Encumbrance when it comes to real estate, due to its many applications, has many different types. Each type is meant to both protect parties and specify exactly what each claim entails—and is entitled to. The term is used in accounting to refer to restricted funds inside an account that are reserved for a specific liability. 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.

Property owners may be encumbered some from exercising full—that is, unencumbered—control over their property. In some cases, the property can be repossessed by a creditor or seized by a government. 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.

  1. For example, you cannot build a swimming pool over a location reserved for a city sewer line.
  2. Here, “involuntary” means that the homeowner did not necessarily agree that such a lien could be filed against the property.
  3. A buyer will inherit the encumbrance upon purchasing the property.
  4. 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.

Encumbrances can be any interest in the property that burdens or reduces the property’s value or clear title. Easements are encumbrances, because they prohibit certain actions and affect rights to the property. For example, you cannot build a swimming pool over a location reserved for a city sewer line. If you do, the city can dig up the swimming pool without your permission. An encumbrance is any legal thing that burdens or restricts usage or transfer of the property.

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. This is a kind of negative easement that prevents a company from developing on certain areas of land that are protected for encumbrance meaning the purpose of conserving the environment. 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.

Easements are often purchased by public utility companies for the right to erect telephone poles or run pipes either above or beneath private property. A mechanic’s lien is generally filed by a contractor or subcontractor for work or materials that remain unpaid. All involuntary liens must be paid off for a title company to issue a title policy without naming the encumbrances as exceptions to the title insurance. Encumbrance accounting sets aside specific assets to pay anticipated liabilities. For example, a company may reserve a sum of cash to settle up its accounts payable. The presence of an encumbrance can give the illusion that there are more available funds inside an account than what is actually free for use.

Ayres promised the Greens prior to the sale that the property was free from encumbrances. 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. A lease is an agreement to rent a property for an agreed-upon rate and period of time.

Two fairly common types of involuntary liens are a lis pendens and a mechanic’s lien. Here, “involuntary” means that the homeowner did not necessarily agree that such a lien could be filed against the property. For example, a seller agreed to sell to a buyer, but the buyer, for whatever reason, could not close on time, so the seller canceled the contract unilaterally, without the buyer’s consent. A tax lien is a lien imposed by a government to force the payment of taxes; in the U.S., a federal tax lien trumps all other claims on a debtor’s assets. A mechanic’s lien is a claim on personal or real property the claimant has performed services on. An example is if a contractor made adjustments to your property that were never paid for.

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An encumbrance is a much broader term, referring to any sort of claim against a property. 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.

There might be a provision that requires the buyer to leave a building’s original facade intact, for example. As long as they do not break the law, restrictive covenants can be as specific and arbitrary as the parties are willing to agree to. 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 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. Encroachment refers to a kind of intrusion that someone who is not the property owner makes upon another person’s property.

What is an Encumbrance?

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. The term “encumbrance” is used to describe a burden on a property that can reduce the value of the property. 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.

Types of Encumbrances

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. An example of Intellectual property encumbrance is “encumbered code”, software that cannot be freely distributed due to intellectual property rights. You must — there are over 200,000 words in our free online dictionary, but you are looking for one that’s only in the Merriam-Webster Unabridged Dictionary. J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.

A lien is a legal right granted by the owner of a property, by a law, or otherwise acquired by a creditor. A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien. A negative easement restricts the title-holder, for example, by preventing them from building a structure that would block a neighbor’s light.

More from Merriam-Webster on encumbrance

An encumbrance is a burden or obstacle placed upon an item of real or personal property that can work to reduce its value. 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 https://1investing.in/ some of the profits before keeping the rest for herself. The concept is most commonly used in governmental accounting, where encumbrances are used to ensure that there will be sufficient cash available to pay for specific obligations. By using encumbrances, a government entity can be assured that it will not over-extend its finances.