Guide to Selling an Apartment with a Protected Tenant

Selling an Apartment with a Protected Tenant – What You Need to Know?

Selling an apartment occupied by a protected tenant is a complex legal process requiring a deep understanding of tenant rights, owner obligations, and lawful procedures. In Israel, a protected tenant is a tenant to whom the Tenant Protection Law (1974) applies, and the apartment owner cannot easily evict him or compel him to leave the apartment based on arbitrary grounds. The rights of a protected tenant are extensive and protected by law, and the sale of the apartment does not alter his legal status.

When you sell an apartment with a protected tenant, you are essentially selling an apartment where a protected lease right exists. The new buyer will inherit all your obligations and rights toward the tenant, and the tenant likewise cannot be easily evicted from the apartment. This significantly impacts the property's value, the legal process of the sale, and the buyer's expectations.

Our firm, Mandelbaum, Gor, Witzman-Gor and Co., Attorneys at Law in Ramat Gan, with over 18 years of experience in real estate and property law, provides comprehensive legal guidance to apartment owners requiring assistance in this process. First consultation at no cost.

Who is a Protected Tenant and How Does it Affect a Sale?

A protected tenant is a tenant who entered into a lease before a certain date (usually before the 1970s or under certain legal conditions) or to whom the Tenant Protection Law applies. Such a tenant enjoys strong legal protections, including:

• Protection from arbitrary eviction: The apartment owner cannot evict the tenant except for very few legal reasons (such as prolonged non-payment of rent or serious breach of the lease agreement).
• Right to remain in the apartment: The tenant may remain in the apartment as long as he pays the rent and complies with the lease agreement terms.
• Right to rent adjustment: The apartment owner may request an update of the rent, but only according to a specific legal formula and in most cases with significant limitations.
• Right to transfer by inheritance: In some cases, a protected tenant may transfer the lease right to a family member or heir.

When you sell an apartment with a protected tenant, the new buyer will inherit all these rights and obligations. This means the buyer will not be able to easily evict the tenant from the apartment and will be obligated to accept the agreed rent (or updated in accordance with law).

Protected Tenant Apartment Value – How Does It Affect the Sale Price?

The value of an apartment with a protected tenant is significantly lower than the value of an identical apartment without a protected tenant. The reason is that the buyer cannot evict the tenant from the apartment or use the apartment as he wishes, and also cannot easily raise the rent. In some cases, the difference in value can be substantial – between 20% to 50% of the value of an identical apartment without a protected tenant, or even more.

Valuation of an apartment with a protected tenant requires an understanding of:

• Evaluation of the present value of the leasehold right: What is the value of the right to lease the apartment to the current tenant, taking into account the agreed rent and legal conditions?
• The buyer's risk: How long might the tenant remain in the apartment? Is there a risk that the tenant will vacate the apartment in the near future?
• Valuation of the property in the future: How is the property value expected to change in the coming years?

In legal publications and court practice, there are various methods for valuing an apartment with a protected tenant. In some cases, the owner and protected tenant agree on a "re-purchase" or "settlement arrangement" – a legal arrangement in which the buyer pays the tenant a sum of money to vacate the apartment. However, this is not always possible, and it depends on the specific circumstances of each case.

Owner's Rights – What Can and Cannot You Do?

As the owner of an apartment with a protected tenant, you have certain rights, but also significant limitations:

• Right to receive rent: You are entitled to receive the agreed rent under the lease agreement. If the tenant does not pay, you can file a lawsuit in court.
• Right to request a rent increase: In accordance with the Tenant Protection Law, you can file a request with the court for a rent increase. However, the increase is limited and depends on a legal formula.
• Right to evict the tenant due to serious breach: If the tenant seriously breaches the lease agreement (for example, prolonged non-payment of rent), you can file a claim for eviction.
• No right to evict the tenant for personal reasons: You cannot evict the tenant from the apartment simply because you want to use the apartment yourself or rent it to someone else.

In legal publications, many owners find themselves stuck with a protected tenant who does not pay rent or breaches the lease agreement. In some cases, the eviction process can be lengthy and involve significant legal expenses.

Process of Selling an Apartment with a Protected Tenant – Step by Step

Selling an apartment with a protected tenant requires a detailed legal process and careful planning. Below are the main steps:

Step 1: Assessment of the Tenant's Legal Status

Before beginning the sales process, you must clarify the exact status of the protected tenant. This includes:

• Reviewing the original lease agreement and its terms.
• Checking whether the tenant pays rent on time.
• Checking whether there are any breaches of the lease agreement.
• Checking whether there are any pending legal claims or encumbrances.

This examination is essential to understand the legal value of the apartment and plan the sales strategy.

Step 2: Valuation of the Apartment

After understanding the tenant's status, you must assess the apartment's value. This requires understanding:

• The value of the apartment without a protected tenant (market value).
• The value of the protected tenancy rights (considering rent and conditions).
• The risk that the tenant will remain in the apartment over time.

In some cases, it may be advisable to hire a professional appraiser with experience in apartments with protected tenants.

Step 3: Preparation of Legal Documents

To sell the apartment, you must prepare accurate legal documents, including:

• Purchase Agreement: The purchase agreement must clearly state that the apartment has a protected tenant and must contain a clear statement of the tenant's rights and the buyer's obligations.
• Statement on Tenant's Status: You must declare in the purchase agreement the tenant's status, including current rent, whether rent is paid on time, and the terms of the lease agreement.
• Proof of Rent Payment: You must provide proof that the tenant pays rent on time (or declare that they do not).
• Land Registry Printout: You must obtain a current copy of the land registry certificate from the registration office, indicating all rights and encumbrances on the property.

Step 4: Marketing the Apartment

Marketing an apartment with a protected tenant requires a different approach than marketing a regular apartment. You should:

• Be honest and transparent about the existence of the protected tenant.
• Emphasize the property's values (for example, stable rental income).
• Offer a competitive price that reflects the decreased value due to the presence of the protected tenant.
• Find buyers who are interested in the property as an investment (to receive rental income) or who have the patience to wait until the tenant vacates the apartment.

Step 5: Sales Process and Contract Signing

When you find a potential buyer, you must:

• Present the buyer with all relevant documents (lease agreement, payment receipts, land registry printout, etc.).
• Discuss with the buyer the terms of sale, including price and legal conditions.
• Sign a purchase agreement that clearly reflects all conditions and the existence of the protected tenant.

It is important to note that the purchase agreement must be in Hebrew and must be signed by witnesses or alternatively documented with the testimony of an attorney. This is important from a legal standpoint.

Step 6: Closing the Deal – Land Registry Registration

After signing the purchase agreement, you must:

• Pay capital gains tax (if applicable to you).
• Pay acquisition tax (if the buyer is liable for it).
• Submit the sales documents to the registration office to register the buyer as the new owner of the apartment.
• Ensure that the land registry is updated according to the transfer of ownership.

This process may be lengthy, and it is important to be patient and organized.

Costs and Important Legal Tips

Costs Associated with Sale

Selling an apartment with a protected tenant involves various legal and administrative costs:

• Legal Consultation Fee: The cost of hiring an attorney for the sale process varies depending on the attorney and case complexity. Typically, attorneys charge based on hourly rates or a fixed fee per transaction.
• Capital Gains Tax: If the apartment has increased in value since you purchased it, you must pay capital gains tax on the difference. The capital gains tax rate varies depending on the property type and holding period.
• Purchase Tax: The buyer is required to pay purchase tax on the apartment. The purchase tax rate varies depending on the apartment's value and the buyer's status (for example, first-time buyer).
• Registration Costs: Registration fees at the Land Registry vary depending on the apartment's value.
• Process Management Costs: Additional costs such as valuation, legal inspections, etc.

Important Legal Tips

1. Be honest about the protected tenant's existence. Do not attempt to hide the existence of the protected tenant or mislead the buyer. This could lead to legal claims against you in the future. The sales contract must clearly state the existence of the protected tenant and their rights.

2. Document all communication with the tenant. Keep copies of all letters, phone conversations, and any other communication with the tenant. This may be important if legal proof is needed in the future.

3. Check the tenant's status before beginning the sale process. If the tenant is not paying rent or breaching the lease agreement, it may be advisable to file an eviction lawsuit before selling the apartment. This could significantly increase the apartment's value.

4. Use an attorney experienced in real estate law. Selling an apartment with a protected tenant is a complex legal process, and it is important to use an attorney experienced in this field. Our firm, Mandelbayum, Gor, Witzman-Gor and Co., has extensive experience in real estate and property law and can assist you in this process.

5. Plan the price carefully. The apartment's price must reflect the value of the apartment with a protected tenant. If you set the price too high, it will be difficult to find a buyer. If you set the price too low, you will lose money.

6. Consult with a professional appraiser. In some cases, it may be advisable to hire a professional appraiser with experience in apartments with protected tenants. This can help you determine a fair and competitive price.

Comparison: Apartment with Protected Tenant vs. Apartment without Tenant

To better understand the impact of a protected tenant on the apartment's value and sale process, here is a comparison:

As can be seen from the table, an apartment with a protected tenant requires a more complex legal process, has a lower value, and is more difficult to find a buyer for.