The Essentials of an Option Agreement

Behind the magic of movie making is a silent, long-drawn legal process that is unavoidable and imperative to be followed. In today’s day and age of remakes, sequels or movie adaptations of novels and plays, understanding the legal aspects of these transactions is necessary.

Imagine you are an author and you have written a novel. Your novel is a best seller and people come up to you praising it and exclaiming how they think your book should be made into a movie. Or imagine you are a person interested in making movies and you find out about a script written by some writer which you think would be a smashing hit if made into a movie. What options do you have? Well, one of the many ways to go about it is through an option agreement.

Typically, an option agreement provides the owner of the rights in a work (which could be a screenplay, a novel or a play) with the “option” to allow a potential film producer the right to purchase the work under negotiated terms. These terms include a time period within which the producer can assess his financial and other responsibilities and make the decision of whether he would like to purchase the rights to the work or not. During such an option period, generally the rights holder is paid an “option fee” by the producer as consideration for the option granted to the producer.

This article covers the essentials that must be encapsulated within your option agreements whether you are the rights holder or you are the producer.

The Absolute Essentials

  1. Option period

The option period is one of the most important clauses in the option agreement especially from the rights holder’s point of view because if such a period is not defined in the agreement, the producer essentially can hold on to the option forever.

Through an options agreement, the producer does not exclusively own/acquire all rights, title and interest in the works but through an option the producer holds exclusive rights, title and interest in the works for a limited purpose of activity i.e., pre-sale activity, developing of show bible, approaching the platform and such other allied activities for a limited period which is called as “option period”. The producer uses the option period to commercially exploit the works with platforms and if the same materialises, then the producer will pay the full purchase price and acquire all rights, title and interest in the works for perpetuity. However, if the option period lapses before the producer can exercise his option, the producer’s right to purchase the rights also lapses, subsequent to which the author/owner of the work can exploit the work with any other person or company.

If the producer wishes to extend/renew the option period, he/she may do so by paying an additional option fee for such an extended term, as mutually agreed by and between the parties. The length of the option period varies and depends on the medium of exhibition of the works. It is usually suggested to the rights holders to limit the option period for one year with one or maximum two renewals of 6 months each, which should be enough time for the producer to raise finance. However, the option period can be further negotiated considering unavoidable and unforeseen situations like pandemic, natural disaster, etc. In Hollywood, generally the option period lasts for around 18 months which is renewable for an equal period. European option agreements have an option period for 12 months with a renewal period lasting for 6 months – 1 year (or two 6-month renewal periods).[1]

Before assigning extensions to the option period, it is not unusual for the rights holders to ask for proof pertaining to the progress made by the producer during the initial option period. In this case, the producer must ensure that the option agreement clearly defines what “progress” means and specifies realistic targets thereby limiting the right holder’s right of termination.

  1. Option fee

As consideration for granting the purchase option to the producer, the rights holder, by virtue of holding the intellectual property rights in the work, negotiates the option fee to their benefit. Option fee is what the rights holder gets as a reward for giving the producer the exclusive right to purchase the intellectual property rights in the works.  Typically, the option fee is around 10% of the purchase price but these are commercial terms that vary on a deal-to-deal basis depending on how the transactions have been negotiated. These negotiations depend on either the fame of the rights holder and/or his works or the producer’s or his proposed talent’s goodwill and popularity.

It is important to mention here that the payment of the first option fee towards the initial option period is effectively an advance payment of the purchase price which shall be payable to the rights holder if the producer chooses to exercise his options. Thus, the initial option fees would be adjusted against the purchase price paid. So technically the rights holder gets paid a percentage of the purchase price and not just an amount over and above it. This is one of the biggest advantages why the producer uses the options route. Instead of purchasing the rights at an exorbitant amount and then going through the drill of convening resources required to produce the film (which in itself is an expensive affair), through an option agreement the producer can, at a limited risk, work towards raising further funds and engage with actors and other important crew members without having to spend too much money at the initial stage.

However, the second and subsequent option fees for the extended periods are one-time payments that are non-adjustable against the purchase price. Thus, this has to be carefully negotiated by the producers. Note that if the producer does not exercise the option, the initial option fee shall not be refunded to the producer.

  1. Purchase price

If during the option period the producer has procured the necessary finances, recruited the essential talents and is now ready to seal the deal with the rights holder, he may do so by paying the purchase price. Considering the fact that usually option fees is a percentage of the purchase price, a fixed purchase price is negotiated by the parties. Producers may try to negotiate this price depending on their budget for their production. However, the purchase price need not always be a fixed amount. If the parties are unable to agree on the purchase price at the time of executing the options agreement, the parties may sometimes negotiate the same to be in terms of a “floors” and “ceilings” figure thereby postponing the discussion to a further date albeit setting an outline for such negotiations. Generally, the payment for this happens before the start of the shooting of the film.

  1. The rights

One of the most important clauses in this agreement, the option agreement helps the producer negotiate and thereby legalise the rights that the producer shall be granted by the rights holder. A blanket clause covering “all rights in the universe” may not be acceptable to the rights holder. Therefore, it becomes necessary that the rights are specified to avoid any disputes over the interpretation of such a clause. The producer may purchase the rights for exploiting the project into a cinematographic film, web series, television series, documentary or even through modes, mediums and formats that have not been developed at the time of entering the deal. The rights holder, through the agreement shall agree to assigning their rights in the works along with waivers of rights that are available to the rights holders within the copyright laws of India. For example, it is a common practice for producers to require from the rights holders to waive the moral rights available to them under Section 57 of the Copyright Act, 1957[2]. It is also a general practice to procure from the rights holders all the derivative rights in the works which includes without being limited to the rights to make prequel, sequel, adaptation or remakes of the works. Furthermore, there could be “holdback” clauses. Essentially these are restrictions on the producers limiting them from procuring certain rights. For example, the rights holders could restrict the producer from obtaining the rights to exploit the works as a television series or the rights holders could restrict the producer from distributing the films and could retain the rights to itself. Negotiating the rights clause in the agreement is very critical for both parties as this is the crux of the options agreement.

  1. Contingent payments

Certain options agreements may include clauses that ensure that the rights holders are paid a percentage of the net profits earned from the film. Here, the producers will have to decide whether they are willing to share their profits with the right holders and they shall then have to negotiate accordingly. Sometimes the right holders may even let go of some portion of option fee in return of the producer’s commitment to share the profits should the project be successful.

  1. Credits

It is a common practice to provide the “based on the story by …” credits to the rights holder in a film, should the producer exercise his option rights and thereby purchase the rights in the story of the rights holder. Here too the rights holder may negotiate as per their requirements and may demand other credit expectations. They may want to be actively involved in the film making process in an “executive producer” capacity thereby needing the credits for such participation. It is however for the producer to decide if they are willing to have the rights holder on board with regards to such active participation especially in cases where the right holder has little or no experience in filmmaking, or if the intention is only to base the project very loosely on the right holder’s work.

  1. Other standard clauses

The rest of the clauses in these kinds of agreements are standard and depends entirely on how they are negotiated. Therefore, whether it is the termination rights, the indemnity or the confidentiality clauses, these completely depend on how the parties mutually decide to safeguard their individual rights. Usually, the termination rights are also accompanied by the consequences of such termination and the same must be drafted carefully leaving no room for ambiguity. Similarly, the indemnity clause too is very important from a litigation point of view. Since frivolous lawsuits are fairly common in the media and entertainment industry, it is important that the same be negotiated properly.

  1. Due diligence

One of the important things that a producer must ensure before entering into an options deal is to make sure that the rights holder has a completely clear chain of title. This means that the rights holder has a series of legal documents/agreements/assurances that establish that the rights holder indeed holds the rights in the work which is to be optioned to the producer. This also ensures that there are no known obstacles for the producer preventing him from purchasing the rights. Verification of these documents, with the help of a lawyer, will assist producers in avoiding any legal hassles in the future. Further, it is advisable to give a public notice and link one of the payments tranche subject to successful clearance of public notice and no claims received from any party whatsoever.

Conclusion

From a producer’s point of view, an options agreement allows them the freedom to hold on to a story/script/works, the rights for which is held by another person, for an extended period of time without having to spend a fortune while trying to get the project rolling. If the producer is unable to get things organised in time i.e., at the very least start the development of the film, the producer does not end up making heavy losses. On the other hand, the rights holder too receives a heavy paycheck as option money as a reward for his hard work. If the producer is unable to purchase the rights of the film, the rights go back to its holder and he still walks away with the option fee. Safe to say it is a win-win for both. However, the option agreement needs to be drafted and negotiated such that nobody is at a loss and everyone takes a piece of the cake.


Associate, Naik Naik & Company

[1] Rights, Camera, Action!: IP Rights and the Film-Making Process – Booklet No. 2- World Intellectual Property Organization (WIPO), <https://www.wipo.int/edocs/pubdocs/en/copyright/869/wipo_pub_869.pdf>.

[2] <http://www.scconline.com/DocumentLink/L6l9i233>.

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