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
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.

Nonpossessory Interests
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.

Lis Pendens
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.)

Related Articles
  1. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  2. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  3. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  4. Investing

    Why We’re Bearish On U.S. Housing

    Hedgeye analyst Josh Steiner discusses the reasons behind our decision to go from bullish to bearish on the U.S. housing market.
  5. Investing Basics

    How to Get More Yield From Your Investments

    Yield seeking investors can boost the amount of income their investments generate through tweaking their portfolio of stocks and bonds.
  6. Retirement

    Dollar Shave Club Review: Is It Worth It?

    Learn about the business model of the Dollar Shave Club, and find out whether the razor subscription company is a worthwhile investment.
  7. Term

    The Implications of Nonfarm Payroll

    The nonfarm payroll is a key economic indicator that’s closely monitored by analysts and investors around the world.
  8. Chart Advisor

    3 Charts That Suggest Now Is The Time To Invest In Real Estate (VNQ, SPG,PSA)

    Real estate assets have some of the strongest uptrends around. We'll take a look at three candidates poised for a move higher.
  9. Real Estate

    4 Real Estate Plays for Income Seekers in 2016 (CCI, HCN)

    Discover four real estate investment trusts that have favorable business developments and provide attractive dividend yields for income-seeking investors.
  10. Investing Basics

    Understanding Real Estate

    Real estate is an encompassing term that refers to land, the buildings on that land, and its natural resources, such as crops and minerals.
  1. What is the difference between real estate and real property?

    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 >>
  2. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. Do FHA loans have private mortgage insurance (PMI)?

    he When you make a down payment from 3 to 20% of the value of your home and take out a Federal Housing Administration (FHA) ... Read Full Answer >>
  5. Does renters insurance cover water damage?

    An all-perils renters insurance policy does cover water damage, less the deductible, to personal property if the damage is ... Read Full Answer >>
  6. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
Trading Center