Connecticut Supreme Court Holds COVID-19 Executive Orders Did Not Excuse Commercial Tenant from Paying Rent

On May 10, 2022, the Connecticut Supreme Court issued its decision in AGW Sono Partners, LLC v. Downtown Soho, LLC, et al[1], ruling that a commercial lessee failed to establish the special defenses of impossibility of performance and frustration of purpose in relation to COVID-19 related executive orders which substantially altered the operation of its restaurant and bar.

After defendant lessee defaulted on its rental obligations pursuant to a commercial lease agreement, plaintiff lessor brought an action against lessee and its individual guarantor seeking money damages and alleging breach of lease, unjust enrichment, and breach of guaranty. Defendants (lessee and guarantor) raised the special defenses of impossibility of performance and frustration of purpose, among others.

The defendants primarily argued that the restraints placed on the restaurant industry by COVID-19 related executive orders rendered performance under the lease impossible and frustrated the objective of the lease to the extent that defendants should be excused from paying rent.

The Connecticut Supreme Court, in partially affirming and partially reversing the trial court’s decision, held:

(1) The COVID-19 executive orders did not render defendants’ performance under the lease impossible or frustrate its purpose because the defendants were permitted, by both the lease and the executive orders, to operate outdoor, curbside or takeout service.

 The lease provides, in relevant part, that defendants “shall use the premises for the operation of a restaurant and bar selling food, beverages, and related accessories, together with uses incidental thereto, and for no other purpose.”[2] The lease language did not restrict the defendants to indoor dining. The Court held that although the restrictions increased the cost of performance, rendering performance highly burdensome, the restrictions did not “make performance under the lease agreement impossible or commercially impracticable as a matter of law.”[3] In contrast, lessees have successfully asserted the defense of frustration of purpose where the lease restricted use of the premises to, for example, “operate only a café with a sit-down restaurant menu and for no other purpose.”[4]

 The lease also explicitly required the defendants to comply with all governmental laws, orders, and regulations, and notably lacked a force majeure clause. To the extent that the lease contemplated a “crisis situation,” the lease excused only the plaintiff’s obligations under the lease.[5]

While this decision may prove beneficial to commercial lessors, the decision also makes clear that whether a commercial lessee will prevail on the defenses of impossibility of performance or frustration of purpose in similar circumstances will depend heavily on the language of the lease.

(2) The trial court improperly placed the burden on the plaintiff to prove its mitigation efforts were commercially reasonable.

 The Court noted the general principle that “the failure to mitigate damages is for the breaching party to prove.”[6] The trial court reduced damages due to plaintiff’s failure to present evidence of its negotiations with the new tenant and whether they could have re-leased on the same terms as the defendants’ lease. By doing so, the trial court improperly placed the burden on the plaintiff to prove its efforts were commercially reasonable. The case was remanded for a new hearing in damages.

Kevin J. McEleney is a Shareholder in UKS’ Hartford office, practicing in the areas of creditors’ rights, bankruptcy, and commercial litigation.  He can be reached at kmceleney@uks.com or (860) 548-2622.

Thomas A. Gugliotti is a Principal in UKS’ Hartford office, practicing in the areas of creditors’ rights, bankruptcy, and commercial litigation. He can be reached at tgugliotti@uks.com or (860) 548-2661.

Updike, Kelly & Spellacy, P.C. would like to thank law clerk Olivia Benson for her contribution to his client alert.

Disclaimer: The information contained in this material is not intended to be considered legal advice and should not be acted upon as such. Because of the generality of this material, the information provided may not be applicable in all situations and should not be acted upon without legal advice based on the specific factual circumstances.

[1] AGW Sono Partners, LLC v. Downtown Soho, LLC, 343 Conn. 309 (May 10, 2022).
[2] Id. at 313.
[3] Id. at 330.
[4] Id. at 337 (quoting UMNV 205-207 Newbury, LLC v. Caffe Nero Americas, Inc., Docket No. 2084CV01493-BLS2, 2021 WL 956069 (Mass. Super. February 8, 2021)) (emphasis added).
[5] Id. at 331.
[6] Id. at 344.