The main sources of real estate law are the following statutes:

• the Land Law, 1969 (the “Land Law”);
• the Planning and Construction Law, 1965;
• the Contracts Law (General Part) 1973;
• the Contracts Law (Remedies for Breach of Contract), 1970;
• the Leasehold and Borrowing Law, 1971;
• the Sale Law, 1968;
• the Real Estate Tax Law (Appreciation and Purchase), 1963;
• the Tenant Protection Law, 1972;
• the Pledge Law, 1967; and
• the Arrangements Law, formally known as the Economic Efficiency Law (Amendments to Legislation to Achieve the Budget Goals), which is submitted to the Israeli Parliament for approval once a year alongside the Budget Law, and which consolidates legislative changes in various fields, including real estate.

Shortage of residential units has been one of the main challenges of the Israeli real estate market in past years. The Israeli market began exploring the option of construction of long-term lease projects (which is uncommon in Israel), though in the last one to two years this track has been almost totally abandoned.

With the intention of encouraging residential construction, tax benefits were given, such as tax benefits to land owners selling their land and where the land is used for construction of residential units within a given (short) period. Additionally, legislative changes occurred in the field of urban renewal, in order to reduce barriers and allow the execution of residential projects.

The sharp interest-rate increase, rising inflation and the global economic crisis led to a significant slowdown in the real estate market over the past year. There has been a reduction in the demand for office and commercial space and for the purchase of residential units, as well as a sharp decrease in construction. 2023 was the weakest year this century for the Israeli real estate market.

As part of the efforts that have characterised legislative processes in the field of Israeli planning and construction law in recent years, many changes have been made (or are intended to be made) to facilitate planning and construction procedures, and to speed them up. Such changes include the following:

• the powers of local planning committees to approve city plans were expanded;
• the pre-conditions for filing an appeal against a decision to approve a plan were tightened;
• a special planning committee is to be established, whose role is to advance residential plans; and
• changes are to be made to speed up the approval procedures for building permits.

Following the October war, a temporary order was approved to allow construction of a protected area (a concrete shelter) in residential units without a building permit.

Israeli law recognises five types of property rights:

• ownership;
• leasehold;
• mortgage;
• right of way; and
• easement.

A very important element of Israeli real estate law is that an obligation to perform a real estate transaction has to be in writing, excluding lease rights that do not exceed five years.

The Land Law stipulates the principles for executing a real estate transaction for all types of property – residential, commercial, offices, etc.

Other statutes govern specific areas and stipulate further provisions, which are usually binding on the seller or the landlord and which protect the buyer or the tenants. An example is the Sale Law, which applies primarily to the sale of residential units.

Article 7(a) of the Land Law prescribes as follows:

“A transaction in immovable property requires registration. The transaction is completed by registration, and the time at which the Registrar approves the transaction for registration shall be regarded as the time of registration.”

In other words, a real estate transaction is completed only by registration in the applicable Land Registry. Registration is computerised and accessible via the internet, both for viewing and for registration of transactions.

Israel does not have registration or title insurance, as in the United States and other jurisdictions, perhaps because there is no need: in Israel, registration is conclusive and is relied upon.

One element that affects timing of registration is the demand for tax authorisation as a condition for registration of transactions. However, it is possible to facilitate tax payment and authorisation automatically against payment by the buyer of fixed advances on account of tax payments (also those that apply to the seller).

Article 13 of the Land Law stipulates that “a transaction in immovable property extends to the land… and a transaction in respect of a specific part of the property is invalid”. Therefore, title (as opposed to leasehold) cannot be registered with regard to land that is not registered as a separate parcel or as a separate unit in a “co-operative house” in the land registry.

A “co-operative house” is the common way of registering ownership with respect to a building or a project that has two or more units, residential or other, and is different from the US condominium. In past years, Israeli law has accepted the option of 3D registration, though the process for this is complex.

A due diligence review is conducted prior to a real estate transaction, with the scope varying according to the type, complexity and value of the property, and to other parameters. The review may include the following:

• checking the registration and any restrictions that may exist with regard to the registered rights, such as mortgage, lien or expropriation;
• planning restrictions – what may be built on the property, and whether a valid permit was issued for the existing building;
• physical inspection – ie, of the land, of construction on the land, of infrastructure, etc;
• third-party rights such as tenants, or obligations towards planners or contractors; and
• outstanding taxes and levies on the property, including those that will be imposed on the seller and that will be required in order to register the transaction.

Depending on the value and complexity of the property, various professionals may be retained for the due diligence process (lawyers, accountants, insurance consultants, tax experts, engineers, assessors, etc).

The seller of real estate must act in good faith and make representations as to what they know about the property, its registration status, defects, and any restrictions and obligations imposed on it. This does not limit the buyer’s duty to perform a due diligence review.

The seller must provide representations about matters that cannot be examined, such as agreements with regard to the property.

A seller who fails to fulfil this disclosure obligation can be sued for damages suffered by the buyer, and in some cases may be at risk of the contract’s cancellation.

There are also specific obligations for a developer who builds and sells real estate property. Such a developer is subject to enhanced duties, both with regard to the representation and with regard to details and provisions that must be included in the sale agreement and its appendices, such as:

-a duty to complete the registration of the property in the land registry within a specific period of time; and

-a duty to guarantee the buyer’s payments until construction has been completed.

There is no survival period for the seller’s representations, though naturally there is a term of obsolescence. Representation and warranty insurance is not customary in Israel.

A cap on the seller’s liability for a breach of its representations and warranties is not standard, and rarely exists.

Following the COVID-19 pandemic and its contractual consequences, the wording of clauses regarding circumstances beyond the control of the parties (and which will not be considered a breach), is now handled with extra care and caution.

Before entering into a transaction for real estate property, the buyer should inspect the items detailed in 2.4 Real Estate Due Diligence.

If the property is part of a “co-operative house”, the buyer should inspect the “co-operative house” documents; if the rights to the property are long-term lease rights, the terms of the lease should be reviewed.

There is no specific law in Israel dealing with responsibility for soil contamination; therefore this subject is handled in accordance with the seller’s responsibilities in the contract, and with general legal obligations, such as the obligation to act in good faith and under court precedents (that are binding).

The seller of a property has a duty to disclose extensive information about hidden defects, such as soil contamination. This duty does not require actual knowledge of the contamination, and mere negligence is sufficient to establish the seller’s full liability towards the buyer.

The allocation of responsibilities between the parties is examined based on (among other things) the extent of the seller’s responsibility in disclosing the contamination, compared to the scope of the inspections that the buyer was required to conduct.

General information about zoning and building rights with respect to real estate property can be extracted from the websites of the planning authorities. One can obtain official information by filing an application and paying an application fee (negligible amount). In some cases, the applicant is required to submit a measurement of the property in order to receive said official information.

A landowner seeking to rezone their property or add building rights can initiate a planning process, provided that the proposed plan is consistent with binding plans that are higher up in the planning hierarchy, and subject, of course, to the planning policy of the applicable planning authorities. In the last decade, general city plans have been approved for many of the larger cities in Israel, stipulating planning policies and principles such as:

• permitted uses;
• height limits and density; and
• the location of public buildings and public areas, road systems, etc.

Any initiated plans must comply with these principles.

Various laws allow property to be expropriated for public use (such as roads, parks, recreation areas, nature reserves, parking areas, etc).

Before initiating such a procedure, authorities must post notice of the intended expropriation in the vicinity of the property, and deliver this notice to the owner in person, to allow them to appeal against it. The compensation to be paid for the expropriation depends on:

• the decrease in value that results from the change of designation of the land from commercial to public designation;
• the percentage expropriated from the land;
• the stage of the expropriation process; and
• the legislation under which the expropriation was carried out.

If the land is expropriated but not used for the purpose for which it was expropriated, or if the need for such public use has ended, the original owner can claim back their land or its monetary equivalent.

Pursuant to the Land Tax Law (Appreciation and Purchase) 1963 (the “Land Tax Law”), the buyer must pay purchase tax and the seller must pay land appreciation tax in any real estate transaction.

Generally, purchase tax is 6%; there are progressive rates for residential properties that may exceed this figure. Land appreciation tax (which is capital gains tax) is equal to 23% of the seller’s capital gain on the transacted property applicable to a seller that is a corporation. The appreciation tax rate for individuals ranges from 25% to 47%, depending on the date of purchase of the sold property.

However, if the seller’s business is the development and sale of real estate property, it will be subject to income tax rather than land appreciation tax.

There are specific exemptions with regard to land appreciation tax on residential apartments. The most common is an exemption on the sale of an apartment if the seller has no other residential unit. There are discounts on purchase tax that apply to an Israeli resident purchasing its only residential unit. Such exemptions apply only to Israeli residents.

In addition, if the seller makes a profit on the sale that results from a change in the applicable city plan, the seller has to pay a land betterment levy to the local authority within whose jurisdiction the property is located, in addition to land appreciation tax. Such levy is calculated as 50% of the gain attributed to the property due to the approval of the city plan.

A gift between certain immediate relatives can be exempted from land appreciation tax, and can be subject to reduced purchase tax rates.

Note that there is no inheritance or estate tax in Israel, so the transfer of real property by will or succession is not taxable.

Land appreciation tax and purchase tax pursuant to the Land Tax Law (as above) applies if the transfer is of shares in a “real estate entity” – ie, an entity that primarily owns real estate property.       

There is no restriction on the transfer of privately owned real estate to foreigners. Rights in land administered by the Israel Land Authority (ILA) can be transferred to foreigners, subject to certain limitations.

In most cases, transactions in commercial real estate are financed by Israeli banks or Israeli insurance companies.

Parties that cannot obtain such financing approach private financers; the terms of such loans from private financers will usually be less convenient for the borrower.

Large projects can raise money by issuing debentures or shares.

The collateral available to the financing entity is first and foremost the property itself. Sometimes, the borrower is required to provide additional securities. In the last few years, there have been hardly any non-recourse loans; in other words, the lender has recourse against the borrower.

The property itself is pledged by registering a mortgage at the Land Registry (if the borrower is not registered at the Land Registry), and until registration is completed the collateral can be in the form of an obligation from the ILA or any other third party registered as the owner at the Land Registry, for registering a mortgage together with registration of the borrower’s rights in the land.

All income accruing from the property is also pledged as collateral and insurance receivables.

There are no restrictions on granting security over privately owned real estate to foreign lenders. The registration of a mortgage at the Land Registry in favour of a foreign lender on land owned by the ILA (as mentioned in 2.11 Legal Restrictions on Foreign Investors) is subject to the terms and conditions set out by the ILA.

There are no legal restrictions regarding loans from foreign lenders or on repayments being made to a foreign lender, except for obligations under tax laws and restrictions under the Anti-Money Laundering Law.

Registration of pledges is subject to the payment of a small fee to the Land Registry. The fee is fixed and is not a function of the value of the property (and is negligible). The cost of notarising a document is also fixed and negligible.

Lenders charge for the preparation of their documents, and for the costs of the consultants they use for the transaction. These amounts could be significant.

Financing agreements commonly stipulate that the cost of foreclosing on the collateral in the case of default will be borne and paid by the borrower. Such costs may be significant.

Upon foreclosure, property is liquidated by selling it and collecting the debt from the proceeds. On the sale of a property in such a case, the borrower shall have to pay land appreciation tax pursuant to the provisions of the Land Tax Law, as described previously.

When resolving to pledge the entity’s property, directors must weigh up the best interests of the company and its shareholders, and must verify that the pledge and financing transaction do not cause a reduction in the entity’s capital.

A borrower seeking to foreclose on a mortgage or pledge created over a residential apartment must comply with Article 81B1 of the Execution Law 1967, which stipulates that, in the case of a loan that is repaid by instalments and where the borrower defaults on at least one instalment, the lender may file a petition to foreclose only six months after the date of default, and only with regard to the amount in arrears and not with regard to the entire loan amount. If it was not stipulated that the loan would be repaid in instalments, the lender may, upon default, file a petition for full recovery of the loan as of the actual date of default.

The borrower has a right to perform a self-sale and for this has an additional 90 days at their disposal. If the borrower does not exercise this right and does not file an objection, the sale procedure will continue. This may take a few months, and in cases where the borrower’s eviction from the residential unit is required, this may take longer. On average, the period for the realisation of a residential unit (provided that the borrower does not file an objection) is up to one year.

The realisation of real estate assets that are not residential units is faster. A borrower has the right to repay the debt within 60 days from the date of submission of the application for realisation, or to object to it. The procedure will include the appointment of a receiver, publication procedures, etc. If the borrower does not file an objection, the whole process should take about six months from the date of filing the case at the enforcement office.

If the borrower submits an objection, the case will continue in court; and it is difficult to estimate the case’s length until its conclusion.

The lender will rank higher than other creditors only if they procured the appropriate registration for their rights. The best protection is granted by registering a mortgage in the Land Registry or – if the borrower’s rights are not yet registered in the Land Registry – by a pledge with the Registrar of Companies (in the case of a company) and in the Registry of Pledges (in the case of an individual).

In the case of two or more pledges of the same kind, the one that was registered first will prevail. A fixed charge will prevail over a floating charge. Obviously, the ranking can be changed by agreement between the owner and the lenders.

The lender does not hold possession or rights in the property. Foreclosure is usually affected by selling the property to a third party, not by transferring it to the lender. The lender is therefore not deemed the possessor and is not liable for compliance with environmental laws with respect to the property. However, such incompliance may affect the property’s value.       

The borrower’s insolvency does not in itself void security interests created by the borrower in favour of a lender. However, the Insolvency and Economic Rehabilitation Law allows the court to cancel liens or other securities in some cases – for example:

• a lien that was pre-formed via the process of invalid creditor preference;
• a lien over a property for which no adequate, or inadequate, consideration was given, and which was given while the borrower was insolvent or a short time before insolvency; and
• a lien intended to smuggle the borrower’s assets.

Registration of a mortgage is subject to the payment of a very small fee to the Land Registry, as is the registration of a pledge with the Registrar of Companies (if the borrower is a company) and the Registry of Pledges (if the borrower is an individual).

The Planning and Construction Law 1965 (and the regulations promulgated thereunder) defines the relevant planning bodies – ie, regional committees, local committees and national bodies (such as the National Planning and Construction Council, the Committee for Protection of the Coastline Environment, etc). It also defines the hierarchy among them, and the plans that each is authorised to approve. Each of the planning and construction committees is subject to another one higher up in the hierarchy, though they also have independent discretion with respect to certain matters.

Building plans must always comply with those of higher hierarchy, including regional and national outline plans. Certain subjects are regulated on a national level, such as coastline preservation, gas stations and railways.

Local committees may stipulate instructions for their jurisdiction, relating to (for example) the aesthetic design of the building, its entrance elevations, and its integration into the environment. Some cities in Israel, such as Tel Aviv, adopt specific plans for the preservation and restoration of heritage buildings that define which buildings must be preserved and/or restored, and categorise them according to the level of restoration required. The most protected level requires restoration of all elements and prohibits any additional new construction.

There are three levels of planning authorities:

• the National Council, which is in charge of planning and stipulating state-wide instructions and policy;
• the regional committees, which are in charge of promoting and implementing the instructions of the National Council in their respective regions; and
• the local committees, which promote and approve plans on the local level, designate uses, define the land-to-building ratio, stipulate building restrictions, etc.

As mentioned, there are also state-wide terms and conditions, such as building and uses on the coastline or near gas stations.

One planning subject that has been on the planning agenda in the last decade is the building of intracity and intercity public transportation facilities. This also affects construction in the city centres and the regulations for the construction of parking spaces, as some of the effort in this respect is directed towards massive reduction of parking space allocations and stipulation of a maximum of applicable parking space construction, to make it harder to use private cars and to encourage use of public transportation. A public transportation project is in progress and works are currently being carried out in many regions of Israel, with some transportation lines having already begun operation.

All “construction work”, which is defined very broadly under Israeli law, requires a building permit from the applicable local planning and construction committee.

A building permit must comply with all plans that govern the relevant land in terms of the land-to-building ratio, location within the lot boundaries, height, designated use, etc.

An owner of real estate property who wishes to construct a building that will not comply with the current plans can apply for a specific city plan. If such a specific plan conflicts with other plans of higher hierarchy, it may also have to be approved by the regional planning and construction committee if it conflicts with regional plans, or by the National Planning and Construction Council if it conflicts with nationwide plans, etc.

Anyone who sees themself as adversely affected were a proposed plan to be approved may file an objection to the proposed plan.

The planning bodies will examine the proposed plan and the objections. It is not possible to object to an application for a building permit that complies with the governing building plans.

Planning committees’ decisions to approve or reject a plan or an application for a concession relief or exceptional use (use that does not comply with the zoning) can be appealed to the Appellate Board or the Administrative Courts.

Decisions of the Administrative Courts can be appealed to the High Court of Justice, subject to receiving leave to appeal.

As stated previously, it is not possible to object to an application for a building permit that complies with the governing building plans.

In some cases, a permit for new construction requires performance of certain development works in the vicinity of the property, regarding traffic, utilities, etc. The local authority charges development levy from the applicant for this purpose, which is usually a “one-time” charge (not a repeated charge), calculated according to the size of the lot and the intended scope of the new construction. The local authority may, in rare cases, require the developer to perform such works on account of payment of the development levy.

The Planning and Construction Law is a penal code, and is enforced by the law enforcement agencies, including municipal inspectors. A person or entity may face enforcement actions and be exposed to criminal and financial sanctions if they:

• violate the Planning and Construction Law;
• build without a permit or in violation of a permit; or
• use any property in violation of a permit.

Investors can hold real estate through any vehicle they choose, either in their capacity as individuals or through corporate entities (companies, partnerships, etc). The main issues considered are tax planning and limitation of liability, as well as the ability to participate in decision-making.

A company has a separate legal identity to that of its shareholder. A limited liability company protects its shareholders such that, subject to special circumstances, a shareholder of a limited liability company has no exposure should any lawful activity of the company fail. A limited partnership also has a separate legal identity to that of its limited partners. Limited partners that are not involved in the management of the partnership have similar protection as shareholders in a limited liability company, though the general partner (and limited partners that are involved in the management of the partnership) have certain liability to its actions.

A corporation and partnership that purchases real estate will be required to pay a purchase tax at a rate of 6% of the purchase price (see 2.10 Taxes Applicable to a Transaction). A corporation selling real estate will be taxed with corporate tax for the accumulated appreciation – ie, it will pay appreciation tax at the rate of 23%. In a partnership, each member of the partnership will pay land appreciation tax (capital gains tax) according to their own status.

REIT funds are entitled to benefits in purchase tax, appreciation tax and income tax, subject to certain restrictions.

In Israel, there are only a few real estate investment trust (REIT) funds, traded on the stock exchange – most invest in commercial real estate, and some in residential real estate. Those who wish to invest in real estate and enjoy a relatively high return on investment (compared to other low-risk investments) can do so by purchasing participation units in a REIT fund. Unlike investing directly in real estate, investing in REIT funds is simple and does not require high investment amounts. The REIT mechanism in Israel is reminiscent of the trust funds mechanism – everyone is a partner in the trust fund according to their share in the fund.

Both foreign and Israeli entities can invest in REIT funds in Israel.

In order to accelerate the integration of the general public into the real estate market through REIT funds, and to protect the general public, the activities of REIT funds were regulated by legislation in 2006. The law established several obligations and restrictions on REIT funds (such as the obligation to make regular distributions of the fund’s profits to its shareholders every year), and granted tax benefits to REIT funds.

The minimum equity required to incorporate a company is ILS1 (less than USD1). No minimum equity is required to form a partnership.

No specific requirements apply to entities that invest in real estate (as opposed to entities investing in other fields). As mentioned previously, there are restrictions and obligations on REIT funds (see 5.3 REITs).

Companies and partnerships must file annual statements with the Companies Registrar and with the tax authorities, and must pay a fixed annual fee to the Companies Registrar. The annual cost of all the foregoing starts from ILS6,000 to ILS10,000 (approximately USD2,000 to USD2,500), and increases depending on the scope of activity and level of complexity.

The Leasehold and Borrowing Law, 1971 (the “Leasehold Law”) provides the following definition: “[a] leasehold is a right granted, against a consideration… to hold possession and use property for a limited time”.

The Land Law, which lists leasehold rights as one of the five property rights, offers a similar definition. Making real property available to others for exclusive use, for a limited time, and against a consideration can only be done through a leasehold. Terms such as “use” or “permission”, which are not defined by law, are sometimes used in this respect; they are substantially leaseholds.

There is an obligation to report a leasehold agreement to the tax authorities and to register it in the Land Registry, depending on the term of the leasehold (ten years for registration, 25 years for reporting to the land tax authorities and paying taxes). A long-term lease of more than five years is called hahira in Hebrew. If the term exceeds 25 years, it is called hahira-ledorot (literally: generations long-term lease).

A status of protected tenancy exists in Israel, protecting tenants who were tenants when the Protected Tenancy Law entered into effect and anyone who rented real property and paid a substantial amount up-front in order to obtain this status. However, hardly any new protected-lease agreements are entered into anymore. There is no longer protected tenancy for commercial property, and protected tenancy is gradually disappearing from the residential lease market as well.

Various mechanisms exist for effecting commercial lease agreements, including advance payment, monthly/quarterly payment, rent calculated on revenue, etc. This does not affect the substantive nature of the engagement as leasehold.

Lease terms are freely negotiable as they are not regulated, though they are subject to certain “general” legal restrictions and obligations, such as to negotiate in good faith and to reveal to the tenant known defects in the property.

The Leasehold Law was amended in 2017 and “fair rental” provisions were added, protecting residential tenants (of residential units whose monthly rent does not exceed an amount in Israeli shekel equivalent to approximately USD5,400).

The law defines obligations governing owners of residential properties, including mandatory contractual disclosures, and stipulates the kinds of payments that the landlord should pay and may not demand from the tenant.

As mentioned, some protected tenancies still exist and the rent for these is limited, though they are gradually disappearing from the market.

The lease term is usually divided into an initial period of about three to five years, plus one or more options for extension periods which the tenant may exercise. The initial lease term and the option periods will not usually exceed ten years in total.

Standard practice is that the tenant is responsible for ongoing maintenance and the repair of any damage, except for reasonable wear and tear. Commercial properties are often let in “shell and core” condition, and the tenant completes the finishing at their own cost. Triple net leases are less common in Israel and are used mainly when the tenant leases a whole building.

Rent is usually paid every quarter, in advance. Since the COVID-19 pandemic, and following the lessons learned from it, lessors of commercial properties often stipulate in the lease agreements that the tenant is obligated to pay the rent and other payments applicable to them, whether they have used the property or not, for whatever reason.

In most cases, rent is linked to the consumer price index, and will also increase at the beginning of every optional extension period if exercised by the tenant, as mentioned in 6.4 Typical Terms of a Lease.

The rent increase rate is usually predetermined by the parties in the lease agreement. It is common to determine that in each option period rent goes up by 3% to 5%.

VAT is due on rent, though leasing of residential units is exempted from VAT.

In addition to the payment of rent, maintenance fees and other ongoing payments throughout the term of the lease (insurance and local taxes to the municipality, for example), tenants of commercial properties are usually required to submit securities to the lessor prior to the commencement of the lease term, and in some cases to contribute to the lessor’s legal fees in connection with the lease agreement.       

Common areas in commercial properties, such as lobbies and parking areas, are usually managed by the lessor, directly or through a third-party management company. The cost is usually divided between all tenants, according to the ratio between the area of their leased premises and the total area of all relevant leased premises.

For utilities and infrastructure that serve several tenants, the same payment applies – ie, the costs are divided between all the users.

In multi-tenant commercial properties, the lessor usually takes care of the insurance of the building and includes the tenants as additionally insured. In some cases, the tenant is billed separately for this cost. In properties that are let to a single tenant, the building insurance obligation can be passed on to the tenant. Coverage is standard; disputes sometimes arise in connection with the duty to insure against earthquakes or other natural disasters. The Israeli government provides insurance with respect to damage caused by war and terrorism.

Depending on the terms of the insurance, the insurance company can sue the person or entity that caused the damage paid for by the insurance company.

Lessors may stipulate provisions regarding the use of the real estate in the lease agreement, such as the purpose (subject, however, to antitrust law in the case of shopping malls and similar properties), operating hours, maintenance, etc. Tenants’ use of the property is also subject to regulatory provisions, such as the Business Permits Law, which regulates operating hours, the duty to obtain a business permit, compliance with permitted use in accordance with the city plan and building permit, etc.

Standard practice is that the lessor prohibits the tenant from performing any works or changes to the property, unless approved in writing and in advance by the lessor. Lessors will generally prohibit any work that involves changes in construction and infrastructure or any change in the external part of the property. 

As mentioned, the Leasehold Law was amended in 2017 and “fair rental” provisions were added, which apply to residential leases of residential units whose monthly rent does not exceed an amount in Israeli shekel equivalent to approximately USD5,400. The purpose of this amendment is to protect residential tenants that are usually the “weaker” party, primarily through imposing certain disclosure duties and liabilities on the lessor. The rent fee is not limited by law.

The Insolvency and Financial Rehabilitation Law 2018 (the “Insolvency Law”) states that the initiation of insolvency proceedings regarding a corporation or its being insolvent does not lead to the cancellation of an existing agreement and does not grant the lessor a right to cancel it, even if it is stipulated in the contract that the contract will be cancelled under such circumstances.

A trustee appointed to an insolvent tenant may, within a limited timeframe, submit to the court a motion to cancel an agreement even if there is no contractual or legal cause for cancellation. The court may approve the cancellation, or order the cancellation of only part of the agreement, if such cancellation is required for the financial rehabilitation of the corporation or will result in an increase in the debt to be paid to creditors.

Even if there is a cause for cancellation of a lease agreement due to its violation by an insolvent tenant, the court may, at the request of a trustee appointed to an insolvent tenant, order the enforcement of the agreement if it finds it necessary for the economic rehabilitation of the corporation.

The court may approve a transfer of the lease to a third party, even if the agreement prohibits such transfer, provided that it does not badly affect the lessor. The court may determine ways to ensure the fulfilment of the obligations according to an agreement that has been transferred or an agreement that the court ordered to be left in force despite its violation.

The best security for lessors is, of course, a bank guarantee. From a legal point of view, this is “safer” than a cash deposit that a trustee appointed to an insolvent tenant may demand be “returned”.

The industry standard is a bank guarantee equal to three to six months’ worth of rent (plus VAT), plus management fees. Other securities include deposits, promissory notes and personal guarantees.

The tenant has no right to stay on the property after the end of the lease. However, if they do, the lessor is not allowed to take any “self-help” action: they must petition the court through an expedited process, seeking an eviction order.

Another effective measure is to stipulate liquidated damages if the property is not vacated after the end of the lease.

The Leasehold and Borrowing Law, 1971 states that the tenant may not transfer their rights and/or obligations under a lease agreement or sublease the leased premises, except with the consent of the lessor. However, if the lessor refuses to consent to the transfer for unreasonable reasons, or conditions their consent with unreasonable terms, the tenant may transfer the lease without the consent of the lessor. In a lease agreement, it is possible to agree differently in this regard.

Usually, commercial lease agreements state that the tenant may not transfer their rights and/or obligations under a lease agreement or sublease the leased premises without the lessor’s consent. Usually, when the tenant is a corporation, the agreement stipulates that the transfer of control in the tenant will also be considered a prohibited transfer of rights.       

Lease agreements usually include a (broad) definition of breach that may result in termination of the lease – primarily for non-payment of rent or violation of the purpose of the lease.

The Leasehold Law protects the tenant where the property (for specific reasons related to the property or its access, as opposed to a “general” market situation) cannot be used for the purpose of the lease, allowing the tenant to not pay rent for the period when the use of the property was precluded. However, if the tenant exercises this right, the lessor may, after a reasonable time, terminate the lease (unless the tenant waives their right to not pay).

A lease exceeding five years requires a written document. A lease exceeding ten years requires registration in the Land Registry. There is an obligation to report a leasehold agreement to the tax authorities if the lease period (including optional extension periods) exceeds 25 years. In the event of a leasehold exceeding 25 years, the lessor will be required to pay appreciation tax (capital gains), and the tenant will bear the purchase tax.

If the lessor terminates the agreement due to breach by the tenant, the lessor may require the tenant to vacate the property; if the tenant does not do so, the lessor may petition the court. This may take several months, and longer if the tenant offers substitutional defence arguments.

Termination of a lease by a third party is very rare. This can happen if a building is declared dangerous, or if the property or any part of it is expropriated for use for public needs, as mentioned previously (see 2.9 Condemnation, Expropriation or Compulsory Purchase).

It is customary to stipulate in a commercial lease agreement liquidated damages which the lessor will be entitled to in the event of a breach and termination of the lease, without detracting from the lessor’s right to claim actual damages. Actual damages may of course be higher than the unpaid rent.

Usually, lessors of commercial properties continue to hold the collateral given to them by the tenant until a certain (short) period after the lease’s end (usually 60 to 90 days) and are allowed to realise such collateral to cover damages.

The consideration in construction contracts is either a pre-agreed fixed sum (allocating the risk to the contractor) or is calculated by measuring the actual quantities of the work performed. Both methods are common.

The developer decides whether to use a single contractor, or to engage different contractors for the different works (structural frame, systems, fit-out work, etc).

Developers usually commission planning and design separately from construction. The developer engages planners and consultants (up to between 15 and 20 in a complex project), as well as a project manager that handles management and supervision; later on, the developer also engages one or more contractors.

Architects and planners/consultants usually limit their responsibilities to not exceed the planning fee. Contractors usually take full responsibility.

These alternatives vary in cost, planning flexibility, and legal and contractual liability. A landlord that does not engage a turnkey contractor and uses several different contractors will be responsible for construction performance, including with regard to building safety, even if they retain a project manager and inspector.

Developers can stipulate that the contractor will bear the entire liability for construction dates and costs, third-party liability, etc. Criminal liability for which the owner is liable by law cannot be transferred to the contractor. The courts have drawn a distinction in this matter between turnkey contractors (who are considered liable for everything that happens on the site) and a developer who builds with several contractors; the latter cannot disclaim liability.

A developer cannot disclaim liability towards purchasers of part of or all of the project. The developer will be liable directly towards purchasers, regardless of whether they have back-to-back liability against their contractor.

Construction contracts usually impose broad liability on the contractor, who assumes contractual liability and warrants for purchasing insurance, indemnifying the developer if the developer is found responsible or is required to compensate any third party for works for which the contractor is liable according to the construction contract.

It is standard practice for contractors to be contractually liable for the project’s timetables. Liquidated damages for delays are also common practice.

In real life, contractors always claim that they are not the cause for the delay, and disputes in this regard are endless.

Contractors usually submit bank guarantees: first, a performance guarantee (the main purpose of which is to guarantee the contractual timetable), and later a warranty guarantee for the quality of the construction and for the handling of defects.

The performance guarantee is usually equal to 5% to 10% of the contractual fee, while the warranty guarantee is usually half the performance guarantee and is sometimes reduced after the first year.

In most cases, construction contracts prohibit the planners and contractors from pledging their contractual rights against the developer. Subject to the developer’s consent, contractors sometimes pledge the right to receive their contractual fee.

Once construction is completed, the building permit issuer must obtain a completion certificate before the new building can be used. Several certificates should be obtained as a prerequisite for such completion certificate – namely:

• a certificate confirming that the building is compliant with the building permit;
• confirmation regarding the quality of construction;
• confirmation that the building complies with safety requirements; and
• a certificate confirming that the building complies with the rules regarding access for persons with disabilities, etc.

Use of a building without a completion certificate is a violation of the Criminal Code, both by the owner and by the user.

VAT is payable on any transaction in which the seller or purchaser is registered with the VAT authority as a “business entity” for VAT purposes. The sale and purchase of corporate real estate will always be subject to VAT.

If the seller is a “business entity”, it is liable for remitting VAT, and the purchaser will receive an invoice and can offset the VAT against VAT in other transactions (such as payments made to suppliers).

If the seller is an individual who is not a “business entity”, the purchaser shall pay VAT through a self-billing invoice, which can also be offset. The VAT rate in Israel is 17%, and is expected to rise to 18% in mid-2024. Transactions in Eilat, in the southern part of Israel, are exempt from VAT.

In the past, purchasers have tried to allocate some of the consideration in real estate transactions to assets other than the real property (such as equipment, leasehold rights, etc) in order to reduce their purchase tax obligation. The Supreme Court established various tests for the purposes of determining whether equipment is part of the real estate or not – for example, the effect of its separation from the property.

Purchasers sometimes claim that some of the amount paid was in consideration for reputation. For this to carry, they must prove that the reputation is independent from the real property, and must establish its value.

Municipal tax is determined by the local authority, in a “Municipal Tax Order”, which is updated from time to time, subject to a cap growth stipulated by the government. The amount varies between different properties, depending on (among other things) the use category and subcategory (such as office, banking, movie theatre, store, etc).

Exemptions from municipal tax on usable (as opposed to not used) property are rare, and depend primarily on the user – for example, disabled persons are eligible for discounts on business uses, and senior citizens are eligible for discounts on residential uses. Certain uses that the local authority wishes to encourage in its territory receive reduced municipal tax rates. An example of this is a discount granted to software companies by some local authorities in Israel.

Payments to foreigners are subject to withholding tax – 30% for individuals, and the applicable corporate rate for corporations (23% in 2024). All such payments are subject to any applicable tax treaty with the investor’s country of residence, and depend on the classification of the income.

Rent is taxable according to the classification of the proceeds: corporations will pay corporate income, while individuals will pay their income tax bracket (this could reach 47%, plus 3% “additional” tax).

Tax on rent is paid by the lessor, or by the tenant through tax withholding, subject to exemptions.

Tax breaks exist only for income on residential rent, up to a specific annual amount.

The sale of real property is taxable at a rate that ranges from 23% (for companies) or 25% (for individuals) to 47% on the profit (see 2.10 Taxes Applicable to a Transaction). Taxable profit can be reduced by offsetting expenses against the income – in addition to the cost of purchase, the seller can deduct improvements such as:

• renovations;
• betterment levy;
• real interest on loans taken to finance the original purchase; and
• ancillary expenses to the purchase and sale of the property (such as broker and attorney fees).

Companies and “business entities” (including individuals that have opened an income tax file) that generate business income on real property can make ongoing deductions to their expenses on the property, and may deduct depreciation of the cost of purchase and improvements they had invested. As mentioned, any deductions made on an ongoing basis will not be recognised as an expense upon the sale of the property.