The Arab-Israeli Peace Process as a Real Estate Transaction

[Kenneth L. Gartner is a partner with Lynn & Gartner in Mineola, New York and an adjunct professor at Touro Law School. He has served as a New York State District Court judge]

The classic formulation of the basic premise underlying the Arab-Israeli “peace process” is “land for peace.” Its proponents thus categorize the so-called peace process as a real estate transaction: The entry into a contract pursuant to which a commodity possessed by Israel, i.e., real property (land), will be exchanged for a stated consideration which it is assumed is solely within the power of the Arabs to either withhold or convey (peace). It is therefore properly analyzed in these terms.

When the proponents of the process envision the “settlement” of the conflict via the signing of a treaty or other agreement, what they are really talking about is a classic real estate closing. In fact, Black’s Law Dictionary (8th ed., Thomson-West) defines a “closing” as “the final meeting between the parties to a transaction, at which the transaction is consummated; esp., in real estate, the final transaction between the buyer and seller, whereby the conveyancing documents are concluded and the money and property transferred. — Also termed settlement.”

Black’s observes that in a typical real estate closing, the consideration, usually cash, is transferred at closing to the seller (in this case, Israel), in exchange for the transfer of title to the realty to the purchaser (the Arabs). In this situation, however, the payment cannot by its very nature be made in cash on closing. “Peace” — the cessation of attacks against Israel – can by its very nature only be obtained in installments, over time.

What is typically required in such a situation is “security.” As defined by Black’s, “security” is “collateral given or pledged to guarantee the fulfillment of an obligation; esp., the assurance that a creditor will be repaid (usu. with interest) any money or credit extended to a debtor.”

When the payment by the buyer to the seller of the purchase price is deferred in a real estate transaction, and does not occur in full at closing, the seller typically takes back a “purchase money mortgage” as security. A “purchase money mortgage” is defined by Black’s as “a mortgage that a buyer gives the seller, when the property is conveyed, to secure the unpaid balance of the purchase price.” The seller becomes a mortgagee, the buyer a mortgagor.

This is where problems arise.

Any obligation must be enforceable to be real. In the case of a purchase money mortgage, the mortgage instrument will be recorded in the appropriate government office, becoming notice against the world of the seller’s continuing interest, and can be enforced through judicial foreclosure proceedings in the event of default. “Foreclosure” is defined by Black’s as “[a] legal proceeding to terminate a mortgagor’s interest in property, instituted by the lender (the mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property.”

In the case of the Arab-Israeli conflict, though, there are no courts in which a “legal proceeding” could be commenced. The United Nations and all other international organizations have demonstrated that they are “interested parties,” who would have to be recused from involvement. There would be no enforcement mechanism beyond self-help – the forceful, military re-taking of the property.

Meanwhile, the likely arms build-up in the subject property which would occur after transfer of the realty, together with the investment which Europe and the U.S. would likely make in the success of the start-up venture to be conducted on the property, their likely disinterest following conveyance of title in whether the consideration is received by Israel, and the efforts they would therefore likely make to discourage “foreclosure proceedings”, would drastically increase the costs of enforcement.

In order to determine how significant it is that enforcement of the security interest would be expensive, difficult, or impossible, the risk of default has to be assessed.

As we have learned in recent times from the United States economy, it is always essential that sellers and, if applicable, their lenders, carefully evaluate any potential purchaser to assess their creditworthiness, i.e., their likelihood of making the required payments. The importance of this factor is multiplied when no judicial enforcement remedy is available should default occur.

In the Arab-Israeli situation, the premise of those advancing a “land for peace” formulation is that the casus belli – the reason that the Arabs have waged an aggressive and non-conventional 60-plus year war against Israel – is Israel’s possession and control of the disputed realty. They posit that the transfer of this realty, by eliminating the casus belli, will motivate the Arabs to end their war, and give Israel peace.

However, there is substantial empirical evidence that the land in question is not the issue, and that its transfer is not the true (or at least not the complete) asset the purchaser desires. This evidence would include the fact that the war against Israel commenced substantially prior to Israel’s 1967 acquisition of the realty; public statements and actions by all segments of Arab leadership and society; and the fact that prior real estate transactions between the same parties, including the transfers by the current seller to the current prospective purchaser, of Gaza, northern Lebanon, the Sinai peninsula, and on a conditional and restricted basis the same property at issue here, have met with poor results.

An additional transactional demand buttresses this conclusion: One would ordinarily assume that the transaction required merely conveyance of the realty, leaving present occupants of the property in place, and thus resulting in approximately 1.5 million “Israeli Arabs” within land to be retained by the seller, and approximately 200,000 “Jewish Palestinians” within the land being conveyed.

However, while the operative assumption with respect to the Arab occupants of the property which the seller will retain is accurate, the purchaser insists that the deed of conveyance include a racially restrictive covenant, barring Jewish residence within the transferred realty; and further insists that the seller deliver to the purchaser selective vacant possession, in accordance with this racial restriction.

While racially restrictive real estate covenants have been denied enforcement in the United States since at least the 1948 Supreme Court case of Shelley v. Kraemer, past real estate transactions between the current contracting parties, in the cases of the Sinai and Gaza, have in fact incorporated both racial restrictions and “vacant possession” clauses.

The insistence on such a covenant and clause in the present transaction indicates a continued unwillingness by the purchaser to accept the presence of the group whose exclusion is sought, which includes the seller.

Since the transaction would therefore not obtain for the purchaser the true or complete asset it desires, its motivation to pay the stated consideration (peace) once title has passed would presumably be low, thus rendering its creditworthiness, i.e., its likelihood of making payment, similarly low.

In view of this, a prudent lender or seller would conclude that the likelihood of payment being made in exchange for the transfer of the property is so remote, that even the most reckless U.S. banker, at the height of the early 2000’s lending frenzy, would have classified the potential transaction as too sub-prime to constitute an appropriate risk.

In sum, the lack of creditworthiness of the purchaser, combined with the absence of any reliable enforcement mechanism in the event of the likely default, would appear to render this a transaction that would have to be disapproved by any prudent economic actor.