It is not unusual in a real estate transaction for sums to be left outstanding from a purchaser under a sale contract following completion of a property disposal. The vendor will usually require some form of security for this deferred consideration.

Security for the sums owed could be in the form of a legal charge over the site transferred but the vendor could, as an alternative, be offered a bank bond, or a bank or parent company guarantee. The terms "bond" and "guarantee" are often used interchangeably and can be difficult to distinguish, leaving a vendor confused over what type of security the purchaser is offering. So what is the difference?

The obligation to pay under a guarantee is dependent on establishing liability on the part of the obligor (the purchaser in this context), and not just a failure to pay. It is a secondary obligation and so is dependent on the underlying contract containing the guaranteed obligations. Care must be taken to ensure the guarantor is a party to any changes to the underlying contract as the guarantor's liability could otherwise be inadvertently discharged. A guarantee will usually be the option available if a parent company is willing to act as surety.

On demand bonds, by contrast, impose a primary obligation to pay a specified sum of money on the happening of a particular event (ie the purchaser failing to pay) regardless of the terms of, or any variation to, the underlying obligation. For this reason a bond from a major financial institution may well be the preferred option for a vendor.