A stunning model apartment can be a dangerous thing. The perfect finish and contemporary Italian furniture could induce you into signing a contract when you get back to the sales office, normally located in a little building on a vacant piece of land. Instead of signing the builder’s standard contract, take a moment to pause and reflect on the complexity of this transaction. Unlike buying a secondhand apartment, buying new construction involves many parties aside from you and the builder. You are entering into a process which includes the builder’s financing bank, the owners of the land (if the builder is not yet the owner), the municipal authorities (for permits) and the Supervisor of the Law of Sale (Apartments) 1973. A plethora of problems can arise in this legal undertaking, and sometimes projects that have gone very wrong become major news, such as Heftziba in 2008. Even if the builder doesn’t go bankrupt or abscond with your money, there are myriad challenges faced by new construction buyers.
New Construction Concerns
Contractor’s financing bank
Contractor’s rights to land
Protecting your payments (bank guarantees)
Making changes to the apartment
Timely completion and compensation for late possession
Timely registration of your rights
Repairs of Defects, after possession
Registration of By Laws (Takanon)
Choosing a Building Manager (Metachzek)
Contracts with builders fall under the heading of standard contracts because the builder usually presents you with a “standard” contract that its legal advisors have prepared. These contracts are designed to protect the builder’s interests, and the same initial draft is presented to all potential buyers. This transaction is subject to a number of important consumer protection laws, including The Law of Sale (Apartments) 1973 and its 2011 Amendment, The Law of Sale (Protecting the Investments of Apartment Purchasers) 1974 and its 2008 Amendment, Consumer Protection Law 1981 and The Law of Standard Contracts 1982. It may be standard practice for the builder, but you should not sign a standard contract until you have fully negotiated every facet of the deal.
Protecting your money is possibly the most important interest to safeguard. The collapse of Heftziba and the fallout for buyers, prompted the comprehensive 2008 amendment, which expanded protection for your payments. If there is one tip to take away from this article, it is that you are entitled by law to a bank guarantee from the builder for any payment of 7%, or more, of the price. There are other guarantees that a builder can provide, including a warning notice or insurance, but most purchasers will encounter bank guarantees. The builder is supposed to tell you that you are entitled to this and to ensure that you get it. This protects you if the builder goes bankrupt or there is an attachment placed on the owner’s land (remember that the builder sometimes does not yet own the land on which he builds). In addition to the bank guarantee, the 2008 amendment provides for a uniform payment process. You pay the builder via a book of payslips which the financing bank creates, into a designated bank account for the project which the builder maintains at the “financing bank.”
Your mortgage bank provides an additional layer of protection, as the law states that the mortgage bank cannot pay the builder the mortgage funds - which you are borrowing to make full payment - until that mortgage bank has informed you of your rights and confirmed that you have received a bank guarantee (or other guarantee), under the Law of Sale.
Are these costs included?
Every contract has to include the technical specifications (“specs” or 'Mifrat Techn'i), which will detail the type of cabinets, tiles, flooring, even toilets and electrical outlets, which your new apartment will have. In the midst of choosing your kitchen cabinets and tiles, you may forget that this 'fun' part of buying new construction is just another of the many legal facets of your new purchase. Contractors try to include provisions in their proposed contracts which allow them to deviate from the specs by a certain percentage. Beware of this, because instead of the bathroom finishes you loved in the model and which you thought were a part of your specs, you may get some standard object which does the job, but doesn’t fit what you thought was included. The 2011 Amendment states that if a builder doesn’t include specs, he will be obligated to provide higher than standard finishes as a penalty.
The amendment also obliges the builder to provide “user guides and instructions” to the purchasers,with the contract and specs. If these are not available when the contract is finalized, then the builder has to provide them when the purchaser gets the key. Consider your air conditioning or solar heater. It is important to know how to use these items, so that you don’t inadvertently break something due to ignorance.
Another welcome provision in the 2011 amendment addresses the relentless problem of a builder’s failure to complete the building on time, causing the purchasers a delay in the move to their new home. The law states that any delay of more than 60 days from the date the builder was obliged to provide the key to a completed apartment immediately entitles the purchaser to compensation, without needing to prove actual damage. The compensation is 1.5 times the amount of rent to pay for an apartment comparable to the new home. This is one of the few provisions that the builder is permitted to change in the contract, so your contract might include a provision that the builder is exempt from paying this compensation in the event of delay due to war,a strike or the absence of materials. Don’t agree to this! Since the law has provided this broad protection to purchasers, use it and insist that the builder cover the costs if they are late in the completion of the building, regardless of the reason. After all, you have to live somewhere and that costs money.
After you move in, it’s time to ensure that everything is in good working order. The warranty under the Law of Sale, is broken down into two phases. The first phase is called the “inspection” period ('Bedek'), which provides coverage of varying durations, ranging from 1 to 7 years. For example, the inspection period for carpentry defects is 2 years, while the inspection period for defects in plumbing, electricity, heating or sewage is 4 years. A warranty period of 3 years, from the expiration of the inspection period, enables the buyers to report any defects they discover. A new category of major structural defects has a 20 year inspection period; this would be a defect in the weight-bearing capacity of the building as it relates to its stability and safety. Even though the law provides extensive warranty, there may still be issues in getting the builder to repair the defects.
Naturally, there are a host of issues that this article hasn’t covered, such as changes to the apartment as it is being built, registration of your rights in the Land Registry and wording by-laws that are agreeable to you. There are also contractual provisions to negotiate, which, at first blush, may not appear problematic. For example, you might be really worried about late completion, but at the same time the proposed contract might attempt to obligate you to early possession if the building is completed earlier than specified in the contract. As nice as that sounds, this too can be a problem if you haven’t sold your current home or the funds to pay the balance of the price aren’t available yet. Before you sign on the many dotted lines, get legal advice to ensure that the contract both complies with Israeli law and is tailor-made for you.
This article is intended for general information and is not legal advice.
Deborah Opolion-Elovic LLC is a licensed attorney in Israel and the US (W1), specializing in Israeli real estate and Israeli probate.