Originally published June 2023.
Is anyone else uncomfortable with the recent legal judgement that says the Ministry of Defence (MOD) can enfranchise 8 “test properties” from the portfolio that it “sold” to Annington over 25 years ago?
The 1996 deal attracted much opprobrium for its apparent failure to provide value for money for the UK tax-payer. For those readers of lesser years than your Undercover Investor, allow me to briefly rehearse the facts here.
The MOD sold the so-called Married Quarters Estate in 1996. Mr. Hands, now of Terra Firma but working for Nomura back then, proved the most astute of all the bidders (there were many, and full disclosure, I was one) and Annington, Nomura’s vehicle, won the auction. Consensus had it that Nomura had invested far more in the due diligence than anyone else, so understood the cash-flows rather better than others, and certainly the MOD who, after a brief period of celebration, have regretted the deal ever since. Hats off to Mr. Hands I say.
The purchase has done well for Annington and less well for the vendor, partly because the latter has allegedly failed their side of the bargain over the years both by not giving back, nor refurbishing properties that they should have done during that time. That probably makes the deal look even worse for the MOD than it could have done had they simply done what they said they would do, but that is not the cause of my reflective mood.
There was apparently sufficient friction between the parties at the 2021 rent review (the first of the 25-year rent reviews in what I recall is a c. 200-year agreement) that the MOD have, it seems, decided to try to deconstruct the original deal. The mechanism that it proposes to use to do that, residential leasehold enfranchisement, is interesting for several reasons.
Whilst one can enfranchise a long leasehold residential property today, one cannot enfranchise a business lease, nor an annuity, and the enfranchisement process does not necessarily offer full recompense to the superior owner being enfranchised against. (The price at which an enfranchisement occurs is artificial and can produce perverse results). In this instance, the superior owner is the business Mr Hands created to own and run the estate which purchased it fair and square in 1996.
The MOD apparently agreed the December 2021 rent review and virtually the next day, to the surprise of everyone, including Annington, served enfranchisement notices on the test properties. No surprise then that this came in front of a judge.
The learned judge in question found in favour of the MOD on all six counts before him which is something of a surprise to me. Losing 6:0 in the first leg of any match is not ideal, and many might count Annington out of any chance of a second leg victory, but I personally rather doubt that we are done in the Courts just yet.
The decision challenges a number of my commercial, moral and societal senses, notwithstanding that the judge has provided a 152-page reasoning. I am neither a lawyer, nor clever enough to follow all the legal arguments, but I do know what I was involved in bidding for all those years ago.
