A memorandum of understanding for buying an apartment is a binding contract: when and how it is enforced

When is a memorandum of understanding a binding contract?

The title of the document is not decisive. A "memorandum of understanding", an "agreement in principle" or an "order form" can each be a binding contract. What matters is whether the document meets the two conditions that contract law requires of every contract: certainty and intention to be bound. Where both are present, the memorandum of understanding is a contract for all intents and purposes, and the detailed agreement the parties intended to sign later merely supplements what has already been agreed. This is the rule laid down by the Supreme Court in CA 158/77 Rabinai v. Man Shaked (Rehovot) Ltd., PD 33(2) 281 (1979), and it has been applied consistently ever since.

The Land Law provides that an undertaking to enter into a real estate transaction requires a written document (section 8 of the Land Law, 5729-1969). A signed memorandum of understanding satisfies the writing requirement, so a detailed agreement is not needed for the undertaking to be valid.

What is certainty?

Certainty means that the document contains the essential terms of the transaction, so that it can be carried out without the parties having to agree on anything else of substance: who the seller is and who the buyer is, which apartment is being sold (its address, or its block and parcel), and the price. Secondary details, such as the dates of delivery and payment, can sometimes be supplied according to the law and to custom (section 26 of the Contracts (General Part) Law, 5733-1973), so their absence does not necessarily defeat the transaction.

What is intention to be bound?

Intention to be bound (gmirut da'at) means that the parties intended to commit themselves there and then, and not merely to negotiate. The court infers this from the circumstances: signature of the document, payment on account of the price, acceptance of the money without reservation, and which party is behaving as the owner of the apartment. Conversely, a sentence such as "the transaction is subject to the signing of a contract" may indicate that the parties did not intend to be bound before the detailed agreement, and that question is examined on the facts of each case.

What does this mean in practice?

• The seller cannot back out because he has received a better offer, or because "no contract has yet been signed at a lawyer's office".
• The buyer is entitled to seek enforcement, meaning that the court orders the transaction to be completed and the apartment to be registered in the buyer's name.
• A cautionary note can be registered on the basis of the memorandum of understanding.
• The transaction must be reported to the Israel Tax Authority, like any real estate transaction.
• The rule works both ways: a buyer who has signed cannot withdraw either, merely because no detailed agreement has yet been signed.

What happened in the case?

A couple rented an apartment in 2002. A few months later it was agreed orally that they would buy it, and they began making payments on account of the price, with the rent reduced accordingly (for example, once 10% of the price had been paid, the rent was reduced by 10%, and so on). The registered owner was not personally involved: his wife handled the transaction under a general notarial power of attorney, and the money was transferred, at her request, to her or to their son.

In 2005 a memorandum of understanding was signed: a price of USD 190,000 was agreed, of which USD 54,000 was acknowledged as having been paid by that date. When the buyers came to sign a full agreement, it emerged that the owner did not know at all of the sale his wife had made under the power of attorney. The lawyer who was to draft the agreement refused to continue, and from that moment the sellers repudiated the transaction.

What state was the case in when it reached the office?

A difficult one. There was no orderly record of the payments actually made, and no cautionary note had been registered, because the previous lawyer had told the buyers that a note could not be registered on the basis of a memorandum of understanding. In practice, the buyers were exposed to the risk that the owner would sell the apartment to someone else or charge it, or that one of his creditors would have it attached.

What did we do first?

• We applied to register a cautionary note on the basis of the memorandum of understanding alone, and it was registered. From that day the apartment was "locked" in the buyers' favour.
• We reconstructed the payments from the documents that did exist: cheques, signed acknowledgements of receipt of money, and a conversion of each shekel payment into dollars at the representative exchange rate on the date of payment. This gave us an exact figure: USD 57,585.
• We sent a letter demanding performance, delivered by hand to the owner himself rather than to his wife.
• We reported the transaction to the Israel Tax Authority.
• We filed a claim in the District Court for enforcement of the memorandum of understanding, for a declaratory judgment and for the appointment of a receiver to complete the transaction. The central argument: the memorandum of understanding is a binding contract because it has the required certainty (the parties, the identification of the apartment and the price), and the sellers showed an intention to be bound by accepting payments on account of the price over a period of years.

What did the sellers argue?

The sellers filed a counterclaim for the eviction of the buyers, for payment of rent and for the deletion of the cautionary note. They argued that the memorandum of understanding was not a contract, that the power of attorney had been revoked, and that the agreed price was so low as to exploit them.

The price argument collapsed once the court appointed a neutral appraiser. The appraiser assessed the market value at USD 188,000 at the relevant date, meaning that the agreed price of USD 190,000 was in fact slightly above the value. As to the power of attorney, the buyers argued that any notice of revocation, if one was sent at all, arrived after the transaction had already been made, and that the power of attorney was intended, among other things, to secure their rights and was therefore irrevocable under section 14 of the Agency Law, 5725-1965.

How did the proceedings end?

After mediation and several hearings, the parties reached a settlement that was given the force of a partial judgment: the buyers purchase the apartment and pay a balance of NIS 750,000 within 60 days of signing a detailed agreement, subject to obtaining a mortgage. That sum also settled all the claims for rent.

One dispute remained: whether the storeroom was included in the property sold. The parties agreed that the court would decide it under section 79A of the Courts Law [Consolidated Version], 5744-1984, that is, by way of compromise. The supplementary judgment awarded the buyers compensation of NIS 17,500. The court commended the parties and their counsel, and ordered the court fees to be refunded.

Can a cautionary note be registered on the basis of a memorandum of understanding?

Yes. Section 126 of the Land Law allows a cautionary note to be registered on the basis of an undertaking to enter into a real estate transaction, and such an undertaking may also be contained in a memorandum of understanding. This is the first and most important step when a seller starts to evade his obligations: without a note, even winning the claim is of little value if the apartment has already been sold to someone else or charged.

What if you paid without receipts?

This is an evidential problem that can be difficult, but it is not necessarily the end of the story. Payments can be proved by cheques, bank transfers, signed notes, messages and witness testimony. It is important to gather all the material early, while memories are still fresh, and to organise it in a single table with dates and amounts.

How can all this be avoided in advance?

• Where the transaction is made under a power of attorney, check directly with the registered owner that he knows of it and consents.
• Do not pay anything "on account" without a signed document for each payment, and pay only into the registered owner's account.
• Register a cautionary note as soon as any binding document is signed, including a memorandum of understanding.
• Do not wait years for a full agreement. Every month that passes adds risk.

When should you consult a lawyer?

Signed a memorandum of understanding and the seller is starting to back away? Send us the document and the Land Registry extract, and we will check immediately whether a cautionary note can be registered.

To arrange a call: 052-5927592, or on WhatsApp using the button on the site.

About the author

Amos Ilan is an advocate (Israel Bar no. 35320) and a notary (licence no. 214444). The office is at 17 Tzahal Street, Ness Ziona, and handles real estate transactions, construction defects, condominium disputes and civil litigation.