What is it?
A contractual clause type that governs allocation of expenses, fees, or statutory liabilities between the contracting parties.
pass-through
UCC / CommercialLegal glossary term
Quick answer
PASS‑THROUGH usually means shifting costs or obligations to another party. In contracts, it matters because the receiving party may face unexpected expenses. Before signing, check which items are listed and any caps or exclusions.
Definitions
What is pass-through?
Legal Definition
A pass‑through clause pushes costs or obligations from one contract party to another, often shifting taxes, fees, or regulatory charges. It creates a duty for the receiving party to reimburse or pay those amounts when they arise, unless the agreement caps or excludes certain items. Practitioners watch for carve‑outs that limit the scope of the pass‑through.
Plain-English Translation
Think of a hall pass: the teacher gives a student permission to leave class, and the student must hand the pass back before the bell rings.
Contract relevance
Why pass-through matters in contracts
Misapplying a pass‑through can leave the obligor stuck with unexpected charges, resulting in a breach‑of‑contract claim; the party tasked with reimbursement bears the risk.
Document context
Where pass-through appears in documents
| Document type | Section | Why it matters |
|---|---|---|
| Commercial lease | Section 5 – Taxes and Operating Expenses | Allocates landlord’s tax obligations to tenant |
| Construction contract | Section 12 – Change Orders | Requires subcontractor to pass through material price increases |
| ISDA Master Agreement | Schedule | Defines pass‑through of regulatory fees to counterparties |
Contract language
Common contract wording
| Contract wording | Plain-English meaning | What to check |
|---|---|---|
| "All applicable taxes shall be passed through to the Tenant" | Tenant must pay taxes levied on the property | Verify which taxes are covered |
| "Borrower shall reimburse Lender for any third‑party fees incurred" | Borrower pays fees Lender pays on its behalf | Confirm fee types and limits |
Red flags
Red flags to watch for
Wording examples
Clearer wording examples
Vague wording
"All costs"
Clearer wording
"All costs"
Vague wording
"No limit"
Clearer wording
"No limit"
Note: “clearer” means easier to read — not legally reviewed or guaranteed safe.
Pre-signature checklist
What to check before signing
1
Identify every cost category listed for pass‑through
2
Confirm whether caps or exclusions exist
3
Determine the required documentation and notice period
4
Check who bears the risk of tax law changes
5
Verify payment timelines for reimbursed amounts
6
Ensure the clause aligns with the overall risk allocation strategy
7
Ask for a schedule of typical pass‑through items
Party impact
How pass-through affects each party
| Party | What this party should check |
|---|---|
| Landlord | Ensure tax pass‑through does not exceed projected operating budget |
| Tenant | Review caps and request exclusions for discretionary fees |
| Borrower | Confirm that only fees directly related to the loan are reimbursable |
Comparison
pass-through vs similar terms
| Related term | Plain meaning | Main difference from pass-through |
|---|---|---|
| Indemnity | Obligor compensates for losses caused by another party | Indemnity covers third‑party claims, while pass‑through shifts contract‑defined expenses |
| Expense allocation | Divides costs among parties by formula | Allocation may be proportional, whereas pass‑through is a full reimbursement |
| Cost escalation clause | Adjusts price based on external indices | Escalation changes price, pass‑through reimburses specific incurred costs |
Missing or vague
If pass-through is missing or vague
If the pass‑through provision is undefined, the parties may dispute which expenses qualify for reimbursement. Ambiguity can lead to delayed payments and accusations of breach. The receiving party might claim the obligor failed to cover required taxes, while the obligor argues the costs were outside the agreement. Courts will interpret the clause narrowly, often favoring the party that drafted the contract. This uncertainty can increase litigation costs and strain the business relationship.
Document map
Document section map
| Contract section | What to inspect |
|---|---|
| Definitions | Look for a clear definition of "Pass‑Through Costs" |
| Payment | Verify timing, documentation, and method of reimbursement |
| Taxation | Check which taxes are subject to pass‑through and any caps |
| Termination | Ensure obligations survive termination if expenses were incurred |
Visual model
Understand pass-through fast
An explainer image has not been generated for this term yet.
01
Landlord bills tenant for increased property tax and tenant pays the additional amount within 30 days.
02
Borrower receives a notice of loan origination fee from lender and reimburses the fee within 10 days of receipt.
Document context
How pass-through shows up in legal documents
Why does it matter?
Misapplying a pass‑through can leave the obligor stuck with unexpected charges, resulting in a breach‑of‑contract claim; the party tasked with reimbursement bears the risk.
When does it matter?
When a tax assessment, regulatory fee, or third‑party invoice is issued during the performance period, the pass‑through obligation is triggered.
Where is it usually seen?
Common in commercial lease agreements, construction subcontracts, and ISDA master agreements, often appearing in the Payment or Expenses sections.
Who is affected?
Landlord receives reimbursement for property taxes; borrower must repay lender‑incurred loan fees; franchisor passes royalty adjustments to franchisee.
How does it work?
First, the contract lists the specific costs subject to pass‑through. Then, the obligor provides documentation of the expense within a set notice period, usually 15 days. Finally, the receiving party pays the documented amount within the payment terms.
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Wikipedia
External reference for pass-through
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Where pass-through connects to real contract work
This layer links the term to nearby glossary entries, document use cases, and contract-risk guides so readers can move from definition to context without dead ends.
Glossary
Use Cases
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Source & disclosure
This page is an AI-assisted plain-English explanation based on LexPredict Legal Dictionary context and contract-review patterns. It is not legal advice. Meaning may vary by jurisdiction, industry, and exact clause wording.
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