What is “encumbrances”?
“an impediment or burden.” An encumbrance is a right to, interest in, or legal liability on real property that does not prohibit passing title to the property but that diminishes its value. (Wikipedia)
There are two major types of encumbrances. Whatever this burden is, usually it will diminishes the value of the subject. First is the financial encumbrance, and second non-financial encumbrance. Encumbrance is just a legal term used to say a burden which may affect the value of a subject (like in the case of property).
Take an example, encumbrance over a transaction of vehicle. Seller has previously owed tickets not paid. This will affect the new owner if not paid. So, the vehicle would cost more to pay including the fines. This encumbrance is financial in nature. However, if a vehicle is known to have suffered some damage earlier which weakened its joints, then it would have a burden which might affect safety in driving. So, this encumbrance is not financial in nature, but risk in safety. It certainly will also affect the transaction of the sale – for nobody would prefer an unsafe vehicle. Thus, the ultimate result is also the reduction in value.
A property with encumbrances can result in transaction failure. What are common encumbrances in a property transaction?
- Caveat, charges, lien. There is third party who has financial interest in the property.
- Easement. There is third party who has non-financial interest in the property.
- Taxes. Local government or State government has interest in collecting taxes. Eg Stamp duty.
- Developer. When a developer has to ensure its own interest in administrative convenience/management. This can be like management charges, sinking fund, processing fees for issuance of title in the progress payment schedules.
- Land office. Requirement of payment of premium, lease terms, special condition requiring State Authority approval.