The wall of my extension will be approximately 120mm away from a 1.2 metre high retaining wall. Do we need to tank either the new or old wall or will the air space be sufficient?
there will be an open gully along the base of the wall going into the rainwater drain.
Your problem is more likely the footings of the wall. Excavating for your new footings will mean seriously undermining or perhaps removing part of the footings of the retaining wall. As such BC may want you to prove the retaining wall is still suitable or engineer the house wall in such a manner as to prove it is capable of retaining the earth.
On a similar project i worked on BC wanted the later and this then included waterproofing. It was decided that it was more cost effective to rebuild the retaining wall further back. You really dont want a habitable building wall retaining earth unless its unavoidable.
If you do get away with leaving the wall then you will need to drain, ventilate and cover this gap. A lead skirt or similar should suffice.
Rather than leave that silly little gap I would be inclined to incorporate the retaining wall into the external wall of the extension. As long as you get the tanking detail right it will be fine. Might have to do something with the window though, maybe form a small recess/step in the retained garden rather like a cellar light well. Alternatively dig it out and push the retaining wall back further so you get some space around the extension.
There's absolutely nothing wrong with a habitable building incorporating retaining walls provided they're detailed and built right. But I wouldn't be incorporating this wall, a gap will be fine provided there's a gap big enough to sweep any leaves/crap out and on the assumption the retaining wall is adequate. Ensure the gulley slopes towards the open ends.
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