Ensure Right to Draw on Letter of Credit

Q: I’ve allowed relatively strong tenants in my shopping center to give me a letter of credit for their security deposits. Now, a small tenant is asking for the same arrangement. The products the tenant sells would be important for synergy at the center, but I’d like to protect myself against problems that could arise if I ever have to draw on the L/C. What should I say about the L/C in the lease?

A: If a lease allows a tenant to give the owner an L/C to meet its security deposit obligations, an effective way to make sure the owner doesn’t get burned is to get the right to use a photocopy or fax to draw on the L/C.

Generally, with an L/C, if the tenant violates the lease by not paying you rent—and doesn’t “cure,” or fix the breach—you can draw on the L/C to cover the payment owed by the tenant. And, if you’re in this situation, the bank must allow you to do so—unless your lease has been poorly drafted and its terms interfere with or prevent you from getting paid. For example, you could run into problems if your L/C clause doesn’t require the tenant to get an L/C that: (1) lets you present a photocopy of the L/C to the issuing bank, instead of the original; or (2) doesn’t let you send the L/C to the issuing bank in a way other than “in person.”

You should require an L/C that allows photocopies or faxes. Make sure that your lease gives you the right to present a photocopy. That way, if you accidentally lose the original L/C you won’t run the risk that, without the original, the issuing bank will refuse to pay you. Say in the lease that the L/C must give you the right to present a photocopy to the issuing bank and have the bank accept that photocopy for payment.

Also, get the right to use various delivery methods. The issuing bank may expect you to present the L/C in person. But if the bank isn’t nearby or you can’t get there for any reason, you need a protection in the lease saying that the L/C must give you the right to present it by various other methods—for example, snail mail, courier, fax, or possibly email. Ask your attorney about what methods are typically used in your particular circumstances and about adapting the following language:

     Model Lease Language

     Draw Requests. The Letter of Credit shall provide that draw requests:

     a. Need not be presented as originals; and

     b. May be submitted in person or by [insert applicable method of delivery, e.g., courier, first-class mail, facsimile, or email].