Encumbrance

This article is about the legal term. For the science and engineering term, see weight.

An encumbrance is a third party's right to, interest in, or legal liability on property that does not prohibit the property's owner from transferring title (but may diminish its value).^[1] Encumbrances can be classified in several ways. They may be financial (for example, liens) or non-financial (for example, easements, private restrictions). Alternatively, they may be divided into those that affect title (for example, lien, legal or equitable charge) or those that affect the use or physical condition of the encumbered property (for example, restrictions, easements, encroachments).^[2] Encumbrances include security interests, liens, servitudes (for example, easements, wayleaves, real covenants, profits a prendre), leases, restrictions, encroachments, and air and subsurface rights.

Jurisdictions

Hong Kong

In Hong Kong, there is a statutory definition of "encumbrance". In Conveyancing and Property Ordinance (Cap. 219) it reads: ""encumbrance" (產權負擔) includes a legal and equitable mortgage, a trust for securing money, a lien, a charge of a portion, annuity, or other capital or annual sum; and "encumbrancer" (產權負擔人) has a meaning corresponding with that of "encumbrance" and includes every person entitled to the benefit of an encumbrance, or to require payment and discharge thereof".

Other uses

Colleges

It is also a term used by colleges and universities to describe limitations placed on a student's account due to late payment, late registration, or other reasons stated by the institution. An encumbrance can prohibit students from registering for classes, affect the release of their transcripts, or delay the reception of their diplomas.

Accounting

In management accounting, encumbrance is a management tool used to reflect commitments in the accounting system and attempt to prevent overspending. Encumbrances allow organizations to recognize future commitments of resources prior to an actual expenditure. The term is frequently used in fund accounting, especially among governmental entities.

Pre-encumbrance

Amount expected to spend, but for which there is no legal obligation to spend. A requisition is a typical pre-encumbrance transaction.

Encumbrance

Amount for which there is a legal obligation to spend in the future. A purchase order is a typical encumbrance transaction. At this point, the amount of the encumbrance will be entered in the financial records.

Expenditure

Amount for which there has been an expenditure of funds. An expenditure is recorded in Commitment Control for both vouchers payable and journal entries. The encumbrance will be removed from the records when the expenditure is recorded.

Intellectual property

An example of Intellectual property encumbrance is "encumbered code", software that cannot be freely distributed due to intellectual property rights.

Real Estate

In certain parts of the world, such as India, an Encumbrance Certificate is issued prior to the sale of a home in order to ascertain whether the title of the home is free and clear.

Pledge

This is the transfer of ownership rights to property belonging to the debtor (the pledger) to the creditor (the pledgee) to secure the repayment of some debt or obligation and for the mutual benefit of both parties.^[3][4][5] This term is also used to denote property that serves as security. A pledge is a type of security interest.^[6][7][8] A pledge is the pignus of Roman law,^[9] from which much of modern European law on this matter originated; however, it is generally a feature even of the most basic legal systems. A pledge of movable property is known as a pawn.

Common Types of Encumbrances in CRE

• Pledge Rights: Creditors' claims on outstanding debts, including mortgage liens, tax liens, or mechanic's liens.
• Easements: Legal rights granted to others, such as utility companies, for access to or use of parts of the property.
• Leases: Lease agreements with tenants are binding agreements that continue to affect the property even after ownership changes.
• Restrictive Covenants: Conditions imposed by previous owners, homeowners' associations, or municipalities that limit the use of the property.
• Encroachments: When a neighboring structure (e.g., a fence or driveway) crosses onto the property’s land, which can cause disputes.^[10]

Banking Regulation

European Union

In the European Union, the Capital Requirements Regulation (CRR) governs credit institutions' obligations to report encumbrances.^[11][12][13] Article 100 of the CRR requires banks to report in aggregate the amount of REPO transactions, securities lending operations, and all forms of asset encumbrances. Furthermore, Article 433 of the CRR contains provisions on the disclosure of unencumbered assets.

USA and Canada

In the United States and Canada, there are legal limits on the issuance volume of secured bonds to ensure an adequate amount of unencumbered assets.