It's really quite simple...most surplus is sold as job lots, usually if it's clothing it's either bundles of shirts or trousers etc, these then are inevitably container stored or warehouse stored until the auctions are set up. Usually there are disposal contractors who do this for the MOD and having been to a few warehouses in my time, they are just stored in some of the worst conditions exposed to humidity, condensation etc so it's all down to he buyer (surplus shop usually or distributer) to sort the wheat out from the chaff in these bundles.)
So it's no surprise that they have this musty smell...