In a sign of the economic turbulence in the banking industry, the FDIC is sending written notices to commercial landlords advising them that the
FDIC will not honor letters of credit issued by banks which have been placed in receivership by the FDIC. Many landlords favor letters of credit
over cash as a security deposit because a cash deposit may not be readily available to the landlord if the tenant files bankruptcy prior to the
landlord's application of the cash deposit. Consequently, a landlord's seemingly safe policy of accepting letters of credit from tenants in satisfaction of
the tenants' security deposits should be reevaluated in light of this development.
Lease provisions addressing the use of letters of credit as an acceptable form of security deposit should be revised to provide that if the
financial institution which issued the initial letter of credit is declared insolvent by the FDIC or is closed for any reason, the tenant must
immediately provide a substitute letter of credit from a financial institution acceptable to the landlord, in the landlord's sole discretion.
If a letter of credit is accepted in satisfaction of the tenant's security deposit, landlords should consider implementing prophylactic
procedures to insure the value of its security deposits. Specifically, adoption of the following policies should help prevent an unexpected
negation of the enforceability of a tenant's letter of credit:
Letters of Credit will only be accepted from financial institutions on the landlord's continuously screened and updated list of approved financial
institutions. (The FDIC does not publish its list of troubled banks, otherwise known as the "FDIC Bank Watchlist." There are, however, private
companies that do publish ratings on banks which could serve as a guide to concerned landlords.)
Landlords should designate an employee on their staff to continually monitor the identity of financial institutions placed in receivership or
closed by the FDIC to insure the landlord is not holding a Letter of Credit issued by any identified financial institution.
Jackson Walker's Real Estate group is experienced in
advising and protecting its real estate clients in today's difficult market. Contact the following attorneys if your lease document needs
scrutiny to insure your interests are fully protected:
AUSTIN
Jim Alsup – 512.236.2010 – jalsup@jw.com
DALLAS
Bryan Birkeland – 214.953.5934 – bbirkeland@jw.com
Wayne Malecha – 214.953.5610 – wmalecha@jw.com
FORT WORTH
Susan Halsey – 817.334.7203 – shalsey@jw.com
HOUSTON
Michael Kuhn – 713.752.4309 – mkuhn@jw.com
Pat Sharkey – 713.752.4266 – psharkey@jw.com
SAN ANTONIO
Peter Hosey – 210.228.2423 – phosey@jw.com
Richard Moore – 210.228.2407 – rmoore@jw.com
If you wish to be added to this e-Alert listing, please
CLICK HERE
to sign up. If you wish to be removed, please reply to this e-mail with REMOVE in the subject line and include your first and last name.
