what is an encumbrance 
an encumbrance is a claim against a property made by a party who is not the property owner an encumbrance can impact the transferability of the property and restrict its free use until the encumbrance is lifted the most common types of encumbrance apply to real estate these include mortgages easements and property tax liens not all forms of encumbrance are financial for example easements are non financial encumbrances an encumbrance can apply to personal property as well as real estate as an accounting term encumbrance refers to restricted funds inside an account that are reserved for a specific liability investopedia jake shiunderstanding encumbrancethe term encumbrance covers a wide range of financial and non financial claims placed on a property by parties other than the title holder property owners may be encumbered 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 some encumbrances involving securities affect the marketability of those securities for example if an investor uses the securities in a brokerage account as collateral for a loan from the brokerage they may not be able to sell them the brokerage would be able to take them in case of default by the investor or if the investor can sell them the brokerage would be entitled to enough of the proceeds to repay the loan an easement or a lien can make a title unmarketable while this does not necessarily mean the title cannot be bought and sold it can enable the buyer to back out of the transaction despite having signed a contract buyers may even seek damages in some jurisdictions other encumbrances such as zoning laws and environmental regulations do not affect a property s marketability but do prohibit specific uses of and improvements to the land that s why for example in hong kong the seller of a property is legally required to inform the real estate agent and purchaser of any encumbrances against the property to avoid problems in the sales process the real estate agent will provide the buyer with a land search document that will have a list of any encumbrances 1it is important for buyers of real estate to be aware of any encumbrances on a property since these will often transfer to them along with ownership of the property types of encumbrancesthere are a various types of encumbrances especially when it comes to real estate this is due to real estate s many applications each type of encumbrance is meant to protect parties and specify exactly what each claim entails an easement refers to a party s right to use or improve portions of another party s property or to prevent the property owner from using or improving the property in certain ways an affirmative easement allows the party that possesses the easement to use a property as defined by the easement for example a utility company may have the right to run a gas line through a person s property or pedestrians might have the right to use a footpath passing through that property holders of the easement must abide by its terms or face potential legal action a negative easement allows the party that possesses the easement to stop certain actions as defined by the easement for example a neighbor may have the right based on agreement with the property owner next door to prevent that owner from mowing their lawn on certain days of the week an easement in gross benefits the easement owner as an individual rather than as an owner of a property therefore the easement can t be passed on to anyone who might buy the easement owner s property it is nullified once the easement owner moves for example jennifer owns an easement that she negotiated with her neighbor that gives her the right to use her neighbor s well but that right would not pass on to someone who bought jennifer s property encroachment occurs when a party who is not the property owner intrudes on or interferes with the property for example by building a fence over the lot line a trespass or planting a tree with branches that hang over onto the adjoining property a nuisance an encroachment creates an encumbrance on both properties until the issue is resolved the property housing the encroachment has its free use encumbered while the owner of the encroaching improvement does not have title to the land it s built on a lease is an agreement whereby someone rents a property for an agreed upon rate and period of time it is a form of encumbrance by which the lessor landlord does not give up title to the property but their use of the property is significantly constrained by the lease agreement a lien is a type of security interest an encumbrance that affects the title to a property it gives a claimant the right to seize the property as collateral for an unmet obligation usually an unpaid debt the creditor can then sell the property to recoup at least a portion of their loan a tax lien is an encumbrance 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 made by a claimant who has performed services on the property for example if a contractor made adjustments to your property that were never paid for the contractor might establish a lien judgment liens are secured against the assets of a defendant in a lawsuit a mortgage is one of the most common types of security interests essentially it is a lien against a real estate property the lender generally a bank retains an interest in the title to a house until the mortgage is paid off if the borrower cannot repay the mortgage the lender may foreclose seizing the house as collateral and evicting the inhabitants a restrictive covenant is an agreement that a seller writes into a buyer s deed of property to restrict how the buyer may use that property for example there might be a provision that requires the buyer to leave a building s original facade intact as long as they do not break the law restrictive covenants can be as specific and arbitrary as the parties involved are willing to agree to special considerationencumbrance accounting refers to money set aside to pay for anticipated liabilities for example a company may reserve a sum of cash to settle up obligations in its accounts payable and salaries that must be paid to employees are an encumbrance 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 the money that has been set aside cannot be used for any other expenditures or transactions encumbrance accounting therefore ensures that a business does not overspend its budget 