A deal with too many moth holes

The developer spent a load of money bringing this 1850s Notting Hill property up to snuff – over £10m – then sold it for £32.5m. But the sale was moth-eaten. He now has to give back the £32.5m and more besides, in damages and costs.

The story goes like this. William Woodward-Fisher bought Horbury Villa, Ladbroke Grove, in 2012 for £10.4m. He is a general practice surveyor. He and his wife moved in and spent another £10m on substantial works over the next few years. In 2018, Mrs Woodward-Fisher noticed a problem with clothes moths in the house; they had damaged some expensive clothing. Pest control folk were engaged. The suspicion was that lambswool insulation was partially infected prior to installation.

Then the moths multiplied. Spray treatment was done and done again, and removal of the insulation was urged. The for-sale boards discreetly went up. Potential purchasers arrived; a deal was in the wind. The usual pre-contract enquiries began. Solicitors were on board.

The next event is important. It’s to do with answers to those pre-contract enquiries. One of the questions asked “whether the property had ever been affected by woodworm, dry rot, or other timber infestations or decay […] and vermin infestations”. The reply authorised by the vendor said: “The seller is not aware of any such matters affecting the property surveyed for such, so no warranty can be given.” Another answer said: “The seller is not aware of any such defects.” The deal was then done, and the purchasers moved in.

Recission effectively cancels the contract. The court ordered the return of the house ownership to the seller, and the seller to return the £32.5m purchase price plus damages

But the moths had not moved out – they were permanent occupants. The blighters immediately found their way into glasses of wine, toothbrushes, clothes, furniture and more. Ugly. So the purchasers brought in pest control folk – two lots. They also embarked on opening up walls and ceilings to see what was up. The couple and their children moved out.

Meanwhile they asked advisers to probe for awareness of moths with the vendor. Reports provided to the vendor were obtained. Those reports had pointed the vendor to the source of a problem as an infestation of the insulation of the house. Pheromone traps, insect spray and smoke bombs had been deployed.

An expert on entomology, and specifically moths, was engaged. He explained how a single egg-carrying female moth can lay 50 to 200 eggs, which soon develop into adults. Their food source was the woollen insulation then clothes, carpets and furniture. The insulation in this building was secluded behind walls.

The answers to the pre-contract questionnaire were false misrepresentations, said the High Court judge: “The vendor was aware of defects and could not argue that moths are not vermin.” Further, the judge accepted that, had the purchasers been made aware of the problem, they would not have bought at all. They had relied upon representations that all was well. On top of that, the court concluded that the vendor knew their answers to be untrue. The judge recited the test for fraud. Let’s look.

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The requirements for fraud are exacting. Believe it or not, it comes from and remains today a test from 136 years ago. “Fraud is proved when it is shown that a false representation has been made (1) knowingly, (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. To prevent a false statement being fraudulent there must be an honest belief in its truth. And, if fraud is proved, the motive of the person guilty of it is immaterial. It matters not that there is no intention to cheat or injure the person to whom the statement was made.”

The judge found that the pre-contract enquiries were answered without caring whether these answers were true or false. So, fraudulent misrepresentation was made out.

Now what? The principal and usual remedy in such cases is “recission”, if that is what the complainant wants. Recission effectively cancels the contract from the beginning; the aim is to restore the parties to the position they were in before the contract was made. The court ordered the return of the house ownership to the seller – and the seller to return the £32.5m purchase price plus damages.

But what if it is not that easy? The purchasers had well and truly fallen out of love with their Notting Hill mansion so they elected to unwind the deal. But the seller only had assets of £15m to £20m. In the event, they were willing to vest their house back into Mr Woodward-Fisher’s ownership but required him to sell elsewhere and accept judgment for the money due to them with a lien (a right of possession) until the debt was satisfied. All in, the vendor must find £36m.

Don’t be distracted by these big numbers. The principle of recission would still apply even if the building was a tiddler. Fraudulent misrepresentation, once proved, calls for the entire deal to be extinguished and money repaid. As for those pre-contract enquiry forms, it’s best to be totally up-front and open. Tell them about moths, mould, mice and misery. Fraud unravels everything.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple