Encumbrance

Encumbrance Meaning

Encumbrance is the legal control over the property of the legal owner and can be claimed if legal owner mortgaged the property, haven’t paid the statutory governmental dues against the property, haven’t repaid the loan against the property, haven’t paid an amount of purchase consideration to the previous owner of the property, breached the terms of contract related to said property, etc. encumbrance put a restriction on transfer of property i.e. legal owner can sale the property only after clearing the dues against the said property.

Types of Encumbrances

Encumbrances

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#1 – Easement

An easement is a restriction on additions or renovation to the property by the owner of the property. This might be because of addition could harm the other persons, for example, Mr. A Purchased the Shop in the complex from Mr. B on Hire Purchase and Mr. B becomes the legal owner and the terms of the purchase were Mr. A cannot make addition or renovation or sale the property without the permission of secretary and treasurer of the complex.

#2 – Encroachment

Encroachment is a situation where property owner renovates or enhances the property but it includes part of other attached property i.e. other owner’s property so another person whose property is affected can interfere with the matter.

#3 – Lien

A lien is a right in the property if the owner is unable to pay. It gives power to creditors to seize the property if the owner is unable to pay the debt. An example of lien is property seized by governmental authorities if the owner unable to pay the property tax and other dues related to property.

#4 – Mortgage

A mortgage is kind of lien but it is a lien against the property. An example of a mortgage is the owner of property taken loan against the property i.e. the owner has to clear the loan before the sale of property otherwise lender has right in property.

#5 – License

The license is right to use other’s property and it is subject to rules and conditions and if conditions breached the owner has the right to take back the property and cancel the license.

Examples of Encumbrances

Example #1

Mr. X wants to purchase the property from Mr. Y the property tax was pending from the last two years’ hence governmental authorities sent a notice to Mr. Y that if property tax is not paid within a specified time the authorities will seal the property. Hence if Mr. X wants to purchase the property, he has to pay property tax first to governmental authorities so as to clear the tile of property. In this case encumbrance to the property is governmental authorities for property tax.

Example #2

Another Example is Mr. Z purchased the property from Mr. A, for purchasing the property Mr. A had taken the loan from the commercial bank, and the loan wasn’t fully paid off before entering into a sale. Here if Mr. Z wants to purchase the property from Mr. A he first by himself or by Mr. A has to clear the loan so as to make the property free from any obligations. Here because of encumbrance the value of the property also can be affected Mr. Z can negotiate with Mr. A for purchase value as the title of a property is defective and if Mr. A is unable to pay the loan Mr. Z has to clear the loan.

How to Receive the Encumbrance Certificate?

This certificate is the legal document which states that property is free from any legal title i.e. free from all obligations whether monetary or non-monetary. It is to be obtained from the local registrar’s office. It will be given to the owner after verification of certain documents attached to property like proof of address, legal documents related to property, a certificate from banks, governmental authorities, etc.

Impact of Encumbrance

Let’s discuss the following points.

Encumbrance Impact

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  1. Affects the Title of Property: Because of encumbrance, the prospective buyer couldn’t get the clear title till the seller pays all the dues related to property.
  2. Encumbrance Affects the Value of Property: As the property is not free from obligations the prospective buyer may negotiate the value of the property.
  3. Restrict Transfer: Sometimes it may restrict the transfer of property without permission for the permission of the debt holder.
  4. Restrict Improvement: If the property is in the large complex it may restrict the improvement or any additions in a property without prior notice and permission letter.

Importance

Let’s discuss the following importance.

  1. Preference to Debt Holder Before Sale: The Debt holder will get the preference at the time of sale i.e. the sale can be executed only after paying the debt or transferring the debt to the purchaser.
  2. Clears the Title Before Sale: Because of encumbrance the buyer gets the property with no obligations attached to it.
  3. Protect the Rights of Others: They protects the rights of others as the debt holder related to property gets the preference before any transaction related to property.
  4. Reveals the Facts Related to Property: It reveals all the obligations related to property so that buyer also comes to know the same.

Benefits

  • The buyer gets the property which is clear from all obligations.
  • Allows using the property without owning it like license.
  • It puts restrictions on the use of funds in public enterprises.
  • They give the right to interest holders to legally claim the interest against the property.

Conclusion

  • Encumbrance in real estate is an interest in the property of which the person is not the owner. Interest may arise from the dues or title attached to the property. In public sector enterprises or public accounting firms, it is to ascertain that sufficient funds are available to meet the obligation.
  • The example of encumbrance is mortgage loan against the property, non-payment of statutory dues related to property, etc. it gives the right to titleholder to get clear the title before the sale of the property. It also affects the value of the property as the title of the property is in question hence value might decrease.

Recommended Articles

This has been a guide to Encumbrance and its meaning. Here we discuss types, examples, and how to receive the encumbrance certificate along with benefits and importance. You may learn more about financing from the following articles –