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Cancellation of a Real Estate Contract

In my 38 plus years as an Israeli real estate attorney I have rarely had the need to enforce the clauses in a real estate sales agreement that deal with the cancellation of the contract. However, this year I unfortunately found myself in that situation.

I had long time clients who I had represented when they purchased an apartment in Israel (I do not want to mention the place) years ago. I was contacted by them again this year when they had decided to make aliya, sell their apartment and purchase a different one in the same city.

They found buyers quickly. Since they were still abroad, I sent them a power of attorney to sign before the Israeli consul enabling me to sign the contract in their names. Also, the passport of the husband had expired, and I needed to update the registration of the property in the land registry office with his new passport number.  So far these were normal occurrences.

The contract got signed in April 2021. The buyer paid the first two payments and was to pay the last payment in July.  During that time, my clients arrived in Israel. They continued to live in the apartment they sold until they finished renovations of the apartment they had purchased. Despite reminders by me to the lawyer representing the purchaser it became clear that the purchaser was not going to make the last payment due in July.

It is very common in Israeli real estate contracts to give a party a seven-day grace period to be late in the fulfillment of his contractual obligations.  This contract had such a clause.  Seven days after the date on which the money was to be paid, I sent the purchaser’s lawyer a notice that his client was in fundamental breach of the contract. This meant that according to the contract he had 30 days to rectify the breach.

The breach was not rectified within the requisite 30 days. The buyer kept promising that the money was forthcoming. The breach wasn’t rectified within 30 days or 60 days. Nor was it rectified within 90 days. Therefore, after 90 days I sent the lawyer for the purchaser a notice that I was cancelling the contract due to the fundamental breach of the purchaser.

What is to happen now? Can the seller sell the apartment to someone else?  Yes, he can but he must do the following:

1. In every real estate contract in Israel, a caveat warning is registered to the benefit of the purchaser in the land registry office. This prevents the seller form selling the apartment to someone else during the transaction and it protects the rights of the purchaser (who has paid some of the money for the apartment but has not yet completed the transaction) from creditors of the seller seeking to put liens on the property.  This transaction was no exception. We therefor needed to cancel this caveat warning. I therefor wrote to the purchaser’s lawyer that I was going to apply to the land registry office within 14 days with a request to cancel the caveat warning. I asked that the purchaser cooperate by signing the requisite forms for this.

He did not cooperate, so I used the power of attorney signed and given to me by the purchaser at the time of the signing of the contract and signed the form in his name and had the caveat warning erased.   I notified his lawyer of this.

This buyer had plenty of opportunities to apply to the court and ask for an injunction preventing me from cancelling the caveat warning, but he did not do so.

To cancel the caveat warning, the seller needed to return to the purchaser all money paid to them by him up to this point. My clients therefor needed to bring me a bank check made out to the purchaser for that amount.  The contract allowed them to deduct from this amount the amount of the agreed upon compensation set out in the contract for breach of contract. The amount of the agreed upon compensation set out in the contract was 10% of the sales price.

Agreed upon compensation for breach of contract is compensation in an amount set out in the contract without having to prove that the injured party actually incurred such damages.

When my clients placed in my hands the bank check, I sent a copy of it to the purchaser’s lawyer and notified him that I was going to cancel the caveat warning the next day. When I got no response, I applied to the land registry office to cancel the caveat warning and it was erased from the books of the land registry office.

Two days later the purchaser himself showed up in my office with a bank check made out to my clients in the full amount of the money owed plus a fraction of the agreed upon compensation set out in the contract (he felt that 10% was too much and arbitrarily decided on an amount of compensation). My clients instructed me not to accept it. The purchaser on his part refused to accept the bank check I had in my possession for the return of his money. He denied my clients right to cancel the contract.

In examining the bank check he brought I found two possible problems. The first problem was that it was from a third party – not the purchaser or a mortgage bank – and anti-money laundering laws would have prevented my clients bank from allowing it to be deposited in their account. The second problem was that the check came with out the top voucher that shows who gave the check, another anti-money laundering no no.

2. Every real estate transaction in Israel needs to be reported to the land tax authorities. This one was no exception. When a contract gets cancelled this too needs to be reported to the tax authorities. When this happens, the parties can be refunded for all taxes paid (purchase tax and capital gains tax) because of the transaction. This is important because if the transaction is not cancelled in the books of the tax authorities, then it can have an affect on any new transaction that my clients, the sellers, would enter in to. 

Since my clients were foreign residents when they made their first sale, they did not have an exemption from capital gains tax.  They therefore paid it. Would they get it back? Now that they were Israeli citizens, living in Israel, would they get an exemption from capital gains tax on the new deal if the old one was not cancelled in their books? Would the tax authorities even issue tax confirmations for the new deal? These tax confirmations are needed to transfer title to the name of the new buyer in the land registry office.

These were all questions that would come up if the first transaction was not cancelled in the books of the tax authorities.

The purchaser did not cooperate with the cancellation of the transaction of the transaction with the tax authorities.  I submitted the notification signed only by my clients, but the tax authorities rejected this since it was no signed by the purchaser.

After a few weeks of silence from the purchaser had gone by my clients found a new buyer who offered them more money for the apartment than what was in the original sales agreement.  I notified the attorney representing this new client of the whole sad story and even included a clause about it in the new sales agreement. The lawyer for the new purchaser was worried that even after this new transaction was complete the old buyer would take his clients to court. He therefor sent a notice to the previous buyer’s lawyer that his client was interested in purchasing the apartment.

This initiated a response from the previous buyer in the form of a request for temporary injunction, barring my clients from selling the apartment to this new buyer or any new buyer – except him of course.

The trial date was set for a week later. My clients had to hire a litigator and a translator who would translate the court proceedings simultaneously. I gave an affidavit and appeared in court to testify on their behalf since I was involved in all the details of the case. At the court, with the help of the judge the parties reached a settlement. My clients would be paid the full amount owed to them under the sales agreement plus the 10% compensation and the difference between the new price that the new buyer offered and the old price of the apartment. The court even assisted in solving the problem of the money coming from a third party by giving instructions to my client’s bank to accept the money. The judge apologized to my clients that this was one of their first experiences of the country after making aliya.

My clients finally received their money in full plus the added compensation. It came about eight months later than it should have come under the contract. The whole situation caused them a lot of worry and aggravation. However, had they gone on with a trial they would not have been able to sell the apartment until the end of the trial and they might not have been awarded all the extra compensation as courts very often do not award the full 10% compensation that appears in the contract.

When my clients purchased their new apartment, they were still foreign residents. They therefore paid at first the higher purchase tax. They made aliya within a year of the signing of the contract so that I can now apply for them to get a refund of part of the tax. If the sales agreement would have been cancelled, they might not have been entitled to this refund. This was another reason to accept the court settlement.