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Always Best to Keep Options Open An option agreement is an increasingly common form of agreement used by producers to acquire an exclusive license from writers to rights in an existing work without having to pay the big bucks up front. When drafted properly, an option agreement provides the perfect balance of flexibility and certainty. When drafted improperly, however, an option agreement can result in the payment of money in exchange for no license at all. The most common pitfall to watch out for when drafting an option agreement is the failure to specify a purchase price. An option agreement merely acquires the option to purchase something. It doesn't actually purchase it. If no purchase price is specified, that price will need to be negotiated at a later date. Depending on how much time and money a producer has spent, and how far down the development track a producer has gone, that producer's negotiating power may be seriously diminished if she has made commitments to producing something without knowing how much it will cost to obtain the license. The writer is under no obligation to grant a license for a certain price to the producer should that price not be already specified in the option agreement. The second pitfall to be aware of is the applicable option fee and purchase price should the writer be a member of the Writer's Guild of Canada (the WGC). If the writer is a member, the WGC Independent Producer's Agreement (the IPA) specifies that the option fee can be no less than ten percent (10%) of the purchase price per year and the option period can be no longer than three years, including all renewals. Further, a producer must specifically mention in the option agreement that the option fee is applicable against the purchase price. Finally, only the option fees paid for the first 18 months of the option period are applicable against the purchase price. By way of example, let's say a producer wishes to acquire an option to a script from a writer who is a member of the WGC. Under the IPA, the minimum purchase price of a script is $47,286.00. The option fee payable for each year is therefore $4728.60, that being 10% of the price. Should the producer renew the option for two full years for a total of three years (the maximum under the IPA), the producer may apply $7,092.90 (the first year's and six months of the second year's option fees) against the purchase price of $47,286.00 for a total of $40,193.10. Finally,
it is important to remember that the purchase price of a script
may be applied against the production fee owing to the writer only
if this is specifically included in the option agreement. Likewise,
should a producer pay a writer more than the minimum purchase price
specified in the IPA for a script, the "overage" may be
applied against the distribution royalty owing to the writer, but
only if this is specified in the option agreement.
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