When my phone rings and the name “Yoram” appears on it, I already know I am about to receive either a big smile or a loud shout. That is the reality when you serve as trustee over buyers' funds in international projects - a relationship that swings between love and hate, sometimes in the same week.
As a lawyer who accompanies developers building overseas who wish to sell the properties to the Israeli public, a substantial part of our work focuses on managing the project's trust account. Since in a considerable share of the countries where Israeli developers operate it is not possible to give the buyer security that is adequate from a regulatory standpoint, and some of the developers ask to receive financing from a local bank or investment fund and are required to pledge the property in their favor, we are required to look for creative ways to replace the security mechanisms customary in Israel under the Sale (Apartments) (Securing Investments of Apartment Buyers) Law. Our role is to create an alternative legal security structure while balancing interests - this is where our legal experience comes in. For each project we try to tailor the right way that will combine the developer's needs with the protection of buyers' funds, to ensure that in the end the buyer receives the property he paid for. This situation creates a love-hate relationship between the lawyer, the trustee, and the developer.
Every week when I sent Yoram the report on the state of the funds in the trust account, I would receive a WhatsApp message with a smiling, happy face emoji. The marketing people Yoram hired did a good job and the pace of sales was beyond what Yoram expected at the start. Yoram was required to raise a substantial sum of over a million euros in the trust account so that he could complete the purchase of the property, and begin what he called a “facelift” ahead of turning it into a modern apart-hotel. The property is supposed to be pledged in favor of the trustee, to ensure that Yoram cannot sell it to third parties until the time when ownership of the units can be registered in the buyers' names.
Last week we completed the process of Yoram's purchase of the property and its pledge in favor of the trustee, not before a crisis in the relationship and a not-so-simple quarrel between me and Yoram.
“Have you lost your mind?” he shouted at me on the phone. “A lien worth 1.2 million euros? Do you know how much tax and notary fees I have to pay on that?”
“What do you expect me to do? How do you expect me to protect the buyers' funds?” I asked.
“Did you examine other registration alternatives? Did you consider registering a partial lien? Why can't you register a lien on 50 or 100 thousand euros? Why does the lien have to be registered for the whole amount?” he replied angrily.
I won't burden you with long legal explanations. I explained to Yoram that from a legal standpoint, if we are required to enforce the lien, we endanger the buyers' funds if the lien is not for the full amount. In case of insolvency or enforcement proceedings, as the holder of a partial lien (which, as noted, is meant to protect the buyers' funds), I may find myself at a significant disadvantage against other creditors. I also suggested that we hold a call with the local lawyer accompanying us, so that he too would explain the legal implications to him (after I had verified in a preliminary conversation with him that the best protection of the buyers' funds would indeed be registering a lien for the full amount that would be transferred to Yoram).
Even after the conversation with the local lawyer Yoram did not calm down and kept being angry.
The truth? I understand the cost-benefit considerations that guide Yoram. Unplanned transaction costs affect the project's cash flow. Yoram did not take into account the cost of registering the lien. It was not a large sum relative to the overall investment, but one can understand that an unplanned expense of a few tens of thousands of euros for the lien is an expense that seems unnecessary to the developer (and between us, had he been building in Israel he would have been required to fund the bank guarantees for the buyers under the Investments Assurance Law, and those also cost quite a lot).
The tension between a developer and a trustee lawyer is a familiar phenomenon in real estate. The developer, driven by business considerations, sees the trustee lawyer as an obstacle on the way to achieving his profits, while the lawyer is committed to protecting the buyers. Our role is to find the point of balance - to protect the buyers without strangling the developer.
It is expected that during the project with Yoram further issues will arise concerning withdrawals of funds from the trust account, defining milestones for the release of funds, and mechanisms for supervising the project's progress. All of these are an integral part of the unique legal challenge of cross-border real estate projects, in which the trustee lawyer serves as a gatekeeper in a complex system of conflicting interests.
This, in essence, is the role of the trustee - to ensure the buyers' proprietary interest while having a deep understanding of the legal and business environment in which the developer operates, even when this leads to unavoidable friction.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית