The housing market in Israel is driven by a number of parameters, among which are population density, planning and construction regulations, and high housing demand stemming from population growth rate, alongside a supply characterized by the fact that most of the land (93%) is state-owned and managed by a governmental body – the Israel Land Authority.

In Israel, the demand for housing ownership is the dominant one. Approximately 68% of the country’s residents live in an housing unit they own, about 8% under other arrangements (public housing, “key money”/“dmei mafteach”, etc), and about 24% live in rented housing.

The rental market in Israel – between 550,000 to 600,000 housing units – is generally owned by private investors, with businesses having a smaller share. It should be noted, that this mixture is not typical of developed countries such as Israel, where a developed institutional rental market exists. However, the reason lies in the fact that the yields obtained from rental housing in Israel are low and estimated at 3% annually.

From 2007 until the first half of 2015, real annual rental prices rose by 37.2%, against a significant real increase of 71% in the price of owned housing units for the same period. In early 2014, as a result of the significant increase in rental prices, proposals were submitted to regulate the rental market and supervise rental prices. As a result, the Housing Cabinet decided to establish a “fair rental law” team. Since 2014, the team, and various legislative proposals, has sought to deal with two main challenges existing in the rental market in Israel: (a) the significant real increase in rental prices; (b) the one-year rental contract common in Israel, which creates a sense of instability and uncertainty for the tenant regarding continued residence in the housing units.

The regulation proposed, including the legislation introduced by Knesset members Roi Folkman and Stav Shafir, has two goals: first, to control rental prices in order to significantly reduce them to below market prices; second, to regulate all aspects of tenant-landlord relations, such as responsibility for unit maintenance, definition of a “habitable unit,” terms of contract termination, guarantees, etc.

On July 17th 2017, the Israeli Knesset passed the Hire and Loan Law (Amendment), 5767 – 2017 also called the “Fair Rental Law,” on second and third readings; it will come into force 60 days after being published in the Official Government Gazette.

The Amendment to the Law deals with the regulation of tenant-landlord relations, defines the minimum conditions according to which a housing unit will be considered habitable, relates to the person who pays the brokerage fees, defines the landlord’s obligation to repair the unit, and limits the amount of guarantees the landlord may collect from the tenant.

At the same time, the Amendment to the Law does not include a limitation on the duration of the rental period and does not limit rental price.

The Amendment does not include enforcement measures against landlords who do not comply with the regulations. Thus, for example, no criminal enforcement or criminal sanction is applicable; and legal aid will be granted only in civil proceedings and at the civil level only. Similarly, no mechanism allows tenants, especially the most disadvantaged ones, to file a complaint against housing unit owners renting out uninhabitable units, and no authority has been appointed to conduct inspections of housing units.

It should be noted that the Amendment shall not apply to residential rental agreements regarding a unit in a hotel or other units rented for recreational purposes, such as Airbnb, student dormitories, units under the Tenants Protected Law or in sheltered housing projects, residential rental agreements not exceeding three months with no possibility of extension, residential rental agreements for more than ten years with no possibility of early cancellation, and residential rental agreements with a rental price set at more than NIS 20,000 per month .

Who is responsible for paying what?

According to the abovementioned amendment, the tenant will pay: the rent, taxes applicable to the occupant of the unit including municipal taxes; for the consumption of current services, including water, electricity, gas and heating; for current maintenance paid to the housing committee or the management company. On the other hand, payments intended for purchase or improvement of systems or facilities serving the rented unit, fees for the insurance under building insurance, and payments owed by the landlord to a third party will be the landlord’s responsibility. For example, payment for brokerage fees will be borne by the landlord if the broker acted on behalf of the landlord.

Amount of the guarantee

The Amendment sets a limit on the amount of the guarantees the landlord is entitled to demand from the tenant. The maximum guarantee is set at one-third of the rent for the full rental period or three times the monthly rent – whichever is lower.

Realization of the guarantee

The Amendment Law enumerates only four cases in which the landlord is entitled to exercise the guarantee deposited with him: (a) failure to pay the rent on time – up to the amount of the rent, plus linkage differentials and interest under the terms of the rental agreement between the parties; (b) failure to repair property defects due to the tenant’s conduct – up to the amount of the cost of the repair; (c) failure to pay additional payments the tenant owes – up to the amount of the debt; (d) In the event that the tenant did not vacate the rented unit on time – an amount in accordance with the terms of the rental agreement .

The landlord must inform the tenant in advance of his intention to realize the guarantee and give him reasonable time to rectify what needs to be rectified.

After the rental period has ended, the landlord must return the guarantee or its balance to the tenant within 60 days from the date of return to the landlord of the rented unit, or until the tenant’s debts are repaid, whichever is later.

Responsibility for repairs

The Amendment stipulates that the tenant must repair any fault in the unit caused by unreasonable use, at his own expense. If the property is damaged due to reasonable use, the landlord will bear responsibility for the repair within 30 days from the moment he was informed of the defect. If the defect is urgent, meaning a defect that does not allow reasonable habitation of the unit, the landlord must repair it within three days at the latest. In cases where the landlord has not done so, the tenant may repair the defect independently and reduce the cost of the repair from the rent paid the landlord.

Mutual cancellation

Under the new amendment, it is not possible to introduce a stipulation in the residential rental agreement allowing the landlord to cancel the agreement if a breach has not occurred, unless the tenant also has such right of cancellation. The landlord will notify the tenant of the agreement cancellation, not for breach of agreement, at least 90 days in advance, and the tenant will announce the agreement’s cancellation, not for breach of agreement, at least 60 days in advance.

Housing unit suitable for habitation

The amendment determines when a housing unit is unsuitable for habitation, stating that the conditions of such are that the unit does not have a drainage system, including a system for the regular disposal of sewage; a unit that does not have a drinking water supply system; a unit that does not have an electrical or lighting system; a unit with no ventilation openings and natural lighting, as well as doors and windows to open/close openings, including a lockable main entrance door; a unit that may pose an unreasonable safety or health risk.

Binding rental agreement

The amendment does not stipulate what a binding rental agreement is, but the main issues set forth in that agreement apply to every rental agreement signed. In addition, the amendment declares that existing clauses in rental agreements exempting the landlord from liability for unsuitability or defect discovered in the unit, which they should have known at the time of signing the agreement, are invalid.