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The Insider's Guide to Film Finance
By Philip Alberstat
Focal PressCopyright © 2004 Philip Alberstat
All right reserved.
Chapter OneUnderlying Rights
Never judge a book by its movie. J. W. Egan
Financing Intellectual Property Rights
One of the fundamental elements of the film business is the buying and selling of rights: rights in books, scripts, treatments, magazine articles, short stories and various other forms of intellectual property. It is customary for a producer or production company to initially option the underlying rights in a project that is based on an existing form of intellectual property. For economic reasons, the cost of an option is much less than buying the rights. As a rule of thumb, producers generally pay 10 per cent per year of the purchase price. If the purchase price is £50,000 then a producer will pay £5,000 for a year-long option. This gives the producer a year to decide whether they want to exercise the option and purchase the rights. Producers usually negotiate the right to extend the option for another year by paying an additional fee, i.e., another 10 per cent. In most cases, the initial option fee is on account of the purchase price so, in the example above, if the producer decides to exercise the option during the first option period, he will have to pay only £45,000 for the rights, as he has already paid the £5,000 option fee.
An Option Agreement must be in writing and must be signed by the person who owns the underlying work (the person who owns the copyright).
From a financier's or a banker's perspective, the ownership of rights is paramount for any film financing transaction. From personal experience as an entertainment lawyer, many film-financing transactions are delayed because producers have not acquired all of the rights necessary to satisfy the requirements of the financier or bank.
Assuming that a producer has raised all the funds needed to finance their film, a bank or financier will send the producer a term sheet or deal memorandum offering to lend money and help finance their production. This is usually done so that a producer will agree the material deal points with the bank or financier. The term sheet/deal memo will contain all the relevant commercial issues and will generally set out a list of condition precedents required by the bank before lending any money. (See chapter four for a sample term sheet/offer letter.)
In relation to rights, most term sheets have a condition precedent provision as follows:
The borrower must provide original or certified copies of the rights documents and/or evidence that the borrower has title to the rights.
Another variation can read:
The borrower must provide the rights documents confirming that the borrower has full and unfettered title to produce the film based on the screenplay.
Banks will require a full chain of title in relation to any film they decide to finance. The chain of title documents that the producer must provide, may, depending on the type of underlying rights, include any or all of the following:
a. An Option Agreement
b. An Option Extension Agreement
c. Assignment or Purchase Agreement
d. Short Form Option Agreement
e. Short Form Assignment Agreement
f. Assignment of Copyright
g. Quit Claim
h. Writer's Agreement
i. Publisher's Release
j. Life Story Rights Agreement.
All film deals are different, so the particular underlying rights documents required by the bank vary depending on the facts. A film based on a book with a screenplay written by multiple writers over a long period of development with various drafts will have more documents in the chain of title than a film based on an original screenplay by one writer.
It is common practice and sometimes a requirement by financiers to record documents at the United States Copyright Office. Most long form option agreements for copyright works include a short form option agreement and short form assignment. These documents are for registration purposes and do not contain all of the commercial terms agreed between the parties. By recording these documents, this enables others to see that the producer has an interest in an underlying work.
In many film financing deals, the bank and other financiers will require the producer's lawyer to provide a chain of title opinion. The producer's lawyer will be required to review all of the underlying rights documents and give an opinion that the producer owns or has acquired all the rights that are necessary to exploit the film. In addition, the opinion will also have to confirm that the producer has the right to assign all rights (or certain rights) under the chain of title documents. Lawyers generally qualify and limit the scope of/and who can rely on their opinion.
The following is a checklist of important clauses in an option/assignment agreement that are necessary for the due diligence process to be completed by a bank or bank's lawyer. If a producer has entered into an agreement with a writer or owner of an underlying work and has not included most of the following clauses then a bank or financier will require the producer to re-draft their documentation. This can result in lengthy negotiations with agents or lawyers. In many cases, the closing of the financing is delayed as a result. The following is a checklist which the bank or financier's lawyers will focus on while reviewing an option and assignment agreement.
1. Parties to the Agreement
It is common for a producer at the outset of the development process to enter into an agreement with a writer or rights owner with a company that may be different from the entity, usually a single purpose company (SPV) set up to make the film. A producer will be required to assign the option or any rights that have been assigned from the original company to the new SPV.
2. Consideration for the Option
All sums due under the agreement should be paid and the producer may be required to provide proof of that payment in the form of a receipt or acknowledgement in writing from the rights owner.
3. Option Period
The agreement will set out how long the option period runs for and whether it has expired. Believe it or not, in many deals an option may have expired, even though all parties to the deal are in agreement with one another. A simple solution in this circumstance is to draft an extension agreement that is attached to the original option agreement. This option extension agreement will then form another document in the chain of title.
4. Exercise of Option
If the option has been exercised in writing and all payments are made under the assignment then there should be a written document that records this.
Since copyright is a form of property, it can (subject to certain exceptions) be bought and sold, charged, licensed and dealt with, in any way the original owner may choose. It is essential that the rights that the producer is trying to acquire are freely assignable. Not only should the rights be assignable, but the agreement entered into by the producer, intending to assign or give the producer the right to do so, should also be assignable to a potential financier as security.
6. Entire Agreement Clauses Just what it says. That the agreement is the complete understanding between the parties, it supersedes all other agreements and cannot be modified except in writing and signed by both parties.
7. Governing Law
This clause sets out which country's laws govern the agreement and in most cases if there is a dispute, where the dispute will be adjudicated.
The assignment/purchase agreement
1. Parties to the Agreement
See option agreement notes.
2. Rights Granted
This is the clause that is of most concern to a bank or potential financier. At one time, producers would acquire all rights in the underlying work for the full period of copyright. This would enable the producer to exploit the rights by all means and in all media without any restrictions whatsoever and without the obligation to make any further payments except to certain performers in relation to residuals, repeat fees, or other collection organizations.
Now that deals have become much more complex, both in the acquisition of rights and in the financing process, producers often may obtain limited rights to make only one film. If this is the case, it is prudent to negotiate in advance, upon payment of a further fee, the right to make prequels, sequels or other derivative works based on the underlying rights.
The financier's or banker's lawyer reviewing this clause in an agreement will set out, in detail, all the rights that the producer is entitled to exploit. The report will set out if there are any reserved rights, such as publication, stage or radio rights or any rights that the producer is not entitled to.
3. Duration and Extent of Rights Granted
The agreement must contain a clause that sets out how long the producer can exploit the underlying rights. For feature films it is advisable to acquire as many rights as possible for the full period of copyright. A short duration will ultimately affect the sales agent's or distributor's ability to exploit the finished film. Most financiers or end users such as distributors will not acquire rights in a film unless the producer has all rights in the underlying work and subsequent film for the full period of copyright or at least a substantial amount of time that will enable the sales agent or distributor to recoup their investment by making appropriate long-term licences/sales of the film.
4. Right to Make Changes
In order for the producer to fully exploit the rights, they will have to ensure that there is a waiver of the author's or writer's moral rights and with an express right to alter and adapt the underlying work.
The due diligence process will ensure that all payments have been made or will be paid on the first day of principal photography. This clause will also set out what is being paid for, i.e. film rights, TV rights or separate payments for different types of exploitation.
6. Representation and Warranties and No Infringement
Standard representations and warranties that the writer is the owner of the copyright, the work is original, has not breached any third party rights and that the rights have not be assigned to anyone else, will be required in the agreement.
The agreement should contain a clause that requires each party to agree an indemnity against all losses that may arise as a result of the other parties' breach. Since the producer will be assigning the benefit of the agreement to a bank or financier then that assignee will want the right to rely on any indemnities that have been given.
8. Credit Provisions
The credit provisions will be checked to ensure that prior to delivery of the film, the writer or author will receive their agreed credit. This provision should state that any inadvertent failure to give a credit will not enable the individual entitled to that credit to seek an injunction against the producers or subsequent theatrical distributor. If this was the case, then a writer who was entitled to a credit that was not given for whatever reason could actually stop the film from being released. Usually this type of clause sets out that the only remedy for missing credits are monetary damages.
A bank or financier will require that the producer is able to transfer or assign the agreement to the bank or financier in order to take a charge or mortgage over the rights. This ultimately enables the bank or financier to enforce repayment in certain circumstances. A charge or mortgage will be meaningless if it cannot be assigned to a lender. See chapter four for further explanation of charges.
The Chain of Title Opinion
A chain of title opinion letter is usually required by a bank or financier as a condition precedent for closing the financing on a film production. Not only do banks require the chain of title opinion, but any other financier or participant who is at risk in a film transaction may ask to be named as a beneficiary to the opinion. The opinion acts as an additional form of comfort that all of the underlying rights are in order and that there is no likelihood of potential litigation or a claim being made. The following is an example of a form of opinion letter that is given by a producer's lawyer to a bank involved in the financing of a feature film. Please note that an opinion given by a lawyer in relation to the underlying rights in a feature film will always be based on the particular circumstances and rights involved in the development of that specific film.
Sample Chain of Title Opinion Letter
[Name of Bank] (the 'Bank') [Name of Producer] (the 'Producer') [Name of Film] (the 'Production')
We act in the capacity of UK production counsel to the Producer in connection with the production and financing by the Producer of the Production.
As such counsel, we have examined or reviewed the following agreements relating to the acquisition by the Producer of all rights and copyright in and to the screenplay in respect of the film currently entitled "
Excerpted from The Insider's Guide to Film Finance by Philip Alberstat Copyright © 2004 by Philip Alberstat. Excerpted by permission of Focal Press. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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