Buying “On Paper” from a Contractor – 7 Important Points to Know


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By
Gad Dishi Adv. Esq.

Buying an already existing apartment in Israel can be an ominous project. Buying a yet-to-be-built apartment, however, poses an even greater challenge to the prospective buyer. The uncertainties inherent in acquiring an unknown commodity are great and the purpose of this article is to raise the awareness of prospective buyers to relevant issues and try to minimize uncertainties. Needless to say, this article cannot cover the entire gamut of issues involved when dealing with a contractor and no one should undertake such an endeavor without seeking experienced, professional legal advice for their particular situation.
Below are seven major points to be aware of when buying an apartment “on paper”.
1. Bank Guarantees as Per Law
            The Israeli government passed basic legislation in order to establish order in the building industry and protect citizen’s investments towards acquiring their own home. As the Israeli real estate market has been and continues to be a driving force in the economy, it remains a mainstream investment for many Israeli families and foreign investors. The law, “Hok Hamekher (Dirot) (Havtachat hashkaot shel Rokhshei Dirot)”, The Law of Sale (Houses)(Securing Investments of Home Purchasers), sets out the requirement for contractors to provide bank guarantees or insurance policies against the monies paid on account of a to-be-built apartment. The regulations promulgated pursuant to this law set out the requirement to provide such guarantees from payment of 7% of the purchase price and upwards. A contractor who fails to issue the required guarantee is not entitled to further payments regardless of what it says in the contract. Instead, other regulations set out how much – in percentages of the contract price – a builder is entitled to receive based on the actual progress of the building. (This does not detract from the contractor’s violation of law.)
Yet, as victims of the corruption at Heftzibah learned the hard way, even an undertaking by a major building corporation to supply bank guarantees as required by law, in and of itself, does not ensure safety for the investment being made. Purchasers need to be aware that most building projects are underwritten by a bank or other lending institution. The latter encumbers the property in their favor to ensure the funds loaned to the contractor are repaid. This encumbrance includes all rights to monies the contractor is entitled to receive by contract with any purchaser. The only way the bank or lending institution releases the purchaser’s property from their lien is to know that all monies paid as per contract are deposited in the special bank account accompanying the project. In the case of Heftzbah, company representatives instructed clients to pay into a different bank account. The sad result was that even though the purchasers made a payment as per contract to the builder, the lending institution did not receive the monies owed and continued to hold a lien against the property until the purchasers basically paid twice for the same apartment.
2. Warranties
An earlier law, entitled simply Hok Hamekher (Dirot) (The Law of the Sale (Houses)) sets out the basic threshold for contractor warranty and liability regarding major aspects of the new construction. The following is a partial listing from the appendix to the law:
  • Piping (including piping for heating and rain-gutters): 2 years
  • Water seepage in the roof, the walls and the shelter (mamad) – 3 years
  • Machinery, Engines, water heaters – 3 years
  • Peeling of coverings in stairwell – 3 years
  • Sinking of flooring on ground level – 3 years
  • Sinking of flooring in parking areas, sidewalks, pathways in the area of the building – 3 years
  • Cracks passing through the walls and the ceilings – 5 years  
  • Noticeable Peeling in external coverings – 7 years
  • Any non-conformity which is not a fundamental non-conformity – 1 year
            The last mentioned item, any non-conformity which is not a fundamental non-conformity, has the shortest time limit of only one year. By law, purchasers need to send the contractor notice of the non-conformity. Industry practice is that all repairs required to be made by the contractor are set out in a letter mailed by registered mail to the contractor’s official office as set out in the contract before the year period lapses. In turn, the contractor consolidates all the repairs in any particular project at about the end of the first year from when the project was completed and has a crew of workers attend to all repairs simultaneously. Therefore, purchasers need to understand that unless there is a pressing need for an immediate repair, the contractor will probably only be coming around to fix things at the end of the year.   
3. Applicability of the Law in Judea and Samaria
When purchasing a home in Judea and Samaria, many contractors will try to avoid providing the required bank guarantees and warranties as set out by law. In contrast, there exists case law to support the view that the abovementioned laws do indeed apply to these areas. However, in order to avoid the need to litigate these points, one should negotiate to contractually include them in the agreement explicitly. If one encounters resistance, at least one knows where they stand and should rethink negotiating price or the worthwhileness of the entire endeavor to reflect the increased risk that the builder is not willing to act in accordance with these laws.
Also worth pointing out is that even the willingness to provide bank guarantees as set out by law or an undertaking to fulfill the requirements as set out in Hok Hamekher (Dirot) (Havtachat hashkaot shel Rokhshei Dirot)”, The Law of Sale (Houses)(Securing Investments of Home Purchasers), does not mean that the contractor is willingly assuming the obligations of warranty and liability as set out in Hok Hamekher (Dirot) (The Law of the Sale (Houses)). The two issues are governed by different laws and need to be mentioned independently.
4. The Technical Specifications – “The Mifrat
By law, the contractor must attach to each contract a list of technical specifications of items included in the price of the unit to be built. The technical specifications, the mifrat, is required to take a standard form which will allow purchasers to compare apples with apples when shopping for a unit “on paper”. In actuality, I have met few laypersons who find themselves at home reviewing a mifrat and contractors are notorious for promising things through the sales office that never make it into the official mifrat. The result is that unless the final signed mifrat attached to your contract includes what was promised to you, you will need to pay extra for it. Therefore, it is highly advisable to carefully review the mifrat and understand what each item means. It is legitimate to ask to see an actual sample of the type of door or window, etc. referred to in the mifrat. When doing so, make sure that what they are showing you bears the same model and style number as listed in the mifrat.
Some people erroneously rely upon seeing the model apartment in the building used for promotional purposes. It is not unusual for the sample apartment to include certain upgrades you may need to pay extra for. This practice is a legitimate one if the contractor wants to demonstrate the possibilities a purchaser can do with their unit and informs them which are the things that constitute an upgrade from the standard mifrat.
Do not rely on the fact that you know someone who already bought in the same project and told you that such and such was included in the mifrat. The mifrat for each apartment can be different and is subject to the negotiation of each buyer.
5. Date of Delivery – Taking Possession
At the time of signing a contract to buy a property “on paper”, the contractor/developer/sales office are all trained to present a very rosy picture of the projected timeline to completion. However, even with the best of intentions, the building process is a dynamic one and various factors can set back work schedules for days or months at a time. A closure on Arab workers from Judea and Samaria, for companies relying on this work force, is a source of potential delay. When you interview your builder you should ascertain the percentage of these types of workers in their workforce to properly gauge the risk of being delayed.
A delay in possession translates into a need to have alternative housing for that additional time. This can result in a need to move twice, extend rental contracts, delay sale of an existing home or fixing a later date for vacating premises of either a rental or an existing home being sold. These matters can cost money or cause serious contractual issues with the purchaser of your current home. Therefore, it is vital that the contract provide for a monthly penalty for each month late that is sufficient to cover anticipated costs.   
Additionally, purchasers should be wary of promises that the apartment will be ready “in two years”. Usually, purchasers may be told that the unit will be ready in a year and a half but “we put two years in the contract just to be safe and cover ourselves”. While seemingly open and honest, these two years may not be two years at all. When do these two years begin? Do they begin from the time of signing the contract or from a different event such as getting an approved building permit on final plans for the entire project? Getting a building permit for the entire project can easily add six months or more to your waiting period.
Furthermore, it is already industry standard that the time to possession is listed in the contract in one section while in a later section the contractor allows himself an additional 2-4 months grace period without penalty. In essence, a “two year” timeframe to possession, when these two years begin with the obtaining of a still needed permit, and along with the 2-4 months grace period, can mean that you are really looking at something closer to three years. It may not be something you can contractually avoid but it is utterly important for proper financial planning and making decisions about where to live. It may also affect your ability or willingness to pay the asked purchased price.
6. Changes
Another area where contractors seek to make money and relax the need to complete the project quickly is making changes from the standard unit design and mifrat. Contractors usually reserve the right to decide whether they will make changes during construction, allow subcontractors to work simultaneously side-by-side or insist that all changes wait until after possession is taken. This control poses the possible danger that the contractor may gouge prices for changes or threaten to withhold approval until after possession when it may cost even more to install. For example, installing a central air conditioning unit not included in the mifrat. Installing it while the floors, walls and ceilings are all exposed is much simpler and cheaper than needing to install it when the unit is complete. Knowing this, the contractor may demand an extraordinarily high payment for installing the unit with exposed walls, etc. but just a bit less of what it would cost to install after the unit is complete. In essence, the contractor seeks to benefit from the savings that should accrue to the purchaser.
In order to remedy this pitfall, one can attempt to negotiate a benchmark for pricing changes such as the “mifrat dekel” or other price list. Contactors are usually vehemently opposed to such restrictions but it is worth negotiating some set of rules regarding pricing changes.
Changes also have an indirect cost which people usually forget to factor in – time. Once a change is accepted by the contractor, the contractor adds time to the contractual date set to take possession. For example, if someone upgrades a sink, the contractor may add three weeks for that change. It seems ridiculous yet, in some situations, there is some logic to this madness. If the purchaser orders a sink that is not in stock and needs to arrive from Italy and this occurs when the kitchen is being installed and delays completion, it may be that three weeks is justified. Purchasers need to be cautious to only agree to changes after factoring in the time element with each change. It may well be that some changes, while affordable in terms of price to the contractor, cost too much in terms of time. Those three weeks for the upgraded sink translates into another month of rent or of lost penalty from the contractor for being late. It probably is better to install the standard sink and upgrade after taking possession.
This point also ties in to the earlier discussion on the timeline towards taking possession. The “two year” timeline has just been made open ended by introducing time delays resulting from changes.  
7. Zoning and Rights of Development
While true of all real estate transactions, one needs to pay special attention to applicable zoning ordinances and rights of development. Contractors may set out early in the life of the project to attract buyers and collect initial payments in order to demonstrate market demand convincingly to the financial institution about to underwrite the project. In some cases, the proposed project may be viable only after a rezoning of the area is approved or if the contractor wins a bid to develop the property from the Lands Authority. Such situations demand extra vigilance as the timeline is not only longer but may never come to fruition. Contractual provisions need to be made locking the parties to their financial positions for a limited time in anticipation of milestone events. The timeline can be extended as those milestones are met. As opposed to the other concerns listed above, this item actually touches on the core rights of ownership and this type of transaction constitutes a much more speculative choice of investment.
Having explored these issues briefly, it should be reiterated that these are but highlights of the process. Contracts with contractors usually arrive as a “book” and the mifrat may be its own additional booklet of 10 pages or more of various charts, etc. that require thorough review. Insisting on having qualified legal representation during this process can certainly help avoid pitfalls and their associated costs.
 
About the Author
The writer is a real estate attorney, admitted to the New York and Israeli Bar Associations and holds a B.S. in Finance. Comments can be addressed to Adv. Dishi at 02-9932430 02-9932430  or via e-mail.

E-mail at: dishi@netvision.net.il

 



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