Definition: An encumbrance is a legal claim attached to certain property or asset that might restricts its transfer or decrease its value. It is a right that entitles the holder to certain benefit or interest over the property.
What Does Encumbrance Mean?
An encumbrance can be either financial or non-financial, depending on its nature. A financial encumbrance involves a charge over the property. The best example of this is a mortgage or a tax penalty.
On the other hand, a non-financial encumbrance might be an easement, which is a right given to a third party to employ certain spaces of a property. In any of these scenarios, an encumbrance might restrict the possibility to transfer the property or it could also diminish its value, due to the claim. There are also some situations where legal actions against the property owner are considered encumbrances.
In this case, property value will be severely affected since it opens the door for a potential seizure of the asset. Contrary to this, an unencumbered property is one that can be freely used and disposed by the owner, since there is no claim against it, as is the case for properties that have no mortgage or were bought in cash.
Example
A gas company called Pipers Co. is currently offering easement agreements to home owners living in certain town, as part of their effort to build new pipelines to serve other locations. The property owners are worried that these easements could reduce the value of their real estate and, they don’t want to have an encumbered property in their hands, since according to certain reports this type of properties are much more difficult to sell than unencumbered ones.
In order to persuade the owners, Pipers offered them a 35,000 one-time payment that will offset this potential loss and they will also obtain a monthly compensation for the easement. This created the necessary incentive for the owners to agree to allow the building of new pipelines under their property’s ground.
