What is an encumbrance?
It might seem intrusive, but sometimes utility workers need the ability to access company equipment, such as pipes or distribution lines, without homeowners giving them trouble, or your neighbor might need to use your private road to access a main highway. Property-use stipulations like these are very common, and can be settled by including an encumbrance on the property title.
What does encumbrance mean?
An encumbrance is a legal claim against a property by someone who is not the current titleholder. While it isn’t always the case, certain encumbrances can potentially impact your home’s value, so it’s an important issue to consider before deciding to buy a home.
With an encumbrance on your property title, you might not be free to sell, refinance or renovate your home until it gets removed. A lien on your property, for example, is a type of encumbrance that restricts you from selling the home until a certain debt pertaining to the lien is paid off.
Encumbrances are a common aspect of the homebuying process and can arise from a variety of property-ownership issues. As a prospective buyer, it’s essential to be well aware of any encumbrances that exist on the property before signing a purchase agreement. When ownership of the property changes, so will the responsibility of honoring any legal claims that come with the sale.
Most encumbrances are designed to allow utility workers access to equipment on private property, not impacting the home’s value whatsoever. However, those that result from ownership or neighborly disputes can be much more costly.
In addition to real estate, these legal claims can also be applied to personal property, such as vehicles or business assets. Let’s take a closer look at some of the encumbrances you might run into when buying a home.
What are the different types of encumbrances?
Encumbrances in real estate can take many different forms. Common homeownership agreements, like mortgages and liens, are just a few examples of claims that would encumber your ability to sell:
- Restrictive covenant
Affirmative easements, also known as an “easement in gross,” grant utility companies the right to access and repair any equipment that might exist on your property. If a power line runs through your backyard and requires a repair, an affirmative easement would restrict your ability to deny any utility workers access.
An easement appurtenant is usually established between neighbors, rather than with an outside company or organization. In some areas, especially rural communities, adjacent property holders might need to use their neighbor’s land in order to reach a public road or walkway. An appurtenant easement would grant that homeowner the right to use their neighbor’s land in order to access the main road. These easements can also be used to construct a shared driveway or access path through someone else’s land.
If you’re behind on property taxes or have personal debts that have gone unpaid, you might have a lien placed on your property. A lien is a type of encumbrance that is usually used to secure the repayment of a loan.
A home loan, for example, is a type of lien that grants your lender the right to foreclose your home if you aren’t able to keep up with monthly mortgage payments. As the homeowner, you’ll always have the opportunity to repay the debt and have the lien released, but the claim to ownership gives your creditor the assurance that you’ll be motivated to settle the loan on time.
If you’re looking to buy a home, it’s important for your seller to schedule a thorough property title search in order to reveal any unknown liens on the property that could hinder the homebuying process.
A lien on your target property means the seller isn’t the sole owner. The decision to sell, therefore, isn’t theirs alone to make. An ex-spouse could have an existing legal claim, or a bankruptcy in the seller’s past might have transferred partial ownership to a bank. Without a property title search, unanticipated disputes could arise due to unsatisfied liens related to the home. Title Insurance provides protection against claims that might not be uncovered at the time of closing.
Encroachments commonly come about as the result of a dispute between neighbors over a property feature that crosses or hangs over the property line. If your nextdoor neighbor built a balcony that crossed over into your lawn without signing an agreement beforehand, that would be considered an encroachment. This triggers an encumbrance on both properties until the issue is settled.
Until the encroachment is dealt with, you might have your free use of the home restricted. Your neighbor would also have an encumbrance on their home. Depending on the severity of the encroachment, this type of encumbrance can either be handled between neighbors, via a real estate attorney or settled in the court of law.
A lease is another common type of encumbrance that impacts your ability to sell if you’ve rented a room out to someone else. If you’re renting an apartment, your name won't be on the title, but your landlord will be constrained by the lease agreement. Until they meet the requirements laid out in the lease, they’ll be unable to remove the encumbrance and sell off the building.
Multi-unit buildings are commonly sold with active leases on them. These leases generally include a clause extending to the new owner automatically.
In some cases, a seller might include a restrictive covenant into the buyer’s deed, limiting how some aspects of the home can be used. A property with some historical significance, for example, might include a provision disallowing the buyer from altering the original facade or structure.
Restrictive covenants are usually addressed early in the negotiating process, and as long as both parties agree, there are not many limits on what these encumbrances cover.
How to know if your property has an encumbrance
The mortgage process might come off as overly complicated, but all of those steps are vital to making sure you and your lender know what you’re paying for. Unexpected encumbrances can easily derail an ongoing sale or cause major headaches if you close on the mortgage without knowledge of the issue.
Part of the due diligence involved in avoiding these problems is the property title search. A title search involves a close review of any documentation pertaining to the property. Previous owners may have encountered situations such as divorce or bankruptcy that could have placed an encumbrance on the ownership status of their home. After a comprehensive review of the property’s history, you’ll receive an owners title policy insurance showing all existing items recorded against the land. You and your lender can confirm that the seller is legally able to move forward with the sale without interruption.
They might seem like another hurdle on the path to buying a home, but most of the time, encumbrances are designed to keep utility systems providing electricity, plumbing and gas properly maintained and working efficiently.
If one of these legal claims does impact your real estate transaction, it’s important to have it addressed early in the homebuying process. Encumbrances, liens or other legal claims can all be revealed through the property title search, a standard process for most mortgage types.