Report to Cabinet
24 June 2014
Subject:
Disposal of Sites C, E and F, Basing View, Basingstoke
Status:
Open
Report Ref:
Ward(s):
Eastrop
Key Decision:
Yes
Key Decision Ref:
882/SC
Report of:
Strategic Project Manager
Contact:
Simon Hope
simon.hope@basingstoke.gov.uk
Tel 01256 845560 or Ext 2560
Appendix 1 – Site Plan
Appendix 2 – Risks Identified
Appendices:
The following Appendices are confidential and not for
publication by virtue of paragraph 3 of Schedule 12A of
the Local Government Act 1972:
Confidential Appendix 3 – Financial Implications
Report to Portfolio Holder for Strategy – 31 July 2013
Phased Proposal submission from Muse Developments
Papers relied on to Ltd – submitted 25 July 2013
produce this report:
CBRE S123 letter and reports – June 2014
Mace tender review – June 2014
SUMMARY
1
This Report
1.1
Updates Cabinet on the disposal of land required to facilitate the John Lewis
at Home/Waitrose (JLP) development proposed by Muse Developments Ltd
(Muse) on land within the western area of Basing View.
1.2
Provides an updated financial forecast for the council’s land receipt following
the conclusion of various pre-development workstreams by Muse, including
tendering the building contract.
1.3
Seeks Cabinet approval to dispose of the council’s land on the terms outlined
in this report.
2
Recommendation
2.1
It is recommended that Cabinet:
2.1.1
Agrees the land receipt figure set out in paragraph 2.8 in Confidential
Appendix 3.
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2.1.2
Notes the reasons for the increase in development costs which has resulted in
a reduction in the council’s land receipt to a figure below the reported
minimum figure in July 2013.
2.1.3
Agrees to the conditional sale contract with JLP and Muse becoming
unconditional on the terms set out in this report in Confidential Appendix 3.
2.1.4
Agrees to the disposal being at an undervalue for the purposes of section 123
of the Local Government Act 1972 given the overall economic and social
benefits to the town and positive impact of the scheme on the future
development of Basing View.
2.1.5
Agrees the Strategic Project Manager shall, in consultation with the Head of
Resources and Head of Legal and Democratic Services, be given the
delegated authority to progress the required legal documentation, in
consultation with the Portfolio Holder, relating to the Supplemental
Agreement, Headlease and Agreement for Lease becoming unconditional in
accordance with the financial terms in this report.
PRIORITIES, IMPACTS AND RISKS
3
Contribution to Council Priorities
3.1
This report accords with the council’s Budget and Policy Framework and
directly supports the Council Plan priority of improving economic vitality.
GLOSSARY OF TERMS
Term
Definition
BVEC
Basing View Executive Committee
DA
Development Agreement
JLP
John Lewis Partnership Ltd
SA
Supplemental Agreement
HCC
Hampshire County Council
DETAILED/MAIN CONSIDERATIONS
4
Background
4.1
The basis for the first scheme proposal arising from the regeneration
partnership between the council and Muse was approved by the Portfolio
Holder for Strategy in August 2013. The report to the Portfolio Holder for
Strategy dated 31 July 2013 set out the Phase Proposal, comprising a new
format John Lewis at Home/Waitrose store. The development would be
situated on sites E and F and part of site C, see Appendix 1.
4.2
Following Portfolio Holder approval to the terms of the Phase Proposal in
August 2013, the council, Muse and John Lewis Properties Ltd entered into
conditional contracts in October 2013. Subsequently, Muse submitted a
planning application and planning consent was granted on 12 March 2014 for
a 106,000ft2 retail development.
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4.3
The conditional contracts required Muse to bring forward the scheme to a
deliverable stage, ready to start on site in accordance with a number of preconditions. This included obtaining planning permission and, entering into
section 106 and 278 agreements. In parallel with obtaining the statutory
consents, Muse tendered the construction works in order to obtain a firm
building price based on the agreed scheme to provide cost certainty and
assess the development costs against the viability condition within the sale
contract.
4.4
The outcome of the construction tender has resulted in a significant increase
in the project costs compared with the estimated costs in July 2013. This has
a negative financial impact on the council’s land receipt which has led to the
need for this report to Cabinet to seek approval to the revised financial
arrangements. The background to the financial implications is commented on
in the following sections and in Confidential Appendix 3.
4.5
The contract pre-conditions are capable of being satisfied and subject to
Cabinet’s approval of the financial implications in this report, contracts could
become unconditional, allowing construction to commence as early as midJuly. Based on the contractor’s current programme this would enable the
store to be completed and open by October/November 2015.
5
Calculation of the council’s land receipt
5.1
The report to the Portfolio Holder for Strategy on 31 July 2013 set out the
basis for calculating the council’s financial return from the development. In
summary, the calculation of the council’s land receipt is subject to two
valuation stages. Firstly, the Initial Appraisal stage was undertaken in July
2013 at the Phase Proposal Stage. Under the legal agreement between the
council and Muse there is then a second, Final Appraisal, prior to the
Supplementary Agreement (SA) between the council and Muse becoming
unconditional.
5.2
The report of 31 July 2013 noted in paragraph 7.4, the council’s land receipt
would be fixed at the Final Appraisal stage. In the meantime, the council’s
land receipt could fluctuate (up and down) between the Initial and the Final
Appraisal stages. The council’s land receipt under the terms of the contract
though is subject to a minimum value test. This requires the land value
generated by the scheme must be equal to or higher than the council’s book
value and the receipt must meet the best consideration requirements of
section 123 of the Local Government Act 1972.
5.3
At the point when the Final Appraisal is completed and agreed, this will set the
minimum level of capital receipt due to the council. If there are savings during
construction beyond the unconditional date, any surplus within the project
contingency would be shared between Muse and the council in accordance
with the terms in Confidential Appendix 3.
5.4
At the point when the contracts become unconditional, the council will receive
not only the land receipt (set out in the Final Appraisal), but also its “sunk
costs”, which relate to third party advisory fees and the purchase/demolition of
the Poison Inn. Full details of the sunk costs to be recovered are set out in
Confidential Appendix 3.
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6
Financial Implications
6.1
Details of the council’s land receipt and how this compares with the figures set
out in the Initial Proposal in July 2013 are contained in the financial review in
Confidential Appendix 3. It should be noted the proposed receipt falls below
the anticipated minimum level stated in the July 2013 report. This is as a
direct consequence of the increase in the costs to build the development.
6.2
The minimum financial payment to the council after the sale agreement
becomes unconditional is £2.438m. This comprises a combination of the land
receipt and recovery of sunk costs.
6.3
The principal reasons for the significant increase in the building costs resulting
from the construction tender are:
6.3.1
A sharp increase in construction inflation affecting the wider contractor market
which has manifested itself in higher tender returns, particularly during the last
six months as the UK construction market recovers from the downturn and
both labour and materials prices increase. The estimated construction costs
reported by Muse in July 2013 did not make any allowance for inflation.
6.3.2
Tenderers adopted a more risk adverse approach in their pricing, putting more
of a premium on the complexities of the construction, particularly the
significant level of enabling and ground works.
6.3.3
The Muse design team made a number of assumptions about the contractor’s
method of working and pricing which the contracting market has not been
prepared to accept, resulting in higher costs.
6.3.4
A significant area of increase has been the cost of diverting the statutory
services, including a considerable increase in the scope of work associated
with fibre-optic/telecoms diversions.
6.4
In view of the additional costs of building the project, the council has been in
dialogue with Muse regarding the financial implications. This has resulted in
variations to the original financial terms put forward in July 2013 which are set
out Confidential Appendix 3. The parties have been working pro-actively to
mitigate the additional costs and taking a long-term partnership approach to
find an equitable solution.
6.5
Cabinet should be aware the contractor selected by Muse from the tender is
unwilling to hold its tender price beyond the end of June given the inflationary
environment in the construction market. In the event there is a delay to the
sale contracts becoming unconditional there is an increased risk of the
construction costs increasing, which has implications for the council’s land
receipt.
6.6
The council has employed specialist cost consultants, Mace Cost
Consultancy, to review the Muse tender process. Mace concluded that 1. the
construction procurement route was well considered and reflected the
characteristics of the project, 2. the tender documents issued were
comprehensive and a robust tender was undertaken to tender return and 3.
the team undertook a detailed tender analysis and significant tender
negotiations to arrive at an agreed contract sum.
Valuation Implications
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6.7
The council has employed external valuers, CBRE, to review the basis for the
JLP acquisition price and the resultant land receipt, together with a
comparison of the alternative use value of the site to allow an assessment to
be undertaken on whether the council is receiving best consideration in
accordance with section 123 of the Local Government Act 1972.
6.8
CBRE have also reviewed the basis for the book valuation to reflect current
information regarding the ground conditions and the cost of developing the
land.
6.9
It should be noted, the value of the council’s retained land post development
of the JLP scheme will be subject to market conditions and potentially vary
depending upon the future use of the land. Part of the land to the south of site
C will be restricted through the no build/low build obligations contained in the
JLP agreement which prevents development of the land hatched black in
Appendix 1, to preserve sight lines for the John Lewis/Waitrose store.
6.10
CBRE have concluded the terms of the disposal to JLP are within an
appropriate valuation range for the nature of the development.
6.11
To determine whether best consideration under the terms of S123 is being
achieved, the value of the land receipt arising from the JLP transaction has
been compared with the market value of the council’s existing land. CBRE
concluded the council is accepting a land payment which is marginally less
than best consideration. However CBRE support the disposal given the wider
social and economic benefits the scheme will deliver to the town. It should
also be noted the undervalue may be reduced or indeed no longer apply in the
event some or the entire assumed contingency is not required. Further detail
regarding the financial background is contained in Confidential Appendix 3.
6.12
Local Government Act 1972 General Disposal Consent (England) 2003
enables councils to dispose of land at best consideration where there are
wider social and economic considerations. This is covered in more detail in
the Legal Implications section of this report.
7
John Lewis at Home/Waitrose Development – Economic/Regeneration
Context
7.1
Securing the John Lewis at Home and Waitrose store represents a significant
coup for Basingstoke. The new format store is only the second within the
John Lewis Group portfolio, and will represent a major investment by the
retailer in the town, bringing significant long lasting economic and reputational
benefits to the town as a whole. The scheme is anticipated to deliver in the
region of 330 permanent and temporary jobs and help attract significant
additional retail and leisure expenditure to the town centre.
7.2
John Lewis have commissioned independent external consultants to review
the socio-economic impact of new stores in towns, and their case studies
show the new shops are part of a larger revitalisation of their town centre
locations, contributing to the attraction of a place as a destination for shopping
and creating a sense of place. Business surveys following the arrival of John
Lewis stores in city and town centres generally view the arrival of John Lewis
or Waitrose as a positive development, for business growth.
7.3
JLP anticipate the new stores will deliver an additional gross value added to
the economy of the town of circa £4.5m p/a
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7.4
In terms of the regeneration of Basing View, the scheme represents a
significant catalyst which engenders confidence and momentum with the
potential to encourage existing businesses within Basing View to remain and
grow, and importantly encourage new businesses to locate to the area.
7.5
Anecdotal evidence from businesses within Basing View since the
announcement of John Lewis/Waitrose arrival has been extremely positive
and further inward related initiatives are under discussion which arguably
stem from the confidence JLP investment will bring to Basing View.
8
Scheme Programme
8.1
Subject to Cabinet approval of this report it is anticipated the contract could
become unconditional as early as the first week of July. Muse has agreed
terms with their preferred contractor and will enter into a building contract
simultaneously with the sale contract becoming unconditional.
8.2
Based on the current programme from the preferred contractor, construction is
anticipated to take place from mid-July 2014 through to October/November
2015.
8.3
There will be some disruption to the road network as an inevitable
consequence of the enabling works to create the new section of road along
the western boundary of the site. The road closure programme will be agreed
between Muse and HCC Highways.
8.4
The council and Muse will be keeping residents and businesses within Basing
View and the surrounding area advised of the closures/re-routing, conducting
regular news releases through various forms of media.
9
HR issues
9.1
None.
10
Equalities
10.1
As this decision does not create or amend a policy, strategy or service, no
equality impact assessment has been carried out.
11
Risks identified
11.1
Appendix 2 identifies the principal risks and comments on the controls that are
proposed to mitigate the risks in an acceptable manner where possible.
11.2
On the basis the council will receive its financial return at the point of
unconditionality, the financial risk is considered low. There is the potential for
some overage arising from unspent contingency, but given the outstanding
project risks it is considered prudent to assume any additional payment to the
council could range from £0 to £150,000.
11.3
From the point of unconditionality, the principal development risks pass across
the Muse and its contractor. The council’s land receipt will be fixed and
received at the point when the sale becomes unconditional along with the
recovery of sunk costs.
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11.4
Delay in the contracts becoming unconditional beyond early July would
increase the risk of the construction costs rising which could affect the overall
viability of the project and call into question the delivery programme.
12
Legal implications
12.1
The legal agreements governing the development of the site and the council’s
disposal have been agreed in accordance with the heads of terms approved
through the Portfolio Holder report in July 2013.
12.2
The council will be fulfilling its obligations under the contract to deliver vacant
possession of the site and land assembly at the point of reaching the
unconditional date.
12.3
At the point when Muse commence construction and the council receive its
land payment, this will also include reimbursement for property acquisition,
demolition and consultants costs, set out in Confidential Appendix 3.
12.4
At the point of unconditionality the Headlease will become operational which
involves the council entering into a 150 year Headlease (with an extension to
extend by 25 years) with JLP. The terms for the Headlease are consistent
with the heads of terms put forward in the reports to the Portfolio Holder for
Strategy in July 2013.
12.5
Under s.123 of the Local Government Act 1972 a council is not permitted to
dispose of land for less than the best consideration than can be reasonably
obtained for it, except with the consent of the relevant Secretary of State. The
council’s valuers (CBRE) have judged that the proposed sale would be at an
undervalue and not at best consideration. Indeed, as set out in paragraph 6.1
of this report, the land receipt would fall below the minimum level agreed
under the development agreement entered into by the council with Muse.
This is why Cabinet has to reconsider the question of whether to proceed with
this transaction.
12.6
The Secretary of State has given a general consent in 2003 to councils to
dispose of land where that council considers that the purpose for which the
land is to be disposed is likely to contribute to the promotion or improvement
of the economic and / or social and / or environmental well being of its area
and residents. The second condition to this consent is that the difference
between the unrestricted value of the land to be disposed of and the
consideration for the disposal does not exceed £2,000,000 (two million
pounds). CBRE have assessed that the difference between these 2 values
does not exceed £2,000,000, therefore the council is permitted to dispose of
this land at an undervalue despite the bar under s123 of the Local
Government Act 1972 and the fiduciary duty of the council to its council tax
payers.
12.7
A second potential legal impediment to this disposal at an undervalue is the
question of State Aid under Article 107 of the 2009 EU Treaty. State Aid
arises where public money or support is provided to an undertaking which
distorts competition and affects inter EU trade. The distortion of competition
affecting trade between member states is strictly interpreted, so an initial
analysis of this issue might assume there was State Aid. There is, however, a
de minimis provision that allows for 200,000 euros (approximately £160,000)
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of State Aid to be given to an undertaking in any 3 year period. As the
undervalue is below this amount, then this de minimis provision would apply
and exempt this transaction from the State Aid rules.
13
S151 Officers Comments
13.1
Independent external advice on the best consideration position under Section
123 of the Local Government Act 1972 in respect of the land disposal has
been provided. This identifies that the land payment proposed is less than
best consideration at an under value of £157,000.
13.2
Under the proposal the council will also receive repayment of significant ‘sunk
cost’ expenditure including costs associated with site assembly
13.3
Cabinet need to specifically consider the economic and regeneration benefits
outlined in the report and determine, if agreed, that the disposal of the site as
proposed supports the promotion or improvement of the economic, social
and/or environmental well-being of the area and or residents.
13.4
Payment received from the disposal will mainly be a capital receipt and the
book value of the land will be written out of the council’s accounts.
14
Conclusion
14.1
The scheme has reached an advanced stage with good progress having been
made through the discharge of the various contract conditions. The financial
implications arising from the increase in build costs are disappointing and will
mean a significantly lower land receipt compared with the anticipated return at
the phased proposal stage in July 2013. However, the reasons for this are
well documented and reflect the complexity of developing this project in this
particular location and also broader economic market conditions.
14.2
The council and Muse have worked pro-actively to mitigate the financial
position and reach an agreement on an appropriate sharing of the additional
burden of the costs.
14.3
The opportunity to deliver John Lewis at Home and Waitrose into Basingstoke
is a major milestone for the Basing View project which can act as a launch
pad for a number of positive initiatives, not just within Basing View, but also
the town centre. The scheme will bring further enhancements to the town
centre infrastructure through the section 106 and off-site highways
contribution which will further enhance the links between Basing View, the
station and Festival Place.
14.4
It is recommended the revised financial arrangements and land receipt is
approved and the council proceeds to the unconditionality stage of the
Agreement for Lease and Supplemental Agreement.
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