Encumbrance

Reviewed by Bhavana | Updated on Aug 27, 2020

What is the Meaning of Encumbrance?

An encumbrance is a charge by a party who is not the proprietor against a property. An encumbrance will affect the property's transferability and limit its free use until the burden is lifted. Immovable properties are the most common forms of encumbrance; these include mortgages, easements, and property tax liens.

Not all types of burden are financial, easements being a case in point of non-financial burdens. An encumbrance can also occur with respect to personal property, as opposed to real property.

In accounting, the term is used to refer to restricted funds within an account reserved for a particular liability.

Let's Understand Encumbrance in Detail

The word encumbrance encompasses a wide variety of other than the title-holder's financial and non-financial claims to a property. Landowners may be burdened by those having full control over their land, that is, unencumbered. In certain cases, a creditor may repossess the land, or the government may seize it.

Some encumbrances affect a security's marketability: a lien or an easement can make a title unmarketable. However, this does not automatically mean that the title can not be bought and sold. Despite having signed a contract, it can cause the purchaser to withdraw from the agreement and even claim damages in some jurisdictions.

What are the Types of Encumbrance?

Encumbrance has many different forms when it comes to real estate due to its various uses. Each form is intended to protect all parties, and to precisely clarify what each argument involves and is entitled to.

  • Encroachment
  • Easement
  • Lien
  • Lease
  • Mortgage
  • Restrictive Covenant

An Important Note

From a buyer's perspective, it is crucial to be aware of any encumbrances on the house, as these are often passed to them along with land ownership. Encumbrance accounting sets aside unique assets to pay expected liabilities.