The Key Money Law, Israel’s version of rent control, is meant to give tenants a protected tenancy in the property they live in. The tenant does not own the property, but he may live in it until his death and pay rent far below what the open market charges.
Key money arrangements first took shape during the British Mandate, a period when rental prices soared day by day, and continued into the 1950s after the establishment of the state.
In the 1950s, when thousands of new immigrants arrived in Israel unable to afford apartments of their own, the state looked for a way to give them housing for an unlimited period and encouraged the key money arrangement.
In this article we look at the Key Money Law: how the key money system works, who counts as a protected tenant, how a protected tenancy differs from ownership, and more.
The Key Money Law – who is a protected tenant and what is the key money system?
Under the key money system, the tenant pays key money of thirty to sixty percent of the property’s value when he moves into the apartment, and from then on pays monthly rent far below the open-market rate. These rights are meant to give tenants stability and to make it hard for property owners to evict them without legal grounds.
A protected tenant is someone who entered the property before August 20, 2018 as a tenant and became protected under the Tenant Protection Law enacted in 1972, or anyone who paid “key money” to the property owner upon entering the apartment.
The Key Money Law – what are the protected tenant’s rights?
The protected tenant has no ownership rights in the property, but he holds many other rights.
When the property is rented under a protected tenancy, the owner cannot use it for himself or his family. He may not rent it to anyone else on the open market, even if the rent he could collect is far higher than the protected rent the tenant pays.
The protected tenant pays rent well below the market rate. The owner may not raise the rent, only adjust it by the few percentage points the Tenant Protection Law allows.
When the protected tenant dies, his rights in the property pass to his immediate family, his spouse or children, provided they lived with him in the property for at least six months before his death. Note that this right of inheritance is a one-time right, and the tenant who inherits it cannot pass it on to his own heirs.
What is the difference between a protected tenant and an apartment owner?
To understand the difference between a protected tenancy and outright ownership of an apartment, we turned to a key money lawyer.
The main difference between an apartment owner and a protected tenant, the lawyer explains, is that the owner holds legal title to the property while the protected tenant does not. The owner has full control: he decides who may live in the property and how it will be used, he sets rent increases where allowed, and he can pass the apartment down from generation to generation.
The protected tenant, for his part, holds specific legal rights, including the right to live in the property for the rest of his life, protection from eviction from a key money apartment without legal cause, and limits on rent increases.
The protected tenant can pass his rights in the protected property to heirs, but only in a limited, one-time way.
If the protected tenant leaves the apartment for a certain period, the law treats him as having abandoned it, and his rights in the apartment expire.
The law also provides that the protected tenant has no building rights in the property and may not renovate or alter it unless he has the owner’s express consent.
The landlord must see to the proper upkeep of the building: cleaning and maintenance of the shared facilities, the garden, the stairwells, the lighting, and the other areas the tenants use, such as the roof, the mailboxes, the stair railing, and the building’s exterior cladding. The owner is responsible for repairing defects in these areas.
When internal repairs to the property are needed, the protected tenant bears their cost, apart from a number of specific repairs whose cost the owner and the tenant share equally.
When tenants change in a protected property and a key money sale takes place, the law entitles the property owner to a percentage of the sale amount. These are significant percentages, but still far below the apartment’s actual value.
The Key Money Law – how is the money divided when tenants change?
As noted, when the tenants of a property change and a key money sale is made, the property owner is entitled to a share of the proceeds.
The proceeds are divided between the property owner and the protected tenant as follows:
A tenant who entered the protected property before 1958 receives two-thirds of the proceeds, and the property owner receives one-third.
When the tenants paid key money and moved in after August 14, 1958:
In the first year, the protected tenant receives eighty-five percent of the proceeds and the property owner fifteen percent.
Two years after the protected tenant entered the property, he receives seventy-five percent of the proceeds and the property owner twenty-five percent.
Between two and five years after the protected tenant moved in, he receives sixty-seven percent of the proceeds and the property owner thirty-three percent.
Beyond five years from the tenant’s entry into the protected property, the tenant receives sixty percent of the proceeds and the property owner forty percent.
In short, the Key Money Law gives the protected tenant many rights, but not ownership
A tenant living under a protected tenancy holds substantial rights in the property, chief among them a low monthly rent and the right to live in the property until his death. When the tenants in the protected property change, the proceeds from the sale of the protected rights are divided between the property owner and the protected tenant.
