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Using Letters of Credit to Secure Lease Obligations
Part One of a Two-Part Series
For a relatively small fee and assuming sufficient collateral or creditworthiness of the tenant or a guarantor, a tenant may be able to apply for and have its bank issue to its landlord a letter of credit (“L/C”) to secure the tenant's obligations under a long-term lease. If the L/C is large enough, the landlord may enter into a lease with a tenant that the landlord would otherwise refuse due to the tenant's lack of creditworthiness. From the tenant's perspective, an L/C may be preferable to a large security deposit. An L/C will not necessarily tie up large amounts of the tenant's cash or other liquid collateral, as would a security deposit. Instead, the cash can be deployed as working capital in the tenant's business.
An L/C is an independent obligation of the issuer. As long as conforming documents specified by the terms of the L/C are presented to the issuer before the expiration date and no fraud is involved, the issuer must honor. The credit of the issuer stands behind the obligation of the tenant. If the tenant is insolvent and/or bankrupt, the issuer still must honor the beneficiary's conforming draws.
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