What are Encumbrances?
When dealing with real estate, there are many instances when an owner of a property will pass an interest or right to another party, which is called an encumbrance.
There are two categories of encumbrances that affect the use of a property: nonfinancial encumbrances and financial encumbrances.
● Nonfinancial - The following are common kinds of nonfinancial encumbrances:
Deed restrictions place a limit on the use of a property. They are also known as covenants or conditions.
Encroachments are physical and arise when a structure is built totally or in part on a neighbor’s property.
Easements are the right of one party to use the real property that is owned by another party.
Licenses allow a person the right to use another person’s property for a specific purpose. Different from easements because they are short-term and revocable.
● Financial - Financial encumbrances are also called liens. Liens are monetary claims against a property to collect a debt from the property owner.
Let’s work through each of these types in more detail.
Deed restrictions (aka covenants or conditions) place a limit on the use of a property. Deed restrictions are most common when new construction subdivisions are built. Builders and developers place restrictions on the deed with the purpose of maintaining standards for the use of the property within a development.
There are many types of deed restrictions. Here are some examples that a builder might create for a development:
No recreational vehicle parking
No fences higher than six feet
No commercial vehicle parking
No non-domestic animals are allowed
In addition to restricting a property’s current use, deed restrictions are also used to control a property's future use. An example would be when an owner divides their property and sells the lot to a builder with a building height deed restriction. The limiting of height on any building erected on the property is a strategy that can help prevent a view obstruction of another property.
Problems with Deed Restrictions
The biggest weakness of deed restrictions is that they do not have a third party that can be designated to monitor and enforce the restrictions. The law has limits on who can enforce restrictions and the length of time. For example, if you have restrictions in your deed and you then sell the property or give the land away without owning or keeping land nearby, you may not be able to enforce the restrictions because it will be difficult to know if/when the restriction is being violated.
Another difficulty with deed restrictions is that landowners may make formal and informal agreements without involving a conservation organization or government agency. Verbal agreements between neighbors and mutual covenants among the members of a homeowners association are a couple of the most popular agreements. In these cases in particular, there is very little security that the land will be permanently protected, as the restrictions depend on the interests of the private parties who are involved. There is no third party to legally enforce the agreements. The following is courtesy of the Land Trust Alliance:
“Enforcing deed restrictions can be difficult over the long term, as they are only enforceable by the prior owner or a third party to the original transaction, such as the owner of abutting property. One way to ensure continued enforcement is to include a third-party entity, like a Community Stewardship Organization, Land Trust, or other corporation, in the transaction. Deed restrictions involve a complicated area of law and should only be used with professional legal advice. For landowners seeking to permanently protect their property, Conservation Easements may be a more attractive alternative.”
Deed restrictions can lose their enforcement capabilities if they haven’t been enforced consistently in the past, and they also can become invalid if the purpose for the restriction no longer exists. It protects homeowners from inconsistent enforcement, changes in the makeup of the neighborhood and changing laws. They aren’t bound by rules that are no longer applicable due to current circumstances.
Encroachments are physical and arise when a structure is built totally or in part on a neighbor’s property. They usually involve confusion or a dispute regarding boundary lines (the borders of a property). Confusion could be caused by an incorrect survey, a mistake by the builder or a mistake by the person erecting the building.
Encroachments can be corrected by removing the structure that is encroaching a property. Other ways to correct an encroachment include selling a portion of the land to the encroaching party, granting a lease to the encroaching party for a period of time, or granting an easement to the encroachment.
An easement is a right of one party to use the real property that is owned by another party. The owner usually gives up a well-defined portion of the property to be used for a specific use. In actuality, almost every property has easements. The easements are said to “run with the land” and pass to future owners. Easements are granted for things such as sewer and water lines.
An easement appurtenant grants the right to use a property or part of a property for the benefit of another property. The key in that definition is the right of use is passed to another property, not a person. It would therefore run with the land and the rights would be enjoyed by whomever owned the property that was granted the easement appurtenant.
Easement in Gross
In the situation where the easement is granted to a person not a property it is said to be an easement in gross. For example, John has an easement to use Mary’s lake for fishing and swimming. John has an easement in gross over Mary’s land and the easement serves John and not a parcel of land.
Dominant and Servient Property
When an easement appurtenant is created, the parcel of land that is benefiting from the easement is the dominant property. This is also referred to as the dominant tenement.
On the other hand, the parcel of land that is granting the easement is the servient property, also known as the servient tenement.
How Easements are Created
Easements are created multiple ways. It can happen through agreement, written or oral, and it can happen with or without the property owner’s consent. Let’s start with what could be the oddest way to create an easement: easement by prescription. When an easement is created through the long-term hostile and open use of land, it is known as an easement by prescription. Hostile means without consent.
The requirements for easement by prescription are:
Open – This means the easement is easily seen.
Notorious – The easement was known by others.
Continuous – No breaks in the usage of the property for 10 years in Washington State
Adverse – To the legal owner
Hostile – Without the owner’s consent
Easements can be created by action of the government, forcing the grant of an easement. This would require the government to pay just compensation for the creation of the easement. The process of taking land from its current owner for the government is known as eminent domain and involves the condemnation of the property and payment from the government.
Easements can also be created by the situation or intent of the parties, known as an easement by necessity. Easements by necessity can occur when a property cannot be accessed without crossing another property. This often happens when an owner divides their property into multiple parcels and in order to access them, it would be necessary to have an easement run through the property. When an easement is created to allow access to another property it is known as an ingress/egress easement because it allows for entry (ingress) and exit (egress) from the property.
After dispensing with the possibly unhappy circumstances of granting an easement either through prescription, condemnation, or via necessity, easements can also be created with the written permission of the property owner, known as an express grant or express reservation. An express grant is when an easement is knowingly and expressly given to another party. This is done on purpose! So, we do see easements signed over to properties and persons with the consent of the property owner.
An express reservation is when an owner reserves part of the property for an easement and then conveys the property to another party.
Another way an owner can grant an easement is through dedication. Dedication is when a private landowner grants an easement to the government. Examples might be an easement for a park, library or sidewalk.
How to Terminate an Easement?
While easements are said to “run with the land” and pass to the new owners of a particular property, they can be terminated under certain circumstances such as:
When the purpose for the easement no longer applies or exists
Merger of the dominant and servient properties
Stop using the easement (abandonment)
Release of the easement by the dominant estate
A license allows a person the right to use another person’s property for a specific purpose. The owner retains control over the property. It is different from an easement in that an easement is created in writing, is irrevocable and is permanent. A license, on the other hand, can be created by oral permission, is revocable at any time by the landowner and can be temporary. A license is not considered an encumbrance to the property and unlike a lease, it does not transfer an interest in the property. An example of a license would be a landowner who gives a neighbor permission to swim in her pond.
Liens are the most common type of encumbrance. Liens are monetary claims against a property to collect a debt from the property owner. There are two types of liens, general liens and specific liens.
A general lien attaches to all of the debtor’s property. Examples of general liens would include judgment liens and IRS tax liens.
A specific lien attaches to a specific parcel of property only. Examples of specific liens would be a mortgage, property taxes, special assessment taxes and construction liens.
The scope of the lien is the concept behind general and specific liens. Liens have varying scope and also are either voluntary or involuntary.
Voluntary liens are those which the owner voluntarily provides to a creditor. This lien is usually used to secure a loan. Both mortgages and deeds of trusts are voluntary liens.
Involuntary liens are given to creditors without the owner’s consent, by operation of law. Liens affect the title to real property and place a cloud on the title. Cloud on title is a term that refers to the title of a property and its ownership, not being clear. It can mean that there are other parties with an interest in the property and therefore the property is not free and clear for transfer. A lien must be satisfied so that an owner can provide clear title when transferring property. If a lien is not paid off in a certain period of time, the creditor could foreclose on the debtor’s property.
Liens can be created one of three ways:
Statutory, meaning by law
Equitable, meaning by the courts
Contractual, meaning by agreement.
A statutory lien is a lien that is imposed by a statute or law and does not need the consent of the owner or a court order. A mechanics lien would be an example of a statutory lien. A mechanics lien is created by those who have provided labor that was performed to improve a property or who provided materials to improve a property. The law is intended to protect construction workers and companies that provide labor and materials from not being paid.
An equitable lien is against property that does not require possession.
The party asserting the equitable lien must establish three elements:
that there exists an express or implied agreement between the parties demonstrating a clear intent to create a security interest, in order to secure an obligation between them;
that the parties intended specific property to secure the payment; and 3) that there is no adequate remedy at law. For example, if a deed of trust was created by accident without having a trustee, then an equitable lien might be placed on the property.
A contractual lien is a contract that gives a security interest to a party in exchange for something, usually money for a mortgage. A bank would give a property owner money to purchase property and in exchange the bank would have a security interest in the property, meaning in the event of default on the loan, the lender would be able to force the sale of the property to satisfy the debt.
Tax Liens General
Property taxes are ad valorem taxes, which means they are taxed according to value. That value is determined by an assessment, which is the valuation of property used for tax purposes. Property must be assessed according to its fair market value in Washington. The property must be assessed every year, and a physical examination of the property must take place every four years. Property taxes are also known as general assessment taxes. If an owner doesn’t pay taxes the government will have a lien placed on the property. A property tax lien is a specific lien (against one identified property).
Special assessment taxes are also known as improvement taxes. They are levied upon a property to pay for improvements, which benefit that particular property. Only the properties that are benefited by the improvement are taxed. Examples of a special assessment tax might be the installation of a sidewalk or a widening of a street. This is usually a one-time tax, although taxpayers may be able to pay off the special tax in installment payments.
A general lien is against both real and personal property. Income tax liens are general liens. Income tax liens are imposed by law and are therefore statutory general liens.
A non-statutory lien includes a financial lien, such as a mortgage which the debtor willingly agreed to.
Procedures for Enforcing Tax Liens
The Department of Revenue in Washington State is not required to obtain a judgment in court to secure a property tax lien. A tax lien is created by a warrant, which is filed with the Superior Court Clerk. A warrant may be filed in any county in Washington in which the department believes the taxpayer may have real or personal property. The department is not required to give notice to the taxpayer prior to filing a lien.
Priority of Liens
Lien priority is established by the date of recording. The first to record has the highest priority.
There are some noteworthy exceptions to the “time of recording” rule. Property tax liens and special assessment tax liens take priority over all other liens in Washington State. Another exception is construction liens, where the priority of the lien is determined by the date that work began on the project, even though the lien was recorded later on.
Local improvement districts and utility improvement districts can also protect their lien in a foreclosure sale. From Washington law:
“If any property situated in a local improvement district or utility local improvement district created by a city or town is offered for sale for general taxes by the County Treasurer, the city or town shall have power to protect the lien or liens of any local improvement assessments outstanding against the whole or portion of such property by purchase at the Treasurer's foreclosure sale.”
Provisions of Homestead Laws
A homestead consists of real or personal property that is owner occupied. In Washington, there is a homestead exemption to protect homeowners from lien foreclosure. The amount of the exemption is $125,000, which offers protection only against unsecured creditors. An unsecured creditor gives money as a loan but doesn’t have any assets (personal or real property) as collateral. It does not apply to mortgages, deeds of trusts, liens for spousal maintenance or child support, condominium or condo association liens or construction liens etc. A person may only have one homestead at a time, even though they may own multiple properties. A homestead terminates automatically at the time the property is sold. The exemption amount stays in effect for a year. This gives the homeowner an opportunity to reinvest and claim another homestead.
A judgment is a decision by a court that resolves a controversy and determines the rights and obligations of the parties. If you win a judgment against someone who doesn't pay up (the “judgment debtor”), you can have a lien put on property the person owns. Given its nature as an unsecured debt, a judgment lien is subject to the homestead exemption in Washington State. A judgment lien is an involuntary general lien. It attaches to all of the property of the debtor in which the judgment was entered. Through an abstract of judgment, the creditor may also be able to attach property owned by the debtor in other counties. This judgment lien places an encumbrance on the title and must be satisfied before the property can be sold. If the judgment is not paid, the property may be sold to satisfy the judgment through the issuance of a writ of execution. A writ of execution is what the court issues when the property must be sold to satisfy the judgment.
Before a court decision can be reached there is a risk the party owing money in a judgment will sell their property and the person who filed a lawsuit won’t be able to recover the money. Therefore, the courts have the ability to issue a writ of attachment, which creates a security interest on the property of the defendant. It attaches an interest in the property to the benefit of the plaintiff and provides protection in the event a judgment is issued by the court ordering damages paid to the plaintiff. When title to property or ownership interest is disputed or affected in a lawsuit, a written notice called a lis pendens, is usually recorded in the county public records. This allows anyone who is researching the title (ownership) of a property to be aware of the pending lawsuit potentially affecting title. Lis pendens is another way of providing constructive notice (making the information readily available) to those who may be affected.