President Biden promised to give “devastating sanctions” if Russia invaded Ukraine. Russia did. So the latest sanctions were enacted. These sanctions could have an immediate effect on documents signed every day in the commercial realty industry. This legal update explains the latest sanctions and what clients need to know before they sign any real estate-related documentation.
President Biden issued Executive Order 14065 on February 21, 2022. It prohibits the transfer, payment, and withdrawal of “all property or interests in property” that is in the United States or comes into the possession of any US person or company. The Secretary of the Treasury determined that the order was directed against the Donetsk and Luhansk regions in Ukraine. On February 22, 2022, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) identified many such individuals and added them to OFAC’s list of Specially Designated Nationals (“SDNs”).
On February 23, OFAC also blocked property of additional people, this time under Executive Order 14024. This was directed at companies and individuals who are involved in activities that threaten the security, peace, or territorial integrity of the US, or its allies. OFAC also blocked transactions with respect to property belonging to a large number of Russian-related persons and companies on February 24. On February 25, and February 28, OFAC added more parties to the SDNs listing. OFAC also prohibited transactions with top Russian banks.
Due diligence must be taken by US citizens to avoid transactions with any of the blocked persons or companies. The list of persons and companies that have been blocked has significantly increased in the wake of recent US sanctions. OFAC violations can lead to criminal or administrative sanctions, and even prison time. As discussed further below, OFAC representations that the representing party isn’t on an OFAC List are common throughout documentation at all stages of real estate transactions.
Nondisclosure Agreements (“NDAs”) or Access Agreements
NDAs and Access Agreements, which are the foundation for most real estate transactions, are the most commonly signed documents by potential real estate investors. These documents should contain OFAC representations and covenants that real estate professionals need to be aware of. Although these provisions are not common in Access Agreements or NDAs for real estate, buyers should verify that they can make the relevant representation if presented with them. It is acceptable to ask for mutual representations from the seller if buyers are asked for OFAC representations.
Purchase and Sale Agreements (“PSAs”)
PSAs often include mutual representations by the seller and buyer with respect to OFAC. A typical PSA representation will state that neither the seller nor buyer is listed on OFAC’s lists. Buyers will often try to negotiate with the buyer to exclude affiliates and investors. This is to limit the parties about which the representation is being made. The buyer should make sure that the seller OFAC representation is as wide as possible. This will allow the buyer to later claim they have not done business (both to investors and lenders) and to avoid penalties for OFAC violations. It is easier to represent a seller when there is greater certainty about the source of the equity in the transaction.
Commercial Leases
A representation for the landlord will be included in most landlord commercial lease forms. It states that the tenant is (1) not on any OFAC lists and (2) that they are not conducting business with anyone on an OFAC listing. This is vital for the landlord because it will help to avoid any OFAC penalties. Typically, the landlord will need to make similar representations to their lender. These covenants will include that the landlord will not do business or conduct any transactions with anyone on an OFAC List. Tenants should be aware of the OFAC representations in their commercial leases. It should not be a problem to ask the landlord to mutually represent a tenant who is required to make an OFAC representation in a lease.
Property Management Agreements
Property management agreements will usually include mutual representations from the owner and property manager that neither party is on an OFAC list.
Loan documents
Many loan documents that you sign as a borrower or owner of real property will include some of the most stringent OFAC covenants and representations. On the day of closing, typically, a broad representation is made that states that no person on an OFAC listing has any direct or indirect interests in the borrower or guarantor. A loan document will typically include an ongoing covenant that states that no borrower party will deal or transact with anyone on the OFAC list. As such, it is important that borrowers understand their equity and protect themselves by properly protecting themselves with “back to back representations” in joint venture agreements, real estate fund,s or offering documents.
Joint Venture Agreements (“JVs”) and Real Estate Fund Documents (Real Estate Capital Markets)
In capital raising documents, it is crucial that sponsors get representations and covenants of investors that they aren’t and won’t be on any OFAC or subject to any OFAC sanction and that they are not doing business (see loan document paragraph). To the extent JV and realty fund documentation allow for transferability, these documents will usually contain an ongoing covenant that states that no party can transfer any of the venture’s interests to anyone on an OFAC List. Side note: A large portion of our practice is in regulation D private placements. This allows accredited investors to purchase LLCs, limited partnerships, and Delaware statutory trusts via broker-dealers or registered investment advisors. In this context, the MBD agreements will usually contain a representation that the MBD has procedures to ensure that no securities are sold by OFAC-sanctioned individuals. Sponsors are further protected by similar representations in the purchase agreements that investors sign when they purchase securities.
If any of the OFAC representations or covenants are broken, it could result in a default under commercial real estate documents. This could also lead to criminal or administrative penalties or prison time for OFAC violations. A default in real estate documents can have severe ramifications. This could include termination or termination of property management services, JV Buyout Rights, foreclosure, and termination of leases. US citizens who are involved in real estate transactions should exercise due diligence and ensure they don’t transact with any blocked persons or companies as per the OFAC rules.
