Sabotage? Encumbrance and your commercial real estate deal

On Behalf of | Sep 21, 2022 | Commercial Real Estate

Many states have laws that deal with commercial real estate transactions. These provide the boundaries for the sale and transfer of property.

Encumbrance is the legal term that defines a legal interest in a property held by someone other than the property owner. Without getting resolved, this could jeopardize the ability to finalize the sale or purchase of a piece of commercial property.

What is an encumbrance?

Although attached to a property, an encumbrance is not an ownership interest. This means the individual or organization holding the interest does not actually own a piece of the real estate. The encumbrance is an obligation associated with the property owner, and the encumbrance could limit the use of a property. An organization or individual can hold an encumbrance claim, with some of the more common parties involved in a commercial property being a utility company or the local government.

What are the types of encumbrance?

An encumbrance has an effect on the property owner’s ability to develop the land or make changes to a property. In commercial real estate, legal encumbrances are those imposed by local laws or ordinances or those issued by federal or environmental regulations. For example, a piece of protected wetlands may have restrictions on building permanent structures. Commercial zoning restrictions have the potential to undermine your plans for a property, such as if you desire to open a liquor store but the town bans the sale of alcohol.

Without knowing if there is an encumbrance on a commercial property, your development plans may not turn into reality. An encumbrance could limit the use of the property, leaving you with a financial investment that may not bring the returns expected.