Jerusalem Homebuyer bought directly from Sellers without Broker. Can Broker Claim Compensation?

A homebuyer who signed a brokerage agreement later bought the same apartment directly from the sellers. The brokers sued for their 2% fee plus an extra 3% “agreed compensation” set in the contract. The Jerusalem Magistrate’s Court ordered the buyer to pay the brokerage fee, but threw out the 3% clause entirely, calling it a harsh, punitive penalty that goes against public policy. Here is what happened, and what it means for anyone signing a brokerage agreement in Israel.

By Adv. Noy Shapir Vitkovsky, Gindi, Caspi & co. Law

In this case summary, we review a decision by the Jerusalem Magistrate’s Court in a dispute over whether an agreed compensation clause in a real estate brokerage agreement is valid. (Agreed compensation is governed by Section 15 of the Contracts Law, 1970. This mechanism allows the parties to a contract to set, in advance, a fixed amount of money to be paid if the contract is breached, without having to prove the actual damage caused. However, the court has the power to reduce the agreed amount. It may do so if it finds that the compensation was set with no reasonable relation to the damage that could have been foreseen when the contract was signed.)

The Facts of the Case

A buyer signed a brokerage agreement for the purchase of an apartment. Under the agreement, if she ended up buying an apartment the real estate brokers had introduced to her, she would pay a brokerage fee of 2% of the purchase price plus VAT. The agreement also stated that if she failed to pay the brokerage fee, she would owe agreed compensation of 3% of the apartment’s price, bringing the total to 5%.

The brokers showed the buyer an apartment, but negotiations ran into trouble because the sellers refused to sell the storage room attached to it. As a result, the bank would not approve the buyer’s mortgage, and the deal fell through. Later, the brokers’ exclusivity period expired. The sellers then changed their minds and agreed to sell the apartment together with the storage room. The buyer learned about this from a different broker and bought the apartment directly from the sellers for NIS 3.1 million. When the original brokers found out about the sale, they sued the buyer for their brokerage fee plus the 3% agreed compensation.

In a partial judgment, the buyer was ordered to pay the 2% brokerage fee plus VAT, and the current hearing focused only on the agreed compensation. The broker argued that they were entitled to it because the clause was reasonable and there was no legal basis for the court to interfere with it or reduce it. The buyer, on the other hand, argued that the agreed compensation was really a “penalty” and was unreasonable.

The Legal Question

Are real estate brokers entitled to collect agreed compensation of 3% of the deal’s value, on top of the original brokerage fee agreed with them? Or is this an extreme clause that should be cancelled or reduced?

The Jerusalem Magistrate’s Court dismissed the remainder of the lawsuit and rejected the brokers’ demand for the agreed compensation. It held that under Section 8(a) of the Real Estate Brokers Law, 1996, brokers owe their clients a duty of loyalty and fairness. The agreed compensation clause in the brokerage agreement was found to be contrary to public policy under Section 30 of the Contracts Law, 1973. That section reflects the basic values and sense of fairness of the legal system, and gives the court the power to step in and cancel a contract, or cancel unfair clauses within it. The court found that the agreed compensation clause was far beyond any reasonable standard: a harsh, draconian penalty clause that goes against public policy and against the purpose of the law. It was therefore declared void. The court added that if an appeal is filed, even if the clause is not cancelled entirely, it should be drastically reduced to 10% of its amount.

Author’s Note:

This ruling raises the question of whether agreed compensation clauses in brokerage agreements are valid. As a general rule, a court’s ability to interfere with agreed compensation is limited by Section 15(a) of the Contracts Law, 1970, to cases where it finds that the compensation was set with no reasonable relation to the damage that could have been foreseen when the contract was signed. Agreed compensation is meant to reflect what the parties intended when they signed the contract, to give them a degree of certainty about what happens if the contract is breached, to save on the costs of going to court, and to encourage both sides to honor the agreement. That is why the court’s power to interfere with it is relatively narrow.

In this case, however, the court saw fit to step in and reject the brokers’ demand for the agreed compensation set in the brokerage agreement. It held that a demand for high compensation, added on top of the original brokerage fee, may be seen as a punitive and deterrent penalty that goes against public policy. The ruling is a reminder that the court will not hesitate to cancel or reduce agreed compensation that appears punitive or amounts to double payment, depending on the specific circumstances and the nature of the breach. It would seem, then, that those drafting contracts would do well to create fair and proportionate compensation mechanisms that suit the nature of the breach, its severity, and the circumstances of the case, and to avoid clauses of a punitive, draconian nature.

[Civil Claim (Jerusalem) 42016-10-22 Uziel et al. v. Gutel (Nevo, 21.02.2025)]