Legal Ground: Little country, big on property

In Israel's 21,000 square kilometers, between 100,000 and 120,000 homes change hands yearly.

heftziba biz 88 224 (photo credit: Ariel Jerozolimski)
heftziba biz 88 224
(photo credit: Ariel Jerozolimski)
In tiny Israel, everything seems to be writ large. We have one of the highest numbers of symphony orchestras per capita, the greatest number of hi-tech start-ups in absolute terms and an effervescent property market. In Israel's 21,000 square kilometers, between 100,000 and 120,000 homes change hands yearly. Most of the apartments that are bought are second-hand sales and about one-third are in newly constructed buildings. Israeli building companies invest approximately NIS 36 billion in construction, two-thirds of which is in the residential market. In fact, the construction industry contributes over 12% of the gross national product and employs several hundred thousand workers. To grasp how big an industry it is (in Israeli terms) one needs merely to look at the number of professional and semi-professionals directly involved: between 5,000 and 8,000 real estate agents; approximately 8,000 architects and about 9,000 registered building contractors. (The subject of registered contractors and why it is important to work only with contractors registered with the Registrar of Building Contractors will be the dealt with in a future column.) It is not really surprising that the residential property market is so active. Quite apart from the large influx of foreign buyers, steadily growing from year to year, Israelis themselves are very active in the market. For Israelis love to be home owners; 72% own their homes, one of the highest homeowner rates in the world. Just take a look at other major countries to make a comparison: the home ownership rate in the US is 68%, in Britain 69% and in France 54%. Like everywhere else in the world, whether you are buying in Spain, the south of France or New York, you have to take reasonable precautions and get decent advice from professionals such as architects, realtors and lawyers when buying your home in Israel. Start by reading the proposed contract. In some of the higher priced construction projects, the contract between yourself and the builder is written in English (and sometimes, due to the influx of French speaking buyers, in French). This is usually a translation of the Hebrew version, but often, when you look carefully, there is a clause that states that only the Hebrew language version is obligatory. Another problem within the Israeli market is that much of the land of the Land of Israel - and thus the buildings that are built on this land - are not registered in the Lands Registry. The situation has improved over the years, but the lack of consistent registration and the fact that 90% of Israel's land is owned by the State - which often leases it out for periods of 49 years only - can greatly complicate registration. Moreover, it exposes the buyer to all manner of risk unless registration is handled property. In recent weeks, people have called me from all over the world to ask whether it's safe to buy an apartment in Israel from a contractor. When IBA News broadcasts dramatic pictures of hundreds of families who seemingly have lost their savings, security and dreams as a result of the collapse of the Heftsiba, it is understandable that foreign and Israeli buyers are troubled. The truth must be plainly stated: the 500 purchasers who face the risk of losing the hard earned money they willingly transferred to Heftsiba have, in most cases, only themselves to blame. These purchasers ignored the protection given to them by law, succumbed to the salesman's lures by diving into the pool without checking the water. Most, if not all, agreed to sign a contract without legal consultation. They waived legislative safeguards and, in some cases, gave unrecorded cash payments in order to receive significant discounts. The law stipulates clearly that no apartment may be sold without one or more safeguard for the purchaser's money. The most common is the receipt of a bank guarantee for every penny as soon as 15% of the total has been paid. The contractor commits a serious criminal offense by taking your money without giving proper security. No lawyer conversant in the property field would have permitted those 500 purchasers to make payments without being given security, however tempting the offers by the contractor's salesmen seemed to be. In fact, such offers to circumvent the legal requirements are virtually unknown in professional property circles and such offers would trigger alarm bells as to the viability of the company. The law, called somewhat dauntingly: Sale of Apartments (Assurance of Investments of Persons Acquiring Apartments) Law 5735 - 1974, clearly protects your capital investment. In fact this is a greater protection than that afforded by many legal systems throughout the world where, if you buy from a contractor and his company goes bankrupt, you are left totally unprotected. However, the Heftsiba fiasco and the fact that so many were lured into an illegal, unsecured purchase, has brought about the initiation of a new law which, if it passes the Knesset, will mandate purchasers as having first place position among creditors in the event of the contractor's default. This law, proposed by MK Zevulen Orlev (NRP) is not yet law. Until such time as it is, the courts are also bending over backwards to protect purchasers by way of precedent. The banks petitioned the court to announce Heftsiba's bankruptcy and commence liquidation process. In liquidation, all the secured creditors, banks, suppliers and government would take their share first and the unsecured purchasers would have to divide up the leftovers, if any. Judge Heshin (Deputy President, Jerusalem District Court) ruled that Heftsiba would not be liquidated and that other creditors such as banks may not evict purchasers who have seized their property by moving into the unfinished apartments. But you, the reasonable buyer, will never find yourself in this position because, having sensibly followed the law, you will have in your hands the tools to fully protect yourself and your capital investment. With proper consultation you will have not suffered any capital loss. The author is a senior partner with with Abraham Neeman Law Offices, one of the largest real estate law firms in Israel.