Buying Real – Estate in Israel, not exactly what you are used to

When buying real estate in Israel, people who are used to the customary US real estate purchase process should be prepared for a few surprises. Every country has its own legal system and business environment, and Israel is no different, but some of the customary Israeli features of real estate transactions are inherently different than what you might be used to from back home and you should be aware of it in advance, otherwise you may find yourself getting upset for no good reason.

The purpose of this essay is to briefly describe a few of the differences you may encounter, and try to give you the sense of why we do things the way we do.

Title

A major difference between Israel and the US lies in the different Title and Record system that Israel uses. Early in the twentieth century, the British Empire applied the Torrens Title System in Israel. This process, called Real Estate Regulation, involved mapping the country, and having every parcel of land go through a procedure of ensuring that the records reflect good title. The record of every lot in the Israeli Land Book (still commonly known as 'Tabu', after the Turkish name for land registry) that went through the process is considered to reflect good title, and therefore, for such a lot, records are title, or at least guarantee indefeasible title. You can not have valid title unless recorded, your title is perfected only when registered in the Tabu, and the registration process involves a great deal of effort to ensure that no invalid title transfer is recorded. The result is that chain of title, for the most part, is not important, because the records reflect good title, and a buyer is protected from any title issues if purchase is made from the owner of record in good faith. The major consequence of that system is that we are in no need of title insurance, and no title in Israel is insured.  In fact, there are no title insurance companies in Israel and even if you wanted to buy title insurance – there is no one to sell it to you.

This system covers today over 93% of the land in Israel, and consequently all real estate transactions in Israel are conducted  in the same manner as if these rules apply.  Over the years, similar mechanisms have been developed to ensure transfer of good title for land parcels that haven't gone through the Regulation process. Note, though, that land that didn't go through the  Regulation process sometimes present extra risks  and cautious have to be applied when buying it.

All this doesn't mean that you don't have to perform due diligence in Israel. Many issues, not related to chain of title, may come up, and you have to make sure you properly understand the title situation of a specific property you buy.

No Due Diligence Period and no Closing Date

You should bear in mind that the big day of a real estate transaction in Israel is the Contract day, not the Closing day. As a general concept, once a Sale – Purchase Agreement ('SPA") is signed, the seller would expect the buyer to be happy and content with all the features of the real estate bought. In fact, a typical SPA in Israel will contain a waiver by the buyer of any claims regarding the Title, physical or legal conditions of the property bought, other than claims that could not be found using reasonable diligence, unless otherwise specified in the SPA. As a buyer you are expected to perform all due diligence regarding the property prior to signing an SPA, and the seller will provide you with any required information and documentation to perform such due diligence inspections. This is why in more complex transaction where due diligence itself involves significant costs, buyers need to ensure that they don't spend money for no avail by having the property removed from the market by entering a "No-Shop Agreement", buying an option to buy the land, or, alternatively, introducing terms into the contract, enabling  some post SPA due diligence.

All this doesn't mean that a buyer is not able to condition the completion of a purchase. An SPA can, and some times should, be conditioned by, basically, anything that you may need it to be, like, cleaning title defects, obtaining required legal consents (e.x. court approval to a sale by incapacitated person), or even financing contingency, but the latter is a great example of a rare, and unfavorable, condition. Conditions for transaction completion are more customary and acceptable in bigger and more complex transactions, but the general rule is that a seller would expect no conditions to transaction completion other than delivering clean title and possession after receiving full payment.

Escrow Accounts and Cautionary Notice

Normally no escrow accounts are used in a real estate transaction, unless there is a specific need for them (as demonstrated by the example below). Payments normally go to the Seller's pocket, and if, for any reason there is a need to return them, the seller has to actively do so, as money is not held by a third party. The reason we allow for this in Israel is a very strong proprietary mechanism we have to guarantee the purchase money form the time paid to the time title is recorded in buyers name.: The Tabu can record a Cautionary Notice on the title of a person who committed to make a transaction, or made a commitment to refrain from making a transaction. The nature of this notice is somewhat similar to Lis Pendens only it provides notice of a pending transaction, not pending litigation. Recording a cautionary notice prevents the recording of a conflicting transaction and is prior to any subsequent lien, and therefore grants the buyer a strong interest in the seller's property, since once a notice is recorded the seller will have to get buyer's consent (or a court order) to remove that notice before entering another deal.

Completion of deal is contingent upon payment of applicable Real Estate Taxation

For historical reasons, Capital Gains Tax incurred by selling real estate is an independent tax in Israel, governed by Real Estate Taxation Act, and not by Income Tax Ordinance (that governs the taxation of income derived from other sources). Another applicable tax that is governed by the same law is Real Estate Purchase Tax, payable on the purchase of any real estate property. One of the special features of these taxes is that to ensure payment, the Tabu may not record any transfer of any real estate parcel without getting a release from the Real Estate Taxation Authorities that the no taxes applicable to  a transfer is owed.  Even more so, taxes not paid in the event of sale of real property are deemed, under Israeli law, the most senior lien on that property, and are payable prior to any other type of lien or mortgage in case of a foreclosure. Municipal taxes also have to be fully paid by the seller before transfer can be made, and a similar release should be presented. This means that the buyer has to pay close attention to seller's taxes, and make sure there is always enough money left to pay these taxes. This is one example where escrows are customary, and sellers do accept payment of sufficient amounts into escrow accounts, to ensure tax payment.

It should be noted that through April 1, 2013 a different mechanism applies to certain transactions, and for this period a buyer has to pay a certain percentage of the purchase price directly to the Tax Authorities, and buyer will receive the release.

Conclusion

The above is meant to describe a few major differences between the customary US Real Estate transaction and the Israeli one.

Some other differences exist as well. For instance, usually there is no need for an environmental report or pest inspection (very few houses in Israel are made of wood) and the completion of a transaction, many times, takes place long after the consideration was fully paid and possession surrendered. Other differences exist as well but the above constitutes major differences that you may want to be aware of.

Disclaimer:

Nothing contained in this essay constitutes a legal opinion or legal advice to any person and no one should rely on this essay when making a decision. Readers should take specific advice from a qualified professional when dealing with specific situations. The author shall not be liable to any damages resulting from reliance on information contained herein.