Buying from a developer
Sale Law guarantee: what it secures, and when purchasers discover they do not have one
A purchaser buying from a developer pays tens or hundreds of thousands of shekels for a property that does not yet exist. The law requires the developer to secure that money. The practical question is whether the security has actually been issued, and exactly what it covers.
Why is security needed at all?
In an ordinary sale the purchaser receives an existing property and registers a cautionary note in his favour. Buying from a developer is different: the purchaser pays according to the progress of construction, sometimes years before the apartment exists, without holding any registered right. If the developer runs into difficulties, the purchaser becomes an ordinary creditor at the back of a long queue. The Sale (Apartments) (Assurance of Investments of Purchasers of Apartments) Law was designed precisely to prevent that outcome.
Which forms of security does the law recognise?
The law lists several possible forms of security, the most common of which are:
- Bank guarantee. The strongest and most common form of security. The bank undertakes to repay the purchaser the money paid if the apartment is not delivered.
- Insurance policy. An insurance company insures the repayment of the money. Its cover and exclusions need to be read carefully.
- Charge or cautionary note. Registration in the purchaser's favour against the land or the apartment, on the conditions laid down by law.
- Transfer of ownership. Transfer of the right into the purchaser's name at an early stage, a mechanism less common in large projects.
When does the obligation to provide security arise?
The law prohibits the seller from receiving from the purchaser more than a certain percentage of the price, about seven per cent, unless the money has been secured by one of the forms of security. In practice, this means that the first payment may be made without security, but every payment beyond that requires a guarantee or equivalent security to be issued. This is a provision intended to protect the purchaser, and the contract cannot derogate from it.
What the guarantee covers, and what it does not
The guarantee secures the repayment of money paid on account of the price of the apartment on the occurrence of defined events, chiefly where the apartment is not delivered. It does not guarantee the quality of construction, does not compensate for late delivery, and does not necessarily cover payments that are not part of the price of the apartment, such as additions and changes ordered directly from a subcontractor, or payments made other than through the escrow account. This is a gap that many purchasers discover too late.
The escrow account is the heart of the matter
In bank-financed projects, a dedicated account is maintained into which all the purchasers' payments are made and from which the bank finances the construction. A guarantee is issued against every payment that enters the escrow account. This gives rise to the simplest rule in a developer transaction: pay only by means of the payment vouchers into the escrow account. A payment into any other account, even if it is presented as technical or temporary, takes the money out of the mechanism that is supposed to protect it.
Warning signs that justify stopping
- A request to pay into an account other than the escrow account shown on the vouchers
- Repeated delay in issuing the guarantee after payment has already been made
- A guarantee for an amount lower than the amount actually paid
- Pressure to pay ahead of the contractual payment schedule, before an agreed milestone
- A project without bank financing, or a situation in which the permit has not yet been obtained
- A demand to sign a waiver or an acknowledgement of receipt before the guarantee is in your hands
What do you do when the guarantee is not issued?
The first step is to stop payments and write to the developer and the financing bank with a detailed demand that the security be issued. Written documentation is critical: in legal proceedings, the difference between a purchaser who documented repeated demands and one who made do with phone calls is substantial. At the same time, the question of breach of contract and the remedies available to the purchaser is examined, including lawfully withholding payments.
And what happens at the end, when the apartment is delivered
The guarantees do not remain in place forever. They are replaced by another form of security and ultimately released, usually against delivery of possession and registration of the rights or of a cautionary note in the purchaser's favour. It is important not to return the guarantee documents to the developer before the replacement is actually in place. This is a stage at which purchasers tend to be careless, out of relief that the project is over, and it is precisely where care is needed.
Questions and answers
The developer is asking me to pay into a different account because of a technical problem. What should I do?
Do not pay into any account other than the escrow account shown on the payment vouchers. Such a payment may not be backed by a guarantee. Demand a valid voucher and document the request in writing.
I paid for upgrades and changes. Are they covered by the guarantee?
Not necessarily. Payments for changes and additions, particularly those paid directly to a subcontractor rather than through the escrow account, may not be covered by the security. Check this in advance and prefer to pay through the secured route.
What is the difference between a bank guarantee and an insurance policy?
Both are forms of security recognised by law, but the conditions for enforcement, the exclusions and the scope of cover differ. A bank guarantee is generally regarded as simpler to enforce. With a policy, read the exclusions and the claims mechanism carefully.
Not sure the deal is safe? Let's start with a conversation
In an initial conversation we will go over the property, the other party and the payment schedule, and tell you what needs to be checked before you sign.