It is not unusual for parties to negotiate an agreement with greater emphasis on the provisions applicable during the term of the agreement than on those applicable following its termination. That being said, some of these post-contractual clauses can have a significant impact, particularly financially, on the parties. This is particularly true of the post-contractual commission clause found in management contracts (commonly known as the sunset clause). Let’s take a look at this clause.
Please note that this blog post does not constitute formal legal advice, but rather legal information. If you have any questions about sunset clauses or a management contract, please contact us!
What is a sunset clause?
In the context of a management agreement, the sunset clause allows the manager to continue receiving commission after the end of the agreement. The purpose of this clause is to reward the efforts made by the manager during the term of the agreement, bearing in mind that the results of such efforts are not always immediate and often have an impact on the career of the other party, even after the contractual relationship has ended.
Close attention should be paid to the sunset clause: if the other party ends up finding another manager, sums could be paid to both the current and former managers. In our experience, artists are often unaware of the sunset clause in their management agreement until they are ready to terminate it, leading to financial impacts that are often unexpected.
How is the sunset clause structured?
The name of this clause is rather revealing of its structure. Like a sunset, the sunset clause is usually (and ideally) structured in such a way that the commission payable after the termination of the agreement decreases over the years. Regressive percentages will therefore be stipulated in the agreement, depending on the duration agreed by the parties for the payment of this commission.
What are the main components of a sunset clause?
Three elements are usually addressed in a sunset clause: the duration of the clause, the revenue streams on which the commission will be calculated, and the applicable commission rates.
Duration
Close attention should be paid to the duration of the sunset clause. Despite the reference to the sunset, sometimes the clause is drafted in such a way that the sun takes a very long time to set, or never sets, and the manager ends up receiving a commission in perpetuity.
The duration of the sunset clause will usually be expressed in increments.
For example:
- 1st post-contractual year: x%.
- 2nd post-contractual year: x%.
- 3rd post-contractual year x%
Revenue streams
On which revenue streams will the manager continue to receive a commission during the agreed post-contractual term?
- On all revenue streams?
- Only on renewals of agreements entered into during the management agreement?
- On all agreements signed with specific clients after the end of the management contract?
There are a multitude of ways of doing this to ensure the clause is fair to both parties.
Commission rates
As mentioned above, sunset clauses usually provide for regressive commissions during a specific term (although it is possible for the parties to proceed otherwise).
For example:
- 1st post-contractual year: 15%.
- 2nd post-contractual year: 10%
- 3rd post-contractual year: 5%
The creativity that can sometimes be found in compensation clauses applicable during the management agreement can also be applied to commissions applicable post-contractually. For instance, different rates could be indicated, depending on the type of income.
If you have any questions about sunset clauses, or if you need assistance in drafting or revising a management agreement, please contact us!
