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In 1996 the Ministry of Defence (MOD) decided to sell and lease back much of its service family accommodation to Annington Homes. The deal has been described as “disastrous” by the Public Accounts Committee. The MOD pays Annington Homes millions each year in rent for the properties it leases.

The National Audit Office estimates the MOD has lost out on billions of pounds of asset value as a result of the agreement.

In early 2022 the MOD indicated its intention to seek full ownership of the estate from Annington Homes. In response, Annington has informed the MOD it may pursue legal action. On 15 May 2023 the Hight Court found in favour of the Ministry of Defence.

The sale of the married quarters estate

In 1996 the MOD sold the majority of the Married Quarters Estate (now referred to as Service Family Accommodation) in England and Wales to Annington Homes Ltd for £1.662 bn.

The sale was made on the basis that the MOD would lease back the properties for the use of armed forces personnel and pay rent on these units to Annington. The MOD remains responsible for maintaining the properties.

As properties become surplus to the MOD’s requirements they are then returned to Annington Homes who can either sell them or lease them to the public.

The MOD residential estate in Scotland was not part of the Annington Homes deal.

Key numbers

Rental price renegotiation

As part of the agreement, the MOD received a discount of 58% compared to open market rates for the first 25 years of the contract. Or to put it another way, it pays 42% of open market rent for the leased properties to Annington Homes Ltd.

The discount reflects, among other things, the bulk nature of the estate, the MOD’s continuing maintenance obligations, and the benefit to Annington Homes of the MOD agreeing to pay guaranteed minimum payments until 2021.

The rent paid by the MOD to Annington was reassessed in 2021 (25 years after the contract was signed). In 2016, when reviewing the MOD’s financial plans for the whole defence estate, the NAO warned that failing to secure an equivalent reduction to that currently enjoyed (ie 58%) would “exacerbate the funding shortfall in the Department’s budget.”

The MOD and Annington entered arbitration in 2021 after failing to agree a new discount rate.

In January 2022 the Defence Secretary announced a settlement had been agreed, with the overall adjustment to open market rents changing from 58% to 49.6%. Ben Wallace said the settlement achieves “value for money” and is a “good outcome and a fair settlement.”

The rent paid to Annington by the MOD is entirely separate to the rent paid by service personnel to the MOD for their accommodation.

A “disastrous” deal

The 1996 agreement has been widely criticised and has been the subject of several parliamentary reports.

The Ministry of Defence argued at the time the deal would transfer property it did not need to own to the private sector; improve the management of Service Family Accommodation (SFA) through greater involvement of the private sector; raise funds to improve the quality of SFA and achieve value for money through a competitive sale.

However, in 1998 the Public Accounts Committee (PAC) said that by retaining responsibility for managing the properties, the department was “now in the business of maintaining and upgrading an estate which… is in effect owned by somebody else.”

In 2018 the National Audit Office estimated that the MOD was £2.2 billion to £4.2 billion worse off over the first 21 years of the contract than if it had retained the estate, largely because of house price increases.

In a further report in 2019 the PAC described the deal as “disastrous”. In evidence to the committee the Permanent Secretary of the MOD acknowledged the deal was a “poor one”.

Plans to recover ownership of the estate

In January 2022 the Defence Secretary announced plans to gain full ownership rights of the estate from Annington.

Ben Wallace said the department will “explore the exercise of its statutory leasehold enfranchisement rights to buy out Annington’s interest in the homes and gain full ownership rights.” He said the MOD has made a single claim for one house as a test case which it hopes will establish certain key principles. Wallace explained “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.” The Defence Secretary added that Annington has notified the MOD that it is considering the impact of the claim and has “put the MOD on notice of a potential legal dispute.”

Private equity group Terra Firma, which owns Annington, said it would challenge the MOD’s move and that it expects to win a “very long and very expensive legal dispute”. Terra Firma has been reported to be looking to sell Annington, which it bought in 2012, and suggested the Defence Secretary’s decision will put the sale of Annington on hold.

On 15 May 2023 the High Court of Justice handed down its ruling on the judicial review (PDF) filed by Annington. The High Court rejected Annington’s claims and ruled in favour of the Ministry of Defence. Annington said it was disapppointed by the ruling and will appeal. The Ministry of Defence “welcomed the decision” and said it has not made a decision on next steps.

The briefing paper discusses the agreement in more detail and provides links to relevant parliamentary reports. It also briefly explains some of the other issues affecting armed forces housing. The MOD says it intends to publish a revised accommodation strategy in 2022.

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