A. Yes, the tenant’s concern is most definitely valid, and the tenant should strongly considering providing a letter of credit to the landlord in lieu of a cash security deposit to protect itself. Although there is an annual financial cost associated with maintaining a letter of credit, given the risk associated with the potential loss of a tenant’s cash security deposit if the landlord has used the tenant’s cash security deposit for its own purposes and the landlord is subject to a foreclosure, such cost is well worth it. Likewise, given that when a tenant files for bankruptcy, a landlord must transfer the tenant’s cash security deposit to the trustee in bankruptcy, many landlords prefer a letter of credit in lieu of a cash security deposit (as generally stated, the letter of credit will withstand any request for a drawdown thereof).
The Legal Line Question by:
Neil B. Garfinkel
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP