Tama 38 Agreement Guide with Developer — What Must Be in the Contract

Tama 38 Agreement Guide: Legal Basis and Its Importance

Tama 38 Agreement (Program for Investment in the Improvement of Old Buildings) is a central legal tool in urban renewal in Israel. When a developer or contractor seeks to demolish and rebuild or upgrade an existing building, they must align the agreement with existing residents according to the law's regulations. Tama 38 Agreement is not merely an administrative document — it is a binding legal contract that defines your rights, the developer's obligations, timelines, compensation, and risk allocation.

In recent years, hundreds of residents in Israel entered urban renewal projects without fully understanding their agreement terms. The result: violated rights, significant implementation delays, lawsuits, and loss of substantial economic rights. Mandelbaum, Gor, and Yitzman-Gor Law Firm (Ramat Gan) has represented residents, contractors, and developers on this matter since 2008. In this guide, we will outline all essential clauses that must appear in the contract and how to avoid costly mistakes.

Why Is Examining the Tama 38 Agreement Critical?

Tama 38 Agreement with a developer is a long-term contract that may remain in force for years. If you are a resident in a building about to be demolished and rebuilt, or if you are a contractor/developer planning such a project, precise understanding of the agreement is the difference between financial and legal success or failure. A flawed or incorrect agreement can lead to:

• Implementation Delays: If payment terms or timelines are unclear, a developer may delay for years, directly affecting residents.
• Financial Loss: Incorrect price update clauses (indexation) can lead to overpayment or capital loss for both parties.
• Lack of Clarity on Rights: If residents' rights to the new apartment, shops, or parking spaces are not precisely defined, lawsuits may ensue.
• Uncovered Construction Risks: If the agreement does not clearly define who is responsible for construction insurance, temporary housing, or damages during the construction period — residents may be left unprotected.

Structure of Tama 38 Agreement: What Must Be in the Contract

A legal and valid Tama 38 Agreement must include specific clauses established by law and regulations. Below are the critical clauses that must appear:

• Identity of Parties: Name of developer/contractor, names of residents, apartment number of existing unit, property address.
• Project Description: Type of execution (demolition and rebuilding, upgrading, expansion), area of new apartment, its location in the new building.
• Compensation and Payment Terms: Price of new apartment or price reduction, payment schedule, management fee percentage, appreciation tax (if applicable).
• Price Updates (Indexation): Which index is used (Consumer Price Index, Construction Index, Wage Index?), and when the update is performed.
• Timelines: Execution start date, estimated completion date, definition of justified delays (force majeure, planning delays).
• Temporary Housing: Is the developer required to provide temporary housing during the construction period? If so — where, for which period, and at what cost?
• Construction Insurance: Who is responsible for property insurance during construction? Who pays?
• Common Rights: Distribution of common areas (roof, storage, parking, garden), parking rights, ground-floor shop rights.
• Termination Conditions: Can residents terminate the agreement? Under which conditions? With what compensation?
• Developer's Obligations: Level of finish, technical specifications, initial maintenance, warranty.
• Family Status Clause (if applicable): In case of divorce or death of a resident, who inherits the agreement?

Critical Sections in a TAMA 38 Agreement That Cannot Be Compromised

When reviewing a TAMA 38 agreement, there are sections that are "legal obligations" and must appear exactly as prescribed by law. If they are missing or distorted, the agreement may be voidable or subject to legal challenge.

1. Consideration and Payment Terms Section — The Heart of the Agreement

This is the most critical section. The consideration must be defined with absolute clarity, including:

• The price of the new apartment in new shekels (not "to be determined" or "at the discretion of the developer").
• If there is a discount (for example, an existing tenant pays less than a new buyer) — the discount must be explicit and in writing.
• A detailed payment schedule: how much upon signature, how much at the start of construction, how much at construction stages, how much upon apartment delivery.
• An indexation clause: If the price is updated according to some index, the index must be clearly defined (not "at the developer's discretion").
• Are there additional fees? (Management fees, security fees, planning fees?) Each one must be explicitly stated in the agreement.

Common mistake: Tenants signed agreements stating "price to be determined according to construction conditions" or "according to appreciation rate upon apartment delivery". This is illegal. The price must be fixed in advance, or at least have a clear and fixed formula for adjustment.

2. Schedules and Justified Delays

A TAMA 38 agreement must clearly define:

• The execution start date.
• The estimated completion date (not "soon" or "within about two years").
• Which delays are justified (force majeure, government agency directives, lawsuits, planning issues) and how much time is extended for them.
• If the developer is delayed beyond the completion date without justified cause, what is the compensation for tenants? (Daily penalty, temporary housing reimbursement, interest on their payments?)

Without this section, a developer can delay for years without any legal liability, and tenants remain stuck in temporary housing or paying for an apartment that is not ready.

3. Temporary Housing — Right or Obligation?

Under TAMA 38 law, if tenants must vacate the existing apartment before the new apartment is ready, the developer must provide temporary housing or pay housing compensation. The agreement must define:

• Does the developer provide temporary housing, or pay economic compensation?
• If providing housing — where, for what period, and under what conditions (furniture? electricity? water?)?
• If paying compensation — how much per month, and for how many months?

If this section is missing or distorted, tenants may end up homeless for months with all housing expenses on their own account.

4. Common Rights and Allocation of Parking Spaces/Shops

In the new building, there are common areas (roof, stairs, machine room, parking lot, garden). The agreement must define:

• How many parking spaces is each tenant entitled to?
• Does each tenant have a storage room? What size?
• If there are shops or offices on the ground floor — who purchases them, and were tenants given a first offer?
• How are common areas divided among tenants? (Usually, according to apartment size or number of units.)

Common mistake: An agreement stating "parking spaces and shops to be allocated later" — this is imprecise. Every right must be allocated in the agreement itself.

5. Construction Insurance and Liability

During the construction period, the property is exposed to risks (fire, theft, accidents, poor workmanship). The agreement must define:

• Who is responsible for construction insurance? (Usually, the developer.)
• How long does the insurance last? (From the start of execution until apartment delivery.)
• What happens if there is damage during this period? Who pays for repairs?
• How long is the developer responsible for defects (warranty) after apartment delivery? (Usually, two years.)

Without this section, tenants may be left with uncovered damages.

6. Conditions for Cancellation and Withdrawal from the Agreement

Can a tenant withdraw from the contract if the developer fails to meet its obligations? Or if significant technical issues are discovered? The agreement must define:

• Under what conditions can the tenant cancel?
• If the developer delays beyond the completion date, does this give the tenant the right to cancel?
• If the developer goes bankrupt or is forced to stop execution, what happens to the tenant's money?
• If a tenant wants to cancel for personal reasons, what is the compensation to the developer? (Usually, forfeiture of part of the payments.)

Comparison Table: Essential Clauses in a Tama 38 Agreement

Below is a table summarizing the essential clauses in a Tama 38 agreement and what must appear in each clause:

What Should You Do If Your Agreement is Missing These Clauses?

If you have reviewed your agreement and discovered that essential clauses are missing or are distorted, do not sign. Instead:

1. Contact our office immediately. A free initial legal consultation will help you understand the risks.
2. Prepare a list of comments on missing or incorrect clauses.
3. Negotiate with the developer — typically, a serious developer will agree to correct essential clauses.
4. If the developer refuses — this is a red flag. Tenants should be cautious of developers who oppose basic protective clauses.

Common Mistakes in Law 38 Agreements — and How to Avoid Them

Based on our experience handling tenants, contractors, and developers in this field, there are recurring mistakes that appear in agreements. Understanding these errors will help you avoid them:

Mistake 1: "Price to be determined later" or "at the developer's discretion"

This is a critical legal error. The price must be fixed in the agreement, or at least with a clear formula for adjustment (for example, "base price of 2 million NIS, plus adjustment according to the Consumer Price Index from January 2024"). If it says "price to be determined later," the developer can arbitrarily change the price, and tenants may be left with unexpected costs.

Mistake 2: Temporary housing not defined

Many agreements state "the developer will provide temporary housing as appropriate" or "at the developer's discretion." This is imprecise. Temporary housing must be defined precisely: where (address), for which period (dates), under which conditions (furnished? utilities? electricity?), and at what cost (if the developer does not provide, how much does he pay the tenant?). Without this definition, tenants may be left without housing or with substandard accommodations.

Mistake 3: "Construction delays will not entitle compensation"

Some developers try to write in the agreement that construction delays (meaning the developer does not finish on time) will not entitle tenants to any compensation. This is illegal. If a developer delays beyond the completion date, tenants are entitled to compensation (daily penalty, refund of temporary housing fees, or interest on payments). An agreement that attempts to remove this right is voidable.

Mistake 4: "Construction insurance at tenants' expense"

By law, the developer is responsible for construction insurance. If the agreement tries to transfer the insurance cost to tenants, it is illegal. Tenants should verify that the insurance is at the developer's expense only.

Mistake 5: Common rights not defined

Many agreements state "common rights will be divided later in the construction agreement" or "according to the final plan." This creates uncertainty. Each tenant should know in the agreement itself how many parking spaces he received, the size of the storage unit, and any other common right. Otherwise, tenants may be left without parking or with smaller parking spaces than expected.

Mistake 6: Warranty too short (less than one year)

By law, the developer is responsible for construction defects for at least two years. If the agreement tries to reduce this to one year or six months, it is illegal. Tenants should ensure that the warranty is at least two years.

Mistake 7: "Agreement termination possible only with developer's consent"

If a developer significantly delays, or substantially changes conditions, tenants can terminate the agreement even without the developer's consent. An agreement that attempts to block this right is voidable. Tenants should ensure they have the right to terminate under certain conditions (significant delay, critical construction issues, or unreasonable change of terms).

Mistake 8: "Capital gains tax at tenants' expense"

Capital gains tax is a tax paid when selling a property at a profit. Typically, in the case of Law 38 projects, capital gains tax is deposited with the developer or contractor, and is later collected by the authorities. If the agreement tries to transfer the capital gains tax to tenants, it is a legal problem. Tenants should check with our office what the correct treatment is in each case.