Property Liens and Encumbrances in Ontario: What Buyers and Sellers Should Know

The short answer: A lien is a financial claim on a property that secures a debt, such as a mortgage, unpaid taxes, or an unpaid contractor. An encumbrance is any legal limit on a property, including liens, easements, and restrictive covenants. In Ontario, sellers typically pay off liens from the sale proceeds so the buyer gets clear title.

In the simplest terms, a lien is a financial claim against a property, and an encumbrance is a legal limitation on it. Either one can complicate a real estate transaction, whether you're buying or selling. Here's what they mean and how they're handled.

What is a lien on a property?

A lien is a financial claim on a property that secures payment of a debt. It means someone is owed money, such as a bank with a mortgage or a contractor who hasn't been paid. Unpaid property taxes are another common example.

How is a lien established?

A lien usually begins when one party owes another money or performance. For example:

• You sign a mortgage with a lender (registered on title as a "charge")
• A contractor does work on your property but isn't paid
• The municipality is owed unpaid property taxes

Once that right exists, the lien holder usually registers it on the property's title through the public land registry. The lien stays on title until the debt is paid and the lien holder discharges or releases it. Only then is the title considered "clear."

What is an encumbrance?

An encumbrance is a broader term. It includes liens, but also other legal interests or limits on your property, such as:

• Mortgages, the most common encumbrance
• Easements, like a utility company's right to run lines across part of your land
• Restrictive covenants, which limit how you can use or develop your land. A subdivision, for example, might ban certain fence heights or require homes to follow specific design guidelines.

What's the difference between a lien and an encumbrance?

How is an encumbrance established?

An encumbrance exists once someone gains a legal interest in your property, and it becomes official when it's registered on title with the Ontario Land Registry Office.

Some encumbrances are voluntary, like a mortgage. Others arise by law without your agreement, like a lien for unpaid taxes.

Can you sell a property with a lien or encumbrance?

Yes, but you're still responsible for paying off the debt.

A lien or encumbrance doesn't stop you from listing your property or accepting an offer. However, because it represents someone else's legal or financial interest, financial liens must be dealt with before the buyer takes over. Buyers expect, and lenders require, clear title on closing day.

Not every encumbrance has to be removed. Easements and restrictive covenants typically stay with the land, and the buyer takes the property subject to them. That's why your lawyer reviews them carefully, and why your agreement of purchase and sale sets out what's acceptable.

How does a seller deliver clear title?

1. Title search. The buyer's real estate lawyer searches title through Ontario's land registry. Any registered mortgages, liens, easements, or covenants will appear. 
2. Resolution before closing. Financial liens, such as mortgages, tax arrears, or construction liens, are typically paid off from the sale proceeds, and the seller's lawyer arranges for a discharge or release.
3. Closing. Once the liens are dealt with and the title is clear, the sale can close.

What should buyers watch for?

• Review the title search results with your lawyer. Ask what each registered item means for your plans, such as a future addition or fence.
• Ask about restrictions on how you can use the land. Easements and covenants can limit where you build.
• Make sure the deal spells out what's acceptable. Your agreement should be clear about which encumbrances you're accepting.
• Ask about title insurance. Your lawyer can explain what it does and doesn't cover.

We're here to help

A knowledgeable real estate lawyer makes sure these issues are identified, addressed, and resolved, so both buyers and sellers can be confident the title is clear and the transaction will go smoothly.

Whether you prefer an in-person closing meeting or a virtual appointment, McMurter & Associates will guide you through your real estate transaction in Whitby, Oshawa, Ajax, Pickering, and across Durham Region and the GTA. Learn more about our services for buyers and sellers.

To meet with a member of our firm, or if you have a real estate question, email info@mcmurter.com or call 905-666-9200.

Disclaimer: This article is meant to inform and educate. It is not legal advice. If you have questions about your specific situation, please speak with a real estate lawyer.