Protection of home purchasers in Israel

The Land Law 1969 is the main piece of legislation in Israel on the subject of real estate. One of the principles underlying this law is that rights in land must be registered. The declared purpose of the law is to cause the registration of all land in Israel in a Land Registry, which is to be current and indicative of all official Israeli land rights holders. One of the ways in which the law sets out to achieve this goal is by mandating that a transaction in immovable property shall be deemed to have been completed only once the property has been registered in the name of the transferee. A right that is not perfected by registration shall be a contractual rather than a property right, even if the parties' intention was to complete the transfer without registration. This state of affairs exposes Israeli home purchasers to a very high risk. This is because registration in the purchasers' name in most Israeli residential property transactions is effected only once possession has been transferred, and in most cases registration only takes place months and even years after that. As such, while a given home purchaser may have possession of specific property for a long time, until it is registered in his name, the property still belongs to the seller, and can ostensibly be attached by his creditors. Thus, if the seller becomes insolvent, the property in question would ostensibly be distributed amongst all his or her creditors rather than to the purchaser alone. This article examines the protection afforded by law to home purchasers that have already paid substantial amounts, but have not received the property as contracted. The second part of this article contemplates the principles underlying this law - the Sale Law (Apartments) (Securing the money of home purchasers) 1974. This discussion focuses mainly on the bank guarantee, which is the main instrument protecting purchasers' rights. The third part of this article briefly reviews the method of construction loans which is the mechanism by which most new buildings are built in Israel to date. This mechanism has been in use for about 20 years, from the mid 1980s. As we demonstrate later on, it is designed to protect the bank's loan to the developing company, but indirectly also protects the money of home purchasers. The fourth part of this article provides a short review of the collapse, in 2007, of the Heftziba Group, one of the largest developing companies in Israel. Its collapse and the flight from Israel of the controlling shareholder, left thousands of unfinished apartments in different stages of construction. We examine here whether the purchasers were adequately protected, and why the protections that were in place were of little use.