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The 'Heftsiba Law' By Raz Smolsky Tags: Heftsiba, homebuyers, Knesset After about 4,000 people who had contracted to purchase homes from the Heftsiba construction company were left high and dry when the company went bankrupt last August, the Knesset stepped in and passed a law aimed at protecting future homebuyers in the future. "There were huge lacunae [in the existing laws] when it came to the relationship among the customers, the banks, the developers and the Housing and Construction Ministry," said MK Stas Misezhnikov (Yisrael Beitenu), who submitted the private member's bill along with MK Reuven Rivlin (Likud). "We took this triangle - the construction companies, the banks and the Housing and Construction Ministry - and examined the role of each." "One of the worst problems in the Heftsiba collapse was the depositing of money into the wrong bank accounts," Misezhnikov said. "Every residential project with by bank financing has its own bank account, into which the revenues from apartment sales are deposited. The bank issues guarantees to buyers based on the deposited funds, and the buyers can exercise the guarantees if they don't receive their apartments." Advertisement Heftsiba gave buyers an account number into which to deposit payments for their apartments, but it was not a dedicated bank account for their specific project. That meant that when the axe fell buyers were not protected by the guarantees intended to shield them from catastrophe. The new law requires the financing banks to verify that each buyer's money is secured. "The bank cannot be aloof from the transactions," explains attorney Mira Bornstein, a partner in Hartavi Bornstein Basson & Co. "If the bank receives money from the buyers it has to make sure guarantees are provided accordingly." One of the law's important clauses is designed to create a mechanism that will ensure the deposit of the buyers' money in the right account. Buyers will no longer give checks directly to a contractor. Instead, they will use deposit slips issued by the bank accompanying the project. "The best news is that there will be no more cash or bank check transactions between buyers and contractors," explains Misezhnikov. Instead, the bank will give each purchaser deposit slips with the project account number printed on them. "Contractors will no longer be able to transfer monies between accounts," Misezhnikov said. A paragraph in the draft bill that would have forced bank managers, as well as officers in the construction company, to assume personal financial responsibility in the event of a Heftsiba-style company collapse did not pass in its original formulation. Bank managers were removed from the paragraph, which called for fines and even prison terms for the individuals involved. "The banks will not bear personal responsibility because we realized that senior bank executives already bear personal criminal responsibility. A bank manager who breaks the law can be indicted. As for bank clerks, we realized that no one would be willing to work at a job that bore such criminal responsibility," adds Misezhnikov. "The police opened an investigation against Heftsiba. If it turns out that the banks acted with criminal negligence, criminal proceedings will be opened against them and their managers." Still, the new law exposes the construction companies and their executives to criminal penalties and high fines. A company's failure to give its clients a deposit slip booklet against which a buyer can obtain a guarantee could result in a one-year prison term for company managers and fines of NIS 50,000-NIS 400,000, depending on the severity of the violation. The law also bars contractors with a history of treating customers in an unacceptable manner from participating in Israel Lands Administration property tenders. Although the Heftsiba law offers a solution to the problem of exercising bank guarantees, it could lead to higher apartment prices. The banks will probably raise their commissions on guarantees and the contractors will pass that cost on to consumers. Another protective measure granted by the new law is a guarantee covering all the costs involved in acquiring the apartment. Until now the guarantee covered only the apartment price itself. From now on guarantees can include additional costs, such as lawyer's fees and registering ownership in the land registry (Tabu). The clause in the new law allowing buyers to exercise their guarantee if the developer does not hand over an apartment within 8 months of the occupancy date stipulated in the contract is great news for buyers but it exposes the banks to significant risk. "Buyers are unwilling to make do with the guarantees covered by the Sales Law," says Bornstein, "because everyone knows the guarantees are hard to exercise, and buyers are not willing to take that risk. This problem is particularly evident in knock down-rebuild projects." In such projects apartment owners expose themselves to a double risk - the loss of their existing home and the non-completion of the new one in the event the contractor does not finish the job. "Ever since the Heftsiba debacle, people are less willing to take risks," continues Bornstein. "When I represent apartment owners in knock down-rebuild projects, I demand that the developers add a clause enabling the client to exercise the guarantee within a specified period. I feel that without this clause, such projects will not be able to proceed. If banks do not join this effort and do not agree to this clause, this issue could become a real obstacle." Misezhnikov stresses the importance of another of the new law's clauses. "I believe the state has been the most negligent," he says. "The new law calls for the Housing and Construction Ministry to appoint a supervisor over all the residential construction projects in Israel. Every company must report to the supervisor when a project is launched and must publish a prospectus for each project. If a company has a problematic history, this information must be publicized. The ministry will become a regulator for the construction industry." What does the new law not include? Eli Kazhdan, CEO of title insurance provider CityBook Services, talks about the title insurance law in the United States. "An insurance company insures the title registration of apartments, and if there is a problem, the insurance covers the extra expenses," explains Kazhdan. "Such insurance involves the investigation of all the ownerships, discounts and attachments and caveats recorded against property in the land registry, as well as any other relevant information." Apartment buyers in Israel hire lawyers to research the property's legal status. Kazhdan notes that the difference between the two systems is that title insurance companies bear the financial responsibility for compensating policyholders in cases of fraud, whereas lawyers do not. Instead, they are vulnerable to negligence suits. "In Heftsiba's case, the company owners were unable to deceive all of the buyers all of the time. The insurance company would check the developer, anticipate problems and warn buyers of problematic issues. It is quite likely that the insurance company would not have insured the title registration for Heftsiba apartments, and that would have alerted buyers," says Kazhdan. 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