The Leasing – Down & Dirty:
- Cash is Not Always King: Given the nature of the bankruptcy laws, a very strong argument can be made that all landlords should require their tenants to have their security deposits in the form of a letter of credit instead of cash.
- As a general statement, if a tenant files for bankruptcy, landlords will not have the right to draw upon the cash security deposit it’s then holding (as they will be required to transfer the cash security to the trustee in bankruptcy and stand “side by side” with the tenant’s other creditors). With a letter of credit, although coming under attack in a few jurisdictions, generally stated a landlord will still be entitled to the security deposit.
- Tenants should explore, in lieu of giving a large cash security deposit to its landlord or sublandlord where it will (a) earn little or no interest and (b) be subject to landlord or sublandlord foreclosure or bankruptcy risks, the annual administrative cost its bank will charge for having a letter of credit instead. Given the “comfort factor” among other reasons, hopefully the amount segregated by the bank for the letter of credit will earn income that approaches or exceeds the annual administrative cost associated with maintaining the letter of credit.
Guarding Your Leasing Dreams & Visions…
AGMB’s 7 Part Series “Negotiating Security Deposits and Good Guy Guarantees in Commercial Leases” a/k/a Strategies to Minimize Short and Long Term Risks for Landlords and How a Tenant Can Counteract Such Strategies.
Letter of Credits (LOC) vs. Cash Security Deposit.