The Government has agreed to tear up GNER’s £1.3 billion franchise agreement to operate the East Coast main line railway, The Times has learnt.

The Department for Transport has decided to re-let the franchise, but as a temporary solution will allow GNER to continue to run it for up to two years on a new, fixed-management-contract basis.

The decision to allow GNER to continue to operate the franchise is bound to stoke anger from other UK rail operators facing similar pressures.

Talks are under way between the DfT and GNER’s bankrupt parent Sea Containers to agree the terms of the new arrangement. It is expected to run for between 18 and 24 months until a new invitation to tender can be produced and a train operating company selected.

An agreement with GNER is expected shortly because the company’s financial situation is unsustainable under the terms of the current franchise, for which Christopher Garnett, GNER’s former chief executive, admitted the group had overbid. GNER is understood to be perilously close to being in breach of its liquidity ratio, the amount of cash that it is legally required to retain to honour its franchise agreement.

“It’s a fix,” one rail industry source said. “It is at least one year’s work to write the invitation to tender and complete the bidding process and the Government would prefer a negotiated solution than to take the franchise back by force.”

The Government has stated repeatedly that it does not renegotiate rail franchises as a matter of policy.

A spokeswoman for Sea Containers said that negotiations were “commercially confidential” and a range of options were under consideration. She declined further comment.

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