Seven per cent: the line above which a buyer's money must be secured

The whole protective architecture around Israeli apartment buyers rests on one number: seven per cent. That is the maximum a seller may take from a buyer without providing a security. Above it, the law does not advise — it prohibits.

The source is the Sale (Apartments) (Assurance of Investments of Apartment Buyers) Law, 1974, and its rule is plain: a seller may not receive more than 7% of the apartment price unless the buyer's investment has been secured. Failure to comply, the Ministry of Construction and Housing stresses, is a criminal offence.

The five routes the law recognises

The choice of security is not left to free discretion. The law lists five routes, and anything else is not a security under the law:

1. A bank guarantee securing the return of all sums paid, in any case where the seller cannot transfer ownership or another right in the apartment — because of an attachment on the apartment or the land, a receiving order, a winding-up order or the appointment of a receiver, or circumstances creating an absolute bar to delivering possession.
2. Insurance with a recognised insurer in favour of the buyers, securing the return of those same sums. Confirm that the premium has been paid in advance.
3. A first mortgage over the apartment, or over a proportionate share of the land on which it is being built, in the buyer's favour.
4. A caution note at the Land Registry, provided no prior charge, attachment or third-party right with priority is registered.
5. Transfer of title or another right in the apartment or a proportionate share of the land into the buyer's name, free of any third-party charge or attachment.

A caution note takes effect immediately and is not conditioned on further events such as construction progress or the erection of partitions — as the Ministry of Construction and Housing emphasises. That is a practical difference from securities released in stages.

An internal distinction

The first two securities — bank guarantee and insurance — return money. The other three — mortgage, caution note and transfer of title — confer a right in the asset. The distinction is not semantic: where the security is not a bank guarantee or an insurance policy, the payment schedule is governed by regulations fixing payment rates by construction stage, even if the contract says otherwise. That is covered in a separate article on the payment schedule.

The duty to inform — an amendment born of unawareness

Section 2A1(a) was added precisely because buyers did not know the right existed. Its wording: a seller shall not sell an apartment to a buyer unless the seller has notified the buyer in writing, on signing the sale contract, of the buyer's right under this law to have the funds secured. In other words, the seller must inform the buyer of a right the buyer holds against the seller.

Reporting to the Commissioner: 40 days

Since Amendment No. 4, in force from October 2008, every seller of a new apartment — contractor, developer and so on — files a declaration with the Commissioner at the Ministry of Construction and Housing recording the sale and the type of security given: bank guarantee, insurance policy, first mortgage, caution note or registration of rights. The declaration is filed no later than 40 days after the sale contract is signed.

Preserving the value of the money

A security that does not carry the value of the money is not a security. The law requires the bank guarantee or insurance policy to be linked according to the linkage method set in the contract for payment of the price; and where the contract sets no method, the seller must link the guarantee or policy to the construction inputs index.

Who pays for the security

By default the contractor bears the costs of providing the security. The law does permit the contract to place the costs of a bank guarantee or insurance policy on the buyer — which makes the cost question a matter for negotiation before signing, not after.

Seven checks before the first payment leaves your account

1. Confirm you received written notice of the right to have your funds secured — at signing.
2. Identify which of the five securities is being given, by its exact name.
3. If a bank guarantee — read the wording of the guarantee itself before signing, not only the contract clause referring to it.
4. If an insurance policy — confirm the premium was paid in advance.
5. If a caution note — check the land extract for any prior charge, attachment or superior third-party right.
6. Check the linkage mechanism of the security, not only of the price.
7. Confirm that actual payments do not exceed 7% until the security is in hand.

What it means for choosing a developer

A security protects the money — not the schedule and not the quality. Checking it is therefore necessary but not sufficient: alongside it you check the company's track record, its classification in the contractors' register and the projects it has actually completed. The company's details and certifications are set out on the about page and the standards page.