Lawyers at the Asset Finance Group at Allen & Overy LLP have outlined some of the issues arising from the coronavirus pandemic that lessors with the benefit of security for unpaid rent or maintenance reserves in the form of a letter of credit (L/Cs) may face.

In an article published by Leasing Life, the lawyers are particularly focused on issues that may arise for financiers, including lenders, lessors, export credit agencies, alternative credit providers and credit providers, to the transport industry.

Many commercial airlines have grounded planes as a result of a massive slump in air travel during the pandemic and may be struggling to make lease payments, in which a case a lessor may be able to make a demand on an L/C guaranteeing lease payments.

Making a demand

The L/C will specify how a demand can be made according to the lawyers who say this usually involves attending at the issuing or confirming bank with the original L/C, a demand prepared in the correct form and any other documentation required by the L/C.

They note that potential issues include locating the L/C, preparing the demand and getting the right person to sign it and attending at the relevant bank to present the demand.

All of these steps may face hurdles imposed by the lock-downs and travel restrictions which prevent the beneficiary from getting the right pieces of paper and people in the right place they say.

Bank closures

Another issue is that the bank specified in the L/C documentation may be closed while the documents also say the L/C has to be presented in person before its expiry.

If the bank is not open, the L/C terms might provide for it to be automatically extended but this depends on the set of rules governing the L/C and its specific terms.

So if the bank is closed, the lawyers say it is important to document the attempts to serve a demand properly to ensure that the beneficiary can show that it has complied with the L/C terms and is therefore entitled to an extension if there is a later dispute.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.