August E. Waegemann, Barbara A. Waegemann, and Earl Tom Pyle v. Montgomery Ward & Company, Inc.

This is an appeal from a judgment of the district court, the jurisdiction of which was based on diversity, 28 U.S.C. § 1332 , and which judgment denied a claim by lessors for rescission of a lease based on the doctrine of frustration. We affirm.

I.

The appellants, August and Barbara Waegemann and Earl Tom Pyle, are owners of a shopping center in Watsonville, California. Montgomery Ward is their lessee. The lease, signed in 1969, provides for a ten-year term followed by two five-year options to renew. The base rent during the initial term was $16,703.00 per year. Clause 17 of the lease, at issue here, establishes that rent during the option periods is to be tied to property taxes:

When the contract was made, property taxes in California were based on current appraised fair market value. Before signing the contract the lessors ascertained that in each of the previous five years the assessed property valuations, as well as the property tax rates, in the county had increased. The district court found that the parties “expected that if the value of the property increased during the initial ten (10) year term of the lease then the base rent during the first option period would…