The Court of Appeal has provided helpful guidance on the correct measure of damages that will apply when a seller misrepresents facts concerning land being sold.

In most circumstances, the buyer’s losses will be assessed at the date of the sale, based on the difference between the price paid and the price that should have been paid, if the issue in question had not been misrepresented. There may be cases where this principle can be disapplied, such as where losses are clearly mitigated or if the sale leads to a connected transaction creating a profit for the buyer.

However, in this case, a subsequent sale for a profit did not affect the measure of damages, as the sale was unconnected to the original purchase. In addition, the sale took place some years after the initial sale and the profit was derived from price rises in the general property market.

The facts

This case concerned a newly developed flat in Chobham Lakes, Surrey (the “Flat”). In January 2012, the developer of the Flat, Hodson Developments Limited (the “Developer”), sold the Flat to Alison Quilter (the “Buyer”) for £240,000. The Buyer sold the Flat two years later for £275,000.

Prior to her acquisition of the Flat, the Buyer sent standard pre-contract enquiries to the Developer, which included a request for the Developer to confirm if it was aware of any dispute relating to the Flat, or any circumstances which might lead to a dispute. In its replies, the Developer failed to admit that a dispute had arisen in respect of a communal hot water and central heating system, which had malfunctioned repeatedly.

The County Court Decision

After acquiring the Flat and discovering the malfunctioning system, the Buyer sued the Developer to recover her losses. When the matter proceeded to trial, the County Court Judge agreed that the Developer had misrepresented the true position, so the Court needed to assess the proper level of damages to be awarded.

When assessing damages in a misrepresentation claim of this nature, it is well-established law that the “normal measure” of damages is “the difference between the actual value of what was acquired and the price which was paid”.

In this case, the trial Judge accepted expert evidence that the purchase price of £240,000 constituted the market value of the Flat, “as it was represented to be”. However, after taking account of the defects, the Flat would have been valued at £225,000. Damages were therefore awarded to the Buyer in the sum of £15,000. The trial Judge also concluded that the fact that the Flat had been sold for an apparent profit did not alter the assessment.

The Developer’s Appeal

The Developer appealed against almost all aspects of the County Court decision, including whether there was any evidence of a misrepresentation and the applicable measure of damages. The Court of Appeal roundly rejected the Developer’s arguments concerning the evidence, so the key legal argument centred on the measure of damages.

The Developer submitted that the Buyer made a profit of £35,000 when she sold the Flat. It therefore argued that the “normal measure” of damages should not apply, as this would “not accord with the overarching principle of compensation”. However, unlike the Seller, the Buyer had fully disclosed the issues when selling the Flat, and she was able to say that the National House Building Council was dealing with the issue, pursuant to a building guarantee. The Developer claimed that this meant she had suffered no eventual loss.

The decision

The Court of Appeal dismissed the Developer’s arguments and upheld the award of damages made by the County Court Judge. In coming to this conclusion, the Court distinguished two types of scenario reviewed in previous case law. In summary:

1. Where a buyer was induced to buy land owing to a misrepresentation by the seller, but quickly sold the land for a profit that was “all part and parcel” of the same transaction that gave rise to the misrepresentation, the Court could discount any damages by the profit made.

2. However, where a buyer was induced to buy land owing to a misrepresentation by the seller, but subsequently owned the land for a significant period of time, any profit arising from movement in the property market could not be said to have arisen through a connected transaction. The Court cited such a case where a profit had been made after the buyer obtained planning permission to unlock development value in the land. The success of the buyer’s planning application was held to be unconnected to the original transaction.

In the recent case of Bacciottini v Gotelee and Goldsmith, also decided by the Court of Appeal this year, the negligence of a solicitor who failed to report a restriction that applied to a planning permission, could have resulted in a substantial loss of value to a buyer. However, although damages would normally be measured on the date of the acquisition, the buyer subsequently had the planning restriction lifted at a cost of £250. This mitigated the loss suffered, as the buyer’s application to lift the restriction was a direct consequence of the negligence.

In the present case, the Buyer had no duty to sell the Flat to mitigate her losses. She needed a place to live and when she did eventually move, the decision arose “in the ordinary course of her domestic life”. Therefore she should be entitled to damages from the wrongdoer. Although her losses were mitigated by the building guarantee, this was in the nature of a policy of insurance, and it is well established law that an insurance policy pay-out will not be brought into account when assessing damages.

Our comment

The normal measure of damages will apply in most cases but there will be circumstances where this principle can be disapplied. In any event, it will be important for to adopt a fair and realistic approach to an assessment of damages when considering a claim. Although those who suffer wrongdoing have a duty to mitigate their losses as soon as they become aware of the issues, this duty will only go so far as is reasonable. In this case, that did not extend to forcing the Buyer to sell the Flat.

Finally, sellers should ensure that they provide honest answers to pre-contract enquiries, which are drafted with utmost care. In some cases it may not be necessary to provide full details, a full answer to a question, but an omission of facts may have serious consequences, as it did for the Developer in this case.