An encumbrance is a third party's right to, interest in, or

legal liability In law, liable means "responsible or answerable in law; legally obligated". Legal liability concerns both Civil law (common law), civil law and criminal law and can arise from various areas of law, such as contracts, torts, taxes, or fines give ...

property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...

that does not prohibit the property's owner from transferring

title A title is one or more words used before or after a person's name, in certain contexts. It may signify their generation, official position, military rank, professional or academic qualification, or nobility. In some languages, titles may be ins ...

(but may diminish its value). Encumbrances can be classified in several ways. They may be financial (for example,

lien A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...

s) or non-financial (for example,

easement An easement is a Nonpossessory interest in land, nonpossessory right to use or enter onto the real property of another without possessing it. It is "best typified in the right of way which one landowner, A, may enjoy over the land of another, B" ...

s, 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).Fillmore E. Galay et al., '' Modern Real Estate Practice in Illinois'', 4th edn. (Chicago: Dearborn Real Estate Education, 2001), 107. Encumbrances include

security interest In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property (usually referred to as the '' collateral'') which enables the creditor to have recourse to the property if the debtor defaults in m ...

s, liens, servitudes (for example, easements, wayleaves,

real covenant A covenant, in its most general and historical sense, is a solemn promise to engage in or refrain from a specified action. Under historical English common law, a covenant was distinguished from an ordinary contract by the presence of a seal. Be ...

s, profits a prendre),

leases A lease is a contractual arrangement calling for the user (referred to as the ''lessee'') to pay the owner (referred to as the Lessor (leasing), ''lessor'') for the use of an asset. Property, buildings and vehicles are common assets that are l ...

, restrictions, encroachments, and air and subsurface rights.

Jurisdictions

Hong Kong

Hong Kong Hong Kong)., Legally Hong Kong, China in international treaties and organizations. is a special administrative region of China. With 7.5 million residents in a territory, Hong Kong is the fourth most densely populated region in the wor ...

, 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

college A college (Latin: ''collegium'') may be a tertiary educational institution (sometimes awarding degrees), part of a collegiate university, an institution offering vocational education, a further education institution, or a secondary sc ...

s and universities to describe limitations placed on a

student A student is a person enrolled in a school or other educational institution, or more generally, a person who takes a special interest in a subject. In the United Kingdom and most The Commonwealth, commonwealth countries, a "student" attends ...

'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

diploma A diploma is a document awarded by an educational institution (such as a college or university) testifying the recipient has graduated by successfully completing their courses of studies. Historically, it has also referred to a charter or offi ...

Accounting

management accounting In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions. Definition One simple definition of management accounting is th ...

, ''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 An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...

. The term is frequently used in

fund accounting Fund accounting is an accounting system for recording resources whose use has been limited by the donor, grant authority, governing agency, or other individuals or organisations or by law.Leon E. Hay (1980). ''Accounting for Governmental and Nonp ...

, 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 Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, co ...

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.

References

Common law legal terminology Property law legal terminology Intellectual property law Accounting terminology {{Realestate-stub