Letter of Indemnification to the Local Committee – a Document Worth Knowing

Among the multitude of forms and documents that a real estate entrepreneur signs on his way to establishing a real-estate project, he must pay attention to the letter of indemnification in accordance with Article 197 of the Planning and Building Law, 5725 – 1965, which is frequently requested by the municipality, whereas this is an undertaking worth looking into. Despite the amendment to the Law, which states that these letters of indemnification are legal, each letter of indemnification should be examined by itself, and under the appropriate circumstances, it is even worth trying to request that the municipality renounce the signing of the letter of indemnification, or to condition its provisions.

Preface

On their way to establishing the long awaited real estate project, entrepreneurs often have to go through the various municipality departments in order to obtain the required approvals. Amongst others, they need to sign what is called a “letter of indemnification” which is delivered to the Local Planning and Building Committee and/or to the municipality. In the following article we will focus on this document, which might impose expenses on entrepreneurs, expenses which they didn’t take into consideration.

A routine among the planning and building procedures, is the entrepreneur signing a letter of indemnification according to which he undertakes to indemnify the Local Planning and Building Committee for claims, inasmuch as they will be submitted, for damages from the plan approved by the Committee itself. These are claims submitted, pursuant to Article 197 of the Planning and Building Law, 5725 – 1965 (the “Law”), by owners of rights in the land, who are within the area of the plan or bordering with the area, and who view themselves as damaged by the plan.

Is the Planning and Building Committee entitled by law to request that the entrepreneur sign this letter of indemnification and to condition the approval of the plan upon it? And if so, will it be possible to argue otherwise under certain circumstances?

Arguments for and against, then and now

In the past, there was ambiguity as to the matter of the legality of the authority’s request to turn the duty of indemnification to the entrepreneur as stated. Thus, in many cases the entrepreneurs would approach the courts with a request to rule that this financial burden should not be imposed on them, amongst others due to a lack of a provision in the law with explicitly authorizes the authorities to impose such expenses on entrepreneurs.

Each case which would appear before the court, would be examined based on its specific circumstances, when material arguments would stand on both sides of the divide – those for imposing this expense on the entrepreneur and those against it.

However, in 2009 an amendment to the Law[1] entered into effect, which in fact granted an approval to the indemnification agreements and made them legal[2]. But would it always be considered legal? There are only few rulings on this matter following the above amendment. We are of the opinion that the considerations guiding the courts prior to the amendment to the law should be reviewed in order to understand the complexity inherent to the indemnification agreement and the claims that may be raised before the Local Committee in order to try and soften the requirement for signing the indemnification agreements.

The main reasons for turning the indemnification agreements towards the entrepreneurs are that transferring the financial burden to the entrepreneur reflects the balance of forces in the planning procedures – the distributive justice requires that the entrepreneur, who makes a profit from the plan, shall bear the burden of expenses for public damages. In addition, there is the aspiration that the Committee will not be deterred from approving private plans in the absence of a financial source for funding the compensation claims.

On the other hand, there are reasons for not transferring the financial burden to the entrepreneurs: concerns that the authority will easily approve a plan without considering potential damages; the claim that the betterment levy is what is meant to “fund” this financial expense; and in the past, it was possible to claim that a provision in the law is required in order to authorize the Committee to impose a financial burden – an argument which is no longer relevant, in light of the amendment to the Law as stated.

There is an intermediate approach between the two aforementioned approaches, according to which the entrepreneur will be charged with paying the compensation only in certain cases. For example, according to this approach, an entrepreneur requesting to operate a pending plan – should not bear the burden of compensation . On the other hand, in the case of private entrepreneurship of a project, it would be fair that the entrepreneur indemnify the Committee, whereas he is the main beneficiary of the plan – thus the principle of distributive justice[3] is fulfilled.

Thus, even today following the amendment to the Law, whether about a plan which was not initiated by the entrepreneur, or an area in which a comprehensive plan to modifying the landscape applies, or a plan for the residents’ benefit – the entrepreneur may claim before the Committee that this is not the appropriate case for imposing the compensation costs exclusively on him. This is mainly in light of distributive justice considerations, whereas in the aforementioned cases the entrepreneur is not the sole beneficiary, rather the general public is as well, therefore the burden of compensation should not be imposed on him. Parenthetically speaking, it should be noted that in areas in which comprehensive urban renewal occurs, the likelihood for submitting claims for indemnification in accordance with Article 197 is significantly reduced, for the simple reason that all property owners are in an identical joint system of economic considerations.

It is important to note that in many cases, even if the entrepreneur is required to pay the compensations pursuant to Article 197 of the Law, this financial burden is transferred in an agreement framework to the contractor company with which establishes the project. This way, indeed the entrepreneur isn’t the actual factor paying these compensations, but these payments are manifested, of course, for the matter of calculating the consideration he receives from the contractor company in the project’s framework.

We shall also state that even when the entrepreneur undertakes to pay the compensations pursuant to Article 197 of the Law, it does not mean that he will pay those compensations at the end of the day, in light of the courts’ trend in recent years to narrow the ruling of compensations in these cases.

In addition, we must not forget that the entrepreneur also pays the municipality betterment levies for bettering the land due to the plan, and therefore – should he be charged beyond this payment with paying compensation as well, the question arises could he be able to deduct it from the betterment levy. We shall note that this matter is hardly discussed in the ruling, and we’re of the opinion that this argument can be raised before the municipality under the appropriate circumstances.

In closing

Among the multitude of forms and documents that a real estate entrepreneur signs on his way to establishing a real-estate project, he must pay attention to the letter of indemnification in accordance with Article 197 of the Planning and Building Law, 5725 – 1965, which is frequently requested by the municipality, whereas this is an undertaking worth looking into. Despite the amendment to the Law, which states that these letters of indemnification are legal, each letter of indemnification should be examined by itself, and under the appropriate circumstances, it is even worth trying to request that the municipality renounce the signing of the letter of indemnification, or to condition its provisions.