An encumbrance is a claim, restriction, or legal right that limits how a property can be used, developed, or transferred. In business real estate transactions, encumbrances such as easements, liens, or mortgages can affect property valuation, financing options, title clarity, and the overall ease of completing a sale.
Common examples of commercial real estate encumbrances include:
- Mortgages and liens
- Easements
- Leases
- Covenants and deed restrictions
- Encroachments
- Tax liens
- Pending litigation or judgment liens
Examples of Encumbrance in Business Real Estate
Encumbrances in business real estate include mortgages, liens, easements, leases, covenants, encroachments, tax liens, and pending litigation. These legal or financial claims limit ownership rights, property use, or transferability. Common issues include unpaid loans, utility access rights, tenant leases, deed restrictions, property boundary disputes, unpaid taxes, or unresolved lawsuits, all of which must be cleared before sale or refinancing.
1. Mortgages and liens
Mortgages and mechanics’ liens are common forms of financial encumbrances because they create a legal claim against a property until specific obligations are satisfied. A mortgage gives a lender the right to seize or sell the property if the borrower defaults on payments, limiting the owner’s ability to sell or refinance.
Mechanic’s liens, filed by contractors or suppliers who have not been paid for work or materials, can delay property transfers until resolved. For example, an office building may remain under a bank lien until its loan balance is fully paid, preventing a clean title transfer to new buyers.
2. Easements
Easements are legal usage rights that allow a person, company, or public en
tity to access or use part of another party’s property for a specific purpose. They do not transfer ownership but can limit how the property owner uses the affected area, making them a form of encumbrance.
Common in business real estate, easements can include:
- Rights-of-way
- Utility corridors
- Shared driveways
One example would be a utility easement that may permit a power company to run electrical lines across commercial land. This restricts the owner from building structures in that section while ensuring continued access for maintenance.
3. Leases
Leases can be a form of encumbrance because they grant tenants legally enforceable rights to occupy and use a property under agreed terms, regardless of ownership changes. When a commercial property is sold, existing lease agreements typically remain in effect, binding the new owner to honor the tenant’s rights until the lease expires or is renegotiated.
This can limit how the property is used or redeveloped. For example, purchasing a retail plaza with tenants under long-term contracts means the buyer cannot immediately repurpose or vacate the space. This is because the lease obligations continue to protect the tenants’ business operations.
4. Covenants and deed restrictions
Covenants and deed restrictions are private agreements that legally dictate how a property can be used or developed. These restrictions are recorded in the property’s deed and remain binding for future owners.
They often regulate aspects such as:
- Building design
- Land use
- Property maintenance
This helps preserve a specific appearance or purpose within a development.
You can see this when business parks require that all buildings follow a uniform architectural design or signage style. This ensures visual consistency but limits an owner’s flexibility to modify structures or branding to suit changing business needs.
5. Encroachments 
Encroachments are physical intrusions that occur when a structure extends beyond property boundaries and onto a neighboring parcel, creating an encumbrance by clouding ownership rights. These situations can lead to boundary or title disputes that must be settled before a sale or refinancing can proceed.
Encroachments may involve:
- Fences
- Driveways
- Building extensions that cross the legal property line
Imagine if a neighboring warehouse fence were built partially onto your adjacent commercial land. In this case, you may need to negotiate an adjustment, removal, or easement to resolve the encroachment and clear the property’s title for future transactions.
6. Tax liens
Tax liens are encumbrances that arise when property owners fail to pay their assessed taxes, leading the government to place a legal claim against the property for the outstanding amount.
The claim must be satisfied before the property can be:
- Sold
- Refinanced
- Transferred
This makes it a significant barrier to clear ownership.
Tax liens take priority over most other types of encumbrances, which can complicate financing or foreclosure proceedings. You could encounter this if you have a foreclosed industrial property that’s restricted by a county tax lien. In this case, it can’t be transferred to a new owner until all delinquent taxes and related penalties are paid in full.
7. Pending litigation or judgment liens
Pending litigation and judgment liens are forms of encumbrance because they create legal claims or uncertainties that directly affect property:
- Ownership
- Transfer
- Financing
When a property is subject to ongoing litigation, potential outcomes such as monetary judgments or ownership disputes can delay or prevent a sale.
A judgment lien, once recorded, gives a creditor the right to collect debt from the property’s value before it can be sold or refinanced. For example, a commercial property involved in a contract dispute may have its closing delayed until the case is resolved and any court-ordered obligations are satisfied.
Contact Johnson, Murrell & Associates with Your Real Estate Questions
Johnson, Murrell & Associates should be trusted with commercial real estate questions thanks to our extensive experience and legal expertise in business and commercial law. With over 40 years of success in East Tennessee, we provide proactive, tailored solutions for complex legal challenges, including contracts, disputes, and governance affecting commercial properties.
Our skilled attorneys ensure clear communication, effective dispute resolution, and thorough guidance in transactions. Our deep knowledge of local laws and the Uniform Commercial Code guarantees that you receive reliable, strategic advice to protect your investments and navigate all aspects of commercial real estate law confidently.
Business real estate encumbrances include mortgages, liens, easements, leases, covenants, encroachments, tax liens, and litigation. These legal or financial claims restrict property use, transfer, or ownership rights. Issues like unpaid loans, utility access, tenant rights, deed limits, boundary disputes, taxes, or lawsuits must be resolved before a sale or refinancing.
Choosing Johnson, Murrell & Associates means choosing a team that knows how difficult the legal process can be. We take care of the heavy lifting, giving you peace of mind. For more information on how we can help with your case, call us at 865-453-1091 or contact us online.