A contract made for appearance sake only is void and establishes a right to restitution but a third party which acted in good faith will not be harmed

November 4, 2018
The legal update was published in Afik News 270 21.11.2018

תא (ת"א) 22960-05-15, אליהו ליבמן נ' יעקב ישראל דומב, בבית המשפט המחוזי בתל אביב - יפו, 04.11.2018, כב' השופטת שלומית יעקובוביץ

A fictitious transaction was signed between an employee and an employer, as if the employee sold an apartment to the employer who will take a mortgage on the apartment and the money will cover the employee’s mortgage obligations while the rest of the funds may be used by the employer for his own purposes. The agreement stated that after a few years and after repaying the full mortgage, the employer will transfer the apartment back to the employee at no cost and until such time the employee may reside in the apartment without payment of rent. The apartment was registered in the name of the employer who later got into debt, gave rights over the apartment to a third party, and then fled the country.
The Court held that the rights to the apartment belong to the third party that purchased such in good faith and for consideration. A contract made for appearance only is intended to achieve a certain covert purpose that the parties, or one of them, sought to realize, and which is not overt and thus lacks legal validity. Here the employee did not really want to sell the apartment to the employer but played along with a coordinated fiction so that the employer can take a mortgage of his own and therefore the rights to the apartment remained in the hands of the employee. However, because a third party purchased the apartment for a consideration and relying on the registration at the Land Registry, the third party is entitled to the rights to the apartment.