Structuring Tenant Letters of Credit in Commercial Real Estate Transactions

Description

Commercial landlords can mitigate risk of tenant financial distress and bankruptcy by insisting on tenant letters of credit as an alternative to cash security deposits. The landlord’s lender, who also has a strong interest in credit enhancements from the borrower’s tenants, may insist that security deposits be held in a certain form. 

Unlike cash, letters of credit are outside the reach of creditors in the event of the tenant’s bankruptcy. While an individual guarantor is another alternative to a cash deposit, guarantors may face exposure associated with the tenant’s bankruptcy. Letters of credit avoid both exposures for the landlord and its lender.

Bankruptcy’s automatic stay can prohibit the landlord from drawing on the letter of credit if the letter is conditioned upon notice of an event of default. Thus, the lease provisions must be carefully drafted to provide the landlord the maximum flexibility to draw on the letter of credit in a timely manner.

Listen as our authoritative panel of attorneys discusses the use of tenant letters of credits in commercial leasing transactions, enforcement and tenant bankruptcy risk, structuring lease provisions when using letters of credit and best practices for balancing the interests of all parties involved.