First, the purpose that is frustrated must have been a principal purpose of that party in making the contract. It is not enough that he had in mind some specific object without which he would not have made the contract. The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Second, the frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract. Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. The foreseeability of the event is a factor in that determination, but the mere fact that the event was foreseeable does not compel the conclusion that its non-occurrence was not such a basic assumption.
The lessee, a chemical distributor, leased premises from the lessor. Those premises were vacated after the city enacted an ordinance, which prohibited the storage of hazardous materials. On appeal, the court held that the ordinance did not excuse the lessee's breach. When a party's principal purpose in making the contract was substantially frustrated by the occurrence of an event that was beyond the control or expectation of the parties, its duty to render performance was discharged. However, the frustrating event had to nullify a basic assumption upon which the contract was made and had to be so severe that it could not be regarded as within the risks assumed under the contract. Thus, so long as there was a serviceable use for the property, a party's performance was expected even though the remaining uses were less lucrative. Because the lessee failed to establish that its entire inventory consisted of hazardous materials, it could not establish frustration of purpose. The court also found that a clause in the parties' lease did not allow the lessee to terminate its obligations and that the trial court's finding about the real estate agent was harmless error.
Did the city-enacted ordinance, which prohibits the storage of hazardous materials excused the lessee's breach of contract?
The court concluded that Di-Chem has failed to establish —as a matter of law—that it is entitled to relief via its impossibility defense or the terms of the lease. Subsequent governmental regulation like a statute or ordinance may prohibit a tenant from legally using the premises for its originally intended purpose. In these circumstances, the tenant's purpose is substantially frustrated thereby relieving the tenant from any further obligation to pay rent. The tenant is not relieved from the obligation to pay rent if there is a serviceable use still available consistent with the use provision in the lease. The fact that the use is less valuable or less profitable or even unprofitable does not mean the tenant's use has been substantially frustrated.