Moshe Kahn*

Background

The development of the law of real property in Israel has been closely linked to the historical development of the country and the political changes that have occurred over the years.

From the middle ages until the end of World War I, Palestine was ruled by the Ottomans. During such time most of the land was owned by the Sultan, and plots were distributed on the condition that the possessor worked the land and paid heavy taxes to the Sultan's representatives. These rights couldn't be assigned to the possessor's successors and could not be bequeathed. The only private lands were within a few small towns that existed at the time.

The Ottoman Empire's rule was succeeded by the British Empire which ousted the Turks during World War 1, I and ruled the country until 1948. The British revolutionized the laws of real property by establishing a relatively modern system of registration based on surveys.

After the Israeli Declaration of Independence, in 1948, the new state began establishing a modern independent civil code. In 1969 the legislature enacted the Real Property Law of 1969. Upon its establishment, the State of Israel took over the British ownership of all non-private lands. Furthermore, over the years additional large tracts of land were purchased by the Jewish National Fund. Together, these lands today comprise approximately 93% of the area of the country.

Thus, today there are two types of real property in Israel, (i) privately owned ("Private Land"); and (ii) State-owned lands - "Minahal"("State Lands"). The laws and practices relating to State Lands differ from those relating to Private Lands.

The main difference between the two is that title to a Private Land property is registered in the name of the purchaser in the land registry. On the other hand, title to a State Land property as a rule does not pass to the purchaser. Rather, the purchaser of a State Land property acquires a long-term lease to the property, (usually for 49 years with an option for an additional 49 years). It bears noting, however, that the majority of urban land in Israel is Private Land, with title thereto being held by private parties. Consequently, the first thing that should be confirmed prior to purchasing a real estate property in Israel, is whether the property is registered as Private or State Land.

Purchase of a New Apartment from a Contractor

Prior to finalizing a contract for the purchase of a new apartment from a contractor (or from a private owner of an apartment, who acquired the apartment from the contractor for resale purposes, the purchaser should carefully review the Specification (????) and The Blueprint (??????) of the apartment. Under the Sale (Housing Law - 1973, the seller is obligated to append the Specification to the contract. These documents set forth a salient part of the seller's commercial commitments regarding the apartment, and without them, there may be material differences between what the purchaser was expecting to receive and what he actually receives. It is important to demand the contractor to have the apartment size stipulated in the Specification in net rather than gross terms (i.e. excluding the "common property", walls, etc.). It is also important to ensure that there is a precise definition of the "common property" that will be attached to the purchased apartment.

Furthermore, every "joint building" (meaning a building containing two or more apartments or more) is required to have a set of By-Laws, which regulate the relations between the tenants. A standard set of By-Laws is annexed to the Real Property Law - 1969 and applies unless a different set of By-Laws has been duly adopted by the apartment owners.

Unlike in the U.S., where it is customary that the contractor provides the purchaser of a new condominium apartment with a title insurance policy, in Israel the Sale (Apartments) (Assurance of Investments of Persons Acquiring Apartments) Law - 1974, stipulates five (5) different types of guarantees, at least one of which a contractor is required by law to provide the purchaser of an apartment, prior to receiving a sum exceeding 15% of the purchase price:

1. Bank Guarantee - money-back guarantee in the event that the contractor cannot transfer the property under the purchaser's name;
2. Insurance Policy - the contractor obtains insurance for repayment of amounts received from purchasers and names purchasers as payees in the policy. This sort of guarantee is in practice quite a rate;
3. Lien - the contract registers a lien on the apartment (or on a relative portion of the land) as a first ranking pledge in favor of the purchaser. This sort of guarantee is likewise rarely provided by contractors;
4. Caution Note - registered at the local land registry, and grants the purchaser preference over any later conflicting transactions or creditors of the contractor;
5. Transfer of Title to the Property in the Purchaser's Name at the Land Registry - contractors will almost never agree to the transfer title prior to receiving payment in full from the purchaser.

If a contractor fails to provide the purchaser with any of the aforementioned guarantees, then, notwithstanding any conflicting provisions in the purchase contract, the purchaser is only obligated to transfer payments for the apartment in accordance with progress being made on the construction, as set forth in the relevant regulations, i.e. 6 payments, each made following completion of a different stage of the building.

The two commonly used types of guarantees are the Bank Guarantee and the Caution Note. As noted, each of these types of guarantees complements each other: the Bank Guarantee provides the purchaser with a money-back guarantee and the Caution Note provides a preference over later transactions and protects from contractor's creditors.

Hence, it is imperative to demand from the contractor both types of guarantees.

Furthermore, the bank financing the project often has a lien registered over the entire property, thus necessitating a waiver from the bank in order to allow registration of the Caution Note. The bank waiver is usually a conditional waiver stating that in consideration for full payment by the purchaser, the bank will discharge the lien over the relevant apartment from the lien.

Following full payment, the bank should provide a final and irrevocable waiver, confirming that the lien over the relevant apartment has been discharged. It is important to demand of the contractor to produce, and append to the purchase contract, a signed conditional waiver from the bank, as well as a draft of the final waiver to be provided by the bank upon full payment.

Purchasing Second-Hand apartment in an Apartment Building

It is essential to check the registration documents of the building, the building's registration warrant, and the By-Laws. These can be found at the Land Registry. These documents regulate the reciprocal rights and obligations of each of the owners.

These documents should address issues such as: what can the common property of the building be used for? Who is entitled to use the remainder of the unused building rights? What is the share of each apartment in the maintenance of the building? And more.

If at the time of the purchase, a building has yet to be registered as a "joint building" in the land registry office, then it is important to realize that the "attachments" of certain parts of the building to certain apartments (for example roofs, parking spaces, backyards, etc.), are not yet registered as well, and thus, it is imperative to check if every exclusive usage/attachment of such property has been approved by all of the neighbors.

Furthermore, even if such approval was granted, if an apartment in the building is sold, the new owner will not be bound by such previously-granted approval, as long as it hasn't been registered, unless the new owner was aware of such right when purchasing the apartment.

Leasing an Apartment under a "Long Term Lease"

As aforementioned, State Property cannot be purchased, only leased. Therefore, the title to such property is not registered in the name of the "purchaser".

The "purchaser" is rather granted the right to enter into a long-term lease with the Israel Lands Administration (the "Administration"). In the past, lessees were required to pay annual rent to the Administration, however, the majority of leases today are "capitalized", i.e. the developer/contractor pays the rent for the entire lease term in advance and the lessee is exempted from any annual payments.

In practice, once the lease agreement is signed, the lessee has no further business with the Administration until the expiration of the lease, unless he wishes to make additions or modifications to the existing structures or to their usage. In such an event, the Administration's approval, as the owner of the land, is required, and it may demand an additional rent with respect to the new usage.

In light of the above, when leasing from the Administration it is imperative to check whether the property to be leased is capitalized and that in the event of a transfer of rights in the lease there will not be any transfer fees due to the Administration.

In the event that the lease is from a contractor who has a "Development Agreement" with the Administration, under which the contractor is obliged to submit plans, commence building, and complete the project within a set timetable, it is imperative to check at the Administration's offices whether the contractor has fulfilled all of its obligations in accordance with the Development Agreement, and is entitled to receive the property from the Administration. In the event that the lease is not from the Administration, but from a private entity (an individual or a company), it's imperative to check when the lease period will expire, and if there is an option to extend the lease for an additional period, and for how many years.

Dispute Resolutions

Contractors like to add an arbitration clause in their purchase agreements, stating that in case of a dispute between the parties on engineering matters, the dispute will be resolved by the contractor's engineer. Obviously, this does not favor the purchasers. Thus, it is essential to demand and verify that the arbitration clause stipulates that the arbitrator will be an objective party, and will be appointed by the chairman of the Engineers and Architects Association in Israel.

General

In general, it is also important to check the "Zoning Plan" of the area surrounding the purchased property. By doing so, the purchaser can confirm that there will not be any "surprises" down the road as to the nature of his neighborhood (tall buildings, schools, kindergartens, synagogues, country clubs, etc.). Such information can be obtained at the offices of the relevant municipal authority.

May 1, 2007

*Moshe Kahn is a business lawyer, focusing on investment, M&A, cross-border, and real estate transactions. From his Tel Aviv office, he provides legal counseling and represents local and multinational companies operating in Israel. Mr. Kahn is a member of the Israel and New York State bars.

www.kahn.co.il

google+