Permitted encumbrances: Overview, definition, and example
What are permitted encumbrances?
Permitted encumbrances are legal claims, liens, easements, or restrictions on a property or asset that are allowed by the parties involved in a transaction. These encumbrances do not prevent the transfer of ownership but are acknowledged as existing or acceptable by the buyer or new owner. They are typically outlined in a contract or agreement to ensure both parties are aware of any legal limitations on the property.
For example, an easement allowing neighbors to use part of a property for a driveway may be considered a permitted encumbrance if the buyer agrees to it when purchasing the property.
Why are permitted encumbrances important?
Permitted encumbrances are important because they provide clarity regarding what is and isn’t allowed with the property or asset in question. Buyers, lenders, or investors must be aware of any existing encumbrances to understand how they may affect the use or value of the asset. Permitted encumbrances are often included in property transactions to avoid surprises and ensure both parties are aware of legal claims or limitations on the property.
For businesses and individuals, recognizing permitted encumbrances can help prevent future legal disputes or misunderstandings about ownership rights or property use. For sellers, it clarifies which encumbrances will be transferred with the sale and which will be removed or resolved.
Understanding permitted encumbrances through an example
Imagine a person buying a piece of land for development. The land has an existing easement that allows the adjacent property owner to use part of the land for a private road. This easement is disclosed in the sale agreement and is considered a permitted encumbrance, as the buyer agrees to accept it as part of the transaction.
In another example, a business buys a commercial building that has a mortgage lien. The lien is considered a permitted encumbrance if both the buyer and seller agree to maintain the lien as part of the sale, with the buyer assuming responsibility for the mortgage payments.
Example of a permitted encumbrances clause
Here’s how a permitted encumbrances clause might appear in a contract:
"The Buyer acknowledges and agrees that the Property is being sold subject to the following permitted encumbrances: (i) existing easements for utility access, (ii) recorded zoning restrictions, and (iii) any outstanding liens or mortgages as disclosed by the Seller. These encumbrances shall not affect the transfer of ownership."
Conclusion
Permitted encumbrances are legally accepted claims or restrictions on an asset or property that are acknowledged in a transaction. Understanding and agreeing to these encumbrances ensures transparency between parties and helps avoid future disputes.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.