Bank Guarantee in Apartment Purchase: The Complete Guide

A bank guarantee is one of the most important legal tools for protecting apartment buyers in Israel. The Sale (Apartments) Law (Buyer’s Investment Security), 1974, obliges contractors to provide security for every payment made by the buyer. This guide explains everything you need to know.

What Is a Bank Guarantee and Why Is It Important

A bank guarantee is a document issued by the bank to the buyer, obligating the bank to pay the buyer the deposited amount if the contractor fails to fulfil his obligations. It protects the largest investment a typical family makes in life.

Without a guarantee, if the contractor becomes insolvent, the buyer risks losing his money and being left without an apartment. With a guarantee, the buyer can approach the bank and recover his funds.

Types of Security the Contractor Must Provide

The law allows the contractor to choose among several protection options:

Bank guarantee: the most popular. The bank guarantees every payment made. When the contractor fails to meet his obligations, the buyer approaches the bank and receives his money back.

Insurance: an insurance company replaces the bank. It is important to verify that the insurance company is approved for this purpose.

Pledge: the contractor pledges an asset of equivalent value for the buyer’s benefit.

Registration in Tabu: if the apartment has already been registered, acquiring rights in Tabu protects the buyer.

Fiduciary deposit: the buyer’s funds are deposited in a trust account that only the buyer can release.

When Is the Guarantee Exercised

The law defines the cases in which the buyer is entitled to exercise the guarantee:

• The contractor did not deliver the apartment within 60 days of the contractual date.
• The contractor was declared insolvent or a receiving order was issued.
• A liquidation order was issued against the contractor.
• The contractor’s assets were attached.
• The land registry refused to register the apartment in the buyer’s name.

How to Exercise a Bank Guarantee in Practice

Exercising a guarantee requires a process: the buyer must approach the bank with the original guarantee and supporting documents proving his right to exercise it. The bank examines the request and pays if the requirements are met.

It is important to keep the guarantee in a safe place, as a lost guarantee is very difficult to replace. Also note the guarantee’s expiry date and ensure timely renewal.

What Happens When the Contractor Becomes Insolvent

This is the scenario the guarantee is designed for exactly. If the contractor became insolvent before handing over the apartment:

First, exercise the bank guarantee immediately. Do not wait for the outcome of the simple insolvency proceeding.

Second, file a debt claim in the insolvency proceeding. Even if there is a guarantee, you may receive additional compensation for damages caused.

Third, check whether it is possible to receive the apartment through a property administrator continuing the project.

5 Frequently Asked Questions

Are guarantees required for every payment?

Yes. By law, the contractor must provide security for every payment made by the buyer, not only the first. Ensure that the guarantee is updated with each additional payment. Contractors who do not update the guarantee violate the law.

What happens if the contractor does not provide a guarantee?

This is a serious violation of the law. The buyer may demand cancellation of the transaction and recovery of his money, approach the authorities responsible for supervision, or demand that the contractor immediately provide a guarantee. This concerns a fundamental right that may not be waived.

Does the guarantee cover significant project cost overruns?

Not always. The guarantee covers the amounts transferred to the contractor, but does not necessarily compensate for price increases, additional costs, or consequential damages. It is therefore important to ensure that after exercising the guarantee you have sufficient funds to complete the purchase with another contractor.

What is the difference between an “autonomous” bank guarantee and a regular one?

An autonomous guarantee pays the buyer upon presentation of the demand, without any need to prove that the contractor breached the contract. A regular guarantee may require proof that the contractor breached the contract. Under the Sale (Apartments) Law, the guarantee is designed to be autonomous as far as possible, so it is important to check the guarantee wording before signing the contract.

What happens when registration in Tabu is reached — is the guarantee still valid?

At the moment the apartment is registered in the buyer’s name in Tabu, the bank guarantee is returned to the contractor. Tabu registration is the best protection because it proves that the apartment belongs to the buyer. Therefore, carrying out Tabu registration in advance is very important.

For free advice on bank guarantees and apartment purchase, contact the Lev-Taieb office: 072-2428822. Construction defects lawyer.