Unlocking Housing: New Planning Act Regulations Introduced

In recent weeks, the Province of Ontario (the “Province”) has introduced two proposed regulations intended to further incentivize the construction of new housing.

On September 16, 2024, the Province introduced a draft regulation on the Environmental Registry of Ontario enabling the use of pay-on-demand surety bonds to secure land use planning obligations under the Planning Act. The stated purpose of this regulation, made under subsection 70.3.1 of the Planning Act, is to help homebuilders free up funds for housing projects by providing for a wider acceptance of pay-on-demand surety bonds to secure municipal obligations that are conditions of land use planning approvals.

On September 23, 2024, the Province posted a proposed amendment to Ontario Regulation 299/19, Additional Residential Units (“O.Reg 299/19”), on the Environmental Registry of Ontario. The proposed amendment to O.Reg 299/19, which regulation was initially introduced through Bill 185, the Cutting Red Tape to Build More Homes Act, 2024 (“Bill 185”), is intended to support the implementation of additional residential units by reducing or eliminating the need for rezoning or minor variances to create additional residential units, saving time and money and helping to build more homes.

Learn more about the proposed regulations below.

Pay-On-Demand Surety Bonds

On March 30, 2022, the Province introduced Bill 109, the More Homes for Everyone Act, 2022 (“Bill 109”), which sought to address the Ontario Housing Affordability Task Force Report’s 55 recommendations to increase housing in the Province of Ontario. Bill 109 received Royal Assent on April 14, 2022.

Bill 109 amends the Planning Act to add the following subsection 70.3.1 in relation to the acceptance of surety bonds to secure municipal obligations that are conditions of land use planning approvals:

70.3.1 (1) The Minister may make regulations,

(a) prescribing and defining surety bonds and prescribing and further defining other instruments or the purpose of this section;

(b) authorizing owners of land, and applicants for approvals in respect of land use planning matters, to stipulate the specified types of surety bond or other instrument to be used to secure an obligation imposed by the municipality, if the municipality requires the obligation to be secured as a condition to an approval in connection with land use planning, and specifying any particular circumstances in which the authority can be exercised.

Generally, when a property owner obtains land use planning approvals from a municipality under the Planning Act (such as site plan approval, plan of subdivision approval, or a consent), the owner is required to provide financial securities to the municipality to secure performance of its municipal obligations. Often, municipalities will accept only two forms of financial security: a certified cheque or a letter of credit. These forms of financial security are considered the most secure form of payment and provide the greatest level of protection to a municipality; however, they can also tie up the property owner’s cash flow, reducing their financial flexibility and limiting their ability to do concurrent building projects.

Subsection 70.3.1 of the Planning Act, which is not yet in force, allows the Minister of Municipal Affairs and Housing (the “Minister”) to make regulations that prescribe and define the use of surety bonds to secure land use planning obligations under the Planning Act, in lieu of the traditional forms of security accepted by municipalities.

A surety bond is a form of financial guarantee among three parties: the principal (the property owner), the obligee (the municipality) and the surety (a federally or provincially licensed body). Simply put, the surety bond acts as a promise that a third party, the surety, will assume the defaulting party’s obligations under a contract.

Historically, letters of credit were preferred by municipalities over surety bonds because letters of credit are payable on demand, and unlike traditional surety bonds, do not require the beneficiary to prove a breach of the underlying contract. As such, letters of credit are viewed as easier to collect upon, while payment terms under traditional surety bonds are more rigid and prone to litigation.

However, in order to compete with shifting market conditions, the surety industry has introduced modern surety bonds that are more flexible and can be drafted to afford the same level of protection and access to funds as a letter of credit. Modern surety bonds offer several benefits to both the property owner and the municipality, including:

• Surety bonds are only issued after an exhaustive and rigorous prequalification process, wherein the surety determines whether the principal has the skills, expertise, labour, equipment and experience to fulfill the terms of the contract. Municipalities will undoubtedly benefit from this stringent prequalification process. Conversely, banks issue letters of credit based solely on an assessment of the principal’s financial status.
• Unlike a letter of credit, a surety bond does not negatively impact the principal’s ability to access more bank credit and undertake concurrent housing projects.
• Sureties monitor performance of the contract on an ongoing basis and often work with the principal to address any performance issues as they arise. Conversely, the issuer of a letter of credit focuses solely on the principal’s ability to repay the outstanding amount.

In recognition of these benefits, several municipalities in Ontario have enacted surety bond policies enabling the use of surety bonds to secure land use planning obligations, including Pickering, Sault Ste. Marie, Hamilton, Bracebridge, Innisfil, Belleville, and Kingston.

On September 16, 2024, the Province introduced a regulation on the Environmental Registry of Ontario under subsection 70.3.1 of the Planning Act, enabling the use of pay-on-demand surety bonds to secure land use planning obligations under the Planning Act.

The Province is proposing the following mandatory elements of a pay-on-demand surety bond:

1. Licensing Requirement: The bond must be issued by a surety that is licensed under the Ontario Insurance Act to write surety insurance.
2. Credit Rating Requirement: The surety must meet specified credit ratings (e.g. by Standard and Poor’s or A.M. Best Company, Inc.) to ensure that the surety’s assurance to pay on demand is supported by a third-party assessment.
3. Guaranteed Payment: The surety bond must be payable on demand. This requirement is critical to ensuring that the surety bond provides the same benefits and security as a letter of credit, with no right of the surety to deny claims.
4. Timely Payment: The surety would be required to make payment to the municipality within 15 business days of being provided with a written notice of default.
5. Partial Drawdowns: The surety bond must provide for partial drawdowns. This requirement ensures that the security reduction process for surety bonds is handled in the same way as for letters of credit, where partial reductions and multiple draws are permitted.
6. Cancellations: The surety would be required to provide the municipality with at least 90 days’ notice of its intention to terminate the surety bond, and the principal would be required to provide the municipality with a replacement security within 60 days after receipt of the notice, failing which the surety bond would remain in force.

The Environmental Registry of Ontario posting is open for comment until October 16, 2024.

To learn more about modern surety bonds in the municipal context, see Quinto Annibale’s articles;