Section Bonds
Financial security for planning obligations and development agreements
Section bonds provide financial security for specific obligations agreed between developers and local planning authorities. Where a bond is required under a Section agreement, it can provide the authority with financial protection if the developer fails to deliver the obligations covered by the bond.
Section agreements are used to secure planning obligations associated with a development. These may include financial contributions, infrastructure improvements, affordable housing provision or other measures required to address the impact of the scheme.
A local planning authority may require a bond or other financial guarantee to secure particular obligations, especially where delivery is due at a later stage or involves significant expenditure. Not every Section agreement requires a bond. Where security is requested, the amount, duration and circumstances in which it can be called should be established early, ideally while the agreement is being negotiated.
The terms available will depend on the obligation being secured, the financial standing of the developer and the wording required by the local authority.
Surety providers will consider the nature of the development, the applicant’s financial position and the likelihood and potential cost of the secured obligations not being fulfilled.
J3 Advisory reviews these requirements and approaches suitable surety markets. Where the proposed wording or security requirements are difficult to accommodate, we can advise on alternatives for discussion with the local authority and the developer’s legal advisers.
Section Bonds Explained
How Do Section Bonds Work?
A Section bond provides financial security for specified obligations under a planning agreement made pursuant to the Town and Country Planning Act 1990.
The developer usually arranges the bond in favour of the local planning authority. If an obligation covered by the bond isn’t met, the authority may be entitled to claim, subject to the bond’s terms and financial limit.
Section 106 bonds may be used to secure:
- Infrastructure works: Agreed improvements required as part of a development.
- Public open space and community facilities: Works or facilities the developer has committed to deliver.
- Financial contributions: Specified payments where the authority accepts a bond as security.
- Phased developments: Obligations due at later stages of construction or occupation.
Not every Section agreement requires a bond. Where security is requested, the amount, wording and release provisions should be considered early, particularly on phased developments.
A Section bond does not replace the planning agreement. It provides additional security for the obligations identified in the bond.
Section Bond Costs, Underwriting & Requirements
The cost of a Section bond depends on the amount of security required, its duration, the developer’s financial position and the terms requested by the local planning authority.
Surety providers typically review the Section 106 agreement, proposed bond wording, development details and financial information before offering terms. Longer-term obligations or more complex developments may require additional underwriting.
How is the bond amount calculated?
There is no standard percentage for Section 106 bonds. The amount is generally linked to the value of the obligation being secured and the local authority’s requirements.
For example, where a developer must complete £1 million of infrastructure works, the authority may request security based on the estimated cost of those works, including any agreed contingency. The bond premium is calculated separately.
Developers should also consider when the bond can be reduced or released as obligations are met. A surety bond may offer an alternative to cash security or a bank guarantee, although collateral or indemnities may still be required.
Why Choose J3 Advisory?
Section bond requirements can be overlooked until relatively late in a development, particularly where the focus has been on securing planning consent and agreeing the wider obligations with the local authority.
The difficulty often comes when the authority’s preferred bond wording does not align with what a surety provider is prepared to offer, or when the developer is asked to provide security for obligations extending several years into the future.
J3 Advisory works with developers and their professional advisers to review the proposed security requirements before approaching the surety market. We look at the obligation being secured, the bond amount, the expected duration and the terms under which the authority can make a claim.
Where the requested terms present underwriting difficulties, we can advise on alternative wording, staged reductions or other security arrangements for the parties to consider.
Our experience across development insurance, legal indemnities and property finance also means we understand the wider transaction, particularly where planning obligations, funding conditions and construction timescales need to align.
Section Bond FAQs
Common questions about Section 106 bonds, planning obligations, costs and underwriting requirements.
What is a Section bond?
A Section bond is a financial guarantee used to secure specified obligations under a Section planning agreement. It may provide a local planning authority with financial protection if the developer fails to meet an obligation covered by the bond.
Are Section bonds compulsory?
No. A Section agreement does not automatically require a bond. Whether financial security is needed will depend on the obligations involved, the local authority’s requirements and the terms negotiated for the development.
How much does a Section bond cost?
The premium depends on the bond amount, duration, developer’s financial position and the wording required by the local authority. Surety providers assess these factors before offering terms, so costs vary between developments.
How is the value of a Section bond calculated?
The bond amount is usually linked to the financial value or estimated cost of the obligation being secured. This may include allowances required by the local authority. There is no standard percentage applicable to every Section 106 bond.
Who pays for a Section bond?
The developer or other party responsible for arranging the security will usually pay the premium. The allocation of costs will depend on the development agreement and any arrangements between the parties.
Can a Section bond replace a cash deposit or bank guarantee?
Potentially. Where the local authority accepts a specialist surety bond, it may provide an alternative to a cash deposit or bank guarantee. Acceptance will depend on the authority’s requirements and the proposed wording. The surety may still require indemnities or other security from the applicant.
What happens if a developer fails to meet its Section obligations?
The local planning authority may have enforcement rights under the Section 106 agreement. Where a bond is also in place, it may be able to make a claim for a covered default, subject to the bond’s terms and financial limit.
What information is needed to arrange a Section bond?
Surety providers will usually require the Section agreement or draft wording, details of the obligation being secured, the bond amount and duration, information about the development and financial information about the applicant.
How long does it take to arrange a Section bond?
Timescales depend on the financial information available, the complexity of the obligation and whether the proposed bond wording is acceptable to the surety provider and local authority. Where wording needs to be negotiated, additional time should be allowed.
Can a Section bond be reduced or released?
Yes, where the bond and associated arrangements provide for it. For example, a bond may be reduced as specified infrastructure works are completed or released once the relevant obligations have been satisfied and the necessary confirmation has been obtained.
These provisions should be considered when the bond is negotiated rather than left until the end of the development.
Can a Section bond cover affordable housing obligations?
It may be possible to arrange security for certain defined obligations associated with affordable housing, but this depends on the nature of the commitment, the local authority’s requirements and the surety provider’s appetite.
A bond should not be assumed to replace the developer’s obligation to deliver affordable housing.
Why use a specialist Section bond broker?
A specialist adviser can review the proposed bond requirements, approach suitable surety providers and advise on the terms available.
J3 Advisory considers the bond wording, underwriting requirements and the development programme, helping clients identify potential issues before they affect planning, funding or delivery milestones.