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FIRST RELEASE: THE SALES LAW COMMISSIONER WARNS AGAINST SECURED ASSETS THAT ARE CAVEATS (Real Estate Center)

Following a precedent ruling of the district court on this subject, the Ministry of Housing warns: “Payments for the purchase of an apartment, when the secured asset is a caveat – should be only conducted in accordance with sales regulations”

19.11.19 | Yuval Nisani


A precedent ruling regarding caveats in favor of residents in a TAMA 38 in Ramat Gan has brought Ministry of Housing officials, headed by Commissioner of the Sales Law, Amit Grady to issue a special instruction to the public purchasing the apartments with regard to secured asset caveats against the purchase of the apartment. The bottom line is that Grady has instructed apartment buyers to make payments for the purchase of a new apartment solely in accordance with the sales regulations, to ensure that the payment reflects the project’s work progress in the field.

The letter was issued pursuant to the ruling of the Tel Aviv District Court regarding the TAMA 38/1 project (Addition and Fortification) at 7 Yehuda Hanasi St. in Ramat Gan, which was developed by the Derech Hate’ena company.  The company had come to an agreement with the residents regarding the execution of the work, including fortification and renovation of the building, expanding the existing apartments and more – within 15 months of the date that the building permits were obtained.  In exchange for its undertakings, the company received all the building rights in the joint property in the building; however, in actuality, the construction work was not completed and was completely halted at the beginning of 2016, after the company suffered economic difficulties.

Naturally, the residents filed a suit against the company with the District Court; and pursuant to this step, a special manager was assigned to the project, in order to execute it, because the building is currently partially renovated and is in poor condition.  The special manager got into the thick of things; and after thoroughly examining the project, he reached the decisive conclusion which he submitted to the court:  Only the waiving of the sales agreements signed between the company and the buyers and removing the caveats registered in favor of the tenants in the Land Registry Register will enable the project to resume construction.  The special manager explained that this step is necessary “due to all the aforesaid difficulties, and due to the fact that the project lacked bank financing in a manner that did not allow for its completion without receiving additional funding from the buyers,” as was written in the ruling.   The implication:  terminating the agreements signed between the residents and the developer, without any monetary refund to be transferred to the residents.

“The buyers decided to enter into an agreement with the company that undertook to build the apartments without bank financing.  The balance of the risks and rewards, as well as the interests of the parties, is expressed in the sales agreements and the  claims as to the damages to the buyers, without belittling them, do not merit a denial of the request.”

In this context, the special manager also mentioned that the buyers were the ones who chose to enter into a contractual agreement with the company in a purchase agreement for the construction of the project without bank financing, with all the risk that it entailed – and in so doing criticized their actions.  The court supported this position and wrote in its decision:  “I agree with the position of the special manager, whereby the buyers are the ones who chose to enter a contractual agreement with the company that undertook to build the apartments without bank financing.  The risk-reward ratio, as well the interests of the parties are expressed in the purchase agreements, and the claims as to the damages to the buyers, without belittling them, do not merit a denial of the request."

Accordingly, the Court authorized the special manager to waive the purchase agreements signed between the company and the buyers as onerous properties, in accordance with the provision of article 361 of the Companies Ordinance, and instructed the deletion of the caveats recorded in favor of the buyers of the apartments.  “Moreover, the special manager may take steps to publish a call for proposals for the purchase of the project that is free of any attachment or commitment as requested,” stated the ruling.  “The question of the status of the buyers in terms of the money to be received will be clarified as part of the debt claims to be submitted by the buyers, and will be decreed in accordance with the provisions of the law.”

“The transfer of funds to the contractor at a rate that is in keeping with the provision of the regulations will ensure that the sum paid by the buyer to the contractor, at any given moment throughout the life of the project, reflects the actual building process, which will reduce the apartment buyer’s exposure in the case of the cessation of the project.  In a case in which the demand for payment arrives and there is a doubt as to whether the demand is in keeping with the construction stage of the project, then it is recommended to take steps to ensure the suitability of the demand in light of the stage of the project, through a professional.”

This is a ruling that affects the entire project, for which the secured asset is a caveat; and consequently, Sales Law Supervisor Amit Grady saw fit to issue an official announcement on the matter.  In the announcement that he issued to the apartment buyers, Grady wrote:  “Payments for the purchase of a new apartment, whose secured asset is a caveat, must only be conducted in accordance with the sales regulations!  The regulations allow the developer to collect money based on the rate of progress of the construction, and based on the milestones set down by the Ministry of Construction and Housing.”

Grady added that “the transfer of funds to the contractor at a rate that is in keeping with the provision of the regulations will ensure that the sum paid by the buyer to the contractor, at any given moment throughout the life of the project, reflects the actual building process, which will reduce the apartment buyer’s exposure in the case of the cessation of the project.  In a case in which the demand for payment arrives and there is a doubt as to whether the demand is in keeping with the construction stage of the project, then it is recommended to take steps to ensure the suitability of the demand in light of the stage of the project, through a professional.”

“It is likely that the Sales Law Commissioner will join the appeals proceeding taking place in the Supreme Court”

Adv. Assaf Englard, senior partner and finance and banking department manager at Hamburger Evron & Co. law firm, says that the result of the District Court’s ruling is indeed a very difficult one for apartment buyers in TAMA 38/1 projects.  “These buyers thought that they received a suitable secured asset in accordance with the provisions of the Sales (Apartments) (Assurance of Investments of Purchasers of Apartment) Law.  The District Court has analyzed the rights of apartment buyers in light of the rights of the company that collapsed and accepted the request of the special manager to declare the purchase agreements as an onerous property and to revoke the caveats.  Remember that the caveats of the apartment buyers were registered on the rights of the existing apartment owners, and in accordance with an earlier ruling of the Supreme Court.  These caveats obligate the apartment owners, not only the company.”

“The probable result of the court ruling is that we will find more and more such projects that will receive bank financing, and the secured asset granted in this case will be a sales guarantee or sales policy, as apartment buyers will be deterred from entering into agreements to purchase apartments in TAMA 38/1 projects that include a secured asset that is only a caveat.  An appeal against this ruling was filed with the Supreme Court; and naturally, it will be interesting to see how the Supreme Court will rule in this clash between the rights of the different parties to this deal.”

The District Court ruling gives preference to the interests of the existing apartment owners over the buyers of the new apartments.  This ruling is not clear of doubts, where the actual Sales Law has determined that a clean caveat is one of the secured assets that the seller is eligible to offer the apartment buyer.  There is no doubt that the court ruling, even though it dealt with a special and difficult case, compromises the power of this secured asset and is likely to negatively affect the apartment buyers’ confidence in and the business certainty of TAMA 38/1.  The probable result of the court ruling is that we will find more and more such projects that will receive bank financing, and the secured asset granted in this case will be a sales guarantee or sales policy, as apartment buyers will be deterred from entering into agreements to purchase apartments in TAMA 38/1 projects that include a secured asset that is only a caveat.  An appeal against this ruling was filed with the Supreme Court; and naturally, it will be interesting to see how the Supreme Court will rule in this clash between the rights of the different parties to this deal.”  

Adv. Englard added that in the Sales Law Commissioner’s last announcement he referred to the sales regulations that determine the permissible rate of receiving funds when the secured asset is a caveat.  These regulations were recently legislated and adapted to TAMA 38/1 as well.  “Of course, the announcement of the Sales Law Commissioner is important, and is definitely likely to reduce the risk and exposure of the apartment buyers; however, it is likely that the commissioner must do more than this.  Since the result of the ruling essentially harms the status of the caveat as a secured asset according to the Sales Law, the Sales Law Commissioner, whose job is to protect apartment buyers, will probably join the appeals proceeding taking place before the Supreme Court, as a friend of the court.  He will express his position with regard to the apartment buyers, for whom the said caveat was intended to protect their rights.   The existing difficulty is that this is a difficult and special case (including the sale of apartments to associates); and consequently, it is doubtful that the Commissioner will want to express an explicit position in such a case.”