Entertainment Law 101: The Anatomy of the Option/Purchase Agreement

Added on Monday, March 11, 2013

By Josh Hemmings (our intern extraordinaire and Toronto entertainment lawyer in training!)

So You’ve Written the Next BIG Screenplay/Teleplay/Novel – What To Expect in an Option/Purchase Agreement

Before pre-production begins on any film or television project, the producer needs to acquire all the underlying intellectual property rights that the production will rely upon. Establishing a connection between the original rights holder (assignor) and the production company (assignee) strengthens the ‘chain of title’ ownership between the two parties. Typically the conditions, representations, and warranties involved these types of transactions are comprised within a contractual document known as an Option/Purchase agreement.

1 – GRANT OF OPTION

An option is a contractual agreement between a potential producer and a writer/rights holder, establishing that the former has the exclusive & limited right to develop and pursue financing for a particular written work.

To be more specific, once a book/screenplay/teleplay is optioned, the producer does not actually acquire the right to use, but merely the ‘exclusive’ right to purchase the intellectual property in the future. In other words, an option agreement does not actually confer title. The producer is merely paying a fee (i.e. consideration) for the promise from the rights holder that he/she will not option the intellectual property to another producer (for a limited time).

Options have long been an essential tool in the film & tv development business, given that they allow the producer(s) the exclusivity to develop an idea at a low cost, without running the risk of a rival producing the same property. As you can imagine, the development process can be rather tumultuous, given that producers need to obtain agreements from actors & directors, find suitable financiers, secure distribution rights (i.e. pre-sales), as well as finalize the screenplay/teleplay to the satisfaction of all stakeholders. The inherent complexity of this process explains why option agreements are designed to expire after a specified period. Often times the producer(s) simply cannot get the project off the ground and as such, rights holder(s) want to ensure that they can exploit the property in the event the option expires.

Typically an option agreement will last anywhere from 12 to 18 months. However, the parties can agree to a renewable option, allowing a time extension to be drafted into the agreement, prolonging the initial option period for an additional fee (usually 10% of the stipulated purchase price).

As you can imagine, contractual terms involving option length and extensions can be a contentious area, given that the interests of the rights holder can conflict with those of the producer. Typically an artist will seek to maintain a ‘reversionary interest’ in the intellectual property, so that in the event the producer exercises the option but does not produce a production in the allotted time period, the rights will revert back to the original owner.

From a producer’s perspective, drafting such a term into the option agreement can be problematic, given the unpredictable nature of the development process. Producers do not want to be in a position where they have invested time and resources, only to find out that the materials they have developed (ex. a screenplay based on a book) are no longer exploitable.

2 – PURCHASE AGREEMENT

Once the option is exercised, the purchase agreement contains all of the rights and terms governing the acquisition of the underlying works. The option agreement is essentially useless without an accompanying purchase agreement, given that the latter details what rights are to be assigned, how and when they can be acquired, and for what consideration. Furthermore, with the progression of on-demand streaming media services such as Netflix and Hulu, potential revenue streams are becoming much more diverse. As such, the terms that are being drafted into today’s option/purchase agreements are becoming far more contentious and increasingly complex.

What are some of the contractual provisions that I should expect to see?

Grant of Economic Rights ¬– it is always in the producer(s) interest to acquire the broadest range of rights in the underlying works, so as not to restrict how the property can be developed or exploited during the length of the copyright. Given the volatility of the acquisitions & financing market, producers will often pursue the limited rights to develop a single film, in an effort to drive down production costs and bolster their chances at locating a financier. In these situations, it is often prudent to negotiate in advance, upon payment of a further fee, the right to make prequels, sequels, re-makes, novelizations or other derivative works based on the underlying rights.

Producers may also want to secure the rights to characters and merchandising, publications (so that synopses can be written, intended for advertising & promotions), on-demand media or any other interactive platform that may not be in common use as of yet. A skilfully drafted phrase such as ‘allied, subsidiary or ancillary rights’ will cover most of these situations. However, negotiating these terms into the purchase agreement can be very difficult, especially if the artist(s) believe that they are not being adequately compensated for their intellectual property rights.

Waiver of Moral Rights – While producers are primarily concerned with the acquisition of ‘economic rights’ (i.e. those intended solely for the purpose of providing an author/copyright owner with monetary compensation for the sale of their rights in copyright), moral rights are distinct and cannot be acquired in an option/purchase agreement. They can, however, be contractually waived in Canada and getting the author to do so is of great importance to a producer, given that moral rights confer on the original author the right to:

(i) have his/her name on a work, to use a pseudonym, and to remain anonymous (right of paternity)
(ii) object to any changes of his work that may harm his reputation (right of integrity)
(iii) prevent anyone else from using their work in association with a product, service, cause or institution – the use of which must be proven to be prejudicial to the honour or reputation of the author (right of association)

In other words, without an express contractual provision indicating that the author has waived his/her moral rights in the property, the producer cannot properly alter or adapt the underlying work without the author’s consent. As such, producers will never consent to an option/purchase agreement unless the author/copyright owner waivers their moral rights.

3 – Representations, Warranties, and Indemnifications
These provisions will generally round out the end of the option/purchase agreement. Once all the business terms have been finalized, the producer(s) will require representations and warranties from the writer that he/she:

(i) is the sole creator and exclusive rights holder of the property, with full authority to enter into an Option/Purchase agreement
(ii) has not assigned, licensed, or entered into any agreement with a 3rd party (incl. corporations) which could conflict in any way
(iii) represents and warrants that the property is wholly original and that there are no outstanding claims or pending litigious circumstances which could limit, impair, diminish, or infringe on the rights being assigned
(iv) will indemnify (i.e. compensate for loss) the Production Company and all its employees (directors, officers, agents, and licensees), against any claims, actions, losses and expenses occasioned, either directly or indirectly, by the breach or alleged breach of any of the above mentioned representations, warranties or covenants

Conclusion

Drafting an option/purchase agreement can be a tricky endeavour. Any writer, talented enough to attract producer interest, would do well to hire a Toronto entertainment lawyer with extensive industry knowledge to properly negotiate these types of transactions. While it is true that producers are always looking for the opportunity to acquire the rights to a profitable piece of intellectual property; they are not, however, in the business of letting writers control the direction of their projects. The best opportunity for rights holders to maximize returns on their intellectual property is always going to be at the negotiating table. That will require experienced representation that can use industry savvy to properly protect and secure the rights of the artist.

«            »

Back to the