How a Toronto Couple Bought a Jerusalem Apartment on Israel Land Authority Leasehold

Result: Jerusalem apartment purchased and registered with a fully capitalized lease, free of future Israel Land Authority consent fees · Timeline: 5 months · Challenge: State leasehold land discovered after signing · Authority: Israel Land Authority and the Land Registry (Tabu) · Financial Impact: NIS 2.9M purchase, NIS 232,000 purchase tax, capitalization shifted to the seller

Background

A married couple in Toronto, both in their fifties with grown children, decided to buy a base in Jerusalem. They settled on a four-room apartment in Kiryat Yovel and agreed a price of NIS 2.9 million with a local seller. Neither of them planned to relocate. They wanted somewhere of their own for long visits and eventually for the next generation, and they wanted the purchase handled while they stayed in Canada. They signed a memorandum of understanding through an agent and asked us to take the file from there.

The apartment looked, on the face of it, like any other resale flat. The complication was buried in who actually owns the ground beneath it. In Israel a large share of residential land is not privately owned at all. It belongs to the state and is held by occupiers under long leases from the Israel Land Authority. To a Canadian buyer used to fee-simple title, that distinction is invisible until someone reads the register, and it changes both the cost and the mechanics of the deal.

The Challenge

Title in Israel is governed by the Land Law 1969 (Hok HaMekarim). When we pulled the Land Registry extract (nesach tabu), the land was not registered as private ownership (be'alut). It was registered as a lease (chachira) from the Israel Land Authority (Rashut Mekarkei Yisrael), and the lease had never been capitalized. In Israeli practice a lease is either capitalized (mehuvan), meaning the future ground rent has been prepaid for the balance of the term so the holder is effectively an owner, or it is uncapitalized, meaning the Land Authority remains an active landlord with rights that bite on every transfer.

That second state is the expensive one. Transferring an uncapitalized lease requires the Israel Land Authority's consent, and consent comes at a price: a consent fee (dmei haskama) calculated on the increase in the land's value since the last transaction the Authority recorded. On an established Jerusalem plot that fee can reach roughly a third of the appreciation in land value, an open-ended number that the buyer, not the seller, usually ends up absorbing if it is not dealt with in the contract. Our clients had signed nothing that protected them from it. They were exposed to a five- or six-figure shekel liability that nobody had mentioned at the kitchen-table stage, and they were 9,000 kilometres away.

In Practice: Under the Land Law 1969, transferring an uncapitalized Israel Land Authority lease requires the Authority's written consent, and the consent fee (dmei haskama) is assessed by the Israel Land Authority on the rise in land value since the prior recorded transaction. On a plot like this one the exposure runs into the tens of thousands of shekels, and the Authority's assessment and consent process typically takes six to ten weeks from a complete application.

What We Did

The right move was not to pay the consent fee. It was to make the problem disappear before completion, and to do it on the seller's side of the ledger.

We reopened the commercial terms. Rather than let our clients buy an uncapitalized lease and inherit both the immediate consent fee and the same friction every time they later sold or passed the flat to their children, we required the seller to capitalize the lease (hivun) before completion. Capitalization means paying the Israel Land Authority a one-time fee, generally a small single-digit percentage of the land value, to prepay the ground rent for the remainder of the long lease. Once capitalized, the lease behaves like ownership: no consent fee on this transfer, and none on future transfers for the life of the lease. We made the seller's capitalization a condition of completion and held the final tranche of the price in trust against it.

The seller filed the capitalization application with the Israel Land Authority. We tracked it, supplied the buyer-side documents the Authority needed, and confirmed the registry would reflect a capitalized lease before any money moved. In parallel we ran the rest of the purchase remotely. The couple signed an Israeli-law power of attorney before a notary in Toronto, which was then apostilled under the Hague Convention by Global Affairs Canada so it would be accepted by Israeli authorities. That power of attorney let us sign the hesem mecher (purchase agreement) addendum, deal with the Land Authority, and ultimately register the transfer, all without either buyer setting foot in Israel. The mechanics of a fully remote purchase are set out in our guide to how non-residents buy property in Israel.

The same title review that exposed the leasehold also did the rest of the buyer's protection. While we had the register open, we checked it for a caveat (hearat azhara) in favour of a third party, for mortgages or liens registered against the seller's rights, and for any building-committee or shared-property entries that would pass to our clients. The leasehold was the headline, but a non-resident only gets one clean look at the register before they are committed, and it has to do all of its jobs at once.

We also handled the tax that a Canadian buyer cannot avoid. Purchase tax (mas rechisha) under the Real Estate Taxation Law 1963 applies to every buyer, and a non-resident with no other Israeli home and no plan to immigrate is taxed at the higher residential scale rather than the reduced rate reserved for a buyer's sole Israeli residence.

In Practice: Under the Real Estate Taxation Law 1963, a non-resident buyer of a residence is generally taxed at 8% on the price up to roughly NIS 5.9 million. On this NIS 2.9 million apartment the purchase tax came to NIS 232,000, filed with the Israel Tax Authority within 60 days of signing. A buyer who later makes aliyah and meets the conditions may qualify for a reduced rate, but no one should sign assuming an exemption they have not confirmed.

The Outcome

The seller capitalized the lease, the Israel Land Authority recorded a capitalized leasehold, and the apartment was registered to our clients in the Land Registry free of any consent fee, then or in the future. The couple paid the agreed NIS 2.9 million and NIS 232,000 in purchase tax. The capitalization cost, which on an uncapitalized purchase could have landed on them as a surprise consent fee, sat with the seller where the renegotiated contract put it. The whole matter closed in about five months, the extra time coming almost entirely from the Land Authority's capitalization process rather than anything on the buyers' side.

Neither buyer travelled to Israel. We also flagged for them, before completion, that Canada taxes its residents on worldwide holdings and that a foreign property of this value pulls them into Canada Revenue Agency reporting on Form T1135 once the cost of their specified foreign property crosses the CAD 100,000 threshold, so the purchase needed to surface on their Canadian return as well as the Israeli one.

Key Takeaways

What this case illustrates for non-resident buyers in similar situations:

1. Not all Israeli land is freehold. A large share of residential property sits on Israel Land Authority leasehold, and the difference between a capitalized and an uncapitalized lease can be worth tens of thousands of shekels. Read the Land Registry extract before, not after, you are committed.
2. An uncapitalized lease triggers a consent fee on transfer. The cleanest fix is to require the seller to capitalize the lease before completion, which removes the fee now and protects you on every future sale or inheritance.
3. Get the protection into the contract. A kitchen-table agreement that says nothing about who bears Land Authority costs usually defaults the cost onto the buyer.
4. Purchase tax is unavoidable and front-loaded. A non-resident buyer should budget the full 8% scale under the Real Estate Taxation Law 1963 and file within 60 days, not bank on an exemption.
5. The entire purchase, including dealings with the Land Authority and the Land Registry, can run on an apostilled Israeli-law power of attorney from abroad. No buyer needs to fly in to close, provided the power of attorney is drafted to Israeli requirements and apostilled before it is needed rather than after.

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Facing a Similar Situation?

If you are buying in Israel from abroad, the register can hold surprises that change the real cost of the deal, and leasehold versus ownership is one of the most common. A proper title review before you are bound is the cheapest protection you will ever buy.

Contact us for a confidential consultation about your Israeli legal matter.