New Law Overhauls Real Estate Contract Interpretation: What You Need to Know

The Knesset plenum approved last week, in its second and third readings, a significant amendment to the Contracts Law, which limits the Aprofim doctrine - a 30-year-old legal principle that allowed courts to interpret contracts not only according to their written text but also based on external circumstances and the parties’ intentions. Over the years, the doctrine faced widespread criticism from legal and business circles, arguing that it undermines contractual certainty, excessively expands judicial discretion, and makes it difficult for parties to rely on the contract’s written wording. The initiative was led by Justice Minister Yariv Levin and the Chairman of the Constitution Committee, MK Simcha Rothman. The real estate market is used to operating based on long and complex contracts, some of which leave room for interpretation. This week, a legal change entered the scene that could affect anyone involved in a real estate transaction - buyers, developers, landowners, and tenants. The amendment gives clear priority to the contract’s wording, especially in commercial contracts - and most real estate transactions are considered commercial contracts. This means that courts are expected to adhere much more closely to what is written in the contract and less to attempt to “fill in” understandings that were not explicitly documented. Attorney Shay Eliav, from Gindi-Kaspi & Co., specializing in real estate law, explains that the practical implications are particularly clear in real estate: “Real estate transactions are mostly commercial contracts. According to the amendment, unless a specific interpretation mechanism is agreed upon, the contract will be interpreted based solely on its wording. Every word, clause, or exception could carry decisive weight.” He adds that while this strengthens certainty and stability, it also shifts significant responsibility to the contract drafting stage: “Relying on understandings that were not explicitly documented may now expose parties to legal and financial risks.” Distinction Between Contract Types The amendment creates a clear distinction between types of contracts: Commercial contracts: Including sales transactions, development agreements, urban renewal contracts, and commercial agreements in real estate - these will be interpreted according to their wording alone, unless otherwise explicitly stated. Non-commercial contracts, standard contracts, employment contracts, or collective agreements: These will continue to be examined according to the parties’ intentions, combining wording and circumstances, but even here clear balancing considerations have been established. Real Estate: Special Importance of Drafting Attorney Sigal Michaeli, also from Gindi-Kaspi & Co., emphasizes the amendment’s special importance in real estate: “Real estate transactions are by nature complex and long-term. The amendment sharpens, more than ever, the importance of precise, forward-looking drafting and the understanding that what is not written may not be taken into account.” She notes that this is not a revolution detached from reality: “In recent years, the Supreme Court has also begun to limit the use of broad interpretation in its rulings, emphasizing that the contract’s wording is the starting - and sometimes even the ending - point. The legislature has now chosen to anchor this trend in law.” The Bottom Line: More Responsibility Ultimately, the amendment strengthens contractual freedom and the ability of parties to manage risks in an informed manner, especially in the business world, including real estate. On the other hand, it also sharpens the responsibility of anyone entering a transaction - buyer, developer, landowner, or tenant.