Encumbrance

Any charge, lien, mortgage, or claim on property that affects its free and clear title. Before a bank creates a mortgage, it verifies the title to ensure there are no prior encumbrances. An Encumbrance Certificate from the Sub-Registrar's office shows all registered charges and mortgages on a property.

An Encumbrance Certificate showing a prior mortgage in favour of SBI would alert a subsequent lender to the prior charge.

In practice, encumbrance is what a lender checks before parting with a rupee, because it tells the bank whether the security it is about to take is clean or already burdened by an earlier charge, lien, or mortgage. The standard step is to obtain an Encumbrance Certificate from the Sub-Registrar's office, which lists every registered charge on the property; a prior mortgage disclosed there warns a later lender that its security ranks behind the earlier creditor. Getting this wrong is expensive: a bank that lends against property already mortgaged to another institution may find, at SARFAESI enforcement, that the first charge-holder has priority and its own security is worth far less than the loan. Conversely, on the recovery side, an auction-purchaser must verify encumbrances before bidding, since the asset is usually sold subject to known prior charges. The certificate only captures registered dealings, so equitable mortgages and unregistered claims can lurk outside it. Well-advised lenders confirm title and encumbrance before disbursal.