Encumbrance

An encumbrance is a claim against property by someone who is not the owner. Cornell's Legal Information Institute defines it as "a claim against an asset by an entity that is not the owner," and names the common ones against real property as "liens, easements, leases, mortgages, or restrictive covenants," adding that encumbrances "impact the transferability and/or use of subjected properties." An encumbrance is therefore not a competing claim to ownership. The owner still owns the land; someone else holds a right in it, and that right is a real one, enforceable against the land itself rather than against the owner personally.

The naming. California's Civil Code, written in 1872 and still in force, spells the word with an "i": section 1114 provides that "the term 'incumbrances' includes taxes, assessments, and all liens upon real property." Modern drafting, modern title reports and every current secondary source use "encumbrance." The two spellings are one word, and a reader who meets "incumbrance" in an old deed or a state code has not found a different concept.

The two axes that make the category useful. Any individual encumbrance can be described by its own rules, and the pages on liens, easements and leases do that. What the category adds is a way to sort an unfamiliar one on a title report by asking two questions.

The first is whether it secures money or restricts use. A money encumbrance attaches a debt to the property so that the property can be sold or foreclosed to satisfy it. A use encumbrance does not represent a debt at all; it constrains what may be done on the land. This axis predicts what happens when the debt is paid: a money encumbrance is released, while a use encumbrance has nothing to pay off and so cannot be cleared by writing a check.

The second is whether it clears at closing or travels with the land. Mortgage balances, unpaid property taxes and most judgment and contractor liens are ordinarily satisfied from the seller's proceeds at settlement, so the buyer receives the property without them. Easements, leases, and recorded restrictive covenants are ordinarily not, because they are the rights of people who are not being paid off and have not agreed to give anything up. This axis is the one a buyer actually feels, because it decides which items on the title commitment will still be there the morning after closing.

The two axes correlate but do not coincide, and the exceptions are where attention belongs. A lease is a use encumbrance that also produces money. A mortgage the buyer assumes is a money encumbrance that travels rather than clearing. An encroachment, where a structure crosses a boundary line, may not fit either axis cleanly and is usually resolved by agreement or by moving the structure.

The typed index. These are the kinds a title report will name, each with its own page.

• Lien. A legal interest in specific property securing a debt or obligation. How one arises, what priority it takes and what releases it are the lien page's subject.

• Mortgage or deed of trust. The voluntary lien the owner granted to finance or refinance the property.

• Property tax and assessments. A charge that attaches to the land rather than to the person, which is why it survives a change of owner.

• Easement. A nonpossessory right to use the land for a stated purpose.

• Lease. A transfer of the right to exclusive possession for a term, so a buyer of tenanted property buys the tenancy along with the building.

• Restrictive covenant. A recorded private restriction on use, commonly imposed by a subdivision and enforced by an association.

• Judgment lien. A money claim that attaches after a court judgment against the owner.

• Encroachment. A physical intrusion, such as a fence or a roofline, across a boundary.

Why the category has teeth: marketable title. A buyer's obligation is usually to accept title free of encumbrances other than the ones the contract names, so an undisclosed encumbrance is a defect rather than a detail. California's Civil Code section 1113 shows how narrow the seller's own warranty typically is: using the word "grant" in a conveyance implies two covenants "and none other," the second being that the estate is "free from incumbrances done, made, or suffered by the grantor, or any person claiming under him." Read that clause carefully. It warrants against encumbrances the seller created or allowed. It says nothing about an encumbrance created by a previous owner two decades ago, and that gap is a large part of the reason a separate title policy exists.

On any sale, each encumbrance is sorted into one of two piles: paid off from the proceeds, or handed to the buyer.

1. The title search lists them. Recorded claims come back on a title commitment, each with a document reference.
2. Payoff figures are ordered for the money ones. The lender, the tax office and any lienholder state what they require to release.
3. The rest are disclosed and accepted. The use encumbrances are listed as exceptions on the title policy, which is the formal way of saying the buyer takes the property subject to them.
4. Releases are recorded. Paying a lien does not clear the record; the recorded release does.

A hypothetical example. A house sells for $355,000. The title work shows a mortgage payoff of $198,400, a contractor's lien of $14,600 from an unpaid remodel, and $3,200 of delinquent property taxes. Those three total 198,400 + 14,600 + 3,200 = $216,200, all cleared from the proceeds, leaving 355,000 − 216,200 = $138,800 to the seller before the agents' fees and other closing costs. The same title work also shows a utility easement along the rear boundary and the subdivision's recorded restrictions. Neither of those is a debt, neither is paid at closing, and both belong to the buyer the moment the deed is recorded. All figures are hypothetical.

An encumbrance is a neutral fact about a property rather than a good or bad one, so the honest framing is what it is worth to each side.

What encumbrances make possible

• Lending against real estate works because a lender can take a recorded interest in the property rather than relying on the borrower's promise.
• Utilities, shared driveways and drainage function because a right to use land can be attached to the land itself instead of renegotiated with every new owner.
• Local government can fund itself with a charge that follows the property, which is why a property tax bill survives a sale.
• Because they are recorded, a buyer can find most of them before committing.

What they cost the owner

• They reduce what a sale nets, and the reduction is not always visible until payoff figures arrive.
• The use encumbrances cannot be bought off. Only the holder can release an easement or a recorded restriction, and a holder with a genuine interest has no reason to.
• Some are not on record at all. An easement created by long use, an unrecorded lease, or an encroachment no one has surveyed will not appear in a search.
• The seller's implied covenant is narrower than it sounds. As California's section 1113 shows, it reaches encumbrances the seller created or allowed, not ones inherited from earlier owners.