The Insider's Guide to Film Finance

Philip Alberstat

• Publisher: Routledge
• Year: 2012
• Print ISBN: 9781138132344
• eBook ISBN: 9781136041297
• Topic: Medios de comunicación y artes escénicas
• Subtopic: Películas y vídeos

Financing an independent feature film production is a highly complex process. This book demystifies the legal and commercial implications of a film from start to finish. It provides a detailed survey of each of the processes and players involved, and analyses of the legal and commercial issues faced by all of the participants in a film financing transaction. Packed with legal advice and straight forward explanations this is an essential reference for filmmakers worldwide. With contributions from leading professionals around the world, and an up-to-date international approach, this is an invaluable tool for producers, and others involved in the film industry. Includes: Case studies, Sample Recoupment Schedules, Alternative Financing Models, Glossary of Film Financing and Banking Terms Philip Alberstat is a media finance and production lawyer specialising in film, television and broadcasting. He has worked on films such as The 51st State, Goodbye Mr Steadman, Tooth and numerous television programmes and series. He is on the editorial board of Entertainment Law Review and is the author of The Independent Producers Guide to Film and TV Contracts (2000), and Law and the Media (2002). Philip is involved in raising finance for film and television productions and negotiating and structuring film and television deals. He undertakes corporate and commercial work and handles the intellectual property aspects of broadcasting and finance transactions. He has also executive produced numerous film and television productions. He won an Emmy Award in 2004 as an Executive Producer of the Film, "The Incredible Mrs. Ritchie". Philip joined Osborne Clarke as a partner in February 2002. Prior to that he was Head of Legal and Business Affairs with one of the largest independent TV production companies in the UK. He was previously Head of Media at Baker & McKenzie and began his career at Olswang. He was winner of the Lawyer/Hifal Award for Solicitor of the year in 1997 and is listed in Legal Experts in the area of Film Finance/Media.

1 Underlying 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:

1. An Option Agreement
2. An Option Extension Agreement
3. Assignment or Purchase Agreement
4. Short Form Option Agreement
5. Short Form Assignment Agreement
6. Assignment of Copyright
7. Quit Claim
8. Writer's Agreement
9. Publisher's Release
10. 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.
5. Assignment
   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.
5. Consideration
   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.
7. Indemnity
   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.
9. Assignment
   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...

Table of contents

• Cover
• Half Title
• Dedication
• Full Title
• Copyright
• Contents
• Foreword
• About the Author
• List of Contributors
• Acknowledgements
• A Note From the Author
• Introduction
• 1 Underlying Rights
• 2 Co-productions (Alan Harris)
• 3 Banking the Deal (Rob Sherr)
• 4 Banking Documents (Lucy Walker and Philip Alberstat)
• 5 The Interparty Agreement
• 6 The Completion Guarantee
• 7 Collection Agreements
• 8 Recoupment — Net Profits
• 9 Gap Financing
• 10 Alternative Financing
• Appendix A: Glossary of Film Production and Finance Terms
• Appendix B: Helpful Websites and Recommended Reading
• Appendix C: Example Errors and Omissions Cover Note
• Index