Legal Updates

Purchaser of a real estate asset is to pay an insolvent seller’s debt of betterment levy

April 11, 2018

A seller of an apartment entered bankruptcy proceedings and did not pay the betterment levy as agreed under the sale agreement. As a result, the local planning committee refused to issue a confirmation of payment, which is required for the registration of real estate rights.

The Supreme Court held that, considering legal policy reasons, the local planning committee should not be turned into an "active" creditor. On the other hand, the purchaser of a real estate asset is the efficient and cheap damage preventer because it can protect itself against insolvency of the seller by relatively simple and effective means such as: use of escrow or another mechanism that achieves similar results (such as payment by purchaser of seller’s debts by way of offsetting). In this case, the purchaser failed to take actions to ensure the fulfillment of the seller's undertaking, even though it was aware, upon drafting of the sale agreement, of the existence of the levies and the existing risk, because the amount deposited in the escrow was low.  In addition, after it took possession of the property, the purchaser remained silent for a long time, long before the seller entered bankruptcy proceedings, and did not act to transfer the rights of the property under its name. Thus, the purchaser must bear the payment of the betterment levy, and then it may file a debt claim as a creditor of the seller.