The High Court recently handed down its decision in the hotly anticipated application for judicial review and declaratory relief brought by a number of Annington companies against the Secretary of State for Defence.
In 1996, Annington, which is owned by the private equity company Terra Firma, had entered into a complex sale and lease-back arrangement with the Ministry of Defence of 55,000 dwellings used to house military service personnel. The properties were spread over 765 sites in England and Wales. Each site was subject to a 999-year headlease which was transferred to Annington, then underleases for a term of 200 years were granted back to the MoD at a discounted market rent.
At the time, the MoD had thought the deal represented good value for tax payers, but it became apparent that the terms exposed it to significant liabilities. The agreement was the subject of scrutiny by a number of public bodies including the National Audit Office which published a report heavily criticising it. In response, the MoD assessed the available options to reduce its ongoing liabilities and the loss to the public purse. One of those options was to exercise its leasehold enfranchisement rights over individual houses and acquire back the freeholds. Although beneficial to the MoD, this course of action negatively impacted on the value of Annington’s portfolio for which it had paid £1.662bn. Annington challenged the validity of the enfranchisement on numerous grounds including novel arguments based on the interpretation of enfranchisement legislation and the public law restraints on public bodies exercising private rights.
In a lengthy judgment, the High Court rejected all of the grounds of challenge, ruling that that the enfranchisement notices served by the MoD were valid.
The case provides important analysis of a public body’s ability to rely on leasehold enfranchisement rights in the same way as private owners. It also considers the relationship between enfranchisement legislation and the security of tenure given to business occupants under the Landlord & Tenant Act 1954. Many of the points have not been considered by the court before.
Annington has stated that it intends to appeal the decision. Regardless of the outcome of the appeal, the case provides a reminder to parties acquiring residential or mixed-use property to be alert to the risk of leaseholders exercising enfranchisement rights to compel the sale of the freehold in return for a premium valued according to statutory principles. This premium may not reflect market value. This risk extends to sale and leaseback arrangements and to disposals involving public bodies.
The full judgment of Holgate J is here.
For those of you not wanting to read 152 pages of the judgment, please see a short analysis of the judgment which was first published on Lexis+® UK on 20 July 2023, available to download in the left-hand column.
If you have any questions concerning the case, please contact Caroline DeLaney.