The Ministry of Construction and Housing recently published a memorandum of law entitled “Draft Sale Regulations” (Apartments) (Securing Apartment Buyers’ Investments) (Restriction on Payments on Account of an Apartment Price) (Amendment), 5779 – 2018.

Up until today, when a person buying a new apartment from a contractor received a surety from the contractor for the monies he paid in respect of the apartment in the form of a caveat, the buyer was required to pay the installment payments for the apartment according to the progress in the construction, at the payment rate defined in the regulations’ payment schedule for each construction stage.

The anticipated amendment to the regulations prescribes a payment schedule for the first time that is specifically defined for urban renewal projects involving the addition of new apartments to existing buildings, including according to a national outline plan for retrofitting existing buildings. Moreover, buyers of these apartments receive a surety in the form of a caveat.

The payment schedule customized for NOP 38/1 projects contains specific reference to the stages of construction of these types of urban renewal projects.

At issue is a measure sought by the Ministry of Construction and Housing, in light of the steady rise in demands for urban renewal projects, and in light of the unfortunate fact that many NOP 38/1 projects have failed while underway in recent years. Contractors often abandoned ship and left existing apartment owners and the buyers of the new apartments in an untenable situation, holding only a caveat.

For example, according to the suggested payment schedule for new construction, upon completion of the initial construction stage (the pouring of the concrete floor of the building’s ground level), the buyer will be required to pay up to 31% of the apartment price, and upon completion of the second construction stage (completing the foundation works up to and including the story relevant to the apartment), the buyer will be required to pay up to an additional 25% of the apartment price.

However, the proposed payment schedule defined specifically for NOP 38/1 projects offers a significant reduction in the payments to the contractor during the initial construction stages. Accordingly, it defines that upon completion of the initial construction stage (completion of the retrofitting of the building’s first floor), the buyer will be required to pay only up to 13% of the apartment price, and upon completion of the second construction stage (completing the retrofitting of the existing building, including the addition of reinforced security rooms in apartments), the buyer will be required to pay only up to an additional 13% of the apartment price.

The amended regulations will come into effect 30 days after they are promulgated, and will not apply retroactively.

To all of our clients who are planning to purchase an apartment in an NOP 38/1 project, we recommend demanding from the developer/contractor – in addition to the caveat – a payment schedule that complies with the one defined in the amendment to the regulations. This should lower your exposure to the risks posed by projects of this kind.

We emphasize that at issue here are only renovation projects involving retrofitting of existing buildings and the adding of apartments, and not demolish and reconstruct projects (as per NOP 38/2, for example), for which the suggested payment schedule for new construction will apply.