Buyer's Protection Guarantee Under the Sales Law for Apartment Purchase from a Contractor

What is a Sales Law Guarantee and Why Is It Critical for an Apartment Buyer from a Contractor?

A Sales Law guarantee is one of the primary securities for an apartment buyer in a contractor purchase transaction in Israel. It is a bank or insurance guarantee designed to protect the buyer's funds in case of contractor failure, bankruptcy, construction delays, or failure to complete the project. In recent years, the protection of apartment buyers has become a vital issue in public discourse, particularly in TAMA 38 projects and urban renewal.

As an apartment buyer, it is important that you understand the legal mechanism of the Sales Law guarantee, the conditions for obtaining the funds, your rights against the parties involved (the contractor, the bank, the insurance company), and the ways to protect yourself in case of problems. Our firm, Mendelboum, Gor, Witzman-Gor and Associates, Attorneys at Law, has been advising buyers on these matters since 2008, and we have accumulated deep experience in guarantee claim proceedings, appeals committee discussions, and representation before courts.

The Connection Between Sales Law Guarantee and Comprehensive Buyer Securities

The Sales Law guarantee is not the only buyer security. In a contractor purchase transaction, the buyer has several layers of protection: the Sales Law guarantee itself, a guarantee for payment to the real estate (if it exists), legal review of all land documents, professional liability insurance of the architect, and construction insurance. Each of these securities serves a different purpose and protects a different aspect of the purchase transaction.

However, the Sales Law guarantee is considered the first and strongest security, because it is legally mandated for every contractor purchase transaction, and its amount is defined by law as a percentage of the property value (usually 5% of the property value). It serves a dual purpose: both to protect the buyer's funds and as a barrier against unethical conduct by contractors.

Who Is Entitled to Demand a Sales Law Guarantee and How Is It Deposited?

Every apartment buyer in a transaction with a contractor (developer or construction contractor) is legally entitled to a Sales Law guarantee. The guarantee is not optional or something that can be waived – it is a legal obligation. The guarantee is typically deposited with an approved bank or insurance company and is locked in the name of the apartment buyer or in the name of the Housing Promotion Fund (according to the agreement terms).

The amount to be guaranteed is 5% of the property value (or the purchase price, whichever is higher), and this is an amount set by law and has remained unchanged for years. The guarantee is maintained throughout the construction period and part of the protection period after the apartment is delivered (usually two years).

What Is the Guarantee Deposit Process and Who Oversees It?

The deposit of the guarantee is a rigorous legal process. The contractor must deposit the guarantee before he can begin construction work and before the buyer pays the first money. Typically, the guarantee is deposited with an attorney or bank, and the buyer receives written confirmation of the deposit. The Ministry of Interior, usually through the Real Estate Department, oversees the process and ensures that all guarantees are properly deposited.

It is important to note that not every bank or insurance company is willing to deposit a Sales Law guarantee – only those approved by the Ministry of Interior. To ensure that the guarantee is properly deposited, it is advisable to check with your attorney or the contractor for a deposit confirmation.

When and How Can You Use a Sales Law Guarantee?

A Sales Law guarantee is not something you can use at any time. It exists for certain and serious cases, such as: bankruptcy of the contractor, cessation of construction work for an extended period, failure to complete the property under the conditions specified in the contract, or the contractor's failure to pay subcontractors and suppliers (which may lead to liens on the property). In each of these cases, the buyer has a legal right to file a request to obtain the funds from the guarantee.

The process of obtaining the funds is not automatic. The buyer must prove to the bank or insurance company that the condition that triggers the guarantee actually occurred. This means you must prove, for example, that the contractor did not complete the property as promised, or that the work was stopped without legal cause. This proof can be through documents (correspondence with the contractor, construction reports, expert opinions), testimonies, or statements from the buyer.

Does a Sales Law Guarantee Cover All Possible Damages?

No. A Sales Law guarantee covers only direct damages resulting from the contractor's failure to complete the property or from bankruptcy. It does not cover indirect damages, such as costs of renting an alternative apartment during the delay, legal costs in additional claims, or loss of income. If the amount of damages exceeds the guarantee (which is 5% of the property value), the buyer can file an additional claim against the contractor for additional damages, but this is a separate claim and requires an additional legal proceeding.

Therefore, it is important that a buyer be aware that a Sales Law guarantee is a significant security but not comprehensive. In cases of substantial financial loss, there may be a need for an additional civil claim against the contractor or other parties (such as a developer, architect, or construction supervisor).

Practical Examples: Scenarios in which the Law of Sale Guarantee is Used

To better understand the importance of the Law of Sale guarantee, let us examine a few practical scenarios:

Scenario 1: The Contractor Stopped Work Mid-Construction

A contractor began construction of a TAMA 38 project, but after one year, he encountered financial difficulties and halted the work. Residents who have already paid substantial sums of money are at risk of losing their money. In this scenario, purchasers can file a claim for the Law of Sale guarantee to recover part of their funds. They will need to prove that the work was stopped without legal cause and present documentation of the delay.

Scenario 2: Contractor Bankruptcy

A contractor files for bankruptcy during construction. The property is not completed, and completion will require additional financial resources that the contractor cannot provide. In this scenario, the Law of Sale guarantee plays a critical role in helping purchasers recover part of their money and enabling them to complete the property through another contractor or with guarantee funds.

Scenario 3: Non-Compliance with Contract Terms

The purchase agreement stipulates that the apartment will be delivered with a built-in kitchen, central heating, and windows with a certain level of thermal insulation. The contractor delivered the apartment without a kitchen and without meeting the insulation conditions. In this scenario, the purchaser can file a claim against the guarantee to cover the cost of repairs and completion of the work as required by the contract.

Procedure for Claiming the Law of Sale Guarantee: Legal Steps

If you are a purchaser who has been harmed by a contractor's failure and the cost of the damage exceeds 5% of the property's value (or if you wish to obtain the guarantee to cover part of the damage), you must follow an orderly legal process. Here are the basic steps:

Step 1: Preparation of the Claim and Evidence

Before filing a claim for the guarantee, you must collect all relevant evidence: copies of the purchase agreement, correspondence with the contractor, inspection reports, expert opinions (if available), photographs of the property at the time of receipt, and all documentation of the delay or failure to complete the work. An attorney with experience in this matter will be able to help you organize this material in a persuasive manner.

Step 2: Filing the Claim for the Guarantee

The claim is filed with the bank or insurance company holding the guarantee. The claim must contain a detailed description of the damage, evidence, and a calculation of the amount you are claiming (up to a limit of 5% of the property's value). Usually, the bank or insurance company will examine the claim and contact you with clarification questions.

Step 3: Examination and Response from the Guarantee Holder

The bank or insurance company will examine your claim and decide whether it meets the conditions for payment. If they approve your claim, they will transfer the funds to your account. If they reject your claim, you are entitled to appeal their decision or file a legal claim against them.

Step 4: Appeal or Legal Claim

If the guarantee holder rejected your claim, you can appeal to an appeals committee (usually appointed by another bank or independent body). If this appeal is also rejected, or if you believe the decision is incorrect, you can file a lawsuit in court. In a lawsuit, you will be able to present all of your evidence and arguments before a judge, who will decide on the amount to be paid to you.

Common Mistakes Buyers Make Regarding Purchase Law Warranty

Throughout our years of experience, we have seen buyers make recurring mistakes regarding purchase law warranty. Here are the most common mistakes and how to avoid them:

Mistake 1: Failing to Verify the Warranty Before Signing the Contract

Many buyers sign a purchase agreement without verifying that the warranty has been properly deposited. This is a critical error. Before signing a contract, you should confirm with your attorney that the warranty has been deposited with an approved bank or insurance company, and that the amount is correct (5% of the property value). If the warranty has not been deposited, do not sign the contract.

Mistake 2: Failing to Maintain Documentation of All Correspondence with the Contractor

If you need to file a claim on the warranty, you will need to prove that the contractor failed to perform. This proof comes through documentation – correspondence, inspection reports, photographs, etc. Buyers who do not maintain such documentation find themselves without evidence when they need it. Therefore, keep all your correspondence with the contractor exactly as it is, in a secure folder.

Mistake 3: Failing to File a Claim Within the Time Limit

The purchase law warranty is released after two years from the date of apartment delivery. If you do not file a claim within this period, you lose your right to use the warranty. Buyers often delay filing the claim in hopes that the contractor will fix the problem, or wait for legal advice. This is a mistake. If you suspect a problem, contact an attorney immediately to review your options and file a claim within the time limit if necessary.

Mistake 4: Failing to Understand the Limitations of the Warranty

The purchase law warranty covers only up to 5% of the property value. If your damage exceeds this amount, you will need to file an additional claim. Buyers who think the warranty will cover all their damages are disappointed. It is important to understand the limitations of the warranty and plan your legal steps accordingly.