It’s important to inform buyers when certain encumbrances exist on the Title – or risk having the deal fall over.
An encumbrance is a registered interest in land by a person who is not the land owner, and any encumbrances on a property can usually be found listed on the Certificate of Title.
I recommend disclosing all encumbrances in the Offer and Acceptance, but there are a handful which pose a particularly significant risk to settlement if they are not disclosed. Below, I outline the differences between three of the most common encumbrances, and explain how you can stop them from endangering your settlement.
An easement is a common type of encumbrance that gives a person or company the right to use part of a property owned by someone else. For example, easements may allow gas, water, or sewerage to flow through the property, and are often granted to local councils, the Water Corporation, Western Power and Main Roads WA.
See our blog post on the importance of searching easements for an example of how an easement can affect a buyer’s plans for a property.
A memorial is an encumbrance that places some form of notice or restriction on a property. For example, the Western Australian Planning Commission may place a memorial on the Title stating that the land is reclaimed swamp, to allow buyers to take into account any potential issues associated with reclaimed swampland.
3. Restrictive covenants
A restrictive covenant places some type of restriction on the use of the land, such as restrictions on building material or on the size of the floor plan. Restrictive covenants are common in new developments, in which developers use restrictive covenants to ensure that properties maintain a level of uniformity.
All three of these encumbrances have the potential to affect the success of your settlement. As per the Joint Form of General Conditions (section 2.9), the buyer is entitled to terminate the contract up to three business days before settlement if the land is subject to an easement, a restrictive covenant, a memorial or a Title restriction*, unless that encumbrance is specified in the contract.
The Joint Form of General Conditions also states (in sections 2.6, 2.7 and 2.8) that when it comes to land that’s not vacant, if the buyer would “reasonably be expected to continue” the current use of the property and the encumbrance doesn’t affect that use, then “the Land will be treated as being sold subject to” that encumbrance, and the buyer will have no right to terminate. However, this is open to some interpretation (for example, how can a seller know if the buyer is planning to build a shed over a Water Corporation easement?), so it’s safer to always include encumbrances on the contract.
If a client’s Title contains an easement, memorial, or restrictive covenant, avoid having the deal fall over by ensuring that the encumbrance is disclosed to the buyer on the Offer and Acceptance.
* A Title restriction is another type of encumbrance that needs to be included in the contract, but this type of encumbrance is much less common than the other three listed in this article.
Image via Wikipedia.