Israel: Lease Of Property From A Local Authority – Comparison With A Lease From The Israel Land Authority

Introduction:

It is a known fact that some 90% of the land in Israel is owned by the State, that is, by the Israel Land Authority (hereinafter: "ILA") or the Jewish National Fund. In such circumstances, some of these lands are leased to Israeli citizens in accordance with the provisions of lease agreements for periods of 49 or 99 years, which usually include options for extending the lease periods.

A lesser known fact, is that local authorities may also own real estate assets and lease them under individual lease agreements.

The difference between the two situations described above, is that the manner and terms of leasing ILA/JNF-owned property are regulated by law¹, whereas this is not the case when the property is owned by a local authority. In such a situation, it is customary to apply the rules and standards of administrative law to the local authority, although the certainty and unambiguous rules which exist when dealing with the ILA or the JNF, are still lacking.

In this article, we shall examine the differences between the two types of lease as aforesaid, with the emphasis on a situation in which the lessee wishes to extend the lease period or upgrade the leasehold title to freehold (i.e. ownership of the property), as has become possible in recent years in accordance with the reform being promoted by the Israel Land Authority.

Extending leases and upgrading to freehold in ILA-owned properties:

Should a lessee wish to extend the period of his lease, ILA charges him a ground rent (which may be capitalized), the amount of which is based upon the value of the land and regulated by ILA's internal resolutions and regulations (about 13% of the value of the land).

In the case of an upgrade of the leasehold title to freehold, ILA Council Resolution No. 1549, which was adopted on 7.5.18, describes the conditions according to which lessees may obtain ownership of the properties which they lease, some of them in return for payment, and others gratuitously.

Examples of where ownership may be acquired from the ILA gratuitously, include, inter alia, an apartment in a condominium complex, a detached residential dwelling of up to 280 square meters, an area of land comprising of up to 16 acres which is zoned for residential or employment use, provided that all the construction rights pertaining thereto, including future rights, were acquired within the framework of an urban building plan in force on the date of the allocation, property located in a national priority area, etc.

The freehold title to all other ILA-owned properties, is acquired through payment of a sum based on a certain percentage of their value, as determined by ILA's appraiser (and which can be contested through a valuation by the lessee's appraiser and thereafter through a determining appraiser). The amount charged for the freehold title ranges from 4.5% to a maximum of 31% of the value of properties comprising an area of more than 1 acre.

As may be seen, the conditions by and manner in which the period of a lease can be extended or the leasehold title upgraded to freehold in the case of ILA-owned properties are clearly regulated by ILA. However, no equivalent regulation exists in the case of properties leased by a local authority.

Extending leases and upgrading to freehold in local authority-owned properties:

Recently, there has been much talk in the media of a dispute between the Tel Aviv City Council and lessees of land in the eastern part of the City, on which hundreds of business owners have been working for decades. The dispute arose from the fact that the Council demanded that a sum equivalent to 91% of the value of the land be paid in return for its consent to extend the term of the lease. The lessees, on the other hand, claimed that the amount was exaggerated and unreasonable, and that the Council had to charge according to the ILA rates and collect a sum equivalent to around 13% of the value of the land for renewing lease agreements.

The lessees filed petitions against the Tel Aviv City Council and after conducting lengthy legal proceedings the parties recently reached a settlement, under the terms of which the lessees shall pay the Council a sum equivalent to 75% of the value of the land in return for a 49-year extension of the lease.

It should be noted that even though the affair in question involved an extension of the lease and not the acquisition of ownership, the local authorities have no clear guidelines regulating either of these actions.

The above affair clearly illustrates the differences between an ILA lease and a local authority lease. While the criteria, costs and procedures for acquiring the freehold title to or extending the lease of an ILA-owned property are clear and predetermined, local authorities have no obligation to regulate and systemize these matters, and therefore apparently free to do as they please and demand whatever sums they want from lessees in return for extending the lease or acquiring the ownership.

The situation described above is doubly problematic in those cases in which the demand to acquire ownership rights comes from the local authority itself, for example, in order to obtain its approval for the implementation of an urban renewal project. Hence circumstances may arise in which a local authority effectively ties the lessees' hands and prevents them from proceeding with urban renewal projects in cases where they do not have the economic ability to bear the costs of purchasing ownership of the property. To complete the picture, it should be noted that in such cases, there are ways of contending with the local authority's demand, such as initiating a binding appraisal process or shifting the cost of acquiring ownership rights in the property to the developer who will conduct the project for the lessees, should it agree to it.

Notwithstanding the foregoing, it is important to note, that since generally speaking, the courts tend to impose on local authorities the same elevated standard of conduct which applies to other administrative bodies, local authorities are precluded from acting as they wish by systems of checks and balances which are designed to ensure that they do not exploit their power to the lessees' detriment.

Conclusion:

The identity of the lessor of a property is of great importance when the lessee is considering whether to extend his lease of or acquire the freehold title to it. While the standards applying to the ILA in either of these scenarios are clear, this is not the case when contending with local authorities. It is therefore recommended to be aware of the actual situation when considering or planning any transactions in a property held pursuant to a lease agreement and to examine the identity of the lessor.

Footnote

1 Israel Land Authority Law, 5720-1960

Originally Published April 2019

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.