Breach of Contract in Israeli Real Estate Law

The purchase and sale of real estate property in Israel is typically conducted under an agreement known as a “sales contract”. 

A significant requirement of such an agreement is that it must be in writing. While the Israeli Contract Law allows for oral agreements between parties, for real estate transactions the agreement must be in writing.

Part of the sales contract is dedicated to cases of breach of contract, whether by the buyers or the sellers. This part is sometimes referred to as “Remedies” according to the Israeli law dealing with breaches of contract (Contract Law Remedies).

The contract usually specifies which clauses are fundamental and essential, such that breaching them constitutes a fundamental breach of the agreement. In addition to defining a fundamental breach of the agreement, the contract typically specifies the agreed-upon compensations that the breaching party must pay to the other party.

An interesting case of breach of contract recently came before the Tel Aviv court.

In 2012, the Magdal family purchased an Apartment in the Israeli town of Shoham from the Ronen family for a total of 3.375 million NIS.

Before the parties signed the agreement to purchase the home, they discovered that the home was not built according to the original building permit. 

Therefore, it was agreed in the contract that the sellers (Ronen family) would obtain a new building permit that would legalize the unauthorized construction within 12 months from the date of signing the agreement.

Despite this commitment, although the Ronen family did obtain a new building permit, it did not cover all the unauthorized constructions, as additional approval was needed.

The Magdal family filed a lawsuit for 337,500 NIS, alleging that the Ronen family breached the agreement fundamentally, and therefore they are entitled to the agreed-upon compensation without having to prove damages.

The Ronen family argued that they did obtain a new building permit and the agreement did not address cases where existing construction cannot be legalized. 

Since the Ronen family did everything within their power and the full permit was not granted due to reasons beyond their control, they claimed that the demand for higher compensation by the Magdal family was unfair.

In this case, the agreement established an obligation to achieve a result. Therefore, failure to obtain the necessary building permits constituted a breach of the agreement. The court found that before signing the agreement, the Ronen family assumed the risk associated with not receiving the new building permit.

The Meaning of Breach of Contract

Magdal Family’s position – Failure to provide the permit constitutes a fundamental breach of the agreement entitling them to full compensation as agreed upon in the contract.

Ronen Family’s position – Magdal refused to perform the necessary adjustments after which a new building permit could be obtained, so their demand for agreed compensation is an unjustified and unfair claim. This is also due to the “substantial performance” doctrine, which supposedly allows Magdal to enforce the performance.

The court ruled that Magdal’s demand for Ronan to fulfill their contractual obligations is not unfair request. A demand by one side to the contract that the other side will fulfill their obligations as they are written in the contract is not considered to be in bad faith.

Only in circumstances that are accompanied by additional circumstances that can be seen as fraud or something similar can be seen in the request for a contractual right as conduct that is not in bad faith.

Regarding the enforcement of Magdal’s obligation to perform the contract, the court established that only in exceptional circumstances will it intervene in a contract between the parties, and this case is not an exceptional case.

Agreed Compensation

The Israeli Contract (Remedies) Law stipulates the right of parties to agree in advance on the amount of compensation to be paid without proving damage, and the Israeli court has an authority to reduce the amount if it finds that the compensation was determined without any reasonable relation to the damage that could have been foreseen in advance.

The existing rule in the Israeli courts is that they should not intervene with the consent of the parties, and generally, the courts will tend to respect the will of the parties and enforce the conditions of agreed compensation. 

However, the courts have established that if the condition of compensation is formulated as an inclusive condition that cannot be refuted, then the court will more easily use the authority to reduce the agreed compensation.

In the case of the agreement between Magdal and Ronan, the breach of contract clause was formulated broadly and inclusively and did not distinguish between minor and major breaches, between fundamental and non-fundamental breaches, and therefore the court determined that Ronan must pay 220,000 NIS to Magdal.

(For further details, see Tel Aviv court case number 35694-09-13, Magdal v. Ronan)