According to a ruling handed down recently by the Israeli Supreme Court, when a real estate asset is sold before the seller enters bankruptcy proceedings, and the seller has not paid the betterment tax, the local council is not obligated to grant the buyer approval for registering the property under his name. Thus, the buyer will be required to pay the betterment tax.

The Supreme Court ruling concerned a case in which the seller undertook in a property sale agreement to bear the payment of the betterment tax, but before the registration of the transaction was completed, the seller went bankrupt. Additionally, the money deposited in escrow pursuant to the sale agreement to ensure the payment of the betterment tax was insufficient to pay it in full.

The legal question deliberated by the Supreme Court is the applicability of section 10(a) of the Third Addendum to the Planning and Building Law. This law allows a local council to delay its approval for the registration of a title if the betterment tax has not been paid, under circumstances in which the sale contract was signed before the seller entered into bankruptcy proceedings.

The majority of the panel agreed on the above ruling for several reasons:

1) The buyer’s position cannot be improved as a result of the seller’s bankruptcy – Just as the buyer cannot ask the local committee to approve the transfer of the rights without the betterment tax being paid before the seller went bankrupt, so too, he cannot make such a demand after the seller went bankrupt as well.

Under normal circumstances, the buyer can pay the betterment tax himself and sue the seller in respect of a breach of the sale agreement. Similarly, in a situation in which the seller enters insolvency proceedings, the buyer can pay the betterment tax himself and file a debt claim against the seller. However, in both instances, the buyer is at risk of failing to collect the debt from the seller.

2) The buyer is the party who can most efficiently and inexpensively prevent damage – The buyer has ways to protect himself and not necessarily rely on the contractual obligation to pay the debt. The buyer can ascertain beforehand whether there is any outstanding betterment tax debt on the property that he is interested in buying, and he possesses contractual means to guarantee its payment. The buyer has an interest in ensuring that the betterment tax is paid, and he has an advantage over the local committee, both in terms of knowledge about the debt and in terms of ensuring that the debt is paid.

Implications of the Ruling

This ruling has significant implications on property buyers, since it explicitly imposes on them the responsibility of making sure that the betterment tax that applies to the transaction is paid, even when the tax does not directly apply to them pursuant to the sale agreement.

There are several ways to avoid a situation similar to the Supreme Court case when buying a property:

  1. Receive a supporting document or a professional opinion regarding the sum of the betterment tax that is expected to apply within the scope of the sale before you sign the agreement.
  2. Make sure that enough money is held in escrow, including substantial security deposits, especially if the assessment of the sum of the betterment tax is uncertain.
  3. Deduct the sum of the betterment tax from the consideration to the seller and specify in the agreement that the betterment tax will be paid by the buyer. (This alternative can be risky if the expected sum of the betterment tax is uncertain).
  4. Specify in the agreement that the betterment tax will apply to the buyer within the scope of the transaction and will be paid out of the consideration directly to the local committee. (Under these circumstances, make sure that a sufficiently large portion of the consideration is retained in the buyer’s hands until the betterment tax assessment is received).