Perplexed by property law? Our Professional Support Lawyer Gemma Cook is here to answer your most pressing questions.
If a landlord has a sanctioned tenant, it cannot receive rent, enforce tenant covenants or forfeit the lease without taking further steps. It may also need to consider its obligations to its own lenders and investors.
The UK government brought in various measures to restrict the use of assets because of the Russian invasion of Ukraine. The measures are known as the sanctions regime and the regime casts a net wider than just the sanctioned person.
I am not sanctioned, how can the sanctions apply to me?
Those not on the list of sanctioned people might still see the consequences of the sanctions regime. All UK nationals and legal entities, wherever they are in the world, and all individuals and legal entities operating within the UK must comply with the UK sanctions regime. In the context of property, the most likely sanction to apply would be a financial sanction such as an asset freeze.
An asset freeze might be imposed on a tenant, whether existing or prospective. If a tenant were to be a sanctioned person, the tenant must not deal with its assets and they must not be made available to, or for the benefit of, the tenant. In short, the law restricts anyone from:
- making funds or ‘economic resources’ available, directly, or indirectly, to or for the benefit of, an individual or entity on the sanctions list. ‘Economic resources’ are widely defined and specifically include property; and
- dealing with funds or ‘economic resources’ owned or controlled by an individual or entity on the sanctions list, or a person acting on behalf of an individual or entity on the sanctions list.
So in a landlord and tenant relationship, landlords are susceptible to breaching the sanctions regime because payment of rent to the landlord by a sanctioned tenant may be unlawful due to the receipt of the frozen funds. Even making legitimate payments to the tenant (such as a refund of service charge at the end of the service charge year) could be caught.
What does this mean for a landlord?
The landlord is in a difficult position because, as a matter of contract law, it wants (and is due) the rental payments under its lease with the sanctioned tenant but:
- can a landlord forfeit for repayment of rent? Most likely, yes in certain circumstances, but does the landlord want to regain possession in a difficult market. It is also possible that the landlord seeking to forfeit would be ‘dealing’ with the tenant’s property and this may be restricted under the terms of the sanction;
- what if a landlord has a financial loan secured upon the property? A lack of rental income might put the landlord in breach of its lending terms and also, affect its ability to repay the loan. Having a sanctioned tenant in the landlord’s building could be enough of itself to trigger a default under the landlord’s loan terms;
- a sanctioned tenant might make a landlord fall foul of its own ethical, social and governance agenda;
- the landlord will be worried to protect the integrity of the building. The sanctioned tenant might be prohibited from paying for utilities, security, and other essential building services; and/or
- what if the sanctioned tenant continues to pay the rents? Ironically, this is not the windfall everyone might hope. The receipt of the rent could still be a breach of the sanctions regime.
So what can a landlord do?
The OFSI, part of the Treasury, handles asset freezes, restrictions on making funds available, and/or economic resources available to or for the benefit of designated persons either directly or indirectly. The OFSI publishes a list of people who are subject to financial sanctions. The first step is to check whether a party, such as the tenant, is a designated person according to that list.
In certain circumstances, a landlord can request that the tenant apply for a licence (or apply for one itself) from the OFSI to enable payments to continue to be made to the landlord.
There is no guarantee that the OFSI will grant a licence and a licence may take some time to be granted. The OFSI can issue a licence only where there are legal grounds to do so. If the OFSI grants a licence, then it would authorise payments that would otherwise be prohibited by the sanctions regime.
There are also general licences, which are not applied for by a particular person, but rather, apply for the public. For example, a general licence was made to allow the payment of insurance and reinsurance premiums and broker commissions relating to the provision of insurance to UK properties. Under this general licence, UK insurers who are registered with the Financial Conduct Authority may receive funds (which would otherwise be sanctioned) and UK institutions may process those payments.
Any other options?
It is likely that any option is likely to require a consent from the OFSI. For example:
- Appoint a receiver: The English Courts have a discretionary jurisdiction to appoint a receiver under the Senior Courts Act 1981. A court may look favourably on such an appointment where the appointment is to preserve property from some danger threatening it. The appointment would allow the receiver to manage the property on behalf of the tenant but even the appointment is likely to also need an OFSI licence;
- Recover rents from undertenants: Commercial rent arrears recovery (CRAR) is a method of enforcement to recover rent arrears relating to commercial property. Under CRAR there is an ability for a landlord to require an undertenant to pay the rent that it owes directly to the landlord rather than the intermediate tenant. This could be seen as dealing with the sanctioned tenant’s assets and an OFSI licence may be required; and/or
- Possession of tenant’s goods: CRAR also allows a landlord to instruct an enforcement agent to take control of a tenant’s goods and sell them in order to recover an equivalent value to the rent arrears. The sale of a tenant’s good is likely to be deemed to be dealing their ‘economic resources’ and therefore, require a licence from the OFSI.
What are the consequences of breaching the sanctions regime?
- financial penalties;
- reputational damage; and/or
- a prison sentence.
These can apply to the landlord because of the receipt or dealing with funds or assets. The OFSI can impose monetary penalties on any person who breaches financial sanctions. The maximum penalty is the greater of (a) £1,000,000 and (b) 50% of the estimated value of the economic resources involved in the transaction.
Action points for landlords
- Check whether a tenant is on the UK sanctions list as a designated person. It is important to note that if an entity or individual is designated, the sanction also applies to any entities (meaning a body of persons corporate or unincorporated or any organisation or association or combination of persons) that are owned or controlled, directly or indirectly, by a designated person. Those entities may not appear on the UK sanctions list. This works by deeming any assets held by such entities to be owned by the designated person.
- Undertake thorough Know Your Client (KYC) processes on any prospective tenant and carrying out a repeat exercise regularly during any continuing relationship.
- If a landlord becomes aware that a tenant is a designated person, advice should be sought immediately. The nature of the sanction will be considered and, if appropriate a report may need to be made to the OFSI.
- If a landlord thinks it may have breached a sanction, again, a report may need to be made to the OFSI.