Buying an Apartment “On Paper” – Caveat Emptor?

In the Supreme Court’s 67-page ruling, the judges explain the liability and responsibility of “on paper” apartment sellers to actively disclose material information about the apartments they sell. The Supreme Court determined in no uncertain terms: caveat venditor.

Ms. Mor v. Elad Israel Residence

The ruling concerns an apartment Ms. Mor bought at the high-end “Park Bavli” project in Tel Aviv from Elad Israel Residence and another seller. The parties signed a sale agreement before construction or issuing a building permit, i.e., an “on paper” sale. The building permit application, submitted before the sale agreement was signed, showed a utility structure for the residents located near the residential building.

According to the plans, the structure’s roof would be higher than the buyer’s apartment floor, substantially blocking the entrance to the apartment. Namely, the sellers knew in advance the structure would block one of the plaintiff’s apartment fronts. The building permit application was not presented to the buyer and was not included in the sale agreement. After commencement of the project’s construction, the buyer visited the project site and observed the obstruction the tenant utility structure roof creates. The buyer reached out to the sellers about this, and when the parties’ attempts to settle their dispute failed, the buyer brought a lawsuit before the district court. In the lawsuit, Ms. Mor claimed a breach of the sale agreement, as, in accordance with the presentation made to her before she signed the agreement, the view from her apartment would not be blocked when, in fact, it was blocked and the representation turned out to be false. The buyer sued for cy-près enforcement (assignment of another apartment in the building), or, alternatively, for monetary damages.

The District Court’s Decision

The district court denied the buyer’s claim. Among its explanations, the court determined:

• The buyer did not prove such a representation had been made to her.
• Even if it is assumed such a representation was made in the pre-contract stage, the sale agreement exhausts the parties’ representations and warranties. Moreover, as it does not contain the claimed representation, there is no representation and no breach.
• An attorney on the buyer’s behalf represented her in the negotiation. The attorney’s responsibility is not limited to the technical aspects of sale agreements, and he or she bears a heightened liability for sale agreements.

In its ruling, the district court limited its review of the sellers’ liability to that assumed by them in the substantial provisions of the sale agreement and the sellers’ compliance with the provisions of the Sale Law and the Sale Law – Apartments. Once the court determined the technical specifications and plans attached to the sale agreement matched the buyer’s apartment as built, it concluded the sellers were not in breach of the agreement.

The Appeal

The buyer appealed to the Supreme Court, which granted the appeal. In its long and detailed ruling, the Supreme Court clarified the legal construction and normative framework as examined in “on paper” apartment sale agreements. It also determined that the legal relationship between the buyer, as an “on paper” apartment buyer, and the sellers, falls under a category of “special contracts, which are governed by special, and essentially regulatory, statutory systems.” These systems differ from the corresponding systems that apply to ordinary contracts.

The Supreme Court highlighted the asymmetry and information gaps between seller and buyer when buying an apartment “on paper.” In consideration of these gaps, the Supreme Court determined the apartment seller must make sure the information the apartment buyer receives contains all relevant details about the purchase in plain and accessible language. Among other things, this duty stems from the apartment seller’s general duty not to mislead the buyer and to treat the buyer in good faith and in the customary manner.

The Court found, further, that considering the information and power gaps between a contractor (the seller) and an “on paper” apartment buyer, the buyer has no choice but to almost completely rely on the contractor and on the information the contractor is willing to submit and reveal. A heightened duty of disclosure applies to the contractor, following from these gaps and the duty of good faith in negotiations.

Good Faith

The anchor the Supreme Court threw into the heart of the legal ocean is the duty to conduct negotiations in good faith and in the customary manner, in accordance with Section 12 of the Contracts Law. In its deft and well-thought-out ruling, the Supreme Court found that, on the one hand, the sellers are not in breach of the sale agreement, but, on the other hand, they are in breach of their duties to negotiate in good faith.

In so doing, the Supreme Court balanced between the need to preserve a sale agreement’s power to exhaust and represent all agreements between the parties on the terms of the sale agreement and to establish commercial certainty and the inherent need, which governs all contract law, to apply a broad policy of sharing and providing information about “on paper” apartments as part of a desirable normative policy. The Supreme Court did not give the injured buyer a remedy in the form of cy-près enforcement, as the sellers did not breach the sale agreement, and it did not allow the undermining of the sale transaction. At the same time, however, the Supreme Court granted the plaintiff a suitable remedy considering the circumstances, in the form of compensation to be determined in the “relative calculation method.” This put the buyer in the situation she would have been in, had the sellers not breached their duty of good faith toward her.

As for the district court’s statements on the buyer’s attorney’s responsibility, the Supreme Court found the district court did not clearly explain how it conceives of the duties of “on paper” apartment buyers’ attorneys and how the buyer’s representative failed, if at all. This finding reinforces the Supreme Court’s essential determination in this ruling, regarding an “on paper” apartment seller’s heightened liability, by eliminating the possibility of shifting the liability, wholly or partially, to the buyers’ representatives.

“Caveat Venditor”

The ruling targets “on paper” apartment sellers and informs them publicly that from now on, they must share all information in their possession that might affect a buyer’s decision to sign the purchase agreement, including whether the apartment and the consideration match its expectations. Doubtlessly, the ruling imposes broad responsibilities and duties, and the implementation might call for more “instructional” rulings. In this case, it is clear information on obstructions of the view from a residential apartment, stemming from a structure the seller itself intends to build, is indisputably important to apartment buyers, and it is natural to consider this information that calls for a lawful disclosure.

However, it remains in doubt what other information, which might not be so clearly necessary for a buyer, or which the seller does not have but can obtain much more cheaply than the buyer, a buyer or the court’s next ruling could perceive as necessary for the seller to disclose. At this stage, the boundaries are blurry. We look forward to seeing how sellers and courts formulate clear and easily implemented rules according to this principle and if they might even go a step further and include other information that calls for a disclosure in the Sale Law – Apartments.

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Adv. Terry Almozlino Arnon heads Barnea Jaffa Lande‘s Commercial Real Estate department.