Acquiring Real Estate in Israel
The Type of the Land
There are two main types of real estate properties in Israel, (i) privately owned land (“Private Land”); and (ii) State owned lands (“State Lands”), also referred to as “Minhal” land. Israeli laws and practices regarding State Lands differ from those regarding Private Lands.
The main difference between the two is that while the title to Private Land is registered under the name of the purchaser in the land registry, title to State Land as a rule does not pass on to the purchaser. Rather, the purchaser of State Land acquires a long-term lease to the property, (usually for 49 years with an option to extent for an additional 49 years) which may be registered under the name of the lessee in the land registry. Extending the lease for a State Land property may require payment to Israel Land Administration (“Minhal”). Consequently, the first thing that should be confirmed prior to purchasing a real estate property in Israel, is whether the property is registered as Private Land or State Land, and in the latter case the date of renewal of the lease should be ascertained.
It is worth noting that only 10% of the land in Israel is Private Land; however, most Private Land is situated in urban areas.
Verifying Title to the Property
Unlike in the U.S., where it is customary to obtain title insurance from an insurance company, in Israel, in order to verify the title to the property, one must rely on the registration in the Land Registry as well as on the Seller’s representations and warranties in the Sale Agreement. In other words, one must ensure that all necessary inquiries regarding the Seller’s ownership in the property are made prior to entering into a real estate transaction.
Purchase of a New Apartment from a Contractor
Prior to finalizing a contract for the purchase of a new apartment (i.e. an apartment which has yet to be built) from a contractor (or, alternatively, from a private owner of an apartment, who acquired the apartment from the contractor for resale purposes), the purchaser should carefully review the Specification and the Blueprint of the planned apartment. Under the Sale (Apartments) Law – 1973, the contractor is obligated to append the Specification to the contract. These documents set forth a salient part of the contractor’s commercial commitments regarding the apartment, and without them there may be material differences between what the purchaser was expecting to receive and what is actually received.
A few important verifications should be made regarding these documents:
1) It is important to insist that the contractor lists the apartment size in the Specification in net rather than gross terms (i.e. excluding the “common property”, wall areas, etc.).
2) “Joint buildings” (meaning buildings containing two or more apartments), are required to have a set of By-Laws, which regulate the relations between the tenants. A standard set of By-Laws is annexed to the Real Property Law – 1969, and applies automatically, unless the apartment owners have duly adopted a different set of By-Laws.
3) It is important to ensure that there is a precise definition of the building’s “common property” that will be attached to the purchased apartment.
4) The Law requires a contractor to provide the purchaser of an apartment with at least one of five (5) different types of guarantees, prior to receiving from the purchaser a sum exceeding 15% of the purchase price:
(a) Bank Guarantee ;
(b) Insurance Policy –This type of guarantee is rarely granted;
(c) Lien – This type of guarantee is likewise rarely provided by contractors;
(d) Caveat – registered at the local land registry, and grants the purchaser preference over any later conflicting transactions;
(e) Transfer of Title to the Property under the Purchaser’s Name at the Land Registry – contractors will almost never agree to the transfer title prior to receiving payment in full from the purchaser.
The two commonly used types of guarantees are the Bank Guarantee and the Caveat. It is imperative to demand from the contractor both types of guarantees.
The Bank Guarantee provides the purchaser with a money back guarantee, while the Caveat grants a preference over later transactions and protects purchaser’s rights to the property from encroachment by contractor’s creditors.
The bank financing the project often has a lien registered in its favor over the entire property, thus necessitating a waiver from the bank in order to allow registration of the Caveat. The waiver granted by the bank, is usually conditional waiver stating that in consideration for full payment being made by the purchaser, the bank will discharge the lien over the relevant apartment.
Following full payment, the bank should provide a final and irrevocable waiver, confirming that its lien over the relevant apartment has been discharged. It is important to demand that the contractor produce and append to the purchase contract a signed conditional waiver from the bank, as well as a draft of the final waiver to be provided by the bank upon full payment by the purchaser.
Purchasing a Second Hand Apartment
When purchasing a second-hand apartment, it is important to carefully review the registration documents of the apartment building, including the building’s registration extract, and the By-Laws (mentioned above). These documents regulate the reciprocal rights and obligations of each of the apartment owners.
These documents should address issues such as: sanctioned uses of the building’s common property; is the parties entitled to use the remainder of the unused building rights; the share of each apartment in the maintenance of the building; etc.
Furthermore, if upon purchase of the apartment the building has yet to be registered as a “joint building” in the land registry office, then it is important to realize that the “attachments” of certain parts of the building to specific apartments (for example: roofs, parking spaces, backyards etc.), have as well yet to be registered, and thus, it is imperative to check if every exclusive usage/attachment of such property has been approved by all of the neighbors.
If the apartment is acquired from a contractor who has entered into a “Development Agreement” with the Minhal, under which the contractor is obliged, within a set timetable, to submit plans, to commence building and to complete the project, it is imperative to verify with the Administration’s offices whether the contractor has satisfied all of its obligations in accordance with the Development Agreement, and is entitled to receive the property from the Minhal
Leasing a “Minhal” Apartment under a Long Term Lease
As aforementioned, State Real Property can only be leased and not purchased.
The “purchaser” is rather granted the right to enter into a long-term lease with the “Minhal”.. In the past, most apartment lessees were required to pay annual rent to the Minhal, however, the majority of apartment leases nowadays are “capitalized”, i.e. the developer/ contractor pays the rent for the entire lease term in advance and the lessee is exempted from annual payments.
Practically, once the lease agreement is signed, the lessee has no further dealings with the Minhal until the expiration of the lease, unless he wishes to modify the existing structure or change its designated use. In such case, approval of the Minhal, as the owner of the land, is required, and if the property has not been “capitalized”, such process may involve payment of transfer fees to the Minhal.
Therefore, when leasing property from the Minhal, it is imperative to verify that the property is capitalized and that in the event of transfer of rights in the lease there will not be any transfer fees due to the Minhal.
To sum, engaging in a real estate purchase transaction in Israel may be complex. One needs to be familiar with the different types of property, the law affecting each type and the measures that need to be taken in the course of such transaction.
About the Author:
Moshe Kahn specializes in the field of corporate law. He is licensed to practice law both in Israel and in the U.S., and serves as vice chairman of the High-Tech Committee and as a member of the Corporations and Capital Market Committee, of the Israel Bar Association.