Buying a home from plans is scary. You don’t really see what you are buying. You don’t know what the neighborhood will look like. What is the bottom line with regard to the cost? Sometimes it seems as though the buyer is really wandering around in the dark.
Recent case law and changes in the law that governs the purchasing of apartments at the preconstruction stage are important steps toward protecting the rights of purchasers.
Linkage of the price to the building index
In Israel, the price that appears in the contract (when purchasing at the preconstruction stage – buying a home from plans) is linked to the building index. The building index is published by the Israeli Bureau of Statistics on the 15th of every month. This can jack up the price of the apartment you are buying from a construction company if you spread the payments out over the 2 or 3 years of the construction.
In all of these types of purchase agreements, there are definitions for what the base linkage point is and what the new linkage point is. Usually, the base linkage point was the date you signed the registration form.
The new linkage point was the date the payment was made. If, as was very often the case, the contract was signed before there was a building permit. Then the buyer would end up paying linkage for all the months that he did not make a payment/ through no fault of his own because in cases like this, the company was prohibited by law from taking more than 7 % of the price if there was no building permit.
If the company was late in delivering the apartment, again the buyer would pay the linkage on the outstanding amount not yet paid on the apartment which was delayed due to the lateness of the construction company.
In addition to the above, companies would define the new linkage point in such a way that it would automatically add an additional month of linkage to the payment.
In this way, construction companies would pocket hundreds of thousands of NIS for each apartment. Is it any wonder that all the purchase agreements prohibit buyers from paying early without the company’s consent (which they usually don’t give)? This is a cash cow that is too hard to give up.
New case law
Recent court decisions in class action suits forced construction companies to return the money collected from purchasers due to the incorrect definition of the new linkage point. Since then, new contracts define the term in the correct way.
Corrected legislation concerning linkage
These types of purchase agreements are governed by a “cogent” law. This means that the conditions set out in the law cannot be changed in a contract if the change is not to the benefit of the buyer. If the contract states something other than what is in the law, then the law is what applies and not the contract.
A recent change in the above law from June 2022 that went into effect immediately, limits the percentage of the price that the construction company can link to the index. In the past, the full price was linked 100% to the index. Under the revised law the first payment of 20% is not linked to where in the past it was. This was important if more than a month had gone by after the registration form was signed until the contract was signed or the contract was signed before there was a building permit. In addition, under the revised law only 50% of the price is linked to the index.
Unfortunately, when this revision in the law was passed, the construction companies adjusted to this by raising the price of their apartments by the amount they felt that they were losing as a result of the cut in linkage.
Other revisions in the law: Lateness in transferring possession of the apartment.
In the past, the construction company was allowed to be late in transferring possession of the apartment to the buyer for 60 days with no reason at all. This has been changed to 30 days. In the past, the construction company was able to lop on to this grace period for all manner of reasons for being late such as force majeure, war, strikes, shortage of materials, bad weather, and more.
Now this is not allowed.
Instead, the law refers to a general clause in the law of contracts that deals with the possibility of a contract not being fulfilled due to outside reasons. This is much harder to prove than the previous situation where the contract listed a series of reasons for which the company could be late in transferring the apartment.
As a result, instead of undertaking to finish the construction in two years, many companies are now writing 3 years in their contracts.
Another change in the law is the presence of direct damages that the company would need to pay the purchaser for the lateness of transferring the possession of the apartment to the buyer. Whereas before this revision, things were vague and the companies pretty much paid what they wanted to (which was never really enough for a family waiting to get their apartment and having to incur extra rent payments), now the law sets out an exact calculation for compensation for lateness.
So, although it may be scary to purchase an apartment on paper and go blind, there are many benefits to doing so in light of the aforementioned changes to the law.