When you're new to homeownership and seeking to secure your first property, you may be dazzled by the different terminology you come across and wonder how they may affect your purchase. In particular, you may see that a specific property is affected by an "encumbrance," so what does that entail?
Handling Third-Party Interests
An encumbrance is a claim on a property by a third party, not the owner. In its most common form, it'll be a mortgage or lease, which will need to be discharged at settlement, so you do not take that on as a debt.
Understanding Liens and Caveats
However, other types of encumbrance can be a little more tricky to sort out. For example, there may be a caveat in place, which is a form of legal notice that someone has a claim against the property. This could be due to a previous lawsuit of some kind where a plaintiff has been successful, and the defendant does not have the means to settle. In this case, a court may have placed a lien against an asset instead (this property), which means that the plaintiff now has a financial claim should the property be put up for sale. This is sometimes called a "cloud" on the title. In most cases, an encumbrance can certainly affect whether a property can be transferred until it has been lifted.
Dealing with Covenants
There may be other types of encumbrance, such as a restrictive covenant. This is an agreement that restricts the owner of the property from taking a specific action. Sometimes they are put in place by community associations to meet neighbourhood rulers. This association may require that the house be maintained to a certain standard, so you would need to keep up with house painting and landscaping, or they could refer to the details of the restrictive covenant. Another covenant may say that the property cannot be used for commercial purposes but only as a residential home. As in the case of all covenants, you have to determine if you can live with the detail should you purchase.
Getting Professional Advice
If you have any questions about encumbrances on a particular property and do not understand the detail, talk with a conveyancer first. If you engage their services, it'll be their duty to look closely at each encumbrance and advise you of the implications. They will also inform you of any easements or other issues that may affect your ownership.
Reach out to a conveyancing law firm near you for more information.
Share
