Jeremy Roberts, a partner and
head of broadcasting & content distribution at UK legal firm
Sheridans, explores the potential threats posed by further Covid-19
restrictions once lockdown is over and provides a five-point plan to keep shows
on track.
From what we currently know of
Covid-19, even after the pandemic ebbs and the current lockdown is lifted,
there is a high chance of future flare-ups of the virus, leading to further
restrictions.
As a result, each new production
will face a new ‘known unknown’ risk – the chance of another lockdown, meaning
potential absences of onscreen talent, cost overruns and delayed delivery.
Laying off production risk
To appreciate the potential scale
of the problem, look at the production model for high-end drama.
Buyers – broadcasters, VOD
platforms and distributors – commit to paying large fees in return for the
future delivery of programmes. By and large, those fees are fixed. Buyers don’t
pay more if the programme ends up costing more to make. The producer bears the
risk of cost overruns.
However, the producer has various
ways of laying off that risk: experienced production managers create the
budgets, those budgets contain contingencies for unforeseen costs, many
productions have completion bonds – a guarantee by a third party to step in to
complete and deliver the programme – and, of course, all productions are
covered by insurance.
These protections are so robust
that banks compete amongst themselves to provide the low interest loans that
most producers of high-budget scripted content need to finance their production
costs.
The impact of Covid-19
Those banks will not lend unless
producers can demonstrate that they can produce and deliver the show, come what
may. In the face of future shutdowns, they can’t. Similarly, buyers will be
loath to commit to paying large fees if there is a significant chance the
production will be shut down, delayed and almost certainly go over-budget.
In normal times, we would look to
insurers, but they are now excluding this and other pandemics. Some coverage
will doubtless re-emerge – perhaps covering limited shooting blocks, or cast
and crew carrying a form of ‘immunity certificate’ – but it will almost
certainly not offer full protection.
The existing government measures
will probably extend to any future shutdown too, but they fall some way short
of underwriting all additional costs caused by any future restrictions.
Producers and buyers want to line
up productions ready to go as soon as the current restrictions are lifted, but
the route to greenlight looks harder than ever.
The way forward
We have reviewed the issue with
various stakeholders, and here is what we will be advising our clients:
- The soft close: Producers, buyers and financiers should use the current hiatus to agree all of the transaction agreements as much as possible, leaving the unknowns like dates and insurances to be dropped in once the situation clears. The default position is that sufficient insurance cover to satisfy the lending bank will be required for full closing. At the moment, it is far from guaranteed that will become available. If the stakeholders want to remove that uncertainty now they will have to manage and allocate the risk amongst themselves.
- Shutdown contingency plan: Approval of
detailed contingency plans quantifying the anticipated costs for
restrictions of different lengths and at different stages of production
should be a new condition precedent to full closing. Producers will have
to plan in advance how they will mitigate the costs of future shutdowns
for each new production. Those costs fall into two buckets: extra interest
on the loans and the extra costs for on-camera talent, crew, staff and
suppliers. Interest rates are so low that the extra interest payments can
be covered by a small increase in the contingency. The other costs are
harder to mitigate. Producers will have to negotiate the ability to
suspend production in all their agreements with cast, crew and suppliers
with as little outlay as possible. In practice, this will be hard for the
main cast who may be scheduled to appear in other productions after the
shoot dates.
- Sharing risk: Even with the best
planning, producers will not be able to get the shutdown costs to zero.
Producers will face pressure to underwrite the costs. They shouldn’t – at
least, not on their own. If another lockdown happens and producers are
left carrying the cost, many will go under leaving unpaid debts and an
industry poorer for their absence. Generally, buyers are in a better
position to assume some financial risk, but we should not expect them to
bear it all. If we do, they will inevitably be forced to reduce their
exposure by ordering fewer shows. That would hurt the sector’s recovery. Producers
and buyers will need to find a compromise. For example, they could share
the costs equally up to a defined point – thereafter, the buyer could
decide whether to fund additional costs themselves or abandon the
production.
- Buyer’s flexibility: In any event,
buyers will need to show flexibility, for example, by accepting delayed
delivery times and, at worst, changes to essential elements caused by
future shutdowns, without penalty to the producer.
- Cast and crew: Pact, Equity and Bectu –
the industry representatives for producers, cast and crew respectively –
are working to agree industry-wide terms that will cover future shutdowns.
Rightly, Equity and Bectu are fighting hard for their members, but they
should bear in mind that, the more robust the protections for cast and
crew, the higher the costs of a shutdown. In turn that will mean that
fewer shows get made, hurting their members. They should accept more
flexibility than they would otherwise like for the greater good.
There are still a huge number of
unknowns – such as whether or when people with immunity to Covid-19 will be
able to return to work outside of their homes – but producers cannot wait for
these questions to be answered.
The best case scenario for the
industry as a whole is for producers to use the current shutdown to line
themselves up to start production as soon as possible once the current
restrictions are lifted. That means agreeing terms with buyers, cast, crew and
banks now, leaving as few unknowns as possible to be filled in on full closing.
All the stakeholders need to take
a sensible and flexible approach. If they don’t, the damage to the UK TV
economy could last months or even years after the current restrictions are
lifted. If they come together, they will give themselves and the industry as a
whole the best chance to bounce back quickly.
Jeremy Roberts is a partner
at UK legal firm Sheridans specialising in all aspects of the TV sector, and is
head of the firm’s broadcasting and content distribution practice. His clients
include award-winning high-end drama producers, US studios, major broadcast
networks, sports media rights owners, and some of the UK’s best known on-camera
talent.
