Ontario’s new Planning Act came into effect in 2024. Under the previous system, developers were required to provide irrevocable letters of credit (LOCs) or other forms of direct collateral to municipalities to guarantee the completion of work. This tied up the developer’s credit facility — if a $2 million LOC was issued, that amount would be unavailable for other borrowing, sometimes for the entire duration of a multi-year project.
The new Act allows developers to use surety bonds instead. With a surety bond, the developer pays a premium rather than tying up credit. If a developer is unable to meet its obligations, the insurance provision is triggered and the surety provider steps in to fulfill them. The key difference – and main advantage – of a surety bond over a letter of credit is that it preserves the developers credit capacity, allowing greater financial flexibility.
Under the Planning Act, a surety claim is triggered when a municipality determines that a developer has defaulted on an obligation guaranteed by a surety bond and issues a formal demand for payment. The municipality must provide written notice of default to both the developer and the surety, specifying the amount demanded. The surety is then obligated to make payment within 15 business days of receiving the notice, regardless of any objections from the developer.
While this fast-track process benefits both developers and municipalities by providing a timely payment guarantee, it also increases underwriting risk. Since the surety essentially functions as a prompt payment mechanism, bonding companies tend to be more conservative in their underwriting. They often apply stricter criteria than they would for a traditional contractor due to the automatic nature of the claim trigger and the accelerated claims process.
In addition, there is no consistent framework across municipalities. Rather than waiting for this to be resolved iteratively over time, there is an opportunity to create more efficiency in the funding process. While this issue extends beyond housing development, CMHC is well positioned to address this specific part of the puzzle. As the primary underwriter of multifamily development in Canada, CMHC is uniquely equipped to lead the development of a streamlined solution.
This can be approached from several different angles. Since CMHC is already underwriting these projects, it could collaborate with the surety providers to ensure the right data is collected upfront to speed up the surety underwriting process. CMHC could go a step further by providing a timely payment guarantee to the surety providers for these projects, given that it already bears the completion risk on these developments.
Finally, CMHC could work with municipalities to establish a standardized process for handling surety bonds. This standardization should be incorporated as a condition for any municipal funding provided through CMHC.
This issue is specific to Ontario but could serve as a model for improving the development process nationwide. If we want a more efficient housing system, we must eliminate bottlenecks and inefficiencies. CMHC has a mandate to improve housing finance—it must move beyond simply identifying problems and take decisive, proactive steps to drive the improvements necessary for meaningful change.
Independent Opinion
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