Russia’s invasion of Ukraine has provoked many changes to the commercial and legal landscape in the UK. In particular, the UK has introduced a raft of economic sanctions that have had a material impact on tenants of commercial and residential properties and, specifically, on tenants of properties that are beneficially owned or controlled by persons who have been designated on the UK Sanctions List.
Proactive steps
Ideally, tenants should take proactive steps to satisfy themselves that their landlord is not a “designated person”. Where it is established that the landlord is a designated person, and so subject to sanctions, then tenants need to consider whether payment of rent or service charge or other sums due under the lease would constitute a breach of the relevant regulations (for example, the Russia (Sanctions) (EU Exit) Regulations 2019, in the case of persons designated under that regime).
The consequences of a breach can be severe. Offences relating to the principal prohibitions under UK financial sanctions carry a maximum of seven years’ imprisonment; and the maximum value of a monetary penalty may range from 50% of the total breach up to £1m – whichever is the greater value.
Managing agents should likewise be aware of the risk in passing on rent, service charge, etc to a designated person, and the difficulties in effectively managing a property in these circumstances.
Advice is needed from both sanctions and property experts to assess the risks and implement strategic solutions to mitigate the consequences of non-compliance with the UK’s sanctions regulations. In particular, it is necessary to consider whether the proposed rental or service charge payments would fall within the exemption which permits transfers to certain bank accounts owned or controlled by designated persons, where those funds are transferred in discharge (or partial discharge) of an obligation which arose before the date on which the landlord became a designated person.
Strategic solutions
To the extent that the proposed rental or service charge payments represent a potential sanctions violation, the strategic solutions may include:
1. Writing to the landlord: If a tenant is concerned that the landlord may be a designated person, then they should communicate those concerns to the landlord.
If a tenant does not comply with the terms of the lease, then a landlord may take enforcement action against a tenant, including forfeiture of the lease. To reduce the risk of such action succeeding, tenants should set out in writing to the landlord the reasons for withholding the payments, making clear that the payments are instead being ring-fenced for payment at a later date or offering to make payment into court if appropriate. The correspondence should require the landlord to respond and if the tenant’s concerns are unfounded, to correct the position, providing evidence as appropriate.
2. Apply for a licence from the Office of Financial Sanctions Implementation: A successful application for a licence to OFSI would authorise payments that would otherwise be prohibited by financial sanctions regulations. In other words, the tenant in question would be permitted to continue to make rent and service charge payments to their landlord, avoiding both civil and criminal liability. There are specific grounds on which a licence may be sought, so the content of the application is of paramount importance.
For example, a licence may be obtained to enable (i) the payment of reasonable fees or service charges arising from the routine holding of frozen assets, or (ii) the extraordinary expense of a designated person to be met.
3. Make an application to appoint a receiver/manager to run the building: Under the Civil Procedure Rules 1998, the court has inherent jurisdiction to appoint a receiver to protect a property pending resolution of an underlying dispute or matter. If appointed, a receiver would take control of and manage the property on the landlord’s behalf, which would permit the tenant to make payment of rent and/or service charges in accordance with the terms of the lease.
4. Engage with the landlord’s lender to persuade it to apply to appoint a receiver/manager: Where there is a legal charge, for example, by way of a mortgage over the freehold of the property, the bank may be entitled to apply to appoint a receiver over the property to manage it for as long as necessary. Forcing the bank to make the application would reduce legal fees and adverse costs risk. Ultimately, the receiver would manage the property (as above) and may seek to redeem the mortgage by selling the property and any surplus would likely be frozen so as not to benefit the designated person.
Clearly each situation is fact-sensitive and needs to be considered carefully with the appropriate professional advice. We are likely to see further developments as the situation in Ukraine continues to unfold, including increased enforcement by OFSI as it looks to upscale its capabilities in this area, so tenants should continue to monitor the risk.
Joanna Lampert is a partner and Ros Monk is a managing associate in the property litigation group and Richard Stopford is a managing associate in the sanctions group at Mishcon de Reya
