Much of the confusion associated with the use of the option results from the fact that, while a purchase price is negotiated, it will not be paid on the execution of the agreement,  nor is there any obligation to pay the purchase price unless the option is actually exercised. What is usually exchanged upon the execution of an option agreement is a small fraction of the negotiated purchase price.

In many cases where no studio, network, or major financing entity is involved, no actual cash compensation is exchanged when the agreement is signed, and what is instead tendered as consideration, is a promise to use best efforts to attempt to further develop, arrange financing and assemble creative elements for the project. What is sometimes frustrating for the principals involved, along with their respective agents, managers, lawyers, accountants, business advisors and the like, is that despite the euphoria of the million dollar script option deal reported in the trades, a considerable amount of time, effort and emotional drama  is invested in negotiating out all of the specific terms and conditions of the option deal but, at the end of the day, little and sometimes no cash may actually exchange hands.

Nevertheless, it is essential that all of the key terms and conditions of the option deal be negotiated and put in writing between the parties so that in the event financing for the project and all of the other essential creative elements come together within the option period, an orderly transfer of rights on behalf of the parties is achieved.

The following is an outline of the basic terms of the Literary Purchase Option Agreement (“LPO”) along with some issues to consider whenever negotiating such an arrangement.

THE OPTION PERIOD.  As is customary with most terms of the LPO, the period of the option is negotiable. The current standard for an initial option period is one year to eighteen months. I’ve seen options as short as thirty, sixty and ninety days, but generally, it takes a minimum of a year to eighteen months to “set up” or finance a project.

THE OPTION EXTENSION.   There is usually also an extension right so that the option period can be extended if the producer needs more time to secure the financing. This extension period generally is a similar period to that of the initial option (for example, if the initial option period is a year, the extension option period is normally a year). Customarily, there are one or two extension periods in the LPO.

THE OPTION FEE.   Option fees are always negotiable. A typical option fee for a studio deal is ten percent of the negotiated purchase price for the literary property. For example, if the purchase price is $250,000, the option fee would likely be in the range of $25,000.  The truly independent producer -- who doesn’t have an overhead or “first-look” deal at a studio like Arnold Kopelson (“The Fugitive,” “ Outbreak”), will generally try to get an option on a literary property for a much lower price, as he is personally financing the option fee. These option payments range from anywhere between $0 -- with the consideration being the producer’s best efforts to further develop the property, arrange for financing and assemble the creative participants -- to $500-$2500, in which case the producer is principally attempting to show his good faith toward the writer and the project (and also perhaps subsidizing the writer’s legal fees in negotiating and documenting the LPO).

The initial option payment is typically applied against or deducted from the purchase price. If an option extension is made, that payment is usually not applied against the purchase price.

DEVELOPMENT ACTIVITIES DURING THE OPTION PERIOD. During the option period, the producer will have the right to undertake all phases of development, (including rewrites of the property), as well as financing activities, attaching creative elements like Jack Nicholson, Julia Roberts and Barry Levinson to the project, and even making domestic and foreign pre-sales of the property -- subject, of course, to the actual exercise of the option. If you are a writer-director, it is in your best interest to be actively involved in the development and to negotiate a clause which assures that you will also direct the project or at least have a first negotiation right to direct. This is a difficult point to obtain for first time directors, but it is possible. As a writer, you should try to obtain first opportunity to perform all rewrites of the project, or at least the first rewrite.

EXERCISING THE OPTION.  The exercise of the option is the act that results in the transfer of the rights from the writer to the producer. Usually this entails the payment of cash to the writer. The purchase price must be paid prior to the expiration of the applicable option period and generally in no event later than the start of principal photography.

THE PURCHASE PRICE.   Purchase prices for literary properties can range as low as a few thousand dollars, and can be and as high as several millions of dollars based upon the perceived market value of the property. Within the studio system, the purchase price is based largely on the writer’s previous quotes, taking into consideration an increase if the writer’s previous project was produced and was critically or financially successful for the studio. Joe Eszterhas’ (“Basic Instinct”) quote is reportedly over $3 million.

The Writers Guild of America (WGA) Basic Agreement provides for union-mandated minimums to be paid for the purchase price of a screenplay for guild members by guild signatory producers. Those amounts are approximately $28,500.00 for a low-budget project ($2.5 million or less) and $58,400.00 for a high budget project ($2.5 million or more).

Many agreements, however, are not subject to WGA terms and conditions.  A general rule of thumb that appears to be accepted entertainment industry practice is that all of the literary rights that need to be acquired to make a movie should range between 2% to 5% of the budget of the film.  In many cases, LPO’s are negotiated to provide that the purchase price will be in this percentage range of the film’s budget. The budget is usually defined as the actual final production budget of the motion picture less interest, financing charges, completion bond fees and overhead. At the very least, the projected budget of the motion picture serves as an effective starting point in determining the purchase price.

Nonetheless, in order to protect both the writer and the producer in ultra-low budget productions and ultra-high budget productions, many times a percentage-of-budget purchase price will also have a floor, i.e., $100,000 and a cap, i.e., $500,000 in order to keep the cost of the rights within a reasonable range. Taking a studio film like “Titanic” as an example (with a budget reportedly in the $200 million range), the purchase price for the original screenplay could have exceeded ten million dollars -- a princely sum even for a sure-fire hit -- without a studio-imposed cap on the purchase price.

ADDITIONAL COMPENSATION.   Once the purchase price is negotiated, you’re not done. Because studios and financiers want all the rights, you have to negotiate additional compensation for uses of the material other than the initial motion picture, and additional services you as the writer may render.

1. Writing Services. :  Generally, the writer will immediately be engaged to write several drafts of the screenplay ( to incorporate Jack, Julia and Barry’s comments on his work), and a fee will be negotiated and included in the LPO for those services. The question naturally becomes, are the fees that are paid to the writer for writing services applied against the purchase price of the property if the option is exercised? This matter is obviously a matter of negotiation. The writer of course will attempt to resist the application of those sums against the purchase price and the producer will want those fees deducted from the purchase price.

2. Net Profits/Adjusted Gross Receipts. It is typical for a writer to be entitled to a share of the Net Profits or Adjusted Gross Receipts of a motion picture. Much has been written about the definitions of the Net Profits and Adjusted Gross Receipts, all of which is beyond the scope of this article (see “FATAL SUBTRACTION” by Art Buchwald attorney Pierce O’Donnell for a comprehensive review of this subject). Generally, just as in the purchase price calculation, 2% to 5% of the Net Profits/Adjusted Gross Receipts -- whatever the best definition the writer can get -- is set aside for all of the literary rights holders. Typically, the writer and his representatives try to get his profit definition tied to -- that is, defined exactly the same as -- the most favorable definition accorded any creative participant on the picture. It is usually difficult to get the writer’s profit definition tied to a star’s definition, but many times the writer can obtain the same definition as the producer (you’ll take Kopelson’s definition) and sometimes, the same as the director (depending on the stature of the individual parties).

3. Remakes of the Picture.  The writer typically is entitled to receive one third of all of the cash and contingent compensation payable to the writer on the first picture with respect to any remakes of a picture.

4. Sequels to the Picture. Additionally, the writer will also be entitled to receive one half of all cash and contingent compensation payable to the writer on the first picture with respect to any sequels of the picture.

5. Movies of the Week, Mini-Series, and Series.  Customarily, the writer can also negotiate a royalty for any movies of the week, mini-series, or pilots based on the initial picture. These royalties range anywhere from $5,000 to $15,000 per hour, typically for a US prime-time network television program. This royalty is generally reduced by one half for other than network non-prime time programs.

6. Series Episodes based on the initial Picture. The writer will also typically be entitled to obtain television series episodic royalties for US prime time network episodic series based on the initial picture. Typical payments for these episodic royalties are approximately $2,000 for a half-hour episode, $2,250 for a one-hour episode, and $2,500 for episodes ninety minutes or more. These royalties are also reduced by one half for non US prime-time network shows. The above sums are usually paid for the first airing of the show and twenty percent of the above royalty is paid for each additional rerun of the show up to a maximum of five reruns.

7. Shared Writing Credit.  If the writer somehow is rewritten and shares the writing credit, all of the above royalties for remakes, sequels, MOW’s, mini-series, television episodes and the like are typically additionally reduced by one half, because the subsequent writer will also typically be entitled to a share of these royalties.

RIGHTS ACQUIRED/RESERVED RIGHTS.  When a producer acquires the rights to a motion picture property, typically he wants to acquire all right, title, and interest to the property in any and all media now known or hereafter devised throughout the world in perpetuity. This means all rights (including without limitation theatrical rights, television rights, video rights, non-theatrical rights, airlines, ships at sea, military installations, theme park rights, restaurant rights, music publishing, soundtrack album, multimedia, commercial tie-in, animation, advertising, promotional, and all other exploitation rights).

If you’ve done a good job negotiating, presumably you will participate in all these revenue streams.

Writers many times may be able to reserve certain rights, such as live television, live radio, and sometimes live theatrical stage rights. Writers with some leverage may also be able to retain hard-cover and soft-cover publication rights, and perhaps even non-dramatic electronic publishing rights. These rights can be valuable. I remember as a studio lawyer receiving a mid-six figures check on behalf of the writers of a successful studio film for the paperback novelization royalties. Typically, the rights which are reserved to the writer are subject to a holdback period so that they are not exploited until approximately five years after the date of the release of the initial motion picture or 7 years after the date of the LPO whichever comes first.  However, publication rights are generally not subject to the same holdback period.

CREDIT.  Perhaps the most important term that a writer will be concerned with other than the purchase price is the credit. In may cases, particularly in the case of WGA companies who engage WGA writers, the credit issue is rarely negotiated. This is because the WGA will determine what the credits are.  The WGA agreement provides that the credit will be the same size on the screen as the director, will appear immediately before the director in the main titles, and will also appear in virtually all paid ads except specific exclusions which have been negotiated with the studios.

It is in non-WGA agreements in where the credit negotiation becomes much more of an issue. The writer will want to take steps to insure himself that he obtains screen credit in the main titles at a size no less than the producer or director, and that his name will appear in all paid ads subject to the customary distributor exclusions as well as on posters and the video box. One way for a writer to protect his credit position is to negotiate a term which provides that, while the WGA Agreement does not apply to all provisions of the LPO, the standards and procedures set out in the WGA Agreement for insuring writers’ credits are nevertheless incorporated into the LPO.

Another important protection that a writer can generally negotiate is an affirmative obligation on the part of the producer or the studio to use best efforts to cure on a prospective basis (i.e., on materials created in the future) any failure to accord the writer his appropriate credit on screen, in paid ads, or elsewhere.

REVERSION.   I’ve seen deals where the producer actually exercises the option, thereby paying the writer the purchase price for the literary property, but, for whatever reason, does not go forward and produce the motion picture project. This puts the writer in the unenviable position of having received what is hopefully a considerable amount of money for his screenplay; but unfortunately, may never see his project on the screen. This scenario can be avoided by negotiating what is commonly referred to in LPO’s as a reversion.  This provision provides that if the option is exercised and the purchase price is paid, but principal photography has not commenced within five years of the exercise of the option, then the literary property would revert back to the writer.

The writer would obviously want the reversion to be free and clear from any liens. However, the producer, who has spent a considerable amount of money both developing the property and paying the purchase price to  the writer, would want to negotiate a provision that the reversion would be subject to a lien in favor of the producer to the extent of the amount of money the producer had actually spent on the development of the property as well as the monies he had paid to the original writer.

This is a matter of negotiation, of course, and depends on each party’s leverage. It should be noted that the WGA agreement does provide a reversionary provision for writers which does include the lien and allows a reversion after a period of five years.

LIMITATION OF REMEDIES. Because studios and producers ultimately will be investing millions of dollars in the production costs of the project, they traditionally require writers to limit the remedies they may have in the event that the LPO is breached by the producer or studio. Studios never want to be in the “Amistad”-type situation where, days before the movie is to be released and millions of dollars on prints and ads have already been spent, there’s a lawsuit being heard that could result in the pulling of prints from the theaters suspension of advertisements. At press time, a similarly unsavory situation has jeopardized the home video release of “The Devil’s Advocate.” As a result, it is virtually always required of a writer to agree that the only remedy the writer may have in the event of a breach is the right to sue for money damages. The writer is generally required to waive any rights to injunctive or equitable relief, as well as the right to rescind or terminate the LPO.  While these waivers appear to be harsh and unfair to the writer, it is virtually impossible in the US to obtain financing for a motion picture project from banks and other lending institutions if the LPO does not include a waiver of these important remedies.  One way to reduce the harshness of this provision is to attempt to negotiate a term that conditions the waiver of remedies on the actual payment of the purchase price to the writer.

OTHER TERMS. Additional issues and terms to be negotiated and included in LPO’s are Representations, Warranties & Indemnities, Errors and Ommisions Insurance Coverage, Creative and Business Controls, Publicity Matters, Free Videocassette and Laserdisc copies, Short Form Option Assignment, and the Certificate of Authorship. These issues are dealt with in a more comprehensive article on this subject available at the author’s website www.medialawyer.com.

CONCLUSION. The above outline provides most of the key terms and conditions of an LPO. Obviously these provisions are negotiable and are certainly not set in stone. The outline is based on a relatively short form document. Independent producers tend to favor the short form while studios generally prefer longer documents, often upwards of forty pages. Before attempting to negotiate and sign an LPO it is generally a good idea to obtain some advice and guidance from either an agent, manager or lawyer familiar with the entertainment industry and the potholes and loopholes one can encounter in LPO’s.