The Hidden Pitfalls Of Letters Of Credit In Lease Negotiations

Most leases require a tenant to provide some form of security. In a residential context, this could be a cosigner or a cash security deposit.

In commercial leasing, the lease security is usually in the form of either a cash security deposit or a standby letter of credit, or LC. Legal practitioners, landlords and tenants often have to decide whether a cash security deposit or LC is preferable.

Tenants often prefer LCs, largely for liquidity and balance sheet reasons. A cash deposit is locked up with the landlord, and does not typically earn interest or any other return for the tenant. By contrast, depending on the banking relationship, a tenant may not need to post 100% collateral for an LC and may earn interest on posted collateral.

This article, published by Law360, explores the pros and cons of each approach. Read the full article.