Banks, financing bodies and financial support
Aug 26, 2026
By: Itzick Simon
What Do the Regulations Mean for Financing Banks and Lending Institutions?
Project financing is currently a central component of the vast majority of construction projects in Israel. Banks, financing companies, funds, and other lending institutions do not merely provide financing for a project; they remain involved throughout all stages of its execution through mechanisms of control and oversight, the receipt of reports, and the monitoring of the project’s compliance with the milestones set out in the financing agreements.
The expansion of the responsibilities imposed on the party commissioning the work under the new regulations naturally raises the question of whether, and to what extent, the regulations may also have implications for financing and lending institutions.
As a general rule, the answer is no. The mere provision of financing, receipt of collateral, appointment of a project monitor, receipt of reports, approval of withdrawals from the project financing account, financial oversight, or monitoring the progress of the project does not make the financing institution the party commissioning the work, nor does it, in itself, impose upon it the obligations set out in the regulations.
However, experience in the construction industry shows that not every project reaches completion in accordance with the original plan. Developers may encounter financial difficulties, projects may be halted, companies may collapse, and in some cases the financing institution may be required to take actions that go beyond the framework of ordinary project financing.
It is precisely in such circumstances that new questions may arise regarding the status of the financing institution and the implications of the regulations for it.
When may a funding body be considered a work commissioner?
As a general rule, the routine activities of a funding body do not make it a work commissioner and do not impose on it the obligations set forth in the regulations.
However, the picture may change substantially when the financing body goes beyond its role as a financial lender and actually steps into the shoes of the entrepreneur or the work commissioner.
This situation may arise, among other things, following the realization of collateral, assuming responsibility for completing the project, directly contracting with contractors or suppliers, appointing parties to carry out the work, making decisions of an executive nature, or any other involvement that goes beyond mere financial support.
In these circumstances, the funding body may be considered the work commissioner, and therefore the obligations imposed on a work commissioner by virtue of the regulations may also apply to it.
This is a fundamental change in the possible status of the financing body and significant legal, operational and insurance exposure, which requires a detailed examination of the circumstances of the case, the actual scope of involvement, the contractual arrangements and the project's insurance system.
Precisely because most construction projects are financed by banks and financing bodies, it is recommended that the implications of the regulations be examined already during the project review and approval stages.
It is appropriate to ensure that the support agreements, control mechanisms, project documents, the zero report, the reporting system, the letters of appointment of the supporting supervisor, and the insurance instructions also provide a response to exceptional situations that may develop during the life of the project.
This preliminary examination is not intended to expand the responsibility of the financing body, but rather to preserve the limits of its responsibility and ensure that even in the event of a change in circumstances, realization of collateral, or entry into project completion, no unplanned exposure will be created.
Equally, it is important to ensure that the duties of the accompanying supervisor, the wording of the reports, and the reporting mechanisms make it clear unequivocally that their role is for financial support and control purposes only, and that they do not imply acceptance of responsibility for the management of the project, its execution, or its safety.
The importance of early preparation
The expansion of the liability stipulated in the regulations also requires a reexamination of the insurance protections available to the financing body.
It is recommended to examine, among other things, the status of the financing body within the framework of the project's insurance policies, the existence of indemnity mechanisms, waiver of the right of subrogation, provisions regarding notification in the event of cancellation or change of insurance coverage, and the insurance preparation in the event that the financing body is required for extraordinary involvement in the continued execution of the project.
As the involvement of the financing body expands, the importance of an integrated examination of all legal, contractual, insurance and risk management aspects increases, in order to ensure that the existing defense system provides an adequate response even to situations that were not anticipated at the beginning of the project.
Insurance and risk management aspects
As part of examining a new project, as well as projects that are currently being implemented, it is recommended that the funding body examine, among other things, the following issues:
⌧ Has the person commissioning the work been clearly identified in accordance with the project structure and the provisions of the regulations?
⌧ Was the application of the regulations to the project and all parties involved examined?
⌧Have the resources required to implement the safety requirements been allocated within the project budget?
⌧ Does the zero report include explicit reference to the costs involved in implementing the regulatory requirements?
⌧ Have the support agreements, contract documents, and control mechanisms been updated to reflect the requirements of the regulations and the division of responsibilities between the parties?
⌧ Do the letters of appointment of the accompanying supervisor and the wording of the reports make it clear that his activities are limited to financial support and control only, and do not impose on him responsibility for the management of the project or its safety?
⌧ Does the insurance system provide the sponsoring entity with the necessary protections, including its status in the policies, indemnity mechanisms, waiver of the right to substitution, and notification provisions in the event of a change or cancellation of insurance coverage.
⌧ Was the possible significance of the collapse of a developer, replacement of a developer, realization of collateral, or completion of the project by another party examined in advance?
⌧ Are there clear mechanisms for receiving information about significant safety events, while maintaining the distinction between receiving information for financial support purposes and taking responsibility for safety management?
⌧ Is there legal, contractual and insurance preparation in place in the event that the financing body is required, directly or indirectly, to step into the shoes of the developer or the work commissioner in order to complete the project.
Practical recommendations for banks and financing bodies
Summary
In general, the regulations do not change the status of banks and financing entities and do not impose on them, by virtue of their being financing entities, the obligations imposed on the person commissioning the work.
However, when a project goes wrong and the financing body is required to go beyond its role as a financial lender and, in effect, step into the shoes of the developer or the work commissioner for the purpose of managing or completing the project, its legal status may also change. In these circumstances, it may be considered the work commissioner, and therefore the obligations set out in the regulations may also apply to it.
Therefore, it is recommended that banks, financing bodies and lending entities not only examine the financial risk of the project, but also examine, in the early stages of support, the implications of the regulations on the structure of the transaction, on the support mechanisms, on the contractual arrangements and on the insurance system. Early preparation for exceptional scenarios, primarily the collapse of an entrepreneur, the realization of collateral or the completion of a project by the financing body, may significantly reduce legal, insurance and operational exposures and assist in maintaining the limits of the financing body's liability throughout the life of the project.
מסמכים
