how football transfers actually work: player contract negotiations
Inside Reevaldo's transfer: Part 3
The sports law team at Mills & Reeve have been involved in countless international transfer negotiations and have sat on both sides of the table, we thought it might be useful to show how a typical deal gets done, from start to finish. Don't miss the footnotes --> 1 <-- which contain links to useful documents as well as additional insights on industry practice.
This is the third of four posts taking you inside the transfer and contract negotiations between Paddington United, Maracanã, and Reevaldo.
In our last post, we saw the transfer agreement between Paddington United and Maracanã.
Now, we'll take a look at the negotiations between Paddington United and Reevaldo's agent over Reevaldo's playing contract. We will also show you the heads of terms in his contract.
Wages
Once the transfer fee was agreed, Moreno began negotiating with Paddington over personal terms on Reevaldo’s behalf. Moreno was looking for a guaranteed salary of £50,000 per week for Reevaldo, but this would have broken Paddington’s wage structure. Additionally, Reevaldo was already certain to be one of Paddington’s highest-paid players, despite being unproven at this level.
Signing-on bonus
After coming to terms on wages – £40,000 per week – Moreno also negotiated a signing-on bonus for Reevaldo, worth £1 million. Moreno originally wanted the full signing bonus to be paid to Reevaldo immediately, or at the latest, in two instalments of £500,000 over a three-month period. However, Paddington had to explain to Moreno that Premier League rules dictate that signing-on bonuses must be distributed in equal annual instalments over the length of the player’s contract.2
The signing-on bonus will be paid over five years on 1 September. Moreno asked for the bonus to be distributed in May, before the transfer window opened, but Paddington insisted on September. As it wasn’t a major issue, Moreno acquiesced, but the timeframe for which the bonus is paid is important.
Over the next four years, if Reevaldo hands in a transfer request during the summer transfer window and Paddington grants that request, the club won’t have to pay his signing-on bonus instalment due that year or in forthcoming years. Generally, if a club sells a player, the club must pay the player any outstanding balance of the signing-on bonus. However, this does not apply when a player hands in a written transfer request and the club then sells the player.3 This is why Moreno had hoped to see the signing-on bonus instalment paid in May, as Reevaldo would be assured of collecting that year’s instalment even if he asked for, and was granted a transfer in the summer window.
Bonus payments
Moreno was also able to extract a number of additional payments from Paddington, including three appearance bonuses of £100,000 each after Reevaldo makes 25, 50 and 75 league starts. Moreno attempted to have these starts accrue across all competitions, i.e. where domestic and European cup matches would be included. However, Paddington was insistent upon these bonuses including league starts only.
Moreno also secured £8,000 to help cover Reevaldo’s accommodation for the first few months he’s in London and up to £8,000 as a tax-free allowance for Reevaldo’s costs in relocating from Rio to London.4
The remaining negotiations were about the trigger for additional payments to Reevaldo. Paddington were concerned to ensure that any uplift paid would be conditional on their Premier League status being retained (i.e. conditional upon Paddington not being relegated back to the Championship). Paddington were also anxious to ensure that should Paddington be relegated, Reevaldo’s salary would be cut, as club revenues substantially decrease upon being relegated.
Eventually, the parties agreed that Reevaldo would receive weekly wage increases of £5,000 if and when he scored at least 20 goals across all competitions in any one season, and conditional upon Paddington remaining in the Premier League.
Paddington had originally demanded that these goals must be scored in the Premier League in order for Reevaldo to trigger the wage increase. However, as a trade-off for acquiescing to Paddington’s insistence that only league starts be counted towards the appearance bonuses, Moreno was able to persuade the club that goals scored across all competitions should count towards the total.
Other issues
Under the dual representation agreement, Paddington is responsible for paying all of Moreno’s agent fees. However, since Moreno acted for Reevaldo on negotiating personal terms with Paddington, 50% of the £570,000 fee Paddington owes to Moreno is regarded as the value of the intermediary services provided to Reevaldo, i.e. “player services”.5 As such, Reevaldo will have to pay tax on this amount as a “benefit in kind” that he has received from Moreno’s services, even though Paddington paid for these services in full.6
A brief discussion was held with respect to a separate image rights deal for Reevaldo with a view towards his future commercial potential.7 It was decided that a separate deal would not be appropriate at this time given that HMRC might balk at the club asserting that an eighteen-year-old with no international experience and just one year of professional football experience – in Brazil – has independent commercial value to Paddington. Additionally, Premier League clubs have the right to use players’ images in commercial contracts under the standard Premier League player contract.8
Reevaldo’s agent Jaco Moreno has taken an extremely active role in this deal, but where is Reevaldo himself in all of this? In our next post, we’ll focus on the player – agent relationship during these negotiations.
Heads of terms
These are the personal terms agreed between Reevaldo (through his agent) and Paddington. Typically, they would be included in Schedule 2 of the Standard Premier League Contract or in an Annex of a bespoke contract.
Much of the twenty-eight page Standard Premier League Player Contract is boilerplate. Schedule 2 of the contract details the player's compensation and bonus payments.
We regularly advise clubs and players on the bespoke terms of the employment contracts specific to the relationship between the player and his or her club.9
REEVALDO MARCELO DO TIRANO
HEADS OF TERMS – PLAYING CONTRACT
SUBJECT TO CONTRACT
Duration: From signature to 30 June 2021 (five years)
Gross basic wage:10 £40,000/week (£2,080,000 annual salary) if Club in Premier League
£35,000/week (£1,820,000 annual salary) if Club in Championship
£16,000/week (£832,000 annual salary) if Club in League 1
£8,000/week (£416,000 annual salary) if Club in League 2
Salary increase:11 Gross weekly wage will increase by £5,000 in the following season if
the Player scores at least 20 goals in all competitions in any one
season, provided the Club remains in the Premier League
Signing On fee:12 £1,000,000 in five equal instalments on 1 September of each year
Appearance bonuses: £100,000 after the player has made 25 league starting appearances
£100,000 after the player has made 50 league starting appearances
£100,000 after the player has made 75 league starting appearances
Accomodation: £2,000/month for the first four months of the contract
Relocation: The Club will reimburse the Player all costs directly and reasonably
incurred by him in respect of his relocation to accommodation in
London, subject to the production of evidence of payment, up to a
maximum of £8,000 excluding VAT.
Agent fee:13 £570,000 paid in five equal instalments on a dual representation
basis, provided the Player remains a registered player of the Club on
the date for payment:
£114,000 on 1 September 2016
£114,000 on 1 September 2017
£114,000 on 1 September 2018
£114,000 on 1 September 2019
£114,000 on 1 September 2020
Release clause:14 If a club, which is not a Premier League club, offers the sum of no less
than £20 million for the permanent transfer of the Player, the Club
agrees to discuss in good faith the possible transfer of the Player.
Pretty cool, right? ↩
For Premier League contracts lasting for more than one year, any signing-on fee must be paid in equal annual instalments (see Premier League Rule T.17). ↩
See Premier League Rule T.18. ↩
The relocation allowance is tax-free under the exemptions set out in Chapter 7 of Part 4 of the Income Tax (Earnings and Pensions) Act 2003 and Schedule 3, Part VIII of the Social Security (Contribution) Regulations 2001. ↩
The £570,000 fee represents 5% of Reevaldo’s guaranteed gross income (wages plus sign-on bonuses) over the term of the contract. Here, Reevaldo’s wages can be reduced considerably if Paddington is relegated to the Football League, but Moreno was able to convince Paddington to pay the fee based on Paddington remaining in the Premier League for the duration of Reevaldo’s contract and imputing his £40,000 weekly wage to calculate Moreno’s fee. ↩
The relevant HMRC form is called the P11D form. ↩
In practice, football clubs don’t enter into image rights deals with the player directly. Rather, the club will enter into a separate deal with the player’s image rights company. ↩
Stay tuned for an article focusing specifically on image rights deals.
↩
These are useful to protect the rights of players or clubs in situations not envisaged in the Standard Premier League Contract. ↩
Many clubs will include relegation clauses in their playing contract, even if the club doesn't immediately appear to be in danger of relegation.
The decrease in revenue that comes with being relegated is sharp, to put it mildly, and clubs can help mitigate this by negotiating for substantially lower wages should the club be relegated.
However, established and ambitious players may balk at signing for a club which admits that relegation is even a possibility, so clubs must tread carefully when proposing these clauses. ↩
This is a performance bonus that will be due if Reevaldo exceeds expectations. Variable pay contingent upon team and individual success is becoming more common. ↩
Signing-on fees can be a significant part of the player's overall compensation package. As discussed, the signing-on fee alone adds the equivalent of nearly £4,000 per week (or nearly 10%) to Reevaldo's wage. ↩
Note that Paddington staggered the instalments over the duration of Reevaldo's contract, and Moreno will only collect the full amount if Reevaldo remains a Paddington player for five years. ↩
This is known as a "good-faith" release clause and does not place Paddington under any obligation to sell Reevaldo if a club outside of the Premier League bids over £20 million. Rather, it only obligates Paddington to enter into a good-faith discussion with the bidding club if the trigger is activated. ↩