When it comes to the amount you are investing in a property or a project, it pays to have a surety guarantee written somewhere to ensure your money will be safe. Bank guarantees and insurance bonds are your best bet. A bank guarantee, to start, is a binding promise to the buyer to reimburse their money if the seller or the developer can’t fulfill their end of the deal. Similarly, insurance solutions come into play. These solutions come from different insurance covers, such as payment protection or surety. These work the same, coming in the form of protection or surety, which come directly from insurance firms. This article will dissect bank guarantees and insurance solutions for the buyer, tackling different types, when it’s best to ask, and how to ensure a guarantee or insurance solution is legitimate.
What is a bank guarantee?
A bank guarantee is essentially a bank’s commitment in writing to pay a specific amount in case someone fails to carry out their promised act. When it comes to property transactions, bank guarantees are often extended to protect a buyer’s deposit payment or may provide security so that if developments are grounded, refunds will be made. A bank guarantee specifies: The beneficiary’s details in the bank guarantee, the value in the bank guarantee, the bank guarantee expiration date in the bank guarantee, and the claim details in the bank guarantee. It can be both conditional and unconditional.
How bank guarantees work for property purchases
The typical way in which the off-plan property purchase would proceed involves the buyer placing down non-refundable funds based on a guarantee. If the developer fails to meet deadlines or if there is a failure in the purchase process, the buyer submits the guarantee to the bank and asks for the cash sum. The bank will then assess the guarantee documents and make payment to the payee as soon as they have met all requirements. Guarantees often have their expiration dates, but may be renewable until completion of development projects. The issues under which you need information as the buyer relate to: the payee details; when it expires; what must be submitted in case you need reimbursement; and if you can transfer it if you assign your contract.
· Always demand that the guarantee be original and written, specifying claims.
· Determine whether the bank will accept a simple written demand or whether judicial proof will be necessary.
· An effective guarantee ensures a shorter period and lower expenses in the recovery of money, giving the buyer leverage in the event of a dispute.
Types of guarantees and insurance bonds
There are a number of different means available for securing bank and insurance payments. Generally, bank guarantees for payments will provide refund protection, performance bonds will provide protection for the completion of the development, while surety or insurance bonds will provide protection for specific defaults. The use of escrow accounts is a different system, although it is not uncommon for these to be used in combination with guarantees.
When to ask for a bank guarantee or insurance
If the seller insists on early or unusually large payment, you can request a bank guarantee or insurance when the project is still off-plan or when the developer's track record is not well-established. Consider guarantees as insurance in case local legal remedies are slow, or recovering a large deposit through court would be difficult. For mortgage buyers, lenders may also require additional security until title registration is approved. For contract assignment investors, request a transferable guarantee or insist on the developer issuing a new guarantee for the assignee. The negotiating points would include the value guaranteed, the expiry date linked to handover, and the renewal clause.
· Ask for a guarantee, for instance, when the deposit for booking seems to be a relatively large portion of the price.
· Seek expiry extensions or a fresh guarantee close to completion to cover the final handover window.
How to get and verify guarantees and insurance
Do not accept a scanned copy or an unclear document as proof. Demand the original documents and verify them with the bank or insurer that issued them. Get the SWIFT codes or contact the bank's guarantees department to verify the number, exact phrase, beneficiary, and date of expiration for the bank's guarantee. Verify the exact terms of the claim with an attorney or the bank if you need quick and easy access with the words 'pay on demand.' When you are considering an insurance bond, you need to verify the policy schedule, the company's license, and the written claims process. These points above should be summarized in the following checklist:
· Obtain the original guarantee or the copy that has been certified, along with the contact information of the bank.
· Verify issuer's name, guarantee number, beneficiary, amount, date of expiration, and claims terms with the bank/insurer.
Costs, limitations, and common pitfalls
Bank guarantees and insurance bonds come at a cost. The party issuing the guarantee has charges to pay—the fees will be a percentage of the amount insured—and may demand collateral. A guarantee has limitations—it only applies to the event described in the wording, it has a limited lifespan that can be contested when it expires, and the bank may contest the level of technicality required to date claims. Insurance bonds can shut the door on a claim arising out of exemptions. Some tricks include ambiguous wording accepted without scrutiny, the use of scanned documentation that might be altered, and failure to ensure that the guarantee shall be valid in the country where the beneficiary has a place of business. Avoid guarantees that are repayable guarantees and those that depend on court action for resolution—such guarantees take time and are costly to pursue when they are enforced. Issues to be wary of include “issuer risk” risks—the validity of a guarantee by a dubious or small bank or insurer outranks that of a major international firm.
Conclusion
Bank guarantees and insurance bonds can make large buyer payments a lot safer. They are formal promises that funds will be returned should the seller or developer not deliver. Always push for original documents, clear "pay on demand" or straightforward claim conditions, and direct checks with the issuing bank or insurer. The instrument to be used should be selected based on the risk: bank guarantees provide the most comprehensive payment protection, insurance bonds can reduce costs where the wording and issuer are sound, and the addition of escrow in conjunction with guarantees is optimal where possible. Remember: the actual wording, expiry date, and who is backing it are more important than the label applied. Have a lawyer review everything, verify authenticity, and negotiate renewal or holdback terms to cover the final handover.
FAQ
Q1: How can one make the claim on the bank guarantee faster?
Seek a “pay on demand” guarantee that is properly phrased. In this scenario, provided that you provide the required documents in accordance with what the guarantee entails, then it becomes mandatory for the issuing bank to pay without necessarily referring to a legal decision, the provided wording permitting.
Q2 Are insurance bonds as reliable as bank guarantees?
These bonds can work well together, though they aren’t the same. Insurance bonds rely on the wording of the insurer’s policies and credit standing, whereas bank guarantees seem to be more reliable due to the banks’ explicit payment obligations and regulation of their capital base.
Q3: Can a guarantee be assigned when I assign my contract?
Yes—if the wording of the guarantee allows transfer. Ask for a guarantee with the right of transfer or have a new guarantee issued by the developer with the buyer’s name before the assignment happens.
Q4: And who pays the charges when there is a guarantee by the bank?
Generally, the cost of the issuer fees will be reimbursed by the party seeking the guarantee, which in many instances can be the developer, although it can be negotiated. Buyers can seek additional protection by paying for the buyer-side guarantees.
Q5: How can you ensure that a guarantee is authentic?
Obtain a copy of the original document, and contact the guarantee department of the issuing bank with the contact details of the bank (and not those on the document). Request that the bank verify in writing the important points relating to the number, beneficiary, amount, expiry date, and terms of the claim.
