Buy-It In Israel

Making Payments to the Kablan: How to Protect Yourself Before Taking Possession of the Property

Posted on 09. Jan, 2010 by buyitinisrael in Buying On Paper, Legal Matters

By Joshua Portman, Adv.

Purchasing real estate in Israel is quite different and often more complex than making such an acquisition in most Western countries.  While this is true in second hand purchases, it is even more critical when it comes to buying an apartment from a contractor/developer or what we call in Israel, a “kablan.”

© iStockphoto.com/bluestocking

While there are many issues that come up when purchasing property in Israel “on paper”, the most serious issue to take into consideration prior to signing any contract with a kablan is how the purchaser’s payments are protected until possession and transfer of title into his/her name.  While the guaranteeing of payments has always been an issue for individuals purchasing from a kablan, the awareness of the general populace has increased due to the bankruptcy of the Heftsiba building company in August 2007, which due to the lack of guarantees left many people homeless and penniless.

By law, a kablan is required to provide his purchasers with securities against payments made on account of the apartment. The main form of security under the law is a “Sales Law  Guarantee”. While there are other forms of securities, in this forum I have chosen to concentrate on the most prevalent form which is a bank guarantee from the bank which provides the kablan with his construction loan. These bank guarantees secure the purchaser’s payments to the kablan though one must be aware that Sales Laws Guarantee only allows the buyer to cash in on the guarantee upon the occurrence of certain events. In other words, it is not an autonomous bank guarantee. The main event entitling the buyer to cash the guarantee is the bankruptcy of the kablan.

Under the old provisions of the “Sales Law”, prior to the Heftsiba incident, buyers of new homes in Israel were entitled to a guarantee on their money only after paying 15% of the consideration. Today, after paying only 7% of the purchase price, a purchaser is entitled to receive a bank guarantee on the funds actually paid.  Furthermore, prior to Heftsiba, the purchaser would pay the money directly to the kablan via a designated account listed in the contract, with no mechanism requiring the bank to provide the bank guarantees. Today, all payments are made directly to the bank guaranteeing the funds with legally mandated payment slips.  Under the terms of the new law, the guaranteeing bank has an obligation to provide the bank guarantee within 14 business days of a payment being deposited by way of the payment slip into the designated account. Any payments not made via this legally mandated method will not be guaranteed.  In the event that the kablan does not use a bank to finance the project in question, the pay slip method noted above may not be applicable.

Individuals buying real estate in Israel from a kablan cannot underestimate the importance of making all payments in this legally mandated method, since if the procedure is not followed the funds are not guaranteed. Also, individuals should ensure that their contract with the kablan only requires them to make subsequent payments on account of their purchase after having been provided with a guarantee for all prior payments.

Additionally, a purchaser should be aware that the bank providing the guarantees has a first priority charge against the property on which the apartment is constructed. This charge also applies to the purchaser’s apartment and, therefore, it is imperative that the buyer receive a letter from the guaranteeing bank shortly after signing the contract which states that if the buyer fulfills all his obligations under the terms of the purchase contract, the bank cannot foreclose against the purchaser’s apartment. This letter is called a “Michtav Hachraga” or a letter of exception from the charge.

In addition to the above, one can also protect their investment by asking the kablan to link payments to the progress of construction.  This method of payment is a good way to guarantee that payment is made against actual progress of the project.    There are several other important financial issues that a purchaser of a new home in Israel should be aware of prior to signing any contract with a kablan.  I shall address these issues in a future article.

While purchasing an apartment  in Israel from a kablan can seem somewhat intimidating, if one adopts the above methods and seeks proper legal and professional advice the purchaser will be given a high level of confidence in entering into the transaction.

The writer has been practicing law in Israel for  thirteen years and is a founding partner of Portman, Rachlin and Co. Law Offices.  He can be contacted by telephone +972-2-563-0224 or by email at josh@rplaw.co.il.

The contents of this article are designed to provide the reader with general information and not to serve as legal or other professional advice for a particular transaction. Readers are advised to obtain advice from qualified professionals prior to entering into any transaction.

© Copyright 2009-2010

Related Articles:

• Should I buy this home in Israel? Understanding the Builder’s Plans
• House Hunting in … Israel
• Buying a New Home in Israel: Why am I paying the Kablan more than the agreed price?
• The Hidden Costs of Buying a Home in Israel: Refiguring the Budget.
• 10 Factors to Consider when Buying into a New Project in Israel