to protect parties and specify exactly what each claim entails.

Easement

An easement refers to a party's right to use or improve portions of another party's property, or to prevent the property owner from using or improving the property in certain ways.

An affirmative easement allows the party that possesses the easement to use a property as defined by the 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. Holders of the easement must abide by its terms or face potential legal action.

A negative easement allows the party tha𝓡t possesses the easement to stop certain actions as defined by the easement. For example, a neighbor may have the right, based on agreement with the property owner next door, to prevent that owner from mowing their lawn on certain days of the week.

An easement in gross benefits the easement owner as an individual rather than as an owner of a property. Therefore, the easement can't be passed on to anyoཧne who might buy the easement owner's property. It is nullified once the easement owner moves.

For example, Jennifer owns an easement, that she negotiated with her neighbor, that gives her the right to use her neighbor's well. But that right would not pass on to someone who bought Jennifer's property.

Encroachment

Encroachment occurs when a party who is not the property owner intrudes on or interferes with the property, for example, by building a ꦏfence over the lot line (a trespass), or planting a tree with branches that hang over onto the adjoining property (𝔍a 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 whereby someone rents a property for an agreed-upo𓄧n rate and period of time. It is a form of encumbrance by which the lessor (landlord) does not give up title to the property, but 🐭their 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 claimant the right to seize the property as collateral for an unmet obligation, usually an unpaid debt. The creditor can then sell the property tജo recoup at least a portion of their loan.

A tax lien is an encumbrance 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 澳洲幸运5官方开奖结果体彩网:mechanic's lien is a claim o🍃n personal or real property made by a claimant who has performed services on the property. For exampl💝e, if a contractor made adjustments to your property that were never paid for, the contractor might establish a lien.

Judgment liens are secureওd against the assets of a defendant in a lawsuit. 

Mortgage

A mortgage is one of the m🔯ost 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.

Restrictive Covenant

A 澳洲幸运5官方开奖结果体彩网:restrictive covenant is an agreement that a seller writes into a buyer's d﷽eed of property to restrict how the buyer may use that property. For example, there might be a provision that requires the buyer to leave a building's original facade intact. As long as they do not꧃ break the law, restrictive covenants can be as specific and arbitrary as the parties involved are willing to agree to.

Special Consideration

Encumbrance as Used in Accounting

Encumbrance accounting refers to money set aside to pay for anticipated liabilities. For example, a company may reserve a sum of cash to settle up obligations in its accou💟nts payable. And salaries that m⛎ust be paid to employees are an encumbrance.

The presence of an encumbrance can give the illusion that there are more available f♐unds inside an account than what is actually free for use.

The money that has been set aside cꦅannot be used for any other expendꦇitures or transactions. Encumbrance accounting, therefore, ensures that a business does not overspend its budget.

The Bottom Line

An encumbrance is a claim or right held by someone other than a property owner that can affe🔯ct how someone might use the property as well as their ability to sell 🌼it.

There are various types of encumbrances, as described above. Some may affect a property owner in a negative way more than others. It's important to uncover any and all encumbrances on property, whether personal or real estate, in which you're interested before buying. That way you can proceed confidently with your purchase or walk away.