The US' Federal Deposit Insurance Corporation (FDIC) has notified some commercial landlords that they will no longer honour standby letters of credit (L/Cs) issued by banks currently in receivership by the FDIC.

The FDIC is the US government body that guarantees the safety of deposits in member banks, if necessary by taking over failing banks. Since 2008 the FDIC has taken over more than 30 insolvent US banks.

L/Cs worthless

Commercial landlords in the US routinely collect standby L/Cs from tenants to secure their leases, but these L/Cs could be rendered worthless in the wake of recent bank failures and bank nationalisations in the form of FDIC take-overs.

L/Cs may disappear

The FDIC's warning that it will not honour L/Cs issued by banks placed in receivership could cause the virtual disappearance of numerous bank-issued L/Cs, according to a US lawyer.

Anton Nitisis reckons that as the FDIC's list of failed banks continues to grow, large numbers of landlords will find themselves in possession of L/Cs that that may not be honoured.

Few commercial leases provide an express remedy for landlords if a bank fails to honour a L/C, he points out.

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