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06.04.2014, Reflections on the Material Prejudice to Indirect Negative Impact in Real Estate

In view of the increasing erosion of the right to claim under Section 197 of the Planning and Building Law, 5725-1965 (hereinafter: the "Law"), we have deemed it proper to "swim against the current" on a certain matter and to present reflections concerning an outstanding example of such erosion that, in our opinion, might also constitute a significant and unjustifiable attrition of individual property rights.

This article will deal with the rulings of the Supreme Court in the judgments on Leave for Administrative Appeal 10510/02 and Administrative Petition Appeal 10549/02 the Local Planning and Building Committee Hadera v. Yosef Cohen et al. (hereinafter: the "Yosef Cohen Case"), and the rationale behind them. True, the judgment in question was handed down quite a few years ago, but its effects are very evident even now, in plans for changing traffic arrangements, often even on a national scale, such as national road infrastructure plans.

It is well known that according to the judgments, the duty to compensate is founded on two basic considerations: the consideration of "distributive justice", based on the principle whereby alongside the State's prejudice to the individual's property right there must be compensation since, even if the plan brings benefit and welfare to the general public, it is not just for those landowners who are injured by the plan not be compensated for the decline in their circumstances.

By means of the compensation, the tax-paying public bears the plan’s negative effect on the property of certain landowners instead of being borne exclusively by such owners.

The other consideration is economic and practical. Were the State not obligated to compensate for the damage resulting from the plan, there is room for reasonable concern that the planning authorities would not give sufficient weight to the damage created alongside the advantages. The damage created by a plan is one of the relevant considerations which the planning authorities must take into account.

The rulings of the courts and the decisions of the regional appeals committees distinguished between two principal types of negative impact to land (as defined in Section 197 of the Law):

The first is defined as "direct impact" on the land, which is usually described as negative impact on planning rights deriving directly from change to planning and legal norms by the plan itself. Thus for instance, when a plan prohibits construction on a certain lot or sets forth reduction of building rights permitted in its area – such is clearly regarded as direct impact on that lot.

The other kind, which is central to our discussion, is defined as "indirect impact" on the land. This type of negative impact does not derive directly from the prejudice of planning rights but from the change in the planning reality applicable to the land bordering on the plan.

Thus for instance, a plan enabling the construction on a certain lot of a multi-storey building creates an indirect negative impact on the adjacent lot, as the residents of the building already built on it, or the residents of a building to be built on it will suffer prejudice to their privacy and blockage of air and light. Note well – the planning rights on the adjacent lot have not changed, and therefore the damage in question is not "direct impact". However the new plan could indirectly create an adverse effect on the neighboring lot, i.e. on the reasonable benefit from use and its objective market value.

These two types of damage have been recognized as compensable under Section 197 of the Law. For instance in the Bareli judgment (Civil Appeal 1188/92 Local Planning and Construction Committee Jerusalem v. Gilad Bareli, ILR 49(1) 463), the Supreme Court recognized the indirect impact as damage entitling the owner of the affected land to compensation, and clarified that from the aspect of the purpose of the Law, there is no need to distinguish, with respect to the right to compensation, between direct and indirect impact. Thus, the Supreme Court recognized the right to compensation due to damage which is in essence blockage of light, air and view, and the creation of nuisances such as noise and air pollution.

The test established by the Court in the Bareli case to examine the right to compensation due to indirect impact is the test of causal relationship and distance of the damage - i.e. the weaker the causal relationship between the plan and the impact, the weaker, in the Court's opinion, the justification for payment of compensation.

The judgment in the Yosef Cohen Case dealt with owners of rights in real estate on which a filling station was operating. The said land was adjacent to a road that, for many years, had been a main road connecting the city of Hadera with Highway 65. As a result of planning processes, changes were made in the layout of the roads, so that the main road adjacent to the land became a side road and a dead end.

The land owners filed a claim for compensation with the Local Committee under Section 197 of the Law, arguing that turning the road adjacent to their land from a main highway into a dead end local road caused severe and extreme damage to their property.

When their claim was rejected by the Local Committee, the land owners appealed to the Regional Appeals Committee. The Appeals Committee rejected their appeal, holding that the change in the definition of the road adjacent to their lot from main road to urban road does not confer on them the right to claim compensation under Section 197 of the Law. According to the Appeals Committee, the damage in question did not justify compensation, since it did not affect the real estate qualities of the land, but rather was only economic damage caused by the reduction of customer traffic passing near the filling station.

The land owners filed an appeal on the decision of the Appeals Committee with the Court of Administrative Affairs, which accepted their arguments and held that the impact was indirect and compensable under Section 197 of the Law. The Court based its decision on the fact that the land subject of the claim borders on a plan which altered the traffic arrangements, as well as on the position in principle whereby there is no justification to distinguish between indirect impact consisting of noise arising from the nearby road which reduces the value of the land, and direct impact consisting of a partial barrier restricting access to the filling station.

The Local Planning and Building Committee Hadera filed a Motion for Leave to Appeal to the Supreme Court on the judgment of the Administrative Affairs Court. The Supreme Court overturned the judgment of the Administrative Affairs Court, holding that the plan that was central to the case and altered the traffic arrangements had no effect on the property itself, since the filling station continues to operate as in the past.

The Supreme Court clarified that the damage caused by transforming the filling station from bordering the main road into a dead end does not concern "the real estate qualities of the land", and in its opinion the full use of the land was not affected nor the full benefit therefrom. Accordingly, the Court held that the damage caused is economic on which there is no compensation.

The Supreme Court noted that the duty to compensate the individual for damage to his property is weighed against the public interest in planning and development activity, which could be adversely affected were financial implications too great for the planning authorities, as well as the interest of certainty, which should be achieved by strict interpretation enabling the planning authorities to assess compensation payments they would have to pay.

According to the Court, great importance is attributed to the planning entity being aware of the costs projected by its activity, in order to be able to plan its actions in good time, and for this purpose it is necessary to ensure that the rule determining the extent of the potential compensation is simple to apply thus creating certainty.

The Yosef Cohen Case further determined that the principle of certainty, although it is not the utmost principle and in itself does not act to violate any material right, is of sufficient weight to influence the point of balance between the various interests.

Accordingly, the Court held that recognizing the damage caused to the land on which the filling station was located as compensable for, due to the significant changes in traffic arrangements affecting the filling station and consequently reducing the number of potential customers, would create uncertainty with respect to the financial implications involved in approving plans, and the feasibility of planning and organizing roads, due to the financial burden that might be imposed in light of the expanding circle of compensable entities and the difficulty of deciding in advance the identity of those entitled to compensation under Section 197 of the Law.

In the Court's balancing of the various interests, it seems to have reached the conclusion that the consideration of certainty decides the balance in favor of not granting compensation.

As we clarified at the beginning of this article, this ruling constitutes an initial indication of significant (and erroneous, in our opinion) impact on the route to diminishing the right to compensation under Section 197, and we believe that it would be just, even in these days, to revisit these decisions.

True, the public interest and the interest of certainty are undoubtedly important but, in our opinion, they should not tilt the balance in favor of divesting the value of an individual's property, often completely or nearly so, without granting appropriate compensation for such critical damage.

The matter is doubly important if we recall that a considerable part of the real estate granted in the past for the erection of filling stations was allotted by the State to individuals with physical handicaps, and compensation for disrupting their source of livelihood should certainly be considered of paramount value.

Furthermore, we believe, with all due respect, that there is no substance to the distinction made between indirect damage to land caused due to the creation of nuisance of noise, blockage of light, air and view, which according to court law give rise to compensation under Section 197 of the law, and the indirect damage to land caused due to changes in methods of access or even worse - blocking access entirely.

After all, just as noise coming from adjacent property will negatively impact residential property, thus the land of a filling station will be negatively impacted by a material change in (and often a barrier to) access to such land. This expression of damage is materially similar to a reduction in reasonable benefit from a property, as well as an objective change, which could be drastic, in market value of the real estate in question.

Adverse alteration of access to land on which a filling station is in operation is equivalent, in our opinion, to reducing the real estate qualities of the filling station land (even if the zoning designation of the filling station was not changed), to the same extent that noise and other external effects of planning on land bordering on the damaged land affect residential property.

In both cases the owners of rights in the affected property could have ostensibly continued to use it as before, but now both properties have a severe "hump", not to mention "handicap", which, in certain cases, might almost negate the value of the real estate - even more so in the case of land on which a filling station is operating.

It is important to add that, in the case of prejudice to traffic arrangements applicable to land used by a filling station, in most cases the damage in question constitutes the breath of life for the station and for the best use of such land, as distinct from indirect damage to property in the case of noise, odors, blockage of air and light which, with all due respect, cannot usually be compared to the severity of the damage contemplated by this article.

It is also important to remember that Section 197 of the Law purports to grant compensation for "devaluation of the land", that is to say, the reduction in the value of the land. It is well known that the test for the extent of devaluation is a comparison of the value of the land before and after approval of the plan.

The value of the land is calculated as present value of the flow of income from the land. The economic component is fundamental in determining the value of the property, and neutralizing it constitutes deviation from basic principles, and most likely does not coincide with the provisions of the Law.

The valuation of filling stations is determined mainly by the economic test deriving from the number of vehicles passing nearby. Rules for determining the value of filling stations were set by the Chief Government Appraiser in guidelines that he published, and they are based on a count of vehicles. When allocating land to a filling station, its value is determined by the economic test. When changing the designation to a filling station, betterment levy is paid according to the land value established based on the economic test. It is unreasonable, when causing damage to a filling station, to stipulate that the economic component will not be taken into account.

Therefore, in our opinion, there is good reason even today to re-examine the statements made in the Yosef Cohen Case and to recognize the fact that henceforth, in a case where the general public will benefit from a change in traffic arrangements (often on a national scale), the individual, who is the owner of a filling station to be adversely affected by such changes, will have, at the very least, the right to claim compensation for damage due to the plan's impact on his property.

We believe that the principle of certainty, however important it may be, does not prevail over the individual's rights in his property which often, and even mostly, is his principal, if not his only asset. Even if this shift in the center of gravity of the necessary balance between various interests makes it difficult for the planning authorities to assess the extent of economic damage that may be caused by the contemplated plans, we are certain that the planning authorities will succeed in producing appropriate and correct plans, as they have done up to now.

After all, plan promotion and approval proceedings are supposed to involve a real estate appraiser, and many times this is actually done.