Defect Of Record

The defect of record outlines encumbrances that may be on a piece of property. Encumbrance refers to a claim or restriction on property that could affect title transfer. The most common encumbrances apply to real estate, such as property tax liens and mortgages. The government uses tax liens, which supersede all other claims on a debtor’s assets, as a method of tax collection. Essentially, mortgages are liens against a property because the lender, typically a bank, has an interest in the title until the mortgage is paid in full. 

The defect of record is public, so reviewing the document to see if property has an outstanding debt or legal claims against it would be considered sound due diligence for potential buyers. Another reason to investigate the defect of record prior to purchase would be to make sure that it is clear in case of future sale.

Encumbrance covers several financial and non-financial claims on property by parties other than the party in possession of the property title. In essence, encumbrances prevent the property owner from exercising full, or unencumbered, control over the property.

Some encumbrances can affect the marketability of property. While such encumbrances do not preclude the property from a potential sale, they may give the buyer reason to rescind their offer and back out of a potential transaction, even if a contract has been signed. In some cases, buyers dismayed by encumbrances may be able to seek damages.

Some of the more common encumbrances on property include the following:

An easement is the right to use or improve another party's property, or the right to prevent the owner from certain uses of their own property. For example, an affirmative easement could be a gas company being able to run a gas line across a property. An easement in gross could be one neighbor being allowed to use another neighbor’s well, a right that would not pass on to the next owner of the property. Negative easements restrict title-holders from erecting a structure that would block a neighbor's light.

Encroachment is when one party interferes with a property that is not their own; for example, building a fence that breaches the lot line. Notably, an encroachment places on encumbrance on both properties until resolution.

For renters, it is important to know that a lease is a type of encumbrance too. That is because the lessor does not give up the title to the property. However, their ability to use the property is limited by the terms of the lease agreement.