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What Is An Encumbrance in Real Estate?

James Anderson

March 2, 2022

There are those days when you have too much on your schedule even to complete anything. Unfortunately, this can also be the case for a real estate property.

Being encumbered means being dragged, inconvenienced, restricted, or slowed down. Encumbrances can also arise from steering. A house may be encumbered by factors that make its sale, inhabitation, or use difficult or impossible.

In this article, we will expound your knowledge on ‘What Is An Encumbrance in Real Estate?’ and the type of restrictions or hindrances you may encounter.

Encumbrances In Real Estate

A third party may claim ownership, possession, or hold property even though they are not the owner. Various situations may lead to this landing in the following categories:

  • Financial
  • Title
  • Physical

These claims may restrict the owner’s ability to sell or use the property, or transfer ownership. They may also reduce the property’s market value.

1.   Financial Encumbrance

These are negative aspects of the property caused by financial issues.

Liens

A lien is a debt from third parties that use the owner’s assets as collateral. They claim the assets as a means of payment or leverage for payment.

They do not affect the owner, but they stick to the property only. This means that a change in ownership would still affect the new owner, but a legal change in ownership would mean paying off any liens on the property.

To clear their property of encumbrance, the owner can pay off their debts.

Some types of liens include

  • Liens for Services

This is also called the “artisan’s lien.”

If a service is delivered to the property and not paid, they can apply a lien against it. These services may be plumbing, construction, furnishing, renovation, among many others.

  • Tax Liens
When Your Property Taxes Are Left Unpaid And You Have A Mortgage, The Government Can Places A Lien On Your Property

If a property owner fails to pay the necessary property taxes, the government seizes the property through a court order until the taxes are paid. If the property has a mortgage, the tax lien will take over, and this may be a headache for the mortgage lenders, who will have to protect it by paying off the taxes and then seeking payment from the owner.

  • Storage lien

This is a lien against payment for storage services rendered to someone. Failure to pay the fees allows the holder to withhold the property at hand till the lien is covered.

  • Floating lien

This is a lien on items that may change in nature, but the lien remains. A house may have a lien on antiques, and the lien remains even if these are switched or replaced.

A floating lien is held by valuable assets that are the collateral for payment.

  • Contractual lien

These are liens that do not rely on laws or statutes but depend on contracts for their existence. A typical example is a mortgage.

This lien is mostly questionable as other liens do not require the owner’s permission, but in this case, contracts are signed by the owner.

Mortgages allow the owner to pay off the property without paying the total price as a one-time payment. The house is used as collateral, but nothing will happen to it, provided that the mortgage is paid at the agreed time.

  • Utility service liens

Well, one may think they are getting off without electricity, water, or sewer bill payments, but when it comes to selling the house, they will find liens for the unpaid utility bills on the property. These service liens have to be cleared before the home can be sold.

2.   Title encumbrance

A Title Encumbrance Reveals Any Problems Listed Against The Property

These encumbrances affect the house’s title, preventing it from being sold or used.

  • Involuntary liens

Liens have a general toll on the property title, preventing it from being sold. Involuntary liens are placed without the owner’s knowledge or approval.

Lis pendens is a term used to mean pending legal action and is placed on the property by a party awaiting the intervention of the law in a dispute. It restricts sales or transfers of ownership until the case is settled.

Some instances where a lis pendens may be filed include:

  • A divorced couple is waiting for an agreement on the sale of their property
  • An heir claiming ownership of a piece of property
  • A seller who goes against the sales contract signed with a previous client in an attempt to resell.
  • Deed restrictions

Private homeowners may restrict land use for particular reasons. These are stated in the deeds, and, most of the time, they affect large pieces of land that are sold off as smaller parts.

A huge piece of land may have restrictions on, let’s say, growing specific types of plants or building certain types of buildings that are specified in the deed.

The deed restrictions are on the land, and even if the property ownership changes, they are still in place as they run with the grounds.

Planned unit developers and homeowner associations may use deed restrictions to regulate land use in the area. These may include parking regulations and maximum or minimum house sizes to maintain the value of the neighborhood.

Hot Tip: An aspiring home buyer should check to see if there are any restrictions on the land or property use before acquisition.

  • Lease

These are agreements between two parties to use or rent a particular piece of property for an agreed period. Any dues are decided on and paid within a specified time frame.

The lease gives the leaseholder a right to use the property within the agreed conditions.

Leases prevent any use or sale of property by the owner or a third party while still active. Unless there is a violation of the lease terms, this calls for legal action but not direct action by the violating or violated party.

  • Adverse Possession

This is a legal right that allows a non-holder of a property to acquire it within the state’s specified terms. One of its supporting beams is eradicating non-used land all over the state by putting it to use through someone else.

This law gives rights to squatters to claim your property if they meet the legal requirements. These may include

✅Criteria:
Being open and obvious about their stay on the property and not hiding it.  
Paying any fees or taxes on the property for the specified amount of time.  
Maintaining and doing any repairs on the property, such as landscaping and fixing any damage.  
Staying on the property continuously for the minimum time stated by the law, for example, five years without leaving to go elsewhere.  

If a squatter meets these criteria, they may file an adverse possession claim, which entitles them to the property even if the owner is aware of the claim.

Did you know: Your neighbor could also be a squatter by encroaching on your property, but the adverse possession laws may entitle them to the area.

The squatter must present any documents that defend their claim, like tax payment documents or color of title. This law may strip the property’s original owner of legal action against them if they try to claim it illegally.

3.   Physical encumbrance

These are inconveniences affecting the use or condition of the property.

  • Restrictions
Restrictions Can Be Imposed By A Third Party Or Court

A third party or court may restrict a property undergoing ownership disputes.

Banks can also seize property if it was the liability during a loan application, especially for high-interest loans, which give a small window for payment. If a bank holds a property, access is restricted to the owner or public unless auctioned or the loan settled.

A house with hanging payments like maintenance fees, utility fees, and property taxes may be withheld until the fees are settled. Liens often lead to property seizures until the debts are paid.

Environmental restrictions also come into play in cases like constructing buildings at a distance from water bodies or forests as a conservation method.

  • Encroachment

This is the use of land by the neighbor by building or putting up a structure like a fence on the owner’s land. They often happen unintentionally.

When the owner wants to sell the property, there may be issues with the boundaries that have to be resolved.

  • Easement

This is the right of another party to use an owner’s property. Easements happen once the owner signs a legal document that gives these rights, such as a deed.

Easements may often affect the process of obtaining a building permit. The permit may be denied if the building plans go against the easements on the land.

There are various types of easements, some of which correlate with others:

  • Prescriptive easement

These occur when someone uses your property without your permission for their own reasons. It is often subject to adverse possession claims that legally allow this to happen and may even give the intruder rights over the intrusion.

  • Express easement

This occurs when an easement is written after an agreement and put down in a deed.

  • Implied easements by existing use

These easements come about due to local custom but are not written down. An example is a common route through someone’s property that’s the only way to access the destination.

  • Appurtenant easements

This is an easement between two linked properties, the servient (offering) and the dominant (benefiting). It is tied to the land and could include direct access to the road by a neighbor whose access is cut off by the neighboring land.

  • Easements in gross

These are easements tied to someone benefiting from them.

  • Utility easements

These allow utility companies to access and use the land to lay sewage, gas, or water pipes.

Restrictive covenants

These are restrictions in areas with historical or architectural significance. There may be strict rules on the types of buildings built or stringent rules permitting no construction at all.

Restrictive covenants also come into play in areas that govern building architecture and appearance. In many cases, a governing body enforces these rules and determines whether a piece of property complies with the regulations.

Some of these covenants are enforced in:

  • Planned development units (PUDs)

These are self-sustaining communities where the homeowners own the property and land, and various amenities make it seem like a small town. Some amenities may include grocery stores, medical centers, parks, and restaurants.

Roundup: To protect the value of the homes and reputation of developments, volunteers or appointed boards develop a set of rules that every member has to adhere to.

As much as the individual owns the land, these restrictive covenants withhold their freedom to use it outside the agreement.

  • Homeowners’ associations (HOAs)

These are condos often developed by a single contractor and have similar-looking houses and buildings. Since the development agency often owns the land, the residents are restricted to written rules and regulations defining their roles and rights.

Residents have to pay fees to the governing body for maintenance and other costs stated in their contracts.

FAQs:

How Do I Tell If A Property Has An Encumbrance?

Run the property through a title search to find out if any encumbrances will limit your use or prevent you from accomplishing any plans you have.

How Can I Terminate An Easement?

An easement may be terminated by:

1. Ending by necessity
This terminates the easement when it is no longer applicable.

2. A merger
People in the dominant state can get a court order to get the servient to give up their right of way.

3. Express agreement
This is a decision by the affected parties to lift the easement.

4. Abandonment
It occurs when an owner stops enforcing an easement over some time until it’s permanent.

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