The end of the uniform model: The state brings order to tenant compensation in urban renewal projects

A new guidance document published by the Ministry of Justice and the Urban Renewal Authority presents a new legal-appraisal framework that enshrines the possibility of offering different tenants different compensation. The move puts an end to the era of uniform compensation that veteran tenants received in urban renewal projects such as Pinui-Binui and TAMA 38.

About three months ago, the Tel Aviv District Court shook the real estate industry by ruling that providing identical compensation to tenants violates the principle of equality. Judge Gilad Hess dealt with a Pinui-Binui project in Ramat Gan, where it was determined in the contract with the contractor that the evacuated tenants would receive new apartments with an additional area of 12 square meters, as well as a balcony, parking, and, if possible, a storage room.

This formula of uniform area addition for all apartments was accepted in the market, but the judge accepted the position of the petitioner, one of the refusing tenants, who argued that the compensation discriminates against owners of large apartments. She herself had an apartment of 104 square meters, which means that the proposed addition increased her apartment area by about 11%, while owners of small 35-square-meter apartments would receive a percentage increase three times larger.

According to Judge Hess, the principle of equality will be maintained precisely through relative compensation, in accordance with the previous situation, and not by giving identical footage to every apartment. The ruling mainly created great uncertainty in the market. The main fear of developers is that many contracts will be reopened, and that from now on, developers and tenants will find it difficult to determine and agree on specific compensation for each and every apartment.

Notable changes

Now, while the Ramat Gan case awaits appeal and a decision by the Supreme Court, a state document determines that developers and apartment owners are free to decide together and by agreement on compensation mechanisms - whether by giving identical compensation to each apartment or, according to what Judge Hess decided, that it be relative.

Director General of the Urban Renewal Authority, Yuri Gammerman, and Deputy Attorney General (Civil Law), Carmit Yulis, drafted the document. Both agree that in cases where the compensation does not take into account the differences between apartments, an owner of a unique apartment, such as a penthouse, a garden apartment, or an apartment significantly larger than the regular apartments in the building, has the possibility to base an argument of lack of economic feasibility.

Therefore, the two determine that the building should be divided into several types of apartments with unique characteristics that justify providing special compensation tailored to them. Parameters such as apartment area, their location, their attachments (garden, storage, parking, etc.) can exist, but do not necessarily entitle the apartment owner to greater compensation. In any case, there is no intention that every apartment in the building will be checked individually.

Transparency and reporting obligation

Regarding excess and appropriate compensation for owners of unique apartments, the document details the possibility of providing a larger apartment or equivalent in money, but not only. Additional compensation includes an apartment on a higher floor, an upgraded specification, providing the option to choose a compensation apartment before other tenants in the project, and more. "In this way, there is a priority for the owner of a certain apartment or owners of certain apartments over the other apartment owners, in a way that may correctly balance the adjustment of compensation required due to the different characteristics of the apartments, and all in accordance with their characteristics and the degree of uniqueness of the group of apartments," write Yulis and Gammerman.

The document clarifies that there is an obligation of transparency in the contract with the tenants. If an apartment owner receives compensation that is significantly different from what their neighbors receive, the developer is obligated to report this to the other apartment owners, otherwise the law will allow them to cancel the transaction with them.