House buyers paid the balance late, after the seller himself had taken about three months longer than agreed to obtain Form 4, and the seller cancelled the contract just three days after the deadline. The Supreme Court held that the delay was indeed a fundamental breach, but good faith required the seller to grant an extension first, so the cancellation is invalid and the contract will be performed.
What happened
In July 2020 a contract was signed for the sale of a house in a West Bank local council for ILS 3,620,000 (including ILS 200,000 for a heat pump and air conditioning). The buyers paid ILS 1 million around the signing, leaving a balance of ILS 2,620,000.
The seller undertook to obtain Form 4 and an occupancy permit within 12 months, by 5.7.2021, and the contract's annex defined a breach of this undertaking as a fundamental breach. It was also agreed that until Form 4 was obtained, the balance would be paid within 10 business days of the form being delivered to the buyers, who could meanwhile live in the house as tenants. The contract called the payment dates a "fundamental obligation", but said that a delay of up to 7 days would not count as any breach at all. The buyers moved in in October 2020.
Form 4 was issued only on 7.10.2021, about three months after the agreed date, and passed to the buyers on 10.10.2021. The next day they applied to their bank for a mortgage. The balance was due by 21.10.2021, and with the grace days by 28.10.2021, but it was not paid. On 31.10.2021 the seller sent a notice of cancellation. The very next day the bank gave approval in principle for a mortgage of ILS 2,394,000 and said it would transfer the funds within two business days once the documents were signed, but the seller refused to sign. Negotiations over an extension went nowhere.
The Jerusalem District Court held the cancellation valid, ordered the buyers to vacate the house against repayment of the money, and charged them use fees of ILS 12,000 a month. The buyers appealed, and the eviction was stayed in the meantime.
Was the late payment a fundamental breach?
Yes. The buyers argued that the contract called payment a "fundamental obligation" without saying expressly that breaching it was a "fundamental breach". The court rejected this: no particular wording is required, and parties who label an obligation fundamental mean that breaching it is a fundamental breach. The court added that the clause is not an invalid "sweeping clause", because it covers only three core obligations (transfer of the rights, handing over possession and paying the price) and distinguishes between a minor delay of up to a week and a significant one.
Even so, the cancellation was not in good faith
A fundamental breach normally allows the injured party to cancel at once, without an extension. But under section 39 of the Contracts Law, exercising a contractual right must also be done in good faith. The court explained that bad faith does not require a trick or an active step, and that in exceptional cases it can oblige the injured party to grant an extension even when the breach is fundamental. This was such a case, for three reasons taken together:
- The seller had himself committed a fundamental breach by being late with Form 4, on which the payment date depended. That delay left the buyers uncertain about when they would have to pay, so the seller had to cooperate with them.
- The cancellation was sent just three days after the deadline, a rigid insistence on the right.
- The buyers needed only a very short time to pay, and the seller did not show that such a delay would have caused him any real loss.
In the court's view, waiting a few days would have been enough. Even if the buyers could have acted faster, that carried very little weight in the overall picture. The argument that they had not paid over their own equity (about 6% of the price) was also rejected, because after the cancellation notice it was unclear whether the deal would go ahead.
The outcome
The appeal was allowed: the contract was cancelled unlawfully and will be performed. Ownership will be transferred to the buyers, who still live in the house. They will repay the seller what he returned to them after the District Court judgment and pay the balance of ILS 2,620,000 with linkage and interest from 28.10.2021, less the use fees they actually paid. Within 30 days the parties will file a joint notice on the amount, after which a supplementary judgment will be given. Since both sides committed a fundamental breach, the agreed compensation amounts cancel out and neither pays. The costs awarded against the buyers below were set aside, and the seller will pay the buyers costs of ILS 50,000 for both instances.
Key takeaways
- A seller who has breached the contract himself, for example by being late with Form 4, should show some flexibility before cancelling over the buyer's delay.
- Before cancelling a contract, even for a fundamental breach, send a warning and give a short extension. An immediate cancellation can be struck down for bad faith.
- Buyers waiting for Form 4: line up your mortgage in advance and keep the bank updated, so you can pay within the short period the contract allows.
- If you may pay late, write to the seller and ask for an extension before the deadline passes.
- Read the fundamental-breach clause in your sale contract carefully: calling an obligation "fundamental" is enough for a late payment to be a fundamental breach.
This article summarizes a published Israeli court decision in plain language and is not legal advice. Every case depends on its facts. The parties' names have been omitted. This is a first-instance decision and may be appealed.
