HOPES of reviving a controversial development in the heart of Edinburgh's Old Town have been dealt a huge blow after a European ruling that council leaders in the capital had flouted the law over the £300 million scheme.
The city council is embroiled in a second international row over its world heritage site after the European Commission ruled the authority had illegally sold a huge swathe of public land at the heart of a controversial development.
The city faces being dragged through the courts after a two-year inquiry found the authority had "infringed" a host of European laws over a 4.5m deal with a property giant.
The firm, Mountgrange, which had already bought up the site of a former bus depot and a homeless hostel, was allowed to create a much bigger scheme after agreeing to buy various council-owned buildings and land without them going on the open market.
Mountgrange – which went into administration last March, after four years pursuing plans for the site – triggered huge opposition with a plan to knock down two listed buildings just off the Royal Mile to create a five-star hotel and conference centre.
But the council, and both the UK and Scottish governments, have been warned infringement proceedings are under way after they broke public procurement rules and flouted principles of "equal treatment, non-discrimination and transparency".
Unesco's heritage arm has already condemned the handling of Caltongate by the council, demanding the scheme is returned to the drawing board over loss of the listed buildings, and impact on classic views. Unesco is still investigating the handling of the scheme by the council and the Scottish Government, which refused to call it in despite the council's financial interests.
The EC's move is a major embarrassment for the authority. And it is likely to further delay efforts to revive development of the site.
The land at the centre of the commission's investigation had been widely expected to be part of any future development. Lloyds Banking Group, the main Mountgrange creditor, has yet to approve the sale of the firm's assets to another property developer.
The council was reported to the EC by the architectural historian David Black. He claimed two years ago that the council had flouted competition law through its dealings with Mountgrange.
He said: "This is likely to have massive implications for the city. It throws into question its whole handling of this development."
Save Our Old Town campaign spokeswoman Julie Logan added: "There was always something extremely suspect about the deal between the council and Mountgrange without anyone else being able to bid for this land. This ruling means the whole future of this land is now up for debate."
A commission spokeswoman said: "This case is currently at the stage of letter of formal notice. It represents the first stage in the pre-litigation procedure."
A spokesman for the council said: "We have always paid due regard to its legal obligations but recognise the European Commission's right to investigate this matter and we are currently preparing a response. "
A Scottish Government spokesman said: "We are aware a complaint has been raised and, in line with standard procedures, will work with the UK Government and the council to ensure that any issues are properly addressed."