Real Estate In Israel

In 1997, Scott, a US citizen, bought a luxury penthouse with a floor area of approximately 100 sq.m. in one of the high-end areas of Jerusalem. Some of the time, the property was used as the family's residence, and the rest of the time - it served as an investment property and was rented to tenants.

Approximately 10 years after the purchase, Scott decided to sell his rights in the property. He received an offer that would have netted him a handsome profit, and the parties commenced negotiations. Simultaneously, the potential buyer's lawyer conducted several preliminary examinations, and found that only 25 sq.m. of the property had been built pursuant to lawful building permits, while most of the property was built in violation of the permits.

Construction in violation of a valid building permit is a criminal violation in Israel. In addition to demolition of the unauthorized construction, penalties may include heavy fines and even imprisonment. Furthermore, the government authorities may initiate criminal proceedings against the owners, even if they were not the ones who performed the violation and merely purchased a property that violated the permit.

The potential buyer understandably withdrew his offer. For several years, Scott was unable to find anyone who would purchase the property as is. He tried unsuccessfully to obtain permits for those parts of the property that violated the building permit, and after two years sued the sellers and his own lawyer for more than NIS 1 million (approximately $250,000 in 2009). Only in 2017, some 10 years after the problem first came to light, Scott's claim was granted and he was awarded the damages he had claimed. This delay lost Scott 10 years of appreciation in the value of his property, while the Israeli market raced ahead and property values rose by more than 70%.

How is it possible that Scott, who was represented by a lawyer when he purchased the property, did not know the status of the property and paid a full price as if all lawful permits had been granted? Why did it take 10 years from purchase, and a potential buyer's lawyer, to first find out? Unfortunately, the answer is very simple. In Israel, unlike the United States, there is no strict procedure forcing the parties, as part of a transaction, to conduct examinations about the status of the property. In fact, the type and scope of examinations carried out depend only on the lawyers selected by the party and their skills.

As a rule, in the...