Bonds and sureties in planning obligations

A planning obligation bond is security taken by a local planning authority so that, if a developer fails to deliver something promised in a section 106 agreement, the authority has money to do it instead. The obligation itself binds the land under section 106 of the Town and Country Planning Act 1990 and passes to successors. The practical problem is that a company in administration cannot build a play area, and an authority holding a covenant against an insolvent developer holds very little.

Why authorities ask for security

Section 106 gives an authority real remedies. It can seek an injunction, and it can enter the land, carry out the works itself and recover its expenses from the person against whom the obligation is enforceable. Recovering expenses from a dissolved company is a different matter.

Security is therefore asked for where three conditions coincide. The obligation involves physical works or a long-running commitment rather than a single payment. The consequence of non-delivery falls on someone other than the developer, usually the occupiers or the public. And the cost of putting it right is large enough that the authority could not absorb it.

That covers a predictable list.

• Estate roads, footways and lighting awaiting adoption.
• Highway works in the public highway delivered under a section 278 agreement.
• Public open space, play equipment and landscaping before transfer or adoption.
• Habitat creation and the long management period that follows it.
• Restoration of mineral and waste sites.
• Affordable housing delivery where the units are to be built out by the developer and transferred.

Biodiversity net gain has pushed security up the agenda, because the Environment Act 2021 regime expects habitat to be maintained for 30 years. A management obligation running three decades beyond practical completion is exactly the kind of promise an authority wants backed, and the Biodiversity Net Gain Assessment that sets the target must be prepared using the statutory metric by a competent person, with the gain plan approved by the authority.

The forms of security used

Five instruments turn up, with different costs and different consequences for your balance sheet.

Surety bonds are the usual answer on medium-sized schemes because they preserve banking facilities. Cash deposits are the authority's preference and the developer's last resort. Parent company guarantees cost the least and are often refused where the parent is thinly capitalised or offshore.

On demand or conditional

This distinction decides how much the bond actually exposes you to, and it is frequently glossed over in negotiation.

An on-demand bond pays out on a written demand in the agreed form. The authority does not have to prove breach, loss or quantum. The bond is effectively cash, and the surety will price and secure it accordingly.

A conditional bond, sometimes called a default bond, pays only where the authority establishes that the developer has defaulted and has suffered loss as a result. It is harder to call, and it is what you should be asking for.

Where an authority insists on an on-demand instrument, negotiate procedural protection instead. A requirement to serve notice of the alleged breach, a cure period of a defined number of working days, and a certificate from a named independent engineer will achieve much of the same protection without changing the instrument type.

What triggers a call

The agreement should say, precisely, what event allows the authority to call on the security. Vague drafting is the main source of dispute.

Four triggers are common and each needs testing.

1. Failure to complete specified works by a longstop date. Check that the date allows for the approvals you still need, including any highway agreement.
2. Failure to remedy a defect within a period after notice. Check the notice route and who may serve it.
3. Insolvency of the developer. Check the definition, since an administration for the purpose of a solvent restructuring should not trigger a call.
4. Failure to maintain habitat or landscaping to the agreed specification during the management period. Check how performance is measured and by whom.

That fourth trigger is the hardest to draft well. Habitat condition varies with weather, grazing pressure and events nobody controls, so the test should be about management actions delivered rather than an ecological outcome achieved in a given year. A Landscape Strategy with a written management specification gives the drafter something objective to reference.

Release and the evidence needed

Release is where money sits idle for years because nobody applied for it.

Build a stepped release into the agreement. On certification that a defined phase of works is complete, the bond value reduces by the value attributable to that phase. That is normal in construction and unfamiliar to some planning officers, so propose it with a schedule attached.

Set out the release evidence in the agreement itself. A completion certificate from a named officer or an independent engineer, a set of as-built drawings, a health and safety file, and confirmation that any maintenance period has expired. Then diarise the application, because a bond does not release itself and the premium keeps running.

Where the works are being adopted, the release usually follows the adoption process rather than practical completion, and the timing is set by the highway or drainage agreement. That sequence is covered in section 38 adoption and the commuted sum negotiation, and the cost build-up for works in the public highway is dealt with in section 278 highway works and how the cost is built up.

What a bond costs

A surety bond is priced as an annual percentage of the bond value, and the rate depends on the covenant strength of the developer, the nature of the obligation and the term. A three-year bond for road works and a thirty-year bond for habitat management are very different products, and some sureties will not write the long one at all.

The premium is only part of the cost. The surety will normally require a counter-indemnity from the developer or its parent, and it may require security of its own, which reduces the capacity available for development finance. Model that effect in the appraisal rather than treating the premium as the whole number.

Longer term obligations sometimes work better through an alternative. A charge over the retained land, a conservation covenant with a responsible body, an endowment held by a management trust, or an upfront capitalised payment to the authority so that it takes on the work itself. Each shifts risk differently and each has a cost, so price two options before accepting the first.

Drafting to limit exposure

Six clauses do most of the protecting.

• A cap on the bond value, expressed as a figure rather than as the cost of the works.
• An expiry date, so the instrument does not run indefinitely.
• A stepped reduction schedule tied to certified milestones.
• A named certifier and a dispute route if certification is withheld.
• A notice and cure mechanism before any call.
• Clarity on indexation, and resistance to indexing a sum that is already capped.

As an illustrative example, a 60 unit scheme carries a bond for estate roads, a separate highway authority bond for a junction improvement, and a thirty year habitat management obligation. Treating those as one negotiation, with stepped release on the first two and an alternative mechanism for the third, is a very different outcome from accepting three on-demand instruments at full value for the whole period.

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This is general guidance, not legal advice, so check the position with your local planning authority or a qualified professional before relying on it. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.