Contracts - עורך דין נדלן ומקרקעין אוהד שפק

Breach of Contract in Israeli Real Estate Law

אוהד שפק — Sat, 27 Jul 2024 12:39:00 +0000

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)

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Buying an Apartment in Israel – Seller’s Disclosure Duty

אוהד שפק — Fri, 26 Jul 2024 15:58:08 +0000

The purchase of an apartment is one of the most significant transactions a person undertakes in their lifetime. As part of purchasing an apartment, the buyer signs a sale agreement that regulates all details of the real estate transaction.

According to Israeli law, crucial requirement of the sale and purchase agreement of real estate is that it must be in writing.

While the Israeli Contract Law of 1973 allows contracts to be made verbally between parties, in the case of real estate transactions, the agreement must be in writing to be enforceable.

Buying the Apartment AS IS

In almost all of these agreements, it is stipulated that the buyer purchases the property “AS IS” (regarding a 2nd hand property rather than a new one).

Before signing the contract, the buyer should examine the property, its facilities, the building/structure it is in, and its surroundings.

The buyer usually confirms that after inspection they found the apartment suitable for their needs and satisfaction, acknowledges that they are purchasing the property “AS IS” and will not have any claims or demands against the seller in the future.

What does this clause mean, considering the buyer had inspected the property and purchased it AS IS, if the seller did not disclose all the information they knew or should have known?

Seller’s Disclosure Obligation

The duty of disclosure imposed on a seller of an apartment requires them to disclose existing defects, hidden flaws, and any relevant information concerning the sale.

This obligation is based on two principles: Section 12 of the Israeli Contract Law and Section 16 of the Israeli Sale Law.

Section 12 of the Contract Law states that parties negotiating a contract must act in bona-fide and in a customary manner. Breach of the duty to act in bona-fide and in a customary manner can include acts or omissions, including the non-disclosure of facts that, under the circumstances, should have been expected to be disclosed by a person conducting negotiations.

Even if the buyers could have discovered those facts themselves, the seller is not exempt from its disclosure duty and must disclose the necessary facts on his/her own initiative.

Seller’s Duty – If Knew or Should Have Known

Section 16 of the Israeli Sale Law imposes an enhanced duty on the seller, as they have access to information about the apartment. This section addresses the discrepancy arising from facts that the seller knew or should have known at the time of the contract but did not disclose to the buyer.

Thus, actual knowledge on the part of the seller about the discrepancy is not required. It is sufficient to establish a culpable basis for liability towards the buyer. The test is whether the seller knew or should have known about the discrepancy or those facts (see, for example, Civil Appeal case number 8068/11 Uri Eini v. Chen Shefer).

It should be noted that the Sale Law does not equate the responsibilities of the parties to the agreement. The seller must demonstrate that the buyer actually had knowledge about the discrepancy in order not to rely on it; While the buyer must show that the seller knew or should have known about the discrepancy (see, for example, District Court case number 27228-11-13 Hillel Masgana v. Eran Peretz).

Cannot Waive the Disclosure Obligation

In practice, the seller’s disclosure duty according to the Sale Law is a matter that cannot be waived.

Therefore, even if a clause commonly appears in sale agreements in Israel stating that the buyers found the property suitable for their needs and purposes and waive any claim or that they purchase the property “AS IS,” such a clause cannot exempt the seller from liability for defects in construction or discrepancy in the property (see, for example, Supreme Court case number 13698-03-11 Ninet Bublil v. Gdilin Investments and Properties Ltd.).

Seller’s Liability – “Should Have Known”

This liability of the seller, if they knew or should have known about the discrepancy or defect, is interpreted by the Israeli Supreme Court rulings in a manner that does not require actual knowledge from the seller but is based on a basis of negligence.

In other words, a reasonable person in those circumstances would have known about the facts establishing the discrepancy (see, for example, Civil Appeal case number 7642/97 Hannah Shterit v. Bella Nosbaum).

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Canceling a Contract – Speculative Land

אוהד שפק — Sun, 24 Sep 2023 04:59:34 +0000

A seller sold land for 10% of its fair market value and requested to cancel the agreement, claiming that he was "misled" and made a mistake. The court ruled that the buyer did not mislead him and did not know the fair market value of the land, but that it was "fair" to cancel the transaction.

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.

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Expansion of an Apartment in Israel

אוהד שפק — Wed, 28 Jun 2023 03:06:51 +0000

In order to extend a single apartment in an apartment building in Israel, the consent of the neighbors is required. Those who have already made an extension are considered to have given their consent in advance. Does the consent apply to the owner of the apartment who is expanding it, or to the apartment itself, regardless of who owns it, who lives in it, or who carried out the expansion?

In Israel, homeowners who own three-quarters of the apartments in a residential building can decide to remove part of the common property and attach it to a particular apartment in order to expand it. They can also decide how to distribute the construction rights required for this purpose. If the expansion is intended to create a Mamad (a protected room inside the apartment) or a protected space that belongs to the entire floor in a building (Mamak), 60% of the homeowners can make the decision.

Apartment owner who has already expanded their apartment is considered to have consented

According to the Israeli Land Law, an apartment owner who has already expanded their apartment is considered to have consented to a similar expansion of any other apartment in the same building. However, an apartment owner can object to this decision if they believe that the expansion would substantially infringe on their rights In this case, the parties can either agree to appoint a real estate appraiser to determine the value of the expansion, or they can appeal to the condominium inspector in Tabu (a judicial body regarding tenant rights).

In a building in city of Haifa, an apartment owners, Zvi and Gila Yogev, filed a lawsuit to demolish an addition to the building that was owned by Hana Steinberg-Nissen. The Yogevs claimed that the addition had been constructed without their consent, and that it substantially infringed on their rights.

Zvi and Gila argued that building a separate residential unit is not the same as expanding an existing apartment, and therefore requires the consent of all 100% of the apartment owners, not just 75%. They also argued that the expansions made by other apartments in the building are not similar to the expansion made by Hana, and therefore do not count as consent.

Hana argued that she has the right to build on her own property as she sees fit, and that she does not need the consent of the other apartment owners. She also argued that since Zvi and Gila have already expanded one of their apartments, their consent should be counted twice, once for each apartment.

The condominium inspector rejected Hana’s claims and accepted Zvi and Gila’s claim. The inspector ruled that since Hana was unable to prove that she had a building permit or that she could obtain one, she needed the consent of 100% of the apartment owners, not just 75%.

Hana appealed the decision to the District Court and then to the Supreme Court of Israel.

Does the consent refers to the owner of the apartment or to the apartment itself?

The legal question that was debated in the Supreme Court was whether a person who owns two apartments in a building and has expanded one of them is considered to have consented to the expansion of their neighbor’s apartment in relation to the expanded apartment, or in relation to both apartments.

This question is much broader than the one at hand, as it deals with whether the consent refers to the owner of the apartment or to the apartment itself. In other words, if the owner of an apartment changes, does the consent remain and bind the new owner who bought the apartment as-is, and did not carry out the expansion, but rather their predecessor in the apartment?

The court decided not to accept Hana’s appeal. Regarding the broader legal question, the judges emphasized that there is no need to decide on it at this time. However, they stated that, without establishing a binding decision, it seems to them that the consent should follow the apartment, not the owner.

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Real Estate Investment – Albania

אוהד שפק — Thu, 06 Apr 2023 06:40:52 +0000

Convenient taxation, tourist destination, close ties with Israel, relatively low real estate prices and the possibility of granting mortgages up to 80% of the property's value - Albania as a real estate investment destination?

The Islamic Republic of Albania and the State of Israel established diplomatic relations in 1991, shortly after Albania was freed from communist rule. In recent years, the bilateral relations between the countries have developed significantly, mainly on the background of cooperation in the fields of cyber defense.

In July 2022, Albania experienced a significant cyberattack attributed to the Islamic Republic of Iran. The event led to Israel offering its cyber expertise, and the Albanian government positively accepted this support. Israel supported the establishment of a cyber defense infrastructure in Albania, and in October 2022 Prime Minister Edi Rama visited Israel together with his national security advisor to discuss cyber issues.

In addition to cyber defense, the two countries have a common interest in countering terrorism and extremism. Albania is known as a leader in the Balkans in the war against extremism and Israel has experience in preventing terrorism. The two countries also cooperate in the fields of security in light of common interests. It should also be mentioned that in 2022, Albania severed diplomatic ties with Iran following the cyberattack, which, as mentioned, was attributed to the Iranians.

The commercial ties between the countries are also in the process of growing. Albania is very young, with the average age being 31 and a significant part of its population turning to higher studies. Trade between the countries increased following the signing of the treaty to prevent double taxation in 2021.

In March 2023, a tech conference was held in Tirana, the capital of Albania, in which about a hundred Israeli companies participated, which examined possibilities to expand their activities to the Albanian market. Our firm sponsored this conference and Ohad Shpak gave lectures about working in the Albanian market. Ohad shared his experience since his law firm specializes in giving legal counsel to Israeli companies operating in international markets as well as to foreign companies leading business activities in Israel.

As for real estate investments in the country, there are several characteristics of investments in Albania that may encourage real estate investors:

A) Encouragement from the authorities – the state encourages foreign investment in real estate. Many new buildings have been built in the capital city of Tirana in recent years, and in the coastal cities there are plans for large-scale projects. The real estate company from the United Arab Emirates, Eagle Hills, announced a 2.5 billion Euro project in the port city Durres. This is a project that will change the marina of the old port city and is expected to include about 12,000 housing units.

B) Tourist destination – Albania is a tourist destination that is experiencing significant growth. Only about 2.8 million people live in the country, but in 2022 it was visited by about 7.5 million tourists, with a significant portion attributed to expatriate Albanians who return home for visits. A new airport in the city of Vlore is under construction that is expected to be completed in 2025 and is supposed to be used mainly by tourists who come to southern Albania to vacation on the beaches that are opposite Italy and Greece.

C) Real estate prices are relatively affordable – prices in Tirana are around 1,500-1,300 euros per square meter. Outside Tirana prices are lower, except in the coastal cities.

D) Mortgages – the banks in Albania offer mortgages to non-residents who purchase real estate in Albania up to 80% of the value of the property, when there are cases where it is even possible to obtain full financing of the property, and this is in accordance with the banks’ policy. Mortgages for residential properties are limited to 400,000 euros and for commercial properties there is usually no A limit in accordance with the banks’ policy.

E) Convenient taxation – there is no purchase tax in Albania but there is a low municipal property tax depending on the size of the property. Capital Gains Tax is 15% of the appreciation accumulated in the sale, the improvement levy (Betterment Tax) for construction is 1% of the construction cost as well as 8% of the expected sale cost of the property (when there is an assessment by the local authority), VAT is 20% but there is a significant discount when building hotels. The income tax from the rental of residential apartments is 15%.

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Buying a New Apartment in Israel – Signing a Contract

shpaklaw — Sat, 06 Jan 2018 15:59:13 +0000

Buying a New Apartment in Israel – Signing a Contract

A few weeks ago, I posted a guide to what you should do before signing the contract to purchase an apartment in Israel.

The guide explained the need to: examine the residential complex and surrounding area; ensure that the seller is the actual owner of the land; examine the contractor assigned to the project; ask the contractor to present a valid building permit; and of course – carefully examine the apartment itself.

The guide also explained the need for a skilled lawyer, specializing in real estate in Israel, to carefully examine all those aspects.

When you decide to start the purchase process of a real estate property in Israel, you can begin negotiations with the seller on various terms of the contract such as price, order of payments, linking payments to the index of construction costs, technical specifications and the cost of upgrades or changes.

Price

You can bargain with the seller on the price of the property, and when the price is agreed upon, remember to ensure that the contract includes the final price after discount (if given) including development expenses and VAT.

The contract should also detail additional payments that the buyer will have to make such as a connection fee for utilities such as water, gas and electricity, legal expenses, etc.

Order of payments

It is important to negotiate a payment arrangement that is convenient for you. Of course, the monthly installments depend on the mortgage you take, but try to adjust the initial payments according to your comfort level.

While payments are usually linked to the Construction Costs Index, which is generally higher than the Consumer Price Index (CPI), it is possible to request that payments be linked to the CPI.

It is possible too, in an agreement between you and the seller, to make some of the payments earlier than agreed upon, thus avoiding a big rise in the index, leading to a rise in the final price as well.

Do not hesitate to negotiate the order of payments with the seller, and you can ask your lawyer to do so on your behalf, as part of the negotiation over the terms of the contract.

Changes

Be sure to specify possible changes and additions to the apartment in the contract, as well as the costs and credits for accessories that are waived on them. It is possible to request that by the time the flooring is set, the buyers are entitled to ask for changes in the interior design of the apartment at no extra charge.

For example, it is possible to move walls or electricity and water points, or to plan additional air conditioning openings at no additional charge. As part of the negotiations before signing a contract, ask the contractor for the addition of electricity points, light or telephone at no additional cost.

Technical Specifications

Make sure that all agreements and guarantees that the seller gives you are noted in the contract. Try to adjust technical specifications for the interior design of the apartment; it is worth bargaining over the cost of upgrades.

Contrary to conventional wisdom, a skilled lawyer can help you achieve significant changes in the contract with your contractor/seller. Keep in mind that a long contract sent by the contractor is not a fait accompli (final version), and changes in favor of buyers can always be introduced.

Therefore, it is important to hire a lawyer who is a real estate specialist and knows how the system works. Israeli real estate law and accepted local business practices are not always the same – an experienced real estate lawyer who is familiar with the business climate in Israel can assist you in the negotiations with the seller on various terms of the contract.

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