Understanding Encumbrance in Commercial Real Estate
2 min read.
In Canada commercial real estate, encumbrance refers to any claim or lien placed upon a property, potentially impacting its marketability and transferability. While encumbrances might initially appear unfavourable, they are primarily designed to protect property interests, benefiting both owners and buyers. However, non-disclosure of encumbrances by sellers can lead to costly legal action. When engaging in real estate transactions, both parties must perform due diligence to uncover any encumbrances attached to the property, as they can substantially influence the terms and conditions of the deal. Encumbrances come in several forms, each with its own set of implications:
Mortgages are the most common encumbrances. They represent loans secured by the property itself. When contemplating a property purchase, buyers must assess the remaining mortgage balance and associated terms.
Leases can be encumbrances due to the existing lease agreements with tenants, affecting a property’s income potential and the ability to redevelop or repurpose it. Therefore, buyers should examine lease terms and tenant obligations.
Liens can arise from unpaid debts, such as contractors' fees or unpaid property improvement charges, potentially resulting in legal actions or the sale of the property to cover the outstanding debts.
Easements grant specific rights to third parties, such as utility companies or neighboring landowners. These rights can restrict the property's use, necessitating careful consideration.
Restrictive Covenants impose limitations on how the property can be utilized, significantly affecting potential developments or alterations.
Encroachments occur when a part of a property extends onto adjacent land or vice versa. This can lead to boundary disputes and potential legal actions that may affect property value and use.
To navigate encumbrances effectively, both parties must conduct thorough due diligence by hiring professionals like real estate attorneys and title companies to search for and address any encumbrances. Clearing encumbrances is crucial to ensure a clean title for the property, which is vital for a seamless transfer of ownership. Parties should also negotiate with sellers to resolve encumbrances before finalizing the deal, as this can prevent future legal complications. It is a practical necessity to protect investments and facilitate smooth transactions of property ownership.
References
Hayes, A. (2020, August 18). Encumbrance: Definition, example, and types of encumbrances. Investopedia. https://www.investopedia.com/terms/e/encumbrance.asp
Johnson, S. (2022, June 20). What is an encumbrance in commercial real estate?. Lev. https://lev.co/blog/financing/encumbrance-real-estate/
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