Brokerage Fees Guide — What the Broker Is Entitled to and What They Are Not

What Are Brokerage Fees and Commissions in Israel?

Brokerage fees (or brokerage commissions) are payments made by the buyer or seller (or both) to a broker for facilitating the sale of a property, typically real estate. The broker is an intermediary who assists in connecting a seller and buyer, negotiating the deal, drafting a purchase agreement, and accompanying the proceedings until completion. Brokerage fees are not a government tax, but rather a private commission backed by a brokerage agreement signed between the broker and the property owner.

In Israel, brokerage fees vary according to the agreement between the parties, but there are market norms and legal rules that govern the broker's rights and obligations. Brokers often charge a percentage of the transaction amount (typically 1% to 3%, depending on the type of property and local market), and the payment may be borne by the seller alone, the buyer alone, or divided between both parties.

Understanding brokerage fees, the broker's rights, and obligations is critical for anyone buying or selling real estate. Errors in a brokerage agreement or misunderstanding of the terms can lead to legal disputes, lawsuits, and unexpected payments. Our firm, Mendelbaum, Gor, Vitzman-Gor and Co., Attorneys at Law in Ramat Gan, specializes in real estate and property law, and can guide you through every stage of a sale transaction, including clarifying brokerage fees and your rights.

What Are the Broker's Rights Under Law and Jurisprudence?

The broker's rights are primarily defined through the agreement signed between the broker and the property owner, but there are also legal norms and case law principles that protect the broker's rights. Generally, a broker is entitled to a commission when they successfully bring a third party willing to sign a purchase agreement under standard terms. This right exists even if the transaction does not ultimately close, provided that the broker was the party who brought the sides to the negotiating table.

According to the prevailing approach in case law, a broker is entitled to a commission when they have fulfilled their duties faithfully and in good faith, and when a purchase agreement is signed between the seller and buyer or when the parties have reached an agreement on the transaction terms. The broker may be entitled to a commission even if the deal fails during official proceedings, if it can be proven that the broker was the founding party to the agreement. Each case is examined individually, based on the specific circumstances and the language of the contract.

When Is the Broker Entitled to a Commission?

• When they bring an interested third party: If the broker brings a buyer or seller willing to sign an agreement under reasonable terms, they are generally entitled to a commission, even if the transaction does not ultimately close.
• When a purchase agreement is signed: This is typically the decisive point — when the parties sign an official purchase agreement, the broker is generally entitled to their commission.
• When the parties reach an agreement on principal terms: Even if an official agreement has not yet been signed, if the parties have agreed on the price and principal benefits, the broker may be entitled to a commission.
• When they have fulfilled their duties faithfully: The broker must prove that they acted faithfully, in good faith, and without neglecting their obligations to the parties.

When Is the Broker Not Entitled to a Commission?

• If they did not bring the parties to the negotiating table: If the parties found each other independently or through another broker, the original broker will not be entitled to a commission.
• If they violated brokerage laws or the contract: If the broker acted deceptively, fraudulently, or in bad faith, they may lose their commission rights and may even be subject to a counterclaim.
• If the transaction was canceled due to their actions: If the broker caused the cancellation of the transaction due to inappropriate conduct or violation of laws, they will not be entitled to a commission.
• If no clear brokerage agreement was defined: If there is no written agreement on commission terms, it may be difficult for the broker to claim a commission, although in some cases a court may recognize their right to a reasonable commission based on principles of fairness.

How are brokerage fees calculated and what are the standard ranges?

Brokerage fees are typically calculated as a percentage of the transaction amount (the sale price of the property). In Israel's real estate market, the standard commission range varies depending on the type of property, its size, location, and local market conditions. Generally, brokerage commissions range between 1% and 3% of the transaction amount, but may be higher or lower depending on the agreement between the parties.

For example, in a sale transaction of an apartment valued at 1,000,000 shekels with a brokerage commission of 2%, the brokerage fees would be 20,000 shekels. If the commission is divided between the seller and buyer (for example, 1% each), each party would pay 10,000 shekels. However, the broker may be entitled to a different commission if it has been agreed in the brokerage contract that the commission applies to only one party.

Factors affecting the amount of brokerage fees

• Type of property: Residential apartments typically command lower commissions (1%–2%), while commercial properties, agricultural land, or special properties may require higher commissions.
• Transaction size: Larger transactions may have a lower percentage (because the absolute profit is higher), while smaller transactions may have a higher percentage.
• Local market: In "hot" markets with high demand, brokers may be willing to invest less effort and accept lower commissions. In "cold" markets with low demand, commissions may be higher.
• Transaction complexity: If the transaction requires additional work (for example, resolving legal issues, arranging financing, settling issues with the bank), the broker may demand a higher commission.
• Agreement between the parties: Ultimately, the amount of brokerage fees depends on the agreement between the property owner (the seller) and the broker. If no specific amount has been agreed upon, the court may recognize a "reasonable" commission based on market conditions.

It is important to note that brokerage fees are not fixed by law and depend entirely on the agreement between the parties. Therefore, anyone wishing to sell or purchase a property should carefully clarify the commission terms before signing a brokerage contract, and ensure that all conditions are explicitly stated in writing.

Brokerage Agreement — What Must It Contain and What It Shouldn't?

A brokerage agreement is an essential legal document that regulates the relationship between the property owner (seller) and the broker. This agreement must be in clear written form and cannot be vague or contain obscure conditions. Any misunderstanding in the agreement could lead to unnecessary legal disputes.

What Must Be in a Brokerage Agreement?

• Identity of the Parties: Full name, ID number, and address of the property owner (seller) and the broker's name and address.
• Property Description: Accurate address, type of property (apartment, house, land, etc.), taba number, or registration number in the Land Registry file.
• Commission Amount: The percentage or specific amount the broker is entitled to, with a clear breakdown of how it is calculated (percentage of sale price, fixed amount, etc.).
• Who Bears the Commission: Whether it applies to the seller only, the buyer only, or is split between both. This is essential as it can affect the decision to buy or sell.
• When the Commission Becomes Due: Whether the commission is due when a sales contract is signed, when the parties reach an agreement, or when the transaction closes at the registration office.
• Additional Conditions: Are there additional expenses the seller must pay (e.g., advertising costs, legal reviews)? These must be explicitly stated in the agreement.
• Brokerage Period: How long will the broker have exclusive rights to the property? (typically 3-6 months)
• Signatures: The agreement must be signed by both parties and each party must retain a copy.

What Should Not Be in a Brokerage Agreement — and Dangers to Avoid

• Vague Conditions: Do not sign an agreement that says "reasonable commission" or "according to market rates" without specifying an exact amount. This will lead to disputes.
• Commission Based Solely on Success: Do not sign an agreement stating the broker will receive commission only if they succeed in selling the property. This may be legally problematic.
• Blank Checks or General Powers of Attorney: Do not give the broker general authorization to sign documents on your behalf or withdraw funds directly from your account.
• Conditions Violating the Law: Do not sign an agreement containing conditions that violate laws (e.g., requests for payment without tax transparency or cash payments without receipts).
• Unlimited Time Period: Do not sign an agreement giving the broker exclusive rights to the property indefinitely. There must always be a defined time period (typically 3-6 months).

Brokerage Claims — When a Broker Demands Commission or When a Property Owner Is Upset

Disputes regarding brokerage fees are quite common in Israel's real estate market. Often, a broker sues a property owner for commission they refuse to pay, or a property owner sues a broker for damages caused by the broker's improper conduct. Each case is examined on its merits by the court, based on the facts, the agreement, and real estate laws.

Broker's Claim for Commission — When Might It Succeed?

When a broker sues a property owner for commission, the court typically examines the following points:

• Is there a written brokerage agreement? If so, what exactly does it say?
• Did the broker present a third party willing to sign a contract on reasonable terms?
• Did the broker fulfill their obligations in good faith and without neglecting legal duties?
• Did the parties reach agreement on material terms (price, basic conditions)?
• Was a sales contract signed between the parties, or did the transaction fail in some way?

If the broker can prove all these points, the court will typically recognize their right to commission. However, if there is evidence that the broker acted in bad faith, with disloyalty, or in violation of laws, the property owner may succeed in their defense.

Claim Against a Broker — When Might a Property Owner Prevail?

A property owner can sue a broker for:

• Failure to Disclose Information: If the broker failed to disclose critical information to the property owner (e.g., that the buyer is not financially reliable, or there is a legal issue with the property).
• Improper Conduct: If the broker acted in bad faith, such as presenting the property in a misleading manner or ignoring the property owner's instructions.
• Breach of Agreement: If the broker violated the terms of the brokerage agreement (e.g., failed to update the property owner on offers, or acted beyond their authority).
• Loss of Opportunity: If the broker caused the property owner to lose a good opportunity to sell the property due to improper conduct.

A property owner harmed by improper conduct of a broker may be entitled to compensation under tort law, meaning compensation for direct damages caused to them (e.g., loss in the sale price due to the broker's conduct).

How to Protect Yourself as a Property Owner or Buyer — Legal Advice

Advice for Property Owners (Sellers)

• Read the brokerage agreement carefully: Do not sign anything without understanding every word. If you have any doubts, consult with an attorney before signing.
• Clarify the commission amount in advance: Make sure you know exactly how much you will pay, what the commission is calculated on, and when it will be due.
• Limit the brokerage period: Do not give the broker an exclusive right forever. Typically, a period of 3-6 months is reasonable.
• Require the broker to update you: The broker should keep you informed of every offer, every inquiry from a potential buyer, and any progress in the proceedings.
• Check the broker: Verify that the broker has a valid brokerage license, has a good reputation, and has no negative evidence in their background.
• Keep all documents: Keep a copy of the brokerage agreement, all communication with the broker, and offers from potential buyers.

Advice for Buyers

• Clarify brokerage fees in advance: Before you commit to purchasing a property, check with the seller or broker what your brokerage fees will be (if any).
• Do not sign documents without understanding: If the broker asks you to sign any document (for example, an agreement to pay a commission), read it carefully and make sure you understand all the terms.
• Demand transparency: The broker has a duty to disclose to you any vital information about the property, the seller, and any matter that could affect your decision.
• Use your own attorney: If you are buying a property, it is advisable to have your own attorney to assist you in the process and protect your rights.

General Advice

• Always in writing: Any agreement with a broker should be in writing. Oral agreements are not sufficient legally.
• Inspect the property yourself: Do not rely solely on the broker regarding the condition of the property. Get a legal inspection, check the land registry, and ensure there are no legal issues.
• Consult with an attorney: If you have any doubts about any matter, do not hesitate to consult with an attorney. This can save you considerable money in the long run.