The US Federal Deposit Insurance Corporation (FDIC) closed 157 banks in 2010, and there are apparently even more banks under threat of closure.

This is troubling news for US landlords whose tenants guarantee rental payments with letters of credit (L/Cs), according to US law firm, Sedgwick.

Troubled banks

There are now more than 860 banks on the FDIC's growing troubled bank list, and according to Sedgwick, bank closures are likely to continue apace during 2011.

For landlords, this means more lenders are likely to refuse credit altogether, while even L/Cs are at risk if the issuer is taken over by the FDIC.

L/Cs favoured

According to Sedgwick, many landlords are the beneficiaries underL/Cs provided by their tenants as security under their leases.

They say that landlords traditionally favour L/Cs because the "independence principle" ensures that they can be drawn upon even if the tenant goes into bankruptcy.

No security

But the FDIC has the right to repudiate certain contracts of failed financial institutions, and this right extends to L/C, say the lawyers.

Sedwick adds that such repudiation would render a L/C valueless, and would likely strip the affected landlord of most or all of its security with respect to a given lease.

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