Hostages to the System No More

People buying homes from building contractors know the problem - being handed a fat contract over which they have very little influence, even when armed with a lawyer. But a new District Court ruling could wind up changing the rules.

People buying homes from building contractors know the problem - being handed a fat contract over which they have very little influence. Even armed with a lawyer, their negotiating power remains small. Chances are any requests they make for changes will be met with a laconic, "Take it or leave it."

But a District Court (acting as a tribunal for standard contract law ) ruling handed down last week Judge Moshe Sobel could wind up changing the rules, after he amended some articles and voided others in a contract between the Housing & Development company and a client.

housing fair house
Dan Keinan

Under the Standard Contract Law, only the attorney general may sue to cancel or amend a standard contract. Over the years, the attorney general fielded numerous complaints about the standard contracts that developers give homebuyers. Following inspection of a number of such contracts, Carmit Yulis of the Attorney General's Office sued two companies - Housing & Development, in 2006, and B. Yair, in 2008 (that case remains pending ).

At the same time, the Attorney General's Office began negotiations with the two companies over offending articles in their standard contracts. In his ruling, which spreads over 70 pages, Sobel also discusses some of the understandings reached between the two sides. In some instances, his ruling sets precedents.

Note, however, that his rulings are not legally binding because the ruling isn't a Supreme Court one. The hope is that other companies with similar articles in their standard contracts will study Sobel's findings and decide that ignoring them isn't worth the risk.

"Development companies are far more powerful than the clients when negotiating. They have more know-how and experience. They have all the figures at hand and have big lawyers on their side," says Ilan Charcon, a lawyer and expert on property law who, until two months ago, chaired the Land and Contracts Committee of the Israel Bar Association.

Hiring a lawyer would equate the power to a degree, he says. "But it's patently clear that the client is in a certain psychological state that makes it hard for him not to sign on the dotted line."

It's also not rare for homebuyers to attend "marketing parties" and sign documents without lawyers present, he added.

Why do buyers sign memoranda of understanding so casually?

"The buyer's underlying assumption is that he's paying to get a right to the dwelling," Charcon explains. "He innocently thinks that he's signing a memorandum of understanding and that in the future, he'll sign a contract and if not, he'll get that advance back. But the memorandum of understanding is a contract for all intents and purposes. One of the important statements in [Sobel's] ruling is that the memorandum of understanding is also a standard contract and, therefore, the developer has to word it carefully."

Here are some main points of the ruling:

Agreed-on compensation

The problem: The company stipulates 15% of the transaction price as agreed-on compensation if the client breaches or breaks the contract. The attorney general feels that's too much, exceeding the company's potential damage.

The change: Sobel ordered that article eliminated outright. Based on current housing prices, that agreed-on compensation comes to tens of thousands of shekels, if not more. The risks and costs caused by a transaction's cancelation - for instance, the cost of finding a new buyer - are negligible in comparison to that huge amount.

The company cancels the deal

The problem: The memorandum of understanding is contingent on approval by the company's management. Essentially, the company is keeping veto power over the deal.

The change: Sobel ordered that article eliminated outright, or changed to define the criteria by which the company management may void the transaction.

Responsibility for changes to the apartment

The problem: The development company doesn't actually build, it hires a builder. In the agreement with the homebuyer, the development company stipulates that it isn't responsible for changes the buyer makes to the dwelling compared with the original blueprint.

The change: Under an agreement that was reached, the development company's responsibility for any change will be identical to the development company's responsibility for the apartment as a whole.

Deferment of payment in the event of dispute

The problem: The customer has no power to withhold payments in the event of a dispute with the company, including if changes to the dwelling have been badly done.

The change: The court didn't feel that article was entirely to the customer's detriment. It would be considered such, however, if the company commits a material breach of contract. What would be considered a material breach depends on each case individually.

Unexpected events

The problem: The company may put off finishing the building because of unexpected events, such as war or natural disaster, though it has to tell the client how long the delay is expected to continue. The client has no power to cancel the contract without such a move being considered a material breach, even if the delay is expected to last more than a few months.

Worse, when delivery of the finished apartment is greatly delayed, during that time the buyer can't cancel the contract - and can't sue for compensation.

The change: Risks must be evenly shared, said Sobel. The article now includes a clause of reasonability. The company cannot be exempt from scenarios that could be reasonably foreseen, for instance escalation in the security situation increasing the probability of war.

The court also required the company to advise the client of delays in construction near the time it realizes that will be the case and to elaborate on the reasons.

Delays may last no more than four months, after which the buyer may void the contract and get back all his money, plus linkage.

List of defects delivered with the dwelling

The problem: Like many development companies, Housing & Development minimizes its responsibility by signing buyers onto a "delivery protocol" that lists damage to the property. The company shrugs off responsibility for anything that isn't on the list.

The change: That article is plainly illegal, ruled the court: The law gives buyers a year to make complaints about problems in the dwelling. Sometimes that right lasts even longer.

The buyer wants out

The problem: A buyer who wants to void the deal after signing the memorandum of understanding has to sign a number of documents to get his advance money back, including a waiver of linkage and interest, and a waiver of any future claims.

The change: Advances will be returned minus NIS 500 for handling fees, within seven days as of notice that the deal is dead.

Pre-contract presentations

The problem: Housing & Development stated in its standard contract that all presentations, prospects and publications shown to buyers before a contract is signed are void and devoid of legal force.

The change: No, they have legal significance, under some circumstances. They are not part of the agreement, but the buyer has rights insofar as these pre-transaction presentations are concerned.

Flipping the flat

The problem: The buyer can't sell the apartment before taking possession of it.

The change: Now he can, if the development company agrees; its refusal can only be on reasonable grounds.


Linkage is in one direction only: When the consumer price index rose, so did the price of the dwelling (if paid off in installments throughout the construction period ). But when the CPI drops, too bad.

The change: None. No change. Sorry. The court ruled that this mechanism of linkage is the norm throughout the economy, in order to protect the company's legitimate economic interest. It, too, pays interest to the bank, buys raw materials and orders services, all of which are linked to the CPI.