Buyers of 51-year-old, ‘one owner house’ awarded damages for reduction in value due to leaks

This was a case where, to the plaintiffs’ horror, they discovered that the house they contracted to purchase was leaky and had leaked for some time prior to the time of sale. Note: James Wollerman, Partner and Dexter Fry, Associate acted for the successful plaintiffs in Z__ v Watson [2023] NZHC 2328.

The judge ruled in favour of the plaintiffs under the doctrine of ‘common mistake’ with the following quote from the judge’s reasons: “[The plaintiffs’] most certainly, and probably also the [defendant], wrongly thought the house was sound and did not leak in any significant way. In particular, [the defendant] was aware of past leaks in the house which she thought had been fixed, and thus she assumed the house had no significant leaking issues.”

The facts were briefly these. The vendor and her late husband who sadly died before the case got to trial, purchased a block of land, and built a house on it in 1969. They were the sole owners and lived in the house for some 51 years. Then in 2020 they employed an agent to sell the property and marketing material was prepared describing the property as suitable for a growing family. After viewing the property several times, the plaintiffs put in a tender for $848,000 which was accepted. Settlement happened without incident, but within a few weeks of moving in the plaintiffs discovered the property suffered from significant damage due to leaks.

The plaintiffs alleged that the vendor had made a number of pre-contractual misrepresentations (ie false statements of fact), prior to the sale. These included that, in answer to a question from the plaintiffs or their agent about whether there were leaks, the defendant had said categorically no. The Court held, albeit “by a rather fine margin” that the alleged false representation was not made to the plaintiffs and even if it was, it was the defendant’s honest and reasonably opinion that earlier leaks had been fixed.

That left the plaintiffs’ claim of common mistake and the question of relief for any such mistake.

Interestingly, the judge began by considering the earlier case of Shen v Ossyanin (No 2). In that case, the buyer of a $10m house lost a claim that he was misled over leaks but later succeeded in a claim that both parties made a common mistake and that this should be reflected in the result, with the Shen Court finding the reduction in value due to the mistake was approximately $1.5m, which it ordered be split 70/30 between the buyer and the seller. This meant the buyer only recovered 30% of his loss in that case.

The judge considered there were some similarities to the case of Shen, in that both parties were ‘influenced’ in their decisions to enter the contract by the same mistake.

To be influenced means that both parties must have “mistakenly accepted in their minds the existence of some fact which affects to a material degree the worth of the consideration given by one of the parties” (Shen (No. 2)).

Here, the judge found that the plaintiffs’ inspections of the house along with a builder did not negate the influence of the mistake on them. There was also evidence from the defendant that if she and her husband had been aware of the mistake (i.e. the true state of the property), they would have taken the property off the market and repaired it to restore the reduction in value.

Reduction in value
Finally, the Court considered the question of relief noting that section 28 of the Contract and Commercial Law Act 2017 (the Act) gives the court power to make any order it “thinks just”. That is a broad discretion but is on, nevertheless, to be exercised on principle not arbitrarily. On the contrary, the aim is to mitigate the arbitrary effects of the mistake.

The judge held that:

1. Arguably Mrs Watson as an owner and occupier of the property for over 50 years was the party who largely “caused” the mistake. She could have disclosed the history of leaks and remedial work but chose not to. The judge also found it interesting that the property had been put on the market only shortly after significant repairs were done in 2019.

2. This was not a case like Shen where the buyer’s conduct was unreasonable and justified a reduction in the relief by 70%. Rather, the need (and uncertainty) of a future fix had been shifted to the Zhous “purely because of timing reasons”.

3. In the circumstances, the correct starting point for quantifying loss attributable to the mistake was the difference in the purchase price without defects ($848,000) and the price with defects, with a further adjustment for risk, which was approximately $460,000.

4. That meant a reduction in value of $388,000.

5. Thus, the judge considered that a “significantly unequal exchange of value” had occurred in terms of the Act.

6. Overall, there should be a 30% reduction to reflect the plaintiffs’ decision not to pursue their pre-purchase inspector and/or any contributory fault – a reversal of the 70% reduction that was made in Shen (No 2). The plaintiffs were also awarded costs and reasonable disbursements plus interest.

Stuart Dalzell, partner.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Dalzell Wollerman to anyone who relies on the information contained in this article