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Article by Yair Alon, Adv. in the Jerusalem Post on Purchasing an Apartment in Israel

July 3, 2015
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Purchasing an apartment is usually the largest and more complex transactions carried out by a new immigrant to Israel ("Oleh") during his lifetime, in which such Oleh invest large funds earned over a long period of time or borrowed for a long time to come. In the acquisition the purchaser is exposed to legally, economically and to many other risks arising from the nature of the transaction and its scope. These important issues require examination and preliminary thought, from the negotiations step to the drafting of the contract. In this articles we will try and discuss some of the issues to be during the process of purchasing an apartment in Israel.

Negotiation and Signing a Memorandum of Understanding

In Israel a land transaction requires a written document as a condition for its validity. In some cases, a memorandum of understanding signed during the process of negotiation may bind the parties to all intents and purposes, even if the parties did not reach an elaborated agreement. A binding memorandum may also start the clock ticking for dates in which tax payments resulting from the transaction are due. Therefore, it is recommended not to be tempted to sign a binding memorandum of understanding and in any case, to obtain legal advice in advance.

Checking the Legal Status Of The Property

It is important to have a legal counsel first check the legal status of the purchased property, including by obtaining information from the Land Registry. The examination will not only ensure that the seller has the legal rights in the sold asset and is not a fraud but also to prepare the legal actions required for the transaction. For example, many properties in Israel are owned by the State and the "owner" of the assets are in fact holding a long term lease with the State, which changes the legal structure of the transaction. Many houses and apartments were built by entrepreneurs and are yet to be registered at the land registry (a process that may take years) and then the registry is at the construction company or the lawyer of the builder. Here too it is important to know these facts in advance and legally prepare to the transaction accordingly. When the seller's rights are not registered with the land registry it is important to examine tax approvals for previous transactions and sometimes to even review prior agreements on the property and any other data that can prove the rights in the asset. As part of the preliminary examination we will also check whether the property is subject to third parties rights (such as a mortgages or other pledges), liens or any cautionary notes at the land registry. It is also advisable to check data on the seller, such as whether there are liens registered at the Liens Registry or (in case of a seller company) at the Companies Registrar, which may prevent transfer of the rights in asset.

Examination of the Physical Condition of the Property and its Environment

It is important to physically visit the apartment and the surrounding area and examine it. If the apartment is purchase "remotely" (e.g. when the purchase is outside of Israel) it is important that a representative of the purchaser will make several visits to the apartment, including during the daytime, to ensure that it corresponds with the presentations made, is in good maintenance (not to hesitate to turn on faucets, light switches etc.) and to check also the apartment building, the neighbors, the neighborhood and its cleanliness and condition (Are there any nearby cellular antennas, are there noise nuisances, traffic jams during rush hour, parking shortage, etc.).

Checking the Planning Status of the Property

It is important that the purchaser, or better yet, a land appraiser, will visit the Department of Engineering and the local Committee for Planning and Construction to review the property's portfolio and retrieve data as to the asset. It is also important to check if there are any illegal construction works, demolition or other orders or if there are any legal proceedings of any kind with respect to the property. Legal violations may not only prevent transfer of the ownership, but in some cases also create personal liability of the purchaser.

Escrow Mechanisms for the Purchase Funds

Purchasing an apartment requires a set of legal actions in parallel to the transfer of the payment and it is impossible to take all actions at the same time. To ensure the purchaser's money and that that seller meets all its obligations, it is important that the purchase funds will be held in escrow and will be released to the seller only upon the satisfaction of certain predefined steps. For example, one can set that the first payment will be transferred to the seller only after registration of a cautionary note in favor of the purchaser at the land registry and that the final payment will be paid subject to receipt of all documents required for the transfer of rights in the asset to the name of the purchaser. If all documents are not timely received (especially certificates attesting payment of taxes and the approval of the local authority regarding the lack of obligations for the property, such as debt for betterment levy or property municipal tax), certain amount will remain in escrow to ensure the payment of all applicable taxes, as such payment will be a required in order to register the transfer of ownership.

Representation by an Attorney

In real estate transactions it is very important to be represented by an experienced attorney which has done enough transactions prior to this one and to ensure that the attorney is holding a proper malpractice insurance coverage. Many lawyers hold insurance policies that do not cover real estate transactions or its coverage is not sufficient to cover the cost of the apartment. Because the seller and the purchaser often have conflicting interests, it is advisable that each be represented by an attorney for each side. It is important that the attorney be involved in the transaction from its commencement as wrong actions at the beginning of a transaction may cause damage that it will be very hard to later correct.

It should be emphasized that this is but a partial list of issues related to purchase of an apartment in Israel. This general review is not a legal advice. Each transaction is unique and one should obtain legal advice.