The Sale Law guarantee: what really protects your money

The rule: seven per cent, then security

Section 2 of the Sale (Apartments) (Assurance of Investments of Purchasers of Apartments) Law, 5735-1974, provides that a seller may not receive from a purchaser any amount exceeding seven per cent of the apartment price unless he has taken one of five steps to secure the money.

In other words, up to seven per cent may be paid without security. Beyond that, every shekel must be secured. This is not a recommendation but a prohibition, and section 4 of the Law sets alongside it a penalty of imprisonment or a fine, together with the possibility of barring a convicted seller from participating in tenders and even cancelling his registration in the Register of Contractors.

Five forms of security, and they are not all equal

• A bank guarantee securing the repayment of the purchaser's money. The strongest and most common form of security.
• An insurance policy with an approved insurer, with the purchaser as beneficiary and the premiums paid in advance.
• A charge on the apartment, or on a proportionate share of the land, by way of a first-ranking mortgage in favour of the purchaser or of a trust company.
• A cautionary note under section 126 of the Land Law, provided that no charge, attachment or third-party right was registered before it.
• Transfer of ownership or of another right into the purchaser's name, free of any charge, attachment or third-party right.

The difference between them is practical. A bank guarantee returns money. A cautionary note holds your place in the register but does not, in itself, return any money, and its value depends entirely on no charge having been registered ahead of it. That is why checking the Land Registry extract before the first payment is no mere formality.

The payment voucher booklet: why you must never transfer money directly to the developer

In a bank-financed project, section 3B of the Law requires the financing institution to issue a payment voucher booklet for each apartment. The seller hands the booklet to the purchaser, and payments are made solely by means of the vouchers, into the project's escrow account.

The key point: payment by voucher constitutes an irrevocable instruction by the seller to the financing institution to provide the purchaser with a guarantee or policy. In other words, the voucher is what triggers the security. Section 3B(e) provides that the financing institution must provide the guarantee or policy within 14 business days of the date of payment.

Two practical conclusions follow. First, a payment not made by voucher may be left without security, and sometimes without proof that it was credited to the correct account. Second, if 14 business days have passed and no guarantee has arrived, that is a red flag calling for immediate inquiry, not for waiting until the next payment.

When the guarantee expires

Section 2A of the Law allows the seller to replace a bank guarantee or policy with security of the other kind, provided that construction of the apartment has been completed and possession has been delivered to the purchaser, and provided that the contract does not prohibit such replacement.

The Sale (Apartments) (Assurance of Investments of Purchasers of Apartments) (Bank Guarantee) Regulations, 5771-2010, set out the conditions for the expiry of the guarantee, and they are cumulative. Receiving the keys is not enough. There must also be a document evidencing delivery of possession, and a Land Registry extract showing either that the right has been registered in your name free of charges, or that a cautionary note in your favour ranks ahead of any charge, attachment or other right.

So do not hand over the original guarantee document in exchange for the keys alone. The guarantee is returned once the registration or the note is in your hands, and not before.

Late delivery: what you are entitled to

Compensation for late delivery is governed by section 5A of the Sale (Apartments) Law, 5733-1973, and is payable without proof of damage. It is important to know that there are two versions of the provision, depending on when the contract was signed.

For contracts signed on or after 7 July 2022: a one-month grace period from the contractual date, followed by monthly compensation equal to the rent for an apartment of similar size and location, or the agreed compensation under the contract, whichever is higher. The rate is one hundred per cent of the rent from the end of the first month until the end of four months from the contractual date, 125 per cent from the fifth month until the end of ten months, and 150 per cent from the eleventh month onwards.

For contracts signed up to 6 July 2022, the previous version applies: a 60-day grace period, followed by 150 per cent until the end of eight months and 125 per cent from the ninth month onwards.

Another difference, no less important: under the old version, the parties could agree in the contract to exclude compensation in circumstances beyond the seller's control. Under the new version that provision has been repealed, and the exemption is limited to cases in which the delay was caused solely by an act or omission of the purchaser, or by circumstances beyond the seller's control within the meaning of the law of contractual remedies.

A practical point that is often missed: the calculation is based on the rent of the apartment being purchased, not on the rent the purchaser actually pays for the apartment he lives in meanwhile. It is therefore advisable to agree on the apartment's rental value during the negotiations and to state it in the contract. At that stage the developer is still talking up the value of the property, whereas after the event it will become a disputed figure requiring proof by an appraiser's opinion.

The cap on linkage to the Construction Inputs Index

One of the central changes made by that same Amendment No. 9 to the Sale (Apartments) Law is section 5C, which deals with linkage. It is important to understand its starting point: section 5C(a) lays down a sweeping prohibition, under which a payment made by a purchaser for the purchase of an apartment shall not be linked to any index and no interest whatsoever shall be added to it, other than interest for late payment under section 5B.

Linkage is permitted only as an exception. Section 5C(b) allows the parties to agree that up to half of each payment will be linked to the Construction Inputs Index, provided that 20% of the contract price, paid when the contract is signed or before any other payment, is not linked at all. This gives rise to the familiar calculation: since one fifth of the price is not linked at all, and half of the balance may be linked, the maximum exposure to linkage is about 40% of the contract price. That figure is not written in the Law but derives from it.

Section 5C(c) adds a time limit: linkage may run only up to a date no later than the delivery date set in the sale agreement. In other words, a developer who delivers late may not continue to apply linkage beyond the contractual date. The exception refers to section 5A(c), which concerns a delay caused solely by an act or omission of the purchaser, or by circumstances of frustration under section 18(a) of the Remedies Law. It follows that where the delay is attributable to the developer and is not covered by those defences, linkage should stop at the original contractual delivery date.

We would note that the courts sometimes reach an intermediate result, under which, instead of linkage to the Construction Inputs Index, the purchaser bears the interest that he earned, or could have earned, on the money that remained in his hands.

Section 5C, like the new version of section 5A, applies to an apartment whose sale agreement was signed on or after 7 July 2022. Earlier contracts are governed by the old version, which did not cap linkage.

What to check in practice

• Make sure the project is bank-financed, and obtain the payment voucher booklet before the first payment above seven per cent.
• Pay only by voucher, and keep every payment confirmation.
• Make sure the guarantee or policy arrives within 14 business days of each payment, and check that the amount matches.
• Check the Land Registry extract before the first payment, to make sure no charges rank ahead of the security promised to you.
• Do not hand over the original guarantee document before the right or the cautionary note is registered in your name.
• Check the contractual delivery date and which version of section 5A applies to your contract.
• Check the linkage clause in the contract against section 5C: what is linked, at what rate, and until what date.
• Agree in the contract on the rental value of the apartment being purchased, in case of late delivery.

Bottom line

When you buy from a developer, protection does not come automatically; it is built up payment by payment. Most purchasers who run into trouble did not knowingly give up their security; they simply did not check that it had arrived. It takes a few minutes at each payment, and it is worth the millions that stand behind it.

Nothing in this article constitutes legal advice or a substitute for it, and every case is assessed on its own circumstances.