For developers and property owners, selling a property with active site improvements requires careful planning. A common misconception is that selling the land automatically transfers or cancels the existing surety bond. This is not the case.
If you are listing a property with an open site improvement bond, understanding the transfer of liability is critical to protecting your interests.
Does the Bond Transfer?
The answer is no. When a property is sold, the existing site improvement bond remains in force. The government agency holds the bond to guarantee the improvements, and the entity that originally obtained the bond remains liable for the work, even after the property changes hands.
If you sell the property without addressing this, you remain responsible for the improvements unless the new owner replaces the bond.
The Replacement Process
To remove your liability, the new owner must replace your bond with one of their own. This requirement should be explicitly addressed in the buy-sell agreement. The typical workflow involves the following steps:
- Escrow Conditions: The seller should require the buyer to obtain their own bond and place it into the escrow account as a condition of closing.
- Bond Replacement: Upon the close of escrow, the new bond takes effect, allowing the original bond to be released.
- No "Transfer": It is important to note that bonds are not "transferred" from one person to another. The buyer must qualify for and obtain a brand-new bond.
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Avoiding Delays and Risks
Failing to coordinate the bond replacement can delay the sale or leave the seller exposed to unnecessary risk. If the buyer struggles to qualify for a bond or is working with an inexperienced agent, it can slow down the escrow process. To ensure a smooth transaction, we recommend the following due diligence:
- Contact the Municipality: The seller should reach out to the city or county to determine if specific documentation is required for the bond replacement.
- Verify Evidence: Ensure the buyer provides evidence of the replacement bond to escrow before closing.
- Do Not Close Early: You should not close escrow without ensuring the bond will be replaced immediately upon closing.
The Importance of Expert Guidance
Open communication between the buyer, seller, and surety providers is essential when an open bond exists. Because the new buyer must qualify independently, working with a specialized surety agency can prevent bottlenecks.
At Commercial Surety Bond Agency, we provide expert guidance to help navigate these complex transactions. Whether you are the seller needing a release or a buyer needing a new bond, our first-class service ensures that bond obligations never hold up a deal.
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