In recent years, we've all been witness to the ongoing rise in apartment prices. Statistically, at least 1 person in 4 will complete a real estate transaction in the course of their lifetime. Knowledge of the ruling presented below is essential for all those wishing to enter the market.
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Most of my clients were surprised to learn that if, in the course of negotiations with a buyer over the sale of their apartment, they were to change their minds at an advanced stage and decide not to sell or sign the purchase agreement, they could be sued by the buyer. In such a case, the buyer could argue that the purchase agreement was binding even though it hadn't been signed, and there's a good chance he could win.
According to law, the court may decide that by doing so, the sellers breached the (unsigned) contract, meaning they would have to compensate the buyer for such a breach. Compensation for breach of contract can total hundreds of thousands of shekels – 10% of the price of the apartment as agreed by the sides.
District Court Judge Naftali Shilo ruled that when the facts clearly show that there was an intent to contract between the parties, the court should find that the purchase agreement is binding, even though it may be unsigned (Gross Ruling).
One of the basic principles of contract law is the expectation that the negotiating parties should act in good faith. Section 12 of the Contracts Law defines this obligation: "During negotiations, prior to signing a contract, each party must act in an acceptable manner and in good faith. A party that does not act in an acceptable manner and in good faith will be obliged to compensate the other party for the damage caused by the negotiations or the making of the contract."
In many cases the court has ruled that abandoning advanced negotiations on a real estate deal, when the sides are close to signing the contract, constitutes acting in bad faith, even to the point of granting the abandoned party a right to compensation. According to the ruling, the reasons for leaving the negotiations must be compelling, and added obligations and restrictions are to be imposed on the party seeking to withdraw.
An agreement left unsigned
In the Gross Ruling, Judge Shilo ruled that since the parties had agreed on all the commercial details, there was no justification for the sellers' decision to leave the negotiations and refuse to sell the apartment. Accordingly, Shilo ruled that although the purchase agreement hadn't been signed, it was binding.
Prior to the ruling, a party that acted in bad faith before signing a contract could be made to pay reliance damages (compensation for the harm caused by entry into negotiations). In the Gross Ruling, the district court ruled that since the sellers left the negotiations at an advanced stage and refused to sell their apartment to the buyers, their act constituted a breach of contract as defined in the purchase agreement, meaning they were obliged to pay the buyers damages totaling 10% of the price of the apartment (in this case, NIS131,500), plus indexation differences and interest accruing from the date of the formulation of the contract's final draft.
According to a Supreme Court ruling, two conditions must be fulfilled for a purchase agreement to be defined as binding: intent to contract, and specificity.
Scholars Gabriela Shalev and Daniel Friedman and Nili Cohen define intent to contract (animus contrahendi) as the intention of the sides to enter into a legally binding contract. The intent to contract must refer to a liaison with a specific party in a well-defined agreement. It is tested objectively, that is, via its external expression by the parties to be bound by a purchase contract.
According to Shalev and Friedman & Cohen, the parties' intent to contract is the central element in making a contract. The law does not ask what the contracting party really had in mind; intent to contract is tested by its external reflection. Thereby the law protects the contractee's interest of potential reliance. The agreement between the sides begins not necessarily when the contract is made, but rather when the reliance interest is created.
The second element, specificity, means that the sides have agreed on all the essential and necessary details of the transaction. According to court rulings, the purchase agreement does not have to be detailed ad perfectum; it should be detailed enough to specify the essence and sphere of the transaction and include all the information without which the transaction cannot be carried out.
Israeli courts have ruled that to create the conditions necessary for an agreement to be binding, the purchase agreement must include the names of the parties, a statement of the essence of the property and the transaction, the price, the dates of payment, the tax expenses, and so on. Over the years, this requirement has been somewhat eased, with courts recognizing purchase agreements as valid even when they did not contain all the conditions necessary for a transaction. In such cases, details could be filled in later via external tests and normative legal directives, as long as no other intention of the parties regarding the missing details could be inferred.
Written document required
When examining a real estate transaction, another, formal element is required. Section 8 of the 1969 Land Law stipulates that "a commitment to carry out a property transaction requires written documentation." The requirement that the agreement should be put down in writing is a formal one.
The courts have emphasized that a property sale, especially between private parties, is a highly important transaction and is usually the largest transaction engaged in by the parties. The assumption underlying the written document requirement is that investing the time needed to prepare and sign such a document solidifies the parties' commitment and intent to contract.
In property purchase agreements, the writing requirement fulfills the need to clearly distinguish between the pre-contractual stage – the negotiations – and the contractual stage. In real estate transactions, special importance is attached to the transition from the pre-contractual to the contractual stage, so as to ensure the parties' intent to contract.
Accordingly, in order to ensure that the lack of a physical signature on the purchase agreement is not exploited by one of the parties to forfeit on their commitments, the principle of good faith was formulated, which is meant to limit the right of the parties to abandon the negotiations.
From the moment two people decide to conduct negotiations with the intent of reaching an agreement, a special relationship is formed between them, based on mutual trust. Each side must act towards the other in fairness and good faith. The trust created during the negotiations imposes various obligations on the two sides, including a restriction on the right to withdraw from the negotiations. Of course, determining that withdrawal from negotiations is an act in bad faith depends on the circumstances of the case in question. Each case should be examined independently to determine whether the withdrawing party acted in bad faith.
The court allows waiving the requirement of a signature in cases where an attempt was clearly made by one of the sides to evade, retract, and undermine obligations already undertaken by that side, and which constitute intent to contract, by using a formalistic excuse.
Has damage been caused?
According to the Gross Ruling, the facts of the case clearly showed the existence of an intent to contract and specificity, meaning that a contract was made even though it hadn't been signed. In the circumstances relevant to the case, despite the fact that the agreement had not been signed, enough evidence was found to prove that the sides had an intent to contract in the purchase agreement.
An examination of the agreement reveals that the second condition was also fulfilled – the contract's specificity. The contract included all the essential details, and the seller admitted that no disputes remained as to its contents.
Since the court found that the purchase agreement was binding despite it being unsigned and that the sellers had violated the agreement by refusing to sell the apartment to the buyer, it ruled that the buyer was entitled to the compensation for breach of the contract determined in the agreement, totaling 10% of the price of the property.
The sellers argued that the buyer had suffered no harm, and that therefore he deserved no compensation for damages caused. However, it should be noted that an agreed compensation clause means that the parties agree that the side incurring the damage has a right to receive compensation, even if in fact, no damage has been caused.
In other words, the obligation stems from the purchase agreement itself, and the agreement between the sides is based on the assumption that damage may be caused. Even if the sellers prove that the buyer suffered no damage, even if they were to prove that the buyer benefited from their breach of contract, this would not diminish the buyer's right to receive the agreed compensation, which is based solely on the breach itself.
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When entering into a purchase agreement, be aware of these rulings and be sure to act fairly and in good faith throughout all the stages of the process, knowing that withdrawing from negotiations at an advanced stage may result in a situation wherein the side seeking to withdraw must pay the other side the agreed compensation, totaling 10% of the property's price.
In light of the ongoing rise in real estate prices, this ruling is of crucial importance, even in the case of a simple transaction. Its serious financial consequences oblige us to conduct ourselves in an alert and calculated manner so as not to find ourselves having to pay exorbitant damages to the other side.
Adv. Ortal Nener is a real estate and property tax attorney.
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