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Bank Guarantees When Buying From an Israeli Developer

Q: Who pays for the bank guarantee?

The developer, as part of the cost of complying with the law. The contract may not shift the cost of the statutory security to the buyer.

Q: What happens to the guarantee at delivery?

It is normally returned to the bank against the developer providing alternative security under the law until your rights are registered, such as a caveat or the transfer itself. Your lawyer must confirm the replacement before you hand the guarantee back.

Q: Can a developer sell without any security?

Only up to the small portion of the price allowed by the law. Taking more without security is an offence under the law, and the Ministry of Construction and Housing has a supervisor who deals with complaints.

Bank guarantee letter with a stamp on a desk

Under the Sale (Apartments) (Assurance of Investments of Purchasers) Law 5735-1974, a developer selling an apartment may not receive more than a small portion of the price, fixed in the law, unless the buyer's money is secured by one of the forms of security the law lists. The most common is a bank guarantee, issued by the bank financing the project, which undertakes to return what you paid if the developer cannot deliver the apartment for the reasons the law specifies. This is the main reason buying 'on paper' in Israel is workable for someone abroad who cannot watch the site.

The forms of security the law allows

A bank guarantee (arvut bankait) for the amounts paid, issued by an Israeli bank.
An insurance policy from an insurer approved for this purpose, which works like the guarantee.
A first-ranking mortgage on the land in the buyer's favour, or on the buyer's share of it.
A caveat registered in the buyer's favour, on conditions set in the law, including that the land is free of prior mortgages or that the lender consents.
Transfer of ownership or leasehold of the apartment to the buyer.

The developer chooses, but the choice must satisfy the law, and the developer must give you the security document rather than merely promise it. In a bank-financed project the first two are standard during construction and are replaced by registration-based security once the building is done.

What the guarantee covers

The guarantee secures return of the money you paid, with the linkage that the law and the guarantee wording provide, if the developer cannot transfer the apartment to you because of an attachment on the land, a receivership, a liquidation or bankruptcy order, or a similar event listed in the law that prevents completion. In short, it protects you against the developer collapsing or the land being seized.

It covers sums actually paid through the project account and recorded against the guarantee.
It is typically issued in stages: an initial guarantee after the first payment, then increased or a new one issued as each instalment is paid.
It is drawn by applying to the bank with evidence of the triggering event; your lawyer handles this.

What the guarantee does not cover

Delay in delivery: compensation for late delivery comes from the Sale (Apartments) Law 5733-1973, not from the guarantee.
Building defects: those are the developer's warranty obligations under the Sale (Apartments) Law.
Money paid outside the project account, in cash, or directly to the developer against the law's requirements.
Changes you ordered from suppliers outside the contract.
Loss of value if the market falls.

Payment vouchers and the project account

In a project financed by a bank, the law and the bank's arrangements require that every payment be made through a payment voucher (shovar) into the project's dedicated account. The voucher states your name, the apartment and the amount, and the bank issues the guarantee against it. Paying by any other route can leave the payment unsecured. From abroad, your lawyer or the developer sends you the voucher details and you transfer against them, naming the voucher number in the transfer.

What to check before paying

Ask which security applies and get a copy of the guarantee wording before the first payment.
Check that the guarantee is issued by an Israeli bank or an approved insurer and names you as beneficiary.
Ask how the guarantee will be increased with each instalment and who sends you the updated document.
Ask what replaces the guarantee at delivery and until registration in your name.
Confirm that the project has a building permit; a guarantee does not cure planning problems.

Common mistakes

Paying a 'reservation fee' or first instalment to the developer's own account rather than through a voucher.
Accepting a letter of intent from the bank instead of the guarantee itself.
Not noticing that the guarantee is for a lower amount than paid.
Returning the guarantee to the developer at delivery before the replacement security is in place.
Assuming the guarantee covers a change of delivery date.

FAQ

Who pays for the bank guarantee?