Security deposits are often required by landlords. The Bank should determine if these are segregated in a special account or escrowed to insure they are available to return to the tenants at the end of the lease term or to cover unpaid rent or damages to the leased premises, as necessary.
Letters of credit are a method of financing security deposits. The Bank should determine if the borrower/landlord is the beneficiary of any LCs. If the borrower is a LC beneficiary, the Bank should take a lien on the letter of credit rights. Consult Chapter 28 of the Texas Secured Lending Guide for perfecting liens on letter of credit rights.
Because a letter of credit is an independent contract between the L/C Bank and the Beneficiary/ Landlord, it may be drawn upon by the Landlord even if the Tenant files bankruptcy. See Chapter 20 for a discussion of a tenant’s right to reject a lease if the tenant files bankruptcy.
