LLOYD ET AL v. MURPHY

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District Court of Appeal, Second District, Division 1, California.

LLOYD ET AL. v. MURPHY.

Civ. 14163.

Decided: November 10, 1943

Chas. W. Rollinson, of Los Angeles, for appellant. Albert W. Leeds, of Los Angeles, for respondents.

This appeal arises out of an action commenced by plaintiffs for declaratory relief and for a money judgment.

The factual background surrounding this litigation may be thus epitomized: On August 4, 1941, plaintiffs leased to the defendant for a period of five years commencing on September 15, 1941, certain premises described in the complaint and located at the corner of Almont Drive and Wilshire Boulevard, in the city of Beverly Hills, Los Angeles County. The premises in question are approximately 100x150 feet in area, the major portion thereof being paved with cement; equipped with six gasoline pumps, and in general being adapted to the maintenance and operation of an automobile service station. Fronting on Wilshire Boulevard the property is improved with a one–story, 40–foot storeroom suitable to be used for commercial or business purposes. In the rear of such storeroom is an L–shaped one–story building extending to the rear of the demised premises.

Contained in the lease is paragraph V thereof reading as follows:

“Use of Premises”

“The demised premises shall be used by lessee for the sole purpose of conducting thereon the business of displaying and selling new automobiles (including the servicing and repairing thereof and of selling the petroleum products of a major oil company) and for no other purpose whatsoever without the written consent of lessor, provided, however, that lessee shall be privileged to make an occasional sale of a used automobile from said premises. Lessee agrees that he will at all times maintain and conduct his business in a lawful manner, and in strict compliance and observance of all governmental rules, regulations, ordinances and laws, and with all restrictions, covenants and conditions required to be observed by lessor upon the demised premises. Lessees shall during the term of this lease operate and keep said business and business establishment open during usual business hours of each business day.” (Emphasis added.)

With reference to any assignment of or subletting under the lease, paragraph XIV contains the provision: “Lessee agrees not to use or allow the demised premises to be used for any purpose other than hereinbefore specified, and shall not sublet the same nor any part thereof, nor assign, mortgage or hypothecate this lease, or any part thereof, without first obtaining the written consent of the lessor. Lessee shall not commit, suffer, or allow any waste or misuse of the premises, or make or permit any alteration upon or addition to any part thereof, except as permitted by the original alterations contemplated by the terms hereof.”

Paragraph XVIII of the lease empowers the lessor to consent to a waiver or compromise in connection with any of the provisions of the lease or with reference to any breach or default thereunder, and limits the rights of the lessee when any such waiver or compromise is consented to by the lessor.

We think it may fairly be said that during occupancy of the demised premises by defendant lessee, the sale of new or unused automobiles constituted approximately 90% of the gross volume of his business. The remaining 10% consisted of gas and oil sales together with automobile servicing and repair work.

On January 1, 1942, following our country's entry into the present World War, the United States government issued its mandate prohibiting the sale of new automobiles and trucks. On January 8, 1942, this prohibition was modified to permit the sale of new automobiles and trucks for military needs and to others working directly on military projects and who obtained certification thereof from the Army or Navy officer in charge of such military projects. A federal regulation, dated January 20, 1942, confined the sale of unused automobiles and trucks to the Army, Navy, certain other federal agencies, and to all persons holding a certain preferential rating referred to as A–1–j or higher. Suffice it to say that at all times here pertinent, the sale of new automobiles was restricted to those who obtained from the authorized governmental agency a priority or authorization to purchase such motor vehicles.

Contending that the aforesaid governmental regulations and decrees deprived him of the beneficial use of the property for the primary and principal purpose to which he was restricted by the lease, viz., the sale of unused or new automobiles, the defendant lessee on March 10, 1942, called upon Edward W. Lloyd, one of the lessors, who claimed he was authorized to act for his co–lessors. Upon that occasion Mr. Lloyd orally waived all restrictions upon the type of business which defendant lessee might transact upon the premises, orally authorized subletting to any responsible sub–tenant, and suggested that if defendant lessee was still unable to conduct his business profitably, the lessors would be disposed to reduce the rent. This conference was followed by a written communication under date of March 26, 1942, confirming the offer theretofore orally made.

However, on March 15, 1942, defendant lessee vacated the leased premises, giving oral notice of repudiation of the lease. This was followed on March 24, 1942, with a written notice of cancellation and termination of the lessee's obligations under the lease.

Exercising their rights under the lease, plaintiffs thereupon leased the property to other tenants for the account of and in mitigation of the damages allegedly due from defendant lessee; and under date of May 11, 1942, instituted this action, one count of which was for declaratory relief to determine the rights of the respective parties pursuant to the lease, while the second count sought judgment for accumulated deficiencies in rent.

Following trial upon the merits, the court made findings of fact and rendered judgment declaring the lease to be still in effect and that plaintiffs recover for the accumulated deficiencies in rent, amounting to $2,000. From such judgment defendant prosecutes this appeal.

The first ground of appeal presents for consideration the doctrine commonly known and referred to as commercial frustration, which is apparently recognized by subdivision 1, section 1511 of our Civil Code. In this connection it is urged by appellant that because the lease restricted the use of the demised premises to a particular purpose, i.e., the sale of unused automobiles, and such use was rendered illegal by wartime governmental regulations, the lessee was thereby relieved from performance of the obligations of the lease assumed by him thereunder.

While not new, the doctrine of commercial frustration came into greater prominence, its scope was widened, and its application was increased following the World War of 1914, when the impossibility of performance of contracts for the sale of certain materials or for the shipment on specified vessels to specified ports was affected by restrictions, occasioned by the war, declaring embargos upon and seizure of vessels named in particular contracts. The doctrine of frustration was thus stated in Straus v. Kazemekas, 100 Conn. 581, 124 A. 234, 238, cited with approval in Johnson v. Atkins, 53 Cal.App.2d 430, 431, 127 P.2d 1027: “Where from the nature of the contract and the surrounding circumstances the parties from the beginning must have known that it could not be fulfilled unless when the time for fulfillment arrived, some particular thing or condition of things continued to exist so that they must be deemed, when entering into the contract, to have contemplated such continuing existence as the foundation of what was to be done; in the absence of any express or implied warranty that such thing or condition of things shall exist the contract is to be construed as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible or the purpose of the contract frustrated from such thing or condition ceasing to exist without default of either of the parties. 12 A.L.R. 1275.”

While it may be conceded, as claimed by respondents, that the sale of unused cars is permitted to a restricted group of civilians who possess preference ratings and to the Army, Navy and certain other Federal agencies, nevertheless the evidence in the case at bar conclusively shows that approximately 90% of appellant's business conducted on the demised premises consisted of the sale of new automobiles. So far as servicing and repairing automobiles is concerned, the terms of the lease, heretofore quoted, absolutely limited such activities to unused automobiles that were sold by appellant and limited the sale of used automobiles to the making of “an occasional sale of a used automobile from said premises”. It seems quite clear to us that when the lease here in question was executed, appellant lessee agreed not to use the premises for purposes other than those enumerated in the lease, and the lessor could refuse to permit any change to be made in such use while appellant was occupying the premises. The conditions of the lease now before us were certainly restrictive in character. Furthermore, section 1930 of the Civil Code provides that when a thing is let for a particular purpose the hirer may not use it for any other purpose. We think it must be conceded that the wartime Federal regulations made the performance of appellant's obligations under the lease “vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract” (6 Williston on Contracts, Revised Edition, p. 5411), because had the possibility of Federal wartime restrictive regulations on the sale of unused automobiles been contemplated by the parties to this lease it is altogether likely that they would have expressly provided therein that the lease should terminate on the day such restrictive regulations became effective, or otherwise made provision for such contingencies.

When, therefore, those conditions, to–wit: the unrestricted sale of new automobiles, became impossible, without fault on the part of either party to the lease, and those considerations which, at its inception, made the lease desirable disappeared, and the lease contains no provisions with regard to the contingencies here considered, then the law reads into the lease that the parties thereto will be excused from performance. In the case at bar the main object which formed the basis of this lease contract was prohibited by Federal decrees. The right to sell unused automobiles was essential to the performance of the lease herein, and that contract must, therefore, be deemed subject to the implied condition that the parties would be excused in case, before breach, performance became impossible by reason of governmental regulations prohibiting the sale of new automobiles except under highly restricted and limited conditions. Commercial frustration in theory, therefore, amounts to no more than a condition or term of the contract which the law implies to take the place of a covenant that, it is assumed, would have been inserted by the parties to the contract, had the contingencies which arose occurred to them at the time they made the contract. Such implication is based on what is fair and reasonable in the light of the mutual interests involved, the ends of justice, and the main objects of the contract. Without taint of bad faith, appellant herein finds himself frustrated by governmental regulations, and thereby rendered unable to fulfill his obligations. Under such circumstances we are impressed that the weight of authority dictates that he should be relieved of such obligations by judicial decree.

Respondents urge that the doctrine of frustration may not be taken advantage of because of legal prohibition of the use to which the premises may be put unless the lessee can show that such prohibition was complete and prevented the use of the premises for any purpose permitted by the lease. With this claim we do not agree. To us, the better rule, and the one supported by the weight of authority, is that the doctrine of frustration may be resorted to whenever a governmental statute, decree or regulation deprives the tenant of the beneficial use of the property––that is––prevents him from using it for the primary and principal purpose for which it was rented. And when such a situation ensues the lease is terminated, although other incidental uses might still be made of the premises. Were we to say that the lease continued because the premises could be used for some other commercial activity, we would thereby be making a new contract for the parties. This a court is not authorized to do. When, as here the primary purpose of the lease cannot be carried out because of governmental orders or decrees, the court should adjudge that the lease is terminated.

In the case at bar it cannot be questioned that when the parties executed the lease here in question they contemplated and assumed that the primary and principal use to which the demised premises were to be put was the sale of new automobiles. That the other purposes were incidental to the main purpose is indicated by the language of the lease which restricted servicing and repair operations to the unused automobiles sold by the lessee, and limited the sale of used automobiles to “an occasional sale” thereof. In such a situation, to require its fulfillment, in effect, could mean only the execution of a new and different lease. It is a matter of common knowledge that the “new” car business and the “used” car business are entirely different.

Respondents urge that the court found that they waived the restrictive provisions of the lease and granted appellant the right to use the entire premises for any legitimate purposes, and to sublet the premises to any responsible party. Originally such waiver was oral, followed by a written confirmation thereof under date of March 26, 1942. The written waiver, it will be noted, was given some ten days after the lessee had declared the lease contract cancelled and had surrendered the demised premises to the lessors. Undoubtedly it is the law that under certain circumstances section 1698 of the Civil Code does not prevent a valid oral waiver of a written provision in a contract. Miller & Lux, Inc., v. Light & Power Corp., 120 Cal.App. 589, 608, 8 P.2d 560. It is equally well settled however, that the provisions in a contract may be waived only when such waiver is made by the party for whose benefit such provisions are inserted in the contract. In other words, under the guise of declaring a waiver, a party to the contract may not write a new one. We are not persuaded that the pertinent provision of the lease contract herein was in the nature of a covenant for the benefit of the lessors only, which they could and did waive. There is no showing that the lessee was fully able to profitably utilize the demised premises for any purpose other than primarily for the sale of new automobiles, while there is ample evidence to show that the sale of unused automobiles was the main and principal purpose for which appellant leased the premises. We do not feel justified in attempting to distinguish the several cases cited by respondent. They are not sufficient, in our judgment, to overturn the legal conclusions at which we have arrived that the restrictive clause in the lease was not one inserted therein for the sole benefit of respondents.

Respondents' contention that appellant cannot avail himself of the doctrine of commercial frustration because the lease was made when restrictions on the sale of automobiles were imminent, and that because of a general and widespread anticipation of such restrictive regulations, appellant lessee as an experienced automobile dealer was fully aware of the situation, is answered by the statement that if the parties to this contract were apprehensive of the imposition of restrictive regulations, it cannot be doubted that at the time they made their contract they would have, as heretofore stated, in all probability expressly covenanted for modification or termination of the lease in the event such governmental restrictive regulations materialized and went into effect.

We are not unmindful of the cases cited by respondent wherein it is held that a change in the law during the term of a lease, which merely restricts but does not wholly prohibit the conduct of the business carried on, does not relieve the tenant from his obligation to pay rent, but in all of such cases the leases did not, as does the one with which we are here concerned, contain a provision similar to the one herein which provides that the demised premises “shall be used by lessee for the sole purpose of conducting thereon the business of displaying and selling new automobiles”. Under the circumstances here present, we are persuaded that it is firmly established in the law that the use of the premises being restricted to a particular and specified purpose, which main and principal purpose is frustrated by governmental decrees or regulations, the subject matter of the contract is destroyed and the covenants of such lease will not be enforced against either party thereto.

For the foregoing reasons the judgment is reversed and the cause remanded with directions to the court below to enter judgment for the defendant.

WHITE, Justice.

YORK, P. J., and DORAN, J., concur.