Pursuant to Section 126 of the Real Estate Law 5769 1969, a warning note should be registered with the Land Registry on the real estate property of a person who has undertaken in writing to make a related transaction, or to refrain from making a transaction. The purpose of the note is to prevent conflicting transactions and ,thereby protecting the rights of the purchaser. 

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Recently, the question of the nature of the warning note as part of the purchase of a new apartment came up for discussion.

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The circumstances of the ruling, entitled "Derech Hateana",refer to a TAMA 38/1 project (strengthening a building and additional construction) in Ramat Gan, which the developer of Derech Hatana undertook.

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At one point in the project, the developer ran into financial difficulties when many creditors called in their loans. The project was stuck with no way to complete it. The occupants of the old building where the project was carried out, submitted a request for the liquidation of the company, whereupon a special manager was appointed who tried to locate sources of financing to complete the construction, but was unsuccessful.

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The district court ordered the cancellation of the sale agreements and the deletion of the warning notes recorded in favor of the purchasers who had by now become a liability and made it difficult to find another developer to continue the project.

The court refused to recognize purchasers with the warning note as secured creditors and ruled in favor of the creditors and reduction of their damages.

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Following the cancellation of the sale of the apartments and the warning notes, the District Court to which the debt claims were filed, approved to sell the project to a third party and repay some of the creditors' debts, of apartment buyers were included, without any priority, despite the warning notes recorded in their favor. The buyers of the apartments were left without an apartment and without security for the money they paid to Derech Hateana, so they appealed to the Supreme Court.

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The Supreme Court (CA 3937/19) upheld the District judgment and while revoking the only security available to the purchasers - the warning note, clarified that its decision was not sweeping and was given in the exceptional circumstances of the case concerning the sale of apartments at market price.

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The Supreme Court reiterated that in some cases a warning note issued in favor of apartment buyers does not protect the buyers and they may even lose their money as well as the apartment they purchased.

Although the ruling deals with the exceptional circumstances of a developer who sold new apartments at a price lower than the market value and encountered financial difficulty during the execution of a project under TAMA 38, the ruling challenged the status of the warning note and reduced its power.

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Following the ruling, the Ministry of Construction and Housing decided to examine a change in the payment schedule for projects that do not have bank guarantees and where the warning note is the only security given to the purchaser in the form of deferring payments to the end of the project.

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There is no doubt that in light of the ruling, buyers of new apartments should aspire to a "bank guarantee" or "insurance policy," which is issued in the amount of the payments made by the buyer of the apartment. Such a guarantee can only be obtained when the developer contracts with a bank that accompanies the project and guarantees the buyers' money.