Hamburger Evron & Co.

  • 07.04.2017, The amendment to the Planning and Building Law has only gone halfway, The Marker


Real Estate Law: Ronen Yardeni and Ram Museri

In its second and third reading, the Knesset recently approved an amendment to the Planning and Building Law, with one of its key mainstays being the addition of a clause allowing a planning body to condition promotion of a plan on a letter of indemnification against claims for compensation. The amendment was intended to solve the problem caused as a result of the Supreme Court ruling published in December.

In that ruling, the Court, in a composition of three judges headed by Justice Yoram Danziger, overturned a practice that was used for years, whereby a landowner who applied to initiate a betterment plan was required to deposit a letter of indemnification as a condition for promotion of the plan. Such letters of indemnification are intended to ensure that should a local committee be forced to pay compensation it would receive indemnity from the developers. The ruling led to a situation where many local committees completely stopped promoting plans in their area and thus put the real estate market into a state of uncertainty.

But the legislator only went halfway, and did not complete the task as required. At the same time as handing down the legislative seal of approval to the requirement for a letter of indemnification, the legislator should have determined that the letter of indemnification be taken into account when calculating the betterment level in respect of the plan.

Under the provisions of the Planning and Building Law, when an approved plan results in an increase in the value of the land, the local committee imposes a betterment levy on the landowners of half of the increase in value. The rationale behind the levy is distributive justice – an owner whose land has benefited from betterment as a result of a planning process, should share his increase in wealth with the public.

This issue has been discussed previously in the Court, when the Tel Aviv Local Committee presented landowners with a demand to pay a betterment levy after they were required to deposit a letter of indemnification with it against claims as a condition for promoting a plan. At the same time, claims to pay compensation were filed on behalf of various third parties. The owners of the land argued that when calculating betterment as a result of the new plan, the fact that payment of compensation had been levied on them should also have been taken into account, and the amount of compensation they would pay by virtue of the letter of indemnification should therefore be offset against the betterment resulting from the plan. Only thus should the betterment levy be calculated and collected in respect of the real value earned by the landowners as a result of approval of the plan.

The District Court accepted the claim of the landowners, but the Supreme Court accepted the appeal of the Local Committee and reversed the ruling. The Supreme Court relied mainly on the argument that payment of compensation under the letters of indemnification is ostensibly an external expense of the plan, and does not constitute part of the market value of the land.

The ruling of the Supreme Court is incorrect in our opinion, since there can be no argument that the profit of the landowners may be considerably lower in view of their obligation to pay compensation for the plan’s approval instead of the Local Committee. In other words, the fact that it is not possible to offset these compensation amounts against the betterment levy leads to the landowners being overcharged in respect of the betterment levy.

The legislator would do well to also regulate this issue soon, so that landowners are not overcharged for the betterment levy (which is not the true tax). Such an amendment would also have a direct and positive effect on housing prices, because it is clear that offsetting against betterment is very likely to be expressed in lowering of apartment prices for buyers.

The Supreme Court ruled that payment of compensation in accordance with a letter of indemnification is an expense that is not part of the value of the land. But there is no dispute that the profit of the landowners could shrink significantly in view of their obligation to pay compensation instead of the local committee. In other words, the fact that it is not possible to offset these compensation amounts against betterment, results in landowners being overcharged on the betterment levy.

Adv. Ronen Yardeni is a partner in law firm Hamburger Evron & Co., concentrating on planning and building, and Adv. Ram Museri is an associate attorney in the firm’s Planning and Building Department.