Legal Updates

A sale agreement entered into for the purpose of obtaining a mortgage will not be deemed fictitious if the parties have de facto consummated it

June 23, 2022

Two business partners agreed among themselves that the one transfer his apartment to the other without consideration, even though the sale agreement stipulated that consideration was paid and additional consideration will be paid, so that the other will use the apartment as collateral for a loan for a joint venture of the partners and after the loan is repaid to the financing bank, the apartment will revert to the original owner. In practice, the original owner continued to use the apartment as if it was his own. Later, the other partner ran into financial difficulties, and one of his creditors recorded a lien on the rights to the apartment.

The Court held that the original owner is entitled to regain his rights in the apartment, regardless of the lien. Israeli law stipulates that a fictitious contract is void. However, there is a difference between a situation where behind the fictitious contract there is a hidden contract, which the parties intend to uphold, and which represents their true will and a situation where the parties are not interested in changing the legal situation and there is no such hidden contract. Here, the parties really intended to transfer the rights to the name of the purchaser for the purpose of obtaining the mortgage from the bank, reported the transaction to the tax authorities, and actually recorded the real estate in the name of the buyer. The agreement was not concluded in order to avoid paying the partner's debts to the creditors, no consideration was given for the agreement and the original owner continued to act as ןכ the apartment is his own. Therefore, the right of the original owner prevails over the creditor’s right and he is entitled to regain the rights אם the apartment