Purchasing an apartment from a contractor in Israel

Purchasing an apartment from a contractor in Israel may be cheap, but it is riskier than buying a second-hand apartment. The apartment does not yet exist, so the buyer cannot examine the quality of the construction or even be sure that the apartment will actually be built. Below we explain about the importance of having an expert examine the details of the sale contract.

In the following article we explain about buying a flat from a contractor, the importance of legal representation to minimize the risks entailed, and, especially, the difference between a sale contract for buying a second-hand apartment and a sale contract for an apartment that is still under construction. For more information, see our list of articles on land law.

WHAT IS THE DIFFERENCE BETWEEN A REGULAR SALE CONTRACT AND A SALE CONTRACT WITH A CONTRACTOR?

When buying a second-hand apartment, both parties hire lawyers, conduct honest negotiations, and sign the contract. This is not so when purchasing a flat from a contractor. In this case, the contract is between the purchaser, who does not have much experience, and the contractor, who is a big construction company with past experience in selling hundreds of real estate assets.

When buying an apartment from a contractor, the sale contract is usually uniform. That is, the contract is exactly the same for all tenants buying an apartment in the new building. Therefore, the contractor’s lawyers invest a lot in formulating the contract to minimize the contractor’s responsibility as much as possible.

In other words, the contract formulators do not have the good of the buyer in mind; and, as we already know, in real-estate transactions, any small change may lead to a great financial loss, even if it sounds minor and insignificant.

Therefore, if you purchase an apartment from a contractor, it is all the more important to hire a professional lawyer to deal with your case and even examine all the sections of the contract and suggest changes to problematic sections or unclear appendices.

PRELIMINARY CHECKS WHEN PURCHASING AN APARTMENT FROM A CONTRACTOR:

You have already read here about the preliminary checks that must be carried out when purchasing a second-hand apartment. When purchasing an apartment from a contractor, the preliminary checks are completely different. In fact, in most cases, the sale contract is signed with the contractor even before the building is constructed, or, as the slang goes: when the building is still “on paper”. Therefore, it isn’t possible to bring an appraiser or engineer, or to conduct any sort of physical examination, to a property that does not yet exist.

Of course, it is possible to check previous projects by the contractor and ensure that the customers are satisfied with the quality, speed of service, and prices. However, the most importance examinations are those conducted by your lawyer.

A sale contract for an apartment purchase from a contractor is usually signed by the entrepreneurial company and the purchaser. That is, the entrepreneurial company, and not the company owner, is responsible to fulfill the conditions of the contract. This point is essential, since the purchaser, who is no expert at contract law, believes that, if the project manager has a good reputation, this justifies a sense of security when signing the contract with the company.

The examinations conducted by the lawyer may be divided into two categories: examining the stability of the entrepreneurial company selling the property; and anchoring the contractual responsibilities of the company toward the buyer. In this article, the entrepreneurial company is referred to as the operating “contractor”, since the responsibilities in the contract relate to one of the two, depending on the specific transaction.

EXAMINING THE ENTREPRENEURIAL COMPANY:

The buyer’s lawyer must first examine the land on which the building is to be constructed—as to whether it’s owned by the entrepreneurial company or the contractor and whether there are no limitations on the land such as it being mortgaged to the bank or another financing body, it being foreclosed for any reason, or any other limitations in the registration that may prevent transferring the rights to the buyer.

The lawyer must deeply examine the issue of taxes—if the contractor has not paid all the required taxes, this may prevent transferring the rights to the buyer even though the contractor, and not the buyer, is the one responsible to pay the taxes. This obligation of the contractor to pay the taxes is also mentioned in the sale contract.

The final stage in examining the entrepreneurial company and the contractor is issuing construction permits via the local authorities and ensuring that the construction is in accordance with these permits and does not violate any rules, which may lead to a delay in completing the project and, consequently, to a violation of the timetable set in the sale contract for transferring the rights to the buyer.

EXAMINING THE OBLIGATIONS OF THE COMPANY TOWARD THE PURCHASER:

A sale contract in this kind of transaction is everything: the buyer has nothing else to depend on. There is no physical apartment that the buyer can see, or even a construction frame that can give the buyer an idea of what the apartment will look like. This gives the precise formulation of every word and sentence in the contract utmost importance. Between the lines of the contract lies the return for the purchaser’s money.

The contract includes many and varying obligations of the entrepreneurial company toward the purchaser. Here are some of the main ones:

Providing a bank guarantee—According to the Sale Law, the company must provide a bank guarantee to the purchaser for every installment that was paid for the apartment. This guarantee ensures that if, for any reason, the contractor is unable to fulfill their obligations, the purchaser will be able to get their money back from the bank that provided the guarantee. You should make sure that this guarantee is well anchored in the contract.
Anchoring responsibilities vis-à-vis the contractor—If the contract was signed with an entrepreneurial company that is hiring an operating contractor to manage the project, you should anchor the company’s responsibility to hire a contractor who is registered in the contractor registry, as well as the contractor’s responsibility to carry out the job.
Allowing for personal planning—When purchasing a new apartment, it is common to provide the purchaser with the option to plan the apartment according to their own preferences within the general plan created by the architect. The purchaser’s right to make changes and request additions to the plan should be anchored in the agreement, as well as the purchaser’s right to get their money back for this option if they don’t wish to make any changes.
Providing timetables—The most important issue when purchasing an apartment from a contractor may well be the timetable for transferring the rights to the purchaser. Almost every project runs late for various reasons, so the compensation to the purchaser for every month of delay should be anchored in the agreement, as well as the option to cancel the purchase if the rights are not transferred after a certain date is reached.
Registering the apartment in the land registry (Tabu)—After the construction is completed, the company must register the building in the condominium registry so that the purchasers will be able to register their individual apartments lawfully in the land registry. In practice, the registration process takes many years, and, until it is over, the company conducts its own internal registration. The sale contract should specify a clear date for registering the apartment in the land registry, after which the company will be fined if they fail to do so. The contractor is obligated by law to carry out the registration within 12 months of completing the construction (i.e., from the time of receiving the certificate that permits the use of the building, called tofes 4 in Israel).
Obtaining an exclusion letter—In construction projects, the land and any structure built on it are mortgaged to the bank that is granting the loan. A purchaser who wishes to take a mortgage that will enable them to reach the amount of money needed for the purchase is required to send an exclusion letter from the loaning bank to the mortgage bank in which the bank declares that, as soon as it receives the money from the purchaser, the purchaser’s portion of land will be excluded from the mortgaged land. This document must be obtained by the contractor or the entrepreneurial company, and the obligation to obtain the document must be anchored in the sale contract.
Limiting the lawyer fees—According to an amendment to the law, the contractor’s lawyer fees are limited to only 5,000 ILS + VAT. You should ensure that the entrepreneurial company does not charge you extra payments that are intended to increase the lawyer fees, such as a registration fee, a fee for opening your file, and a handling fee.

Our law firm, which has branches in Jerusalem and Tel Aviv, specializes in Israeli civil law. If you have any further questions about purchasing property from a contractor or second hand, I and my colleagues will be happy to help. Contact us to schedule a meeting: