Encumbrance is any limitation on the ownership of real property. Similar to a lien, an encumbrance can restrict both the free use and the transferability of the property until removed. Encumbrances include leases and mortgages, but are not always financially related. Encumbrances are non-possessory, holding no interest in the title of real property.
Encumbrances not only affect the usage of real property, but could also affect the marketability of the property. Although encumbrances do not necessarily keep a buy-sell transaction from occurring, it will remain on the property until satisfied and is said to “run with the land.” An example would be air rights, which may restrict how high you may be able to construct improvements on a parcel of land located in a central business district.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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