What is an Encumbrance?

An encumbrance is a restriction placed on the use of funds. The concept is most commonly used in governmental accounting, where encumbrances are used to ensure that there will be sufficient cash available to pay for specific obligations. By using encumbrances, a government entity can be assured that it will not over-extend its finances. A downside of encumbrances is that they increase the complexity of government accounting to some extent.

Real Estate Encumbrances

The encumbrance concept is also used in real estate, where it is a claim against a property. For example, there may be a property tax lien or mechanic’s lien on a property. These encumbrances can usually be found in the records of the local county recorder or land records office. An encumbrance can also restrict the uses to which property can be put, such as zoning laws that limit the types of construction on a plot of land.

It is difficult to transfer an encumbered property, so the property owner has a strong incentive to settle the underlying claim.