Supreme Court Rules Financiers Must Compensate Buyers for Project Delays
The Israeli Supreme Court ruled that financial backers taking over failed real estate projects must compensate apartment buyers for delivery delays, altering rescue project economics.
The Supreme Court has ruled that financial accompaniment companies that take over a project following the collapse of the original developer are also responsible for compensating apartment buyers for delays in delivery. This ruling came in the case of a failed Tama 38/1 urban renewal project in Bat Yam, where the accompanying financial institutions refused to compensate buyers for late delivery.
The project is located at 63 HaNeviim Street in Bat Yam, managed by a company bearing the street's name. In 2017, the company agreed with tenants to build a Tama 38/1 project, which included the construction of 14 new apartments. A family purchased one of these apartments under a contract stipulating delivery within two years of signing, by the end of 2019.
However, the developing company collapsed in 2021, and Adv. Hagi Ullman was appointed as its receiver by the Tel Aviv District Court at the request of the project's financial backers, Yessodot E. Real Estate and Development and Harel Insurance.
As in similar cases, severe delays occurred in delivering the apartments to the buyers. Most units were delivered only last year, except for the apartment purchased by the family, which became entangled in legal proceedings.
In 2022, the family petitioned the Tel Aviv District Court, asking it to instruct the receiver to compensate them for the delivery delay as stipulated in the agreement and the Sale Law. The receiver argued that the companies' only obligation toward the buyers was providing the statutory Sale Law guarantees.
The District Court initially dismissed the petition, ruling that the contracting company was not undergoing insolvency proceedings and that the receiver's appointment was intended solely for realizing fixed liens. The court noted that choosing to complete the construction created a "blurring of boundaries" between the receiver's role in realizing the lien and handling the company's broader affairs.
However, the Supreme Court, via a panel consisting of Justices Noam Solberg, Yael Wilner, and Ruth Ronen, sustained the appeal and overturned the District Court's decision. Justice Ronen explained that the financial backers' choice to continue building creates a structural tension between buyers' expectations and the banks' rights to full loan repayment, establishing that the financiers step into the developers' shoes regarding obligations to buyers.
The ruling splits liability into two parts: pre-receivership debts created by the developing company, and debts accumulated during the receiver's operation period. While buyers are not super-creditors for the initial delay period caused by the developer, they are entitled to compensation from the receiver for delays occurring during the second period. This creates a proper incentive for receivers to complete construction swiftly.
Legal experts note that this landmark decision serves as a major warning sign for financing bodies. Credit committees must now factor in ongoing liabilities to apartment buyers, particularly late-delivery compensation, fundamentally altering the economic models and risk assessments of rescuing distressed real estate projects.
