Enabling the Use of Pay-on-Demand Surety Bonds to Secure Land-Use Planning Obligations under Section 70.3.1 of the Planning Act.

Landowners/homebuilders often require municipal approvals to move forward with their development proposals, such as housing projects. When approving a development proposal, municipalities may impose conditions on the homebuilders, which could include obtaining financial assurance from the homebuilder that the required public infrastructure (e.g., roads, sidewalks) or improvements (e.g., plantings) are built as per municipal standards and function as intended. Typically, this financial assurance takes the form of a Letter of Credit (LOC) issued by a bank. If a homebuilder fails to fulfil their contractual obligations, the municipality can draw on the LOC to complete the work to its satisfaction.

Ontario has heard from stakeholders that instruments, such as LOCs, 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 can’t 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 LOC, to fulfil any conditions that are not met by the homebuilder.

Under Bill 109, the More Homes for Everyone Act, 2022, the province amended the Planning Act to provide regulation-making authority to the Minister of Municipal Affairs and Housing to authorize landowners to stipulate the instruments to be used to secure municipal obligations that are conditions of land-use planning approvals. The Minister may prescribe the instruments that landowners and other applicants can choose from as well as the circumstances in which the authority can be exercised.

As part of Bill 185, the Cutting Red Tape to Build More Homes Act, 2024, the government announced that it would consult on a potential regulation to prescribe instruments, such as pay-on-demand surety bonds, to secure municipal obligations that are conditions of land-use planning approvals. A wider acceptance of pay-on-demand surety bonds is one of many targeted steps to support the increase of housing supply in Ontario.

The government is now proposing a regulation under section 70.3.1 of the Planning Act. The proposed regulation would authorize homebuilders to use a pay-on-demand surety bond with prescribed features to secure municipal obligations that are conditions of land-use planning approvals.

Pay-on-Demand Surety Bond

A pay-on-demand surety bond is a three-party instrument that involves obligations and rights of a principal (i.e., homebuilder), the obligee (i.e., municipality) and a surety i.e., the insurer).

The bond represents a promise by a surety (i.e., the insurer) to pay the obligee (i.e.​​​​​​​​​​​​​​, municipality) an agreed amount, on demand, if the principal (i.e.​​​​​​​, homebuilder) fails to meet the agreed upon development obligation.

Proposed Mandatory Elements of a Pay-on-Demand Surety Bond

1. Licensing requirement

The pay-on-demand surety bond would be required to be issued by an insurer that is licensed under the Insurance Act to write surety insurance.

This would cover insurers that are licensed to write insurance in Ontario and that are overseen by the Financial Services Regulatory Authority of Ontario.

2. Credit Ratings requirement

In order to minimize credit risk to municipalities of the pay-on-demand bonds, the insurer would be required to meet one of the following credit ratings:

• Dominion Bond Rating Service as “A” or higher;
• by Fitch Ratings as “A-” or higher;
• by Moody’s Investors Service Inc. as “A3” or higher;
• by Standard and Poor’s as “A-” or higher;
• by A.M. Best Company, Inc. as “A” or higher.

This is an important feature to ensure that if a pay-on-demand surety bond is called on by a municipality, the surety’s assurance to pay the amount due and on time is supported by a third party (i.e.​​​​​​​, credit rating) assessment.

3. Guaranteed payment

The pay-on-demand surety bond issuer (i.e.​​​​​​​, insurer) guarantees payment to the obligee (i.e.​​​​​​​​​​​​​​, municipality) if the principal (i.e.​​​​​​​, homebuilder) defaults in performing the obligation guaranteed by the bond.

This feature requires the insurer to make payments to the municipality for amounts demanded by the municipality if the municipality determines, in its sole discretion, that the principal (i.e.​​​​​​​​​​​​​​, homebuilder) has defaulted in performing the obligation guaranteed by the bond and provides written notice of the default to the principal (i.e.​​​​​​​, homebuilder) and the insurer.

4. Timely payment

The insurer would be required to make payment to the municipality within 15 business days of being provided with a written notice of default. This feature ensures that the municipality, in the case of default, would have timely access to funds so that it can remedy/complete the works required on the land.

5. Partial Drawdowns

The pay-on-demand bond instrument would provide for partial drawdowns. This means that, similar to a LOC, a municipality would release portions of the security (i.e.​​​​​​​, reduce the amount of the bond) when it is satisfied that the condition of development has been fulfilled by the homebuilder.

6. Cancellation

The insurer would be required to provide a written notice to the municipality and the principal (i.e.​​​​​​​, homebuilder) at least 90 days in advance of its intention to terminate the pay-on-demand surety bond.

The principal (i.e.​​​​​​​, homebuilder) would be required to provide the municipality with a replacement security (e.g., LOC, another equivalent pay-on-demand surety bond) within 60 days of the receipt of the notice. Failing which, the existing pay-on-demand surety bond would remain in full force.

The Ministry of Municipal Affairs and Housing is not proposing to enumerate the specific circumstances in which the authority can be used in regulation.

Analysis of Regulatory Impact

The province amended the Planning Act to provide regulation-making authority to the Minister of Municipal Affairs and Housing to authorize landowners to stipulate the instruments to be used to secure municipal obligations that are conditions of land-use planning approvals. The Minister may prescribe the instruments that landowners and other applicants can choose from as well as the circumstances in which the authority can be exercised.

The government is proposing a regulation under section 70.3.1 of the Planning Act. The proposed regulation does not require landowners and municipalities to use pay-on-demand surety bonds. However, if a landowner chooses to provide a pay-on-demand surety bond to secure municipal land-use planning obligations, then a municipality would be required to accept this instrument as a financial assurance with the instrument having certain mandatory features as set out in the proposed regulation.

There would be some financial and time costs related to learning about the regulation and drafting policies on pay-on-demand surety bonds. These costs are estimated to average $1,400 per municipality and would generally be incurred around the time a proposed regulation is introduced.