6th article | Epstein & Co. Law

The Risks of Buying an Apartment in Israel

that Lacks a Valid Building Permit

Some time ago an agitated man charged in to the office and appealed for help. A family member helped him buy an apartment in Israel. Everything was fine until two incidents occurred at the same time. First, municipal building inspectors informed him that he had purchased an apartment with a building offence and will be prosecuted. In addition, they informed him that they might issue an administrative demolition order for the illegal "parts" of the apartment. The second incident was that his bank informed him that he had not received an approved mortgage loan for the full value of the apartment as expected, which placed him in the untenable situation to finance his last payment to his seller.

The two problems are actually connected. In Israel many apartments have added sections that where built without a valid building permit, These are called building offences. These offences affect the calculation of the mortgage and may affect the viability and the buyer's capability of completing a transaction. In the next two articles, I will explain the issues that are involved.

Stay tuned to the end of my analysis below, and I will tell you what happened to the anxious buyer that I described above.

The Planning and Building Ordinances

The purpose of the Israel Planning and Building Ordinances ("Ordinances") are to set standards for buildings in Israel and regulate the building process. This law states that one must first obtain a building permit from the appropriate government authority before building any structure. Any construction undertaken without an official and valid permit, or which deviates from the conditions of the permit, is considered illegal construction.

One must consider that even slight external renovations require a permit. One must request a permit before undertaking any external changes, and in some cases even ones that seem to be internal.

The enforcement authorities (usually municipal but also regional and in some cases the central government) have the authority to demolish and/or a penalize construction offences. In addition, the authorities can issue an indictment and/or serve a demolition order without a conviction and in extreme cases, can issue an administrative demolition order which does not require court review. The goal of the authorities is to caution and restrain people from building without permits.

According to the Ordinances the authorities can indict a wide circle of people for committing a building offence.Of course, the central focus is on the owner of the property. Yet, the authorities can and have indicted the building permit holder, the owner of the apartment, the current tenant, and the individual who performed the actual construction. In addition, , the enforcement authorities can indict or issue an administrative order to the current or previous tenants, and most relevant to our current discussion to the new owner of an apartment who purchased the apartment with a violation.

Buying an Apartment that Deviates from its Approved Plan and Valid Building Permit (even on part of the apartment)

Prior to purchasing an apartment, you must check whether any part of the construction of the apartment deviates from the apartment's approved building plan and permit. If this is the case, then one must check if there is a demolition order, or a caveat on the property from the local authorities or by court order, or whether an indictment is yet to be issued.

If an indictment has not been issued, the buyer faces the risk of being charged for the previous and as yet not adjudicated offenses, for as we explained above even the buyer who was not involved in the actual illegal construction may be issued with an indictment for its demolition or charged with penalties.

Even if the buyer purchased the apartment from someone who has already been indicted or even convicted and there is still no permit, this buyer must realize that he/she may also be charged. In all probability there will be a demolition order on the property which will be realized should the offences not be corrected. The court and law enforcement authorities do not consider that the apartment has changed ownership; as long as the offense remains, they may issue a demolition order.

Because of these potential legal complications, you should also realize that the value of an apartment without a permit is potentially significantly lower than an apartment built according to its permit.This influences directly the value of the mortgage that a bank will give you, as we explain below.

The bank will not approve a full mortgage

An Israeli mortgage bank will not readily provide a mortgage for an apartment that does not have a valid permit. Even in the case that the the bank approves a mortgage, the bank will evaluate the value of the apartment when calculating the mortgage based on the bank's appraisal and not based on the perchese price. The bank's appraisal will not include the value of additional building offence added on space, and it will deduct the cost of correcting the infractions.

For example, a buyer wants to buy an apartment sold at 2,000,000 NIS that has a building infraction in the kitchen. The seller "improved" his kitchen by extending into an unused portion under the building's foundations that is adjacent to his apartment (often called in Hebrew a "challal") and was able to build an extended and spacious modern kitchen.

In the mind of the seller this addition is one of his central selling points. After all he "improved" his apartment by adding on unused "lost" space for which he did not have to pay. He requests a premium of 200,000 NIS for this extension.

Yet, the bank will not consider the so called added value of the apartment, as the extension was built illegally. As such, the initial appraised value of the apartment will only be 1,800,000 NIS. In addition, the bank will deduct from the appraised value the cost (100,000 NIS) of destroying the area and then rebuilding the wall that has been removed illegally. Lastly, the bank will deduct the cost of rebuilding the kitchen in the legal part of the apartment. As such, a person who was approved a 50% mortgage of the of the value of the apartment, will be surprised that the bank will appraise the apartment for only 1,700,000 NIS, which allows a mortgage of only 850,000 NIS.

At the time of Executing a Contract

When preparing a purchase contract you should have the seller declare in writing that there are no demolition orders and/or legal proceedings against the apartment. Breaking this declaration is a breach of contract, and if needed would allow the buyer to claim and receive damages from the seller. The buyer should also be aware that although there are currently no caveats on the apartment in the Tabu, this might be because the legal procedures in this respect have not yet been completed or there may be a demolition order but for various reasons there are no warning caveats, among other reasons.

Because of the intricacies of this issue, and its other connected issues, we recommend that a buyer engage an experienced real estate lawyer and if necessary other professionals to undertake all the actions that need to be done to protect you, the buyer, before the transaction takes place. This will save you much effort, aggravation, money, and possible legal complications. Be smart, be careful and plan ahead.

And now for the conclusion of the story above.

After explaining to this buyer his options my associate decided on the following actions:

He set in motion efforts to apply for a proper building permit on the illegally built part. He was fortunate that the conditions in his building allowed him to do this, although it's expense was high this we felt was better than having nothing.
Regarding a mortgage. He contacted a mortgage broker whom he work with who arranged that that the buyer get a bridge loan to make the last purchase payment. The idea was to replace this loan as soon as the buyer receives his building permit with a proper and cheaper mortgage.

Warning: This information is not intended to constitute legal advice and should not be relied upon in lieu of consultation with the appropriate legal advisors in your own jurisdiction.

Please refer to other articles in our series: "The Ins and Outs of Real Estate in Israel" for non-Israelis on www.epsteinlaw.co.il.