Currency in the Contract: Euro, Dollar or Lei, Indexation, and What Happens When the Shekel Moves Between Signing and the Last Payment

An Israeli buyer signing a contract for a property abroad sees one price, for example 180,000 euros. But someone who earns in shekels does not pay 180,000 euros once. They buy euros with every payment, at the rate on the day of payment. In an off-plan deal with a payment schedule of a year or two, the cost in shekels is known only at the end.

This guide explains what is written, or should be written, in the contract regarding currency: in which currency the price is stated, in which currency you pay, what an indexation clause is, how the payment schedule affects the exposure, and which tools exist for managing it. This guide is not investment advice and does not recommend any financial product.

1Why is the contract currency a risk for an Israeli buyer?

Because the income, the savings and usually also the mortgage in Israel are in shekels, and the price is not. Every change in the exchange rate between signing and payment changes the cost in shekels by the same proportion. The following illustration is simple arithmetic, not a forecast:

The exposure works in both directions, and there is no way to know in advance where the exchange rate will move. The goal is not to guess the rate, but to know what the contract provides and to decide in advance how much uncertainty suits you.

2In which currency are contracts stated in the countries where Israelis buy?

On the implications of the move to the euro in Bulgaria, see the guide Bulgaria and the euro. Romania has not yet adopted the euro; on what the move may change there, see Romania and the euro.

3A contract in euros and payment in lei: how does it work in Romania?

Several formulations are common in Romania, and it is worth identifying which one you are dealing with:

• Price in euros and payment in euros to the account set out in the contract. Your exposure is between the shekel and the euro only.
• Price in euros paid in lei at the rate on the day of payment, usually the reference rate of the National Bank of Romania. The risk remains between the shekel and the euro, and a second conversion is added, from shekels to lei, with its own cost. The contract should define the rate and the day on which the calculation is made.
• Price in lei. In that case the exposure is between the shekel and the lei, and the lei-euro rate affects it as well.

Two legal points are important here. First, under Article 1488(1) of the Romanian Civil Code, a debtor of a sum of money is discharged by paying the creditor the nominal amount. The meaning: without an express clause, the amount in the contract is the amount owed, and any indexation or adjustment has to be written. Second, Romania applies the central bank's foreign exchange rules (Regulamentul BNR 4/2005), under which payments between Romanian residents for the sale of goods and services are, as a rule, made in lei, with exceptions. Anyone buying through a Romanian company (SRL) or who is a Romanian resident should check with the Romanian lawyer in which currency payment is permitted in their transaction.

4What is an indexation clause, and what should you check in it?

An indexation clause links the price, or the balance not yet paid, to an index or a rate. In development projects it is usually used to pass part of the risk of rising construction costs to the buyer. Such a clause is not improper, but it has to be fully defined:

• Which index: the name of the index and the body that publishes it, so that each party can check the calculation.
• Base date: from which index reading you start, and on which date each payment is calculated.
• What the indexation applies to: the whole price or only the balance.
• Cap: a maximum rate of increase, overall or per year.
• Both directions: if the index falls, whether the price falls too.
• Freeze during delay: no indexation for the period in which the developer is late in delivery.

A clause that allows the developer to change the price at its discretion is a different story. In Romania, in a standard-form contract with a consumer, such a clause may be considered unfair. See the guide unfair clauses in a developer contract in Romania.

5How does the payment schedule affect currency exposure?

The longer the payments are spread out, the longer the exposure to the exchange rate:

6Which tools exist for managing exchange rate exposure?

There are several common approaches. Each involves its own costs and risks, and none of them removes the need to plan:

• Early conversion: you convert the amount, or part of it, at signing and hold it in an account in the contract currency until the payment dates. The cost in shekels is fixed in advance, but the money is held in a foreign currency.
• Staged conversion: you convert on several dates, so as not to lock the whole deal into a single day's rate.
• Forward transaction: a contract with a bank to buy currency on a future date at a rate set today. It fixes the rate for a specific payment, and usually involves collateral and a cost. There are also other instruments, such as options.
• Natural hedge: income in the contract currency, for example rent in euros, that covers a liability in the same currency, such as a mortgage repayment in euros.

7How do you know how much the conversion costs?

Compare the rate the bank offers with the Bank of Israel representative rate on the day of conversion, and in a deal in Romania also with the reference rate of the National Bank of Romania. On the amount of a property, a small difference in the rate is worth more than the transfer fee. It is worth asking the bank for a written rate quote before any large conversion. On the order of steps in the transfer itself, see the guide transferring money from Israel to buy a property in Romania.

8What should you ask for in the contract regarding currency before signing?

1. The currency of the price written expressly, including whether the price includes VAT.
2. The currency of payment and who bears the conversion and transfer costs.
3. If payment is made in another currency: which rate, from which body and from which day.
4. An indexation clause, if there is one: a defined index, a base date, a cap, and no indexation during a period of delay by the developer.
5. No unilateral price change that is not based on a written formula.
6. The currency of repayment: if the contract is cancelled, in which currency the money is returned and at what rate, so that you do not get back less than you paid merely because of conversion.
7. The currency of the agreed compensation for delay, and how it is calculated.
8. The payment account in the contract currency, in the name of the party to the contract.

9What to do before signing and how we assist

Before signing, it is worth writing yourself a simple table: each payment, its date, its currency, and where the money in shekels will come from. This table shows how long you are exposed to the exchange rate and for what amount. We assist Israeli buyers in reading the currency, indexation and repayment clauses in the contract, and in drafting requests for amendment before signing. Decisions on conversion and hedging are made with the bank or a licensed adviser.

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