The Ministry of Defence is gearing up for a legal battle with private equity tycoon Guy Hands as it seeks to reclaim tens of thousands of military family homes that were sold off more than two decades ago.
Some 55,000 properties were sold and leased back by Sir John Major’s government in a deal that was later denounced for losing taxpayers as much as £4bn.
The MoD argued at the time that taking out the 200-year lease would free up money to spend on improvements.
But with the annual rent bill now spiralling above £200m, the department has admitted it may be cheaper to buy back the remaining 33,000 properties from Mr Hands’ Annington Homes.
It is pushing ahead with a test case to repurchase a single home in Cranwell at market value under leasehold “enfranchisement” rights and claims this could clear the way for similar deals across the entire portfolio if successful.
However, the announcement has set the stage for a showdown with Annington, which has vowed to use all legal means available to block the proposal.
Mr Hands is trying to sell Annington for as much as £9bn, according to reports.
A spokesman said: “Annington is of the firm view that the MoD has no legal right to exercise statutory leasehold enfranchisement rights to buy either the house which is the subject of the test claim or any others.
“Annington will be taking all legal steps available to it to resist the MoD's claim on this single house and any other enfranchisement rights claims brought by the MoD.”
The Government originally sold the military homes for £1.7bn to a consortium led by Japanese bank Nomura in 1996.
Annington Homes, the firm created as part of that transaction to hold the properties, was then bought by Mr Hands’ Terra Firma for £3.2bn in 2012.
The National Audit Office (NAO) has repeatedly criticised the original deal, saying the MoD had dramatically underestimated how much the value of the homes would rise.
The spending watchdog in 2018 estimated that the properties would have been worth as much as £4.2bn more if the Government had held on to them. Annington Homes values them at about £7.6bn.
Meanwhile, the MoD has been saddled with huge costs for both rent and maintenance, for which it retained responsibility, while largely failing to deliver improvements to the accommodation that were originally promised.
It leases the homes from Annington for about £183m a year, a figure that is set to increase by another £36m following a recent review. Another £140m per year goes towards repairs, maintenance and upgrades.
In a written statement to Parliament, Jeremy Quin, the defence procurement minister, said the MoD was now exploring whether it could use the leasehold enfranchisement system, under which a leaseholder can acquire the freehold of their property, to “buy out Annington’s interest in the homes and gain full ownership rights”.
The department has started with a single claim on the Cranwell house and intended to submit another one “in the near future”.
If those efforts prove successful, with the price agreed in a settlement or through tribunal, it could seek to acquire the entire Annington portfolio via the same method.
Mr Quin said this decision would hinge on whether the total cost was found to be lower than the MoD’s predicted future liabilities under the leasehold arrangement.
"If the cost of recovering full ownership of the units from Annington is less than the present value of MoD’s ongoing liabilities, such a transaction is likely to represent good value for money,” he said. “The MoD would then benefit from any future appreciation in value of the units.”
The Government’s move creates a potential headache for Mr Hands, who is reportedly seeking to find a buyer for Annington Homes. The company is said to have been valued at £9bn.