Summary of this article
EC verifies property’s legal and financial status
Confirms ownership and reveals liabilities
Essential but not sole due diligence document
Buying a property is one of the most exhilarating experiences for people to make. No matter what the nature of the property is, house, apartment, or land, buyers should ensure that the property is legally clear of all financial and legal liabilities. An Encumbrance Certificate (EC) acts as one of the most important documents that helps in verifying whether the selected property is free of all such dues. Understanding what an encumbrance certificate is and why it is important in protecting buyers from any potential legal and financial troubles.
What Is an Encumbrance Certificate?
By definition, encumbrance is a claim, financial liability, or stake in an asset, mostly land and property, which restricts the owner's rights and right of transferability. An Encumbrance Certificate is an official document that is issued by the local sub-registrar’s office. This certificate records all registered transactions that are related to a particular property for a specific period. “The purpose of the Encumbrance Certificate is to reveal any ownership disputes on a property and whether the property has any other encumbrance based on the transactions registered with the Sub Registrar. An encumbrance certificate, therefore, becomes a legal assurance for the buyer about the property having a clear title that can be safely purchased without issue coming up later,” says Advocate Mayank Arora, Partner, Chambers of Bharat Chugh.
To put it simply, the EC confirms whether the property is free from any legal or monetary obligations. If the property has been used as collateral for any loan or has any other legal claims attached to it, the certificate is bound to mention those details.
The EC contains information such as the names of the property owners, details of the property transactions, and the period for which the certificate is issued. Buyers usually require an EC that covers the last 10 to 30 years about the property, which ensures that there has been no undisclosed liability attached to the property.
Types of Encumbrance Certificates
There are two types of Encumbrance Certificates. These define the property in the two categories, which are,
Form 15: This form registers all the encumbrances that are related to the property during the requested period. This would include details such as sale deeds, loans, and leases. This form indicates that the property is not clear for transfers.
Form 16: This form is issued when no encumbrances are found on the property during the requested period. It indicates that the property has no registered legal or financial liabilities, which makes it clear for purchasing.
Why Is an Encumbrance Certificate Important for Buyers?
Here are some key benefits of procuring an EC before putting down the money for the selected property,
Confirms Clear Ownership: This certificate confirms whether the seller is entirely the rightful owner of the property and has the right to sell the property. It shows the chain of ownership through the registered transactions, hence allowing the buyers to verify the buyer’s status on transferability.
Reveals Loans Attached to the Property: In cases when the property owners put down the property as collateral in order to borrow a loan, the property can not be sold until the borrowed amount is paid. The EC helps in identifying such financial obligations.
Prevents Legal Disputes: Buying a property that has financial dues pending can lead to legal and financial obligations for the potential buyer. An EC helps the buyers to avoid such properties.
Property Registration: EC is required when authorities and buyers are updating land records, transferring property ownership, or applying for property mutation in government records. Hence, an EC, specifically Form 16, is required for the legal transfer of the property.
Despite the fact that EC is an important document, it has its limitations. It only records the transactions that are entirely registered with the sub-registrar’s office. Arrangements that are unregistered, be it family arrangements or certain legal disputes, are not included in the certificate. Hence, a long process of verification is still due on the prospective buyer’s end, such as verifying title deeds, property tax receipts, and approved building plans. “While the Encumbrance Certificate is a crucial starting point in property due diligence, it must always be read along with original title deeds, revenue records, and other checkpoints to conclusively determine whether the property has a clear and marketable title,” advises Arora
Having an EC is a critical document for anyone who is planning to buy a property, as it provides transparency about the property’s history, be it legal disputes or financial dues. While it should not be the only document that should be relied upon, it helps buyers gain confidence in the property they are planning to buy. By verifying this certificate before finalising a property purchase, buyers can easily safeguard their investment and avoid legal troubles.
