President Biden has promised “devastating sanctions” if Russia invades Ukraine. Russia did. And so the most recent sanctions followed. These penalties can have a direct effect on the documents that are signed daily in the commercial real estate industry. This legal update reviews recent penalties and what clients should be aware of before signing real estate related documents.
On February 21, 2022, President Biden issued Executive Order 14065 which, among other things, prohibits the transfer, payment, export, withdrawal, or other transaction of “all property and interests in property located United States (“US”) or come into the possession of any United States person belonging to companies or persons” determined by the Secretary of the Treasury to operate, inter alia, in the Donetsk or Luhansk regions of Ukraine. , on February 22, 2022, the Treasury Department’s Office of Foreign Assets Control (“OFAC”) identified many of these companies/persons by adding them to the Specially Designated Nationals (“SDN”) list of the OFAC.
The following day, February 23, OFAC also blocked the assets of others, this time under Executive Order 14024 which, among other things, targeted businesses and individuals engaged in activities that undermine the peace, security, political or territorial stability. the integrity of the United States or its allies. On February 24, OFAC blocked transactions involving certain assets of another large group of companies and individuals linked to Russia. OFAC added even more games to the SDN list on February 25 and 28. At the same time, OFAC banned various transactions with major Russian banks.
As a result of these recent US sanctions, US persons should exercise due diligence to ensure that they do not engage in transactions with blocked companies and individuals for several reasons, as the list of companies and of stranded people has been significantly expanded in recent days. First, there are potential criminal or administrative penalties, or even jail time, that can result from violations of OFAC. Second, statements by OFAC that the representing party is not on an OFAC list are already prevalent in documentation at all stages of a real estate transaction, as discussed in more detail below.
Non-Disclosure Agreements (“NDAs”) and/or Access Agreements
As the starting point for most real estate transactions, NDAs and access agreements are among the most frequently signed documents for potential real estate investors. Real estate professionals should be aware of OFAC’s representations or undertakings in these documents. These provisions are not typical of real estate NDAs or access agreements, but when presented with such a provision, purchasers should confirm that they are able to make the applicable declaration. Further, if a buyer is asked for such representations or undertakings from OFAC, it would not be improper to ask the seller for mutual representation in return.
Purchase and Sale Agreements (“PSA”)
PSAs often have mutual representations, made by both buyer and seller, to OFAC. A typical PSA representation will say that the buyer or seller is not identified on any list maintained by OFAC. Buyers will often attempt to negotiate OFAC’s representation of the buyer so as not to include affiliates or investors, in an attempt to limit the parties about which the representation is made; this may be particularly important, given that a buyer may not yet know its ultimate source of equity for a transaction on the day the PSA is executed and therefore need not make representations to parties with whom the buyer does not yet know that they are partnership. On the other hand, from the buyer’s point of view, the seller’s OFAC representation should be as broad as possible, so that the buyer can later make a statement that he has not done business with anyone on any OFAC list. (both for investors and its lenders), and also to help the buyer avoid exposure to penalties associated with OFAC violations. When representing a seller, there is more certainty about the source of capital already in the transaction, so it is usually easier to give broader OFAC representation.
Most commercial landlord lease forms will contain a statement for the benefit of the landlord, which states that the tenant (1) is not on any OFAC list and (2) does not conduct any business or transact with anyone on any list. OFAC. This is important to the owner because, in addition to the owner’s broader desire to avoid potential penalties from OFAC, the owner will generally have to make similar representations and undertakings to their lender, including that the owner will not not deal with parties on an OFAC list. As such, it is important for tenants to be aware of the scope of OFAC representation made in their commercial leases. Additionally, if a tenant is asked to give OFAC representation in a commercial lease, it should not be controversial to ask the landlord for mutual representation.
Property management agreements
Property management agreements will typically contain mutual representations from the owner and property manager that neither party is on an OFAC list.
As a real estate owner and borrower of funds, many loan documents will contain some of the stricter OFAC pronouncements and covenants found in typical commercial real estate documents. For example, on the day of closing, a broad representation is usually made that says no one on an OFAC list has any direct or indirect interest in the borrower or guarantor. Additionally, there is usually a permanent clause in the loan documents that states that none of the borrowing parties will enter into relationships or transactions with parties on an OFAC list. As such, as discussed below, it is very important for borrowers to understand the origins of their equity and properly protect themselves with “consecutive representations” in joint venture agreements and real estate funds or mortgage documents. ‘offer.
Joint Venture (“JV”) agreements, real estate fund documents and real estate capital markets
It is extremely important in capital raising documents that sponsors obtain representations and undertakings from investors that they are not and will not be on OFAC lists or otherwise subject to OFAC sanctions, and do not do business with parties on these lists; this is important because the sponsors will have to make these arrangements with their lenders (see the paragraph of the loan document above). As such, to the extent that the joint venture and real estate fund documentation is permissive with respect to transferability, such documentation will generally contain a continuing undertaking which states that neither party may transfer any interest in the business to anyone on an OFAC list. By the way, much of our practice is in the world of Regulation D private placement offerings, where accredited investors purchase interests in Delaware limited liability companies, limited partnerships and statutory trusts through the through brokers and registered investment advisers; in this context, managing broker (“MBD”) agreements will typically have a statement that the MBD has procedures in place to ensure that no securities are sold to persons sanctioned by OFAC. Additionally, sponsors are further protected by a similar representation in the actual purchase agreement that investors sign when purchasing securities.
Violation of any of the above OFAC representations or covenants could result in default under various commercial real estate documents, in addition to possible criminal or administrative penalties and/or imprisonment. associated with OFAC violations. A defect in the real estate documents could have serious consequences, such as termination of the lease, termination of property management services, joint venture redemption rights, triggering a cash trap or even foreclosure. As such, U.S. persons engaged in real estate should undertake appropriate due diligence to ensure that they do not engage in transactions with companies and persons blocked under OFAC rules such only recently extended. The most recent list of companies and individuals blocked under OFAC can be found here: https://home.treasury.gov/policy-issues/financial-sanctions/specially-designated-nationals-and-blocked- persons-list-sdn- human-readable lists.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.