Ontario’s land use planning system requires developers to provide financial security to municipalities before construction begins. These securities guarantee that important public works, such as roads, sewers, sidewalks, and landscaping, will be completed according to a site plan agreement or other planning approvals.
Until recently, developers had only two choices: post cash or provide an irrevocable letter of credit from a financial institution. Both approaches tie up significant capital and create financial strain.
Now, the Province has introduced a new option: surety bonds. Through Ontario Regulation 461/24 under the Planning Act, municipalities may accept pay-on-demand surety bonds as an alternative form of security for development obligations. For developers, this represents a major shift in how projects can be financed and delivered.
Development Securities in Ontario: The Traditional Model
Under the Planning Act, municipalities require developers to secure obligations related to land use planning approvals. This ensures that if a developer fails to complete the required works, the municipality can access funds to finish the job.
Historically, this security has been provided in two ways:
- Letters of Credit (LOCs): Developers obtain an LOC from a bank. The municipality may draw on it if obligations are not met.
- Cash Deposits: Developers post cash directly with the municipality.
While effective from the municipality’s perspective, both methods come with major downsides for developers:
- Capital lock-up: LOCs reduce available credit, and cash deposits remove funds from circulation.
- High costs: Banks charge annual fees for LOCs, and tying up capital has opportunity costs.
- Limited flexibility: LOCs are inflexible; partial drawdowns can complicate financing.
This traditional approach has long been a point of frustration for developers, particularly as Ontario faces a housing supply crisis and rapid construction demands.
The New Option: Surety Bonds
Surety bonds aren’t new to Ontario, but their use to secure municipal obligations related to land-use planning is relatively new.
What Is a Surety Bond?
A surety bond is a financial guarantee, backed by an insurance company, that forms a three-party agreement between:
- Principal: the developer (obligated to complete the works)
- Obligee: the municipality (beneficiary of the security)
- Surety: the insurer (guarantees payment if the developer defaults)
If a developer fails to meet their obligations, the municipality can make a claim and receive guaranteed payment from the surety, up to the bond’s value. The bond’s payment ensures the municipality will have the funds to complete the project.
Surety bonds appear similar to traditional contractor insurance, but differ in two main ways:
- Surety bonds protect the municipality, not the developer. Surety bond payouts are made to the municipality, whereas a developer’s insurance would pay out to the developer.
- If a surety bond claim is paid, the contractor must reimburse the surety, unlike insurance, where the risk stays with the insurer.
Pay-on-Demand Feature
Ontario’s model emphasizes a pay-on-demand surety bond. Unlike traditional surety bonds, which often require proof of default and lengthy disputes, a pay-on-demand bond allows the municipality to demand payment immediately upon non-performance. This aligns the product more closely with the liquidity of an LOC or cash deposit.
Eligible Insurers
Only surety companies authorized to write surety insurance in Ontario under the Insurance Act are eligible to issue these bonds. Municipalities must also monitor insurer credit ratings, often through a regularly updated bulletin, to ensure the surety remains financially stable.
If an insurer no longer meets the required standards, the municipality can demand replacement security. This means the developer must substitute the original surety bond with another acceptable form of security — either a new bond from an eligible insurer, or a letter of credit or cash deposit of equal value. Replacement security ensures municipalities are always protected, while giving developers flexibility to adjust their financing.
Surety Bond Benefits for Ontario Developers
For developers, this change brings significant advantages:
- Capital efficiency: Unlike letters of credit, a surety bond does not tie up cash or credit facilities. This frees capital for construction, land acquisition, or other investments.
- Cost savings: Premiums for surety insurance are typically lower than LOC fees charged by banks.
- Flexibility: Bonds allow for partial drawdowns, replacement security, and scaling to match project stages.
- Support for housing goals: By freeing up funds, surety bonds help speed up development approvals and project starts.
In short, the new regulation creates an alternative to LOCs that can improve developers’ balance sheets while still providing municipalities with secure obligations.
Considerations and Risks
While promising, there are important considerations developers must understand.
Municipal Adoption
Although the Province has authorized surety bonds, individual Ontario municipalities have sole discretion to accept them. Some municipalities have eagerly adopted surety bonds and quickly amended their public policies. Here are sample policies from a few Ontario municipalities:
- The Town of Oakville’s Development Securities Procedure
- The City of Mississauga’s Surety Bond Template, required for site plan approval
- The Town of Essex’s Securities Requirements
Other Ontario municipalities may accept surety bonds, but may not publish that fact in their public policies. They may either be slow to amend their public policies or not include that level of detail publicly.
Qualification Standards
Not every developer will qualify. Surety companies conduct rigorous underwriting, requiring financial statements, credit checks, and evidence of past performance. Developers with weak balance sheets may struggle to access bonds.
Ongoing Monitoring
Municipalities are responsible for monitoring the eligibility of insurers. If an insurer’s credit rating falls, municipalities may require replacement security. Developers must stay prepared for such contingencies.
Risk Allocation
Even though the surety provides payment, the developer remains ultimately liable. The surety will seek reimbursement from the principal if a claim is paid.
Surety Bond Benefits for Ontario Municipalities
From the municipal perspective, the obligation guaranteed remains intact: if the developer defaults, funds are still available to complete the works. Benefits include:
- Administrative efficiency: Easier to manage than multiple LOCs from different financial institutions
- Guaranteed payment: The pay-on-demand form ensures municipalities can access funds quickly
- Alignment with provincial housing objectives: Encourages faster approvals and reduces barriers to development
However, municipalities may initially have concerns such as unfamiliarity with surety insurance compared to long-standing LOC practices, or risk perception if insurers’ financial health changes. Over time, with guidance from organizations like the Municipal Finance Officers Association, adoption is expected to increase.
Role of Brokers and Surety Companies
For developers, successfully leveraging surety bonds requires expertise. This is where insurance brokerages offering insurance for builders and contractors play a crucial role.
- Access to Surety Markets: Brokers connect developers with surety companies and negotiate terms
- Application Process Guidance: Helping prepare financial statements, credit information, and performance history
- Municipal Education: Assisting developers in explaining the product to municipalities and ensuring compliance with provincial requirements
- Risk Management: Monitoring insurer ratings and providing strategies for replacement security if needed
Working with a brokerage ensures developers not only qualify for bonds but also maximize the financial benefits while minimizing risks.
Practical Steps for Developers
If you’re considering using a surety bond for your next project, here’s how to prepare:
- Engage early: Speak with a surety-focused broker like Experia Group at the planning stage, before submitting applications
- Prepare financials: Ensure your statements, credit profile, and project track record are strong
- Confirm municipal acceptance: Check whether the municipality where you’re developing will accept bonds under the new regulation
- Stay informed: Follow updates from the Province and review any regularly updated bulletins on eligible insurers
- Plan for replacement security: Be prepared to substitute bonds if required by the municipality
Get Help Securing Your Surety Bonds
Ontario’s move to allow surety bonds as a new security option for development approvals represents a major policy modernization. For developers, this shift means less capital locked up in letters of credit or cash, lower costs through surety premiums, and greater flexibility in managing obligations.
However, navigating this change requires preparation, strong financials, and expert guidance. Municipalities must be confident in accepting bonds, and developers must ensure compliance with all requirements.
At Experia Group, our surety specialists help developers access the right surety insurance products, structure agreements to meet municipal requirements, and unlock the financial flexibility needed to keep projects moving forward.
Ready to explore Ontario’s new surety bond option for development securities? Contact Experia Group today to learn how we can help you secure obligations, protect your projects, and free up capital for growth.