A bank-issued financial instrument used in lieu of a cash security deposit, allowing the landlord to draw funds directly from the issuing bank if the tenant defaults on lease obligations.
A standby letter of credit (SLOC) is preferred by landlords because it is unconditional — the landlord can draw on it without proving default in court. Tenants prefer letters of credit over large cash deposits because the funds remain in their operating accounts as a line of credit rather than locked up. Letters of credit typically expire annually and must be renewed; the lease should specify what happens if the tenant fails to renew (usually an event of default). Tenants should negotiate "evergreen" provisions that automatically extend the LC unless the bank provides advance notice of non-renewal.
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