An attorney's advice in wake of Heftsiba fiasco

It is important for buyers to understand how to safeguard their investments.

October 10, 2007 10:27
Heftsiba 88 298

Heftsiba 88 298. (photo credit: Ariel Jerozolimski)


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When it comes to buying an apartment, for the average Israeli it is one of the biggest transactions in his lifetime, if not the biggest. In Israel, developers are allowed to sell apartments before they are completed, thus selling houses "on paper." In the past, purchasers would pay a great deal of money to the contractor before the apartment was built, without any security whatsoever for the money. In 1974, following the bankruptcy of several contractors - including receivership of several large contracting companies which left innocent customers without money and without the houses they had paid for - the Knesset passed the Sales Law (Apartments - Insuring Investments of Apartment Buyers, 1974) to protect purchasers of new apartments from contractors (and even from non-contractors) and to insure their investments. Section 2 of the law sets forth that the seller shall not receive more than 15 percent of the purchase price from the buyer, unless the seller provides a bank guarantee or insurance policy to insure the refund of monies paid by the buyer as a down payment. He can also provide a lien in favor of the buyer who takes out a first degree mortgage on the apartment or relative portion of the land on which it is built, or has registered a caveat [he'arat azhara] in favor of the buyer at the Land Registry Office, pursuant to Sec. 126 of the Land Law. It also applies if he has registered the rights in the apartment or proportionate rights in the land on which it is built at the Land Registry Office, in the buyer's name. A seller who has breached the provisions of Sec. 2 of the law has committed a criminal offense and is liable for a fine or imprisonment. Sec. 3 of the law sets forth that an apartment purchaser who has not received a bank guarantee or insurance policy is not liable for payments exceeding the amounts set forth in the regulations. It is important to note that the law contains cogent provisions, i.e., they may not be made conditional, and any apartment purchaser who agrees to waive receipt of a bank guarantee or insurance policy will be exempt from paying the contractor amounts of money on account which exceed the amounts stated in the regulations, pursuant to Sec. 3 of the law. The provisions set forth a graduated scale of amounts of money which the seller may receive based on a schedule of progress of construction of the apartment. These security measures are grounded in law to insure the apartment purchaser's investment, and to classify the purchaser as a preferred creditor over any other of the seller's creditors, in case of liens on the property or the contractor's bankruptcy. Usually, the party issuing the bank guarantees is the construction project's lending bank (the seller's financing institution); in case of the contractor/seller's bankruptcy, the bank will not be very enthusiastic about repaying the guarantee. This is why, and in order to prevent future defaults, it is a good idea upon receiving the guarantee to make certain that it is formulated as befitting the purpose of the law. The advantage of instruments such as a bank guarantee or insurance policy over other collateral listed in the law is that in certain situations, the apartment purchaser can receive money back by using these securities. However, we must also note that these securities ensure only the refund of the actual payments made by the buyer: no other payments and/or expenses and/or indirect expenses incurred by the buyer, such as price rises of similar apartments, loss of rental fees and the like are covered. In order to be eligible to realize the bank guarantee received (the arevut mecher, or sale guarantee), the buyer must be sure to make all payments on account of the apartment only into the bank account of the development project as stated in the sales contract or in one of its appendices, and not in any other way. Realizing the bank guarantee and receiving one's money back is often not a simple process, and the buyer should take the utmost care to fulfill the above conditions for peace of mind. Let it be emphasized that under the law, the seller is obligated to provide collateral for the period ending with delivery of possession of the apartment and registration of title in the buyer's name in the Land Registry Office. Let us also note that a large portion of new apartments are not being built on private land, but rather on state land which is registered in different ways, such as in the name of the Israel Lands Administration (ILA), Israel Development Authority, the JNF-KKL and others, on which the buyer's lease rights are registered. A caveat may be recorded only on an apartment which is registered in its owners' names in the Land Registry Office (the "Tabu"). A large portion of state lands are registered only in the ILA and not in the Land Registry Office, thus no caveat may be recorded against them. As for apartments under construction, the law specifically refers to them in Sec. 2 (b) that the seller who insures the buyer's investment for an apartment being built on state land is liable for the money until the following three conditions are fulfilled: lawful completion of the construction of the apartment, delivery of possession of the apartment to the buyer, and signature on the lease contract between the ILA and the buyer. After more than 30 years of experience since the law passed, it seems that good intentions have nothing to do with reality. The law was enacted at the time to safeguard the money of apartment purchasers, but reality has shown us that some of the provisions and their realization are problematic. There are situations that the law does not cover, and which should be changed so that the goal of the law - protecting money of innocent purchasers - will be achieved more rapidly and justly. Please note: This article is a concise survey only, and it not intended as specific legal advice. In every case of a specific question, confer with your lawyer and take the lawyer's advice based on the circumstances of the particular case. Tips for apartment purchasers 1) What are the documentation requirements for real estate transactions?In order to enforce a real estate agreement, there must be a document in writing. This is an essential requirement and not an evidentiary requirement. The commitment to carry out a real estate transaction that is not accompanied by a document in writing cannot be enforced. 2) What is a "precontract memorandum" [zichron devarim] and its validity?The Land Law does not directly refer to the precontract memorandum. It is usually a document which the parties draw up for a transaction (not only a real estate transaction), often without being represented by lawyers, in order to set forth their undertakings. Its validity is not determined by the title of the document but by the content and circumstances of signing. A real estate transaction document titled "zichron devarim" but which includes all of the contractual elements for a real estate sale (such as the parties' names, date, identification of the property, date of delivery of possession, price and payment terms, and the like) can sometimes be construed as a real estate contract of sale and as valid for all intents and purposes. 3) What is an irrevocable power of attorney? This is a document signed by the seller through which its empowered representative (usually the buyer's lawyer) can carry out various actions on behalf of the seller, such as signing documents, in order to realize the sales transaction in actual practice, when certain conditions have been met, as set out in detail in the contract of sale. The author is a partner in the law office of Schor Greenwald & Levy, Ramat Gan, specializing in real estate and commercial law.

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