NATIONAL AUDIT OFFICE

REPORTBY THE COMPTROLLERAND AUDITORGENERAL

Sale of CountyHall (RiversideBuilding) to ShirayamaShokusan CompanyLimited

ORDEREDBY THE HOUSEOF COMMONS TO BE PRINTED 30 MARCH1995

LONDON:HMSO HC 314 Session 1994-95 Published 5 April 1995 f8.95 NET SALE OF COUNTY HALL IRIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN C0MP.m-Y LIMITED

This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn National Audit Office Comptroller and Auditor General 30 March 1995

The Comptroller and Auditor General is the head of the National Audit Office employing some 800 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of otherpublic sectorbodies: and he hasstatutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources. SALE OF COUNTY HALL C-WERSIDE BUILDING) TO SHIBAYAMA SHOKUSAN COMPANY LIMITED Contents

Page

Preface

Part 1:Background to the sale of County Hall 1

Part 2:The conduct of the sale to Shiiayama Shokusan Company Limited 12

1. County Hall complex 26

2. Chronology of sale 27

3. Statement by Shirayama Shokusan Company Limited on the County Hall development 33

4. District Auditor’s management letter relating to the London Residuary Body accounts, 1993-94 35 SALE OF COUNT,’ HALL (RIVERSIDE BUILDING TO SHIRAYAM.4 SHOKUSAN COMPANY LIMITED Preface

1 The Riverside Building of the County Hall complex, begun in 1913 and completed in 1933, was designed and built for the London County Council. The County Hall complex, including the North, South and Island Blocks and tbe Addington Street Annexe, was the home to successive local government bodies in London until the abolition of the Greater London Council in 1986 and the Inner London Education Authority in 1990. In 1985 the London Residuary Body was set up by an Act of Parliament to deal with a wide range of residual matters, including the disposal of property or transfer to successor bodies.

2 The County Hall complex was earmarked in 1986 for disposal by the Residuary Body. The initial sale to the County Hall Development Group fell through in October 1990, with the Group forfeiting their g20 million deposit plus E4.8 million accrued interest. The subsequent sale of the Riverside Building to Shirayama Sbokusan Company Limited, a Japanese private company, was completed in October 1993. The sale price was f60 million, including a deferred payment of El0 million. The other land and buildings on the County Hall complex are the subject of a contract for sale, signed on 14 October 1994, at S17.5 million to a property company, Frogmore Developments Limited. The sale was completed on 29 March 1995.

3 The London Residuary Body is due to he wound up later in 1995 and by that time some 292.3 million of sales receipts in relation to the sale of County Hall will have been made available for distribution to the London Boroughs, in accordance with the provisions of the Local Government Act 1985. The deferred payment of El0 million for the Riverside Building will fall to the successor body a lead Borough - to collect and distribute as appropriate to the London Boroughs by 2012 at the latest.

4 This report by the National Audit Office examines the sale of the Riverside Building to the Shirayama Shokusan Company Limited. Part One of the report setsout the events leading up to thesale. Part lbvo of thereport examines the Residuary Body’s preparations and conduct of the sale, the contractual arrangements and some wider considerations. SALE OF COUNTY HALL WVBRSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED Part 1: Background to the sale of County Hall

London Residuary Body

1.1 The London Residuary Body was set up in August 1985, under section 57 of the Local Government Act 1985, to deal with a range of residual matters following the abolition of the Greater London Council. These included the transfer and disposal of residual property, payment of compensation to the redundant staff, management of the Greater London Council debt and Superannuation Fund and the provision of a range of agency services to successor bodies. The Education Reform Act 1988 gave the Residuary Body additional duties in respect of residual matters, following the abolition of the Inner London Education Authority in April 1990.

1.2 The Residuary Body is a non-departmental public body sponsored by the Department of the Environment. The powers and duties of the Residuary Body are set out in the Local Government Act 1985, which applies many of the provisions of local government law. Under the Act the Secretary of State for the Environment may give Directions to the Residuary Body.

1.3 The Board of the Residuary Body are appointed by the Secretary of State. The Chairman of the Board is the Accounting Officer. Under Section 79 of the 1985 Act, the accounts of the Residuary Body are subject to audit by an auditor appointed by the Audit Commission, under substantially similar provisions to those applicable to local authorities in accordance with Part III of the Local Government Finance Act 1982. The Audit Commission appointed the District Auditor.

1.4 As at February 1995 the Residuary Body comprised four Board Members who have expertise in the fields of property, iinance and law. Secretarial and adminisirative services are provided by a partner from Eversheds Jaques and Lewis, solicitors. Financial services are provided by the Royal Borough of Kensington and Chelsea. The Board is also assisted by a property consultant and by marketing agents.

1.5 In April 1986 the Residuary Body inherited a substantial and varied portfolio of about 10,000 properties ranging from small sites and buildings of little value, to prime sites of significant public interest, such as County Hall. Much of the property associated with statutory functions was transferred by the Residuary Body to successor bodies having responsibilities for those functions. The Residuary Body had inherited all the records of the former Greater London Council and had the task of agreeing with successor bodies the identity and extent of such properties and the handing over of deeds, records and arrangements for management and maintenance.

1 SALE OF COUNTY HAIL (RIVERSIDE BUILDINQ TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

1.6 Property that was not transferred was to be sold and the proceeds used for the benefit of London Boroughs. Over 500 staff of the Greater London Council Valuation and Estates Department, many of whom were professionally quali6ed and familiar with the properties, were transferred to the Residuary Body to manage the properties and carry out the work involved in their transfer or disposal. They were supplemented by external agents and consultants who provided specialist valuation and marketing advice. A variety of methods of sale were used by the Residuary Body, including public auction, tender following public advertisement and private treaty.

1.7 The Residuary Body’s statutory responsibilities relating to land and property (Box One) include duties to:

. dispose of any land not required for carrying out its fnnctions;

. dispose of property in any manner it wishes subject to Section 123 of the Local Government Act 1972, which provides that unless the consent of the Secretary of State is obtained, it may not dispose of land other than by way of a short tenancy for a consideration less than the best that can reasonably be obtained; and

. use its best endeavours to complete its work as soon as practicable and in any event by 1 April 1993 (extended from 1 April 1991, following the abolition of the Inner London Education Authority, under Section 187(l) of the Education Reform Act 1988). In accordance with its statutory duties, the Residuary Body has submitted proposals for its wind-up, and the Secretary of State for the Environment expects to make the appropriate orders when the sale of County Hall has been completed.

Legislation underwhich t)e Londos@iduerf@odv i~hei~t&CoeotpkelI~ ,I ,: ” ., ,’ The ResiduaryBody inherited County Wall under Article Wofthe LocalGpverq& Re@9ani$ti,on, (PropertyEtc) Order 1996 (Statutorylnstmment 148), theprincipal PropertyOrder made und$the 1985 Act

1.8 The Government, in its proposals for reorganising local government in Greater London and the Metropolitan Counties, stated that it envisaged that abolition of the Greater London Council and Metropolitan County Councils would give rise to opportunities for the sale of surplus assets to the private sector, with the proceeds, in the form of capital receipts, distributed for the benefit of the local areas. The London Residuary Body was, therefore, given the statutory duty to dispose of any land and buildings held by it which were not required for carrying out its functions. The 1985 Act provides that, except with the consent

2 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

of the Secretary of State, all such disposals are required to be for a consideration not less than the best that can reasonably he obtained. Accordingly, once the Residuary Body had identified a property as being surplus to its own requirements, it sought to dispose of that property in accordance with its statutory duty. In addition, the Residuary Body considered that it had to have regard to its general duty to complete its work as soon as reasonably practicable. The Secretary of State is empowered to give directions to a residuary body in relation to the exercise of its functions. The Department of the Environment informed the National Audit Office that when exercising this power to give directions, the Secretary of State could and did take into account wider considerations than those lawfully available to the London Residuary Body.

1.9 By the end of 1994 the Residuary Body had completed over 1,600 property sales, involving several thousand properties, with receipts of some 5658 million. The Residuary Body deals with receipts in accordance with Capital Money Orders (a form of statutory instrument) made from time to time by the Secretary of State under the Local Government Act 1985. Orders made under the Act either require the Residuary Body to distribute money to the London Boroughs or to apply capital money to defray the costs of its own functions.

County Hall

1.10 On 1 April 1986 the Residuary Body inherited the County Hall complex under the 1985 Act (Box One). The complex consists of five buildings. The Riverside Building, begun in 1913 and completed in 1933, was designed and built for the London County Council. Additions to those parts of the Riverside Building surrounding the inner Members Courtyard were added in the 1960s. The other buildings comprise the North and South Blocks; the Island Block; and the Addington Street Annexe. A photograph of the County Hall complex is at Appendix 1.

1.11 The complex comprised approximately 2.2 million square feet of administrative office space, all of which was in use by the Greater London Council up to 1 April 1986. The Residuary Body considered the general condition of the complex in April 1986 was reasonable given the age of the buildings, although the services in the older buildings needed renewal. Following the abolition of the Greater London Council, a significant proportion of the complex became vacant. The Residuary Body’s own occupation in July 1986 amounted to some 40 per cent of the usable space but was decreasing; some 30 per cent was vacant; and the remaining 30 per cent was occupied by a number of successor bodies including the Inner London Education Authority. So far, the sale of County Hall has taken nine years. A chronology of the history of the sale, including the various planning inquiries, is at Appendix 2. SAL!? OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Marketing of County Hall

1.12 Following competitive tendering, the Residuary Body commissioned Richard Ellis, chartered surveyors and international property consultants, in April 1986 to conduct a marketing appraisal for the disposal of County Hall. Their report in August 1986 concluded that there was a market for the County Hall complex and the most satisfactory disposal would be achieved by refurbishment and change of use of the Riverside Building, together with refurbishment or redevelopment of the other buildings for general office use. The marketing agents recommended that the Residuary Body should, through the planning process, promote alternative uses for the County Hall complex and specify a iirm date when purchasers could expect completion of the sale with full vacant possession. The Residuary Body accepted these recommendations and appointed Richard Ellis as marketing agents in August 1986. Marketing efforts were to be concentrated on major developers and financial institutions in the United Kingdom, Europe, the United States of America and the Far East.

1.13 In October 1986, the marketing of County Hall began. The Residuary Body submitted planning applications for a change of use for the Riverside Building to hotel and residential use; and applications to use the whole complex as general offices rather than for local government purposes. Details of subsequent planning consems are al A~qendix 2.

1.14 As a result of the marketing, expressions of interest were received from some 40 parties. In 1988 the Residuary Body invited tenders and received 12 bids. In July 1988 the Residuary Body approved the sale of the complete County Hall complex (Riverside Building, North, South and Island Blocks and Addington Street Annexe) to the County Hall Development Group (the Group) for 2185 million. The Group’s hid was on the basis that vacant possession would be given on completion of the sale on 30 September 1990. Contracts were exchanged on 27 January 1989 and the Group paid a deposit of 220 million. The Group proposed to convert the Riverside Building to apartments, a hotel and heritage centre; and to demolish the other buildings and replace them with new office developments. The Group agreed to grant a lease of a major part of the Riverside Building to Tunesure Limited, a joint venture company set up specificallyfor thedevelopment of an international hotel. Shirayama Shokusan Company Limited, a private Japanese company, was to act as developers; Trafalgar House plc as contractors; and Hyatt Hotels and Resorts as operators of the hotel.

1.15 In September 1990 the Residuary Body agreed to the Group’s request for deferral of completion of the sale by 17 days to allow shareholders to subscribe additional funds, but the option was not taken up. The Group had also requested a reduction ln the price, but no agreement was reached. The Group failed to complete the contract as planned on 1 October 1990 and eight days later, after the Residuary Body served a notice requiring completion by 24 October they called in a Receiver. On 25 October 1990 the Residuary Body notified the Group that they considered the 1989 agreement for the sale rescinded and the g20 million deposit forfeited. The Group’s deposit of

4 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIBAYAMA SHOKUSAN COMPANY LMITED

220 milllon, plus 4.8 million accrued interest, was transferred to the Residuary Body’s Capital Account and subsequently made available for distribution to the London Boroughs (paragraph 1.91. These transactions were reflected in the publicly available accounts of the Residuary Body on which the District Auditor has given unqualified audit opinions.

1.16 In February 1991, following ihe rescission of its contract with the Group, the Residuary Body reviewed the performance of its marketing agents. The Residuary Body considered that Richard Ellis had acted satisfactorily and had developed considerable knowledge of the property, and it therefore reappointed them as the marketing agents. The Residuary Body also decided in May 1992, when following completion of a large part of its work the majority of its senior officers had been made redundant, to retain the services of its former Director of Property Services as its property consultant. This was In order to provide the necessary continuity and expertise in relation to the disposal of County Hall.

Sale to Shirayama Shokusan Company Limited

1.17 Some five days after the Residuary Body’s rescission of its contract with the Group, Shirayama Industrial Investment Limited, a subsidiary of the Shirayama Shokusan Company Limited, submitted a bid for f60 million for the Riverside Building only. The purchaser could be either Shirayama Industrial Investment Limited, Tunesure Limited or a new joint venture company. The bid was not conditional on the granting of planning consent by the London Borough of Lambeth, although it imposed an obligation on the Residuary Body to continue to seek planning consent for the Group’s proposals, including a hotel in the Riverside Building. Selling the whole complex as one entity remained the preference of the Residuary Body, because of the comprehensive nature of the planning consent it was seeking and the difficulties in dividing the County Hall complex into two independent sales. The Residuary Body therefore instructed its marketing agents to continue discussions with other potential purchasers.

1.18 In Novemher 1990, the Residuary Body decided to re-market the whole County Hall complex by following up enquiries which had been received since the receivership of the Group, contacting those who had bid unsuccessfully in 1988 and approaching developers known to be active in the market. The Residuary Body considered that any bid for the complex was likely to be conditional on planning permission.

1.19 In September 1991 planning permissions were granted for the Riverside Building to be used for a hotel, residential apartments, conference and business centre, retail and other uses. The Residuary Body resumed marketing of the complex, but renewed interest was adversely affected by appeals against the planning decisions. A brief history of the planning appeals and consents is included in the chronology of the sale in Appendix 2. Discussions continued with Shirayama Shokusan Company Limited, and on 19 March 1992 the Residuary Body signed an agreement with Shlrayama BV Limited, a subsidiary of Shirayama Shokusan Company Limited, for the sale of the Riverside Building

5 SALE OF COUNTY HALL WVBRSIDE BUILDING1 TO SHIBAYAMA SHOKUSAN COMPANY LIMITED

for 260 million. Shirayama paid a 2.3 million deposit to the Residuary Body and completion was due to take place in October 1993. Shirayama were allowed access to the Riverside Building for survey, but not construction, work.

1.20 A clause in the contract allowed the Residuary Body, but not Shirayama BV Limited, to terminate the agreement no later than 31 December 1992. The Residuary Body included this clause because it wished to keep its options open should it be able to sell the whole complex at one sale for a higher price. A further Z3 million deposit was to be paid by Shirayama lfthe Residuary Body withdrew its option to terminate the agreement, which it did in October 1992, and the sale was completed on 29 October 1993. The contract included a confidentiality clause forbidding either party from disclosing details of the agreement. The Residuary Body agreed to such a clause, as it was of a kind common in property transactions and is designed to protect the financial interests of the parties involved.

London School of Economics conditional hid

1.21 In March 1991 the London School of Economics and Political Science (LSE) had requested marketing material and carried out a preliminary inspection of County Hall. Although no formal approach was made to the Residuary Body, in August 1991 the LSE submitted planning applications to the London Borough of Lambeth of which one was for change of use of some of the County Hall complex, including the Riverside Building, to educational purposes. In its representations to the London Borough of Lambeth and the LSE the Residuary Body did not support the applications, which it considered speculative and unhelpful, as the situation on its own planning applications was uncertain.

1.22 Six days before the exchange of contracts with Shirayama BV Limited in March 1992 the Residuary Body received a conditional offer of 220 million for the whole site from the LSE, working in partnership with a German company, Advanta. The Residuary Body decided not to pursue the LSE bid because of its comparatively low price.

1.23 The LSE continuedto presstheir case.In May 1992 the LondonBorough of Lambeth granted consent to the planning applications submitted by the LSE. In an adjournment debate on 26 June 1992 in the House of Commons the Parliamentary Under-Secretary of State for the Environment encouraged the LSE to submit clear proposalsas soonas possible.On 29 June 1992 the Residuary Body invited the LSE to submit an unconditional bid by 10 July 1992, supported by evidence of their ability to finance the purchase of County Hall.

1.24 Although the LSE submitted financial information by this date no offer was made. The Residuary Body appointed Binder Hamlyn (then known as BDO Binder Hamlyn), chartered accountants, to form a view on the ability of the LSE to launch a bid. The Residuary Body accepted the advice of Binder Hamlyn that there was no serious prospect of the LSE mounting a persuasive bid and signing a contract by the end of November 1992, the date by which the Residuary Body had to exercise its opt-out clause in the contract with Shirayama BV Limited.

6 SALEOFCOUNTYHALL(RlVBRSIDEBUILDING) TOSHIRAYAMASHOKUSANCOMPANYLIMITED

1.25 The Residuary Body considered that the publicity surrounding the LSE’s interest in County Hall was damaging Shirayama BV Limited’s ability to raise finance and hence the prospects of the sale to Shirayama. It therefore proposed to waive its rights under the opt-out clause and make the contract with Shirayama unconditional, precluding further discussions with the LSE. The Residuary Body therefore Informed the Secretary of State of its views on the LSE position. On 22 July 1992 the Secretary of State directed the Residuary Body to take no further action on the sale to Shirayama. This was to allow the LSE a further chance to submit an unconditional bid by 31 July. In August 1992, Shirayama started judicial review proceedings against the Secretary of State’s decision to issue a Direction allowing the LSE time to make a bid.

1.26 On 31 July 1992 the LSE put in a formal bid of 265 million for the whole County Hall complex. The bid was supported by the LSE’s business plan and letters from Hambros Bank Limited and Wright Oliphant, their financial and property advisers respectively. The financial offer of X65 million was expressed to be subject to two formal conditions - the sale of the LSE premises at Houghton Street for El00 million and clearance from the Universities’ Funding Council (now the Higher Education Funding Council for England). Their approval was required for the disposal of assets purchased partly from Exchequer funds, as required by the framework of rules governing universities’ property transactions.

1.27 The Residuary Body informed the National Audit Office that the valuation of Houghton Street was estimated by Wright Oliphant to be in the range of g55 to El00 million. Under covenants applying to one of the Houghton Street buildings the LSE would have been required to pay to the Residuary Body (as the successor body to the Inner London Education Authority who had sold the building to the LSE in 1990) all the net proceeds of the sale of that property. Wright Oliphant estimated that the value of the claw-back would have been in the region of X8.25 million to Z15 million.

1.28 The Residuary Body commissioned a further report from Binder Hamlyn following receipt of the LSE bid. The Residuary Body accepted Binder Hamlyn’s conclusions that there were still major uncertainties about the funding of the Schools project, for example that the timing and value of the Houghton Street sale was uncertain; and that no agreement had been reached on refurbishment costs.

1.29 On advice from its marketing agents the Residuary Body decided, subject to the Secretary of State’s Direction, to reject the conditional bid by the LSE. The Residuary Body considered the net present value of the contractual bid from Shirayama BV Limited was g54 million, plus potential receipts from the sale of the rest of the County Hall complex, estimated in July 1992 to be in the region of El5 million. In net present value terms the Shirayama bid was worth E54 million for the Riverside Building alone, in contrast to the net present value of E46 million represented by the LSE bid for the whole County Hall complex (Table 1 and 2). SAL!!! OF COUNTY HALL IRIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

liming of Payments: Dewsil - March1992 f3 million

ResiduaryBody waived opt-out, makingbid unconditional- October1992 f3 million

Finalpayment - October1993 f54 million

Total bid f60 million(21

Not PresentValue of bid (I) f54 million

Source:London Residuary Body and NationalAudit Oftice

Notes: 1. Net PresentValue is calculatedby discounbngfuture cashflows to the baserime period of Jo/y 1992.The Residuary Body used a nominal discountrate of 12percent recommended by its marketingagents. 2. Thevalue of fhe Shimyamabid excludesreceipts from the saleof the rest of fhe site which the ResiduaryBody estimated to be at leastf 15 million (1992prices). 3. TheResiduary Body would haveto pay an estimatedf 1 million of maintenancecosfs (including insurance)on the RiversideBuilding for oneyearand f 1.5million (including ratesand insurance)for the other buildings on the complexuntil they weresold.

Thevalue of the bid by ShirayamaBV in Net PresentValue terms for the RiversideBuilding alone was f54 million. Also the ResiduaryBody expected additional receipts from the sale of the North, South, Island andAddington Street Buildings.

liming of Payments: Onepayment-July 1995 f65 million

Total bid f65 million

Net PresentValue of bidI’) f46 million

Source:London Residoaiy Body and NationalAuditGfffce

Notes: 1. Net PresentValue is calculatedby discountingfuture cashflows to the basetime period of July 1992.The Residuary Body useda nominaldiscount mte of 12per centrecommended by its marketingagents.

2. TheResidoaly Body would haveto pay an estimatedf2.5 million maintenancecosts (including ratesandinsumnce) until fhe LSEtook over ownershipof the CounlyHall complex. TheLSE expected to start refurbishment workin early 1993.

The value of the bid by the LSEin Net PresentValue terms for the whole complexwas f46 million.

8 SALE OF COUNTY HALL WWRSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

1.30 In addition, the Residuary Body informed the National Audit Office that the LSE offer of 265 million was contingent upon them disposing of their existing premises at Houghton Street for at least El00 million, and upon the waiving of the Residuary Body’s entitled clawback to a proportion of the proceeds of such a disposal. Furthermore any sale receipts would become available only in 1995. In addition, the Department considered that if the clawback was waived there would have been a loss to the Residuary Body, and hence to the London Boroughs, or to the Exchequer if it had to compensate the Residuary Body.

1.31 In September 1992, the Universities’ Funding Council reported that they did not feel able to endorse the proposal by the LSE. The Funding Council considered on the basis of an independent valuation, that the estimated sale value of Houghton Street was unrealistically high. Moreover, the most likely scenario for the project would yield a negative net present value and an unacceptable risk to the financial health of the LSE. The Government considered that the LSE bid would involve a significant and unacceptable call on public funds. The Secretary of State therefore revoked his Direction on 25 September 1992 thus enabling the Residuary Body to proceed on the basis of its earlier decision. On the same day the Residuary Body informed the LSE of its decision to reject the conditional bid.

Completion of the Sale of the Riverside Building

1.32 Following the Residuary Body’s decision to proceed with the sale to Shirayama BV Limited and withdraw its right to opt-out from the contract, the remaining SE3million of the !?6 million deposit was paid by Shirayama on 1 October 1992.

1.33 In May 1993 the Shirayama Shokusan Company Limited sought to renegotiate the purchase price from X60 million to f42 million. At iirst the Residuary Body insisted that the contract must be honoured in full. Following protracted discussions throughout June and July the Residuary Body indicated that it might be willing to accept a short deferment of a small part of the purchase price beyond the completion date of 29 October 1993. After extensive negotiations the Residuary Body reached an agreement in August 1993 whereby Shirayama would pay E.50million on 29 October 1993, with agreed deferment terms for the remaining X10 million. The Residuary Body decided, on the advice of its marketing agents and property consultant, that it should continue with the sale to Shirayama despite the revised payment terms. It considered this was still the best offer available. Failure to complete the sale to Shirayama, the Residuary Body considered, could have resulted in a considerably lower price being obtained for the Riverside Building and jeopardized the sale of the rest of the County Hall complex.

1.34 In July 1993 the Residuary Body informed the Department of the negotiations with Shirayama Shokusan Company Limited and of the terms of the sale under discussion. After correspondence and discussion with the Residuary Body, the Department accepted the Residuary Body’s view that the proposed terms were the best reasonably available, for the reasons it had advanced (paragraph 1.30). On 7 September 1993 Shirayama confirmed that it had bank support for the

9 SALE OF COUNTY HALL (RIVERSIDE BUILDING1 TO SHIBAYAMA SHOKUSAN COMPANY LIMITED

revised terms and wished to proceed. On 21 September 1993 the Residuary Body’s Board approved in principle the deferred payment agreement. On 24 September 1993 the Department told the Residuary Body that Ministers had decided not to give any Directions under Section 65 of the Local Government Act 1985 as to how the Residuary Body should act in the circumstances then prevailing and that it was therefore for the Board to proceed as it thought best. The Department did, however, ask the Residuary Body again to try to persuade Shirayama to pay interest on the proposed unpaid balance of El0 million. The Residuary Body informed the Department on 30 September that it had already tried hard, but unsuccessfully, to obtain Shirayama’s agreement to pay interest, and that any further attempts to renegotiate this point might put the completion of the sale at serious risk. Subsequently, on 14 and 29 October, the Residuary Body and Sbirayama signed the necessary documents to give effect to the deferred payment arrangements.

1.35 Contracts had been exchanged in March 1992 with Shirayama BV Limited. Shirayama requested that the leases, the deferred payment agreement and other documents should be transferred to the name of Shirayama Shokusan Company Limited, the parent company which had acted as guarantor, and four members of the Shirayama family. The Residuary Body’s legal advisers had confirmed that there were no adverse consequences in agreeing these changes and a deed of assignment was prepared.

1.36 The main elements of the agreement with Shirayama Shokusan Company Limited for the sale of the Riverside Building were as follows:

. the Riverside Building was sold on a 999 year lease. Shirayama has the right to acquire the freehold for a nominal El upon completion of listed building works or if the Residuary Body disposed of the remainder of the County Hall complex on a freehold basis;

l the purchase price remained at E60 million. Shirayama paid 250 million (E44 million plus the two deposits totalling E6 million);

. the deferred payment of El0 million was to be paid, without interest, in annualinstalments on the basisof an equalshare of the net profitsfrom the hotel and other business activities in the Riverside Building; any outstanding sum was to be paid no later than April 2012. Shirayama were required to produce an annual certificate of net profit and the Residuary Body was to have right of access to Shirayama’s books and records. The first instalment was due in 1997, based on profits in the 1996 calendar year;

l the deferred payment was secured by the Residuary Body having first charge on the Riverside Building which could be postponed only in favour of a first charge required by a bank providing construction finance; and

. a disputes procedure was agreed for any failure to produce on time the audited certificate of net profit for the year, written by a professionally qualified auditor, and the annual accounts. In the event that Shirayama fails to produce the audit certificate on time, Shirayama would have to deposit a

10 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

pre-determined sum on account within two weeks of the specified date and they would become liable for interest (at the Royal Bank of Scotland plc base rate) on the amount due for the period up to the date of actual payment. If Shirayama delivered the certificate but the Residuary Body disputes either the amount of the net profit or the calculation in the certificate, then interest accrues at one per cent below the base rate from the date of notice of the dispute.

1.37 The 1993-94 audited accounts of the Residuary Body show E50 million capital receipts from the sale of the Riverside Building being distributed amongst the London Boroughs. A note to the accounts states that future receipts, including the deferred capital receipt of El0 million, will be distributed in due course.

1.38 On completion, and as a way of guaranteeing its obligation to complete the listed building works, Shirayama Shokusan Company Limited deposited an agreed sum of El.6 million in a bank account which was to be drawn down as the works were completed. In the event of any default by Shirayama the fund would be available to the Residuary Body to complete the listed building works itself.

1.39 In February 1994, Shirayama Shokusan Company Limited notified the Residuary Body of their intention under the legal charge to sub-let the hotel elements of the Riverside Building to Parkview International (London) Limited to enable them to construct, complete and open a hotel by 1996. The Residuary Body gave its consent. In the event, Shirayama have not proceeded with the proposal to grant Parkview International the under lease and have told the National Audit Office that they are considering other offers before making a final decision.

1.40 From October 1993 the Residuary Body marketed the rest of the County Hall site and completed the contract, signed on 14 October 1994, for the sale of the North, South, and Island Blocks and the Addington Street Annexe to Frogmore Developments Limited, a property company, for f17.5 million in March 1995. The Residuary Body also expects to wind-up during 1995, following the distribution of the sale proceeds and other residual balances to the London Boroughs. Responsibility for collection and distribution of the deferred payment for the Riverside Building will pass to a successor body, the lead borough, to be designated in the wind-up orders to be made by the Secretary of State.

1.41 On 22 November 1994, Shirayama Shokusan Company Limited issued a press notice indicating that they had decided to abandon their original plans to convert the Riverside Building to a hotel, but would develop a Pacific Asia Centre. Shortly afterwards Shlrayama announced the suspension of development works pending a “London Referendum” concerning the use of the Riverside Building. Shirayama’s United Kingdom Representative provided a statement to the National Audit Office on 28 March 1995 on the development of the Riverside Building (Appendix 3).

11 SALR OF COUNTY HALL (RIVERSIDE BUILDING1 TO SHIR4YAMA SHOKUSAN COMPANY LIMITED Part 2: The conduct of the sale to Shirayama Shokusan Company Limited

Scope of National Audit Office examination

2.1 The National Audit Office examined the London Residuary Body’s sale of County Hall (Riverside Building) to the Shirayama Shokusan Company Liited after the withdrawal of the County Hall Development Group bid in October 1990, in particular the arrangements for ensuring the proper conduct of the sale.

2.2 The National Audit Office examined documents and interviewed the London Residuary Body and staff at the Department of the Environment. The National Audit Office also consulted the Audit Commission and District Audit; the United Kingdom representative of Shirayama Shokusan Company Limited; the London School of Economics and Political Science; and Hambros Bank Limited. Representations were received from ‘Friends of County Hall’ and ‘Action for London’.

The conduct of the sale

Valuation 2.3 The Residuary Body was provided with estimates of likely receipts from disposals In 1986 by its marketing agents, Richard Ellis, and received an updated valuation in June 1987. The marketing agents estimated the total value of the complex, assuming certain planning consents and vacant possession, at between E90 and El20 million. In July 1987 the marketing agents valued the Riverside Building alone at SE30million. In addition, the Residuary Body obtained advice from its property consultant, its former Director of Property Services, on bids for County Hall in the light of the property market at the time.

2.4 Following the acceptance of the bid by the County Hall Development Group (the Group) in 1988 the Residuary Body considered it had no need of further valuations because the property market was in decline and it had signed an unconditional contract for the sale to the Group. The Residuary Body did not obtain a further valuation following rescission of its contract with the Group in 1990 or during the initial negotiations with Shirayama Industrial Investment Limited in 1990, as it decided to continue discussions with all interested parties and await the outcome of a plannhrg inquiry. In March 1992, when deciding to sign contracts with Shirayama BV Limited, the Residuary Body obtained advice from its marketing agents and its Director of Property Services as to the attractiveness of Shirayama’s offer in comparison with other bids it might have

12 SALE OF COUNTY HALL (RIVERSIDE BUILDING1 TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

received. In October 1993 when deciding to agree to a deferral of part of the price the Residuary Body obtained further advice from its marketing agents and its property consultant that, in the context of the poor state of the property market, the bid from Shirayama represented good value.

2.5 Treasury guidance recommends regular updating of valuations prior to sale. The Residuary Body obtained independent advice from its marketing agents and independently from its property consultant. In July 1987 the Treasury Minute, responding to the Tenth Report of the Committee of Public Accounts 1986-87, made clear that revaluations should be undertaken where negotiations become protracted (Box Two). The Treasury guidance, subsequently introduced in 1992, also advises that valuers independent of the professional selling agents should be appointed for major or potentially diEcult sales. The Residuary Body considered that, In the context of a falling property market, a further valuation of the Riverside Building (in addition to the advice obtained from its marketing agents and property consultant) was unnecessary and would not be a worthwhile use of public funds. In April 1994, during negotiations with prospective purchasers for the remainder of the site, the Residuary Body commissioned independent chartered surveyors to provide a valuation because it considered that an independent up-to-date valuation was necessary.

valuations.Thb revisedguidance makes clearihatrevaluabions should be undertakenh caseswhere negotiationsbecome protracted or wherethe marketShift3 significantly; that considerationshould be,given in such casesto terminatingnegotiationsand re-offering the asseton the market;and that the bodies’ internalprocedures should be framedaccordingly.” (paragraph40)

Marketing 2.6 The Residuary Body carried out a full marketing campaign before seeking bids in 1988. Subsequently in 1990, following the rescission of its contract with the Group, the Residuary Body received several expressions of interest from prospective purchasers as a result of media coverage of the Group’s failure to complete the contract for sale. In October 1990 the marketing agents concluded that the best strategy was to revive and follow up earlier contacts with prospective purchasers and that a further full-scale marketing campaign was inappropriate. This was because of the wide knowledge in the property markets that County Hall was again available; the continuing decline in the general properly market; and the apparent lack of interest because of the uncertainty surrounding planning permission (Appendix 2). The Residuary Body accepted its marketing agents’ advice that developers interested in making an unconditional bid were most likely to recognise from the media coverage that opportunities existed again for them to become involved in the project.

13 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Method of sale 2.7 Prior to 1990 the Residuary Body adopted a tendering approach to the sale of County Hall. Following the rescission of its contract with the Group, the Residuary Body accepted the advice of its marketing agents that whilst there was a sufficient number of prospective purchasers, who could be encouraged to develop an interest if planning permission was obtained, the continuing uncertainty surrounding planning permission and the further decline in the property market ruled out the invitation of tenders. In October 1990 the Residuary Body, on the advice of its marketing agents, decided discussions with all interested parties should continue and that private treaty was the most appropriate method of sale. This was due to the complexity of the site; the need for potential purchasers to make in-depth, costly and time-consuming investigations into the designs and viability of their schemes: and the fact that the market was insufficiently strong to permit a rigid timetable for bidding to be imposed. Also two United Kingdom developers had indicated to the Residuary Body that they were not prepared to consider making formal bids.

2.8 The Committee of Public Accounts ln their Tenth Report 1986-87 also considered that assets should be exposed to the market unless there are compelling reasons to the contrary (Box Three). Treasury guidance issued in July 1992 advises that property should normally be sold by auction or competitive tender; private treaty should be used only exceptionally, following professional advice. In reaching its decision, which pre-dated this guidance, the Residuary Body weighed-up the advantages of different disposal methods. In 1988 it had adopted a competitive tendering approach. In 1990 when the property market was depressed, it accepted its marketing agents’ advice that there were exceptional and compelling reasons for a private treaty sale.

‘The Departmentof the the bestconsideration proposednew guidanceto statequiteexplicitly that the marketshould be testedby competitidhektiepiin circumstanceswhere, with professional advice, there were good reasons tothe contrary-for ex%nple, in the caseof the sale of the freeholdto a tenant.”(pamgraph 11)

The Committeeemphasised that to help maximisereceipts and to providean importantsafeguard against fraud and corruption,assets for disposalshould be exposedto the marketunless there are compelling reasonsto the contrary.We consider that all exceptionsto salesby competitivetender should be strictly controlled.”(pamgraph22)

The Residuary Body’s assessment of fmancial status of the pm-chaser 2.9 In March 1991, the Residuary Body first requested evidence from Shirayama Industrial Investment Limited, with whom negotiations for the sale had first begun, of their financial ability to complete the contract. Following further

14 SALEOFCOUNTYHALLIRIVERSIDEBUILDING) TOSHIFIAYAMASHOKUSANCOMPANYLIMITED

requests to Shirayama for such evidence Nomura International, Shirayama’s financial advisers, informed the Residuary Body in November 1991 that they considered Shirayama was an entirely reputable company, but explained that this had not been independently verified.

2.10 In January 1992, Shirayama Industrial Investment Limited asked that the contract should be completed in the name of Shirayama BV Limited, and subsequently provided some information and accounts relating to their other hotel in Madrid. Over the past year, the Residuary Body had held extensive discussions with Shirayama Shokusan Company Limited, the parent company, on the measures that would afford adequate security in the event of any default by Shirayama BV Limited. The Residuary Body therefore pressed Shirayama for both a parent company and a bank guarantee.

2.11 On 27 January 1992 Shirayama Shokusan Company Limited wrote to the Residuary Body conthming that they would arrange a parent company guarantee of the purchase price, but refused to supply a bank guarantee because this would involve the company in additional and unreasonable costs, Shirayama said that a bank would require a substantial fee for a guarantee. The Residuary Body’s legal advisers had emphasised the desirability of a bank guarantee because of the difficulties in establishing the net worth of a Japanese private company and enforcing obligations through the Japanese courts.

2.12 As Shirayama Shokusan Company Limited was a Japanese private company no independently verifiable information about it, such as accounts and material from financial institutions, was available to the Residuary Body. Nor was such information obtainable from Government sources. The Residuary Body was, however able to obtain some information about the parent company’s operations. The Residuary Body was also able to obtain letters from Dutch and Japanese lawyers confirming that the Shirayama companies were legally able to enter into commitments with the Residuary Body.

2.13 The Residuary Body concluded that both Shirayama BV Limited and Shirayama Shokusan Company Limited had substantial assets, and that parent company borrowings were low. The Residuary Body recognised that there were risks associated with the lack of a bank guarantee, primarily the di&ulties of enforcing obligations in foreign jurisdictions and monitoring the movement of assets held by private companies. The Residuary Body took account of these risks and concluded they were not su&iently great to warrant abandoning the sale given, in its view, the attractiveness of the price offered. Accordingly the Residuary Body decided to proceed with the contract with Shirayama BV Limited, with a parent company guarantee for the purchase price.

Cost of the sale 2.14 The Committee of Public Accounts in their Twenty-Second Report 1993-94 (published in April 1994) emphasised the importance of maintaining a record of sale costs that is sufficiently accurate for management to identify expenditure trends (Box Four overleaf). The Residuary Body prepared annual financial budgets for all its work and expenditure was recorded in the Body’s annual

15 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

report and accounts. Costs of the sale of County Hall are included with all other ongoing costs, such as maintenance, in the published accounts. Separately identifiable figures are, however, available in the Residuary Body’s management accounts. At the request of the National Audit Office the Residuary Body has identified that the total cost of selling the Riverside Building, between 1 April 1990 to 31 March 1994, was some 52.2 million (3.6 per cent of the E60 million sale price), as set out in Table 3. The costs of E2.2 million include legal fees; costs associated with obtaining planning permissions; and marketing agents’ fees, but exclude the costs of the Residuary Body’s staff.

Legalfees Planninginquiries and obtainingplanning consents Marketingagents’ fees(‘) Financialadvisers’ fees Totalcosts

Source:London Residuary Body

Notes: 1. Costsin respectofsale to ShhayamaShokusan Company Limited only Therewere also fees in respectof the abortivesale to CountyHall DevelopmentGroup. 2. Thefees do not include valueadded tax.

The costs incurred by the London ResiduaryBody in respectof the saleto ShirayamaShokusan Company Limitedwere somef2.2 million, equivalentto 3.6 per cent of the saleprice.

Contractual arrangements

Deferred payment 2.15 When contracts had been exchanged in March 1992, Shirayama Shokusan Company Limited had been supported by a leading Japanese bank, who were to make available funds of E60 million. In the summer of 1992 the bank was replaced by another leading Japanese bank, but they withdrew in March 1993. The Residuary Body was told by Shirayama’s United Kingdom Representative that the adverse publicity surrounding the Schools bid had largely contributed to the withdrawal of the banks.

2.16 In May 1993, six months before the contract was to be completed, Shirayama Shokusan Company Limited requested a reduction in the purchase price from 2.60 million to E42 million. The Residuary Body refused to reduce the price and at the same time confirmed that if the contract was not honoured in full, it

16 SALE OF COUNTY HALL IRIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

would seek legal redress. The Residuary Body considered that the options available were either to enforce the existing contract, or to consider the March agreement repudiated, the E6 million deposit forfeited and to remarket the whole County Hall complex.

2.17 In July 1993, in an attempt to break the deadlock in discussions with Shirayama Shokusan Company Limited, the Residuary Body indicated to Shirayama that while it was not prepared to reduce the price, it might be willing to accept an arrangement whereby the payment of a small part of the price was deferred until after completion.

2.18 The Residuary Body was convinced from extensive discussions with Shirayama Shokusan Company Limited that, although the Japanese company’s commitment to the project remained strong, they were not in a position to complete and pay the Residuary Body X60 million on 29 October 1993. Enforcement would require litigation.

2.19 The marketing agents advised that rescission of the contract with Shirayama Shokusan Company Limited, and the inevitable public and political reaction that would follow, could render almost impossible the sale of any or all of the site, unless at a “distressed” price considerably lower than that agreed with Shirayama. The marketing agents also pointed out that prospective purchasers of the remaining buildings would be awaiting completion of the sale to Shirayama before taking further action. Therefore the Residuary Body considered that rescission of the Shirayama contract would delay the sale of the whole County Hall complex. The Residuary Body did not at this stage carry out any formal revaluation to establish what the County Hall complex might be worth, although advice was obtained from their property consultant that there was a serious risk that bids would only be made for the County Hall complex at a price considerably lower than Sbirayama’s offer for the Riverside Building alone.

2.20 The Residuary Body did not have a bank guarantee, but had been provided with a guarantee from Shirayama Shokusan Company Limited of the obligations of their purchasing subsidiary, Shirayama BV Limited (paragraph 2.11). Whilst the agreement between the Residuary Body and Shirayama was governed by English law, the Japanese company had no known assets in England against which any judgement of the English courts could be enforced. In the opinion of the Residuary Body’s legal advisers litigation involving the Japanese courts would have been very lengthy and costly, and the chances of success were uncertain.

2.21 The Residuary Body reached agreement in September 1993 with Shirayama Shokusan Company Limited on the revised basis for the completion of the purchase of the Riverside Building. The Residuary Body informed the Department of its intention to accept deferred payment terms. The Department had already carefully considered the options open to the Residuary Body, and now decided not to intervene by giving Directions under Section 65 of the Local Government Act 1985 (paragraph 1.34). Completion was on 29 October 1993, as originally envisaged, but on the following revised terms:

17 SALE OF COUNTY HALL WVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

l E6 million deposit, comprising E3 million paid in March 1992 and E3 million paid earlier in October 1992;

l 244 million to be paid on completion;

. the deferred sum of El0 million to be paid as follows:

a) Rrst payment equal to 50 per cent of the net profit of the hotel and all other business activities in the Riverside Building made during the calendar year 1996 and to be paid in the summer of 1997;

b) subsequent payments in each of the following years up to and including 2011 of amounts equal to 50 per cent of the net profit of the hotel and other business activities in the Riverside Building in the previous calendar year;

c) the fmal payment to be made on 1 April 2012 equal to El0 million less the aggregate of sums already paid under (a) and lb) above; and

d) the deferred payment to be secured by a charge on Shirayama’s leasehold/freehold interest in the property. This is subject only to it being postponed in favour of a bank requiring a first charge to secure a loan for construction finance.

2.22 The Residuary Body’s property consultant estimated in September 1993 that the net present value of the deferred payment was between E7.9 million, if the hotel and other business activities made a profit of E20 million in its first year of operation in 1996, and f2.9 million if none of the El0 million was paid until 2012. The property consultant considered the most Likely outcome was some revenue in 1997, increasing thereafter. The Residuary Body had been unsuccessful in its attempts to provide for payment of interest on the outstanding amounts by Shirayama Shokusan Company Limited.

2.23 The cash payment of E50 million (Table 4 opposite), plus a deferred payment of El0 million payable over a period up to 2012, contrasted with the reduced price of S42 million (including X6 million deposit) which Shirayama Shokusan Company Limited had proposed in May 1993. Despite the reduced value of the sale, and no interest being payable on the outstanding balance of the deferred sum, the Residuary Body took the view that the terms represented the best option available for the sale of the Riverside Building. The Residuary Body considered that there were no other prospective purchasers of the Riverside Building who would be willing to pay a price that represented better consideration than the offer agreed with Shirayama. This was especially the case in the light of the Residuary Body’s ongoing maintenance costs for the Riverside Building and its statutory duties to sell as soon as practicable. In proceeding with the sale to Shirayama the timescale for the transfer of assets remained unchanged.

18 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIFAYAMA SHOKUSAN COMPANY LIMITED

Date of receipt f million contractstage 19 March 1992 3 Depositon exchangeof contracts

1 October1992 3 Seconddeposit when the ResiduaryBody withdrew its right to terminatethe contract and it becameunconditional.

29 October1993 44 Completionof contract

Total receipts 50

Source:London Residuary Body

2.24 In September 1993, the Residuary Body’s marketing agents confirmed that the revised terms would be very difficult to match. They considered the market had further deteriorated since March 1992 and it had become increasingly difficult for prospective purchasers to obtain development funding for major projects.

2.25 Payment of the outstanding El0 million during the period from summer 1997 to April 2012 is dependent upon the hotel or other business activities being developed, opened and operating profitably. There is no contractual incentive (for example a liability to pay interest) for Shirayama Shokusan Company Limited to pay off the deferred sum before 2012. There is also no contractual obligation on Shirayama to complete the hotel or any other development. When reaching this agreement, the Residuary Body considered that any developer who had spent so large an amount of money would be under strong commercial pressures to obtain a return on the investment as soon as practicable, and thereby to get the business activities up and running to make a profit and pay the deferred payment. The Residuary Body informed the National Audit Office that it would make little commercial sense for Shirayama, having purchased the building and subsequently having spent considerable sums on that building, to keep it unoccupied simply to avoid the deferred f10 million until 2012.

2.26 The National Audit Offtce assessed the net present value of the Residuary Body’s agreement with Shirayama Shokusan Company Limited, as at October 1993. The National Audit Office estimate the value of the purchase price of the Riverside Building at between f52.5 million and g57.5 million, depending on the timing of the payment of the outstanding El0 million. This compares with the X30 million estimate for the Riverside Building alone in 1986. Sale proceeds from the whole of the County Hall complex are estimated between 270 million and 275 million taking account of the sale of the remaining buildings to Frogmore Developments Limited (paragraph 1.40). In addition, proceeds arose from the Group’s forfeited deposit of !Z20million plus f4.8 million accrued interest (paragraph 1.15).

2.27 The National Audit Office assessed the net present monetary value of the offers for and the proceeds from the sale. They found that although the proceeds from the sale to Shirayama Shokusan Company Limited in October 1993 were less than that envisaged under the agreement reached with the Residuary Body in

19 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

May 1992 they, together with the proceeds from the sale of the rest of the complex, exceed those forecast horn the LSE’s conditional bid for the whole of the County Hall complex in July 1992 (Table 51.

,~oi;~~ii.b’ili;31::,~~~~ .-_.-_ onetarycvalue~ofth jf&i@sz$i i _.' ,.,.,j/.: "g,: ,+":< >,..*.,'Ai I : Shirayama LSEC3’ Shirayama Shirayama Original Offer”) best case (4) worst caset4) (March 1992) (July 1992) (October1993) (October1993) Peynlents Deposits March 1992 (Exchangeof contracts) 3.0 3.0 3.0 October1992 (Contractmade unconditional) 3.0 3.0 3.0 Paymenton completionof contract October1993 (Shirayama) 54.0 July 1995 (LSE) 65.0 44.0 44.0 Oeferredpayments April 1997 10.0 April 2012 10.0 Total(Cash) 60.0 ss.0 60.0 60.0 Net PresentValue (‘) 60.0 56.3 57.5 52.5 Add Proceedsfrom saleof restof site (March 1995) 17.5 _(5) 17.5 17.5 Total proceeds G $G m ml

Source:National Audit Office

Notes: 1. Netpresentvalue is calculatedby discountingfuture cashflows to October1993, using the Treasurydiscountrate of Gpercent in real terms. 2. Detailsof offersetoutinparagraphs 1.19to 1.20of report 3. Detailsof offerset outinparagraph 1.26of report 4. Detailsofsale set out in paragraphs1.36and2.21 to 2.23 ofreport 5. Includedin main bid. 6. LSE’Soffer off65million to bepaid in July 1995would haveresulted in the LondonResiduary Body incurring maintenancecosts from the time ofsale to Shirayamain October1993 until the LSEtook over ownershipof the CountyHall complex.The Residuary Body by selling the RiversideBuilding to Shirayamastill had to pay maintenancecosts for the otherbuildings on the complex.

Theproceeds from the saleto ShirayamaShokusanCompany Limited in October1993 were less than that envisagedunderthe agreement reached with the ResiduaryBody in May 1992 but they,together with the proceedsfrom the saleof the rest of the complex,exceed those forecast from the LSE’sconditional bid forthe whole of CountyHall complex in July 1992.

Wider considerations

Development of County Hall 2.28 Given the Residuary Body’s objective to obtain the best price for the sale of the building, it sought planning permission for development which it considered would be appropriate for the complex and would maximise its value. The Residuary Body considered that it did not need to seek to prevent any change of plans once the Riverside Building was sold. It therefore did not commit

20 SALEOFCOUNTYHALLIRIVERSIDEBUILDING) TOSHIRAYAMASHOKUSANCOMPANYLIMITED

Shirayama Shokusan Company Limited in the sale agreement to carry out a development of the building, other than to complete the listed building works (paragraph 2.30).

2.29 The Residuary Body told the National Audit Office that Shirayama, although not contractually bound to develop the Riverside Building as a hotel in accordance with the planning permissions,would need to obtain further planning permissions for any significant variations from the development already permitted. The Residuary Body understood Shirayama’s proposals for the development of the Riverside Building to involve the conversion of the floors above first floor level in the building to 600 hotel bedrooms: the refurbishment of the first and ground floors to provide reception, conference, restaurant and leisure facilities; and works to the basement to provide car parking and a swimming pool.

Listed building works 2.30 The Riverside Building is a Grade II listed building, and conditions relating to the completion of listed building works had been attached to planning permissions authorising the new office buildings on the remainder of the County Hall complex. The Residuary Body was concerned that, in order to market the rest of the complex satisfactorily, it required adequate guarantees that Sbirayama Shokusan Company Limited would complete the listed building works. On completion on 29 October 1993 the Residuary Body included an obligation in the lease for Shirayama to complete the listed building works. Under a supplemental agreement Shirayama deposited 21.6 million in a special bank account, over which the Residuary Body had a charge, from which the company would draw down funds as listed building works were completed on the certificate of its chartered quantity surveyor. In the event of default the balance would be available to the Residuary Body to underwrite the cost of completing the works.

Claw-back provisions for change of use or resale 2.31 The Committee of Public Accounts Tenth Report 1986-87 recommended that departments and non-departmental public bodies should consider using claw-back over a period of five years, where there were real doubts about the basis for valuations or there was a possibility of windfall profits for the purchaser (Box Five). While agreeing with this general principle, the Treasury

yearsto~p%&i ~~~~Bli~ib;er~siinalf:~~~1s vi and the possibility of windfall profitsto the purchaser!(p&g&/120)

21 SALE OF COUNTY HALL(RIVERSIDEBUILDlNG1 TOSHIRAYAMASHOKUSANCOMPANYLIMITED

Minute responding to the Committee of Public Accounts Thirteenth Report 1989-90 advised that one of the factors to be considered when using claw-back was that generally it would make an asset less attractive and future benefits might be uncertain (Box Six). Treasury guidance, issued in July 1992, recommended that departments and non-departmental public bodies should consider claw-back provisions in cases where land is disposed of before uncertainties about the planning position have been satisfactorily resolved. . , .~,_ :;. ,>:,;:i= : ; ;;,;.~,,, (\” ! ._:*:; s,/ u: ~~~~-~~,,i;:~~,~~~:~~ ;,+a t, $~;y;:,~;<~r:~:a; :; ‘i,j,:~ i:;; ‘,,_ ;, ?,‘” ?: _ ,i,7 :,I, ;~.;;, tT,J \*,Bgg;BiX “\ ,“‘“““;;~~~~;n~~.~,~~~~“~~:~;i,.~,.,I “‘~WX.~~,~, ..,.;,:, L ;yy’c:;‘;z;; 1, _ .*<,, * ) ~” ,:,.&‘~:~:y”%‘;‘-:-~~:?,,~,,,;“i’~..;:‘: ;:y i’: ;; *,::,:-‘, t’;; ,;;;~ \ ),,( r / ,>,I Eti,rbktfrdm thk TreasuryMi~~t~.~~~~~~i;Ig;to.theThlrteenthR the Cpi@i!te~~ ~ of PublicAccounts 1989-90 (Cei li'%ij Committeeof PublicAccounts conclusion (v) “Whereland is consideredto havedevelopment potential, seriousconsideration should be givento all the optionsfor protectingthe taxpayers’interest including separatesale or the use of clawbackprovisions.’

‘The Treasurybelieves that within the particularcircumstances of eachsale all the appropriateoptions for protectingthe taxpayers’interest in relationto properlyassets are fully considered.As regards clawback,a rangeof considemtionswill needto betaken into account.Its usewill generallymake the businessless attractiveto potentialpurchasers, and thus reduceinitial proceeds,whilst future benefits to the Exchequerare necessarilyuncertain. More widely however,its use needsto beassessed in the light of the balanceof advantageon other issues:enabling the taxpayerto sharein the potential proceedsof pmpeily developmentmay be cost-effectiveas a singlechange to the termsof salein a particularcase, but may not be so if the Governmentas vendor is then forcedto concedeprovisions for downsiderisks, for exampleon trading performancewhich would otherwisenot form partofthe sale arrangements.*(paragraph 25).

2.32 Given the Riverside Building’s Grade 11listed building status, its redevelopment was subject to strict planning consents. When the sale took place, the planning consent existed, which reflected the full planning potential for a commercial development of the building. The Residuary Body considered the potential for substantial profits to arise from a further change of use or resale were unlikely, and to have included claw-back provisions would have had the effect of substantially reducing the sale proceeds. The Residuary Body had included claw-back provisions in the sale agreements for other properties where potential enhancements in value might arise from future planning consents.

Security for the deferred payment 2.33 The deferred payment is secured by a first legal charge granted by Shirayama Shokusan Company Limited in favour of the Residuary Body or its successor. At the time of the agreement Shirayama Shokusan Company Limited did not have in place the necessary level of construction finance. In recognition that Shirayama may wish to use the Riverside Building as security for construction finance for the project, the Residuary Body agreed on 14 October 1993 that its interest should rank second behind any charge in favour of banks providing construction finance. In the event that Sbirayama might need to subordinate the Residuary Body’s charge in order to secure construction finance, and the cost of clauses covering the priority of charges might prove unacceptable to prospective lenders, there is a provision for them to replace the legal charge by a bank

22 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMlTED

guarantee. The Residuary Body accepted its property consultant’s advice that a satisfactory guarantee from an appropriate bank would be an acceptable form of security for the deferred payment.

2.34 In the event of default on the payment of the deferred El0 million, the Residuary Body or its successor has the right to sell the Riverside Building and recover the amount in full, or whatever is the outstanding amount, in any year from 1997 until April 2012. In the event that Shirayama secures construction finance against the Riverside Building, and the realised value of the building is less than the amount required by the banks providing construction finance, the Residuary Body might not receive some or all of the outstanding deferred sum.

External Audit of London Residuary Body

2.35 The Residuary Body’s accounts are audited by the District Auditor. In the audit opinions expressed by the District Auditor the Residuary Body’s annual accounts have fairly presented the financial position of the authority for each financial year up to 1993-94.

2.36 The District Auditor’s management letter relating to the 1993-94 Residuary Ijody’s accounts lYY3-94 concluded that the Residuary Body had followed proper procedures in discharging its statutory responsibilities:

l “to secure best consideration reasonably obtainable for tbe County Hall site; and

. to protect the financial interests of the London boroughs, the recipients of the capital receipts arising from land and property disposal.”

A copy of the District Auditor’s management letter has been reproduced at Appendix 4, with the agreement of the Residuary Body.

Findings and conclusions of the sale

2.37 By the summer of 1995 some E92.3 million of receipts in respect of the sale of County Hall is expected to have been made available for distribution to the London Boroughs. The Riverside Building, which is the subject of this report, was sold for SE60million, including a deferred payment of El0 million. The main findings and conclusions on the conduct of the sale are set out below.

On valuation . The Riverside Building was valued at E30 million by marketing agents in (paragraphs 2.3 to 2.5) July 1987. Advice on the sale price at subsequent points in the disposal, in the context of the general decline in the property market, was obtained from the marketing agents and independently verified by the Residuary Body’s property consultant. SALF. OF COUNTY HALL (RIVERSIDE BUILDING1 TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

On marketing l The Residuary Body carried out a full marketing campaign before the County (paragraph 2.6) Hall Development Group’s bid. The Residuary Body accepted its marketing agents’ advice that another full-scale marketing campaign was inappropriate. This was because of the continuing decline of the property market: the wide knowledge in the property markets that County Hall was again available following the aborted sale to the County Hall Development Group in 1990; and the uncertainty surrounding the planning permission.

On method of sale . The Residuary Body decided in 1990, on the advice of its marketing agents, (paragraphs 2.7 to 2.8) that private treaty was now the most appropriate method of sale because of the further decline in the property market and the continuing uncertainty over the planning permission.

On assessment of the . As the purchaser was a Japanese private company, no independently verified financial status of the information, such as company accounts and material from financial purchaser institutions was available to the Residuary Body. The Residuary Body was (paragraphs 2.9 to 2.13) able to obtain some information about the parent company’s operations and concluded that Shirayama had substantial assets and that the parent company borrowings were low. On the basis of this, the Residuary Body decided to proceed with the contract for the sale with a parent company guarantee for the purchase price. The Residuary Body sought, but was unable to obtain a bank guarantee.

On accounting for the . The Residuary Body estimates that the cost of the sale of the Riverside cost of the sale Building, from 1 April 1990 to 31 March 1994, was some E2.2 million. (paragraph 2.14)

On the sale price l The Residuary Body accepted on the advice of its properly and marketing (paragraphs 1.19 consultants that the sale price of 260 million in March 1992 represented the and 1.33) best consideration.

. Following an approach by Sbirayama in the summer of 1993 the Residuary Body agreed to defer the payment of El0 million, of the purchase price of E60 million. The Residuary Body’s property and marketing consultants considered this was still the best offer available.

On the deferred . The deferred payment was to be repaid to the Residuary Body or its payment agreement successor by paying from 1997 half of the annual net profits of the hotel and (paragraphs 2.15 other business activities, or in any case by 2012 at the latest. The agreement to 2.27) covering the deferred payment provided for:

- the deferred sum of El0 million to be paid, with no provision for interest to be charged on the outstanding amount;

- a disputes procedure in the event that the purchaser fails to produce on time the required certificate of net profit for the year and copies of the audited accounts: and

24 SALE OFCOUNlYHALLWVERSIDEBUILDINGj TOSHIRAYAMASHOKUSANCOMPANYLIMITED

- the Residuary Body to resell the Riverside Building to recover any outstanding amounts, in the event of the purchaser defaulting on the payments made against net profits or any outstanding part of it in 2012.

l The net present value of the purchase price, as a result of the deferred payment, is estimated by the National Audit Office at between 252.5 million and X57.5 million.

On wider l The purchaser was not contractually bound by the sale agreement to develop considerations the Riverside Building as a hotel for which planning permission had been (paragraphs 2.28 granted. The Residuary Body told the National Audit Office that Shirayama to 2.34) would, however, need to obtain further planning permissions for any signiRcant variations from the development already permitted.

l There was a supplemental agreement under which the purchaser deposited a further El.6 million in a special bank account, from which the company was to pay for listed building works certified by the Residuary Body’s quantity surveyor.

l Since planning permission for development, reflecting the full planning potential for the commercial use of the building, had been granted the Residuary Body considered that claw-back provisions for change of use or resale were not appropriate.

l The deferred payment was secured by a legal charge in favour of the Residuary Body. If the charge has to be subordinated in order to raise construction finance, Shirayama is entitled to replace the legal charge by a bank guarantee.

On the external audit l The District Auditor’s management letter concluded the Residuary Body had of the London followed proper procedures in discharging its statutory responsibilities in the Residuary Body sale. (paragraphs 2.35 to 2.361 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED - Appendix 1

RIVERSIDEBUILDINGS Begun in 1913 and finally completedin 1933. Sold to ShirayamaShokusanCompany Limited in 1993. NORTHBLOCK Constructedbetween 1936 and 1939 and extendedin the 1950’s 1 and 1960’s.

The County Hall complex consists of several buildings, including the RiversideBuilding.

Photographcoutiesy of Herb/eKnott/The Independent

26 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED Appendix 2

Chronology of sale of County Hall

1986 February London Residuary Body invited three fivms of chartered surveyors to submit marketing proposals for County Hall.

March 31 Greater London Council abolished.

April 1 London Residuary Body took over interests of Greater London Council including employment of 3,733 former Council staff, of which 567 were involved in property management and disposals.

April 2 London Residuary Body commissioned Richard Ellis to prepare marketing appraisal report.

August London Residuary Body appointed Richard Ellis as marketing agents following the submission and adoption of appraisal report.

October London Residuary Body suhmitted planning applications to London Borough of Lambeth for:

. use of the complex as a whole and the Riverside, North, South and Island Blocks individually as general offices so that a commercial developer could buy and use as offices without further planning permission:

. planning consent to change use of Riverside Building to hotel with ancillary uses, and also planning consent for a hotel and residential apartments; and

. continuing to use Addington Street Annexe as general offices as previous consent expired in 1977.

December By law London Borough of Lambeth had until 22 December to reach decision on London Residuary Body application. When it had not done so by the statutory deadline London Residuary Body exercised its automatic right of appeal to the Secretary of State for the Environment.

1987

February 19 Three further planning appeals lodged on behalf of the London Residuary Body.

27 SALE OF CO”N’IY HALL (RIVERSIDE BUILDING1 TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

April First Public Planning Enquiry into the use of County Hall started and ended in June 1987, when the Planning Inspector recommended refusal for change of use, as proposed in London Residuary Body’s October 1986 application, on grounds of the over-riding need to use buildings for local government purposes.

June High Court rejected Inner London Education Authority’s application to have London Residuary Body’s notice terminating its user rights quashed.

October 20 Secretary of State for the Environment rejected the Planning Inspector’s recommendations and granted change of use of the Riverside Building as general offices rather than local government use but refused proposed change of use for hotel, residential or hotel/residential use.

Court of Appeal rejected Inner London Education Authority’s appeal to have London Residuary Body’s notice terminating its user rights quashed.

1988

January London Residuary Body invited bids for County Hall to be submitted by March 1988.

February 4 Secretary of State for the Environment announced decision that Inner London Education Authority would be abolished on 31 March 1990.

March 28 High Court upheld action by successor bodies (Inner London Education Authority, London Fire and Civil Defence Authority, London Waste Regulation Authority) against the Secretary of State for the Environment for over-ruling his Planning Inspector by granting permission for use of the County Hall complex for general offices, and without giving proper reasons. Overturned by the Court of Appeal on 20 July 1989.

March 31 London Residuary Body received 12 bids for purchase of County Hall complex and shortlisted four

June 27 London Residuary Body accepted bid from County Hall Development Group.

1989

January 27 Contracts exchanged between County Hall Development Group and London Residuary Body; completion due on 1 October 1990.

February County Hall Development Group and the London Residuary Body applied jointly to London Borough of Lambeth for detailed planning and listed building consent to convert the Riverside Building to hotel and residential use, and demolition of the other buildings and their replacement by new office blocks. SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKLJSAN COMPANY LIMITED

April London Borough of Lambeth failed to determine County Hall Development Group’s planning applications. London Residuary Body and the Group appealed to the Secretary of State.

September 5 Second Public Planning Inquiry started and ran until November 1989.

1990

May House of Lords ruling in favour of London Residuary Body, allowing Riverside Building to be used for general offices rather than local government uses

June 30 County Hall vacated, except for London Residuary Body staff who subsequently moved to Globe House, Temple.

JOY Secretary of State for the Environment gave his decision on the Second Public Planning Inquiry. He allowed the County Hall Development Group a fortnight in which to consider whether to amend their applications to take account of Public Planning Inquiry objections about their proposals for the development of County Hall.

September London Residuary Body offered an option to County Hall Development Group to defer completion of contract to 17 October to allow shareholders to subscribe additional funds. Option not taken up by the Group.

September 30 County Hall IinaIly vacated by the London Residuary Body.

October 1 County Hall Development Group failed to complete and London Residuary Body served notice on County Hall Development Group to complete by 24 October.

October 9 County Hall Development Group asked banks to call in a receiver.

October 25 County HaII Development Group again failed to complete the contract. London Residuary Body informed the Group’s receiver that it regarded the contract as repudiated and the deposit forfeited.

November 1 Shirayama Industrial Investment Limited submitted a bid of SE60million for Riverside Building.

London Residuary Body continued to attempt to secure planning consent (as applied for by the County Hall Development Group in February 1989). It submitted amendments as required by the Secretary of State for the Environment to take account of the Second Public Planning Inquiry objection to the County Hall Development Group scheme, in particular the scale and visibmty of the new office blocks.

29 SALE OF COUNnHALL(RIVERSIDEBUILDING) TOSHIRAYAMASHOKUSANCOMPANYLIMITED

1991

January 15 Submission of amendments led to reopening of Second Public Planning Inquiry; which closed in February 1991.

August LSE submitted planning applications to London Borough of Lambeth for use of Riverside and Island buildings for educational use, and renewal of permissions for office use for the North and South Blocks obtained by the London Residuary Body in 1987.

Secretary of State for the Environment granted London Residuary Body planning consent for hotel, residential, conference and business centre, retail and other uses in the Riverside Building and for office redevelopment of the rest of the complex.

1992

March 13 LSWAdvanta consortium submitted bid for 220 million for whole County Hall complex.

March 17 London Residuary Body decided to sell the Riverside Building to Shirayama BV Limited for i?60 million.

March 19 London Residuary Body and Shirayama BV Lilted exchanged contracts; completion due 29 October 1993. Shlrayama paid f3 million deposit.

March Court of Appeal rejected London Borough of Lambeth’s appeal against the planning consent granted by the Secretary of State for the Environment in September 1991.

May 12 London Borough of Lambeth granted planning permission to LSE for various changes of use as applied for in August 1991.

June 8 Debate in House of Lords on LSE interest in acquiring County Hall.

June 26 Adjournment debate in House of Commons. Government urged LSE to put in a bid.

June 29 London Residuary Body invited LSE to submit a bid, supported by financial details, by 10 July.

July 10 London Residuary Body considered information submitted by LSE. No bid was made. Residuary Body advised the Secretary of State that it did not consider that the LSE could mount a satisfactory commercial bid.

30 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

July 22 Secretary of State for the Environment directed London Residuary Body to take no further steps to dispose of County Hall without his consent. Secretary of State for the Environment also invited LSE to submit an unconditional bid by 31 July to London Residuary Body.

July 31 London Residuary Body received LSE’s conditional bid of f65 million.

August 4 London Residuary Body considered LSE’s bid and decided to reject it and waive its rights to terminate the Shirayama contract, both subject to Secretary of State for the Environment’s consent.

August 7 Shirayama issued writ seeking judicial review of Secretary of State for the Environment’s decision to issue Direction.

September University Funding Council (now Higher Education Funding Council for England) announced it was not able to endorse the LSE’s proposals.

September 25 Secretary of State for the Environment withdrew his Direction, leaving London Residuary Body to make its own decision. I.ondon Residuary Body wrote to Sbirayama terminating opt-out provision and making contract unconditional.

December Launch of marketing for North, South, and Island Blocks and Addington Street site.

1993

March Shirayama obtained detailed planning permissions from London Borough of Lambeth to develop the Riverside Building as a hotel, conference centre and for leisure uses.

May London Residuary Body rejected Shirayama’s request for reduction in price from f60 million to 542 million.

September 21 London Residuary Body agreed terms with Shirayama whereby El0 million of the 260 million purchase price could be deferred.

October 14 London Residuary Body and Shirayama signed legal documents for the deferred payment. Assignment of contract to Shirayama Shokusan Company Limited.

October 29 Completion of sale of Riverside Building to Shirayama for 260 million (of which El0 million deferred).

November Shirayama commenced renovation works in Riverside Building.

31 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

1994

October London Residuary Body exchanged contracts with Frogmore Developments Limited for El 7.5 million for the freehold of the remainder of the County Hall complex.

November 27 Shirayama announced suspension of hotel project and indicated an intention to review future uses for Riverside Building. SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED Appendix 3

Statement by Shirayama Sbokusan Company Ltd (Sent to National Audit Office on 28 March 1995)

The County Hall Development The Riverside Building at County HaUwas acquired by Shirayama Corporation (Japan) on 29th October 1993 from the London Residuary Body. Since then much work has been undertaken and various plans proposed - these have Included plans for Europe’s largest aquarium, leisure and education facilities for families and other ancillary use such as a hotel which have been submitted and approved by the planning authorities.

Shirayama plans to form a firm concept/decision by October 1995 ofwhat the building will be used as. The decision will be taken as a result of ongoing discussions with the London Residuary Body relating to the border line and other legal rights between Shirayama’s freehold land and others.

Their initial concept was to ‘preserve and enhance the building, whilst allowing the greatest public accessand use consistent with maintaining the ambience and decor of the property’. This determination remains unchanged. Shirayama folly support the idea that the County HaU should be available for all generations of the public (particularly families) and is determined to achieve this. In order to attract and achieve maximum public use, Shirayama needs to weigh the various possible uses of the building and decide which options are best suited to the building for aU generations of the public and also to see whether these are commercially viable.

The following is a brief summary of the present ideas hehind the redevelopment of County Hall. l.Aim To develop facilities that are both exciting and unique for London itself - an attraction for the family such as a family entertainment centre. A more leisure and education orientated concept in comparison to having just a ‘Hotel’ which would comprise mainly of guestsjust sleeping over. Shh-ayama’sintention is to make the County HaUa destination (the Channel Tunnel EoroterminaVWaterloo station is located a few minutes away) for visitors from all over the world and for the British public and it should participate and help in revitalising the South Bank (the Cultural Centre of London.)

2. Market Target The development of County Hall Intends to target its leisure market to the mass public, particularly the family sector, There are very few places in London for this (most places tend to target teenagers). It needs to draw in a wider age range, cater for aU sorts of people and be friendly and accessible.

3. Categories The family leisure centre plans to include the biggest aquarium in Europe - which will he fascinating, innovative and educational. Other ideas are for an advanced multi-media centre - In order to utilize virtual experience for better and exciting communications with other people and the world. A high-tech children’s museum - stimulating for both adults and children is also an option.

Since 1993 preparation has been going ahead In terms of necessary works and the following is an outliie of past and present packagesin relation to the County HaU Development. In order to keep options open and still carry out works, they relate mainly to the building of the new infrastructure, safety and maintenance of the building.

33 SALE OF COUNTY HALL (RIVERSIDE BUILDING TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Packages/works that have heen completed

. Demolition of the whole non-structural walls on all floors (except only “Listed” first floor)

. Removal of all asbestos l Heating system, boilers, radiators and electricity supplies above “Listed” 1st floor have been stripped out

. Windows overhauled and replaced where necessary and all ironmongery repolished

. Window cleaner safety eyebolts fitted to all windows l Roof has been completely overhauled and all the tiles have been secured

. Fire alarms Installed on all floors

l ~;t;$ers Installed and about to be commissioned. Refurbished heating system up to and including the “Listed”

. Old lifts taken out and all lifts shafts surveyed

. 3 f”lly operational mock up bedrooms made on 2nd floor (facing Parliament)

Packages/works presently being done (under way of works)

l Heating distribution

. Building of new fire fighting shafts/cores and installation of new fire fighting lifts

l LiR replacements and refurbishments

. Servicesto iire fighting cores

. CCTVinstallation

. New Sump pumps and Drainage overhaul

. Early sirwtwal works

l Restoration of panelling for crescent area and panelling treatient on the whole of the existing conference centre on the 1st floor

. Installation of Co-generation Plant

. Installation of Intruder alarms

l Essential electrical works to meet new IEE regulations

. Replacement and improvement of the Members Courtyard inffl built in the 1970’s

Whilst Shiiayama Corporation’s overall objective (as set out in the iirst page) for the eventual concept of the property is clear, it is essential to verify that the Shirayama family purchased the County Hall as a very long term investment. Consequently,the family has no such illusions or expectations in making any profit from this investment - eve” for more than two decades.The speed of the redevelopment will thus entirely depend upon matters outside the ordinaly short-sighted business objectives.

The decision on the &al schemewill be take” as a result of current discussions with the London Residuary Body relating to the border line and other legal rights between Shirayama’s freehold land and others.

34 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED Appendix 4

District Auditor’s management letter relating to the London Residuary Body accounts, 1993-94

London Residuary Body

1994 Management Letter

Contents

Section

I Introduction

II Management Arrangements

m Finance and Probity

Iv Future Audit Work

Appendix A Auditor’s Certificate and Opinion: 1993/94 Accounts

35 SALE OF COUNll’ HALL (RWBRSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Iutroduction London Residuary Body

1. The purpose of this letter is to summarise the main findings of my annual audit of the London Residuary Body. It represents the main channel of communication with Members of the Body and servesas an agendafor a meeting with them.

2. The Local Government Finance Act 1982 and the Code of Audit Practice published by the Audit Commission require me to:

. assess the adequacy of the systems in place for securing economy, efficiency and effectiveness;

. form an opinion on the Body’s annual accounts and assessthe adequacy of the financial systems in place, both for the production of those financial statements and for the detection and prevention of fraud, corruption and financial irregularity.

3. These matters are considered in the remaining sections of this Letter.

36 SALEOFCOUNTYHALL(RIVERSIDEBUILDING) TOSHIRAYAMASHOKUSANCOMPANYLIMITED

Management Arrangements London Residuary Body

4. Since my previous Management Letter the Body has reached the situation where it was able to make proposals to the Secretary of State for its winding up on 30 June 1995. The Department of the Environment is expected to enter into consultations with the London Boroughs on the winding up in the new year.

5. Much has been achieved. As a result of an Order made by the Secretary of State the Royal Borough of Kensington and Chelsea is now responsible for Late Rating Adjustments. An order has been laid to transfer responsibility for monitoring gas emissions at a former waste disposal site at Stone in Kent to the London Borough of Bexley. These Orders follow the transfer of residual property responsibilities, other than those relating to the County Hall site, to the London Borough of Bromley as reported in my previous Management Letter.

6. In the past few weeks there has been much publicity concerning the disposal of the Riverside Building of the County Hall site and, in the wake of the exchangeof contracts for the disposal of the rest of the County Hall site, information is now in the public domain which was previously confidential. In the circumstances I have highlighted the salient features of the disposal.

I. In 1990, following the collapse of the original proposals for the sale of the entire County Hall site, the LRB continued to market the property. Later a proposal was received from Shirayama to purchase the Riverside Building for &60m. The LRB continued to seek a purchaser for the whole of the site and only when these efforts were unsuccessful, and following the normal financial and status checks, was the offer by Shirayama BV of the Netherlands (Shirayama) accepted. Contracts were exchanged in March 1992 with a completion due for October 1993. The guarantor to the contract is the Shirayama Shokusan Company of Japan. The contract included an ‘escape clause’ allowing the LRB to withdraw from the deal on or before 3 1 December 1992

37 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Management Arrangements London Residuary Body

8. In July 1992 the London School of Economics, which had been showing an interest in the site for some time, approached the LlU3 with an offer of E65m for the whole of the County Hall site. A Direction was issued by the Secretary of State on 22 July 1992 prohibiting the LBB from taking any steps to proceed with the sale other than with his consent. Although open-ended this Direction was issued . ..‘with the specific purpose of ensuring that your Board takes no action to revoke the escape clause in your contract with Shirayama before 1 August. This [was] to give the LSE an opportunity put in a firm bid for County Hall by 31 July should they wish to do so.’

9. The LRB gave careful consideration to the proposals from the LSE. Acting on the advice of its professional advisors it rejected the LSE’s offer on the following grounds:

. the offer related to the whole of the County Hall site rather than just to the Riverside Building;

. the purchase was contingent on the projected sale proceedsfor the LSE’s existing sites;

. the receipt of cash would be delayed by two years compared with the Shirayama offer.

On 25 September 1992 the Secretary of State withdrew the Direction and the LRB continued with the disposal of the Riverside Building to Shirayama.

10. In May 1993 Shimyama informed the LRB that it would not be able to complete the transaction at the original price and sought to negotiate a discount. The LRB received professional advice that, should the property sale to Shirayama not proceed, the potential proceeds from a sale to another party would now be significantly lower. Negotiations resulted in an agreement that Shirayama would pay the original price of ;E60mfor a 999 year lease on the Riverside Building at a peppercorn rent but that flOm of the sum be deferred until a date no later than 2012, the exact timing of the payments to be contingent on the profits arising from the

38 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIBAYAMA SHOKUSAN COMPANY LIMITED

Management Arrangements London Residuary Body

business activities on the site. The LRB’s interest was securedby a first charge on the Riverside Building.

11. Subsequently the LRB marketed the remainder of the County Hall site which comprises the North, South and Island Blocks and the cleared site at Addington Street. Following negotiations during 1994 contracts were exchanged for the disposal of the LRB’s freehold interest in these sites to Frogmore developments plc for gl7.5m with completion in March 1995.

12. The LRB has further protected the financial interests of the Boroughs in Greater London as additional sums will become payable in the event of the sale with the next five years, of any part of the site whilst not developed for a sum greater than the apportioned sale price. Also, should Frogmore Developments plc secure more favourable planning permission for the residential development of the North and South Blocks than anticipated, further sums will be payable.

13. On completion of the Listed Building works to the Riverside Building and the completion of the sale of the LRB’s freehold interest in the remainder of the site, the contract with Shirayama provided for the conveyance of the freehold interest in the Riverside Building for the sum of El. It is understood that by the end of the current financial year the LRB will have disposed of all its interests in the County Hall Site.

14. My staff have monitored developmentsclosely and maintained a close liaison with your Chairman and your officers. We are satisfied that the LRB followed proper procedures in discharging the statutory responsibility:

. to secure best consideration reasonably obtainable for the County Hall site; and

. to protect the financial interests of the London boroughs, the recipients of the capital receipts arising from land and property disposal.

39 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Management Arrangements London Residuary Body

15. We are liaising with the National Audit Office and will be monitoring the finalisation of both the sale to Frogmore Developments plc and the disposal of the Body’s remaining interests in the County Hall complex.

1994 MANAGEMENT LETTER

Finance and Probity London Residuary Body

16. I gave an unqualified opinion and certificate on the Body’s accounts for 1993/94 on 31 August 1994. The published accounts disclose the receipt of ;E50mfrom Shiiyama for the sale of the Riverside Building, the distribution of that receipt to the London Boroughs and the deferred payment of flOm as required by the Accounts Direction issued by the Secretary of State on 20 April 1993. A copy of my opinion is reproduced below.

17. No other material issues arose from the audit of the annual financial statements. A schedule of minor matters arising from my audit has been agreed with your officers.

18. In undertaking my audit I have liaised with your internal auditors. On the basis of my own work, and that of your internal auditors, I am satisfied that overall the Body has adequatearrangements in place to prevent and to detect fraud and any other financial irregularity.

40 SALE OF COUNTY HALL (RIVERSIDE BUILDING) TO SHIRAYAMA SHOKUSAN COMPANY LIMITED

Future Audit Work London Residuary Body

19. We will shortly be presenting our audit programme for the periods ending 31 March 1995 and 30 June 1995. The main focus of our work will be the audit of the financial statements of the Body and monitoring of the winding-up of the Body.

20. We are liaising with your officers so that the audit of the annual accounts for 1994/95 might be completed and reported to the final meeting of the Body. The audit of the Body’s accounts for the period 1 April 1995 to 30 June 1995 will be reported to the successorauthority.

Concluding Comments

21. Might I take this opportunity to thank you and your officers for the courtesy and assistanceafforded to my staff in the course of the audit.

Yours sincerely

Peter Day District Auditor

20 December 1994

41 SALEOFCOUNTiFLALL(RI"ERSIDEBUILDING) TOSHIRAYAMASHOKUSANCOMPANYLIMlTED

District Auditor’s Certificate and London Residuary Body Opinion: 1993/94 Accounts

I certify that I have completed the audit of the authority’s accounts for the year ended 31 March 1994 in accordancewith Part III of the Local Government Finance Act 1982, Part VIII of the Local Government Finance Act 1985 and the Code of Audit Practice.

In my opinion the statementof accountsset out on pages 10 to 21 presentsfairly the fmancial position of the authority at 31 March 1994 and its income and expenditure for the year then ended in accordance with the Accounts Direction issued by the Secretary of State on 20 April 1993.

PRDay District Auditor

31 August 1994

42