An Urban Renewal Project Agreement Is Not Transferrable

Barnea Jaffa Lande & Co.
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In urban renewal projects, residents or owner’s rights holders select the company with whom they are willing to embark upon this long journey, based on relationship of trust and competence. The trust required leads both parties to execute a binding agreement. Understandably, residents expect the company which whom they have contracted with to remain unchanged and not for those rights not to be transferred to other parties.

A recent district court ruling considered a case in which in pursuit of signing an agreement with the land rights holders, the developing company sold its control to a different company. The rights holders refused to accept this transfer of control, undertaken without their consent, and demanded annulment of the agreement. They argued that the change in shareholder composition was made without their consent and breached the agreement with them.

The company sought a temporary injunction against any actions to void the agreement and to remove various cautionary notes recorded in its favor. In its motion, the company argued the agreement was unlawfully voided and its voiding stemmed from the residents’ desire to contract with another developer.

The court rejected the motion, ruling that even at the outset of the binding relationship it was very important to the rights owners to ensure they had control over the nature of the company with which they had contracted. This was to ensure the company would not be allowed to convey nor transfer its rights to a third party without the advance and written consent of the owners’ representation, as well as to ensure the developing company’s composition of control would not materially change without the residents’ consent. Therefore, the company should have secured the written and advance consent of the owners’ representation, which it failed to do.

The ruling emphasized that an “evacuate and reconstruct” project is a journey and its challenges require a special trust between the developer and the rights holders. The court was satisfied by the representation’s testimony that in the case at hand it attributed great weight to the relationship with the developer’s controlling shareholders at the agreement’s date of execution. The residents were not informed of the anticipated changes to the composition of shares, despite the company being aware of the issue’s importance to them, and the residents reserving themselves with the contractual power to avoid a change in shareholder composition.

In addition, the court dismissed the company’s argument that the voiding of the agreement was performed unlawfully and in bad faith. In its reasoning, it noted that the agreement gave the representation the power to consent to the joining of new shareholders or controlling parties in the company. The court ruled that since the representation did not approve the change in control and the change was made nevertheless, it is clear the agreement should be terminated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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