What Are The Essential Clauses In An Option Agreement?

Here we outline the key clauses of an option agreement:

1. Exclusivity Clause: This ensures that the author/owner of the literary work does not discuss the same work with other producers simultaneously.
2. Definition of Option: It is crucial to clearly define the term “option” in the agreement to avoid any misunderstandings. It should be stated as an “Exclusive and Irrevocable Option” to prevent the work from being optioned by another party.
3. Option Fee Clause: The payment of the Option Fee (a specified amount) is essential to grant the producer the exclusive right to evaluate the marketability of the literary work. This fee allows the producer to pitch the story to various potential platforms, directors, and exploitation partners. The clause should also address any additional fees if the producer decides to extend the option period beyond the initially agreed-upon time.
4. Option Period Clause: Defining the time period for which the producer’s rights are secured in the literary work is crucial. During this period, the author/owner will refrain from approaching or accepting other offers for the same work, allowing the producer to exercise their option right. The typical option period is one year, but negotiation for an extension of 2 or 3 years may occur to allow the producer time to develop the project and secure financing. However, the author may be hesitant to extend the period beyond 2 years to retain the flexibility to consider better offers if they arise.
5. Grant of Rights Clause: Clearly outlining the types of rights being optioned in the agreement is crucial. Producers may seek to acquire all rights in the literary work, including the ability to create derivative works such as prequels, sequels, spin-offs, and remakes if the film or web series based on the literary work becomes successful in the future. It is also essential to specify whether the producer has the right to create merchandise based on the film or web series in case of its success or popularity. Additionally, the platforms on which the producer can exploit the film/web series—such as theatrical, non-theatrical (satellite, digital, OTT, radio, etc.), and ancillary markets (home video, new media, video games, theme parks, etc.)—must be clearly defined.
6. Representation and Warranties Clause: The producer should require the author/owner to confirm that they are the true author and owner of the literary work and hold the copyright to it. The owner must provide warranties stating their commitment to maintaining exclusivity and confidentiality as per the terms of the agreement until the expiry of the Option Period. They must also agree not to approach any third-party for optioning or assignment of the story during this period.
7. Termination Clause: Including a termination clause is essential to ensure that if the exclusivity and confidentiality of the literary work are not maintained or are breached by the owner, the agreement shall be terminated immediately. This clause protects the producer’s rights and provides recourse in case of any violations or breaches during the option period.
8. Right of First Refusal [“ROFR”]: The Option Agreement should include a “Right of First Refusal” clause if the author and owner wish to be involved in the development and production of any derivatives based on the first film or web series created and/or produced subsequently.

The “Right of First Refusal” grants the author and owner the contractual right to enter into a transaction related to the derivative work before anyone else can. This means that the producer is obligated to approach the original author and owner before considering other offers for the derivative work. Only if the author and owner decline to enter into the said transaction, the producer is free to explore other options.

The “Right of First Refusal” is often sought by individuals or entities who prefer to assess how a business or opportunity unfolds before committing fully. It allows them to become involved at a later stage, if they choose to do so. Importantly, the holder of this right has the opportunity, but not the obligation, to enter into a transaction. The ‘Right of First Refusal’ gives the author and owner the chance to establish a contract or an agreement specifically related to a project, typically the derivative based on the film, before others can.

Additionally, the main author/owner may include a clause stating that if they refuse to work on the project due to unfavorable terms offered by the producer, such as a lower service fee, and the producer subsequently approaches another author/owner and offers more favorable terms, say the service fee initially demanded by the author/owner, the producer is prohibited from doing so. This clause helps protect the interests of the original author and owner in case the producer attempts to secure more favorable terms with another party after being refused by the initial author/owner.

9. Reserved Rights: In the Option Agreement, only the specific rights that are optioned by the Producer will be considered for assignment if the option is exercised. All other rights that are not explicitly defined in this Agreement will be retained and reserved by the Author/Owner of the literary work. For example, the Author/Owner may choose to publish the literary work at a later date, and this clause ensures their right to do so. The following additional rights must also be specified:
   1. Stage Rights: The right to perform the literary work or its derivatives on live stages, in theaters, and similar venues.
   2. Radio Rights: The right to produce and broadcast audio-only versions of the literary work on radio platforms.
   3. Podcast Rights: The right to produce and podcast audio-only versions of the literary work on podcast platforms.
   4. Holdbacks: The Author/Owner will have the right to exploit the reserved rights at a later time, typically 5-7 years after the release of the Film/Web series.
10. Right to Write Sequels/Prequels: The Author/Owner will always retain the right to write sequels or prequels based on the current work, providing detailed insights into characters or events before (prequel) or after (sequel) the events described in the current work. If such a sequel/prequel is created and the Producer wishes to adapt it into a Film/Web series, the clause must specify the optioning of this new work as well. Additionally, the period of holdback will be extended accordingly when a sequel/prequel is created.
11. Right of First Negotiation: In case the Author/Owner wishes to exploit any of their reserved rights and intends to negotiate with a third-party, this clause establishes an obligation for the author to provide written notice to the Producer and offer them the right of first negotiation (similar to the ROFR clause of the author). Only if the Producer refuses to exploit the reserved rights or if no agreement is reached within the specified time frame, the author will be free to explore opportunities with a third-party.
12. Assignment Clause: The Parties must also include an Assignment Clause, which comes into effect if the Option is exercised. This clause should explicitly state the Assignment Fee or Purchase Fee for acquiring the optioned rights. The Purchase Fee is usually expressed as a percentage of the overall budget of the Film/Web Series.
13. Author/Owner’s Credit: The author/owner should negotiate to receive appropriate credit in the Film/Web Series. Authors often prefer to have an opening credit, which appears at the beginning of the film/web series, as it gives due recognition to their work. They might prefer this over a closing credit, which typically lists all the names of people involved in the production, including authors, but appears at the end.
14. Reversion: In case the assignment is made, and the purchase fee is paid, but the Film/Web Series does not get released or the production does not commence, it can put the author/owner in a difficult position. To address this concern, the Reversion clause should be included, stating that in such situations, the rights assigned will revert back to the Author/owner. However, it is worth noting that Producers often resist this clause and may prohibit the application of Section 19(4) of the Copyright Act in the Grant of Rights clause, which deals with reversion of rights.