A bank guarantee in brief
A bank guarantee is a bank's undertaking to pay the apartment owners a sum set in advance, if the developer does not meet the obligation that the guarantee secures. The bank provides the guarantee at the developer's request, usually as part of the project's bank financing.
An autonomous guarantee (an independent, on-demand guarantee) is a guarantee that the bank must pay on demand, without examining the dispute between the apartment owners and the developer. A Sale Law guarantee is given under the Sale (Apartments) (Assurance of Investments of Persons Acquiring Apartments) Law, 5735-1974 (חוק המכר (דירות) (הבטחת השקעות של רוכשי דירות), התשל״ה-1974), and it can be enforced only in the circumstances set in the law.
The guarantees the apartment owners receive
Sale Law bank guarantee
A Sale Law bank guarantee, for the value of the new apartment to which the apartment owner is entitled, including the VAT component. This is the main guarantee in the agreement: it secures the new apartment until it is handed over to its owner and a caution note (warning note) or the ownership is registered in the owner's favour, as set in the agreement.
Enhanced bank guarantee
A guarantee to which additional enforcement conditions have been added, beyond those set in the Sale Law. For example:
- a condition under which enforcement of the guarantee can also be demanded in the event of a delay in construction;
- a condition under which the guarantee can also be enforced if the construction works stop for more than 90 consecutive days, other than in circumstances of force majeure.
The additional conditions allow the apartment owners to act when the project gets stuck, and not only when the developer can no longer hand over the apartments.
Guarantee securing the rent during the construction period
An autonomous, unconditional bank guarantee, securing payment of the rent that the developer pays the apartment owners during the construction period. Its amount equals the monthly rent multiplied by the number of months of the construction works.
Guarantee securing the tax payments
An autonomous bank guarantee that secures payment by the developer of the taxes it undertook to pay for the apartment owners. At the stage before construction begins, the apartment owners receive a professional opinion from a tax adviser on the tax exposure that applies to the owners and that the developer must pay for them. The amount of the guarantee is set according to the opinion, and the apartment owners receive an autonomous bank guarantee accordingly.
Guarantee for legal proceedings
An autonomous bank guarantee for a sum fixed in advance, intended to fund legal proceedings by the apartment owners against the developer: if the agreement is cancelled, or when guarantees need to be enforced. This way the apartment owners do not have to fund the proceedings out of their own pockets just when the project is in trouble.
Guarantee securing registration of the condominium
A bank guarantee that the apartment owners receive at the stage when the new apartments are handed over. It is intended to ensure that the developer registers the condominium in accordance with the agreement, so that each apartment is eventually registered in its owner's name.
| Guarantee | Type | Amount | When |
|---|---|---|---|
| Sale Law | Under the Sale Law | The value of the new apartment, including VAT | Before the evacuation, until the new apartment is handed over and registered |
| Enhanced | Sale Law, with additional enforcement conditions | The value of the new apartment, including VAT | Before the evacuation |
| Rent | Autonomous, unconditional | The monthly rent multiplied by the number of months of the construction works | Before the evacuation, for the construction period |
| Taxes | Autonomous | According to the tax adviser's opinion | Before construction begins |
| Legal proceedings | Autonomous | A sum fixed in advance | According to the agreement |
| Registration of the condominium | Bank guarantee | According to the agreement | When the new apartments are handed over, until registration |
This is a summary only. Every case should be reviewed individually with a lawyer who specialises in the field.
What to check in each guarantee
- That the guarantee was issued by a bank, and that its wording is the wording agreed in the agreement and approved by the residents' lawyer.
- Who the beneficiaries are: the apartment owner themselves, or the lawyer in trust for them.
- The amount, and whether it is index-linked.
- The expiry date, and who is responsible for extending the guarantee if construction takes longer.
- What the conditions for enforcement are, and which documents must be submitted to the bank.
Also important alongside the guarantees are the project's closed bank financing, the insurance policies and the inspection periods under the Sale Law. See also the Guarantees and security section on the pinui-binui (evacuate and rebuild) page.
Frequently asked questions
When do you receive the guarantees?
The Sale Law guarantee, the rent guarantee and the tax guarantee are delivered before the apartment owners vacate the building, so that the old apartment is not handed over to the developer without security. The guarantee for registration of the condominium is delivered when the new apartments are received. The exact dates are set in the agreement with the developer.
What is the difference between a Sale Law guarantee and an enhanced guarantee?
A Sale Law guarantee can be enforced in the circumstances set by the Sale Law. In an enhanced guarantee, additional enforcement conditions are added, for example a delay in construction, or a stoppage of the works for more than 90 consecutive days, other than in circumstances of force majeure. This makes it possible to enforce the guarantee even in situations that the law itself does not cover.
Who holds the guarantees?
Usually the residents' lawyer holds the guarantees in trust for the apartment owners, and makes sure that they are valid, extended on time and match the wording agreed in the agreement.
What is an autonomous guarantee?
A guarantee that the bank must pay on demand, without examining the dispute between the apartment owners and the developer. It makes it possible to receive the money quickly, without waiting for a legal ruling on the dispute.
This is a summary only. Every case should be reviewed individually with a lawyer who specialises in the field.
Have you received a draft agreement from the developer?
Before signing, check that all the guarantees appear in the agreement, with the correct amount and wording. Leave your details, and we will get back to you.