4.0 Recoupment and Deferment

4.1 UK and US Approaches

Most UK record companies will agree to account to the producer for his royalty subject only to recoupment of his advance. Some UK companies follow the example of the US record companies which invariably refuse to pay any producer royalties until the recording costs have been recouped. In the worst cases, the producer’s royalty will actually be used towards recoupment of those costs. In most cases, however, the record company will simply agree to a deferral so that the producer’s royalties will be paid calculated from the first record sold (subject of course to recoupment of the producer’s advance) but only if sales are sufficient to enable the recording costs to be recouped from the artist’s royalty.

4.2 Example

By way of illustration let us again assume a gross artist royalty of 16% inclusive of a 4% producer’s royalty. Let us assume that the producer receives an advance of £20,000 but that there are additional recording costs of £100,000. What will be the position if the 16% gross royalty generates say £100,000 of royalties? The 4% producer’s royalty would be worth £25,000 so that after recoupment of his £20,000 advance the producer at this stage is due a further £5,000 in royalties. However, if the contract provides that his royalties are to be deferred pending recoupment then no producer royalties will be payable until the recording costs net of the producer’s advance (i.e. £100,000 in this case) have been recouped from (usually) the net artist’s royalty (i.e. 12%). In this example, the net artist royalty so far amounts to only £75,000 so that there is an unrecouped deficit of £25,000 (so that no royalties will yet be payable to the producer).

If the next royalty statement discloses aggregate royalty income (calculated at the 16% gross rate) of £200,000 so that the producers 4% is at that stage worth £50,000 then the full £50,000 less only the £20,000 advance will then be payable because recoupment will by then have been achieved (i.e. the 12% net rate will have given rise to £150,000 which is, therefore, more than sufficient to recoup the £100,000 recording costs).

4.3 Pitfalls

If the producer is forced to accept deferment provisions of this nature there are various pitfalls to be avoided. Firstly, he should ensure that he does only suffer a deferment and that his royalties may not be used actually to recoup a share of the recording costs. Secondly, for this purpose recoupment should either be calculated by reference to the net recording costs (after deduction of the producer’s advance) from the net artist royalty (as in the above example) or by reference to the gross recording costs (inclusive of the producer’s advance) from the gross artist royalty. Also, for the purposes of calculating recoupment there should be a strict definition of recording costs. Most importantly, recoupment should not extend to any other costs which may be recoupable as between the record company and the artist (e.g. promotional video costs and tour support payments).