Building Guide on Leasehold Land — Legal Limitations You Must Know

What is Building on Leasehold Land? Understanding the Fundamentals

Building on leasehold land is a complex legal and practical process that is rare in Israel but exists mainly in properties acquired in ancient periods or in specific transactions. Unlike building on land with full ownership (fee simple), building on leasehold land means that the land itself does not belong to you — you lease it from other owners for a defined period specified in the lease agreement. This creates an entirely different legal situation in terms of rights, obligations, risks, and the permit approval process.

Building on leasehold land essentially operates in two legal layers: the first layer is the builder's rights (lessee) in the land itself — namely, the right to use it and build upon it; the second layer is the building itself and rights in the structure to be erected. This complication is a source of significant risk in this field.

In Israel, leasehold land may be state land (land of the Israel Land Authority), private land, or land belonging to religious or public institutions. Each type of lease carries different conditions, limitations, and risks. Before beginning the building process on leasehold land, it is important to understand the details of your lease agreement and its implications for your rights as a builder.

Lease Limitations — Implications for Building

Lease limitations are perhaps the most important factor you need to understand before starting to build on leasehold land. While with full ownership you own the land in perpetuity, with a lease you are bound by the conditions set forth in the lease agreement — and these conditions may significantly restrict your ability to build, sell, lease, or transfer the property.

Term of the Lease: One of the most critical limitations is the length of the lease term. If your lease agreement specified a lease for 49 years, and that period has nearly elapsed, the value of your property will drop sharply as the lease term approaches its end. Banks, lending institutions, and potential buyers will hesitate to invest in a property about to revert to the landowner. This creates a substantial problem in property value and marketability.

Building Conditions and Height Restrictions: Many lease agreements contain explicit restrictions on the type of building permitted — for example, residential building only, limitations on the number of stories, or restrictions on maximum building area. These limitations may be more stringent than the regulations in the official building plan of the municipality, and in such case — the more restrictive condition will apply. This means you cannot realize the full potential of your land.

Restrictions on Transfer and Payment Obligations: A lease agreement may restrict your right to transfer the property to others, or impose difficult conditions on transfer (such as landowner approval, payment of fees, or price redetermination). Additionally, a lease agreement typically requires payment of annual or periodic rent to the landowner — a payment that may be substantial and increase the maintenance costs of the property.

Risk of Non-Renewal of Lease: When the lease term expires, the land (and everything built upon it) reverts to the landowner. If the landowner decides not to renew the lease, you may lose the entire property — building and all. This is a substantial risk that does not exist with full ownership.

Building Permit on State Land (Miri Land) — Process and Complications

When the leased land is state land (Miri land — Israel Land Authority), the process of obtaining a building permit becomes even more complicated. The Israel Land Authority is the government body that controls most of the state lands in Israel, and obtaining a building permit on such land requires compliance with strict conditions and a lengthy process.

Israel Land Authority conditions for construction: The Israel Land Authority sets specific conditions for each lease — limitations on the type of construction, building area, height, and use. Additionally, the Israel Land Authority typically requires payment for the lease (land rent) which is updated at fixed intervals. This payment can be substantial and affect the project's feasibility. Moreover, the Israel Land Authority retains rights to the land — for example, the right to use certain parts of the land for public infrastructure.

Approval of planning committee plan: Before submitting a building permit application to the Israel Land Authority, you must obtain prior approval from the city or district planning committee. This approval requires proof that the plan complies with building regulations, local building plans, and public space maintenance requirements. This process may take months, and in some cases — years.

Examination of rights and obligations: Before obtaining a building permit from the Israel Land Authority, it is important to carefully review your lease agreement — whether it is valid, whether all payments have been made on time, whether there are outstanding liabilities on the property. If there are issues with the lease agreement, the Israel Land Authority may reject the permit application or impose additional conditions.

Costs and payments: Obtaining a building permit on Israel Land Authority land involves many costs — land rent, engineering fees, soil tests, legal and administrative expenses. All of these can significantly add to the total project cost.

Comparison: Building on Leasehold Land vs. Building on Freehold Land

To better understand the implications of building on leasehold land, it is worthwhile to compare construction on leasehold land with construction on freehold land:

As can be seen, building on leasehold land involves substantial risks that do not exist in freehold ownership. This does not mean that building on leasehold land is impossible or inadvisable, but it requires more thorough planning, rigorous legal due diligence, and careful assessment of the risks.

Important Steps Before Starting Construction on Leasehold Land

If you are considering construction on leasehold land, there are several critical steps you must take before actually beginning:

1. Carefully Review the Lease Agreement
Read your lease agreement very carefully. Check the lease term, transfer conditions, building restrictions, rental payments, and all terms related to construction. If you are uncertain about the terms, seek professional legal advice.

2. Verify the Legal Status of the Agreement
Check whether the agreement is valid, whether all payments have been made on time, and whether there are no outstanding debts on the property. Also check whether the landowner has given consent for construction, and whether additional consent is required.

3. Obtain Planning Committee Approval
Before starting construction, you must obtain approval from the planning committee of the city or district. This approval will require proof that the plan complies with building regulations and the building plans of the location.

4. Check the Landowner's Requirements
If the landowner is the Israel Lands Authority or another government body, check their specific requirements for construction. The Israel Lands Authority, for example, sets strict conditions for construction on state land.

5. Evaluate the Economic Value of the Project
Given the risks and limitations of construction on leasehold land, carefully examine the economic value of the project. Is the expected profit worth the risks? Are there better alternatives?

6. Obtain Professional Legal Advice
Before starting construction on leasehold land, it is very important to obtain professional legal advice in the field of real estate and property law. An expert attorney will be able to help you understand the risks, obtain required approvals, and protect your rights.

How Mendelboums, Gor, Witzman-Gor Law Office Can Help You

Construction on leasehold land is a complex process that requires deep legal expertise in real estate and property law. Mendelboums, Gor, Witzman-Gor & Co., Advocates, has specialized in this field since 2008, and we have extensive experience representing clients in matters related to construction on leasehold land, legal permits, and settlement of property rights.

By working with our office, you will receive:

• Personalized and professional legal counsel: Our attorneys will carefully review your lease agreement, identify risks, and offer practical solutions to protect your rights.
• Guidance through the permit approval process: We will assist you in obtaining planning committee approval, submitting an application for a building permit to RAMI, and handling all stages of the process.
• Protection of your rights: We will ensure that the entire process is conducted in accordance with the law and protect your rights vis-à-vis the landlord, authorities, and RAMI.
• Support in legal settlements: If there are discrepancies or issues in the lease agreement, we will help you resolve them with the landlord or with the competent authorities.

First consultation is free of charge. Come meet us at our Ramat Gan branch (Donosh 1) or at our Petach Tikva branch (Yuni Netanyahu 8), and we will inform you how we can assist you with your construction project on leasehold land.