Helpful information
Any Recording Agreement is a formidable document which even the most experienced music business attorney will find difficult to comprehend on a first reading. Anyone who is not an attorney is likely to be confused if presented with the copy of the document and is told to read then sign it. This summary has been prepared as a general explanation of recording agreements and does not explain any specific agreement. I do hope that this explanation will enable you to read any agreement with some basic understanding of all details involved and will prompt you to ask questions on the specific agreement with which you're involved.

1. Before the agreement
Most groups have probably been working together for a while before they actually sign an agreement. All financial records related to expenses and income should be kept from day one. They should also be made available to the groups accountant as soon as possible. The accountant can then establish the fact that the group has had trading years before they signed agreements which may be advantageous from a tax point of view, because it's better if substantial advances do not come in the groups first year of trading. This should be discussed at an early stage with an accountant.

2. Duration of the agreement
Most agreements are presented as if they can only last for a maximum of five years but this is rarely the case. What is important is how many albums the record company is able to ask for. If they are able to ask for eight albums then the agreement will last as long as it takes for eight albums to be properly recorded, releases and promoted (probably about ten years f.e. Dire Straits have done four in about five years). However if a record company loses interest in an artist then the recording agreement may last twelve months or less.

3. What you will be paid
The record company will make two types of payments: advances and royalties. Advances are pretty straight forward but remember that the majority of them are only payable if the record company decides it wishes to continue with the agreement. Royalties are the payments that the recording artist is entitled to receive as recording artist (as opposed to songwriters) in respect of every record sold by the company and not returned to the company. The calculation of royalties is a complex subject involving a large number of factors.

Example:
Let's say the royalty is 10% of the retail price payable in respect of 90% of sales:
1. the 90% means that the royalty will only be paid on 90% of sales, i.e. for 10% no royalty will be paid at all.
2. the retail price is calculated by a formula which is linked to the company's dealer price and a market survey of retail prices.
3. from the retail price the company deducts packaging costs (could be 15% for an album) and VAT.
4. the record company then pays the artist 10% of that price and if a group the artist shares those payments among themselves and their management.

A. No royalties are paid until all advances and recording costs have first been recouped from royalties.
B. The record company will pay 1/2 rate royalties or no royalties in respect of the following sales:
1/2 rate:
budget records, TV advertised records (this is a very dangerous clause - you could sell 200,000 copies or more in respect of Album 1 and the record company could advertise the next album on TV from the beginning and pay you half rate royalties on all sales of such album. They can even put out an album, sell a lot of copies the advertise on TV and apply the half rate to previous sales), sales to armed forces, compilations, premium records, multiple record sets, 12" singles, colored vinyl sales, picture discs, mail order sales and others.
No royalty:
deletions, cut outs, free goods, promotional copies.
C. The royalty quoted will almost always be inclusive of producers royalty and so any payments to a producer will be deducted from royalties payable to the artist.
D. US royalties: industry practice in the USA means that your royalties will suffer very large reserves provisions in respect of sales in the US. American companies also operate a 'free goods' scheme to dealers which means that there are a very large number of records for which you are not paid. This can be as many as 50% of singles.

4. When you will be paid
If any royalties are due they are normally paid on March 31st and September 30th of each year sales outside the record company's country and sales by third parties (f.e. K-Tel) may take as long as two years from the date of sale to the date of payment of royalties. If the company does not get paid you won't get paid. In any event no royalties are paid until advances, recording costs, video cost and tour support are recouped. All of these are recouped out of your royalties after deduction of the producer's royalties. I.e. the producer does not contribute to video or recordings costs or your advances or tour support.

Example:
if a group:
A. receives an advance of $50,000
B. spends $100,000 on recording costs
C. has three videos made at $15,000 each (assuming only 50% recoupable from record royalties)
D. receives $20,000 tour support
then it will need to sell about 450,000 albums to recoup such payments and by that time may well have received further advances, incurred further recording costs etc. Some of the recording costs e.g. remixing costs, cutting costs, producer advances etc. may well be outside of your control.

5. What you have to do
You must record a certain number of recordings for the record company. The producer, the title and the studio will be selected by the company. The contract will be an exclusive contract so you may not record for anybody else nor even do session work. You will almost always need the record company's permission to do any instrumental only works (this can obviously be very important in the context of dance music especially).

6. What the record company does
In practice a great deal but as far as the recording agreement is concerned very little. It will agree to make recordings, pay advances and royalties, but will not often commit to releasing the recordings. This can be a real source of frustration if you and the company disagree over the quality of the product you record.

7. Who controls the recordings?
The record company takes the view that it pays for the costs of making the recordings, takes the risk and therefore will own and control the recordings. They will own them forever and will have complete marketing control so that they will decide if and when to release the recordings, how many singles will be taken from an album, what the artwork will be, how the records will be released and where they will be released.

To quote two extremes:
A. your recordings may never been released
B. they may be released in every country and every format including record clubs, readers digest packages, K-Tel compilations, Greatest Hits packages or in TV advertisements (Sting objected to 'Don't stand so close to me' being used in a TV advert but could do nothing about it). You will have lost all control of the recordings but you will be paid royalties in respect of all such users. The company will also be able to use your photographs, biographies and likenesses in connection with all such uses. The record company will claim all rights in respect of every recording made during the term of the agreement even if they did not pay for them and even if they were not intended for release.

8. Your obligations
In practice, provided that you do your best to record in time to the best of you ability, any responsible record company will leave you alone but the recording agreement will list a number of obligations that you should consider very carefully. A few common ones are:
1. the songs you record must not be defamatory or obscene
2. you must be free of any other recording obligations
3. you must not record for anyone else
4. you must not re-record any of the recordings for anyone else
5. you must be prepared to make personal appearances in connection with the recordings
6. you must own the name that you use professionally.
It is very important to be aware that in the case of a group of artists (as opposed to a solo artist) the liability under the recording agreement is designed in such a way that all the members of the group are liable for a breach by anyone of them.

9. If you leave as a member of a group
The company will still have control over your exclusive recording surfaces under the terms specified in the agreement and the company will almost certainly be entitled to terminate the whole agreement if any one person leaves. In addition if you leave towards the end of an agreement it is very likely that you could be tight to the record company for longer then if you had stayed in the group. Remember also your joint as well as several tax liabilities. The record company also ends up controlling the group name so that leaving members could not use the name once they left even if they were the founder members. It is important that the only people who signed the agreement are those that everyone expects to stay in the band for the foreseeable future. If people leave who have signed it it will cause expensive legal problems for all concerned.

10. The 75% mechanicals clause
Put simply in respect of the USA and Canada even though the respective governments have provided that a certain amount must be paid to songwriters in respect of every record sold, the record company will specify that they will only pay 75% of that amount and will pay 75% of the amount applicable at the date of recording (or when it should have been recorded if earlier) even if the rate goes up.

Cover recordings can actually eat into your recording advances and royalties. This is because normally the publishers of the cover songs will not accept the 75% clause and so the record company will have to pay 100%, but they will want to recover the extra that they pay from you recording and/or publishing income and if you end up doing a number of covers it can very seriously erode your income. If a producer or a friend or indeed anyone other then someone who has signed the record agreement write songs for you or you record songs they have previously written it is important that they accept this clause in writing. Your management should be told by you to contact them. An established songwriter may refuse to accept the clause but it's always worth a try. An approach should be made to their publisher and it has to be made a long time before you record the song.

11. Prior recordings
You should draw up a list of all recordings (not just under a group name but as a session man, previous group, etc.) you have ever made listing the following:
A. demos and who owns them
B. all released Masters and who released and owns them
C. all unreleased Masters and who owns them.

12. The group relationship
When a number of people perform together as a group you have formed what in legal terms is described as a partnership. This is quite a complicated arrangement but most importantly you should be aware that you are all liable for the group debts. Equally important you must be aware that if one member of the group does not pay his/her tax the others can be liable for it even though they have paid their own tax. It's important to have a good accountant and to ensure that he ensures that everyone pays their taxes. It's not very fair for one member to pay his taxes and the other to spend his money on wine, women and song only to find the sensible one has to pay more to compensate for the other's good time. Some accountants approach the inland revenue and agree with the revenue that the group is not a partnership but a collection of individuals and that there is no joint and several liability for the groups taxation. Each member would then only be liable for their share of tax on their share of profits only.

NOTE
This explanation is only a general guide and cannot be a substitute for reading the specific agreement to be signed and asking questions about any part of that agreement that you do not understand.

Read also the do's and don'ts