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Note: When The Mortgage Zone (Tenant) and Ideal Mortgage Bankers Ltd. (Subtenant) defaulted on the 10 year 6 month lease of commercial office space, Tenant was liable for the rental balance of US$1,094,350.23. Subtenant was in arrears US$99,171.74 for the month of May 2008. The lease had provided that there must be "delivered to Landlord an unconditional, irrevocable, stand-by letter of credit ... in the amount of $850,000 to serve as security for the [full] and faithful performance and observance by Tenant of all of the terms and conditions, covenants and agreements of this lease." In accordance with this provision, Tenant posted a standby LC in favor of Landlord/Beneficiary which drew on the LC and was paid. Landlord also sued Tenant and Subtenant under the lease and sublease agreements, moving for default judgment against Tenant which did not appear and for summary judgment against Subtenant. The New York Supreme Court of Suffolk County, Pines, J., entered judgment in favor of Landlord.

Subtenant argued that the amount that it owed has already been satisfied by the drawing on the LC and that the lease required that the LC proceeds must be applied to existing debts before being applied to future unpaid rent. The Judge noted that the lease provided that the Landlord could apply the proceeds of the LC at its election to sums as to which the Tenant is at default including future unpaid rent. She ruled that in light of these terms, the proceeds "must be applied in a way most favorable to [Landlord] to minimize the losses caused by the breaching Tenant and Subtenant."

[JEB]

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