Adv. Assaf Englard: "Apartment buyers paid hundreds of thousands of shekels and were left with no collateral"Adv. Englard warns against the weakening of the caveat as collateral following the court ruling and presents the good news hidden in the new shelf agreement for Evacuation – Reconstruction
02.12.19 | Dror Marmur
Many Israelis realize their dream of purchasing an apartment and then discover that it’s actually a nightmare. In the terrifying worst case scenario, they both pay a great deal of money and do not receive the apartment of their dreams. This is what recently happened to apartment buyers in the TAMA 38 project on 7 Yehuda Hanasi Street in Ramat Gan – they paid hundreds of thousands of shekels to the contractor and were left without a caveat on the land, after the court ruled that it was an onerous condition and ordered to delete the caveats from the Land Registry deed (tabu), to enable a new contractor to step into the shoes of the contractor who got into trouble.
In a Migdal Bavel podcast, we spoke with Adv. Assaf Englard, senior partner and head of the Finance and Banking Department at the Hamburger Evron & Co. Law Firm who warns apartment buyers regarding the legal and other risks involved in the purchase of an apartment.
Englard: “The court ruling that was issued by the Tel Aviv District Court regarding the project in a building on Yehuda Hanasi Street in Ramat Gan sent shockwaves regarding the subject of TAMA 38/1 (Reinforcing the Existing Building Structure). This is a building whose construction was held up for many years, and the judge ruled that the caveats for the new buyers are onerous assets according to the Companies Law and must be deleted. In this instance, the developer’s plan was to build 12 new apartments; unfortunately, however, he was only authorized ten and was also forced to pay a parking replacement fee for more than one million shekels, which undermined his entire business plan. The judge said that was concerned about society and was actually concerned about the owners of the existing apartments instead of those purchasing the new ones. One could argue with this ruling, because in the real and fragile balance between the owners of the existing apartments and the new apartment buyers, the court clearly gave preference to the owners of the existing apartments.”
What is their current status?
“Although a caveat is collateral, they were left without collateral. The judge also said that she had no legal basis to grant them secured credit, so the many hundreds of thousands of shekels of appraiser fees they had paid was left without any collateral.”
We’ve returned to the days prior the Heftziba era, when apartment buyers were left without anything.
“True. In the meantime, an appeal was filed in the Supreme Court, after a petition to delay execution was rejected. There is a very important road sign here – whether or not the project supported by the bank. A large number of these projects are not supported; however, this may encourage support, which means that the bank will oversee the entire system of payments and offer the buyers a guarantee or a Sales Law policy. In addition, the number of cases in which Sales Law guarantees were exercised are very few, which means that, de facto, the buyer who received a Sales Law guarantee ensures the completion of the apartment.”
So, someone hasn’t received guarantees in a residential project should run away?
“More input should be invested in order to see if the money paid is indeed used for the construction and match the progress in the field, so that the caveat will be valid.”
And perhaps the court is right and this is the only way to save projects?
“You are right that this was the consideration that guided the court’s decision. Receivers tried to complete the project, and the court said that deleting the caveat was the only way to complete the project.”
“I don’t think that the Housing Ministry is weak. Together with the Ministries of Finance and Justice they promote reforms to protect consumers on issues related to acquisition groups and urban renewal, and here it probably should have taken another step toward reaching a balance between the apartment owners and the new apartment buyers”
In recent days, the Sales Law Supervisor at the Ministry of Housing, Amit Grady, has issued a warning to the public, related to the power of the caveats and the obligation to make payments only according to the progress of the project. According to Englard: “No one said that the payments were not made according to the right progress. Not only should we be concerned about payments, but also we must ensure that the funds were indeed used for the construction purposes and the project was managed in a closed economy. I would ask whether it’s more appropriate that the Sales Law Supervisor at the Housing Ministry join the Supreme Court proceeding as a friend of the court. He is responsible for protecting the apartment buyers, it’s his mandate.”
Is the Ministry of Housing too weak?
“I don’t think that the Housing Ministry is weak. Together with the Ministries of Finance and Justice they promote reforms to protect consumers on issues of acquisition groups and urban renewal, and here it probably should have taken another step toward reaching a balance between the apartment owners and the new apartment buyers.”
What’s riskier – TAMA 1 or an acquisition group? It appears that in both cases, people do not realize the risk.
“That’s an excellent question. In TAMA 1, the Court has taken a stand and has told the public to join projects that have financial backing. This will result in developers who will run to receive financial backing for a TAMA 38/1 project. The banks do not like this, but we will see collaborations between non-banking institutions and developers. There is an additional factor of costs, but people will go in these directions.”
“In acquisition groups, there is no doubt that you have to make the right choice. I think that the Acquisition Group Law will be ratified immediately by the next government and the tests of the group must be a lot larger. Here too, the group that is supported by a financial institution is in a much better situation, even if it cannot be depended upon formally. Much more legal, purchasing and commercial input must be invested in order to see if the project is commercial.”
And the ministries’ acquisition group?
“It’s the same risk, although the regulator expressed his opinion that he wanted to protect the residential apartment buyers. This is the regulator’s main focus.”
You meet buyers, do they understand the risk?
“From my experience with buyers, I think that they generally do. Certainly, in commercial or office space projects. But also, in terms of apartments, people are more aware following the Heftziba affair.”
“The Evacuation – Reconstruction shelf agreement includes a paragraph that enables a capital contributor to receive a lien on the land rights. This is good news that will free up more credit and enable the developer to tailor the finance package. The equity contributors enter at more dangerous stages and they allow the project to get underway.”
Last but not least is the Evacuation – Reconstruction. Every project lasts at least ten years. Will the ‘shelf agreement’ currently announced by the Ministry of Housing help expedite these projects?
“It is apparent that a lot of professional and experienced work was invested in the shelf agreement. The agreement has some new elements – there is a good and appropriate balance between the different parties – the apartment owners, the new apartment buyers, the contractor and the financial institution. It’s a balanced agreement. I would point out two points – one, the paragraph that enables the capital contributor to receive a lien on the land rights. Not only the senior party, paragraph 18/4 includes an option to encumber the apartments in favor of the capital contributor. This is good news that will free up more credit and enable the developer to tailor the finance package. The equity contributors enter at more dangerous stages and they allow the project to get underway.”
“The second bit of good news is related to the mechanism that many have tried to use – Evacuation Reconstruction integrated into an Acquisition Group. The developer will be able to transfer part of his rights from the landowners not only for the purpose of selling apartments, but also the rights to the land will be able to be transferred to a third party according to paragraph 23 in the shelf agreement. But the bottom line is that this is an excellent work tool, a basis for different parties to work on. It doesn’t take away from our work as attorneys, but it is definitely good news and a boon to urban renewal that is so important to us.”