Bought Your Dream House in Israel? Now Make Sure It Doesn’t Turn Into Your Worst Nightmare

Five things to do before making what’s likely to be the most expensive purchase in your life. Hint: Checking the land registry is not enough.

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You’ve bought a home. A lawyer helped you examine everything, so now you can sleep soundly in your new master bedroom knowing that you’ve done everything a buyer should do to avoid any problems. That’s what a lot of people thought, too, only to discover they were wrong. And, when problems involve real estate, they can be particularly expensive and time-consuming to fix.

Buying a home is more complicated than any other purcahse the average person makes in his or her lifetime. It involves issues of property rights, including various encumbrances attached to the property as well as limitations imposed by city planning bodies.

In that respect, buying a home has the potential to be a minefield. Most of the time it can be navigated successfully — if there are no problems with the buyer, the seller or the property itself. There are also new laws that have recently come into force in the residential real estate sector to consider. It can all easily blow up, even after you think you are safe.

Because of the complexity and huge sums of money involved, the housing market is a magnet for dubious operators and the origin of many a malpractice suit against lawyers. It’s not enough to undertake a pro forma inspection of the property registry or files at city hall to establish with certainty that the property you are buying is safe and sound.

With the help of real estate lawyers TheMarker has idenitified five questions prospective homebuyers should be asking themselves before they sign a contract.

Itzik Ben-Malki

1. Are there debts attached to the property?

A case in Tel Aviv that ended up in litigation after the buyers failed to get an exclusion letter (michtav hachraga) from the sellers’ bank. This left the buyers with encumbrances against them in connection with a mortgage. The bank ultimately foreclosed on the mortgage and the buyers were left with neither the property nor the money.

So what is this exclusion letter and why is it important to obtain?

Residential building projects are generally financed by a general contractor through bank loans, which include a mortgage on the land and financing the construction. In such cases, the buyer needs to make sure he or she is getting their home free and clear of any of these so-called encumbrances, generally by getting a letter of exclusion from the bank. The letter states that from the moment the buyer takes title, the bank mortgage does not apply to the unit being sold. The buyer should obtain the letter before making any payment toward the purchase price, warns lawyer Tal Benenson.

More than just a mortgage may stand between a buyer and his future home, however. Benenson recommends examining all prior transactions relating to the property and whether all of the seller’s obligations have been fulfilled, including first and foremost improvement taxes owed by the seller. When the buyer goes to register the property in his name, he will be asked to provide confirmation that all of the taxes have also been paid. That in effect is how the government makes sure that it gets its share. Benenson therefore suggests that a sum be left in trust with a lawyer until it’s confirmed that everyone has paid up.

2. Who owns the apartment that is up for sale?

Last August, a panel of justices of the Supreme Court ruled that buyers who had fallen victim to a scam and bought an apartment based on falsified documents could not take possession of it and would lose their money. The apartment belonged to Shlomo Mintz, the world renown violinist, who inherited it from his parents. Mintz hadn’t been living in the Holon apartment, but in 2004 to his surprise, he discovered that it had been sold by someone who had impersonated him.

The buyer, Mordechai Bohadana, who bought it for less than the market price, turned around and sold it to a couple, Mordechai and Shoshana Kazayev. Mintz filed a complaint with the police, but the seller who impersonated him could not be found. Mintz then filed suit to get the apartment back.

In late 2012, Tel Aviv District Court Judge Drora Pilpel ruled that the transaction was void and that Mintz would take the apartment back. The Kazayevs appealed the case to the Supreme Court, claiming that they had relied in good faith on the property registry, but the three Supreme Court justices denied the appeal. Justice Elyakim Rubinstein ruled that the purchase of real estate based on forged documents could not be accorded any legal validity.

Bohadana had been listed as the owner on the land registry only several weeks after he sold the property to the Kazayevs, although there was a notation in the record in favor of Bohadana’s purchase earlier than that. Rubinstein said that if the sale to the Kazayevs had been carried out after Bohadana’s ownership interest had been fully recorded, the Kazayevs’ legal standing would have been different and they could have asserted that they were relying on the land registry records. Reliance on a notation in the record, however, was not sufficient, Justice Rubinstein ruled.

Special care must be exercised, it should be noted, if a transaction involves the sale of property by owners who are abroad who provide a power of attorney to have the transaction proceed.

3. What is Tama 38 and what are its pitfalls?

National Building Plan 38, or Tama 38 as it is known by its Hebrew acronym, includes a provision through which apartment owners in a building can get together and in effect sell rights to a contractor who builds additional apartments, usually on the roof, in exchange for making improvements to the building, including enforcing it against earthquakes. Attorney Avi Lalum, who specializes in urban renewal projects, says buying one of the new apartments in a Tama 38 framework involves a unique relationship that includes not just buyer and seller but also the other apartment owners.

What happens, for example, if the other owners have a complaint against the contractor? Lalum asks. There are lawyers who simply review the builder’s contract with the buyer of the new unit, but the agreement between the developer and the other longtime owners in the building should also be reviewed.

On the other hand, David Lam, a lawyer who specializes in real estate, says Tama 38 projects generally don’t require the contractor to take out a bank loan. The contractor finances the improvements to the building himself and sells the new units and a notation is made in the land registry in favor of future buyers.

Lam is now representing a group of apartment owners who claim that the contractor breached his Tama 38 obligations and are seeking to rescind the agreement. “In such a case, the losers are the apartment purchasers who put down money. Not only did the project come to a halt, but no one can promise them that they will see their money back,” Lam notes. “You need to remember that buying an apartment through Tama is very risky. The lawyer who represents buyers in such circumstances must be careful to ensure that the contract between the developer and the [existing] owners includes a provision that if the contract is rescinded, the apartment owners will complete the construction. Otherwise, the buyers can find themselves in a problematic situation.”

4. What if there is a discrepancy between the specifications of the apartment and the building permit?

“Unfortunately, many properties in Israel are built at variance with their building permits,“ says Benenson, who points to an extreme example in the case of a client he represented who bought a 400-square-meter (4,300 square foot) luxury home in Herzliya Pituah for 10 million shekels ($2.5 million).

“When we compared the building permit for the property, we were surprised to discover that half of the house was built without a permit. As a result, the deal fell apart and, of course, the seller accused the lawyers of souring things. Within a short time, he found another buyer whom we did not represent, who bought the house without checking and to this day is sorry he made the purchase,” recalls Beneson.

5. Do I need to check the building’s bylaws before buying an apartment?

Yes, you do. Apartment bylaws regulate relations between individual apartment owners and the rights and obligations of the owners of the building as a whole. It is usually the lawyer for the developer who built the building who writes and files the bylaws. In the absence of a specific document on file, the building is regulated by the terms of the law on the subject.

“It’s very important to review the apartment bylaws, especially when buying an apartment second hand,” Lalum notes. Such an examination, he says, is fundamental because sometimes, for example, you might fnd that construction rights are attached to a specific apartment unit. In such a case, a Tama 38 project would run counter to those rights.

Lam notes another common mistake made by apartment purchasers. Generally, he says, buyers think that if they are on the top floor of the building, they own the roof, but the bylaws would clarify whether they have the right to build upward. “I have a client who wanted to buy a 240-square-meter top-floor apartment, but when we checked the bylaws, it turned out that the right to build on the roof belonged to the owner of another apartment entirely,” Lam says.