Job creation at the flagship £750 million Longbridge regeneration scheme is in danger of grinding to a halt following a protracted financial dispute between developers St Modwen and Birmingham City Council.

St Modwen, owners of most of the 300-acre former MG Rover site, will challenge city planners at a public inquiry after rejecting the council’s demand for a £145,000 contribution toward public transport improvements in the area.

The company is also accusing the council of imposing unrealistic conditions on tenants of new offices it has built at Longbridge, making it impossible to find occupants and putting 250 jobs at risk.

The stand-off prompted a warning from Birmingham’s planning committee chairman Peter Douglas Osborn, who said it was likely progress at Longbridge would be stopped in its tracks if St Modwen did not meet its obligations to make a substantial contribution to infrastructure works.

The disagreement centres on St Modwen’s application to change the use of Building 2 at the Longbridge Technology Park from industrial use to offices.

Members of the council planning committee said they would agree, but only if the firm paid £145,000 towards public transport improvements in the area.

The Section 106 money, part of the Longbridge infrastructure tariff, would go towards improving Longbridge train station.

St Modwen argues that it is unreasonable of the council to expect it to pay so much in the current economic circumstances and has offered to make the payment either when the building is sold or within five years.

The firm rejected a compromise to pay half the £145,000 once the building is occupied and the remainder within six months.

The building has been completed, but stands empty and St Modwen has warned it will not allow tenants to move in until the payment row can be resolved.

Coun Douglas Osborn (Con Weoley) said council officials had “bent over backwards” to help St Modwen.

He told the planning committee that development at Longbridge would stop if the infrastructure tariff was not paid.A year ago, St Modwen warned the council it would not be able to afford to pay in full £35 million of Section 106 payments previously agreed for the whole Longbridge development five years ago.

The company is arguing that when planning permission for Building 2 was originally granted in March 2006, proposals for an infrastructure tariff did not exist.

Since then the tariff has been enshrined in the Longbridge Area Action Plan, which has Government approval.

Mike Murray, senior development manager at St Modwen, said the council had imposed so many conditions on the use of Building 2 offices – prohibiting occupation by the public sector, accountancy and law firms – that it would prove difficult to let the premises.

Mr Murray said the Government accepted at a planning inquiry last year that infrastructure tariff payments would have to be “applied flexibly” because of current difficult market conditions.

He added: “St Modwen is not against the principle of the infrastructure tariff and is willing to pay the tariff – which is in addition to the traditional Section 106 obligations – and all the roads, transport and open space infrastructure required to deliver the Longbridge redevelopment, as long as the scheme is viable.”

He said the council’s stance would “simply have the effect of delaying the creation of new jobs”.

A report before the planning committee disclosed that St Modwen made an offer to pay £50,000, but the proposal was “retracted, varied and remade on a number of occasions and with a number of different contributions and payment terms offered”.

Planning officer Pam Brennan said St Modwen constructed the building “in a more certain economic climate” and without an end occupier. The firm was now in the position of paying rates on the empty building and it was likely rent-free periods would have to be offered to let the premises.

Ms Brennan added: “Whilst I understand that viability is an issue, not only in this instance but with the redevelopment of Longbridge as a whole, it would not be correct for the city council to waive the infrastructure tariff requirement entirely.

“Whilst flexibility has been offered in payment terms, along with the amount of tariff sought against the full requirement, an infrastructure tariff payment is necessary against compliance with the area action plan and in order for planning permission to be granted.”

The council is warning that Section 106 payments are essential in order to provide roads and transport links at Longbridge.

A year ago St Modwen told planners the timetable for completing the huge regeneration scheme was bound to slip because of the recession.

Two weeks’ later, St Modwen told the council it could only afford to pay a total of £17 million in Section 106 money instead of £35 million originally pledged.

The project, one of the largest of its kind anywhere in the country, will see construction of a village centre, the £84 million Bournville College, new industry, offices, 1,450 houses and eventually provide 10,000 jobs. Only 400 jobs have been created so far.