Commerical Lease Liability: Breach of Contract and “Piercing the Corporate Veil”

Commercial tenants and landlords alike will find  a recent  Massachusetts case instructive as to the limits of liability to be imposed on corporate property owners in actions for breach of contract.

In  OMV Associates v. Clearway Acquisition, Inc. et al., a commercial landlord (OMV) attempted to hold the parent company of its subsidiary tenant (Clearway) responsible for unpaid rent and breach of the parties’ lease of Boston office space.   OMV requested that the Massachusetts Appeals Court disregard Clearway’s corporate personality and enter liability against its corporate parent, Mirror Images Internet, Inc., on the basis that parent and subsidiary employed overlapping corporate officers and shared assets within the rental premises, thus “confusing” OMV as to the party or parties responsible for paying rent (specifically, Mirror Image occupied a number of the rented office suites, posting its own signs and logos).

At the time of signing of its lease with OMV, Mirror Image had not yet merged with Clearway.   However, upon learning of this merger, OMV did not request that Mirror Image be added to the commercial lease as a signatory or guarantor.

Ultimately, the parent and subsidiary were unable to streamline their respective technologies, and Mirror Image stopped using Clearway technology.   Thereafter, Clearway stopped paying rent to OMV, which sued both parties in Superior Court. The Appeals Court refused to “pierce the corporate veil and hold Mirror Image liable for Clearway’s breach, stating that the parties to the contract in question — OMV and Clearway — were “plainly identified…their rights and obligations clearly defined.”   The Court referred to situations in which the corporate form should be disregarded as “rare,” and stated that the intermingling of corporate assets must result in gross inequity to the aggrieved party.   Mirror Image and Clearway were not found to have perpetrated any fraudulent conduct against OMV:   Mirror Image was not the parent company at the time of Clearway signing its lease; OMV did not request that Mirror Image sign or guarantee the commercial lease upon learning of the corporate merger; and Mirror Image maintained its own board of directors, bank accounts, payroll and corporate office in Woburn, aside from the offices rented by Clearway in Boston.     The Court found that, on such evidence, OMV could not reasonably maintain that Mirror Image had siphoned Clearway’s funds or otherwise used its control to cause Clearway to default on its lease.

Clearway Acquisition holds valuable lessons for commercial tenants and landlords alike.   The corporate subsidiary and signatory on the OMV lease, Clearway is now entirely liable for its unpaid commercial rent, though its corporate parent, Mirror Image, occupied much of the office space for a number of years.   In the grand scheme of corporate mergers and other transactions, tenants must carefully weigh the value being provided to parents or affiliates when allowing those entities to place personnel in commercial rental space.     It may simply make the most sense to request that other parties become co-signors or guarantors on the commercial lease; this is certainly the case from a landlord such as OMV’s perspective.

If you or someone you know have any questions about this any other  civil litigation matter, the attorneys at Mirageas & Avery, LLC are here to assist you.