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What
is a Letter of Credit? What
is a PayMaster?
It is up to the
Applicant to insure that he/she can use a Letter
of Credit for the purpose indented. Applicant
should check with the Beneficiary to insure that
the Beneficiary will accept Applicant's LOC or
SBLC from The Company or Institution, The Issuer.
The
Issuer prepares and issues the letters of credit.
Applicant must provide suitable collateral for
their Letter of Credit and must have the capacity
to pay their letters of credit at the appointed
time.
LETTERS OF CREDIT
- FOR REAL ESTATE DEPOSIT
Letters of credit
are often used in leases and other real estate
transactions to secure obligations. Instead of
providing a cash security deposit, a tenant or
buyer may secure its obligations under a lease
or purchase contract with a letter of credit.
An attorney representing a party giving or receiving
a letter of credit needs to understand the law
of letters of credit, their risks and benefits.
Because real estate attorneys may lack that expertise,
information is intended to provide a basic primer
on letters of credit for real estate attorneys.
Although this information focus on the use of
letters of credit in lease and purchase transactions,
many of the principles set out below apply to
other real estate transactions.
A
letter of credit is a commitment made by a Institution,
a Corporation or other party (the "issuer"),
upon the application of the issuer's client (the
"applicant"), to pay the amount of the letter
of credit to a third party (the "beneficiary")
upon the beneficiary's submission to the issuer
of the documents listed in the letter of credit.
By separate reimbursement agreement, the applicant
agrees to pay the issuer for any liability to
be incurred by the issuer under the letter of
credit. Although letters of credit may theoretically
be issued by anyone, Corporate and Institution
letters of credit are typically used in commerce.
Translated into leasing parlance, the tenant,
or purchaser, "applicant", requests its Institution
(the issuer) to issue a letter of credit to the
landlord, or seller who is the "beneficiary".
WHAT DOES A LETTER
OF CREDIT LOOK LIKE?
Letters of credit are typically one or two page
documents. Each issuer, however, has its own form
of letters of credit and may refuse to use a form
dictated by the beneficiary. Accordingly, the
beneficiary's attorney should be prepared to review
the issuer's form to determine if it is appropriate
for the use.
WHAT ARE THE ADVANTAGES
AND DISADVANTAGES OF LETTERS OF CREDIT?
Letters of credit are generally regarded as superior
to cash security in a bankruptcy. However, because
letters of credit involve some disadvantages (which
may be ignored in the rush for a more secure form
of security), it is important for the beneficiary
to make an informed decision about whether or
not to require the Applicant to secure its obligations
with a letter of credit. Bankruptcy Considerations
Because letters of credit are viewed as more advantageous
in bankruptcy than cash security, security in
the form of a letter of credit may be required
by landlords leasing space to high risk tenants
(such as start up companies, restaurant tenants,
and dot coms).
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