2.13 Planning Permission for the 2 Marsham Street site was given by Westminster City Council on the basis of a mixed development of the site of office accommodation, housing and other commercial development. The Home Office has contracted to sell the surplus land not required for its office development to AGP for £11 million for housing and commercial development in line with the planning permission but is not obliged to transfer the land until the development has reached certain key milestones. There are arrangements for termination of the land sale in the event that the residential/commercial development is badly delayed so as to frustrate the contract. AGP has subsequently sold its rights to this surplus land to a subsidiary company AGPRD (Annes Gate Property Residential Developments) established to carry out the residential development. A further agreement has been made whereby Galliard Homes Ltd will purchase the share capital of AGPRD once the surplus land development is completed.
2.14 A clawback arrangement has been put in place so that the Home Office can benefit from any increase in the value of the surplus land development. This arrangement means that:
■ The Home Office will receive 50 per cent of any increase in the value of the site resulting from planning permission granted before 26 March 2012;
■ The Home Office is entitled to a share of savings on specified costs; and/or
■ The Home Office is entitled to an increasing percentage share over specified limits of aggregate sale proceeds.
2.15 The planning permission stipulates that the final 25 per cent of the Home Office building floorspace cannot be occupied until practical completion of the residential/commercial site. There is therefore a theoretical risk that the Home Office will not be able to fully occupy its offices if the residential/commercial site has not been completed. The Home Office considers that the risk of this scenario materialising is slight since Bouygues is carrying out the construction of both the office and surplus land developments and AGP is not entitled to receive any payment from the Home Office until it is able to occupy 100 per cent of the office space and the Independent Certifier has declared that the contract requirements have been met. The Home Office decided to retain this risk following legal advice that any contractual arrangement to mitigate this risk by permitting it to step in to complete the residential and commercial development would be very complicated and it had a number of other protections. In addition, Westminster City Council have sent a non-binding letter to the Home Office stating that planning conditions may be varied if necessary to overcome any problems associated with the above scenario materialising.
2.16 Variation bonds for £30 million were issued but not funded as part of the index-linked bond in order to provide potential funding for any construction cost increases:
■ £10 million of these bonds would be sold to cover the costs of any Home Office initiated changes to the Marsham Street office building specifications. If these bonds are used, the Home Office has to compensate AGP with a higher accommodation and services payment.
■ The remaining £20 million of the bonds would be sold if AGP's own costs are higher than anticipated. If these are used then AGP's equity returns will be diluted.