Treasury in hot water over pounds 200m Whitehall renovations

The Treasury may be sued by the property company which was to have redeveloped its headquarters in Whitehall.

Exchequer Partnerships wants at least pounds 1m from the Government to cover its expenses for the aborted contract to renovate the building, which is threatened by a dangerously high water level.

Geoffrey Robinson, the Paymaster General, said last week that the building - a cross between a Victorian gents lavatory and a turn-of-the-century reform school - would not be renovated.

"Extremely tight spending controls" were blamed for the termination of the contract, which was signed in January after Exchequer, a consortium including Bovis Construction and Hambros Bank, was named as preferred bidder a year ago by Kenneth Clarke.

As part of the deal, Treasury civil servants were to move out while the building was gutted. Now, the mandarins are to stay put in their 800,000 square foot warren, watching the water level lapping round their feet. The Treasury was built on the site of medieval London's richest fish ponds, which were fed by the Thames, and which now rise in what has become Hyde Park. Lately the building's basements have been filling up.

Despite confirming a fortnight ago that a pounds 200m private finance deal to rehouse the Treasury was still on, the Government has now decided it will pay for only minor work on the Grade II-listed building.

Since plans were first announced two years ago, an unknown sum has been spent on surveys, consultants and applications to Westminster City Council and English Heritage.

The Tories had been keen that the Treasury show maximum enthusiasm for the Private Finance Initiative. The building's frontage on Whitehall was to have been kept, but the interior remodelled to provide new space, which the Civil Service would lease from the developer. At one stage the Treasury was going to share the site with a luxury hotel looking out on St James's Park with a swimming pool in its basement - perhaps making use of that surplus water.