Are my payments protected when I purchase a home in Israel?

The Sales Law (5734-1974) establishes the obligation of a developer to protect the money that you pay him in case the building process and/or delivery does not reach its appropriate conclusion due to circumstances outside your control, such as bankruptcy or fraud on the part of the developer. According to the Law, a developer may not take more than 7% of the price of a new unit from you, unless your payments are protected via one of the methods specified below. 

Bank guarantee — the most common security

The most common way to secure funds is through a bank guarantee, also known as the Sales Law Guarantee. The developer grants you a bank guarantee, usually from the “accompanying” bank that has loaned the money for the project, and guarantees each payment that you make to the developer toward your new apartment, until the date of delivery. Accordingly, the larger the amount you pay, the greater the guarantee will be in order to protect the payments. Therefore, before signing any agreement, it is essential to ensure that the developer is committed to providing you with guarantees according to the Sales Law, and in line with the percentage of payment relative to the price of the apartment.

Exercising a bank guarantee

Scenarios that may lead to you exercising the guarantee are rare and include liquidation, receivership, or freezing of proceedings of the marketing or executing company of the project, or a judgment for an extreme delay in handing over possession of the apartment. On the other hand, “ordinary” delays in handing over possession of the apartment, construction defects in the apartment, or variations in actual construction compared to what was promised to you, do not constitute grounds for exercising the guarantee of the Sales Law. (In such cases, you would have to file a claim in a routine proceeding.) Either way, the exercise of a sales law guarantee is considered extreme, but if necessary, will be executed by the bank only after it has received a judgment instructing it to do so.

Alternative forms of collateral

While the bank guarantee is the most common mechanism to ensure that your payments are protected, it is not the only method. The law also allows a developer to purchase a policy in your favor in the amount of the monies paid, or by registering a he’arat azhara or “warning note” in your name – a legal action performed at the Land Registry Office (Tabu).