Pleasurama here we go again.

Bit of a council U-turn here, I wonder if it’s a vote winner, it seems to back on with The Royal Sands, no flood risk assessment, the council get full liability for the cliff for the life of the development, and from the bandstand we get to look a 100 feet of corrugated rubber, instead of the beach and harbour.

This is what they have to say:

Royal Sands Development

To: Cabinet – 11 September 2014

Main Portfolio Area: Cllr Rick Everitt, Cabinet Member for Finance & Estates

By: Edwina Crowley, Head of Economic Development & Asset

Management

Classification: Unrestricted

Ward: Eastcliff

Summary: Further information has become available since Cabinet adopted

the recommendations of the Overview and Scrutiny Panel on 20th

February. Cabinet are asked to consider this information and

determine the resolution.

For Decision

1.0 Introduction and Background

1.1 On 20th February Cabinet made a number of decisions based upon the

recommendations of the Overview and Scrutiny Panel which it received and adopted.

2.0 The Progress since the Decision on 20th February

2.1 Since the Cabinet report of 20th February there has been a change in project team as

follows:

Edwina Crowley Project Lead, Head of Economic Development and Asset

Management

Steven Boyle Interim Legal Services Manager

Mike Humber Technical Services Manager

Grant Burton Capital Development Manager

2.2 The team is supported by Stuart Wortley and Luke Miotte of Pinsent Masons (legal

advice) and Tim Mitford-Slade of Strutt and Parker (valuation advice). The project team

have re-visited the site and reviewed the documents and correspondence.

2.3 Acting on the recommendations contained in the Cabinet report made on the 20th

February the Council served Notice on the developers legal advisor requiring remedy

of the breach of the agreement.

2.4 Following the service of the Notice the development agreement contractually provides

for parties to enter into mediation when there is a significant dispute and therefore on

10th July, a without prejudice meeting took place at the offices of Pinsent Masons.

2.5 At this meeting the Developer informed officers that they had been approached by

Cardy Construction Ltd to acquire the share capital of SFP (Ventures) Ltd thereby

proposing to take ownership of all SFP contractual obligations (including this

development agreement with the Council) and that in principle, the Developer is keento accept the offer. This would mean that Cardy Construction Ltd would become

responsible for finishing the construction works in accordance with the planning

permission.

2.6 Furthermore Cardy Construction Ltd would amalgamate this company into the

established parent group of companies which has an long history of successful

performance with such schemes.

2.7 Additionally, Cardy Construction Ltd are, in principle, in a position to enter into an

agreement which, subject to successful negotiations between the parties, would mean

the Council would not only receive the overage payments in advance of completion of

the construction but also provide additional benefits for the Council.

2.8 Cabinet is asked to note at this point that the current contractual arrangements with

SFP entered into in 2006 mean that the Council has substantially disposed of its

freehold interest in the land (with freehold transfer provisions documented in the

development agreement); the Council’s only continuing legal interest is the right to

receive overage payments in respect of the completed units.

2.9 Notwithstanding the problems that the developer has outlined which they state have

caused a problem in developing out this construction (see 3.2.3) if the matter

progressed to Court, the Courts would expect the Council to undertake an objective

assessment of all reasonable offers put forward in order to complete this construction

project and by doing so receive the overage payments owed to them.

3.0 The Current Situation

3.1 In light of this offer advanced through the mediation process, the council development

project team has reviewed all the documents and correspondence and can provide

the following comment on the position.

3.2 It is clear following legal advice that terminating the development with SFP would not

be straightforward for the following reasons:-

3.3 Notwithstanding the expiry of the date for compliance contained within the Notice

served on the developer’s legal advisors, the procedure for terminating the

development requires the service of 3 additional separate notices. The Notice served

referred to the breach committed and had to allow the developer reasonable time to

comply with performance documented in the notice. The developer may comply in full

or in part, and at the end of the period for compliance the developer would be allowed

further time to proceed to the next phase of works.

3.4 To continue down this route of performance management means the process will be

likely to be drawn out over a number of years.

3.5 Furthermore, SFP (Ventures) Ltd could at any stage decide to contest any attempt to

terminate the development agreement by formal action on the basis of several

arguments. Whilst there are varying degrees of merit to these potential challenges

they might include:-

a) some of the delays to the development were caused by matters outside of their

control and therefore may validate the request by SFP to extensions of time, for

example the problems with the cliff face wall, access and egress restrictions.

b) SFP have also made allegations about the actions of a particular Councillor

trying to undermine its attempts to fund the scheme and promote the

development (including its attempts to identify a suitable hotel operator).

c) Notwithstanding the programme of works agreed at the time of the 2009

variations required the developer to build in an illogical manner because the

hotel could not sensibly be opened with the residential still underway; the

highways issue in 2010 made it practically impossible too for the reasons

documented in (d) below.

d) A review of the programme of works in light of the access/egress restrictions

mentioned means that it would be extremely difficult to follow in a safe and

practicable manner (given that if the hotel was built first in accordance with the

programme, access to the remaining site would be obstructed by the hotel), and

Health & Safety Construction Regulations require adjustments to works

programmes where there is a safer way of delivering the project.

3.6 SFP claim to have invested significant sums of money in the development, accordingly,

they are likely to fight very hard to protect SFP's interest in the development site.

3.7 For these reasons, any formal attempt to terminate the development agreement would

undoubtedly take a considerable time and there is always a risk with litigation that the

Council may be unsuccessful and at the very least the outcome would be uncertain.

Contentious litigation would be very likely in this case and progressing with such action

would be expensive (with uncertainty as to where the Court would award the costs) and

could tie the development site up for many years.

3.8 The Council's decision through Cabinet to terminate the development agreement on

20th February 2014 was reached on the basis of a summary of Pinsent Masons' legal

advice. Issues which have been raised by Parry Law in response to the Notice served

for the breach have resulted in amendment to the original advice, including (as

requested by Members) a review of the comments around the absence of a long stop

date being a “material defect”

3.9 There was no one off long stop date in the development agreement whereby if the

developer had not performed the Council would have step in rights to get the site back.

The agreement did however have several performance indicators; failure to perform

one of them would trigger a review of the agreement with the Council taking action as

appropriate. In light of the amount of money that the developer would have invested at

each stage, Pinsent Masons advise it is unlikely that they would have been agreeable

to a long stop date when the contracts were being negotiated in 2006.

4.0 Cardy Construction Ltd

4.1 Focusing on the present situation, it is clear that circumstances have materially

changed in that there is now a reputable and established construction company,

willing to take over SFP and they in turn have indicated they are willing to transfer

their interest to this company. Upon completion of company transfer contracts

between SFP and Cardy Construction Ltd, the current owner of SFP would have no

further involvement with the development.

4.2 Cardy Construction Ltd have in principle funding in place to complete the

development within a reasonable time frame. Furthermore, they are of a sizable

nature, have proven technical expertise and a consistent record for delivering quality

projects of this type and scale. 4.3 It is also proposed that the Cardy Construction Ltd will employ local tradespeople for

this project and engage apprentices. A construction project of this scale will employ

up to 200 people on this project when in full operation, there is also the ongoing

opportunity for jobs aligned to the hotel trade, commercial units and servicing of the

residential common parts.

4.4 Overall, Cardy Construction Ltd is therefore considered a much stronger covenant for

the development and for this reason are able to attract funding for the scheme,

making delivery viable.

5.0 Commercial Considerations

5.1 The project team had been asked to consider the present value of the site and what

the implications would be if the council was able to buy the site from the developer.

Valuation experts Strutt and Parker were asked for advice on the present value of the

freehold interest.

5.2 Strutt and Parker advised that the site is worth a significant amount of money even in

its part developed state.

5.3 The Council does not have the funds to buy the site back (see section 7.1 below)

even if the developer was willing to sell the site. The market value of the scheme is

the value added by the granted planning permission for the finished scheme.

5.4 Even if the Council was able to buy back the site then the Council would still be

required to secure an alternative developer, in order to secure the best financial value

for the site, so it is likely that the same scheme or a scheme of similar type and scale

would be developed out.

5.5 Therefore, the offer by the Cardy Construction Ltd to finish the scheme and

compensate the council for the overage money owed is considered to be a good

solution. To get the site developed will not only bring financial return to the council but

will support regeneration in Ramsgate, both by direct and indirect employment

opportunities.

5.6 The project team have considered the benefits of receiving the overage payment in

advance of completion of the development. The project team are also confident that

they can negotiate better contractual terms for the council to include a call in option

for non-performance.

5.7 The offer from the Cardy Construction Ltd to build out the site in a timely manner is,

subject to successful negotiations, considered by the project team to be acceptable in

principle.

6.0 Recommendations

6.1 It is therefore recommended that Cabinet authorise officers to defer the

recommendations of the Cabinet paper dated 20th February whilst positive

negotiations continue;

6.2 Furthermore, that Cabinet authorise the project team (in consultation with the S151

Monitoring Officer, Head of Paid Service and Cabinet Member for Finance and

Estates) following due process and procedures to progress with negotiations;

6.3 That a report be brought back to Cabinet in October, documenting the outcome of the

negotiations for final decision.

7.0 Corporate Implications

7.1 Financial and VAT

The Royal Sands development is currently accounted for within the Council’s asset

register and subsequently within the Balance Sheet. The financial implications of the

aforementioned have been detailed below:-

To receive the overage monies owed to the Council would result in a substantial

capital receipt that would be used to fund council’s capital expenditure programme.

It is noted that preliminary investigations were held by the project team to get an

indicative present value for the site and that this amount is a considerable sum. There

is no allowance in the budgets to take this action, it would constitute as capital

expenditure for acquisition of the rights bought back that had previously been sold.

There has been a decline in capital receipts over the past few years due to the

economic downturn and the need to achieve best value. Currently the council does

not hold sufficient funds in the unallocated capital receipt reserve to fund such

expenditure as it has been fully committed to fund the existing capital programme. It

is likely the Council would need to borrow to facilitate the purchase of the leases,

which would result in increased revenue costs for the Interest on borrowing and the

minimum revenue provision for principal repayment.

Once agreement has been sought on which option would be the most appropriate

then specialist VAT advice will need to be sought.

7.2 Legal

The legal issues are broadly as outlined within this report.

There are processes to be followed to seek to terminate the existing agreements as

outlined. There is likely to be a challenge to this process which will be costly and time

consuming.

Careful attention needs to be made to any action taken either to terminate the existing

agreement, purchase the leases or seeking to sign a new agreement to ensure the

Council’s legal position is secured.

Appropriate advice has been sought at all stages so far to ensure that the Council’s

position is sustainable.

7.3 Corporate

As outlined within this report the position has changed materially since the Cabinet

Decision was taken in February.

Given that there is now an alternative which may bring about a solution to the

problem avoiding the legal challenges it is appropriate that members are given the

opportunity to consider this and to take a decision based upon all of the options.

7.4 Equity and Equalities

If Cabinet agree to taking this forward, all discussions and agreements are subject to

a Council equity and equalities assessment.

8.0 Decision Making Process

8.1 This is a key decision subject to call in.

Contact Officer: Edwina Crowley, Head of Economic Development and Asset

Management

Reporting to: Madeline Homer, Acting Chief Executive

Corporate Consultation Undertaken

Finance Nicola Walker, Finance Manager - HRA, Capital & External Funding

Legal Steven Boyle – Interim Legal Services Manager & Monitoring Officer