Get Right to Use Photocopy or Facsimile to Draw on Letter of Credit

Your lease may let a tenant give you a letter of credit (L/C) to meet its security deposit obligations. With an L/C, if the tenant violates the lease by not paying you rent—and doesn't correct its violation—you can go to the bank that issued the L/C (known as the “issuing bank”) and draw on it to cover the payment owed by the tenant.

But if your lease is like many we've seen, three loopholes in the L/C clause may inadvertently interfere with, or even prevent, your getting paid. That is, the clause doesn't require the tenant to get an L/C that:

• Lets you present a photocopy of the L/C to the issuing bank, instead of the original;

• Lets you send the L/C to the issuing bank in a way other than “in person”; or

• Gives you the issuing bank's facsimile number.

Require L/C that Allows Photocopies and Facsimiles

To plug these loopholes, make sure that your lease requires the tenant to get an L/C that covers the following three points, says Santa Monica attorney Susan Fowler McNally:

Get right to present photocopy. It's not unusual for owners to accidentally lose an original L/C, says McNally. After all, you may have a lot of tenants and paperwork to keep track of, and an L/C could easily be misplaced. But without the original, you run the risk that the issuing bank will refuse to pay you. So, say in the lease that the L/C must give you the right to present a photocopy to the issuing bank and have the issuing bank accept that photocopy for payment, she says.

Get right to use various delivery methods. The issuing bank may expect you to present the L/C in person, says McNally. But if the issuing bank isn't conveniently located or you don't have the time to trek over there, you can't present it in person. So, say in the lease that the L/C must give you the right to present it by various other methods—such as by mail, overnight courier, or facsimile, she says.

Get facsimile number. Although the bank's address will usually appear in a letter of credit, the bank's facsimile number may not. So, require the tenant to get an L/C that provides you with the issuing bank's facsimile number, says McNally. This way, if you decide to present the L/C to the issuing bank by facsimile, you won't have to waste time tracking down the number, she says.

Add Lease Language

To get these rights, add the following language to your lease's L/C clause:

Model Lease Language

a. Draw Requests. The Letter of Credit shall provide that draw requests:

(i)Need not be presented as originals; and

(ii) May be submitted in person, by courier, by first-class mail, or by facsimile.

b. Issuer's Name and Address. The Letter of Credit shall also provide the issuing bank's address and facsimile number to be used for such draw request.

CLLI Sources

Susan Fowler McNally, Esq.: Partner, Gilchrist & Rutter, 1299 Ocean Ave., Ste. 900, Santa Monica, CA 90401; (310) 393-4000; smcnally@grlawyers.com.