What Are Encumbrances?

Unfortunately, you’re not out of the woods just yet. There are still issues that can arise between signing your purchase agreement and closing. The selling agent will ask the title company to conduct a thorough title search on the property now. Sometimes listing agents do this when you put in your offer.

There are several key issues, also known as encumbrances they are looking for:

• Liens
• Easements
• Covenants, Conditions, and Restrictions (CC&R)
• Judgments
• Errors and Fraud

Liens
A lien is a type of interest in the property called a security interest. It is the security (the collateral) for a debt. If the property owner does not pay the debt, then the creditor can foreclose on the lien—in other words, force a sale of the property to pay off the debt. Liens come in many types. For example, the seller hired a contractor to renovate their basement, but never paid them for their work. The contractor can place a lien on the seller’s home, called a mechanic’s lien. The government can place a lien on a property if the owner fails to pay property taxes. A mortgage itself is a lien.

Liens are enforced in order of the date they were recorded in the county recorder’s office. For example, a property might be worth $100,000, the earliest lien on it is a $150,000 mortgage, and later on a contractor recorded a mechanic’s lien for $10,000. If the property is sold by foreclosure, all of the sale proceeds would go to pay the mortgage, and the contractor would get nothing.

For this reason, lenders will require that all prior liens be paid off at close of escrow, so that no lien has priority over the lender’s mortgage. Even if you are doing a straight cash transaction with no lender, you should make sure the escrow instructions require all prior liens to be paid out of the purchase money. Otherwise, you will take the property subject to those liens, and those lienholders can foreclose upon you.

Easements
An easement is another type of interest in real property. Easements are non-possessory rights, meaning a person or company has rights to use the land without actually owning it. For example, a cable company that has the right to install cable lines across the property has a utility easement, or a neighbor who has the right to drive through a road on the property to get to their own has a right of way easement.

Easements are treated differently in different states, but as a general rule, easements granted by prior owners are still binding on all future owners. Easements are generally created by executing and recording documents, but can also be created by implication or use. For example, if the prior owner always let the neighbors drive across a certain portion of the property, they likely created an implied right of way easement or a prescriptive easement.

Covenants, Conditions, and Restrictions (CC&R)
CC&R are restrictions on what the owner can do with the property—renovations, building rules, property uses. This is common in co-ops and condos, which regulate how the property should look and be used so as not to infringe on the other tenants or owners. The CC&R can restrict a vast number of things. They may prevent you from owning pets, or having more than a certain number or type of pets. They can prohibit you from renting out the property at all or set a limit on the percentage of total units in the development that can be rented out at one time. They may regulate noise in the development by prohibiting electronic or acoustic music or setting time limits on noisy activity. They may say that you can’t have satellite TV or install other items to the exterior of your unit.

One thing that CC&R can’t do is violate the civil rights laws. Many older CC&R still hanging around contain provisions which, for example, restrict residents to a certain ethnicity, but those provisions are unenforceable.

Judgments
They will also search for any court judgements against the seller and bankruptcy filings. Any judgment against the seller could mean that the person who sued them has the right to put a lien on the property. Even if there’s an existing judgment on someone with a name very similar to the seller, it could create legal issues, so the title company will have to do an extensive search to make sure they are clear of judgments.

Errors and Fraud
Finally, the title company will have to make sure there weren’t any clerical errors when the deed was filed or the seller’s mortgage documents were processed. They’ll also make sure that there isn’t any fraud, such as the seller posing as someone else to try to sell a property that isn’t theirs or any forgeries on documents.

Once all these encumbrances are cleared, the title company will issue a title commitment promising to insure the property’s title after you close.