Registration of a Cautionary Note

Yair Aloni, Adv.
November 11, 2015

A real estate transaction holds many risks. While the purchaser is often required to pay considerable sums to the seller as early as the execution of the contract and purchaser is left with no real security that the transaction will complete and that the seller will not sell the property to another. Thus, one of the most important actions to be carried out immediately after execution of the contract is to record a cautionary note at the Israeli Land Registry Office (Known as, "Tabu") in favor of the purchaser.

Israeli law enables recording of a cautionary note on several enumerated rights: leasehold, borrowing, easement, preemption and mortgage. By recording a cautionary note one puts the public on notice of the transaction executed between the parties and thus reduce the possibility of the occurrence of "legal accidents" such as multiple sale transactions of the same property. Israeli case law teaches that in a case were contradictory transactions were made on the same property priority will be given to the purchaser who recorded a cautionary note. Failure to record a cautionary note by the first purchaser may be considered negligence or even mala fide because being the first he could have prevented the "legal accident" by simple and inexpensive measures.

A cautionary note also helps to ensure the rights of the purchaser from the seller’s creditors. For example, a lien imposed after registration of cautionary note will be decline by the Land Registrar who will avoid recording any action that contradicts the cautionary note.

It is important to note a cautionary note may not be registered in any case. For example, a recent Israeli Supreme Court case law teaches that a cautionary note may not be registered with regard to transfer of building rights in order to avoid misleading of potential purchaser. The Court held that despite the fact that such building rights are lawfully transferable, one cannot register a cautionary note because it does not fall under the limited rights in land that may be recorded. Nevertheless, the Court held that it is possible to change the recorded common scheme or the land partnership agreement (which are both available for recording at the Land Registry), in a manner that will reflect the transfer of the building rights.

There are cases where recording of rights of the land does not take place at the Land Registry but at the Israeli Land Authority’s registry (that owns most of the lands in Israel and leases them out) or even at a contractor who function as a private land registry, due to the fact that the building has not yet been registered at the Land Registry. In such cases, it may not be possible to record a cautionary note at the Land Registry but the transaction can be recorder at the Israeli Land Authority the contractor company (usually the contractor's legal firm), with similar effect.

Because often the purchaser is required to transfer considerable sums to the seller already at the time of execution of the contract, it is recommended to have a contract clause guaranteeing that the funds in respect of the first installment will be kept in escrow for the benefit of the seller until a cautionary note is recorded thus securing the funds in case of breach by the seller.

Real estate transactions are complex transactions and require great attention to many details. Therefore it is recommended each real estate transaction to be accompanied by a lawyer well acquainted with such field.