Not just the interest rate: The contracts that are stalling real estate

Every time the Israeli real estate market hits turbulence, a predictable discourse arises: eyes are turned to macroeconomic tools — the interest rate trajectory of the Bank of Israel, Ministry of Finance grants, guarantee subsidies, and the removal of regulatory barriers. However, focusing on macro factors misses another failure occurring at the micro level: the fragility of the legal-contractual practice used in Israel.

A modern real estate transaction — whether it is urban renewal, a combination deal, or land acquisition for development — is not a momentary transaction, but a long-term economic venture with multiple variables. Despite this, many contracts in the industry continue to be written from a conservative legal perspective, based on rigid schedules, conditions precedent, and sweeping definitions of "material breach."

In a stable world, this model might provide some certainty. In a reality of extreme volatility in financing costs, supply chain disruptions, and security and statutory uncertainty, it can turn into a trap. The central problem in the traditional contractual structure is the lack of ability to adapt to changing market conditions. When a deviation from the original work plan occurs, legal mechanisms may be triggered: warning letters, forfeiture of collateral, freezing of bank financing, and mutual lawsuits. Instead of protecting economic rights, the result can be value destruction: frozen projects, land tied up in long-standing court disputes, and capital that remains trapped.

To restart the industry's wheels, a change is needed in how lawyers and developers plan real estate transactions:

1. There must be a shift from an "all or nothing" approach to pre-defined economic adjustment mechanisms. A modern contract should include formulas for adjusting compensation rates, re-spreading milestones, and agreed-upon deadline extensions in the event of abnormal interest rate fluctuations, licensing delays beyond the parties' control, or material tax changes.

2. A tiered collateral architecture is required. Instead of relying on absolute collateral that could bring down a developer during a point-in-time cash flow distress, closed support mechanisms, cost transparency, and tiered protections should be created to ensure the rights of landowners and buyers without driving the project into insolvency.

3. Professional and fast decision-making mechanisms must be created. Dependence on the court system to resolve disputes during a project's execution can harm it. Agreements should include fast and binding decision-making mechanisms through a deciding appraiser, engineer, or agreed-upon arbitrator, who can rule within days or weeks while maintaining construction continuity and cash flow.

A real estate contract is not a preliminary pleading intended for a court drawer, but a platform for managing an economic partnership. The ultimate goal is not to prove the correctness of the wording, but to complete construction and hand over the keys. Policymakers are required to continue structural reforms, but the immediate responsibility for creating resilience in the industry also lies with the legal and developer community. The Israeli market cannot afford to continue managing tomorrow's challenges using yesterday's contractual models.

Doron Levita is an attorney and notary, co-chair of the Property and Real Estate Committee of the Tel Aviv District, Levita Mazor & Co.