COVID-19 Shut Your Business Down. Did Your Lease Excuse the Rent? It Depends on What Your Lease Says.

COVID and commercial rent disputes have produced a clear lesson: the difference between winning and losing a contract dispute often comes down to a single clause — sometimes a single sentence — that nobody paid much attention to at signing.

If you signed a commercial lease with a “government takings” clause, a fresh decision from the Second Circuit Court of Appeals deserves your attention. In Delshah 60 Ninth, LLC v. Free People of PA LLC, decided May 5, 2026, the Court reversed a nearly $6.8 million judgment against a retail tenant. But pair that decision with a 2022 ruling from our own Connecticut Supreme Court, and a clear lesson emerges. When it comes to COVID and commercial rent obligations, the outcome of a dispute depends heavily on the specific language of your lease. The words you use in your contracts (any type of contract) are so important.

The New York Case: Tenant Wins COVID and Commercial Rent Dispute Thanks to a Takings Clause

Free People operated a brick-and-mortar clothing store in Manhattan’s Meatpacking District under a ten-year lease. When New York’s COVID-19 emergency orders shut down retail in March 2020, Free People stopped paying rent. It pointed to a lease provision excusing rent when the tenant is denied “the ability to operate its business” by government action. Landlord Delshah disagreed and terminated the lease. Then Delshah sued for breach of contract — winning a judgment of over $6.7 million in the district court.

The Second Circuit reversed.

Why the Court Sided with the Tenant

The district court had ruled that because Free People retained some use of the premises — storing inventory, fulfilling online orders, keeping signage up — there was no “taking” under the lease. The Second Circuit found that reasoning fatally flawed.

The lease’s takings clause was written in the disjunctive: a taking occurs when the tenant is denied use and/or the ability to operate its business. By focusing solely on whether Free People had any physical access to the space, the district court effectively read the “operate its business” language out of the contract entirely. Under basic New York contract interpretation principles — which require that every clause be given meaning — that was error. This matters for any pandemic or governmental order
scenario where partial access to a space remains.

Free People’s actual business was operating a traditional, in-person retail clothing store. Storing boxes and filling online orders is not that business. The Court held that from March 22 through June 22, 2020, Free People was excused from paying rent.

The Connecticut Case: Tenant Loses When COVID and Commercial Rent Obligations Lack a Takings Clause

Compare Delshah to AGW Sono Partners, LLC v. Downtown Soho, LLC, 343 Conn. 309 (2022), decided by the Connecticut Supreme Court. There, a fine dining restaurant in South Norwalk stopped paying rent when Governor Lamont’s executive orders closed indoor dining beginning in March 2020. The tenant argued that performance was excused under the common law doctrines of impossibility and frustration of purpose.

The Connecticut Supreme Court disagreed on both counts and upheld the landlord’s right to recover damages.

Why the Tenant Lost

Without a takings clause in the lease, the tenant was left to rely on common law doctrines that Connecticut courts apply very narrowly. On impossibility, the Court found that the COVID pandemic, while devastating to the restaurant’s commercial rent obligations and profitability, did not make performance factually impossible. Takeout and curbside service remained legally available under the executive orders. The lease itself did not restrict the tenant to dine-in service only. The lease also placed the cost of regulatory compliance squarely on the tenant. As the trial court put it, the law required the tenant to operate a restaurant — not necessarily a profitable one.

On frustration of purpose, the result was the same. The doctrine applies only when the objectives of the contract are utterly defeated. Here, the lease broadly authorized restaurant and bar operations without limiting the tenant to a specific style of dining. Because some lawful use of the premises remained available — outdoor dining and takeout — the purpose of the lease was not wholly frustrated. The Court drew a critical distinction. The tenant’s profitability was frustrated, not the purpose of the lease itself. This is consistent with our prior writing on how courts treat force majeure and impossibility defenses during the pandemic.

The Court also issued an important ruling on damages. When a tenant breaches a commercial lease during a pandemic or following a governmental order, it is the tenant — not the landlord — who bears the burden of proving that the landlord failed to make commercially reasonable efforts to mitigate its damages. That’s a procedural point that catches many tenants off guard — most assume the burden runs the other way, and walk into disputes without the evidence they need to make that argument.

What the Two Cases Tell Us Together

Read side by side, Delshah and AGW Sono Partners illustrate how much lease language matters in COVID and commercial rent disputes. In New York, a carefully drafted takings clause — one that expressly addressed the tenant’s inability to “operate its business” — saved a tenant from a multi-million dollar judgment. In Connecticut, the absence of such a clause left a restaurant tenant with no viable defense. This was true even though the economic hardship it suffered was real and severe. Written contract terms control, and courts enforce them as written — a principle that applies just as firmly to commercial leases as it does to payment obligations.

What This Means for Business Owners and Landlords

Whether you are a tenant negotiating a new lease or a landlord enforcing an existing one, COVID and commercial rent litigation have produced a body of law with practical lessons. Tenants should look closely for takings and force majeure provisions and understand precisely what they cover. Landlords should know that lease language defining the scope of permitted uses — and the allocation of regulatory risk — will be carefully scrutinized if a dispute arises. We recommend reviewing your commercial contracts periodically to ensure they protect you.

We handle business litigation and contract disputes for businesses in Connecticut, New York, New Jersey and Massachusetts. If you have questions about your commercial lease or a contract dispute, contact us.

Keywords/Tags: commercial lease, government takings clause, COVID-19 rent dispute, force majeure, impossibility doctrine, frustration of purpose, Second Circuit, Connecticut Supreme Court, contract interpretation, business litigation, commercial landlord tenant, mitigation of damages