The government of Ontario is proposing a regulation under its planning laws that would authorise landowners to stipulate pay-on-demand surety bonds to be used to secure municipal obligations that are conditions of land-use planning approvals.

The move by the Canadian province responds to a wider acceptance that pay-on-demand surety bonds may help homebuilders to free up funds that are currently tied up by letters of credit (L/Cs) used to secure municipal obligations.

L/C requirement

When moving forward with their development proposals, homebuilders often require municipal approvals, which could include obtaining financial assurance from the builder that the required public infrastructure meets municipal standards.

Typically, this financial assurance takes the form of an L/C issued by a bank. If a homebuilder fails to fulfil their contractual obligations, the municipality can draw on the L/C to complete the work to its satisfaction.

Tying up capital

Ontario has heard from stakeholders that instruments, such as L/Cs, which municipalities generally require to secure homebuilder obligations when building communities, tie up the homebuilder's capital that could otherwise be invested in additional home-building projects and make some projects that currently cannot obtain financing more viable.

A wider acceptance of pay-on-demand surety bonds is regarded by some homebuilders as a means to help free up funds for housing projects while providing municipalities with the necessary assurance that they would have ready access to funds, similar to a L/C, to fulfil any conditions that are not met by the homebuilder.

The government of Ontario is therefore now proposing to authorise homebuilders to use a pay-on-demand surety bond with prescribed features to secure municipal obligations that are conditions of land-use planning approvals.

More details about the proposed change can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.