Commercial landlords in the US may be more inclined to look to letters of credit (L/Cs) to protect themselves from unexpected bankruptcies precipitated by the economic fallout of the coronavirus pandemic according a partner in the Orlando office of law firm Shutts & Bowen.

James Bowen says many landlords are learning that unexpected circumstances can cause a good tenant to become a non-performing tenant almost instantly and L/Cs are one of four main approaches they can take to protect themselves from at least a portion of their recovery rights in a bankruptcy case.

L/C or cash security

The advantage to a landlord of a tenant putting up an L/C is that it is generally not stayed by the automatic stay in a bankruptcy case because it is the independent obligation of the issuer according to Bowen.

He reckons L/Cs can provide excellent protection, especially in larger transactions, but their relative complexity could be a drawback.

Bowen suggests a cash security deposit is another option and the most liquid way to protect against a default, but it could take a landlord some time to see it paid due to the bankruptcy process.

Other options

Landlords could include financial disclosure requirements in the lease and monitor a tenant's finances. This may allow a landlord to anticipate a potential default and act accordingly.

Another option is a third party guarantee that would allow the landlord to seek payment of unpaid rent from the guarantor.

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