In a letter of credit, a bank promises that it will pay the landlord a certain amount of money by a certain time, as long as specified conditions are met. Landlords want these conditions—what they must do to get their hands on the money—to be as loose as possible. Landlords would like to be able to draw on a letter after simply demanding payment from the bank (not surprisingly, tenants call these demand letters “suicide” letters). As a savvy tenant, you should bargain for a requirement that a landlord show the bank more extensive proof of your failure to pay a certain expense—perhaps by providing a sworn statement that you haven’t paid the rent.
A letter of credit isn’t free. For starters, there’s always a bank fee, which is tied to the amount of the credit. And the bank usually won’t extend what essentially amounts to a loan unless you can post some collateral, such as a mortgage on your home. Also, since there’s a limit to the amount of credit you can expect to get from a bank or series of banks, this letter of credit will cut into your potential borrowing power. Collateral that is pledged for a letter of credit won’t be available to secure another, business-necessary loan.
Despite the cost of a letter of credit and its potential to curtail your future borrowing potential, some businesses prefer to use a letter over a cash deposit. You may decide that using the cash that would go toward a deposit to grow your own business instead (rather than have it sit in the landlord’s bank account) is worth the cost to take out the letter of credit. For example, if you could use the deposit amount to buy needed equipment, your business may prosper significantly, which would more than compensate you for the cost of the letter of credit.
If you’re considering a letter of credit, be sure to carefully negotiate the conditions that the landlord must meet before making a draw. You’d want the landlord (or a highly placed person in the landlord’s organization) to certify that the monies are due and owing, and you’d want advance notice of the landlord’s intent to demand a draw (including, ideally, a period in which to cure your default—for example, if you’re late paying rent). And in case you might like to substitute the letter with a cash deposit in the future, negotiate for the right to replace the letter with cash.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.
]]>Before returning the deposit, your landlord will probably require you to remove your personal property and move out. The leased space may also have to pass the landlord’s inspection if the lease requires you to return the property in its original condition (prior to any improvements or alterations you made). In addition, the landlord may insist that all rent and other monies owed be calculated and paid. These conditions are reasonable and, in turn, enable you to raise some of your own—specifically, the timely return of your deposit.
You’ll almost never see a landlord’s lease clause that imposes a time requirement for the return of the deposit. Usually, there’s no mention of the issue, which means that legally the landlord is free to return it in a “reasonable” manner, whatever that is.
This is an opportunity for you to press for the prompt return of your deposit. Surely a few weeks should be sufficient, after all inspections and accounting are done, for the landlord to write that check. Especially if your lease requires the landlord to put your deposit ion a separate account (something that you should negotiate for), it should be no great stretch for the landlord to quickly return your money.
While you typically won’t see your deposit until the end of the tenancy, you may be able to negotiate an early return of the deposit if you establish yourself as a responsible tenant. Bargain for the right to get to get your deposit back early—known as a “burn down”—if you’ve steadily met your rent obligations over a certain period of time. Or, establish a set of financial mileposts (such as a minimum level of debt) that will trigger a gradual reduction and return of the deposit.
If the ownership of your rental property changes hands, the new owner will be bound by the terms and conditions of your lease. To protect yourself, make sure your lease states that any successor is deemed to have received your deposit and will bear the burden of returning it to you at the end of your tenancy.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman.
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