Real estate professionals: The urban renewal compensation document cannot replace a judicial ruling

The "compensation document" published by the Urban Renewal Authority and the Ministry of Justice is not a substitute for a court ruling that will establish a precedent in the field, and although it may soften here and there the court ruling that fundamentally changed the formula accepted until now regarding compensation for apartment owners in urban renewal - it cannot replace them; this is the opinion of professionals who commented on the document.

Judge Gilad Hess ruled about three months ago in the "Keren Or" case that the accepted method - giving apartment owners in urban renewal uniform compensation - discriminates against owners of large apartments, whose relative compensation is significantly lower than the compensation received by owners of small apartments. In his view, the compensation mechanism that should be applied in urban renewal should be proportional, taking into account the differences between the apartments.

The ruling caused a great stir and even raised concerns that changing the formula would torpedo urban renewal projects. Following this, the CEO of the Urban Renewal Authority, Yuri Gamerman, and the Deputy Attorney General (Civil Law), Adv. Carmit Yulis, published a clarification document regarding the compensation framework, which is supposed to bring order to things following the ruling.

In principle, the document does not rule out the method of uniform compensation - provided it was done by agreement. In other cases, it recommends dividing the building into several types of apartments with unique characteristics, which justify providing different compensation.

"A stamp of approval for practice"

"The main importance of the document stems first from the very fact of its publication, as well as regarding the clarification and sharpening in relation to agreements that have been signed and the ability to reopen agreements in light of the fear that was created after the ruling," says Adv. Yishai Itzkovitz, head of the Real Estate and Urban Renewal Department at Agmon with Tulchinsky.

"In fact, the purpose of urban renewal, the broad view and the impact on property rights strengthen the approach that there is room in these cases to make the necessary adjustments and even deviate from fundamental principles relevant to other transactions. In doing so, the position paper actually gives the courts justification for making decisions in these circumstances that would not necessarily have been made in real estate transactions in the free market.

"Regarding the rest of the issues, the document actually gives a stamp of approval to the practice prevailing in cases of promoting fair and reasonable transactions, since the determination of scoring by an appraiser is intended to balance the differences in the apartments, and to give exceptional compensation to owners of special or exceptional apartments, or to divide into groups. In the required cases, the document constitutes an existing practice for parties who wish to carry out these projects.

"It is to be assumed that the position paper will not cause significant changes due to its publication, and still in most agreements a fixed area addition will be determined (if at all), and the balances will be carried out within the framework of the right to choose the new apartment, economic improvements in the apartment, grants, reasonable economic benefits, etc. Regarding the exceptional cases that will not receive an answer within the framework of negotiations, fairness and common sense - these will continue to reach discussion in the judicial instances, and with time and the ruling, the principles will be determined regarding the question of when it is a material exceptional case that requires a different answer."

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"A recipe for stagnation"

Adv. Moshe Raz-Cohen from the Raz-Cohen, Freshker & Co. firm, who filed the appeal against the ruling to the Supreme Court, responded by saying that "the state is creating disorder in compensation. It is understandable that this is an attempt to soften the results of the Keren Or ruling. It is clear to everyone that the strictness in maintaining full relative equality is unacceptable and could lead to stagnation. The position paper tries to present a pluralistic approach, according to which any mechanism with its own logic that creates a reasonable distinction between the apartments - is worthy of adoption.

"However, a pluralism of approaches will in turn lead to stagnation. Apartment owners whose area is above average will stick to the Keren Or formula, and apartment owners whose area is below average will insist on adopting a moderate mechanism. That is, always only half will support the proposed mechanism. Since a majority of two-thirds is required, this is a recipe for stagnation. My known personal position is that the ruling in the Keren Or case should be overturned. As is known, the appeal we filed to the Supreme Court against the ruling is pending."

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"The balance will be achieved only by another ruling"

Adv. Yochai Schechter, a partner in the real estate department at S. Friedman, Abramson & Co. and an expert in urban renewal, says that the document, although it comes to soften the consequences of the ruling, it is not certain that it will succeed in this. "The position paper of the Ministry of Justice and the Urban Renewal Authority presents important statements, primarily the expected and simple statement that signed contractual agreements will not be reopened, and the fact that uniform compensation remains completely legitimate.

"This is a welcome sharpening for the market. However, since a position paper cannot change a court ruling, especially since it was formulated carefully and in a measured manner - it is complex to neutralize the effects of the ruling in question on the ground through a position paper alone, even if the position paper had been formulated more firmly.

"The possibility of differential compensation has always existed, but the District Court dropped a bomb on the market when it determined that this is supposedly the royal road, and that a different contractual determination would allow for a reasonable refusal for owners of large apartments.

"This ruling, as long as it remains in place, may continue to create friction and complicate negotiations in a market that until now has operated with a high percentage of transactions giving uniform compensation. The required balance can be achieved only through another ruling, preferably in an appellate instance on the ruling of the honorable Judge Hess. The various players in the market are eagerly waiting for such a judicial statement."

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"Erroneous basis"

Appraiser Shmulik Cohen, CEO and owner of SK Appraisal, attacks the issue from an appraisal point of view and warns that relying on the apartment area as a central parameter for determining the fairness of compensation is wrong, since area is not necessarily equal to value.

According to him, "the very existence of a larger apartment does not automatically indicate a higher relative value, and therefore granting increased compensation just because of physical area is not fair to the other apartment owners, and the approach presented in the framework could delay projects for many years."

"One must remember the direct economic effect of moving from an old property to a new property. Owners of large apartments already enjoy a net profit, in shekel terms, that is significantly higher than that of owners of small apartments," he says.

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"The right and practical way"

Adv. Yariv Bar-Dayan, an expert in representing apartment owners in Pinui-Binui projects, notes that "the various decisions of the court caused substantial uncertainty in the field, and it can be said that they are already capable of harming the ability to realize projects.

"The appeal filed against the ruling of Judge Gilad Hess in the Keren Or case begins the important journey to restore certainty by establishing a binding precedent on the subject. The publication of the position paper of the Government Urban Renewal Authority is another step, correct and necessary in the interim stage, as long as no judicial decision has been reached on the subject, and it has the potential to restore certainty to the field."

According to him, "the position paper walks the right and practical path accepted today in the bulk of Pinui-Binui agreements, because in practice the existing apartments in the complex are divided into 'reference groups' according to their existing area. The reference to each apartment is within its reference group and between the reference groups themselves, when in most cases, although there is a difference in sizes between apartments and between groups, the area addition that will be determined will be uniform for each apartment.

"Even today in practice (and as emerges from the position paper), in special and extreme cases, it may be that the compensation basket will be different between different apartments, but this is only in a case where the characteristics of that apartment are significantly different from the other apartments."