Arrears and Penalties: Charging Interest for Breach of Contract

This guide provides general legal information for educational purposes only and does not constitute legal advice. Always consult a licensed attorney in Israel for advice specific to your situation. Information last verified: October 2024.

Governed primarily by the Contracts (Remedies for Breach of Contract) Law, 5731-1970 (effective March 27, 1971), and the Hire and Loan Law, 5731-1971 (effective October 1, 1971, with major "Fair Rental" amendments effective September 17, 2017), Israeli law provides a framework for managing rent arrears. While the Fair Rental Law introduced significant protections for tenants, it left the determination of "Arrears Fines" to be governed by the broader principle of freedom of contract, subject to the test of reasonableness. Unlike some jurisdictions with strict percentage caps, Israeli law allows landlords to establish a deterrent mechanism, provided it does not amount to extortion.

1. The First Mechanism: Agreed Compensation ("Daily Late Fine")

The most effective way to defend against delays in rent payments is establishing an "Agreed Compensation (Daily Fine)" clause in the basic agreement.

• What is the familiar phrasing? "For every day of delay in paying the rent (or any other payment to the landlord or authorities), the tenant will pay a pre-estimated and agreed compensation sum of X shekels". (Usually negligible sums for delay related to rent range between 100 to 150 ILS per day).
• (A fine for "Delay in final eviction" is usually higher - for example, 400 ILS for every day of delay after the contract has ended. Note: Under Rule 81 of the Civil Procedure Regulations, 5779-2018, this monetary claim cannot be included in an expedited eviction proceeding).
• The Reasonableness Limit (Courts): Section 15 of the Contracts (Remedies for Breach of Contract) Law allows agreed compensation without proof of damage, but grants the court (typically the Magistrate's Court) the authority to reduce compensation if it was fixed without any reasonable relation to the damage that could be foreseen at the time of the contract. In residential practice, total liquidated damages exceeding 10-15% of the monthly rent are frequently reduced by the Magistrate's Court.

2. The Second Mechanism: Arrears Interest (2025 Reform)

If an "Agreed daily fine" is not specified, landlords may instead claim arrears fees under the Adjudication of Interest and Linkage Law, 5721-1961.

• Phrasing: "Any delay constituting a fundamental breach will entail payment of differentials bearing arrears interest at the maximum rate customary in the banking system or according to the Adjudication of Interest and Linkage Law."
• 2025 Reform: Under the Adjudication of Interest and Linkage Law, 5721-1961 (as amended effective January 1, 2025), the mechanism for arrears has shifted from daily compound interest to an "Arrears Fee" (Dmei Pigurim). These fees are added at set intervals (not daily) and are capped to prevent the "snowballing" of debt. Compound interest on the arrears component is prohibited.

3. Offsetting from Securities / Cash Deposit

Under the Hire and Loan Law (Section 25J(b)(1), as amended in 2017), a landlord may realize a security deposit to cover unpaid rent and related expenses, provided they provide the tenant with at least 10 days' advance written notice. Per Section 25S, this 10-day notice requirement is cogent (mandatory) and cannot be waived or shortened by contract to the tenant's detriment. This allows for the recovery of the rent plus any agreed fines or legal costs directly from the Guarantee or cash depositPreview unavailable.

4. Enforcement Limitations

According to Rule 81 of the Civil Procedure Regulations, 5779-2018, an expedited claim for the eviction of a rented property (Tvi'a Le-Pinu'i Muskar) must not include any other relief, including claims for rent arrears or late fees. Monetary recovery must be pursued through a separate civil claim or the Execution Office (Hotsaa LaPoal) if based on a promissory note or a contract for a fixed sum.

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