“Let the Buyer Beware”?!

“Let the buyer beware” (or caveat emptor, in Latin) is a fundamental principle of contract law, under which the buyer alone is responsible for checking the quality and suitability of an item before he buys it. So, if a buyer fails to make the appropriate legal, planning and physical checks before purchasing a property, he has only himself to blame.

Yet, under Israeli contract law, a good faith obligation is imposed not only in fulfilling a contract, but even when negotiating a contract, the parties must “act in a customary manner and in good faith”. Failure to do so may entitle the injured party to sue for compensation (sections 12 and 39 of the Contracts (General Part) Law, 5733-1973). The requirement of good faith not only in fulfilling the contract, but even at the negotiating stage, regardless of whether the contract materializes at all, is an extremely far-reaching innovation. Effectively, this means that one or both parties to a contract may be liable for acting in bad faith or against good usage.

Concealment of defects is a common phenomenon in the second-hand property market in Israel. Sellers exploit the buyer’s naiveté and attempt to hide behind the conventional rule of caveat emptor. The standard clause that appears in almost all real estate contracts states: “The Apartment will be sold כמות שהיא”, and to underscore the fact that the buyer will be estopped from suing the sellers should it transpire after the sale that any defects are discovered by the buyer, the two Hebrew words will be translated into English(!), often capitalized, underlined and bolded: “AS IS”.

Yet a growing number of court cases in recent years have clarified that the seller is required to disclose to the buyer any defects of which he is aware before signing the sale contract. In one case, the court ordered an apartment seller to pay NIS 200,000 in compensation for committing a fundamental breach of the contract, after failing to disclose to the buyers that the patio flooring was planned. The buyers, who bought the apartment in the summer of 2015, sued the sellers, when, in the winter of that year, it became apparent that the defective tiling on the balcony was causing drainage problems, resulting in turn in the penetration of rain water into the outer walls. Moreover, they claimed the sellers were grossly in breach of their contractual declarations and undertakings, which stated that all of the systems in the property were in proper working order and that they were not aware of any defect in the house.

The sellers protested that in the sale agreement the buyers had declared and warranted that they had examined the property, including its physical, engineering and planning condition, and found it suitable for their purposes, and explicitly waived any claim on the ground of defect or incompatibility, purchasing the property “as is”.

The court ruled that the sellers had breached their duty of disclosure, such breach contradicting the principle of good faith enshrined in Israeli law. To the contrary, the Sale Law required the sellers to represent the true condition of the property to the buyers.

The court had recourse also to section 15 the Israeli Contract Law, which provides that “deceit includes the nondisclosure of facts which the other party – according to law, custom or circumstances, should have disclosed”. The assumption is that due to the buyer’s limited access to material information regarding the property, his position is inferior to that of the seller. It follows that the seller is required to reveal, in a proactive and explicit manner, any factor relevant to the specific condition of the property being sold. This might include dampness and mold (retivut) problems, electrical faults etc., in addition to liens and charges relating to the legal status. Planning infringements should also be disclosed.

Section 16 of the Sale Law further provides that failure to disclose a nonconformity “arising out of facts which the seller knew or should have known when the contract was concluded, and which he did not disclose to the buyer” may entitle the buyer to rely on such nonconformity, “provided he gives notice to the seller immediately upon discovering it”. In practice, even if notice has not been furnished in a timely manner, the buyer may still be entitled to compensation, according to a court ruling in a case of retivut. Even a nonconformity that appears minor or insignificant in the seller’s eyes should be disclosed by the seller.

Does this mean that the buyer need not perform legal/planning/physical checks of the property before he buys it? No; all such checks should be performed as a matter of course, using appropriate professionals. Firstly, for peace of mind; but, secondly, because, in practice, it is often possible to obtain a reduction in the sale price due to some defect discovered in the premises in the course of an inspection!

Yet as the buyer’s lawyer, I would add a large number of prefatory clauses (“Recitals”) to the contract, in which the seller declares and affirms that his rights in the property are free and clear of any lien, charge, mortgage etc.; that there is no demolition or other judicial/administrative order against the premises, and the seller is not aware of any intention to instigate such proceedings; that the property is fit for living in; that it has been constructed according to a lawful building permit; that there Is no demand and/or dispute and/or other legal proceeding between the seller and neighbors or other third party, including any tenants in the premises; that the seller is not aware of anyone who has been injured in the apartment and/or of any tortious proceeding against the apartment etc.

So, yes, the buyer should beware and be aware of anything that can conceivably be discovered by an appropriate professional and through the naked eye; but sellers too should be wary that the courts may, in appropriate cases, rule that they have not, in good faith, fulfilled their legal obligations owed to the buyers!

 

The writer, Simon M. Jackson, is a practicing Israeli attorney, notary and legal translator, and also a qualified UK solicitor. Simon represents residential and commercial clients in real estate transactions, and also advises on rental, employment and general contracts. Simon can be contacted by any of the following methods:

Telephone/WhatsApp: 0545-742-374 / 0737-40-60-40
Email: simon@jacksonadvocates.net
Skype: simonjackson
Facebook: israelnotary