The UK is seeking to unwind one of its most costly privatisation deals with a legal challenge against billionaire Guy Hands’ Annington Homes over the ownership of tens of thousands of properties in the Ministry of Defence housing portfolio.
Jeremy Quin, minister for defence procurement, said in a written statement to the House of Commons on Thursday that he would explore the government’s “statutory leasehold enfranchisement rights to buy out Annington’s interest in the homes and gain full ownership rights”.
The move is likely to spark a legal battle between the MoD and Hands’ business, Terra Firma, over whether the government can force through the acquisition of the estate.
Terra Firma, which is headed by Hands, bought Annington from Nomura Holdings for £3.2bn in 2012. However, Hands was also part of the Nomura team that struck the original 1996 deal.
The MoD sold 57,400 properties to Annington Homes in 1996 for £1.7bn, making it the biggest residential property owner in England and Wales. It then leased back the homes on a 200-year lease at a discount but in return also agreed to pay the costs of refurbishment and maintenance. The deal was struck by the then defence secretary, Michael Portillo.
The portfolio is now valued at £7.6bn, according to accounts for Annington, while the MoD has to pay close to £183m a year in rent as well as the cost of upkeep of the 38,000 homes it still leases.
The National Audit Office said in 2018 that the deal had already lost the taxpayer up to £4.2bn given the huge increase in the value of property after 1996.
The NAO said the MoD “has lost out on billions of pounds’ worth of increases in asset values, while Annington has made a significantly higher return on its investment than expected”.
MoD officials are keen to avoid further losses over the remaining 174 years of the lease, and are attempting to use the property law of enfranchisement to take back ownership of parts of the portfolio.
Quin told MPs on Tuesday that initially the MoD had made a single claim for one house, and intended to submit a further claim over another house in the near future. He said: “It is hoped that this test case will establish certain key principles.”
He added that if the cost of recovering full ownership of the units from Annington was less than the present value of MoD’s ongoing liabilities, “such a transaction is likely to represent good value for money . . . The MoD would then benefit from any future appreciation in value of the units.”
Officials close to the situation said that a successful claim could lead to further acquisitions across the vast portfolio of properties, which spans almost 500 sites across England and Wales.
Quin said that “given our obligations to secure value for money, we have reviewed MoD’s current arrangements with Annington and . . . set out the steps that MoD is taking to deliver greater value for money for the taxpayer in relation to service family accommodation”.
Officials said that the MoD had taken extensive legal advice and was confident in its position to reclaim taxpayer money from the deal. If successful, the cost of taking ownership of the houses in the test case will be determined by an independent tribunal using market values.
Enfranchisement allows leaseholders to buy the freehold of their residential rental property under a value agreed by a court.
The 200-year deal came with a 25-year rent review, which occurred at the end of last year. The settlement will increase annual rents across the Annington portfolio by about £36m. The MoD also spends about £140m every year on repairs, maintenance and upgrades of the properties.
Terra Firma has been reported to be looking to sell the property company.
Quin added that “Annington, through its lawyers, has notified the MoD that it is considering the impact of the claim and has put the MoD on notice of a potential dispute”.
In October 2021, Annington raised £800m of new debt, which allowed it to pay a dividend of £793.6m to its parent company.
Neither Annington nor Terra Firma responded immediately to a request for comment.