Bonds: an alternative way to secure your property interests
In the current economic climate, security and stability are high on everyone’s agenda; never more so than when taking a calculated risk. Often builders, property developers/ landlords wish to find solutions on how they can continue trading and to develop their business without over stretching their cashflow and bonds seem to be a good option for property vendors and commercial landlords alike. There are a number of different property related bonds and these are summarised below.
Property deposit bonds
Rather than receiving a cash deposit, property vendors can accept property deposit bonds from a purchaser. Property deposit bonds tend to be used in relation to property under construction or bought off-plan.
Essentially, the purchaser pledges to pay the agreed amount at completion. The advantages are two-fold: the purchaser can secure the sale without having to tie up funds during the construction process and the vendor has unrivalled protection. In the event of default, the bond would pay the vendor the deposit amount and the insurer would seek recovery from the purchaser.
Most deposit bonds are issued for periods up to 36 months, and typically for amounts up to 15% of the purchase price. This is of particular interest to people who are interested in buying overseas property and worried that they have to pay the Deposit prior to the build being completed. By using a bond the developer knows that they have the commitment of the bond and the buyer knows that he only pays on completion.
Rental guarantee bonds
Commercial and industrial landlords are all too familiar with the grave financial consequences that losing tenants involves. Cash flow can be severely restricted by the legal cost of pursuing defaulting tenants coupled with the loss of rental income. Landlords need to concentrate on finding replacement tenants and honouring the costs still associated with the premises.
A rental guarantee bond alleviates this precarious situation by protecting both the rental income and the capital value of the property. Often used in place of a personal guarantee, landlords can be confident that in the event of default, they will still receive their rental income.
Another Bond relevant to the UK is the NHBC Bonds which is required by property developers/ building Companies to meet the NHBC requirements for new building developments. These are Bonds provided by a UK housebuilder or developer to the NHBC (National House Building Council) upon applying to be on the NHBC register.
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