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From a legal and financial perspective, film production can be quite complex. Startup and independent filmmakers and producers are often unaware of how many parties are involved in producing and distributing a film. However, as you probably know, film production is not cheap. Costs for even the smallest of art-house productions can easily exceed £100,000. Therefore, as with other expensive commercial projects, producers need access to upfront cash, and the producer must enter into several legal agreements to facilitate the financing. This article will examine how a startup production company can finance its film production.
Who Are the Key Parties?
The goal is to understand the financing structure of a film production. To do this, looking at the main parties and their role in the process is helpful.
1. Production Company
The production company is the entity that produces the film. As a producer, your operations will be structured through a production company. In practice, a production company may contain several companies operating under a parent company. In most cases, the production company is produced exclusively for the film in production. That is, it does not continue trading after the film is completed.
The production company’s goal is to produce the film according to the artistic standards of the creatives involved and the terms specified in the distribution and presale agreements. Therefore, the production company will undertake to do the following:
| Agreement Terms | Explanation |
| Commission the screenplay and acquire all the necessary intellectual property rights from the relevant parties. | The production company may purchase the screenplay if it has already been independently written. This also entails intellectual property considerations. |
| Prepare and manage the film’s budget, cash flow, and production schedule. | This includes managing the bank account used to pay production costs and acquiring the necessary insurance policies, which can be extensive. The production company will also acquire any available tax credits from the relevant governments and authorities. |
| Engage the creative element. | This includes the cast, crew, director, individual producers, heads of departments (audio, visual, FX, catering, etc.), and laboratories, and sound studios. |
| Own and manage the intellectual property and various legal obligations arising under the financing and distribution agreements. | This includes managing the copyright in the film. It entails undertaking specific legal promises, such as granting legal guarantees and security over film production. |
2. Distributor
The distributor is the party that manages which third parties can play and distribute the film. Depending on the distribution size, this can be global and involve dozens of different third-party distributors.
From a financing perspective, the distributor usually agrees to acquire the distribution rights to provide the production company with a guaranteed minimum sum. The distributor may agree to pay the production company:
- upfront; or
- upon the film’s delivery.
Where the distributor agrees to pay for the film upfront, the distributor acts as the production financier. However, where the distributor pays for the film upon completion, the production company will need third-party financing. In this case, the distributor pays the third-party financier upon completion.
A distribution agreement governs the relationship between the production company, distributor, and the third-party financier (where applicable). This specifies:
- what the production must deliver to the distributor;
- the date of delivery;
- The film’s specifications relate to run-time and the starring cast.
The distribution agreement is a vital contract in the production process. For instance, the distributor can refuse to pay the production company if the producers:
- fail to deliver the film on time; or
- fail to adhere to the film specifications in the distribution agreement.
3. Financier
The production company will need a third-party financier if the distributor refuses to provide the production costs upfront. Financiers will only agree to lend to the production company if they are satisfied with the distribution company’s creditworthiness. The production company has limited assets and will not continue trading after the film’s production.
Therefore, as a term of the financing agreement, the distributor must provide a legal guarantee to the financier that it will pay the financier upon delivery of the film. The financier may demand that the distributor obtain a letter of credit from its bank, which acts as an additional guarantee over the distributor. The financier may also obligate the distributor to pay a portion of the upfront costs to the production company as a deposit to secure its obligations.
Other terms contained in the financier agreement include:
- limitations on the right of the distributor to claim ownership over royalties and the intellectual property in the film until it has repaid the financier in full;
- the right of the financier to terminate the agreement and sell the distribution rights if the distributor defaults on its obligations; and
- restrictions on the distributor to access the film materials until full payment to the distributor.
4. Laboratory
The lab is the party that processes the post-production film material. Because the laboratory takes possession of the film in its post-production state to undertake final edits, colour correction, and quality control, you can think of the laboratory as having “physical” possession of the film.
As a result, the financing/distribution agreement term may be that the laboratory will not release the film to the distributor without the financier’s consent.
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Key Takeaways
Film production and distribution require upfront cash, which makes financing necessary for independent and startup production companies to make their films. Generally speaking, the distributor is ultimately responsible for meeting the production costs. However, where the distributor does not agree to provide the financing upfront, a third-party financier will provide the cash to the production company. The distributor will then guarantee repayment once the production company delivers the completed film. Numerous legal documents govern the relationship between these parties and other third parties.
If you need help with your startup production company, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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