What Are Title Encumbrances?

What Are Title Encumbrances?

16 February 2024

If you have ever been a party to a sale or purchase of a property, you have likely heard the term title encumbrance before. But what does this really mean and what do you need to be aware of as a consumer?

Here we will delve into the meaning of the term title encumbrances, and explore the different types of encumbrances you may come across when buying or selling property.

 

The Meaning of Title

A title refers to the ownership of a property, and it gives the title holder proprietary rights over the property in question. There are several different types of title – The most common being what is known as a torrens title, which defines a freehold ownership of a property and all improvements on it. Other common types of title are strata (where a larger property is divided into building units which each have their own individual title), and community titles (where a larger property is divided into separate land lots, each with their own title).

The legal document which identifies the owner of a property and all other relevant information pertaining to it is known as a Certificate of Title.

So What is a Title Encumbrance?

A title encumbrance is a defect on the title of the property, usually by way of a claim made by a third party which restricts the title holder’s ability to deal with or transfer (sell) the property. For this reason, they are required to be disclosed during a property sale and details of any title encumbrances are typically found by performing a title search.

Title encumbrances can be either registered on the title, or in some cases unregistered but nevertheless they all need to be either disclosed or discharged (removed) in order to sell or transfer the property.

Different Types of Title Encumbrances

Easements – An Easement is a right of way over a portion of the land which generally prohibits the owner from developing or building over it and grants a specified third-party access to it wherever required. It could come in the form of a major stormwater or sewerage line running underneath the ground, a set of high-tension power lines running through the property, or potentially a shared driveway in which multiple owners share in order to access their respective properties. Regardless, it basically restricts the use of that particular portion of the land and prevents the owner from building improvements on it.

CovenantsCovenants impose constraints and limitations as to what an owner can do with a property, and come in two forms: Positive Covenants, which stipulate something the owner is obligated to do, and Negative Covenants, which stipulate something the owner cannot do. These are common in new housing estates where developers are desperate to keep the look and feel of the development consistent and attractive to potential buyers.

Liens – A Lien is a legal instrument used by creditors when a loan is taken out using the property as security for the loan, which allows them to take possession of the property in the event of a payment default (foreclosure), in order for them to recover the debt. These come usually in the form of a home loan or mortgage, and taking out a home loan will trigger a lien being listed on the title of the property. Normally when selling a property, the mortgage is a non-transferable encumbrance which is discharged at settlement, however there can sometimes be circumstances where the settlement sum or sale price is insufficient to cover the amount outstanding on the loan. This could prevent the transfer or sale of the property from occurring.

Caveats – A caveat is a warning to potential buyers that a third party has registered an interest or charge over the property, normally due to an unpaid debt being owed by the owner. The word caveat is derived from Latin and literally means beware.

Leases – If the property is not owner-occupied, and instead has tenants living or conducting business in it, then it will typically mean that there is a lease agreement in place which needs to be honoured, irrespective of whether or not the property is being sold. This has implications for access to the property if you purchase it, as you may not be able to obtain possession of it even after settlement has occurred. In residential real estate conveyances, lease details are simply disclosed in the Tenancies section of the contract, but in commercial real estate, it is normal practice for leases to be actually registered on the title.

Statutory Encumbrances – Where any statutory authority (which includes all levels of government, as well as energy and utilities suppliers) owns assets which are located on the property, such assets are known as statutory encumbrances. These assets may not be registered on the title of the property, but nevertheless still need to be disclosed in the event of a sale. Such assets can be either above ground or underground, and normally exist to provide some type of service or supply to the property. Statutory authorities retain the right to access the property in order to maintain them.

Administrative Advices – An administrative advice registered on a title refers to an interest that impacts the use of the land as a result of some overlapping legislation, such as conservation laws, heritage status or vegetation management. These are common with properties which are situated adjacent to national parks or other protected areas, or properties with heritage or character protection overlays.

Unregistered Dealings – This refers to interests (which could be any of the above) which have been lodged with the titles office but are still awaiting registration.

So What do I Need to be Aware of?

If you are a buyer, then it is of the utmost importance to conduct a thorough suite of searches on a property so that you were aware of what restraints, defects, and charges may be attached to the property’s title. Should settlement occur, and encumbrances previously unknown be subsequently found, you may find yourself in a situation whereby you are now responsible for things that you had not even considered.

As a seller, you must take your duty of disclosure seriously, and attempt to uncover all title encumbrances, either registered or unregistered, prior to attempting to sell the property. Failure to disclose encumbrances at point of sale could lead to the buyer terminating the contract prior to settlement, even though the contract may already be unconditional. The buyer may also elect to pursue you legally for damages.

‘Til next time, ciao 😊

 

Disclaimer: The information is this article is for general information only, it is not intended and should not be considered as either legal or financial advice. The information contained herein should not be relied upon solely and all parties are encouraged to obtain their own independent advice before making any financial decision.
Lee Knutsen

Article by Lee Knutsen

Co-founder & Managing Director of House, Lee Knutsen first entered the real estate industry in 2006 as a residential sales specialist. After more than a decade as a sales agent…

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