Recently, the Second Circuit Court of Appeals for the State of New York issued a significant decision clarifying how “takings” provisions in commercial leases operate when government orders shut down a tenant’s business. See, Delshah 60 Ninth, LLC v. Free People of PA LLC (May 5, 2026), This decision is significant because it broadens the scope of a tenant’s argument to not pay rent in circumstances other than a force majeure event.

Background:

In March of 2020, the State of New York issued emergency shutdown orders in response to COVID-19. Free People of PA LLC, a Manhattan-based retail clothing tenant, stopped paying rent based on its lease agreement’s “takings” language. In response, Delshah 60 Ninth, LLC, Free People’s landlord, terminated the lease and sued for unpaid rent. Free People counterclaimed for wrongful termination and return of mistaken post-termination payments.

The District Court ruled in favor of Delshah, finding convincing the fact that Free People used the leased premises to store inventory and fulfill online orders and was, therefore, not deprived of all use and occupancy of the store.

The Second Circuit reversed based on the takings provision of the lease. The takings provision excused rent if Free People was:

“denied or deprived of either the use, occupancy and/or enjoyment of the Leased Space and/or the ability to operate its business thereon or therefrom by action or decree of any lawful power or authority…”

The Court treated “ability to operate its business” as distinct from mere use/occupancy. Because Free People’s business was a brick-and-mortar retail store (not a fulfillment center), limiting operations to online fulfillment meant it could not operate its business as contemplated by the clause.

Key Takeaways for Landlords:

The Second Circuit’s decision serves as a reminder that:

1. All provisions of a contract must be read to give effect to all of its provisions. The Second Circuit explicitly rejected the District Court’s restrictive standard, which incorrectly held that a taking requires a tenant to be “deprived of all use or occupancy.” By applying this benchmark, the lower court rendered the phrase “ability to operate its business” meaningless.
2. Courts cannot read into a contract that which does not exist. If a clause does not explicitly limit or qualify a phrase, the court must enforce its plain, ordinary meaning. Delshah attempted to conflate permitted uses (such as inventory storage or online fulfillment) with the Free People’s actual business operations. The Second Circuit made clear that a general use clause does not dictate or restrict the definition of “business operations” within a risk-allocation framework unless explicitly cross-referenced.
3. Precise drafting is required. The core of the Delshah ruling rests on the Court’s distinction between a tenant’s passive “use/occupancy” and the operation of its “actual business” (brick-and-mortar retail store). To present similar such disputes, landlords should define “operation of business more broadly to include any level of continuous operation and explicitly incorporate all potential uses under that umbrella.
4. Landlord’s should limit “takings” to physical condemnation. Eminent domain and takings clauses should be drafted narrowly to ensure they are only triggered by classic condemnation, physical acquisitions, or permanent loss of possession. Leases should explicitly state that temporary regulation restrictions, health-related occupancy limits, or government-ordered shutdowns do not constitute a “taking” or warrant rent abatement.