Court finds payment of rent under lease fell within exception to UK sanctions regulations

Karan Anil Chanana -v- Anzhelika Khan [2025] EWHC 1472 (Ch)

In another sanctions-related dispute to come before the English courts, the Court has held that payment of rent under a tenancy agreement that was entered into before the landlord became a sanctioned person fell within an exception under UK sanctions regulations. 

The decision usefully confirms the courts’ approach to pre-existing liabilities and contractual obligations that arose before a counterparty becomes a designated person or entity.

The background facts

The underlying dispute related to non-payment of rent under a three-year fixed-term tenancy agreement for a property in Belgravia, London. The rent was payable quarterly and was not paid by the tenant between 20 October 2022 and 20 April 2024. The amount outstanding was significant and resulted in a statutory demand dated 26 June 2024 for around £851,000, comprising the principal amount and contractual interest.

The tenant applied to set aside the statutory demand. The tenant relied on the fact that, in April 2022, the landlord became a sanctioned person under the Russia (Sanctions) (UK Exit) Regulations 2019 (UK Regulations). The tenant, therefore, argued that:

1. The UK Regulations prevented him from paying rent to the tenant.

2. Even if that was not correct, he reasonably believed he was prevented from making the payments and so was excused from payment by virtue of s.44 of the Sanctions and Money Laundering Act 2018 (SAMLA). The statutory demand should, therefore, be set aside because s.44 meant he could not be liable for any civil proceedings with regard to the non-payment.

3. His solicitors held the sum of £678,000 on an undertaking to pay the landlord’s solicitors once permission to do so was received from the Office of Financial Sanctions Implementation (OFSI) or a court order to the effect that payment was permitted. Consequently, the payment obligation was to that extent secured.

Pursuant to rule 10.5 of the Insolvency (England and Wales) Rules 2016, a statutory demand may be set aside if the creditor holds security, the debt is disputed or “on other grounds”.

The applicable regulations

UK Regulations

Regulations 11 to 15 of the UK Regulations set out asset-freezing and other restrictions in respect of “funds” and “economic resources” (as defined at section 60 of SAMLA). Regulations 12 and 13 prohibit the making available of funds whether directly or indirectly to a designated person or for the benefit of a designated person.

It was common ground that to pay rent to or for the benefit of a designated person would breach the Regulations and would amount to a criminal offence. However, Regulations 12 and 13 are subject to Part 7 (Exceptions and Licences). 

Pursuant to para. 6 of the OFSI Guidance (Financial Sanctions General Guidance), an OFSI licence is written permission allowing an act that would otherwise be prohibited under the UK Regulations. On the other hand, an exception to a prohibition applies automatically in certain defined circumstances as set out in the UK Regulations and does not require a licence to be obtained.

Regulation 58(5) provides for the following exception:

“(5) The prohibitions in regulations 12 and 13 are not contravened by the transfer of funds to a relevant institution for crediting to an account held or controlled (directly or indirectly) by a designated person, where those funds are transferred in discharge (or partial discharge) of an obligation which arose before the date on which the person became a designated person.”

SAMLA

S.44 of SAMLA provides as follows:

"Protection for acts done for purposes of compliance
(1) This section applies to an act done in the reasonable belief that the act is in compliance with—
(a) regulations under section 1, or
(b) directions given by virtue of section 6 or 7.
(2) A person is not liable to any civil proceedings to which that person would, in the absence of this section, have been liable in respect of the act.
(3) In this section "act" includes an omission.”

The Court decision

UK Regulations

The Court found that the Regulation 58(5) exception applied in the present case. The payment of rent due under a lease that was made before the landlord’s designation would be for these purposes a payment in discharge of a pre-designation obligation, in circumstances where the relevant sums only fell due for payment after designation.

Specifically:

1. The UK Regulations should be construed consistently with the EU sanctions regime, which they replaced following Brexit, unless there was good reason not to. Under the EU regime, the exception would apply because the contract was made before designation.

2. There was no obvious reason to consider that the exception was intended to have a different or narrower scope in the UK Regulations than in the EU regime. Both were essentially intended to allow for payments in discharge of obligations, the source of which pre-dated designation.

3. The language of Regulation 58(5) was not inconsistent with this conclusion. The tenant’s obligation arose before designation; it was an obligation created by the lease and there was no good reason to narrow the words of the legislation.

4. Para 6.1 of the OFSI Guidance was consistent with this outcome. It deals with crediting frozen accounts and refers to obligations that were concluded or arose before designation and, therefore, suggests a broad reading of “obligation” that encompasses “contract.”

SAMLA

The purpose of s.44, as confirmed by the Court of Appeal in Celestial Aviation Services -v- UniCredit Bank AG [2025] 1 WLR 196, is to ensure that a person is not pressurised into doing something that risks breaching sanctions by a fear of being exposed to civil claims. It is concerned to protect against a liability which is created as a result of something done or not done in the reasonable belief that it is in compliance with a sanctions regulation. 

S.44 is not, however, concerned to protect against pre-existing liabilities. The Court of Appeal expressed the view that it is not intended to protect a debtor from an action to recover a debt which is otherwise lawfully due, but which has not been paid in the reasonable belief that its payment would be in breach of sanctions. Absent sanctions, the debtor would expect to have to pay that sum in the normal course of events. Exposure to a claim to recover it is not a new financial exposure which might pressurise payment.

The Court in this case thought that s.44 could provide protection against insolvency proceedings based on a failure to pay a debt. A person could not be said to be insolvent and made bankrupt because of his failure to pay a debt in circumstances where his very failure to pay the debt was a result of his reasonable belief that payment would be in breach of the UK Regulations. There was arguably such a reasonable belief in this case.

However, that did not mean that the statutory demand should automatically be set aside. A statutory demand was not in itself the commencement of civil proceedings; it was a prelude to proceedings in the form of the presentation of a bankruptcy petition. The Court, therefore, ordered that no bankruptcy petition should be presented for 21 days to give the tenant time to make payment. 

The Court added that the part of the debt referable to the interest being claimed would be subject to a substantial dispute. To that extent therefore, a bankruptcy petition could not be pursued.

Security

The Court did not think the claim was adequately secured. The arrangement in question, whereby funds were held by the tenant’s solicitors, was unilateral and had not been agreed to by the landlord. No OFSI licence would be issued for release of the money to the landlord’s solicitors because OFSI did not believe one was required. The funds remained the tenant’s property. At most, they were subject to a revocable personal undertaking. 

In conclusion, the application to set aside the statutory demand was dismissed but no bankruptcy petition was to be presented before the expiry of 21 days.

Comment

The decision illustrates a recurring dilemma facing those who are contractually obliged to make payments to a sanctioned or potentially sanctioned counterparty. They face the possible risk of breaching their contract or breaching sanctions. 

Generally speaking, the tendency might be to err on the side of caution and to refuse a payment absent, say, a licence from the OFSI, in the reasonable belief that this is in compliance with a sanctions regulation; however, this risks a contractual exposure, which could prove more costly. It is crucial to carefully consider the applicable regulations, any guidance issued by governmental authorities and to take expert legal advice.