Landlords Beware: Bank Leases and Letters of Credit Are in Jeopardy


The final totals are in: the Federal Deposit Insurance Corporation (FDIC) closed 157 banks in 2010. With more than 860 banks on the FDIC's growing troubled bank list, bank closures are likely to continue at a similar pace in 2011. This is troubling news for landlords. Not only are increasing numbers of lenders likely to close their doors in the current economic climate, the consequences of a failure are potentially more severe than with other types of tenants. Now more than ever, landlords must be aware of the unique risks presented by this tenant class.

If you're a commercial landlord, you probably recognize the risk that any of your tenants can go bankrupt at any time. That's why you make credit checks and investigate the financial strength of potential tenants up front. You may also know that, if a tenant does in fact go under, you will have a claim in bankruptcy for some amount of lost future rents. But suppose your tenant is an FDIC-insured depository institution (bank, savings and loan, or the like). Did you know that, if such an institution fails, its lease could be terminated and you would be left without even the level of damages available in a bankruptcy?

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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