David and Jacob own a successful building corporation. They decided to invest in commercial real estate.

The pair started searching for a suitable property. Both partners decided they will invest in this purchase NIS 20,000,000 of their own capital and finance the rest with a bank loan.

After a prolonged search, the pair found a suitable property - the entire floor in a luxurious office building located in central Tel Aviv. This floor was rented by a large insurance company. The owner of this magnificent office space, a well-known business man, stated an asking price of NIS 44,000,000.

When the negotiation process was complete, the parties agreed the price for this office-space floor will be NIS 41,250,000.

In order to complete the transaction, and finalize a contract, David and Jacob sought legal counsel. In the remainder of this article we shall present an overview of various aspects they should check prior to signing a binding contract. There can be a substantial cost associated with ignoring any of these checks or performing them in the wrong manner.

First and foremost, one must check the property’s ownership record. It is not advisable to trust the owner’s own self-declared ownership. This check is rather simple, and is performed with the Land Registry Office (also know in Israel as the “Tabu”). A quick check revealed that the office building is registered as a condominium and the floor in question is legally registered under the name of a different company, and not under the business man’s own name. When our partners asked the business man for his comments, they found out that the business man himself has only recently purchased the floor from another company, and it was not yet registered under his own name! The land registry did have a cautionary notice written in favor of the business man.

The puzzled partners sought counsel, and were determined to find what was the significance of this fact.

And so it is, that in order to transfer ownership of real estate property from the seller to the buyer, one must present the the Land Registry Office with the following paperwork: written confirmation of payment in full of all improvement taxes, purchase taxes, and property taxes, written confirmation from the local Planning and Construction Committee that no improvement levies are outstanding, the deed, the company protocols, written confirmation from the municipality that there are no outstanding municipal taxes (also know in Israel as “arnona”), as well as the bill of mortgage. When David and Jacob asked the business man to present these documents, they found out that there are a few outstanding debts to the various authorities, and that these prevent the property from being properly registered under the business man’name!!! The outstanding “arnona”debts to the municipality, and the outstanding improvement tax bill summed up to NIS 3,500,000.

Two more checks that should be made with respect to the property are with the local municipalauthorities and also with the local Planning and Construction Committee.

When they checked with the municipality, they found that the building was erected in 1995, that there is no pending demolition order against it, and also that it is fit to be populated.

When they checked with the local Planning and Construction Committee, they found that there are no outstanding improvement levies for this property.

Well then, what instructions shall be included in the contract in order to protect David and Jacob when contracting with a person who is not even registered as the owner of the property?

This situation can be address by various legal methods.

First and foremost, one should ascertain that there exists an agreement that demonstrates the business man has legally purchased the office building floor. One should ascertain that other than the debts to the municipality and the tax authority, there are no other outstanding liabilities.

It is extremely important to verify there exists a power of attorney that empowers the business man to sign in the name of the previous owner on any and all documents the may be required to transfer the ownership of the office floor to his own name.

Therefore, the contract had the following clauses:

1. A clause indicating a sum of NIS 5,000,000 will be deducted from the total purchase price and be placed in escrow. The escrow account shall be managed by David and Jabob’s attorney. This clause also stated that these funds shall remain so in escrow until all outstanding debts were paid and the property was actually registered under the business man’s name.

2. A “suspending condition”granting David and Jacob the right to rescind the contract if the ownership of the office building floor was not transferred to the business man until a certain date.
Several days prior to the contract signing, David and Jacob approached their banker. They wanted to verify that the bank will finance the deal. Indeed, the bank required the office building floor to be pledged as a guarantee. However, due to the registration status of the property, the bank asked the partners to provide additional guarantees. The pair offered other flats they owned as collateral, and the offer was accepted.

Now, with the secured financing and the appropriate safety measures taken, the pair scheduled the contract signing meeting. Before signing, they asked to be shown the rental agreement signed by the insurance company that was using the office building floor. They found out the remaining rental term on the contract was just one year…but nothing was lost - the pair sought the services of a well-known real estate appraiser. This professional informed them that the proper rent due for the office floor was about 20% higher than the amount currently paid by the insurance company!

Our two partners realized that even after performing all due diligence and taking all precautions, investing in real estate is quite a risky endeavor. It requires planning, preparation and work, and not in the least, a bit of luck.

Finally, the two signed the purchase contract and took ownership of the office floor. Time flies, and there are they today? There is no need to worry. The deal was consummated, ownerships was properly registered under the two, the insurance company renewed the lease and even agreed to pay a bit more.

What is the moral of this story? That a thorough due diligence process, done by seasoned professionals, is the hallmark of a successful deal.

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This article should not be used in lieu of proper legal counsel and cannot replace specific counseling as appropriate to each and every case.