Section 106 bonds and guarantees for an SPV applicant
An obligation binds the land, but a contribution from an assetless company does not. The instruments authorities ask for and how to price and negotiate them.
A planning obligation binds the land, so an authority can always enforce a positive covenant against whoever owns the site. What it cannot easily do is recover money from a company with no assets. That gap is why a section 106 bond or guarantee gets asked for whenever the applicant is a special purpose vehicle, and why the negotiation is about the instrument and the amount rather than about the principle.
Why authorities ask for security
Obligations under section 106 of the Town and Country Planning Act 1990 are local land charges. Positive obligations run with the land and bind successors in title, which protects the authority on anything tied to the site itself. The difficulty is everything else.
A financial contribution is a debt owed by the covenantor. If the covenantor is a newly incorporated company whose only asset is the land, and the land is already charged to a lender, the debt is unsecured and ranks accordingly on insolvency. Affordable housing delivery sits in between: the obligation attaches to the plots, but the authority has no money to procure a replacement provider if the developer stops building.
Authorities have also learned from schemes that changed hands mid-build. The successor inherits the obligations, but the officers lose the relationship, the programme and the practical ability to chase. Security converts a covenant into something enforceable without litigation.
Expect the request where the covenantor has no track record, no published accounts or no assets beyond the site, where the obligation involves works to be delivered by the developer rather than payments, or where the authority has had a bad experience on a comparable scheme.
The instruments and how they differ
| Instrument | Who provides it | Called by | Main drawback |
|---|---|---|---|
| Surety bond | Bank or insurer | Written demand, on-demand or conditional | Premium cost and credit assessment of the covenantor |
| Parent company guarantee | Group parent with assets | Claim against the parent | Only as good as the parent's balance sheet |
| Bank guarantee | Clearing bank | Demand on the bank | Uses the developer's facility headroom |
| Cash deposit or escrow | Developer | Drawdown under the escrow deed | Ties up working capital for the whole period |
| Legal charge over land | Developer | Enforcement of the charge | Ranks behind the senior lender unless subordinated |
On-demand bonds are the authority's preference and the developer's least favourite, because the authority can call without proving loss. Conditional bonds require evidence of default and of quantum, which is fairer and slower. Most negotiations land on a conditional bond with a defined demand procedure and a short cure period.
A parent company guarantee often costs less where the parent is substantial, because there is no premium. The authority's legal team will want to see accounts, and a parent registered outside the jurisdiction will usually be resisted or require a solvency opinion.
Triggers for calling security
The drafting that matters is the trigger, not the instrument. Three patterns are common.
A delivery trigger ties the security to a milestone, such as completion of the affordable units by occupation of a stated number of market units. Failure to meet the milestone, after notice and a cure period, allows a call.
A payment trigger ties it to a contribution falling due and remaining unpaid for a stated number of days after demand.
A works trigger ties it to off-site infrastructure, with the call measured against the authority's cost of completing the works itself. Travel plan and monitoring arrangements often carry their own small default bonds, and the mechanics of those are set out in travel plan monitoring fees and default bonds.
Press for a notice and cure procedure in every case. A trigger that permits an immediate call on a technical breach makes the bond uninsurable or very expensive, which serves nobody.
What security costs and who bears it
The developer bears it, and it is a real cost that belongs in the appraisal rather than in the legal fees line.
A surety bond is priced as an annual premium on the face value, with the rate set by the provider's view of the covenantor's covenant strength, the length of the exposure and the nature of the obligation. A thin SPV with no trading history pays materially more than a housebuilder with audited accounts, and some providers will decline altogether without a parent guarantee behind the bond. Get an indicative quotation before you agree a figure in heads of terms, because the premium on an inflated bond can be the difference between two schemes.
Cash in escrow has no premium but a full opportunity cost, and it is the worst option for a geared scheme. Where the security cost materially affects the residual, it goes into the Viability Assessment with the quotation behind it, treated as a cost of development rather than as an obligation that can be traded down.
Release on performance
Draft the release mechanism at the same time as the trigger. A bond with no clear release becomes a permanent balance sheet item and an annual premium nobody remembers agreeing to.
Workable release provisions tie the reduction or discharge to objective evidence: a certificate of practical completion from the contract administrator, the transfer of the affordable units to a registered provider, the highway authority's issue of a final certificate under the section 278 agreement, or payment of the contribution in cleared funds. Stepped release across phases is reasonable on a large site, and most authorities will accept it if the steps are tied to deliverables rather than to time.
Set a longstop date as well. An authority holding security indefinitely against an obligation that has been performed is holding it by inertia.
Insolvency, the land charge and mortgagee protection
If the SPV fails, the position splits. Positive obligations attached to the land continue to bind the owner, so a purchaser from the administrator takes the site with the affordable housing requirement and the infrastructure obligations intact. Monetary obligations already accrued are a claim in the insolvency, and the authority will rank as an unsecured creditor unless it holds security.
Lenders will insist on a mortgagee exclusion clause so that a lender taking possession, or a receiver selling the site, is not personally liable under the obligations. Authorities accept these, within limits. The limits worth negotiating are that the exclusion should not extend to a purchaser from the mortgagee, and that it should not release the land from the obligations themselves, only the lender from personal liability.
Where the permission is later varied, check that the security carries across. The mechanics of making the original agreement bite on a varied permission are set out in making the original section 106 bind a section 73 permission, and a bond drafted by reference to the original permission number alone can fall away when the scheme is varied.
Negotiating the amount
Start from what the authority would actually have to spend if you stopped. For off-site works that is a procurement estimate with a margin for the authority's own costs and for inflation over the likely delay. For affordable housing it is the cost of completing the units to a standard a registered provider would accept, not the value of the units.
Four arguments reduce the figure in practice.
- Stepped reduction as each phase completes, so the exposure matches the outstanding liability.
- Excluding obligations that are already secured by the land charge and that a successor would inherit anyway.
- Offering a parent guarantee in place of a bond where a parent exists, removing the premium from the appraisal.
- Pricing the works yourself, with a contractor's figure, rather than accepting the authority's estimate unchallenged.
The honest uncertainty is how far an authority will move. Practice varies between authorities and between individual legal teams, and the starting positions in heads of terms are often template rather than considered. Ask what the figure is based on. Where an Affordable Housing Statement already sets out the tenure split and delivery programme, point the authority's legal team at it rather than letting them assume a worst case.
This is general guidance, not legal advice. Planning obligations and security instruments are matters for a solicitor, so take advice from a qualified professional and your local planning authority before relying on anything here. PlanScope provides AI-assisted draft reports for planning applications. Reports should be reviewed before submission. We do not guarantee planning approval.
Frequently asked questions
Can a council insist on a bond as a condition of permission?
Not by condition, but it can decline to complete a section 106 agreement without security, which has the same practical effect. The obligation and any security within it still have to satisfy the tests in regulation 122 of the Community Infrastructure Levy Regulations 2010. In practice the negotiation is about the instrument, the trigger and the amount rather than the principle.
What is the difference between an on-demand and a conditional bond?
An on-demand bond pays on a written demand without the authority proving loss. A conditional bond requires evidence of default and of the amount claimed. Authorities prefer the first, developers and sureties prefer the second, and most agreements settle on a conditional bond with a defined demand procedure and a cure period before a call can be made.
Does a parent company guarantee cost less than a bond?
Usually, because there is no premium payable to a third party. The trade-off is balance sheet exposure for the parent and a disclosure exercise, since the authority's legal team will want accounts. A parent incorporated outside the jurisdiction is often resisted or accepted only with a solvency opinion, which erodes the saving.
What happens to the obligations if the SPV goes into administration?
Positive obligations attached to the land continue to bind whoever owns the site, so a purchaser from the administrator inherits the affordable housing and infrastructure requirements. Money already due is a claim in the insolvency, and the authority ranks as an unsecured creditor unless it holds security. That split is the reason security is asked for.
Will the bond survive a section 73 variation?
Only if it is drafted to. Security tied solely to the original permission number can fall away when a varied permission is granted, because the obligation attaches to the earlier consent. Deeds of variation should expressly carry the security across, and this is worth checking before the variation is submitted rather than afterwards.
Sources and further reading
This article is general guidance about the planning system in England and, where stated, the rest of the UK. It is not legal or professional advice. Check your local planning authority’s validation requirements and take professional advice for your specific site.