Owner Can Apply Letter of Credit Proceeds to Rent After Lease Termination

When a tenant failed to pay its rent, the owner terminated its lease. The lease had required the tenant to post a letter of credit (L/C) as a security deposit. A dispute arose about whether the owner was entitled to use the L/C's proceeds to reimburse itself for unpaid rent accruing after the lease had terminated. The dispute ended up in court.

A California appeals court ruled that the owner was entitled to apply the L/C's proceeds to rent accruing after the lease had terminated. Normally, California law would have barred the owner from doing that. But here, in the lease, the parties had waived the application of that law. So the owner didn't have to give back the L/C's proceeds. In particular, the court noted that the lease's security deposit provisions permitted the owner to apply the L/C's proceeds to the payment of rent owed. But they didn't limit those proceeds to rent accruing before the lease terminated, said the court. Plus, the lease's remedies clause permitted the owner to “recover from the tenant unpaid rent earned after the date of termination,” the court pointed out [Sherwood Partners, Inc. v. EOP-Marina Business Center].