Encumbrance

The term “encumbrance” is used to describe a burden on a property that can reduce the value of the property. As an example, an encumbrance can be a mortgage. If someone owes $100,000 to the bank in the form of a mortgage, then he must pay the bank back that money upon selling the house, which reduces the amount of profit he makes. To explore this concept, consider the following encumbrance definition.

Definition of Encumbrance

Noun

  1. A mortgage or loan secured by an item of personal or real property, or an asset.

Origin

1275–1325       Old French (encombrance)

What is an Encumbrance?

An encumbrance is a burden or obstacle placed upon an item of real or personal property that can work to reduce its value. For example, an encumbrance can be a lien or a mortgage. The term “encumbrance” can also be used to refer to another person’s right to a property. For instance, if Sally wants to sell her house, but Bobby still has partial ownership, then Sally must satisfy Bobby’s right to some of the profits before keeping the rest for herself.

When a piece of property is made less marketable by an encumbrance, this means that it will be harder for the owner of the property to sell it.

For example:

When Marty falls behind on his mortgage payments, the bank forecloses and takes possession of his house. Marty also didn’t pay his property taxes for two years, so anyone who buys the house when the bank holds an auction must pay those taxes in full immediately. This would make a prospective buyer less enthused about buying the property. In this case, there are two encumbrances on the house: the mortgage, and the property taxes.

Types of Encumbrances

There are several types of encumbrances that exist. Most of them are financial, but some of them are not. What follows is a brief description of each.

Easement

An easement refers to a person’s legal right to use or improve upon another person’s property. For instance, an electrical company has the right to run electrical wires across a person’s property for the purpose of delivering electricity to the home. While the electrical company has the legal right to modify the person’s home and/or property, legal ownership still belongs to the person who owns the land. The purpose of an easement is to give a person who does not own a parcel of property a legal right to use or improve upon that property. This is also known as an affirmative easement.

Negative Easement

A negative easement, on the other hand, prevents a property owner from using or improving upon his property in a way that might negatively affect others. For instance, a negative easement would prevent a property owner from modifying his property in such a way that it restricts the amount of sunlight on his neighbor’s property. Another example would be a conservation easement. This is a kind of negative easement that prevents a company from developing on certain areas of land that are protected for the purpose of conserving the environment.

Encroachment

Encroachment refers to a kind of intrusion that someone who is not the property owner makes upon another person’s property. For instance, if a neighbor puts up a fence, and the fence is over the property line, then this is a form of trespassing, which is a form of encroachment. Encroachment is an encumbrance because it provides an obstacle to a property owner’s enjoyment of his own property.

Lien

A lien is a contract that a property owner, or borrower, makes with a creditor that allows the creditor to seize the property if the borrower stops making payments as agreed on the lien. If the creditor does seize the property, the company can then sell the property to make back the money it is owed.

A tax lien is one such example of a lien. In the U.S., a lien that is issued by the government takes precedence over all other liens, mortgages, etc. This means that the federal lien must be paid before anyone else takes their share.

There’s also something called a mechanic’s lien, which does not refer to an auto mechanic, but instead a contractor that does work on a piece of property. If the property owner does not pay for the work that was done, the contractor can then put a lien on the property until his bill is paid.

Mortgage

One of the most common forms of encumbrance is a mortgage. A mortgage is a loan that is provided to a borrower by a bank, so that the borrower can purchase a piece of property. The bank is then the owner of the property until the borrower has paid off the mortgage. If the borrower decides to sell the property before the mortgage is fully satisfied, then he must pay back what he owes before claiming any of the profits for himself.

Lease

The second most common form of encumbrance is a lease. A lease is an agreement to rent something, like a car or an apartment, for a specific period of time and at a specific rate. A lease is a kind of encumbrance because it limits the borrower’s ownership of that car, or other piece of property. For instance, if you lease a car, and you really love it, you must return it by the agreed-upon date, as directed in the lease.

Restrictive Covenant

A restrictive covenant is an agreement that is made wherein a seller writes a clause into a buyer’s contract that restricts how the buyer can use the property he is purchasing. For instance, if a buyer is purchasing an office building, there might be a clause in the contract that specifies he cannot alter the building in any way. So long as it’s not illegal, anyone can make a restrictive covenant for anything they choose with regard to how a property that is being sold is ultimately used. A restrictive covenant is a type of encumbrance because it affects the use of the property by the current owner, and must be transferred to a new owner.

Encumbrance Example Involving a Surprise Encroachment

An example of encumbrance that proceeded to litigation can be found in the case of Green v. Ayres from 1975. On May 12, 1959, John and Beverly Green entered into a contract with J.V. Ayres to purchase a piece of real property that Ayres was selling in Oregon. Ayres promised the Greens prior to the sale that the property was free from encumbrances.

About 12 years later, the Greens attempted to sell the property. Prior to closing, however, the new buyer discovered that the property extended four feet into the neighbor’s property – and that this encroachment had existed for over 30 years! The new buyer demanded that the Greens remove this encumbrance. The Greens did exactly that, adding a new wall to the building that cost them over a thousand dollars. The Greens then sued Ayres for the money they had to lay out to remedy an encroachment they were told did not exist.

The trial court held that the Greens were unable to successfully show that the encroachment was actually an encumbrance upon their purchase of the property. The court stated that there was reason to believe that the Greens may have actually engaged in something called “adverse possession,” and that the Greens did not deny this – something that was ultimately detrimental to their case. (Adverse possession is the occupation of land owned by someone else, with the intention to claim ownership of it someday.)

The Greens appealed to the Supreme Court of Oregon, but the court affirmed the lower court’s ruling, saying that the Greens had not met their burden of proof in showing that Ayers had breached a covenant against encumbrances.

Related Legal Terms and Issues

  • Contract – An agreement between two or more parties in which a promise is made to do or provide something in return for a valuable benefit.
  • Litigation – The process of taking legal action; the process of suing someone, or trying them for a criminal act.
  • Trespassing – Entering someone’s property without permission.

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