Many commercial leases, particularly for office, lab and larger retail tenants, use a standby letter of credit instead of a cash security deposit. The tenant arranges for a bank to issue a letter naming the landlord as beneficiary, and the landlord can draw on it if the tenant defaults. It is an efficient structure for both sides. It also has a failure mode that catches landlords every year: the letter expires, or the bank declines to extend it, and nobody notices until the security is needed.
A letter of credit is a separate instrument from the lease, governed by its own terms and usually by international practice rules such as ISP98 or UCP 600. The lease says what the tenant must provide and maintain. The letter says what the bank will pay, until when and against which documents. Lease administrators often track the lease obligation but not the instrument itself, and treasury teams may hold the original letter without knowing what the lease requires. The gaps between those views are where security is lost.
This guide is for lease administrators, asset managers and treasury teams at landlords and property owners. It explains the dates and conditions that matter, the patterns behind lapsed security and a five-step approach to tracking letters of credit across a portfolio.
What to track for every tenant letter of credit
These data points come from both the lease and the letter itself. Capture them as structured fields so alerts and reports can use them.
- Expiry and extension terms, the stated expiry date, whether the letter extends automatically and the issuer’s notice period for non-renewal.
- Lease maintenance requirement, how long the lease requires the letter to remain in effect, often until a set period after the lease ends.
- Burn-down schedule, any scheduled reductions in the required amount and the conditions, such as no default, that must be met first.
- Issuer requirements, minimum credit rating or eligibility standards for the issuing bank and the tenant’s duty to replace the letter if the issuer no longer qualifies.
- Transfer and draw conditions, whether the letter is transferable to a new landlord, any transfer fees and the documents required to present a draw.
The lease usually gives the landlord protection if the tenant fails to keep the letter in place. A common provision allows the landlord to draw the full amount and hold the proceeds as a cash deposit if the tenant does not deliver a renewal or replacement a set number of days before expiry. That right only helps if someone knows the deadline and acts before the letter expires. Once it lapses, the right to draw is gone. Lease administrators already tracking options and notice dates, as covered in the critical date and lease obligation management guide, should treat letters of credit the same way.
Many letters of credit renew automatically each year unless the issuer sends notice of non-renewal within a set period before expiry. A non-renewal notice can arrive by courier to an old address or sit unopened. Track the notice deadline, confirm where notices are delivered and treat any non-renewal as an urgent trigger to demand replacement or draw.
Why letter of credit security lapses
Lapsed or unusable letters of credit tend to share a few causes. Each comes from treating the letter as a document in a safe rather than an instrument with dates and conditions.
- The expiry is not calendared. The lease obligation is tracked, but the letter’s own expiry date and non-renewal notice period are not.
- Non-renewal notices go astray. The issuer sends notice to an outdated address or to a property manager who does not recognize its significance.
- Burn-downs are granted automatically. The tenant requests a scheduled reduction, and it is approved without confirming that conditions such as no default were met.
- Transfers are left to closing. A property sale closes before the letter is transferred to the buyer, leaving the new owner without drawable security.
- Issuer quality slips. The issuing bank no longer meets the lease’s credit standard, but nobody checks, so the tenant is never asked to replace it.
A five-step roadmap for letter of credit tracking
Step 1, Inventory every letter and lease
List every tenant letter of credit with its issuer, amount, expiry, extension terms and where the original is held. Link each letter to its lease and extract the lease’s maintenance period, draw rights, burn-down schedule and transfer provisions. AI-assisted review speeds this up across large portfolios.
Step 2, Calendar the critical dates
Set alerts ahead of the issuer’s non-renewal notice deadline, the lease deadline for delivering a replacement and the expiry itself. Build in enough lead time to demand a replacement and, if needed, prepare a draw before the letter lapses.
Step 3, Control notices and addresses
Confirm the address and contact the issuer uses for notices, update it after management changes and route any notice received to lease administration and treasury immediately. Record receipt dates so response deadlines are calculated correctly.
Step 4, Verify burn-downs and issuer standards
Before approving a scheduled reduction, check that the lease conditions are met and document the decision. Review issuer eligibility periodically against the lease standard and request replacement if the issuer no longer qualifies.
Step 5, Plan transfers before sales and refinancings
When a property is sold or refinanced, identify every letter of credit that must be transferred or reissued, confirm issuer requirements and fees and make transfer a tracked closing item. Record the new beneficiary and update the file after closing, including where the original instrument is now held.
Never let tenant security expire unnoticed
See how Aavenir links letters of credit to leases and tracks expiry, notice, burn-down and transfer obligations.
How lease administration and treasury can share one record
The most reliable programs put the lease requirement and the letter’s own terms in the same record, visible to both lease administration and treasury. Lease administrators see when the tenant must deliver a replacement and what rights the landlord has. Treasury sees where the original is held, what the bank requires for a draw and whether the issuer remains acceptable. Alerts go to both teams, so a missed email does not become a lost right. The same record supports acquisitions and dispositions. Buyers conducting due diligence want a schedule of tenant security with expiry dates, amounts, transferability and any pending burn-downs, and a clean record produces it quickly. After closing, the new owner inherits a working calendar rather than a box of originals. Owners bringing lease data together more broadly, as described in the lease lifecycle management datasheet, can include letters of credit as a standard component of every lease record.
Letter of credit dates and conditions to track
The table summarizes the items most worth tracking and who usually owns them. Specific terms depend on each lease and letter, and counsel should confirm draw procedures.
| Item | Source | Suggested lead time | Owner |
|---|---|---|---|
| Non-renewal notice deadline | Letter of credit | Well before notice period starts | Lease administration |
| Replacement delivery deadline | Lease | Ahead of lease deadline | Lease administration |
| Expiry date | Letter of credit | Enough time to draw if needed | Treasury |
| Scheduled burn-down | Lease | Before reduction date | Asset manager |
| Transfer on sale | Lease and letter | Before closing | Transaction counsel |
A tenant letter of credit is only as good as the calendar behind it. Track the letter’s own expiry and notice terms alongside the lease requirements, control where notices arrive, verify burn-downs and issuer quality and plan transfers before any sale. Landlords that do this keep their security drawable for every day the lease requires it.
For related guidance, see Tenant improvement allowance tracking for lease teams, SLA service credit tracking, a vendor manager’s guide and SNDA agreement tracking for landlords: a datasheet.
