Instructions
Play through the main storyline until you travel to Brightwall Village.
Head toward the library and you will see a Jonathan standing near a pond. Talk to Jonathan and he will ask you to complete a mission called "Gnomes are Great."
Complete the mission by finding the gnome hidden somewhere in the village.
Leave the town and then return later in the game. Speak to Jonathan again and he will tell you all of his gnomes have escaped.
Accept the mission called "All Gnomes are Evil." This will activate the gnome side quest.