Legal Due Diligence in Second-Hand Real Estate Transactions - only with a Real-estate Lawyer

General Overview – Why Second-Hand Transactions Are More Complex Than They Seem

Purchasing a second-hand apartment may appear to be a simple process: the property already exists, the buyer can physically inspect it, and the transaction often takes place directly with a private seller. However, this illusion of simplicity can be deceptive. It often leads buyers to make mistaken assumptions or to become complacent, believing that “since the apartment is already built, there is no real risk.” In fact, this assumption is one of the main causes of costly mistakes in real estate transactions.

Unlike the purchase of an apartment from a developer, which is heavily regulated under Israel’s Sale Law (Apartments - Guaranteeing Investments of Apartment Buyers), second-hand transactions are governed primarily by the general principles of contract and property law. This means that the responsibility for conducting legal due diligence falls entirely on the buyer. Every check that is not carried out creates an open door for future legal and financial risks.

The Importance of Legal Representation in Second-Hand Transactions

Many buyers who are not represented by a lawyer during the purchase of a second-hand apartment find themselves, often at an advanced stage, facing legal and practical obstacles that work against their interests. Common examples include:

· Old caveats “He’arat Azhara” (notes of caution) still registered in the Land Registry (Tabu) that were never removed;

· Liens or foreclosures imposed after signing the agreement but before title registration;

· Building irregularities, which can lead to fines, unanticipated municipal charges, or even demolition orders;

· Hidden ownership disputes, such as claims by heirs, cohabitants, or tenants;

· Existing mortgages or contractual obligations of the seller that have not been disclosed.

The most critical stage in a second-hand property transaction is not merely the signing of the contract — but rather the pre-contractual due diligence. This is where the lawyer’s role becomes essential: not as someone who merely fills out forms, but as a professional who identifies, exposes, and mitigates potential risks.

Core Legal Principles – Good Faith, Duty of Disclosure, and Responsibility

The Role of Sections 12, 39, and 61 of the Israeli Contracts Law

Section 12 – Good Faith in Negotiations

“In negotiations toward the conclusion of a contract, a person must act in an acceptable manner and in good faith.”

This section establishes the foundation for the mutual duty of disclosure between the parties. Even before a binding contract exists, withholding a material fact during negotiations may be considered bad faith behavior.

Section 39 – Good Faith in the Performance of a Contract

“In fulfilling an obligation arising from a contract, a person must act in an acceptable manner and in good faith.”

Over the years, Israeli court rulings have interpreted this section broadly, applying it to situations where one party violated the spirit of the agreement, concealed important information, or exploited the other party’s lack of knowledge.

Section 61(b) extends these principles to non-contractual dealings, thereby requiring fair and honest conduct even in cases not explicitly regulated by law.

Examples of (Lack of) Good Faith in Real Estate Deals

· A seller concealing ongoing planning or zoning proceedings against the property;

· A seller failing to disclose a prior contractual obligation to sell the same property to a third party;

· A buyer neglecting to verify the legal status of the property altogether.

Judicial Interpretation – The Centrality of Good Faith

The Israeli Supreme Court has repeatedly emphasized the importance of good faith both in disclosure and in conduct between contracting parties:

“A party cannot act in bad faith by knowingly concealing material information and then argue that the buyer simply failed to ask.”

“The duty of good faith is not a matter of moral preference — it is an integral part of the legal system in Israel.”

Leading Case Law – Aharonov, Shifris, and Recent Decisions

Aharonov (C.A. 189/95)

In this landmark case, the court addressed the validity of an ownership right that had not yet been registered in the Land Registry. Aharonov purchased a property but failed to register a caveat (He’arat Azhara). Subsequently, a lien was registered against the property.

Key holding: “A commitment to transfer ownership rights, accompanied by delivery of possession or equivalent legal acts, grants the purchaser an equitable right that prevails over a later lien.”

This decision reinforced the concept of equitable rights, recognizing that contractual rights may take precedence over later-registered encumbrances if the buyer acted in good faith and fulfilled their obligations.

Shifris (C.A. 8068/11)

The court ruled that a seller must disclose existing building violations even if the buyer does not explicitly inquire about them. This precedent marked a conceptual shift from “buyer beware” to “seller beware” in Israeli real estate law.

“A seller who conceals material information acts in bad faith and may be held fully liable for the buyer’s damages.”

C.A 38018-12-22 – A Modern Application of the Aharonov Doctrine

In this recent case, a woman claimed ownership of an apartment under a divorce agreement and an irrevocable power of attorney. The court ruled that her right — though unregistered — prevailed over later liens.

The judge emphasized that a clear commitment, coupled with good faith and a supporting legal document (such as an irrevocable power of attorney), creates an equitable right that protects the buyer from subsequent encumbrances. Even governmental authorities cannot override such a commitment retroactively.

Essential Pre-Purchase Legal Checks in Second-Hand Property Transactions

Title Verification – Land Registry, Israel Land Authority, or Housing Company

The first and most critical step in any second-hand real-estate transaction is verifying the ownership and registration status of the property. The buyer’s lawyer must determine where the property is registered and under which regime:

· Land Registry (Tabu): confirm that the seller is the registered owner and that there are no notes of caution, liens, or foreclosures.

· Israel Land Authority (ILA / RMI): if the property is held under a leasehold, review the lease terms and verify whether there are restrictions on the transfer of rights.

· Housing Company Records: when the property has not yet been registered in the Land Registry, ensure that the seller appears as the lawful owner in the company’s records.

What Must Be Verified

· That the ownership or leasehold right is valid and transferable;

· Whether there are any prior caveats registered in favor of third parties;

· Whether there are planning restrictions, such as expropriations or easements, that limit future use of the property.

Caveats, Liens, and Common Encumbrances

It is common for second-hand properties to carry prior registrations, such as caveats in favor of a former spouse, an heir, or a previous buyer whose transaction was never completed. A registered caveat means that another party may claim a right in the property, and it cannot be ignored.

Additionally, a thorough search must include:

· Liens registered by the Execution Office (Hotza’a LaPo’al);

· Encumbrances registered by government authorities (e.g., Tax Authority, National Insurance, or municipal fines);

· Contractual undertakings of the seller (for example, those included in a divorce settlement).

Planning and Building Checks – Construction Deviations, Orders, and Levies

Building Permits and Deviations

A planning check with the local municipality is essential to verify that the structure complies with its building permit and approved plans. Questions to ask include:

· Were any additions (e.g., balconies, roof enclosures, or parking conversions) made, and were they properly authorized?

· Have internal alterations been carried out that compromise structural integrity or deviate from the approved plan?

Municipal authorities in Israel have the power to issue demolition or cessation orders even years after illegal construction was completed — and these may apply to the new buyer as the property owner.

Documents to Request from the Seller

· The original building permit and Form 4 (occupancy certificate);

· A written declaration that no building violations or unauthorized additions exist;

· Confirmation from the municipality that no enforcement proceedings are pending against the property.

Enforcement Orders and Betterment Levies

Before completing the transaction, verify whether any demolition orders, work stoppage orders, or municipal warnings have been issued; whether betterment levies (Heitel Hashbacha) have been imposed but remain unpaid; and whether pending municipal or civil claims exist against the property owner. Municipal inquiries are not optional — they are a mandatory due-diligence step, especially when any structural changes have been made to the apartment.

Financial Checks – Debts to Authorities and Utility Providers

Unpaid debts associated with a property can pass to the buyer upon transfer of ownership. These may include:

· Municipal property taxes (Arnona);

· Water and sewage fees;

· Infrastructure or development levies;

· Outstanding condominium fees to the residents’ committee (Va’ad Bayit).

How to Verify

· Obtain a municipal clearance certificate confirming no outstanding debts (and listing future charges, if any);

· Obtain a letter of clearance from the building’s residents’ committee;

· Check with the Israel Electric Corporation and the local water company;

· Include a contractual clause stating that any debt incurred before possession remains the sole responsibility of the seller.

Contractual Protections to Include in the Sale Agreement

Representations and Warranties

A properly drafted Sale Agreement should contain clear representations by the seller, including confirmation that:

· They hold full and lawful ownership of the property;

· There are no pending claims, liens, or third-party rights;

· The property complies with all planning and zoning regulations and has no building violations;

· All taxes, municipal levies, and other payments have been fully settled;

· A portion of the purchase price is held in trust (escrow) by the buyer’s attorney to cover any potential municipal debts.

Breach of these representations may entitle the buyer to liquidated damages, contract termination, and even compensation for misrepresentation under the Israeli Contracts (Remedies for Breach) Law.

Protective Clauses for the Buyer

· Termination Clause: enables the buyer to cancel the agreement if hidden encumbrances, building violations, or undisclosed debts are discovered.

· Suspension Clause: allows the buyer to delay payments until liens are removed or a municipal clearance certificate is provided.

· Escrow Arrangement: purchase funds are held by the lawyer until specific conditions are met (e.g., receipt of municipal approval).

· Caveat Registration: the buyer’s caveat should be registered immediately upon signing the agreement (usually within three to seven days) to prevent conflicting transactions.

The Lawyer’s Role in Second-Hand Transactions – Far Beyond “Checking the Tabu”

More Than a Technical Task

A real-estate lawyer in a second-hand transaction does far more than perform a technical title check. They act as the buyer’s gatekeeper, responsible for analyzing every legal, contractual, planning, and financial aspect of the deal:

· Legal: title, liens, and prior agreements;

· Planning: building violations, demolition orders, and municipal files;

· Contractual: ensuring balanced terms that protect the buyer’s interests;

· Financial: coordinating bank financing, payment schedules, and escrow arrangements.

Common Buyer Mistakes – and What We Can Learn from Them

· Relying only on the seller’s word instead of obtaining an up-to-date Land Registry (Tabu) extract;

· Ignoring the building permit and later discovering illegal additions;

· Delaying the registration of a caveat, thereby risking later liens or double sales;

· Signing a memorandum of understanding (Zikaron Devarim) without legal counsel;

· Failing to obtain municipal clearance and inheriting the seller’s debts.

When Neglecting Due Diligence Becomes Expensive – Lessons from Case Law

Shifris (C.A. 8068/11) – Failure to Disclose Building Violations

The seller failed to disclose substantial building deviations. The court ruled that this constituted bad faith and ordered the seller to pay significant compensation to the buyer. The duty of good faith includes full disclosure of material information — even when not explicitly requested.

Aharonov (C.A. 189/95) – Equitable Rights Prevail Over Liens

The court held that a buyer who acquired a property and fulfilled the contractual terms obtains an equitable right that supersedes later-imposed liens — even without a registered caveat. Contractual and equitable rights, when exercised in good faith, may override subsequent registrations.

C.A 38018-12-22 – Rights Under a Divorce Agreement

A woman claimed ownership of an apartment based on a divorce settlement and irrevocable power of attorney. Even though liens were registered afterward, the court ruled in her favor, reaffirming the Aharonov doctrine: her equitable right, based on a clear legal commitment and good faith, took precedence.

Practical Recommendations for Safe Real Estate Transactions

· Do not rely on instinct — conduct thorough legal and factual checks.

· Do not sign any document (including a memorandum) without legal review.

· Demand official documents: updated Tabu extract, building permits, and municipal confirmations.

· Transfer funds only through escrow with clear, pre-defined conditions.

· Register a caveat immediately after signing the contract.

· Review all prior agreements and encumbrances carefully.

· Consult a real-estate lawyer who specializes in due diligence, not just contract drafting.

Summary – Key Takeaways for Buyers

· Do not rely on verbal assurances — demand documentation.

· Always engage and consult with an attorney before signing any document.

· Ensure full transparency and due diligence on title, planning, and debts.

· Record a caveat immediately to protect your interest.

· Transfer funds only after all legal conditions are met.

· Legal representation is not an expense — it is an investment.

Attorney Adam Znati – Your Legal Partner for Real Estate Decisions

Purchasing a home is a major life and financial decision. It requires a combination of legal caution, experience, and attention to detail. Adam Znati Law Office specializes in representing buyers in second-hand real-estate transactions — from the preliminary due diligence and drafting of the contract to registration of ownership in the Land Registry.

· Full legal representation – from inspection to registration;

· Personal and professional attention – full availability for every question;

· In-depth knowledge of all relevant authorities and regulations.

Visit us at Adam Znati Law