Buying an apartment as part of a combination transaction

Doron Afik, Esq.
July 22, 2015

A person who purchases a newly built apartment is exposed to risks associated with the contractor and it is important to be represented in such a case by an independent lawyer and not to count on the contractor's lawyer to take care of the purchaser's interests. The risks are substantially larger and join additional risks related to the land owner when the project in question is part of a combination transaction.

A landowner who wishes to develop a project on the land will face large funding, resources and risks. One path to avoid such barriers is known as a "combination transaction," a transaction in which the landowner transacts with a developer that receives units in the project in exchange for the service of developing the project. Ultimately both the developer and the landowner will have project units for sale and in many cases such units are even sold by the same team.

Purchasing a yet to be built apartment is by itself more complex than purchasing an existing apartment, especially when the purchase is made before building permits are obtains and prior to commencement of construction. When a person purchases an apartment built as part of a combination transaction, in addition to the usual risks to be handled the purchaser's lawyer needs to also careful examine the contractual relationship between the developer and the landowner to ensure that the agreements between them do not create restrictions affecting the purchased property. Sometimes a legal difference may exist between a unit purchased from the developer and a unit purchased from the landowner, even though the units themselves may be almost identical in their specifications.

The relationship between the developer and the landowner may also affect the certainty of obtaining bank financing for the project, the ability to execute the project and the ability to timely receive the built unit. For example, a dispute between the developer and the landowner could cause the project to fail even though units were already sold and it is important to ensure that the agreements between the parties are not likely to cause such a situation. In addition, it is important to ensure that the sales agreement refers not only to the responsibility of the seller to his own actions but also the actions or omissions of the owner of the land, if the seller is a developer, and the developer, if the seller is the owner of the land.

In conclusion, purchasing a yet to be built apartment is a much more complicated transaction than purchasing a "second hand" apartment. The ability to negotiate may in many cases be much lower, but the set of agreements is much more complex, one cannot anticipate many issues and the completion of the transaction and receipt of the apartment is usually far into the future (sometimes several years) and involves many factors other than the seller (contractors, subcontractors, suppliers of equipment and services and often also a financing bank). When a combination transaction is involved another factor is the landowner and the relationship between the landowner and the developer. Thus, it is most important to be accompanied by a lawyer who specializes in this area and can manage the legal negotiations vis-à-vis the lawyer of the developer or landowner and make sure not only the suitability of the transaction to the purchaser and the purchaser's expectations but also the minimizing of the legal risks involved.