The Cabinet was reminded that in 2004, the Council embarked on a project in conjunction with Edinburgh House Estates Limited to redevelop what was then referred to as the Heritage Quarter, an area in Gravesend Town Centre encompassing St George’s Shopping Centre, the area north of the Shopping Centre and the area north of Gravesend Market.

Redevelopment in the following 13 years was not forthcoming.

In 2017, Edinburgh House decided to market their interest in the development opportunity. 

In late 2017, Reef Estates Limited expressed an interest in the development opportunity and in working with the Council to stimulate wider regeneration of Gravesend Town Centre.

Following initial discussions, due diligence was undertaken to assess the interest that was being presented, which included securing legal opinion from Trowers & Hamlin, property advice from Jones Lang LaSalle and treasury and accounting advice from Link and engaging in discussions with the Council’s audit firm at the time, Grant Thornton.

In 2018, the Cabinet and the Overview Scrutiny Committee was provided with information relating to the proposals from Reef Estates Limited regarding the development of the Heritage Quarter, including the St George’s Shopping Centre. These reports were supported by presentations from Reef Estates on their proposal. The report set out the view that the proposal, in the round, would deliver economic and social benefits to Gravesend Town Centre given the strategic position of the St George’s Shopping Centre and the ability of the Agreement to act as a major catalyst to much-needed wider town centre regeneration.

Following consideration of the proposals by the Cabinet and the Overview Scrutiny Committee, it was agreed that the Council would terminate the development agreement with Queenridge Properties Ltd/Edinburgh House and enter into legal agreements with Reef Estates Limited and Aviva Investors relating to the St George’s Shopping Centre. At the same time, the Council entered into an Exclusivity Agreement with Reef Estates Limited to bring forward residential and commercial development proposals for land formerly known as the Eastern and Western Quarters of Gravesend Town Centre.

The Agreement for the St George’s Shopping Centre followed the form of an income strip structure. This was effectively a forward-funding structure whereby the investor (Aviva Investors) enabled the developer (Reef Estates) to acquire the interest in the Shopping Centre from Queenridge Properties Ltd/Edinburgh House Estates Limited, with further funding provided by Aviva Investors to deliver the proposed reinvigoration of the St Georges Shopping Centre. 

As reported to Members in the General Fund Provisional Outturn Report 2021/22 and the 2018/19 Statement of Accounts, the St Georges Shopping Centre Arrangement was treated as a finance lease, following assessment of the accounting treatment required. This included discussions, prior to entering into the agreement, with representatives for the Council’s auditor, Grant Thornton. This treatment was accepted and confirmed by Grant Thornton in the 2018/19 Statement of Accounts.

A new audit team from Grant Thornton was appointed to audit the Council’s 2019/20 financial statements and, during the audit process, the auditors requested that the Council reconsidered the accounting treatment being applied for the St Georges Shopping Centre transaction, indicating that the treatment for the transaction should be that of a loan agreement and also challenged the implicit interest rate applied.

The Council sought advice from various sources to ascertain which accounting treatment should be applied for the transaction. Advice was sought from CIPFA, Link (the Council’s treasury management advisors) and a technical expert in Local Government Accounting. All concurred with the view of Grant Thornton that the transaction should be treated as a loan, and that additional interest costs derived from the implicit interest rate within the arrangement should be reflected within the Council’s General Fund balance.

Given the financial and accounting implications that had emerged, the Council approached Aviva Investors to begin discussion on termination of the arrangement. Aviva Investors responded openly to the Council’s request and following a period of negotiation with Aviva Investors during which the Council were assisted by Reef Estates and Jones Lang LaSalle, consensus was obtained from all parties to end the legal agreement and remove the lease arrangement between the Council and Aviva Investors. 

To end this arrangement, the Council will be required to make a capital payment to Aviva Investors in the form of a surrender premium, effectively replacing the finance lease with external borrowing. The value of this sum would be intended to represent the ‘make-whole’ position of the deal, taking into account that Aviva Investors were unlikely to be able to replace the income stream for its investors with liquid assets (i.e., gilts) and the likely time that will be taken to reallocate their investment in what was currently a challenging market.  

In return, Aviva Investors will surrender the headlease and bring to an end the operational underlease agreement with the Council.  The Council would then have an unencumbered interest in the St George’s Shopping Centre, giving the Council full control over its future operation.

As the Council has a responsibility to ensure it is securing economy, efficiency and effectiveness in deploying the resources it has available to it, the Council engaged ArlingClose, an independent Treasury Advisory firm, to provide specialist advice in reviewing the proposed termination methodology and the valuation calculation used to inform the surrender premium valuation.  The review identified opportunities to negotiate on some of the elements used in the methodology to the benefit of the Council therefore ArlingClose were engaged to act on behalf of the Council to negotiate a revised settlement sum and agree the final valuation methodology to calculate the surrender premium to be paid.  

A report on the final valuation methodology had been produced and included within the report. It set out the view of ArlingClose that the final valuation methodology agreed provided a fair valuation for the Council.

The Director (Corporate Services) advised that financial cashflow modelling including sensitivity analysis had been conducted by the technical accounting expert engaged by the Council as well as the Council’s Finance Team. The finance and value for money implications together with the Legal and Taxation Implications; Accounting impact – MRP and statement of accounts; Treasury Considerations and Property Management Implications had all been detailed within the report for Member’s consideration. 

Advice on alternative options for structuring the required loan debt had also been sought from ArlingClose. The final advice report had not been received from ArlingClose by the time of publication of the report but a Members’ Briefing Note would be prepared by ArlingClose and shared with Members once available.  This and the final advice report will be used to inform the final approach to structuring the loan requirement.  Members were informed that the final loan structure will be impacted by prevailing interest rates at the time of surrender and at the points of refinancing during the duration of the loan requirement.

In coming to a decision, Members were requested to consider the information detailed within the report and to also take into consideration the nonfinancial benefits that would be derived from unencumbered freehold of the St Georges Shopping Centre which would provide greater opportunity for the Council to manage and consider the future purpose of the shopping centre without being constrained by any requirements of Aviva as Investor. It would also make it legally easier to adjust, modify or repurpose the centre and the area to the rear as identified in the current St George’s Square proposals as all the land holdings would be within the direct ownership of the Council.

The Director (Corporate Services) informed Members that Mr David Blake from ArlingClose was in attendance and would be happy to answer any questions that Members may have.

The Cabinet noted the information contained within the report, including the financial information, that needed to remain confidential at this stage.

Questions from Cabinet Members were put to and answered by officers and Mr David Blake.

The Cabinet expressed its disappointment with Grant Thornton change of opinion regarding the accounting treatment and sought reassurance that the proposed accounting treatment was now the best way forward for the Council. 

The Cabinet was informed that expert advice had been sought and the Council had been advised that the proposals set out in the report/recommendations would be the best way forward for the Council. The proposed accounting treatment had also been shared with Grant Thornton who had accepted it ‘in principle’.

The Cabinet was informed that the current accounting treatment was a complex transaction however the proposed accounting treatment would be much simpler and would mirror similar transactions that had been taken at a number of other local authorities.

The Cabinet noted that, if it was to approve the recommendations, then all the land holdings would be within the direct ownership of the Council and requested a valuation. Officers advised that they would explore this further and update Members outside of the meeting.

Resolved that:

1.    the Council enter into the necessary legal agreements to give effect to the removal of the leasing structure currently in place with Aviva Investors relating to the St Georges Shopping Centre and replace this with external borrowing;

2.    delegated authority be granted to the Director (Corporate Services) (in the role of S151 officer) in consultation with the Leader of the Executive, Chief Executive and Monitoring Officer, and in conjunction with the Council’s Property, Finance and Legal teams, to take all necessary practical, financial, and legal actions required; and

3.    the Cabinet noted the need to take on additional borrowing will see external debt exceed the CFR in the short term.  In response to this the Council will review its capital investment plans.

The Leader thanked Mr David Blake for attending the meeting and answering Members questions.