The case concerned the Ministry of Defence’s portfolio of service family accommodation (previously called “married quarters”). The MoD owned the freehold of those properties but, in 1996, granted a 999 year lease to a private company – Annington Properties Limited (“APL”) - which then granted 200 year leases back to the MoD. This “sale and leaseback” arrangement was, like other similar arrangements in the market, intended to free up capital for the MoD, with Annington paying around £1.7 billion for a headlease interest in the portfolio.
While the MoD retained responsibility for voids and maintaining the properties, they were nonetheless liable to pay rent and dilapidations to APL at the end of those leases (which could be handed back to APL under the terms of the agreement, or terminated by the MoD on 6 months’ notice).
In the years which followed, it became clear that the commercial arrangement was hugely advantageous for APL, who had limited responsibilities under the lease yet, after the first 15 years, took all the up-side of the rise in the capital value. The National Audit Office found that the MoD was £2.2 - £4.2 billion worse off than it would have been if it had retained the estate, and the agreement was described as “disastrous for taxpayers”.
A series of events, including rent reviews due to be settled in 2021 and the pending sale of APL by Terra Firma before that fund closed in 2022, prompted the MoD to grasp the nettle, and it served a notice under section 5 of the Leasehold Reform Act 1967 (the “LRA 1967”), seeking to acquire the freehold of one of the units and - in so doing - to acquire APL’s superior interest. This was followed by a further 7 notices. It appears that the purpose of this exercise was to either remove APL from the equation (saving the MOD money in its capacity as tenant), or to achieve a bargaining position ahead of the pending sale of APL by Terra Firma.
APL challenged the validity of the notices on various grounds, both through judicial review, and in the High Court.
Position where leaseholder is also freeholder
It is well established that a leaseholder who also owns the freehold cannot use the 1967 Act to buy out an intermediate interest. However, this can be overcome by transferring either the leasehold of the house, or the freehold, to a nominee company.
The MoD had done just this, and as part of the process had transferred the freehold to a shell company - DIHL. APL argued that, because the section 5 notices were served before DIHL was registered as the property owner at the Land Registry, the Ministry of Defence remained the freeholder and, for the purposes of the LRA 1967, the applicant and freeholder were one and the same. APL also unsuccessfully argued that due to the principle of “Crown indivisibility”, the Ministry of Defence and DIHL were effectively the same entity.
The court dismissed both arguments as technicalities, and said it was clear that the Ministry of Defence had served the notice as trustee on behalf of DIHL, which was the freeholder in reality, and the entity that would put the notice into effect.
The Leases were not business tenancies under the Landlord and Tenant Act 1954
APL argued that, as the Ministry of Defence was not living in the properties, it was instead using them for business purposes such that they were protected under the 1954 Act, and fell outside the leasehold enfranchisement regime.
This argument was not difficult for the Court to dismiss. The Court said that the 1954 Act only applies where the tenant is in occupation for business purposes. The Ministry of Defence was not in occupation of the properties, which were occupied by the individual licensees, so the 1954 Act did not apply.
Enfranchisement is not the same as compulsory acquisition
APL argued that the service of enfranchisement notices by the MoD amounted to an exercise of compulsory purchase powers, which could only be done in the public interest, and not for a collateral purpose.
The Court was clear that, while enfranchisement has a similar effect to compulsory service (in that the landowner is compelled to sell their interest to the tenant at a statutory price, whether they want to or not), they are not the same. Enfranchisement is a private law right, which is available as of right to public and private bodies alike, and does not require any justification, reason or purpose.
The court added that, even if the constraints on compulsory purchase did apply, the MoD would have satisfied them by legitimately seeking to achieve value for money in the public interest.
The MoD’s motives were not improper or in breach of APL’s legitimate expectations
Again citing the MoD’s status as a public body, APL asserted that the MoD could not serve notices for an “improper purpose”, such as to avoid political embarrassment and reputational damage.
The Court rejected that argument. Enfranchisement is a statutory right conferred on all qualifying tenants, not a discretionary power for public authorities, so there is no need to demonstrate a purpose for exercising that right.
In any case, the MoD had served the enfranchisement notices to achieve value for money and assert such bargaining power that it had over APL to change the commercial terms ahead of sale, which was entirely right and proper.
APL also challenged the timing of the service of the notices, just before a planned sale of the company, which had the effect of reducing its value. Again, the Court disagreed and said that not only was the MoD entitled to serve the notices, but waiting until after a sale would have raised questions of probity, as it would have artificially inflated the sale price. The MoD’s bargaining power would have been significantly lower as against a purchaser who had already paid handsomely for a secure income stream.
APL argued that the service of the notices was in breach of its “legitimate expectation” that the contractual arrangements entered into between the parties (the original sale and leaseback) would persist. The Court disagreed and said that the leases were always subject to the MoD’s statutory enfranchisement rights, so that was a risk that APL undertook when paying for the headlease in 1996.
Finally, the Court rejected any argument that service of the notices breached APL’s right to peaceful enjoyment of their possessions under Article 1 of the European Convention on Human Rights.
What was the final verdict?
The Court made a declaration that the notices served were valid, and dismissed APL’s claims for judicial review.
With so much at stake, it seems inevitable that APL will appeal the High Court’s judgment. APL’s claim raised numerous grounds for challenging the validity of the enfranchisement process, and even though none of them were successful in the High Court, it might hope to be successful on one or more on appeal. However, for now at least, this marks an important restatement of a public body’s unfettered right to rely on leasehold enfranchisement rights in the same way as private leaseholders can, as well as a helpful summary of the intersection between leasehold enfranchisement and security of tenure provisions under the 1954 Act.
Anyone investing in a freehold or headlease interest in residential or mixed-use property must be mindful of the risk of their tenants deploying their enfranchisement rights to compel the sale of that interest in return for a premium determined under statute, which might not reflect market value. This case reminds us that deals involving a sale and leaseback, or involving public bodies, are not immune from that risk.
Authored by Tim Reid and Lucy Redman.