Encumbrances and Nonpossessory Interests In Real Property

The term property doesn't necessarily refer to a physical item. Rather, it describes a legal relationship of a person to a thing. Property is a legal concept that grants and protects a person's exclusive right to own, possess, use and dispose of a thing.

But before you start adding properties to your portfolio, whether that's for investment or other purposes, there are a few things you'll need to understand. This article reviews the basics of two key concepts related to property: nonpossessory interests and encumbrances.

What Are Nonpossessory Interests?

A nonpossessory interest is the right to use or restrict the use of another person's real property or land. In some cases, the nonpossessory interest arises from a voluntary contract made between two parties, as in the case of a lease agreement.

In other instances, the nonpossessory interest occurs because of a court order, such as a lien against the property. For instance, a federal tax lien may be filed with the court in the county in which a delinquent taxpayer's real estate is located.

While the holder of a nonpossessory interest has certain and clear-cut rights in regard to the use of a property, they do not hold title to the property.

Types of Nonpossessory Interests

Real Property

Real property consists of lands, tenements, and hereditaments. Lands refer to the ground, the air above, the area below the earth's surface, and everything that is erected on it. Tenements include the lands and certain intangible rights related to the lands. Hereditaments, on the other hand, embrace every tangible or intangible interest in real property, including lands and tenements, that can be inherited.

Interest

An interest describes any right, claim, or privilege an individual has toward land or real property. The law recognizes various types of interests in real property. A nonpossessory interest in land is the right of one person to use or to restrict the use of land that belongs to another person.

Nonpossessory interests do not constitute ownership of the land itself. Instead, holders of a nonpossessory interest in real property do not have title, and the owner of the land continues to enjoy the full rights of ownership, subject to any encumbrances.

What Is an Encumbrance?

An encumbrance is anything that can lessen the value or use and enjoyment of a property, such as a lien or restrictive covenant. Because encumbrances can have an adverse effect on land value or use, anyone involved in a real estate transaction should be aware of the existence of any encumbrances on the property that is being transferred.

An attorney typically performs a title search and forms a title opinion, wherein any encumbrances discovered during the search will be specified. An encumbrance doesn't prevent the title from passing in a real estate transaction. Rather, the title passes subject to any encumbrances. In other words, an encumbrance remains on the property, or runs with the land, until satisfied, even when the title is transferred to a new owner.

Types of Encumbrances

Easements

An easement is a nonpossessory right to use another person's land in some limited way that does not constitute full ownership. The person or legal entity that benefits from the easement has a nonpossessory interest in the other person's land. This means the owner of the property is burdened by the easement.

Common easements include rights-of-way, drainage ditches, public utility lines, and easements by condemnation, which is generally known as eminent domain.

Encroachments

An encroachment is an improvement that extends beyond a property owner's boundary line and encroaches on an adjacent property. Examples of encroachments include building or overhanging eaves, outbuildings, fences, driveways, and walkways.

Encroachments can render the title to both involved properties unmarketable. That's because the encroaching property does not have title to all of the land upon which improvements have been made, while the encroached-upon property does not have use of all the land.

Leases

A lease is a contract between a property owner (lessor) and a person or entity who wants to rent the property (lessee). Under a lease, the lessor agrees to allow the lessee to occupy and use the property in exchange for rent or valuable consideration.

The lease typically specifies the duration of the agreement, any terms for extending the agreement, and the amount and frequency of rent that will be paid. Although the lessee occupies the property, the lessor remains the owner and holds the title to the property.

Liens

A lien is a right provided by law granted to creditors to have debts that are due to them satisfied by the sale of property that belongs to the debtor. The property acts as collateral, and in the event that the property is transferred, proceeds from the sale can be used to pay the debt and satisfy the lien.

Common liens include real estate tax and assessment liens, mechanics' or construction liens, judgment liens, and federal tax liens.

Lis Pendens

A lis pendens is a notice of pending litigation that informs all interested parties that a legal action has been initiated that affects the title to a particular property. A lis pendens, which can be filed in either a state or federal court, typically involves the title to a property or a claimed ownership interest in the property.

Because a lis pendens is filed against real property, any person to whom the property is transferred will be bound by the outcome of the pending lawsuit.

Protective or Restrictive Covenants

A protective or restrictive covenant is an enforceable condition that appears as a clause in a deed that limits the manner in which real property can be used. These covenants burden property owners to perform or not perform in specified manners.

Examples of protective or restrictive covenants include constraints for minimum square footage in a new building, architectural design, setback and sideline from roads or adjacent properties, and exterior home color.

The Bottom Line

It is important to perform a title search whenever you consider purchasing real estate. Doing so helps you determine if there are any title defects that could affect the use of the property. A qualified attorney can perform a title search to uncover any liens or encumbrances against the property.

Many properties are sold subject to all liens and encumbrances, which means that the property may be burdened. It is, therefore, in the buyer's best interest to discover any encumbrances prior to making any final decisions.

A general warranty deed is the buyer's best protection and contains a covenant against encumbrances warranty that assures the buyer that no encumbrances exist on the land except those that are specified in the deed.