In 1997, Scott, a US citizen, bought a luxury penthouse with a floor area of approximately 100 sq.m. in one of the high-end areas of Jerusalem. Some of the time, the property was used as the family's residence, and the rest of the time – it served as an investment property and was rented to tenants.
Approximately 10 years after the purchase, Scott decided to sell his rights in the property. He received an offer that would have netted him a handsome profit, and the parties commenced negotiations. Simultaneously, the potential buyer's lawyer conducted several preliminary examinations, and found that only 25 sq.m. of the property had been built pursuant to lawful building permits, while most of the property was built in violation of the permits.
Construction in violation of a valid building permit is a criminal violation in Israel. In addition to demolition of the unauthorized construction, penalties may include heavy fines and even imprisonment. Furthermore, the government authorities may initiate criminal proceedings against the owners, even if they were not the ones who performed the violation and merely purchased a property that violated the permit.
The potential buyer understandably withdrew his offer. For several years, Scott was unable to find anyone who would purchase the property as is. He tried unsuccessfully to obtain permits for those parts of the property that violated the building permit, and after two years sued the sellers and his own lawyer for more than NIS 1 million (approximately $250,000 in 2009). Only in 2017, some 10 years after the problem first came to light, Scott's claim was granted and he was awarded the damages he had claimed. This delay lost Scott 10 years of appreciation in the value of his property, while the Israeli market raced ahead and property values rose by more than 70%.
How is it possible that Scott, who was represented by a lawyer when he purchased the property, did not know the status of the property and paid a full price as if all lawful permits had been granted? Why did it take 10 years from purchase, and a potential buyer's lawyer, to first find out? Unfortunately, the answer is very simple. In Israel, unlike the United States, there is no strict procedure forcing the parties, as part of a transaction, to conduct examinations about the status of the property. In fact, the type and scope of examinations carried out depend only on the lawyers selected by the party and their skills.
As a rule, in the United States, only after the parties sign the sale agreement and the buyer deposits an advance, the buyer begins to investigate the physical, legal and planning status of the property. Only once the investigation has deemed that the property is in order, with no debts or liens, is the consideration released to the seller.
The underlying rationale is clear – until an agreement is executed, the buyer and seller are not bound toward one another, and may withdraw their offers. The seller may receive a higher bid, terminate negotiations and accept the new bid, and the buyer can find another property, withdraw the offer and cause the seller (who may have foregone other offers in the meantime) serious damages. The parties therefore execute an agreement that precludes them from withdrawing from their understandings. Only then, once they are mutually committed, is the buyer given time to perform all necessary investigations: ascertaining that the seller indeed has good title, checking that the property was built in accordance with required permits, and discovering material defects, liens or violations. Some of these examinations are performed by the buyer's lawyer, and some through a title company.
The title company makes sure that title to the property is legitimate and clear, such that the purchaser can be certain that once the transaction closes and he has paid the consideration in full, he can be recognized as the lawful owner. In order to assure title validity, the title company conducts a thorough search through the records of the property. The title company ascertains that the seller is indeed the lawful holder of the deed and that there is no third party who may claim full or partial rights to the property.
As part of this search, the title company checks for outstanding mortgages, liens, judgments or unpaid taxes and for any restrictions, easements, leasehold rights or any other matter that may adversely affect the title. The title company also checks whether neighbors or others are trespassing or squatting or whether any person has been given a right of use that is liable to adversely affect the title.
Once title has been cleared, the title company issues an insurance policy that protects lenders and owners against claims or legal costs they may incur in connection with title-related disputes.
There are no title companies in Israel. Moreover, contrary to the standard course of dealing in the US, the legal approach here is that the buyer should perform all investigations before the purchase agreement has been signed. The agreement is binding only upon signing. Most of the payments are transferred directly to the seller, shortly after execution, and only certain amounts are held in trust against specific payments that the seller must make (which if not paid would preclude registration of title in the buyer's name).
Since in Israel too, either party may withdraw until a binding agreement has been signed, and since there are no title companies in Israel, it falls upon the lawyers to perform the preliminary examinations.
Only some of these examinations are legal, and since they involve several authorities and must be performed within a very short time, not all lawyers strictly perform all of them.
The legal approach in Israel is that the buyer should perform all investigations before the purchase agreement has been signed.
A summary of the main investigations that need to be carried out ahead of signing an agreement for the purchase of real estate property in Israel is provided below. This is not an exhaustive list, and a lawyer who specializes in real estate should be consulted in order to make sure that the necessary examinations are conducted as required for that type of property.
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