The ABCs of a Letter of Credit When Used to Secure Tenant Obligations Under a Commercial Lease

Landlords often require that their tenants provide some form of security to backstop their obligations under a commercial lease. While security deposits and advanced rent are commonly used, a tenant’s secured creditors and/or a trustee in bankruptcy may be able to scoop these funds out of the landlord’s hands. Our March 2016 News ReLease – “Security Deposit Insecurity” discussed potential pitfalls and suggested that landlords might prefer to rely on third party assurances, such as guarantees, indemnities and letters of credit (all of which should be able to withstand the bankruptcy of the tenant). This News ReLease elaborates on letters of credit. Our next News ReLease will address some qualifications on the landlord’s right to draw on a letter of credit, including: use of the funds to remedy the breach, overcompensation concerns, mitigation of damages, restoration of the letter of credit to its original amount, and more.

Read the full article: The ABCs of a Letter of Credit When Used to Secure Tenant Obligations Under a Commercial Lease