Recording Contracts

A recording contract or record deal is a legal agreement between a record company and a recording artist which sets out conditions and expectations and obligations of both parties. The record company agrees to promote and sell recordings of the artists performances. It is important that any legally binding contract that you intend to enter into is drafted by a suitably experienced music solicitor.
There are basically three types of recording deal. The exclusive deal, the licensing deal and the development deal.
1. The Exclusive Deal
The exclusive deal is a commitment from the record company to invest in an artist in return the artist is bound to that record company for a specific period. Conditions laid out in the contract will mainly depend on how much creative control the artist wants.
This type of deal can restrict an artist and also stops them working with other record companies. Most record companies will want you to assign copyright to them which may still be owned by the record company after the term of contract has expired.
New artists starting out do not have much bargaining power therefore handing over copyright gives the record company a better chance of recouping advances and investment over time. If the record company is restricted over what copyright they can own, then any advances given to the artist will be smaller.
Advances are in effect a loan which the record company expect to be able to recoup from record sales, royalties and licensing of your music for other uses.
2. The Licensing Deal
The licensing deal allows the artist to retain all rights including copyright and have all rights to their work returned to them once the contract has come to an end. The record company still has the right to manufacture, distribute and sell recordings. Whilst the artist still has artistic control and over a period of time the artist is able to exploit those rights as they wish.
With a licensing deal big advances are not given, therefore artists are not in a position to rely on a record deal to live on. This kind of deal suits artist with an existing publishing deal who are already making money from their songs i.e. songs covered by other artists or used on TV or films etc.
3. The Development Deal
The development deal is when a record company isn’t willing to offer an exclusive deal but they are prepared to invest in improving and developing an artist.
Although these types of deals are sometimes helpful to an artist the record company, very often take control of management and publishing rights as well as copyright on anything you record with them. With the development deal there is usually low advances and investment in recording.
It is also worth considering making your own recordings independently as it is relatively easy and cheap to do so.
In all recording contracts regardless of which type you would expect to find some of the following terms:
Exclusivity - The artist is bound to one recording company for the term of the contract.
Term – The length of time of the contract.
Minimum Commitment – There will be a minimum commitment for each period (usually means delivering an album). Delivery is a legal term, indicating recordings must be of a technical and artistic standard acceptable to the label. There will be some kind of clause indicating that the songs must be of a "commercially acceptable standard".

Option Period – Once the Minimum Commitment has been fulfilled, the company has a period of time to decide whether or not to exercise the next option.
Release Commitment – It’s important that there is a positive obligation on the record company to release recordings you deliver (if your records are never released, you will not earn royalties).

A release commitment usually specifies that the record company has to release the recordings in the UK within 120-180 days from Delivery. If they don’t, the artist can send them a 'notice to release'. The record company usually then has 60-90 days to release the recordings.
If the record company still doesn’t release the recordings then the Artist should be allowed to terminate the contract. There should also be some way for you to force the record company to license the recordings to another label, so that you can release them elsewhere.

Advances - Advances are really loans, until you start making money from the records you sell. You get a lump sum which the record company recoups from your share of the profits.

Consequently, you won’t receive a royalty cheque until the record company recoups all of your advances (and recording costs).

What the advance pays for - Your advance will have to cover management commission, legal and accountancy fees, new equipment. You'll have to pay Income Tax on it and you will also need money to live on.
Anyone signing a record deal would do well to discuss their financial requirements with a specialist accountant prior to negotiating the deal. They can assess whether the advance is realistically enough to cover everything.

Amount - The level of advances varies considerably.
Types of Advance - Recoupable or Recoverable - It's important that an advance can only be recouped from your recording royalties. Therefore if the record company don’t take up an option to extend your contract, they can't take any money off you personally, they can only recoup by selling records.

'recoverable' advance means that the record company can recover their money from any of your income sources and you'll have to pay it back.

Recording costs – These can be included or excluded from any advance you are given. There are advantages and disadvantages to both.

Royalties - There are three main ways a royalty might be calculated under a recording contract.

1. Net Profits - This method is usually used by small record companies.

The record company recovers costs from the initial sales and then you and the record company split the rest of the money that the record makes, usually split 50/50. It’s important to agree in advance what an ‘expense’ is.

2. Published Price to Dealer - The Published Price to Dealer (PPD) is basically the highest amount for which the record changes hands before it's sold to the public. That means the price a shop buys it from the label or their distributor.

A label will publish its dealer price when it presses the records. The artist will get a percentage of the PPD for each record sold, usually 15-19%.

3. Retail Price - With this kind of deal, your royalty is a percentage of the price that the record actually sells for in the shops. All you can say for certain is that the royalty rate for retail is lower than that for PPD. That's because the retail price is higher as it includes the shop-keepers' mark-up. Whether you win or lose by using PPD or retail price is up to your solicitor.

Different Levels of Royalty - Record companies will usually pay different (lower) royalty rates for singles and for overseas territories. Often they break down these reductions further into Major Territories - Europe, North America and Japan among others - which will have a lower rate than the UK.

Then there'll be Rest of the World which would attract the lowest rate. These rates are all the subject of a lot of negotiation and again depend on your solicitor and your track record. In a recording agreement there are normally pages and pages of other provisions explaining where and how a record company can reduce the royalty rate.

Royalty Increases - Your royalty rates should increase throughout the term of the recording contract so that you are paid higher rates for later albums as you become well known as an artist. You should also try and negotiate a sliding scale so that your cut of the proceeds go up as you sell more of one particular album. An artist would also expect an increase if a disc goes Gold (selling over 100,000 units in the UK) and Platinum (over 300,000). 

Territory - Major deals usually cover at least the World. A few artists manage to carve certain territories, such as the USA out of the deal, allowing them to do a separate deal for that territory. As an alternative you could start with just one territory such as the UK and then extend into Europe if that’s a success. Major record companies are extremely reluctant to enter into this kind of deal.
Packaging Charges - Record companies deduct a "packaging charge" before they calculate your royalty, usually 25% for CDs. If your deal says you get 15% of the retail price you might expect to get £1.50 from a CD selling for £10. In fact, by the time you've taken off the packaging charge, you'll get £1.20. This doesn't really reflect the cost of packaging CD’s at all but is another device for your record company to increase profits.
Giveaways - Record companies normally only pay royalties on records actually sold. Therefore the record company won’t want to pay royalties on any freebies given away to promote the record whether to DJ’s, journalists or to shops. It is very important that this kind of thing is kept under control.

Creative Control – This is a big area for negotiation and how much of it you keep is again dependent on your solicitor's bargaining skills and your track record as an artist.
Creative control covers a number of areas such as control over whom you can record with, choice of songs to record, which director you want working on your video and even control over how your recordings can be exploited i.e. which films or TV adverts can use your work or even political parties. You may also want control over which artists can sample your records. You may also want rights of approval over video and recording budgets. These expenses are recoupable from your royalties so you want to control how much of your money they can spend. 
There are three stages of control over this, the draft contract may not mention this and you'll find yourself with no control at all unless your solicitor adds it in. The next stage is the 'right of consultation'. That's where your record company has to ask you but don't necessarily have to go with your wishes. The third stage is Right of Approval, the record company can't make a creative decision without your say-so.

Re-recording Restrictions – This means that if you record a song while you're under contract to one label, you can't go away and record it for another. The restriction usually lasts for a period of 3-5 years from the end of your contract.

Accounting - You should ensure that there are adequate accounting provisions and receive statements at least twice a year. You should also be allowed to inspect the accounts if you wish.

Other Considerations – Other things you should think about when you're negotiating a record deal:

Extra tracks - Try to limit the number of extra tracks such as B sides and bonus tracks, that the company ask for, 4 extra tracks per contract period is reasonable. The record company should not be allowed to release demo recordings without your permission.

Reserve against returns - A major record company pays artists royalties on the records that they've actually sold. The problem is that shops will often want to stock records on the basis that they can return what they can't sell. A 'Reserve Against Returns' allows the record company to hold back a proportion of money in case records are returned.

Record companies usually want to hold back 25% it’s advisable to try and negotiate this down to 10%. You should also limit the time that they can hold the money back, a year is about right.