Option agreement in Israel
One of the most important tools in the field of real estate in general, and in real estate purchase transactions in particular, is the ‘option agreement’. An option agreement in Israel grants “priority” – after registering the agreement in favor of a potential buyer in the Land Registry (Tabu) record of a real estate, the owner of the property cannot sell it to another buyer without the approval of the buyer in whose favor the option is recorded. An option agreement is also used to grant priority to the ownership of a property used as a deposit for a lender, such as a bank issuing a mortgage. Finally, in many cases the registration of the option agreement constitutes a stage of transferring rights and finalizing a transaction.
One specialty of our office is real estate, including handling registration in the Land Registry, cancellation of registration, inspection before purchasing a property and other matters related to real estate transactions. In this article we will detail the many implications of an option agreement and explain the difference between the various agreements defined in the law.
What is an option agreement?
If you are in the process of buying an apartment, you have undoubtably heard about the existence of this legal tool at some point. Most properties in the State of Israel are registered in the Land Registry, which enables issuance of a Land Registry Extract document containing the details of the property owners. An option agreement means a warning has been issued that there is a restriction on the property, and this warning appears at the bottom of the Land Registry Extract.
After the buyer signs a purchase agreement for the apartment and makes an advance payment, he or she wants to make sure that the seller will not violate the agreement and sell the property to another buyer. That is why it is customary to register an option in favor of the buyer on the property being sold. This agreement prevents the seller from selling the property to another person without getting the buyer’s permission.
After completing the purchase procedure, the bank that granted you the mortgage to purchase the property, registers an agreement in its favor that prevents the sale of the property before the payment of the mortgage loan. An agreement of this type can also be between a private borrower and lender, when the lender wants to secure their money with a property owned by the borrower.
An option agreement is a kind of property right that guarantees the rights of the person who is the beneficiary of the agreement. There is usually a contract between the parties, but a contract is a contractual right that is decided in court, while a property right does not require any action for it to be realized.
Who is the option for?
The registration of the option enables the proper management of a real estate transaction and provides significant protection to the buyer of the property, so that the seller cannot sell the property to another party, or in the event that the owner of the property goes bankrupt or is foreclosed. Anything that happens after the agreement was registered does not override your right to the property.
Beyond that, the agreement allows any interested party to see whether there are any restrictions on a property they wish to purchase without relying solely on the information presented by the seller, given that the seller’s primary interest is of course to sell the property as rapidly as possible.
How is the registration done in the Land Registry?
The registration of an option agreement is done by the Land Registrar, after the applicant has submitted an application for registration in which they state what their application for registration is based on. The application can be submitted on line, but it is important to know that in this procedure you must consult with an expert real estate attorney who will accompany you, especially since attorneys have the option of submitting an online application using a smart card.
Registration of the agreement entails a fee of 126 NIS (as of 2022) and after the completion of the procedure, the application goes to the Land Registrar in the area where the property is located, who examines its details and, according to the conditions in the law, decides whether to approve the application. If the application is approved, the attorney is updated. Applications are usually approved within a few days.
Revoking an option
If an option agreement has been registered on a property that you own in favor of a third party and you wish to revoke it, you should know that cancellation can only be done with the consent of the party in whose favor the agreement was registered. For example: if the agreement was registered in favor of a mortgage bank, you must complete the balance of the debt and request permission from the bank to delete the option agreement.
Another way to revoke an option agreement is through a court order. An attorney on your behalf can submit a request for declaratory relief to a court and if the court deems appropriate, it issues an order instructing the Land Registrar to delete the option agreement.
General option
Although the most common use of option agreements is to secure the seller’s obligation in real estate transactions, these agreements are also made for different uses. For example, if parents wish to give a property as a gift to their child, and want to ensure that the recipient of the gift does not sell it after their death, they can write this in an option, thus creating a restriction on the sale of the apartment.
There is also an option agreement in redevelopment transactions. When developers sign a contract with tenants and they wish to ensure the tenants’ commitment to it, it is customary to register an option in favor of the developers.
Over the years, local authorities (and other organizations to which the property owner owes money) have also begun to write option agreements on properties that had construction defects or due to debts of the property owner. In this way, the local authority guarantees that the owner of the property cannot make a sale transaction before the debt is paid.
Types of options on rights in a real estate property as defined in section 161 of the Real Estate Law:
- Ownership – this is the classic agreement which limits the property owner’s ownership due to a transaction, or some financial obligation.
- Rent – an option agreement is recorded when there are special rights for tenants.
- Mortgage – the option agreement states that the owner of the property owes the bank a sum of money and that the sale of the real estate will not be possible until the debt is paid.
- Easement – the agreement states that there is a public or private easement in the property, but usually it does not prevent the sale of the property as a result.
- Priority – an agreement detailing a third party’s priority in purchasing the property.
The role of an attorney in registering an option agreement
An option agreement is a professional legal tool and its registration can sometimes have financially fateful implications. Although technically it is possible to submit a request for the registration of an option agreement independently, without an attorney, it is not definitely not recommended to do so.
If you submit the application on your own, you may make an error that will lead to a large financial loss. Accordingly, as in all real estate matters, it is recommended to choose an expert attorney who will accompany you throughout the transaction.
It should also be noted that the attorney takes on full liablity for their work, so that if an error occurs, they are exposed to a lawsuit from the client. Thus hiring an attorney’s services is a kind of insurance policy.
Our tip
When you sell an apartment, and the buyer rightfully demands to write an option agreement after signing the contract, ask your attorney to draw up a document cancelling the option agreement that the buyer has signed, and deposit this document with a trustee. This will enable you to cancel the registration of the option agreement if the buyer breaches the contract.
Summary
Registering option agreements is a broad and complex field, so if you would like advice on the subject, as well as other matters in the real estate field, contact our law office today. With branches in Jerusalem and Tel Aviv, we specialize in Israeli civil law. If you have any further questions, my colleagues and I will be glad to help.
:
:מאמרים מומלצים