A Jerusalem apartment seller unilaterally canceled the sales agreement after the buyers delayed payment, even though the delay resulted from the seller’s failure to meet agreed conditions. The buyers sued to enforce the contract, arguing the cancellation was unjustified. The District Court was left to decide—was the seller within their rights, or had they breached the agreement themselves?
By Attorney Linoy Berros, with assistance from Law Intern, Inbal Tzadok
Contracts must be performed in a customary manner and good faith, as outlined in Section 39 of the Contracts Law (General Part), 1973. A fundamental principle of contract law is that agreements must be upheld, and courts generally prioritize their enforcement. When a breach occurs, and a cancellation notice is issued, courts carefully examine whether the cancellation was lawful, timely, and justified under the circumstances and whether the injured party acted in good faith. Legal precedent also makes it clear that unjustified cancellation of a contract constitutes a breach of the agreement.
This legal summary examines a District Court decision addressing whether the buyers’ failure to pay the remaining balance for an apartment prior to the seller fulfilling their contractual obligations by the agreed payment date constituted a breach of the sale agreement. Additionally, the court evaluated whether the seller’s cancellation of the agreement under these circumstances was lawful.
Case Details:
The case involved a claim to enforce a sale agreement for an apartment alongside a counterclaim by the seller for its cancellation. In 2020, the seller entered into an agreement with the buyers to sell a residential apartment in Jerusalem. At the time of signing, the apartment’s physical and planning status did not align with its registered status.
The original apartment had been legally expanded before the seller purchased it. It was subsequently divided into two separate apartments with permits—the “Apartment” under the Sale Agreement and the other referred to as an “Additional Apartment”. The seller committed to formalizing these changes in the Land Registry (referred to by the court as “Phase A”) and to further reallocate 30 square meters from the Additional Apartment to the Apartment through a new construction permit and registration (referred to as “Phase B”).
The Sale Agreement outlined four payments, with the third payment contingent on the seller providing a property tax clearance certificate and a “clean approval,” reflecting the Apartment’s registered status at the time of signing (i.e., completion of Phase A). Additionally, all subsequent payments were conditioned on meeting these requirements.
The seller failed to fulfill these obligations and did not complete the Payment Conditions by the third payment’s due date, constituting a significant portion of the total price. Consequently, the buyers withheld the payment. However, they ultimately paid “under protest” one day after the contractually agreed-upon delivery date to move the transaction forward. By the due date for the fourth and final payment, the Payment Conditions remained incomplete, prompting the buyers to withhold the remaining balance, and the Apartment was not delivered to them.
In response, the seller sent the buyers a cancellation notice, claiming they had breached the agreement. The notice stated that the cancellation would take effect unless the breach was rectified. When the alleged breach was not remedied, the seller declared the agreement canceled. The buyers filed a lawsuit to enforce the Sale Agreement, while the seller filed a counterclaim to enforce its cancellation.
…the seller sent the buyers a cancellation notice, claiming they had breached the agreement. The notice stated that the cancellation would take effect unless the breach was rectified. When the alleged breach was not remedied, the seller declared the agreement canceled. The buyers filed a lawsuit to enforce the Sale Agreement, while the seller filed a counterclaim to enforce its cancellation.
During the legal proceedings, the required registration tasks (Phases A and B) were completed, albeit significantly late. The seller subsequently issued a second cancellation notice, asserting that their first cancellation notice remained valid and that the buyers’ breach continued until the remaining balance was paid. The buyers contended that this notice was premature, as their payment deadline was five business days after the completion of Phase B. Since the notice was issued before this deadline, they argued that both the notice and the cancellation were invalid. When the deadline arrived, the buyers attempted to pay the remaining balance, but the seller refused to accept it.
The District Court was tasked with determining whether the buyers had breached the Sale Agreement and whether the seller’s cancellation of the agreement due to non-payment was lawful.
Court’s Decision:
The court ruled that since the seller had not fulfilled their obligations, the buyers were not required to pay the remaining balance. The ruling highlighted the importance of aligning the Apartment’s registered status with its physical and planning status, citing the known risks of transactions involving properties not properly registered in the Land Registry.
The court noted that the buyers had paid most of the agreed amount. While the legal proceedings had been imposed on the buyers due to the seller’s breaches, it was reasonable for the buyers to withhold the remaining payment unless the seller rescinded the First Cancellation Notice.
The court ruled that the First Cancellation Notice was invalid due to the seller’s prior breaches. The Second Cancellation Notice was also deemed invalid as it was issued prematurely, before the deadline for rectifying the buyers’ “breach”. It was also based on prior breaches by the seller. The court emphasized, citing previous rulings, that unjustified cancellation of a contract, even if done in good faith or due to a misunderstanding of the legal situation, constitutes a breach by the canceling party. The seller was, therefore, found to have breached the agreement by unlawfully canceling it. The court ordered the enforcement of the Sale Agreement.
The judgment also stated that even if there had been a fundamental breach by the buyers that entitled the seller to cancel the agreement, the seller’s insistence on their right to cancel under the exceptional circumstances of this case amounted to bad faith. The court noted that even in fundamental breaches justifying cancellation cases, it is permissible to cancel for practical considerations, including rising real estate prices.
Author’s Note:
This ruling demonstrates that canceling a sale agreement may constitute a breach by the canceling party, even if circumstances appear to justify the cancellation. Therefore, consulting with an attorney before taking such action is essential to avoid claims of bad faith or improper cancellation.
Case Reference: Civil Case No. 14696-12-21 Parash et al. v. Yishai.
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