When a builder crumbles - Haaretz

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Mon., August 13, 2007 Av 29, 5767

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When a builder crumbles

By Arik Mirovsky

Are bank guarantees given to homebuyers a magic solution to the problems that may arise when a building contractor collapses? According to what you read in the papers, yes, but in reality, even buyers clutching guarantees in hand can expect very hard times - and heavy expenses that will never be reimbursed.

The law requires the builder to provide a bank guarantee for any sum greater than 15 percent of the apartment price. Or, he can choose one of four other options. He can personally guarantee to return all the money to the buyer if the need arises, or he can take out a mortgage on the apartment for the buyer. Or he can register what is called "ha'arat azhara" (a special warning clause added to the deed of ownership) with respect to the financing of the apartment. The last option is for the builder to transfer the title of the apartment to the buyer.

For reasons of convenience, and often practicality as well, builders tend to prefer bank guarantees.

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So is the money you pay him safe? Yes, but buyers can find themselves locked into a deal where the circumstances have changed, and they may prefer to get out, which is too bad.

"Guarantees can only be exercised under certain circumstances," says attorney Rina Shiboleth, an expert on real estate. "When the buyer signs the contract, it includes an appendix regarding financing, in which the buyer agrees to demand of the banks the right to complete construction and to deliver the apartment to him if the builder enters receivership. When the court appoints a receiver to a project, it legally allows the bank not to honor its guarantees, unless a long time has passed - say, a year - and the project has not advanced. Then the courts allow the buyers to exercise their guarantees."

Another problem is that beyond the sums covered by the guarantees, when a contractor collapses, the buyers may suffer heavy additional costs that they can't recoup. "The sureties provided for under The Sale Act (Apartments - Ensuring Investments of Apartment buyers, 1974) - are not insurance against indirect damage, only direct," explains attorney Eli Eshel. "You can often find cases where most of the damage to the homebuyers aren't the payments on the apartment, but changes in the terms of the transaction: delays in handing [the property] over, flawed construction and discrepancies between the actual apartment and the plans."

Take the people who bought homes in the Mey Arad project in Netanya, called "A Home in the Country." They also paid for a country club to be built on the premises. But Mey Arad collapsed. The buyers got their apartments, but the country club remained on paper and the money they had paid for it in advance, included in the price of their properties, is unrecoverable. Eshel, who represented several buyers, adds that several problems in construction won't be fixed either because the builder that took over from the defunct Mey Arad doesn't contractually have to deal with them. If they want to fix the problems, the buyers will have to do so themselves, for extra money.

Or take the project erected in the 1990s between Achziv and Nahariya in the North. Sybil Israel sold luxury holiday apartments complete with communal swimming pool. But come 2000, the company went into receivership. The receiver did finish building one of the three planned apartment buildings, but the project has no pool or other promised holiday facilities. It's just an apartment building, squatting there in the middle of a giant mound of sand.

The buyers filed a lawsuit at the District Court to be allowed to exercise their guarantees. They lost and appealed to the Supreme Court. In 2004 the Supreme Court ruled that extraordinary cases could exist - when the discrepancy between the apartment described in the contract and the one the buyers actually receive is so extreme - that the court could determine that the buyers indeed did not receive what they were promised. Yet, the court ruled, this was not the case here.

That ruling paved the way for freeing receivers to make certain changes to apartments and construction projects in order to minimize building costs, at the expense of homebuyers. Sometimes they would muck around with the building materials, or the technical plans. These machinations have often lowered the value of property, as buyers discover when they try to sell.

Five years ago, a receiver was appointed to deal with an opulent housing project in Kiryat Motzkin. He began marketing the apartments at as much as 40 percent below the prices that the initial buyers had paid. Naturally, the properties were bought by people of a lower socioeconomic level, and the status of the project suffered. And thus the value of its apartments also dropped precipitously, too.

A rather more rare type of loss caused to homebuyers that isn't covered by bank guarantees happened with respect to a project near Latrun, in Ein Hemed. As the last millennium closed, cottages were sold as holiday homes there and the buyers took possession. But the court voided the construction permit and the occupancy permit as well (Form No. 4), and evicted the tenants.

Some of the frustrated buyers tried to exercise the bank guarantees they had received under the The Sale Act, but the court rejected their claim, saying only that the circumstances did not warrant such action concerning the guarantees.

A more common problem when a builder crumbles into rubble is rent. You had an apartment. You bought a new one and had a deadline by which you had to leave your former domicile. It's time to leave and the new place remains on paper, and meanwhile, you have to live somewhere else. The rent can mount up to thousands of dollars and you can't get it back. You probably also have to make mortgage payments at the same time, never mind that your new abode remains a figment of the imagination. Many families have to resort to borrowing yet more.

"Buyers must be aware of the limitations of guarantees. For example, they don't provide cover in respect to the quality of construction or maintenance," Shiboleth points out. "Receivers do bring in new contractors to finish the building, but what happens afterward is unclear."

Attorney Shai Amit is pessimistic about improving the lot of the buyer. "All deals involve risks," he says, and the same is true of buying a home. "You can't secure the buyer 100 percent. If the contractor collapses, the acquisition turns into a sort of financial transaction, in which the money that the buyer paid is linked to the consumer price index. That naturally isn't a good deal.

"Another problem is that this 'financial transaction' involves the buyer paying heavy costs, hoping that the value of the apartment will exceed the rise of the consumer price index plus the other costs he has to bear."

Obviously the optimal solution would be to force contractors to provide financial guarantees that could be exercised at any given moment. But the costs involved would be heavy and the contractor would be vulnerable to extortion by the buyers. It won't happen, Amit says.

So all in all, he backs the solution of guarantees based on The Sale Act. "It isn't a bad solution," he argues. "It's a path down the middle that allows the developer to build, and if the developer collapses, it allows the receiver to continue construction and to assure the money that the buyers paid so far."

Eshel doesn't entirely agree: The solutions existing today are flawed. There is always the problem that banks may be prepared to complete construction, in order to avoid giving money back to the buyers, but the buyers may not want the apartments any more, for all the reasons mentioned above. They want their money back - but they can't have it.

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