A recent Israeli Supreme Court case, (Civil Appeal 4983/07 IsrSC, August 23, 2012) Soroker v. Orolov, highlights the problems that can arise for a buyer, who purchases an Israeli unit, located in a building, which is not yet registered as a condominium (“Bayit Meshutaf”) with the Israel Land Registry. A buyer has to understand that such an Israeli unit may never be registered in the Israeli Land Registry, and this will seriously impact its value and marketability.
Soroker owned 3/26 of a parcel, which he sold to a developer, who also purchased additional parcels and property rights, in order to build a 76 unit complex. Soroker received possession in 3 units of the complex, which was completed, though the units were not registered. The developer’s business failed and various parcels, on which was the complex was built, were not reparcelized; nor was the building registered as a condominium, both of which are necessary preliminary legal steps to the registration of individual rights in one particular unit.
Despite the unsettled registration, Soroker entered into a sale contract for one unit with Orolov. As the seller, Soroker was obligated to register and transfer ownership rights in the unit to the buyer, in the Israel Land Registry, within 3 years of signing the contract. This 3 year period is much longer than a seller typically has to transfer rights to a buyer, when the seller’s rights are properly registered. In this case, the contract made clear that the registration and transfer of the rights in the unit would be subject to any delay in the parcelization and registration of the condominium (Bayit Meshutaf).
Three years passed and the unit wasn’t registered in Orolov’s name, so he sued Soroker for damages and to compel him to complete the registration.
The District Court ordered Soroker to pay NIS 15,000 in damages for mental anguish and to commence additional receivership proceedings against the bankrupt developer. The Supreme Court reversed and found that Soroker had not breached the contract. The court noted that the registration and parcelization of a 76 unit project requires special legal knowledge that Soroker doesn’t have and ordering him to commence receivership proceedings would not necessarily resolve the buyer’s problem. Finally, the court found that the contract between the parties was clear on this point. Soroker’s obligation was conditional on the developer’s registration of the condominium, and the buyer was well aware of the conditional nature of the Seller’s obligation and the unit’s registration status.
As in all Israeli real estate transactions, buyer beware is an axiom to live by. There are steps that an Israeli lawyer can take to try to minimize the potential damage to a buyer, when purchasing a unit that isn’t registered in the Israel Land Registry. For example, the buyer can leave monies in escrow with his Israeli lawyer, pending registration of the condominium, and subsequently, the individual unit. The exact amount to be left in escrow, though, is likely to be a difficult negotiating point. Most sellers will not consent to a substantial enough escrow to truly protect the buyer, in those cases where bankruptcy or other major obstacles intervene, and the buyer is unable to register his rights, or sell the unit.