Related Articles: Business Law/Commercial Landlord

Letters of Credit: Good for More than Just Shipping Jellybeans to Java

Letters of credit have been in use for over two thousand years, in one form or another. From the time of ancient Greece and Rome up through the present, letters of credit have been mainly used to finance shipping contracts. However, letters of credit have uses that go far beyond just transportation.

In a letter of credit arrangement, the issuing party, usually a bank or insurance company, contracts with one party to pay funds to a third party upon the fulfillment of certain conditions specified in the agreement. Most commonly, they are employed to finance a sale of goods where the buyer and seller have limited contact and experience with each other, such as an international transaction. Because letters of credit are employed so extensively in international trade, they are governed by an international treaty ("Uniform Customs and Practices Governing Documentary Credits"). But utility of letters of credit is not confined to international shipping; they can be quite useful right here in Virginia.

A tenant can obtain a letter of credit which will become payable to the landlord upon a certification from the landlord that the tenant has defaulted on his rent. This arrangement has several advantages over a conventional security deposit. The landlord can demand a much larger security deposit in the form of a standby letter of credit than he could in cash, and the tenant does not have to use his valuable cash reserves to satisfy the security deposit, assuming the tenant has a reliable credit history. In addition, the tenant will not be at risk of losing his security deposit if a foreclosure occurs.