Decision comes after two British nationals born on Diego Garcia, the largest island in the archipelago, claimed the islands should remain under UK control.
A British High Court judge has temporarily blocked the government from transferring sovereignty over the Chagos Islands to Mauritius.
The last-minute injunction on Thursday morning came hours before the agreement was expected to be signed at a virtual ceremony with representatives from the Mauritian government.
The High Court decision was granted after action was taken by Bernadette Dugasse and Bertrice Pompe, two British nationals who were born at the Diego Garcia military base on Chagos and claimed that the islands should remain under British control.
High Court judge Julian Goose temporarily blocked the British government from taking any “conclusive or legally binding step to conclude its negotiations concerning the possible transfer of the British Indian Ocean Territory, also known as the Chagos Archipelago, to a foreign government”.
“The defendant is to maintain the jurisdiction of the United Kingdom over the British Indian Ocean Territory until further order,” he said.
Another court hearing is set for 10.30am (09:30 GMT).
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Earlier this year, the lawyer for the two nationals, Michael Polak, said on his chambers website that the government’s attempt to “give away” the islands without formal consultation with its residents is a “continuation of their terrible treatment by the authorities in the past”.
“They remain the people with the closest connection to the islands, but their needs and wishes are being ignored,” Polak said.
The UK, which has controlled the region since 1814, separated the Chagos Islands in 1965 from Mauritius to create the British Indian Ocean Territory.
In the early 1970s, the government evicted about 1,500 residents to Mauritius and Seychelles to make way for the Diego Garcia airbase on the largest island.
In October, the government announced a draft agreement to hand the islands to Mauritius and allow Britain and the United States to continue using the Diego Garcia base under a 99-year lease.
US President Donald Trump’s administration, which was consulted on the deal, gave its approval. However, finalising the agreement was delayed by a change in government in Mauritius and reported last-minute negotiations over costs.