A surety bond is a three-party legally binding agreement between a local government, a principal/applicant and a surety bonds company. It guarantees to the local government that the principal/applicant will carry out their performance obligations according to agreement. The surety bond is put in place in order to protect the public and the local government.
The Principal is the person required to get secure the surety bond. The surety bond does not protect the principal but the local government. In the case of a land use board it would be an applicant coming before the board requesting relief from land use requirements. We see this most often with projects such as new developments and others that require interruption of our roads, water or sewer systems, anything that touches on or affects public space. The surety bond is in place so that if the work was not completed according to the local government inspectors’ satisfaction, the local government could work with the Surety to complete the work and “put things back together”.
For example, a builder is approved for a twelve single family home project. They begin work, sell eight homes and then the market changes such that there is no need for the final four homes. The final paving is not done, the sidewalks and curbing are not complete in front of some lots, a stormwater basin was not constructed correctly and other issues exist with the site. This is the classic example of how a performance surety bond protects the local government by guaranteeing these issues are remedied.
The Surety is an insurance company that takes the risk by backing the principal financially and “betting” that the principal will complete the project to the satisfaction of the local government. If the principal fails the Surety is responsible, up to the full dollar amount of the surety bond, to make the local government whole by either paying the local government the amount of the bond or hiring their own contractors to satisfy the local government inspectors.
For some projects it is recommended the Board require a performance surety bond and later a maintenance bond. A performance bond ensures the required work is done correctly. A maintenance bond ensures the work continues to perform as it was designed to do. Examples of projects which require maintenance bonds after the work is completed are storm water basins and landscaping to ensure the basins drain and the trees planted do not die off.
BONDING AND LAND USE DECISION & RESOLUTION CONDITIONS
When a Board places conditions on approval the Certificate of Occupancy(CO) cannot be issued unless the conditions are met. If a Board permits an applicant to get a CO prior to certain conditions being met it is appropriate for the Board to require a performance surety bond/guarantee that the work will be done according to specifications and in the time period granted for completion. I hope this quickly gives you a better understanding of how performance surety bonds work within land use. If you have further questions and serve as a land use board member or applicant needing counsel. Please call our office to set an appointment.