Key money, the payment that creates a protected tenancy under Israel’s rent control regime, is a transaction that gives a protected tenant the right to live in an apartment for life. The tenant does not acquire ownership of the apartment, only residency rights. Which raises the question: can a key money apartment be sold?
Key money transactions have grown rarer in recent years, but they still happen, mostly in the central neighborhoods of large cities, and listings offering an apartment for sale with key money still appear on the classified boards of the printed press and on websites.
So can a key money apartment be sold? The answer is yes, but within the limits of the Tenant Protection Law.
In this article, we will answer the question of whether a key money apartment can be sold. We will examine the rules and consequences of such a sale, review the rights and duties of protected tenants, and learn how the apartment’s value is calculated and how the proceeds are divided between the property owner and the protected tenant.
Selling a key money apartment – what is key money?
Buying a property or business for key money makes the buyer a protected tenant, with the rights and duties detailed in the Tenant Protection Law. The law lets the tenant “purchase” the property by paying key money of one-third to one-half of its free-market value.
In practice, the tenant does not acquire ownership. He gains the right to live in the apartment and, with a commercial property, the right to use it.
After the transaction, the tenant keeps paying a low rent for as long as he holds the property. In certain circumstances, he may pass the rights to the apartment on, subject to specific conditions.
The protected tenant’s obligations include maintaining the property, paying rent on time, and using the property for personal use only.
Can a key money apartment be sold? In principle, yes.
If the protected tenant wants to leave the property, he can look for another tenant to buy his rights in it. The new tenant steps into the shoes of the previous one and enjoys the same rights: he pays key money and takes on the reduced rent. The key money the new tenant pays is divided between the departing tenant and the property owner.
Can a key money apartment be sold? What does the law say?
The key money law, which addresses the sale of a key money apartment among other things, gives the property owner first priority when a protected tenant intends to sell his rights. If the owner agrees to the amount the tenant names, the tenant sends the owner a letter closing the transaction. The owner can also adjust the offer and buy the rights from the tenant himself. If they disagree on the amount, or on anything else, either side can turn to the Tenancy Court to decide the matter.
Even so, it pays to bring in a key money lawyer, both to make sure the deal closes on the terms agreed between the tenant and the owner and to stop the owner from complicating the sale by scaring off potential buyers in the hope that the tenant will sell cheap. In some cases the owner accepts the terms but raises the protected rent above what the previous tenant was paying.
Can a key money apartment be sold, and how is its value calculated?
Can a key money apartment be sold? Yes, but know that key money apartments are relatively cheap. They are usually valued at a third to half the price of an identical apartment sold free of key money on the open market.
When the tenant sells his rights in the protected apartment, the proceeds are divided between the property owner and the protected tenant at the following ratios:
If the tenant has lived in the apartment for less than a year, the departing tenant receives 85% of the key money.
If the protected tenant lived in the apartment for between one and two years, the tenant is entitled to 75% of the amount.
If the protected tenant has lived in the apartment for between 2-5 years, the protected tenant receives two-thirds and the property owner one-third of the sale proceeds.
If the protected tenant has lived in the apartment for more than 5 years, the property owner receives 40% and the protected tenant 60% of the sale proceeds.
And if the key money was paid before August 14, 1958, the tenant’s share of the key money is 66.6%.
The bottom line: can a key money apartment be sold? Yes, subject to the Tenant Protection Law.
Key money sales are rarer than they once were, but they still close. Understanding their rules and consequences matters to protected tenants and property owners alike. Because these are complicated transactions, it is recommended to consult an expert attorney in real estate law with the knowledge and experience to tell you whether a key money apartment can be sold, and how to sell it.
