A commercial landlord might assume it has recourse to recover unpaid rent from the parent company of a tenant/subsidiary when (1) during the lease term, the tenant is acquired by another company no money in herewhich converts the tenant into its subsidiary, (2) the parent moves into the leased space with its new subsidiary, (3) the parent commingles corporate funds with the subsidiary, (4) the parent and the subsidiary have common management and staff, and (5) the parent installs a new sign outside the leased space bearing the parent’s name.  The Massachusetts Appeals Court recently ruled that this assumption would be wrong.  

In OMV Associates, L.P. v. Clearway Acquisition, Inc. (pdf), the Appeals Court determined that, despite the above-mentioned indicia of parental control of both the subsidiary and the leased space, the landlord could not pierce the corporate veil and hold the parent liable for the tenant/subsidiary’s unpaid rent after a breach of the lease.  Pursuing the parent for the sins of its subsidiary requires clear evidence that the parent used the parent-subsidiary relationship to defraud the landlord.  The court also noted that the parent’s acquisition specifically excluded the assets and liabilities of the subsidiary.  However, the critical fact was that, even though the landlord knew of the parent’s presence in the leased space, it never sought to amend the lease to substitute the parent as its new tenant. 

Without having amended the lease, the landlord’s only option was to pursue the failed subsidiary for the unpaid rent.  But as the court stated, without a lease amendment, the landlord was “attempting to exact what in effect would be a guarantee” from the parent, after the fact.  OMV Associates highlights the importance of negotiating lease terms that protect the landlord’s interests in the event the tenant is involved in a merger or acquisition (e.g. provisions barring assignment of the lease or forbidding occupation of the premises by others), and promptly moving to amend (or, if necessary, terminate) the lease upon a change in control on the tenant’s side.