The decision provides guidance to commercial and residential landlords on how to properly structure and enforce an incentive recovery provision.
In a matter of first impression, the New Jersey Appellate Division affirmed a trial court ruling in VL North LLC v. Allen, A-1187-23, 2025 WL 2526184 (App. Div. Sept. 3, 2025), that a residential lease provision allowing the landlord to recover leasing incentives from the tenant is not unconscionable and does not violate the state’s expansive Consumer Fraud Act, and further affirmed the dismissal of a class action against a real estate company brought by tenants challenging the incentive recovery provision. (Note: Duane Morris attorneys represented the landlord in this matter.)
In doing so, the Appellate Division affirmed the trial court’s dismissal of a proposed consumer fraud class action at the motion to dismiss stage without allowing the tenant to amend. The decision provides guidance to commercial and residential landlords on how to properly structure and enforce an incentive recovery provision.
Residential and commercial leases frequently include incentives to enter a lease such as free rent periods, free parking and other concessions. Lucrative incentives were particularly popular to induce tenants to return to cities and offices post-COVID. These incentives are usually conditioned on the timely payment of rent and strict observance of lease covenants. But if a tenant defaults, the tenant forfeits entitlement to incentives and must repay all or a portion of them.
This case arose when a residential landlord offered four months’ free rent and parking in exchange for tenants committing to a two-year lease. In a separate rider, tenants agreed that if they terminated early or failed to pay rent on time, they would have to repay the concessions to the landlord in full. In the expensive Jersey City market, where median residential rents exceed $3,000 a month, a free rent incentive can be very valuable.
After the tenant was late paying rent for the third time and asked to terminate early, the landlord initiated civil actions to evict the tenant and to recover back rent owed as well as $17,000 in rent and parking concessions. In response, the tenant filed a class action counterclaim alleging that the provision allowing the landlord to recover the value of the rent incentive was unconscionable and exacted an unlawful penalty that constituted consumer fraud under the New Jersey Consumer Fraud Act. Because the landlord owned many residential units in the market, the effort to certify a class of all tenants who had accepted lease incentives raised the landlord’s stakes considerably beyond the $17,000 at issue in the case.
The landlord turned to a nationally recognized class action defense practice and top-rated New Jersey litigators to defeat the novel argument in Hudson County, one of New Jersey’s toughest venues for defendants. The defense immediately moved to dismiss the claim on the grounds that the incentive recovery provision was not a penalty and not unconscionable, as well as on the basis that the class claims were not viable. The trial court dismissed the tenant’s claim with prejudice, finding the provision did not amount to a penalty and could not form the basis of a consumer fraud claim. The trial court found the provision to be “reasonable” because it only compensated the landlord “for the benefit it conferred on [the tenant]” in exchange for her promise “to make full and timely rent payments.”
As well, the landlord benefited from thoughtful lease drafting, taking care to clearly explain the rent concession and the prospect of forfeiting it in a separately signed rider to its lease. The trial court noted that the tenant never alleged she was “duped” or otherwise unaware of the provision, or that she did not understand the unambiguous provision. The trial court further noted that the tenant “did not allege any facts alleging dishonesty … or a lack of good faith and fair dealing.” For good measure, the trial court also dismissed the class claims due to defects with the class theory and a predominance of individualized issues.
The defense then defended the dismissal in the Appellate Division, which affirmed the trial court’s ruling, finding that the clause was not a penalty “but a bargained for provision that provided [tenant] a significant monetary inventive—four months’ free rent—which was part of the consideration for the Lease.” The Appellate Division further explained that the incentive recovery “was not a random penalty provision that imposed an unreasonable damage amount for a breach, but it was tethered to the free rent provision in the contract entered into between the parties.” Finally, the Appellate Division rejected the tenant’s effort to revive its class claims, finding them to be without merit.
Although incentive recovery provisions are common, cases litigating their validity are few and far between across the country. The few reported cases involve commercial leases of limited utility in residential circumstances. The Appellate Division found these cases persuasive and ruled consistent with those decisions.
Though unpublished and thus nonprecedential, the Appellate Division’s ruling establishes that even costly incentive recovery provisions are enforceable in residential leases—even in a pro-consumer jurisdiction like New Jersey, with a strong Consumer Fraud Act and aggressive class action bar.
It also underscores the importance of careful lease drafting upfront to avoid claims of unconscionable or deceptive practices, or if challenged, aggressive and comprehensive motion to dismiss strategies.
About Duane Morris
Attorneys in the firm’s Class Action Litigation Group assist clients who face class action complaints and wish to review incentive recovery provisions in leases and contracts with aid from attorneys in the Real Estate Practice Group.
For More Information
If you have any questions about this Alert, please contact Gerald L. Maatman, Jr., Paul P. Josephson, George J. Kroculick, James Hearon, any of the attorneys in our Class Action Litigation Group, any of the attorneys in our Real Estate Practice Group or the attorney in the firm with whom you are regularly in contact.
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