Option Agreements
After a writer has developed an underlying work such as a screenplay, novel, treatment or sometimes even a detailed project proposal (“the property”), producers and production companies alike have to acquire the rights in the underlying work prior to adapting it into a movie or a television series. This is generally referred to as securing the movie or television rights. As I wrote in an article entitled “The Importance of Securing Chain of Title”,
“For a literary work such as a screenplay, copyright protects it or any substantial part of it in any material form from being, among other things, produced, reproduced, distributed, published, translated, adapted, made into a film, or communicated to public by telecommunication without the permission of the author.” Director’s Chair, April 26, 2006
Sometimes producers who wish to acquire the movie or television rights may either immediately purchase the rights or they may wish to enter into an option agreement with the original writer in order to keep development costs as low as possible. An option agreement essentially gives a producer an option to purchase the rights of the underlying work at a later date. In other words, producers at their election only have to pay a portion of the purchase price (“option fee”) in exchange for the exclusive right to develop the property for a period of time (“option period”). If the producer decides to exercise the option before the expiry of the option period, then he or she will pay the “exercise price” of the option.
For example, consider the case whereby a producer approaches a writer and wishes to acquire the movie rights in the writer’s property that took the writer, let’s say 5 years combined with a lot of sweat and tears to research and develop. The writer then says to the producer,
“Thank you for your interest in my work. You know what, I am willing to sell it to you for the small price of $100,000.00 USD if the finalized production budget is $25,000,000.00 or less, or $200,000.00 USD should the production budget exceed $25,000,000.00 because then you probably attached a noteworthy actor to the production and if you did that, my work must be worth my price.”
Notice that this writer is pretty sophisticated in that he or she is attempting to tie his or her compensation to the production budget. This approach is not always possible, and of course, the definition of “budget” will have to be defined and one approach would be to have it certified by an independent third party, such as a completion guarantor.
The producer then responds, “Wow, that’s a lot of money to pony up on the spot. And more than that, I need time to develop the property, put the production together and make it to the first day of principal photography (the time when the production financiers will come up with the funds for the production costs which includes purchasing all the rights necessary to carry out the production). How about I pay you (writer) an option fee of $10,000.00 USD for a one-year term subject to allowing me to renew the option for another year at 10,000.00 USD?”
The writer responds, “That may be okay, but I am a popular writer and the work in question is really compelling, so I want you (producer) to satisfy, amongst other things, certain benchmarks in developing the project because I want to see my work made into a film and not end up merely collecting dust on the shelf. If the benchmarks are not met, then the option will terminate.”
The producer says, “Well, you are certainly making this deal a bit more complicated than I originally fashioned and there’s a lot to think about here. I’ll get back to you once I speak with my lawyer.”
An option agreement should spell out a number of important issues relating to:
- Detailed financial terms including the royalty participation;
- Duration and expiry of the option;
- Reversion rights;
- The nature of intellectual property rights granted (time, territory, type of media, language, novelization, public performance, adaptation, production and reproduction, distribution, publication, stage play rights, multimedia, etc.);
- Prequel and sequel rights;
- Commercial tie-ins and merchandising licensing;
- The rights reserved by the author (e.g. print publishing rights, stage play rights, etc.)
- Credit
In the option agreement, it is common that the author of the original work will have to make certain representation, warranties and indemnities to the producer. These representation and warranties attempt to securer a clean “chain of title” (see my article “The Importance of Securing Chain of Title, Director’s Chair). In a nutshell, the producer requires the author of the original work to make certain claims about the work, some of the most important being, that the work is original with the author, that the work is not in the public domain, that the property has not being exploited by others, that the author is the sole and exclusive owner, and that the work does not infringe any other’s rights (i.e. copyright, trademark, privacy, publicity, etc.)
It is important to remember that negotiating an option agreement is no less complex than negotiating a literary purchase agreement because all the terms of a purchase agreement have to be included or attached to the option agreement, so that if the option is exercised, the terms of acquisition have already been negotiated.
This article was written by Jindra Rajwans, a business and entertainment lawyer based in Toronto, Canada. The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.