On June 20, 1963, the plaintiff, 2814 Food Corp., signed an agreement leasing real property owned by the defendant, Hub Bar Building Corp., at Broadway and 109th Street in Manhattan. The property was then improved with four stores and a garage. The parties contemplated an extensive alteration of the property to adapt it for use by the tenant as a supermarket. The lease obligated the landlord to obtain possession of those portions of the leased premises then occupied by other tenants and gave the landlord until July 1, 1964 to obtain possession, with an option under which the tenant was permitted to extend the landlord's time to obtain possession of the premises up to December 31, 1964. If the landlord failed to procure possession by such date, the lease was to be abrogated (par. 30th). Paragraph 31st gave the landlord seven months after obtaining possession of the entire premises to complete certain extensive alterations (Schedule A of the lease) which it had agreed to make, "it being further agreed that any delays caused by strikes, unavailability or delay in delivery of materials, or other causes beyond the landlord's control, which may prevent the landlord from completing the aforesaid work within the said seven months period, shall be added to the time fixed for the completion of the landlord's work."
On the signing of the lease, the tenant deposited $37,350 with the landlord, $34,600 of which represented security (par. 15th) and $2,750 represented the first month's rent payable in advance. The rent to be paid was fixed at $33,000 a year during the 1st through the 4th years of the term of the lease, $35,000 a year during the 5th through the 8th years, and $37,000 a year during the 9th and 10th years. Paragraph 57th granted the tenant the option to renew the lease for a further term of 11 years at an annual rent of $39,500, thus making the total contemplated term of the lease 21 years. If the tenant at the beginning of the 10th year did not exercise the option, it was obligated at that time to pay the landlord $25,000, "as reasonable compensation to the landlord for all monies expended by it in connection with all alterations and improvements made in the demised premises and for obtaining possession of the demised premises from the tenants and occupants thereof at the time of the execution of this lease agreement, as mentioned in Paragraph '27th' hereof, which sum of $25,000 shall be due and payable to the landlord, without further demand, on the first day of the tenth year of the term of this lease agreement".
The lease provided that when the landlord completed those alterations that it was obligated to make and pay for under the lease, it was to give notice to that effect to the tenant. Paragraph 37th fixed the time of the commencement of the term of the lease and also fixed the time of the commencement of the obligation to pay rent. It reads: "37th. It is agreed that the term of this lease shall commence from such date as the landlord completes such work in the demised premises on its part to be done and performed, as hereinabove mentioned and set forth, notice of which shall be given by the landlord to the tenant by certified mail requiring a return receipt and rent for the demised premises shall commence sixty days thereafter or on such date as the tenant opens the demised premises for business, whichever date shall occur sooner, it being understood and agreed that at the time said rent shall commence the landlord shall have a temporary or final Certificate of Occupancy for the demised premises, provided that the issuance of such temporary or final Certificate of Occupancy is not prevented by any work then to be done in the demised premises by the tenant. In the event a temporary Certificate of Occupancy is issued at such time, it is agreed that a final Certificate of Occupancy will be applied for by the landlord at its own cost and expense at such time as the tenant completes its work in the demised premises as hereinabove mentioned and set forth."
The landlord sent the notice provided for under paragraph 37th to the tenant on March 26, 1964. After the landlord's notice of completion of landlord's work was sent on March 26, 1964 and while the tenant's work was in progress, the landlord sent a letter under date of April 14, 1964, advising the tenant of action taken by the Board of Estimate with regard to the proposed taking by the city. The letter concluded: "However, we are passing this information on to you so that you may take such steps as you may deem appropriate to protect your interests."
The contractors who had been employed by the tenant thereafter, at the tenant's direction, stopped the work that each had been engaged in at various stages of its completion. The tenant never completed the installation of the improvements and equipment or took any other steps that would have enabled it to open for business. On August 12, 1964, an order in a condemnation proceeding vested title to the property in the City of New York. The taking was for the purpose of extending the school yard of the contiguous public school building.
The defendant has in its possession the sum of $5,145.17, plus $1,821.49 representing interest earned on the security, or a total of $6,976.66. After the commencement of this suit, the defendant returned $32,204.83 to the plaintiff. The plaintiff seeks to recover the moneys retained by the defendant as rent claimed.
The tenant asserts the claim that the landlord's work as provided for in Schedule A was not completed, assigning as an objection the landlord's failure to remove the rubbish and debris remaining after the completion of the other work. The court does not consider this claim of any consequence. It appears that no more than $75 in carting charges would have been required to complete this inconsequential requirement. The court holds that at March 26, 1964, the landlord had performed all those conditions of the lease that it was obligated to perform up to that time.
The tenant's further claim, its third cause of action, is based upon a failure of consideration.
At the time the parties entered into their lease, they contemplated the use and occupancy of the premises as a supermarket for a long period of years, during which time the tenant's business would be the source from which the landlord would receive rent from the tenant. The question presented by this action is whether there has been a frustration of the agreement between the parties antedating the actual vesting of title in the city so as to relieve the tenant of its obligation to complete the alteration and to embark on the conduct of its business and to relieve it of its obligation to pay rent under the terms of the lease.
The principle of frustration was first enunciated in Krell v. Henry (1903), (2 K. B. 740). In that case the contract involved the use of Mr. Krell's chambers "in the daytime of June 26 and 27, for the sum of 75l., 25l. then paid, balance 50l. to be paid on the 24th, the premises, third floor, 56A Pall Mall" (pp. 749-750). The letting was entered into with the understanding that the royal coronation procession might be viewed from the windows of the premises on both days. The court held that the rooms were let for the purpose of seeing the royal procession and that the cancellation of the procession on the days originally appointed frustrated the condition or state of things that were the foundation of the agreement.
The court laid down the test in the following terms (pp. 751752): "Each case must be judged by its own circumstances. In each case one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative (as I think they should be in this case), I think both parties are discharged from further performance of the contract. I think that the coronation procession was the foundation of this contract, and that the non-happening of it prevented the performance of the contract; and, secondly, I think that the nonhappening of the procession, to use the words of Sir James Hannen in Baily v. De Crespigny [L. R. 4 Q. B. 185], was an event 'of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened.' The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against. It seems difficult to say, in a case where both parties anticipate the happening of an event, which anticipation is the foundation of the contract, that either party must be taken to have anticipated, and ought to have guarded against, the event which prevented the performance of the contract."
Williston, Contracts (Rev. ed., 1938, vol. 6, § 1955, pp. 5485-5487) states:
"The fact that a lease is a conveyance and not simply a continuing contract and the numerous authorities enforcing liability to pay rent in spite of destruction of leased premises, however, have made it difficult to give relief. That the tenant has been relieved, nevertheless, in several cases indicates the gravitation of the law toward a recognition of the principle that fortuitous destruction of the value of performance by ...