Is a Memorandum of Understanding Binding in an Israeli Property Deal
Many people sign a memorandum assuming it is no more than a statement of intent. The courts look at it differently: if it shows that the parties intended to be bound and is sufficiently definite, it may be a contract in its own right. This guide sets out when that happens, what each side risks, and what can be done instead.
What a memorandum is
Signing a memorandum has become a standard preliminary step in Israeli property transactions. The document is meant to show that both sides are serious: the buyer wants the price fixed, and the seller wants confirmation that the buyer really intends to proceed. In practice it is usually signed without a lawyer present, and sometimes on a form downloaded from the internet.
The trouble starts when one side changes its mind. That is when the question arises of what that page is worth in law, and the answer is far from obvious.
When a memorandum becomes a binding contract
The starting point in Israeli law is that an undertaking to carry out a transaction in land requires a document in writing, under section 8 of the Land Law, 5729-1969. A memorandum is a document in writing, so that formal requirement may well be satisfied.
From there the court applies two cumulative tests, laid down in CA 158/77 Rabinai v. Man Shaked Ltd.:
- Intention to be bound: whether the document and the parties conduct show an intention to enter into a binding contract rather than to continue negotiating.
- Definiteness: whether the document contains the material terms, including identification of the property, the parties, the price and the dates for payment and delivery.
Where both tests are met, the document may be treated as a binding contract even if terms are missing, and even if it states that a detailed sale agreement will be signed later.
Alongside the two tests the court examines the linkage clause, meaning the sentence that connects the memorandum to the future agreement. Wording such as "a detailed agreement will be signed within 30 days" does not necessarily defeat binding force, while an express statement that the document creates no legal relations until a sale agreement is signed points the other way. The content governs, not the heading given to the document.
The risk to the buyer
A memorandum is normally signed before the buyer has carried out a single preliminary check. No Land Registry extract has been produced, the condominium plan has not been read, building irregularities have not been examined and no mortgage approval in principle has been obtained.
The risk is therefore not theoretical. If it later emerges that a mortgage is registered against the property which the seller cannot remove, that the parking space or storeroom is not registered as part of the rights, or that the bank will not lend on the assumed scale, and the document is held to be binding, the buyer is tied to a transaction he never examined. Withdrawing from it is a breach of contract, with everything that follows.
The document is called a memorandum rather than a sale agreement, but the name gives it no different standing. The court looks at what is written in it and at what the parties did next.
The risk to the seller
The risk is commonly assumed to fall on the buyer alone, and that is a mistake. A seller who has signed up to a price may find afterwards that the figure is too low, for example because a betterment levy applies that was not taken into account, or because the capital gains tax rate is higher than assumed. If the memorandum is binding, he cannot go back on the price without the buyer agreeing.
There is a second, less familiar risk. A seller who signs a memorandum with one buyer and then contracts with another is exposed to a claim by the first, and in some circumstances to a caveat registered in that buyer favour against the property, which will make completing the second transaction difficult.
The tax consequence
This is the point that is almost always missed. If the memorandum constitutes a binding contract, the date it was signed may count as the sale date for the purposes of the Real Estate Taxation Law. The 30 day period for filing the declaration with the tax authority runs from that date, and that date determines the purchase tax brackets and the capital gains tax rates that apply to the transaction.
The practical consequence: parties who signed a memorandum and did not file, on the assumption that the document was not binding, may find themselves filing late, with the penalties and interest that follow. Tax planning too, such as the timing of the sale of a sole residential apartment, becomes fixed at an earlier date than intended.
To sign or not to sign
This is not a yes or no question but a question of timing. On one hand, refusing to sign can cost the transaction: the seller may sell to someone else, or the buyer may find another property. On the other, signing early ties a party to a transaction he has not examined, or to a price he has not fully worked out.
Three practical courses of action:
- Put the signature off by a few days and use them to obtain the Land Registry extract and mortgage approval in principle. In most transactions this is possible.
- Sign a document drafted by a lawyer, with an express condition precedent and an expiry date, rather than a generic form from the internet.
- Do without a memorandum and move straight to a short-form sale agreement. This is usually the safest of the three.
What they have in common is that a signed document is very hard to correct afterwards. The checking is done before signature, not after it.
Before you sign, talk to us. Our office drafts the agreement for you, conducts the negotiation and represents you through to completion of registration. Our real estate department has accompanied transactions for over 15 years, alongside an architect, a surveyor and a property valuer. Call 02-5953322, send a WhatsApp message to 050-4411343 or leave your details in the form below, and we will get back to you as soon as possible.
What people ask most often
We wrote in the memorandum that it is not binding. Does that hold?
The other side has pulled out. What can be claimed?
We paid a deposit on signature. Does that matter?
Does a memorandum trigger a filing duty with the tax authority?
Can a caveat be registered on the strength of a memorandum?
All Real Estate Department pages
Signed a memorandum, or about to
Send us the wording of the document and tell us where you stand: whether a deposit has been paid, whether a Land Registry extract has been produced, and whether a date has been set for the sale agreement. The earlier you get in touch, the more there is to work with.