Canceling a Contract – Speculative Land

Israeli law defines what constitutes “misrepresentation” in a contract. A person who enters a contract because of a misrepresentation made by the other party to the contract (or by someone acting on their behalf) is entitled to cancel the contract. Misrepresentation can also be a failure to disclose information that the other party was required to disclose – according to the law, according to custom, or according to the circumstances.

Of course, the plaintiff, who is essentially claiming that they were misled into entering the contract and is therefore seeking to cancel the contract between the parties, must prove that the other party to the contract, or someone acting on their behalf, was aware of certain facts and deliberately withheld them.

But what is the mistake defined under misrepresentation?

The Israel Contract Law states in the section dealing with error that a person who enters a contract due to a mistake and it can be assumed that if it were not for the mistake, he would not have entered that contract, and the other party to that contract knew or should have known about it, then he is entitled to cancel the contract.

Court rulings in Israel have ruled that to prove the error, it must be proven that there is a connection between the error and the signing of the agreement and that it is not a mistake that is not in the feasibility of the transaction.

Cancellation of a contract from justice

However, even if you are unable to prove that the other party knew about the error or should have known about it, according to Israeli law the court may cancel the contract – “if it saw that it was just to do so”.

Sale of real estate for 10% of the real value

Yosef and Guy were the owners of agricultural land in the northern city of Afula. Yosef was the owner of 1/4 of the land and Guy was the owner of 1/6.

In July 2016, the parties signed an agreement whereby Yosef sold his land to Guy for about NIS 220,000 and the sale agreement stated that it was agricultural land.

When the parties to the transaction filed a tax declaration with the Israeli Tax Authority, the Tax Authority demanded capital gains of about NIS 500,000, claiming that the land was worth NIS 2.2 million. The Israeli Tax Authority based this on information it received from the Afula Municipality, which stated that the land was included in a planned expansion that would be approved within one to two years.

The seller and the buyer appealed the Tax Authority’s decision, arguing that the Tax Authority had ignored the fact that the land was sold for NIS 220,000. They also argued that there was no guarantee that the planned expansion would be approved within one to two years.

The Tax Authority rejected the appeal, arguing that the land was “speculative land” because it was adjacent to an approved planning area. The Tax Authority argued that the land’s value should be based on the assumption that the planned expansion would be approved, even though there was no guarantee that it would be.

The seller filed a lawsuit and claimed he was misled by the buyer, who was a real estate developer. The seller alleged that the buyer knew that the land was likely to be rezoned for residential development, but he did not disclose this information to the seller.

The buyer denied that he misled the seller. He claimed that he did not know about the rezoning process when he purchased the land. He also argued that the seller’s claim of being misled was simply a mistake of judgment, which is not grounds for canceling a contract.

The District Court of Nazareth ruled in favor of the seller. The court found that the seller did not prove that the buyer misled him, but that it was “fair” to cancel the contract. The court reasoned that the seller had sold the land at a fraction of its fair market value, and that it would be unfair to require him to uphold the contract.

The court ordered the buyer to return the land to the seller and to pay the seller NIS 140,000 in compensation for the loss he suffered.

Additional information:

• The term “speculative land” refers to land that is purchased with the expectation that its value will increase in the future. In this case, the seller was unaware that the land was likely to be rezoned for residential development, so he did not purchase it with the intention of speculating on its future value.

• The court’s decision is based on the principle of fairness. The court found that it would be unfair to require the seller to uphold the contract, given that he sold the land at a fraction of its fair market value.