Sanctions designations may require U.S. persons involved with sanctioned individuals to terminate existing contracts, including leases.
It is important for landlords to conduct thorough due diligence on prospective tenants and to negotiate language that enables them to quickly terminate a lease if a tenant becomes subject to sanctions.

The United States’ response to Russia’s invasion of Ukraine has been swift and decisive, with the Biden Administration issuing dozens of new sanctions designations in a matter of weeks. While these sanctions are aimed at crippling the Russian economy, their impact has also had a profound impact on a broad array of U.S. industries. In particular, the listing of Specially Designated Nationals (SDNs) has the potential to impact any American doing business with a named party, including landlords who lease real estate to sanctioned persons.

What Is an SDN?

The U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) enforces economic sanctions programs, and one of its primary tasks includes publishing and maintaining the Specially Designated Nationals and Blocked Persons (SDN) List. In the weeks since Russia’s invasion of Ukraine, OFAC has designated dozens of individuals and entities who have close ties to the Putin regime, including many Russian oligarchs.

U.S. persons are prohibited from engaging in any transaction with SDNs, and must block any property or interest in property in their possession or under their control in which a SDN has an interest. Additionally, any entity which is owned 50 percent or more, directly or indirectly, by one or more blocked person is itself considered blocked. For example, an entity in which three SDNs each have a 20 percent interest would itself be blocked, even though the entity itself is not on the SDN list, since SDNs own more than 50 percent of the entity.

OFAC’s legal authority is derived from several statutes, most importantly, the International Emergency Economic Powers Act (IEEPA), which provides the statutory authority for the president to impose sweeping sanctions against persons and entities. These sanctions include the ability to “regulate … nullify, void, prevent or prohibit” any transaction involving “any property in which [a] foreign country or a national thereof has any interest,” subject to the jurisdiction of the United States.

Impact for Landlords

The designation of an SDN prohibits U.S. persons from engaging in “any transaction” with them, as well as providing goods or services to them. As a result, all landlords should routinely screen tenants against OFAC’s SDN list, as well as all known persons or entities that have a direct or indirect ownership interest in the tenants. If a tenant is not able to provide ownership information, landlords will be expected to conduct reasonable due diligence to ensure that the tenant is not owned 50 percent or more by one or more SDNs. While the number of SDNs present in the U.S. has not historically been common, the increase in SDN designations, particularly involving high net worth individuals, such as Russian oligarchs, has made the issue more prevalent. Additionally, the Department of Justice has implemented a KleptoCapture program to find and seize, where possible, property held by SDNs in the U.S. or that comes within the jurisdiction of the U.S., including yachts, vessels and real estate.

For landlords entering into new leases, it is important that tenants negotiate lease terms that include language allowing for termination of the lease if the tenant becomes an SDN or the lease otherwise violates U.S. sanctions regulations. It is also important that landlords conduct adequate due diligence on prospective tenants to ensure the tenant is not an SDN and is not owned 50 percent or more, directly or indirectly, by one or more SDN. Best practices involve subscribing to a commercial screening service that provides dynamic (i.e., ongoing) screening and ownership screening.

If a landlord identifies an SDN tenant, it must promptly commence proceedings to terminate the lease and remove the tenant from the leased space. If necessary, this may involve commencing eviction proceedings. The landlord also must freeze any property of the tenant, including any security deposit that a tenant may have provided. Finally, the landlord must promptly report any property or interest in property of an SDN that it has control over to OFAC.

Possible Basis for Termination and Eviction

Many leases contain a “compliance with the law” clause, which requires the tenant to comply with all laws that relate to the property and refrain from putting the landlord in a position in which they are breaching the law. Designating a person as an SDN is considered a change in the law, which makes the lease noncompliant with U.S. law. Thus, a “compliance with the laws” clause should enable a landlord to terminate the lease in the name of complying with the law, even if the tenant is otherwise compliant with rent and use provisions of the lease. This method is likely the most straightforward basis on which to terminate a lease with an SDN.

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