## Facts

- Lessors leased commercial premises in Beverly Hills to Murphy for a five-year term beginning September 15, 1941.
- The lease restricted use to displaying and selling new automobiles (including servicing/repair) and selling major-brand petroleum products, allowing only occasional used-car sales; subleasing/assignment required written consent.
- Beginning January 1942, federal wartime measures discontinued new automobile sales, later modified to permit limited sales to specified priority or military-related buyers.
- Murphy notified a lessor on March 10, 1942 that the restrictions impaired his business.
- The lessor orally waived the lease’s use and subleasing restrictions and offered to reduce rent if Murphy could not operate profitably.
- Murphy vacated the premises on March 15, 1942 and repudiated the lease (written notice March 24).
- Lessors confirmed the waiver in writing on March 26, 1942 and re-let the premises to mitigate damages.
- The premises were located on a major traffic artery, had gasoline pumps, was suitable for a service station, and included space adaptable to other commercial uses.
- Murphy continued selling and servicing automobiles at other locations.

## Issues

1. Whether federal wartime restrictions on new automobile sales so frustrated the lease’s principal purpose that Murphy’s duty to pay rent was discharged.

## Decision

- The California Supreme Court affirmed judgment for the lessors.
- The court held the lease was not discharged by frustration of purpose.
- Murphy remained liable for rent, with credit for amounts the lessors received through re-letting.

## Legal Principles

- Frustration of purpose is narrowly applied and requires a substantial or nearly total destruction of the contract’s principal purpose, not merely reduced profitability or adverse market conditions.
- When a supervening event and its regulatory consequences were reasonably foreseeable at contracting, and the parties made no contractual provision allocating that risk, a court may infer the party seeking discharge assumed the risk.
- Government regulation that limits a contemplated use does not establish frustration where the property retains substantial value through permissible residual uses, including alternative uses allowed by the contract or by the other party’s waiver.
- A party’s repudiation is not excused where performance remains feasible in some commercially meaningful form and the asserted frustration falls short of destroying the transaction’s expected value.

## Conclusion

The court refused to discharge the tenant’s lease obligations because wartime limits on new-car sales were foreseeable and did not destroy the lease’s value or purpose, particularly given the premises’ adaptability and the lessors’ waiver and mitigation efforts.


Lloyd v. Murphy, 25 Cal. 2d 48 (Cal. 1944)