The manner in which urban renewal agreements are formulated (which are signed on a daily basis) is critical to the parties involved, as the whole project is performed by virtue of the agreement (whether it is a reinforcement project under the provisions of N.O.P. 38, or an ‘evacuation and construction’ project), and it anchors and consolidates all of the provisions that apply to the parties, and in particular the barriers and restrictions applicable to the developer and the actions it may take by virtue of the agreement.
A classic example of this is a mechanism that determines how and when a developer can register a property caveat on the Land Register (hereinafter; “Caveat”) in its own favour by virtue of an agreement, and even more so – how and when a developer can register caveats in favour of end buyers who have bought apartments in a new project that is planned to be built. A judgment recently given by the Tel Aviv District Court deals with this very issue. There it was ruled that caveats recorded both in favour of the developer and in favour of the end buyers must be deleted, as the agreement between the developer and the original tenants was found to be null and void.
Introduction:
A few months ago, a ruling was given by the Honourable Justice Edith Berkowitz in the Tel Aviv District Court (hereinafter, the “D.C.S. Judgment”). At the heart of the case was an agreement signed in 2010 for the performance of reinforcement and renovation work to a building in accordance with the provisions of N.O.P. 38[1].
The problem with the agreement, other than the fact that it was signed 11 years ago and no progress was made with it at all, was that by virtue of the agreement, the development company, D.C.S. Reinforcement Construction Ltd. (hereinafter, the “Developer”) had registered a caveat in its favour on the rights of the tenants in the building, before the agreement was even signed by all of the tenants in the building and without having met the other conditions stipulated in the agreement that entitle the Developer to the right to register a caveat in its favour. Moreover, the Developer even went ahead and registered caveats on the rights of the tenants in the building in favour of end buyers, i.e. third parties who have no connection to the transaction or the agreement that exists between the Developer and the tenants.
In a nutshell, the agreement that was examined in the D.C.S. Judgment stipulated that the Developer will be allowed to register a caveat in its favour only after three conditions precedent have been met: the agreement has been signed by all parties, a building permit has been applied for and obtained within the prescribed dates, and a claim is filed by the Developer against a number of recalcitrant tenants. The court, however, ruled that not one of these 3 conditions precedent had been met, yet this did not stop the Developer from registering a caveat in its favour on the rights of the tenants.
As noted above, the Developer even registered additional caveats in favour of end buyers who, so it claimed, invested money in the project and the registration of the caveats in their favour was the security for the money that they had invested. Assuming that this is the case, this may indeed guarantee those end buyers but may cause severe damage to the original apartment owners in the building, on whose apartments are registered a number of caveats that prevent them from making any disposition in the apartments.
To complete the picture, it is noted in the D.C.S. Judgment, the court had no problem in deleting the caveat in favour of the Developer, since it was ruled that the agreement between it and the tenants was void. There arose a difficulty, however, when dealing with the question of deleting the caveats in favour of the end buyers, as they were never a party to the legal procedure.
The Honourable Justice Berkowitz, nevertheless, ordered the deletion also of the caveats in favour of the end buyers, with this being for several reasons but mainly due to the fact that according to the agreement, the Developer could register caveats in favour of end buyers only under a caveat registered in its own favour. Since it was ruled that the caveat in favour of the Developer is to be deleted, the caveats that were registered under this caveat (being those in favour of the end buyers) are also to be deleted.
Truth be told, the manner in which the Court came to its ruling in the D.C.S Judgment, is an important reminder to end buyers of the importance of receiving guarantees for their money while contracting with a developer, so their money will not be at risk, as has happened in this case.
The Legal Implications and the Appropriate Contractual Mechanisms:
When a caveat is deleted, it usually means that the person in whose favour the caveat was recorded no longer has a surety with respect of the relevant real estate. This creates great difficulty for such person or entity, and in the case of the D.C.S. Judgment for the end buyers. On the other hand, registration of caveats on rights in a specific real estate property, greatly restricts the use that the owner of said property, in our case the apartment owners, can make of it. In other words, these interests are to be balanced for the benefit of all the parties involved.
The way to do this, and this is also recommended when drafting an agreement between a developer and tenants as part of an urban renewal project, is to clearly set the conditions and the possible date for the registration of a caveat in favour of the developer, and to ensure that the documents that enable the developer to register the caveat in its favour are given to it only after said conditions are met. With regard to the end buyers, the agreement should state that the guarantees the developer will give them will only be a bank guarantee or in insurance policy, in accordance with the law, since such guarantee do not affect the original tenants. Thus, the developer will not be entitled to register caveats in favour of end buyers before obtaining ‘Form 4’ (occupancy permit) and conveying possession of the new apartments to the original tenants, and receiving letters of exception from the developer’s lending bank. This way, the caveats that will be registered in favour of end buyers will only be registered on the developer’s rights, and the rights of the original tenants in the new apartments will remain free and clear.
Summary:
There is great importance in the manner in which the mechanisms contained in urban renewal agreements are formulated, so that the original tenants’ rights are protected in the most comprehensive manner. One major way this can be done is by setting the manner and date for the registration of caveats in favour of the developer and in favour of end buyers in the manner specified above.
If such mechanisms are not correctly formulated, original tenants in urban renewal projects may find themselves “bound” for many years to developers and to third parties with whom they have no acquaintance, in a way that significantly limits their use of the real estate property owned by them. On the other hand, and in light of the D.C.S. Judgment, there is now also a significant risk that the end buyers will at the end of the day be left without any real guarantee for the money that they paid, and, therefore, the regulation of this issue is very important for them.
[1] Civil Action 8991-10-15 D.C.S. Reinforcement Construction Ltd. et al vs. Yosef et al, (published in Nevo 22.8.21)