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Dissolution of Real Estate Partnership

The different legal systems tend to relate to shared ownership as a temporary and tolerated situation and not as a desirable one. Therefore in a situation where there are feuding co-owners they prefer to bring the partnership to an end, because the ability of the court to make peace where the relationship has been undermined is very limited and cooperation will delay the development of the shared property, discourage alternative proposals by the partners, and complicate the execution of transactions in these assets.
Indeed – Avraham and Lot were relatives who lived together as a family, their families, their sheep and their cattle and the Torah states: (Bereshit 13:12):
The land could not sustain them to live together, because their wealth was too much and they could not sit together. And there was an argument between the shepherds of Avraham and the shepherds of Lot, and the Caananties and Prizim were living in the land. And Avraham said to Lot: "Let there not be a quarrel between me and you and between my shepherds and your shepherds. Is not the whole land in front of you? If you go left I will go right and if you go right I will go left. And Lot lifted his eyes and saw the area of Jordan that was fertile before G-d destroyed Sdom and Amorah, like the garden of G-d like Egypt near Zoar. And Lot chose the whole Jordan area and Lot traveled eastward and he separated from his brother. Avraham dwelt in the land of Caanan and Lot dwelled by the cities of the area and pitched his tents by Sdom.
Similarly the law in Israel follows this policy which is manifested in the Israel Lands Law, Clause 37 – 1969:
C 37 (a) every partner of property is allowed to demand the dissolution of the partnership.
C 37 (b)  If there is a condition in the partnership contract that denies or limits the right to demand dissolution for a period time that exceeds three years the court after three years can order dissolution of the partnership despite the condition, if there appears a justified reason under the circumstances. 
Incidentally, there is a similar law for possessions, in the inheritance law, and in the Land Rights Settlement Ordinance (New Version). Therefore the first overriding principle is that every property partner can and is allowed to state his desire to dissolve the partnership.
Indeed, the courts wanted to award the partners the right to sue for dissolution of partnership and in the case of Levi vs Levi (Tel Aviv 11589) regional precedent 93(2) 1195 (Judge Dr. Weingrad) said "The court has no discretion to demand dissolution of partnerships, but in practice not all agree with this position, and many considerations are taken into account.
The courts referring to Clause 37 (a) ruled in this matter that dissolution of partnership could be the division of property according to Clause 39 (a) or by selling the property and sharing the revenue according to Clause 40 (a).
Clause 39 (a) – If the property can be divided easily, the dissolution of partnership will be by way of distribution in kind.
Clause 40 (a) - If the land cannot be divided easily, and if the court finds that division will cause a significant loss to some or all of the partners, the dissolution of the partnership will be through the sale of the property and distribution of the revenue amongst the partners.
Consensual Dissolution of Partnership
The dissolution of partnership can be with the consent of all the partners and can be done according to court order, following a request from one of the partners. Those who wish to dissolve a partnership by consent – and choose to dissolve the partnership by selling the property and sharing the revenue amongst themselves have full freedom to execute the sale. But dissolution of partnership by dividing the land itself is limited in light of the Planning and Building Law but only by this law.
Non-consensual Dissolution of Partnership.
If there is no consent amongst the partners in dissolving the partnership, each partner is allowed to turn to the court and request the dissolution. The court can rule to dissolve the partnership whether by dividing the land or selling or a combination of both or by registering it as a condiminium. Sometimes the court will not rule to dissolve the partnership at all if there are certain exceptions.
Exceptions to the Right of Dissolution of Partnership:
1) Lack of good faith - a demand for dissolution of partnership that is submitted and is not in good faith, with the intention of harassing the partners may be denied based on the doctrine of "Abuse of Right".
This is according to the judgement of Yaakobi vs Yaakobi 1915 91. PD MT (3) 529 (3) whereby the president Shamgar used the principle of good faith concerning a dissolution of partnership lawsuit, even though he could not establish a general law on this issue. See also Pavon vs Pavon, Tel Aviv (T.A.) 84 17123 PM 1986 (3) 424,416.
Claiming lack of good faith requires proof and discerning between lack of good faith and taking advantage of a financial opportunity, case Ulpiner Shmuel vs Segel Aryeh, 95 A001245 green 3.
2) An agreement to limit the right of dissolution of partnership – the law does not limit the validity of the agreement that was entered into with a third party. But it limits the validity of the agreement made between the joint owners only, and empowers the court to order the dissolution of the partnership after three years from the making of the limiting agreement. (Clause 37 (b) to the law) if it seems justifiable.
An example of this is a situation where a partner constructed a building or planted on the shared property, against the law, the partners can sue for dissolution of partnership even though the agreement limits their right to dissolution (Clause 46, of Land Law).
3) Shared assets that cannot be divided – while normally the prevailing view is that it is better to separate ownership, there are assets that need to be owned jointly, for example: a piece of land used to access both properties that are near each other, a shared wall that serves as a divider between two adjoining properties, or shared property in a shared house (Clause 56 of Land Law), an apartment which is owned jointly by the couple (Clause 40 A to the law), etc.  Dissolution of partnership in shared assets like these will conflict with the purpose they fulfill and therefore the law prevents the possibility of forcing a dissolution of partnership.
When there are no exceptions, the court will exercise the right of dissolution of partnership in different ways:
Different ways of dissolution of a partnership: sale, distribution in kind, joint registration
A unit of land that can be subject to a claim for dissolution of partnership is a unit that is registered in the Land Registry, i.e. the "lot" and has the rights of a piece of registered land. Therefore the fact that a structure is built on more than one lot and all the lots that the structure is standing on are registered to the partners, and shared equally, does not preclude a claim of dissolution on only one of these lots.
The key question is: will the dissolution be by distribution in kind or by sale.
The uniqueness of dissolution of partnership in real estate is that the discretion of the judge is limited. Real estate ownership usually receives special consideration, and it is not easy to impose a monetary settlement in exchange for land. Therefore the law does not allow the court discretion to order dissolution of settlement if distribution in kind is possible. (Y. Weissman, laws of purchase, general chapter (Jerusalem 1993 rule 3, 1110).
Distribution in Kind
A second principle in dissolution of real estate where there is no agreement between the partners is to make every effort to dissolve the partnership by distribution in kind.
The provision of the law requires the court to dissolve real estate partnerships by distribution in kind, if possible. This was established in two Clauses of the Israel Lands Law mentioned above:
Clause 39 (a) – If the property can be divided easily, the dissolution of partnership will be by way of distribution in kind.
Clause 40 (a) - If the land cannot be divided easily, and if the court finds that division will cause a significant loss to some or all of the partners, the dissolution of the partnership will be through the sale of the property and distribution of the revenue amongst the partners.
The problem is that these two sections are not compatible with each other. The first clause states that if the real estate is easily dividable the court must rule to distribute in kind. The second clause states that even if there is a possibility for distribution the court may not necessarily order it, if there will be a significant loss.
The way to solve this difficulty in interpretation is to see the second clause as one that modifies the first clause, and that is what the courts do – by saying: dissolution of real estate partnerships that can be divided will be executed through sale of the real estate if distribution in kind will cause significant damage to one of the partners.
Reiner vs Commissar 725, PD LZ (3) 131
Rothschild v Frank 587 78 PD LG (3) 33.
H Salim Buildings Inc. vs Binyan 3967 PM 58.


Options of Distribution in Kind
What kind of real estate is dividable? It turns out that the legislature meant that the real estate be divided according to the plans approved by the authorities and in accordance with the Planning and Construction Law – 1965. If their plan is not approved the real estate is considered "non-distributable land". This conclusion appears in Clause 38 of the Israel Lands Law – 1969, and Clause 143 of the Planning and Construction Law (Judgement Muzar vs Shuster Inc. TA (TA) 1349 91. Top precedent 92 (1) 933).
Does the court have to wait for approval from the planning authorities? If there is a possibility to receive a plan within a reasonable amount of time, an extension should be given to obtain the approval. But if approval will take a long period of time the court should determine that the real estate cannot be divided due to lack of said plan. (Judgement of Salim Buildings Inc. vs Binyan 3967).
Here are some examples of real estate that is non-distributable:
When one of the partners owns a very small piece of the shared land, this prevents distribution in kind, then the court will judge not to distribute in kind unless all sides agree. (S 41 (a) Israel Lands Law).
When the property is owned by 3 or more owners, and some of the partners decide to combine their small lots together and be co-owners on the land that will be distributed, then because of this agreement alone, the court will order distribution in kind. (S 41 (b) Israel Lands Law).
If the court decides to accept the suggestion of distribution in kind, the question arises how to divide amongst the partners the various pieces.
Burden of Proof – in the judgement Ploni vs Almoni TMS 207030 96 and also 101797a Ridlovitz vs Modii Supreme Court 986). And BAU 587/78 Rothschild and brothers vs Frank PD 33 (3) 33).
Judge Chana Rothschild ruled that the burden of proof that the property is non-distributable is on the plaintiff of the dissolution, who wants to dissolve by selling the property. This proof is mandatory but one should take into account if the defendant wrote in his plea that he prefers distribution in kind.
In the Judgment SM vs RM 79550/97 they described the burden of proof as follows: "Therefore, the judgment states that the burden of proof to show that the land is non-distributable in kind is on the plaintiff. But if we read this ruling carefully we see that the facts relate to a case in which the plaintiff is requesting a deviation from the rule. Meaning, dissolution by sale. Therefore in the framework of proving the claim, it was necessary to convince the court that the property was non-distributable in kind, which is consistent with both the Israel Lands Laws and the evidence laws. On the other hand, in a case where the plaintiff is requesting the dissolution by distribution in kind, the plaintiff is subject to the universal rule of "He who demands – the proof is on him". In this kind of case the burden of proof is on the one who claims that distribution in kind promotes his interest in court. For it is not plausible for a litigant to be dragged into legal proceedings and be required to deny allegations made by the plaintiff without requiring the plaintiff to show some basis for his claims.
(In my opinion, we see from here that although distribution in kind is the first preference it is not very strong, and the plaintiff has the burden of proof whether he wants distribution in kind or not – Irit).

Significant Loss:
The loss described here is a direct loss as a result of dividing the property and not referring to "prevention of future profits". (Judgment in Lev Shmuel vs Kornbaum Esther and others TA 3754/95). And it has already been said by the honorable Justice Heshin 1017/97 Radilvitz vs Modii:
This interest is only for direct damage caused by the division. And not how to fully exploit the financial potential inherent in a piece of real estate…the topic of dissolution of real estate partnerships is not intended to make the real estate a source for profit.
Boaz Barzilai, in his book on Dissolution of Real Estate Partnerships claims that the law and the judgment did not establish a certain percentage of the property value as being a significant loss beyond which it would be preferable to sell, but we can draw an analogy from judgments that deal with loss of property value.
In order to estimate compensation under Section 197 of the Planning and Construction Law and the question of possible damage in light of Section 200 of that law. In Boaz Barzilai's opinion, the 30% limit is a reasonable appraiser limit. That is, if there is damage of 25% of the tables set out above, this damage is within the framework of an acceptable appraisement deviation and the assumption is there is no damage at all.  But if the damage is 35% this defies all logical appraisement and there is definite damage.
In Conclusion: Distribution in Kind is the First Preference for Dissolution of Partnership in Real Estate Unless:
1) In a situation where there is an agreement one must take into account only if the real estate is dividable according to the Planning and Construction Law.
2) In a situation where there is no agreement one must check if there are existing exceptions that allow dissolution in general.
3) In a situation where there is no agreement and no existing exceptions one must examine the case individually.
a. If there is a possibility of distribution in kind.
b. If there will be damage from the distribution will it be a significant loss.
Combined Procedure of Partial Distribution and Partial Sale:
The third principle – in a partnership where some lots of the joint owners are large enough to allow distributing them in kind, while other lots are so small that there is no point in distributing in kind. This kind of procedure is dependent upon the owners of the bigger lots buying out the owners of the smaller lots. But the partners of the smaller lots cannot be forced to sell. 
Dissolution of partnership using partial distribution and partial sale can also be used in cases where the physical lot cannot be divided equally amongst the partners. In these rare cases the law states that the court is authorized to force the owners who received more for their share of the land to pay the other owners who received less equalization payments, due to the difficulty of sharing the lot equally.  Clause 39 (b) Israel Lands Law.
In this case the court is using the method of partial distribution and partial sale, where the buyer is the partner who pays equalization payments to the other partners.
Dissolution through Registration as a Condominium
The fourth principle is established in Clause 42 of the law. When a dissolution of partnership in real estate cannot be distributed in kind, the court must examine the possibility of dissolution through registering the property as a condominium, and distribution of the apartments in the building to the partners. (Clause 42 (a) to the law). This is more preferable than dissolution through sale. (Judgment Rothschild vs Frank 587/78 PD 33 (3) 33, Judge Landau) because this method leaves the partners as owners of the land and does not force them to settle for money instead of land. However, if the case allows for distribution in kind, the court cannot choose to use another type of dissolution. The court can propose it's preference only if it's a choice between registration as a condominium or selling. 

Clause 42 of the Law:
When the real estate is a building that can be registered as a condominium, the court is allowed, after receiving the opinion of the building inspector, to order the dissolution of the partnership by way of registration as a condominium. The reason for this is that registration as a condominium does not lead to a complete separation of the partners, as it does in distribution in kind. In a condominium the owners of the apartments are connected to one another in all communal areas of the building (like the stairwells) and therefore the law grants discretion to the judge to determine if the new obligations imposed on the owners are reasonable. In other words, the court will not rule for dissolution through registration as a condominium:
a) When the relationship between the partners is unstable (Shermeister vs Islis Tel Aviv (TA) 25880/87 PM 1993 (4) 265).
b) When the cost of registration is prohibitive. (Reiner vs Kommisar 725/82 PD 37 (3) 131).
c) If the registration will not be just to some of the partners (Rothschild vs Frank 587/78 PD 33 (3) 33, Judge Landau).
d) If the building is not suitable to register as a condominium and has not yet received the opinion of the building inspector. (Clause 42 of the Israel Lands Law).
The authority given to the court to order the property to be registered as a condominium seems to be in conflict with Clause 143 of the Israel Lands Law which requires the consent of the partners who own more than half of the area of the condominium apartments. It is possible to reconcile this conflict in two ways:
1. In a case where the partners who own more than half the area of apartments requested the registration, the court does not have the right of discretion and must rule accordingly.
2. In a case where one of the partners requests dissolution of partnership, the court can use its discretion to rule in favor of registration. (Here there is no legislation that decides, as noted above, i.e. there is no exception of "significant damage" and no other exceptions as well).


Dissolution of Real Estate Partnership through Sale:
Dissolution of partnership through the sale of the shared property and distribution of proceeds is possible only after the court has found that it cannot be dissolved through distribution in kind (Clause 40 of the Israel Lands Law) and that dissolution through registration as a condominium is also not a suitable option (Clause 40 (a), 42).
The court can use its discretion as to how to execute the sale. Property Exclusivity can be seen as one way of selling common properties: the partner receives exclusive ownership of any piece of property from the common properties, and is in fact, the buyer of this property, from the other partner, in exchange for selling a different piece shared property that becomes exclusive property of the other partner. See judgment Nellis vs. Nellis BS 548/82, PD (4) 437.

Petitions of the Partners: Clause 43 of the Israel Lands Law:
In the case Ploni vs. Almoni, the claim was raised to take into account Clause 43 of the law:
"The court shall take into account as much as possible the petition of some partners to maintain the partnership between them and the rest of the wishes of the partners." The judge in this case ruled that in a case where the relationship between the partners is unstable, Clause 43 of the Law cannot be taken into account and the judgement cannot be distribution in kind, because this will perpetuate the conflict between the partners.
In the judgment Ploni vs. Almoni, the judge brought the only real possibility of taking this Clause into account:
For example, when one partner out of the three partners demands distribution in kind, and the property is distributable, the court cannot demand the dissolution between the three partners but can take into account the two partners wish to continue their partnership after the one partner has received his share of the distribution. And what is the meaning of "the petitions of the rest of the partners" in the context of Clause 43? This can also be explained by example: in the case of Mordechai vs. Mordechai, (288/71 PD 26 393).
Namely, "this Clause is applicable in the case where there is an agreement between the sides, and it does not detract from the basic right of each partner to dissolve the partnership either through distribution in kind or by selling the property" and decided in 319/74 Rubinstein and Partners, Contracting Company Inc. vs. Tamra Fein case 30 (1) 454: "This Clause applies in the case of a distribution in kind and when as a distribution in kind is not possible."

 


יישום ההכרעה באופן פירוק השיתוף כפי שעולה מפסקי הדין:

1) בפס"ד ס' מ נגד ר'מ תמ"ש 79550/97- פסקו לטובת פירוק שיתוף ע"י מכירה מהנימוק שאין המקרקעין ניתנים לחלוקה כיוון שהתובע לא הגיש כלל תשריט לחלוקה לרשויות התכנון.
2) בפס"ד ויקטור לנקרי נ' עזרא קחטן ת"א 000984/96- פסקו לטובת פירוק שיתוף ע"י מכירה מהנימוק כי מנתוניה של החנות עולה שלא ניתן לפרק את השיתוף ע"י חלוקה בעין או חלוקה חלקית.
3) בפס"ד מ' א נגד א' א עמ"ש 1119/99- פסקו לטובת פירוק שיתוף ע"י מכירה בגלל הקושי הרב לחלוקה בעין: אין קיר מפריד בין החלקים, יש משכנתא אחת, קיימים חובות משותפים על הדירה,מערכת היחסים בין השותפים גרועה, יווצר הפסד כספי בגלל החלוקה,...
4) בפס"ד אולפינר שמואל נ' סגל אריה א 001243/95- פסקו לטובת פירוק שיתוף ע"י מכירה מהסיבה של אי אפשרות לחלוקת הנכס למרות חוות דעתו של המומחה כי החלוקה הינה אפשרית. וגם בגלל העדרו של תשריט חלוקה.
5) בפס"ד פלוני נ' פלוני תמ"ש 2050/03- פסקו לטובת שיתוף ע"י מכירה מהטעמים הבאים: חלוקת החלקה יוצרת מגרשים שאינם עומדים בגודל הנדרש,וכן יישארו שותפויות בין קבוצת האחים,ושותפויות אלו אינן אפשריות מאחר והקרע ביניהם עמוק מידי.
6) בפס"ד לב שמואל נ' קורנבוים אסתר, ת"א 3754/95- פסקו על חלוקה בעין לחלק מהשותפים.
7) בפס"ד דניאל דניאלי נ' שעשוע ניסים,ת"א 007329/95- פסקו על מכירה.
8) בפס"ד פלונית נ' אלמוני תמ"ש 207030/96- פסקה השופטת דיון להוכחות בדבר האפשרות לחלוקה ואם לא יוגשו הוכחות יש למכור את הדירה.
9) בפס"ד רע"א 1017/97 רידלביץ נ' מודיע,פ"ד נב(4),625-נפסק על רישום הבית כבית משותף ולא על מכירה כיוון שהתובע למכירתה לא הצליח להוכיח את העדיפות של מכירה לעומת חלוקה


 
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