Property is a legal concept that grants and protects a person's exclusive right to own, possess, use and dispose of a thing. The term property does not suggest a physical item, but describes a legal relationship of a person to a thing.
Real property consists of lands, tenements and hereditaments. Lands refers to the ground, the air above, the area below the earth's surface and everything that is erected on it. Tenements includes the lands and certain intangible rights related to the lands. Hereditaments embraces every tangible or intangible interest in real property, including lands and tenements, that can be inherited. (For more, read 5 Mistakes Real Estate Investors Should Avoid.)
TUTORIAL: Exploring Real Estate Investments
An interest describes any right, claim or privilege that an individual has towards real property. The law recognizes various types of interests in real property. A nonpossessory interest in land is the right of one person to use or to restrict the use of land that belongs to another person.
Nonpossessory interests do not constitute ownership of the land itself: holders of a nonpossessory interest in real property do not have title, and the owner of the land continues to enjoy the full rights of ownership, subject to any encumbrances.
An encumbrance is a burden, claim or charge on real property that can affect the quality of title and the value and/or use of the property. Encumbrances can represent nonpossessory interests in real property. Examples of encumbrances include liens, encroachments, easements, leases, restrictive covenants and protective covenants. This article will provide an introduction to encumbrances and nonpossessory interests in real property.
A nonpossessory interest in land is the right to use or restrict the use of another person's land. While the holder of a nonpossessory interest has certain and clear-cut rights in regard to the use of a property, he or she does not hold title to the property.
Nonpossessory interests can be created either by an agreement between two parties, namely the property owner and the person wishing to gain the nonpossessory interest; or through court order. A federal tax lien, for example, may be filed with the court in the county in which a delinquent taxpayer's real estate is located. A lease, on the other hand, may be voluntarily entered through an agreement between two parties.
An encumbrance is anything that can lessen the value or use and enjoyment of a property, such as a lien or restrictive covenant. Because encumbrances can have an adverse effect on land value or use, anyone involved in a real estate transaction should be aware of the existence of any encumbrances on the property that is being transferred.
Typically, an attorney performs a title search and forms a title opinion, wherein any encumbrances discovered during the search will be specified. An encumbrance will not prevent title from passing in a real estate transaction; rather, the title will pass subject to any encumbrances. In other words, an encumbrance remains on the property, or "runs with the land," until satisfied, even when title is transferred to a new owner.
(To learn more, check out Attention Home Buyers! Why You Need A Lawyer.)
There are many forms of encumbrances, including:
An easement is a nonpossessory right to use another person's land in some limited way that does not constitute full ownership. The person or legal entity that benefits from the easement has a nonpossessory interest (the right to use the property, but not to possess it) in the other person's land; the owner of the property is burdened by the easement. Common easements include rights-of-way, drainage ditches, public utility lines and easements by condemnation (Eminent Domain).
An encroachment is an improvement that extends beyond a property owner's boundary line and "encroaches" on an adjacent property. Examples of encroachments include building or overhanging eaves, outbuildings, fences, driveways and walkways. Encroachments can render the title to both involved properties unmarketable: the encroaching property does not have title to all land upon which improvements have been made, while the encroached-upon property does not have use of all the land.
A lease is a contract between an owner of property (lessor) and a person or entity wishing to rent the property (lessee). Under a lease, the lessor agrees to allow the lessee to occupy and use the property in exchange for a valuable consideration (rent).
The lease typically specifies the duration of the agreement, any terms for extending the agreement, and the amount and frequency of rent that will be paid. Although the lessee occupies the property, the lessor remains the owner and holds the title to the property.
A lien is a right provided by law granted to creditors to have debts that are due to them satisfied by the sale of property that belongs to the debtor. The property acts as collateral, and in the event that the property is transferred, proceeds from the sale can be used to pay the debt and satisfy the lien. Common liens include real estate tax and assessment liens, mechanics' liens, judgment liens and federal tax liens.
A lis pendens is a notice of pending litigation that informs all interested parties that a legal action has been initiated that affects the title to a particular property. A lis pendens, which can be filed in either a state or federal court, typically involves the title to a property or a claimed ownership interest in the property.
Because a lis pendens is filed against real property, any person to whom the property is transferred will be bound by the outcome of the pending lawsuit.
Protective or Restrictive Covenants
A protective or restrictive covenant is an enforceable condition that appears as a clause in a deed that limits the manner in which a real property can be used. These covenants burden property owners to perform or not perform in specified manners.
Examples of protective or restrictive covenants include constraints for minimum square footage in a new building, architectural design, setback and sideline from roads or adjacent properties, and exterior home color. (For related reading, see Holding Titles On Real Property.)
The Bottom Line
A nonpossessory interest in real property is the right to use or restrict the use of another person's real property. In some cases, the nonpossessory interest arises from a voluntary contract made between two parties, as in the case of a lease agreement. In other instances, the nonpossessory interest takes place because of a court order, such as a lien against the property.
When considering the purchase of real estate, it is important to perform a title search to determine if there are any title defects that could affect the use of the property. A qualified attorney can perform a title search to uncover any liens or encumbrances against the property. Many properties are sold "subject to all liens and encumbrances," meaning that the property may be burdened, and it is in the buyer's best interest to discover any encumbrances prior to making any final decisions.
A general warranty deed is the buyer's best protection and contains a "covenant against encumbrances" warranty that assures the buyer that no encumbrances exist on the land except those that are specified in the deed. (For more, check out To Rent Or Buy? The Financial Issues.)
Fundamental AnalysisReturn on net assets measures a company’s financial performance.
Mutual Funds & ETFsLearn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
ProfessionalsA look at Donald Trump's statement of finances and the biggest lesson every investor can learn.
Investing BasicsDiscover the best websites for finding valuable properties that can earn you income.
Mutual Funds & ETFsLearn about the iShares US Real Estate fund, which holds shares of equity and nonequity real estate investment trusts incorporated in the United States.
MarketsLearn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
Mutual Funds & ETFsTake an in-depth look at the Vanguard Global ex-U.S. Real Estate ETF, an international property fund tilted toward Asian markets.
ProfessionalsAre hedge fund ETFs right for you? Here's what investors need to consider.
EconomicsUnderstand how asset bubbles often lead to deep, protracted recessions. Read about historical examples of recessions preceded by asset bubbles.
Home & AutoEvolving Swiss property laws mean that Swiss ski chalets have become precious commodities – and excellent investments, even if you're not British royalty.
A security with a price that is dependent upon or derived from ...
A REIT is a type of security that invests in real estate through ...
An insurance policy that covers glass that has been broken or ...
A type of investment issued by the Government National Mortgage ...
An insurance policy provision which determines how the coverage ...
A form of securitization whereby single-family residential mortgages ...
Real estate is simply a piece of land plus any natural or artificial (man-made) improvements that are attached or have been ... Read Full Answer >>
Generally, penny stocks are traded through the use of the Over the Counter Bulletin Board (OTCBB) and through pink sheets. ... Read Full Answer >>
Some penny stocks, those using the definition of trading for less than $5 per share, are traded on regular exchanges such ... Read Full Answer >>
The price of an American depositary receipt (ADR) is determined by the bank or other financial institution that issues it. ... Read Full Answer >>
American depositary receipts (ADRs) are bought and sold on regular U.S. stock exchanges, either in the over-the-counter market ... Read Full Answer >>
While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>