A recent court ruling found that a Zichron Devarim (Memorandum of Understanding) can serve as a legally binding contract in a real estate deal worth around NIS 100 million. The case involved a developer and a landowner who signed a document outlining the main terms of a complex sale and combination deal. Despite continued negotiations, the court ruled that the signed Zichron Devarim met the legal requirements of intent and specificity, making it enforceable—even without a final, formal contract.

Edited by Adv. Karin Yitzhaki with assistance from intern Shirel Simanian

A Zichron Devarim, or Memorandum of Understanding, is a document intended to summarize the main points agreed upon between two or more parties during negotiations for a future deal or agreement. While often used as a reference point or demonstration of good faith, in some cases it can be considered a legally binding contract.

This article reviews a recent District Court ruling that addressed whether a Zichron Devarim signed between parties in a real estate deal—along with the registration of a He’arat Azhara, a Warning Note, amounted to a binding agreement.

Case Background:

A private landowner and a development company entered into extended negotiations over the sale and combination of rights in a parcel of real estate. After two months of discussions, they signed a document titled “Zichron Devarim.” Following the signing, the developer paid a deposit of NIS 200,000, and a warning note was registered in its favor.

Negotiations continued for another seven months, during which the parties exchanged draft agreements. Eventually, the developer sent a final draft reflecting all agreed terms from the Zichron Devarim and resolving all disputed issues except for one, which was not inconsistent with the original terms.

The landowner conditionally approved the draft, subject to minor comments, and acknowledged the remaining unresolved issue. The developer accepted the comments, and discussions over the last issue progressed until they reached an agreement. However, shortly after, the landowner withdrew from the agreement and declared negotiations over.

The developer rejected the withdrawal, arguing that the signed Zichron Devarim and subsequent conduct created a binding memorandum that could not be undone. The landowner filed for a declaratory judgment, stating that the document was non-binding and sought to cancel the warning note. He also argued that the deal had been canceled or abandoned due to unresolved disputes.

In response, the developer filed a counterclaim demanding enforcement of the agreement, asserting that the Zichron Devarim was never canceled and that both the final draft and the parties’ conduct confirmed a legally binding relationship.

Court Ruling:

The court rejected the landowner’s claim and accepted the counterclaim in full, relying on an earlier precedent. The court emphasized that the title of a document or its intermediary status does not determine its enforceability; instead, the court must examine the substance of the agreement.

Two critical criteria are required for a Zichron Devarim: intent to form a binding contract and sufficient specificity. The court uses an objective test, examining the language of the document, its contents, and the parties’ behavior before and after signing. An additional tool—known as the “connection test”—looks at how the memorandum relates to the anticipated formal contract.

Regarding specificity, the court checks whether the document includes essential terms of the transaction. Although the requirement for completeness has been relaxed over time, missing terms can be supplemented through legal norms or customary practice.

The court found the three-page Zichron Devarim detailed enough to include key terms such as the purchase price, combination percentage, warning note registration, interim use, project costs, and taxes. Though financing and VAT were not specified, the court held they could be supplemented by legal standards.

Furthermore, the fact that negotiations continued after signing and that all subsequent drafts upheld the original memorandum and indicated a shared intent to finalize the deal. Accordingly, the court ruled that a binding memorandum had been formed.

The landowner’s claim was dismissed, and the court ordered the agreement enforced. The warning note would remain, and the deal would proceed based on the terms of the signed Zichron Devarim and later drafts.

The court’s decision confirms that a Zichron Devarim can serve as an enforceable contract if it meets the standards of intent and specificity. It highlights the importance of the substance of the agreement over its form and supports the objective test for determining legal intent. This ruling serves as a warning to parties drafting such documents: treat a memorandum seriously, as it may have binding legal consequences.

(Case: Tel Aviv District Court, No. 39504-08-21, David Sinai v. L.A. (Hezek) Investments Ltd.)