Review Your Letters of Credit: Courts Narrow “Evergreen” Renewal Language

Institutional landlords routinely require letters of credit, often in lieu of cash security deposits, as security for tenant obligations under a lease. Two court decisions should prompt landlords to take a closer look at the automatic renewal language in their letters of credit.

Court Decisions

In Starr Indemnity v. Midwest Mortgage, No. 25-cv-4874 (S.D.N.Y. Jan. 21, 2026), the court reviewed an extension provision of a letter of credit which stated “This Letter of Credit is deemed to be automatically extended without amendment for one (1) year from the expiration date hereof or any future expiration date unless sixty (60) days prior to such expiration date, we notify you by regular mail and registered mail at the above address, …that this Letter of Credit will not be renewed for any such additional period.” The court ignored the fact that the bank did not send the beneficiary a notice of non-renewal, and reasoned that the most natural interpretation of “any future expiration date” is to hold open the possibility that the parties might subsequently agree to establish a new expiration date during the letter of credit term. Thus, the court held that the instrument permitted only a single one-year automatic extension. In People ex rel. DNR v. Regions Bank (Ill. App. 4th Dist., Mar. 2025), the court reversed a $320,000 judgment on similar grounds. The letter of credit at issue provided that it would “automatically extend for an additional term of One (1) year unless [First National Bank] provides at least ninety (90) days notice prior to the expiration date that it does not wish to extend the Letter of Credit for an additional period.” The court found the use of the singular article “an” and the singular noun “term” dispositive. The instrument renewed only once.

Practical Implications

The practical consequences of an expired letter of credit are serious. If a tenant defaults and the letter of credit has lapsed, a draw to recoup reimbursement for landlord-incurred damages will be dishonored. The landlord is left unsecured and must pursue the tenant directly.

As an institutional landlord, the first step is to assess your risk and conduct an audit of the existing letters of credit with an attorney. For any letters of credit flagged, request a replacement letter or an amendment from the issuing bank that incorporates express language providing automatic renewals for successive one-year periods.

New letters of credit should expressly state that the instrument will automatically renew for “successive one-year periods” (not “an additional term of one year”) and should include a final outside expiration date. The final expiration date should be 60 to 90 days after lease expiration to ensure the landlord retains the ability to draw on the letter of credit beyond the end of the tenancy – there may be damages caused by the failure of the tenant to comply with its surrender obligations.

It is important to have an attorney involved – courts will read these instruments as written, not as the landlord and tenant intended them to work. The gap between the two can be costly.

Questions about a letter of credit or another matter related to your commercial lease? Reach out to Varun Chari or another member of LP’s Real Estate Group.