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.