Seller Beware

A court has ruled that receivers selling property must reveal more information than they'd like to.

Unpleasant surprises may lurk in property bought from receivers selling on behalf of bankrupt owners. If confronted, the receiver will most likely shrug that the property was sold "as is," meaning it's the buyer's responsibility to check the facts.

By the nature of the beast, property owners or their receivers won't go out of their way to point out flaws that could lower their chances of selling an asset, or that could lower its price. But a recent ruling by the Rishon Letzion Magistrate's Court limits the amount of information property owners can conceal when seeking to sell.

The case in question involved a plot of land on Rishon Letzion's Hakukia Street that had multiple owners. The site was zoned for the construction of a shopping center.

The owners weren't bankrupt but wanted to dissolve their partnership. When real estate assets are in question, dissolving a partnership requires a court's participation. The court appoints a receiver to handle the sale of the property.

In this case, the receiver published a tender offering the property "as is" and fielded about 10 bids, including one from a company called Ofroni Holdings.

As usual in "as is" cases, it's the bidder's responsibility to inspect planning for the area and any rights pertaining to the asset. In the end, Ofroni Holdings won with an offer of NIS 15 million. Soon afterwards, Ofroni discovered that for years the site's owners had been waging a battle with the Rishon Letzion planning authorities.

The upshot was that while the receiver was motioning the court to approve the sale to Ofroni, the company was motioning the court to void the tender on the grounds that it didn't know about certain planning issues.

Through Noam Ronen of law firm Gornitzky & Co., Ofroni argued that while a buyer can investigate a site's plans and registered rights, the buyer can't possibly find out about related legal proceedings. This information isn't in the public domain, the company argued.

For instance, it turned out that the previous owners and city hall were embroiled in no less than seven disputes involving planning for the site. Thus, it was incumbent on the sellers and the receiver to disclose these facts, which - claimed Ofroni - it could not discover for itself.

The receiver claimed that the legal processes did not affect the asset's pricing. Also, the owners claimed that these legal steps weren't taking place in some dank cellar but in public proceedings that Ofroni could have found out about if it had tried.

Judge Iris Soroker wasn't impressed. The land's owners should have told the buyer about the outstanding issues, she ruled. And it should have done so before the pricing stage.

"Even though the buyer could have investigated for itself, the burden of active disclosure belongs to the seller, as the one in possession of the information," Soroker wrote. The information would have revealed the planning authorities' position on licensing and permits, which is important information, she wrote.

Contract law, the principle of good faith, and the laws governing tenders and pricing require the owners to disclose material information, the judge summed up. She voided the tender award to Ofroni and ordered the receiver to start the process from scratch.

The conclusion is that even when a property is being sold "as is" and the responsibility for discovering most information remains with potential buyers, there's crucial information that the sellers must disclose, like it or not.