In basic terms, an encumbrance is a claim against or a hold on a property by someone who is not an owner. You can consider any limitation on property use as an encumbrance. An encumbrance can limit both the owner’s use of their property and potentially their ability to sell or transfer it.
Leases and mortgages are good examples of encumbrance.
A mortgage is an encumbrance upon the property that it finances. It designates the rights of ownership to the lender until the mortgage is satisfied (paid off). The owner can’t sell the property without lifting the encumbrance of the mortgage.
A lease is also an encumbrance since it limits the owner's use of the property. For example, if you own a home and lease it to someone, you can't just move in and live there. The lease confers the right to occupy the space on the lessee and precludes the owner from unfettered use of the property.
Tax liens are used to encumber property. A lien is placed on a property when a governmental agency endeavors to collect money owed. The owner can’t sell or refinance the property until the lien is lifted.
Not all encumbrances are financial.
An easement is another encumbrance that may attach to a property. For example, the easement might require that the owner allow access by a non-owner. The party benefiting from the easement might be a neighbor with a right to use a private road. It could also be a utility provider with the right to build towers or other conduits.
Encroachment is an encumbrance. It is similar to an easement but hasn't received an agreement. For example, if your neighbor asks for permission to use your private road, they need an easement. In contrast, if the neighbor builds a gate blocking your road, that is an encroachment. Other encroachments are buildings the neighbor builds on your property without your approval.
Zoning laws and Homeowners’ Associations can encumber.
Local zoning laws may create an encumbrance. For example, if you buy a home in an area that is strictly "zoned" for residential structures, you can't turn the house into a retail business or tear it down and build a movie theater. Zoning restrictions may also prevent the owner from building more units, keeping goats or chickens, or removing trees.
Homeowners’ Associations (HOAs) have rules, typically called covenants, that create an encumbrance on the properties within the association’s jurisdiction. The restrictions can be large or small and are sometimes prolific. For example, the HOA covenant may preclude an owner from changing the landscaping, painting the exterior, adding outbuildings, or even keeping vehicles in view of the street.
Sometimes property owners seek changes in zoning laws or HOA restrictions, seeking to broaden their ability to use their property. The potential success of such an effort may depend on support from other owners with the same preference but can also be thwarted by opposing interests.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
