Oral Agreement v. Written Agreement…That is the question.

The film business has often been notoriously known as a handshake business ¬— deals done at upscale bars, a few ideas written on a napkin, all while clinking overpriced martinis. That being said, the film industry is a high-risk business with millions of dollars at stake. An oral agreement becomes precarious when disagreements arise. Can an oral agreement obligate someone to invest, and/or are they enforceable in a court of law?

I am not a lawyer, and therefore will not opine on the legitimacy of an oral agreement and the plausibility of enforcement therein. That said, in order to mitigate that risk, as a producer, and someone who has worked on a myriad of equity and bank financed movie deals, I will say that it makes a tremendous amount of sense to get the terms and conditions of an investment agreed to and put down in writing prior to moving forward on any film production. This will avoid delays, cancellations and ultimately law suits.

As a rule of thumb, it is imperative to have all obligations — financial, timeline and deliverables — memorialized in writing, and signed by both parties. These writings generally begin with a term sheet, and then are expanded into a long form contract detailing the points and definitions of each term. If the film is wholly financed by an equity investor, those terms are agreed to between the financier and the producers, and bye and large no other parties are involved.

Such agreements are critical and necessary before any investor, lender or producer agrees to invest, loan, or put money into the production of any motion picture, because it outlines the terms upon which an investors’ funds are used, protected and would be recouped.

A customary financing/investment agreement would include, but would not be limited to, the following deal terms:

i. Amount of Defendants’ investment (based on an approved budget);

ii. Cash flow schedule (based on approved budget);

iii. Determinations between the parties on how budget overages would be handled, approved and paid for;

iv. Preferred interest rate on Plaintiffs’ investment (return on investment);

v. Securitization of investment;

vi. Definition of “Net” or “Adjusted Gross Receipts”;

vii. Profit participation amount;

viii. Position in “waterfall” for recoupment and profit participation.

However, when working on a bank financed picture, many entities are involved, including but not limited to a bank, a foreign sales representative, distributors in each territory, an equity investor(s) and possibly a tax credit provider, all of whom need to be protected, and included in the recoupment schedule.

In this scenario, it is general industry standard for the investor(s) to be a party and signatory to certain documents required by the senior secured bank lender, the completion bond company, and the collection account management company, which protect the bank and the investor’s interest in the collateral, in this case the movie.

When a film is financed in whole or in part by a financial institution such as a bank as senior secured lender, the bank requires any investor to be acknowledged in, and/or a signatory to, the documents listed in the bank “Closing Checklist.” These documents include, but are not limited to:

i. The Commitment Letter;

ii. Loan and Security Agreement;

iii. Note;

iv. UCC filing protecting investor’s interest in Jane;

v. Copyright Mortgage and Assignment executed by Borrower in favor of Senior Lender for filing with the U.S. Copyright Office;

vi. Completion Bond;

vii. Intercreditor Agreement;

viii. Collection Account Management Agreements;

x. Cash Flow Schedule.

The Intercreditor Agreement details the amounts and subordinating positions of each lender; the Collection Account Management Agreement (“CAMA”), reflecting the agreed upon terms regarding the order of the recoupment and profit participation waterfall for each lender and investor; the Cash Flow Schedule which is monitored by the bond company, as to the timing and responsibility of each investor and so on.

The requirement for an investor to have been identified in these documents is stated in the bank “Commitment Letter” and often reads like this:

“If any third person contributing funds to the production of the Picture has a security interest therein (e.g., a mezzanine or equity lender), then such person shall have entered into an intercreditor agreement with the Bank, deeply subordinating all of its rights and liens to the repayment of the Facility and the Bank security interest.”

These types of terms cannot be covered in an oral agreement. These requirements are put in place for compliance purposes, as it is important to know who it is providing equity contribution, so that they can be held responsible, as well as protected during the recoupment process.

If an investor is not listed in, at minimum, the agreements listed above, the safeguards to protect the investor’s financial interests, and those of the lending institution, do not exist. In the absence of any term sheets, agreements, memoranda, emails, documents or writings of any kind memorializing a commitment to invest, there is no reasonable basis for an investor to be obligated to invest.

This is a tremendous amount of information to consume, but the basic concept is simple.

Fully negotiated and detailed term sheets and agreements are critical to mitigate the risk and miscommunication that can lead to lawsuits and the loss of millions of dollars. It is judicious for these terms to be memorialized in writing and signed prior to funding of those investments to occur.