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100 The US-Israel Legal Review 2019
ISRAEL: REAL ESTATE
I
n 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, whilemost
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%.
HowisitpossiblethatScott,whowasrepresented
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 (whomay have foregone other offers
Real Estate in Israel
In Israel, unlike the United States, there is no strict procedure
forcing the parties in a real estate transaction to conduct
examinations about the status of the property.