Passion investing: The Artful Dodger
Purchasing a serious piece of art for yourself or a client can be one of the largest investments you’ll make in your life, but you may not realise that having the money to make the purchase is just the beginning.
Past, high profile art purchases have included forgeries and fakes; a bewildering amount of art fairs to attend and never being quite sure you are paying way over market value.
With big budgets, how does a buyer ensure they are making a good investment? Navigating the art world requires effort, skill and expertise and with that in mind Citywealth’s April French Furnell questions art experts, fresh from Art Basel, for their insights.
“The most important consideration when buying a work of art is to understand what you are buying and who you are buying it from”, said Azmina Jasani, a senior associate in the art and cultural property law group of Constantine Cannon LLP. “The three major arts hubs of the world: London, New York and Hong Kong, recognise and uphold the legal principle of “caveat emptor” or ‘buyer beware’ which means a buyer is responsible for conducting due diligence before purchasing an item and where the buyer fails to conduct due diligence, he can be forced to deal with the consequences of his failure without any recourse”, Jasani added. “The first things to check are: whether the work is stolen, its provenance, whether it is authentic, its condition and to confirm its value by getting an independent appraisal”.
Major in art history
Of course, that’s easier said than done but there are certain scenarios that should raise red flags to a buyer. Such as if the seller is unable to produce documents that provide a complete history or provenance; if the artwork is not insured and if the seller is not forthcoming with information that you may find elsewhere, even on a Google search.
It’s also important to carry out official searches, such as with an organization called the Art Loss Register. “These searches can reveal issues with paintings, for example if a painting is subject to a dispute, has been stolen or is suspected of being an object looted by the Nazis. It is important to also consult scholarly compendia which are called ‘catalogue raisoneés’ which is a listing of artworks by an artist with descriptions that make them easily identifiable to determine authenticity”, said Fred Clark, an associate at Boodle Hatfield and member of the art law team.
“Due to staggering sale prices and the desire for confidentiality, fine art transactions are becoming increasingly complex and susceptible to fraud”, said Jasani. It’s therefore more important than ever that “buyers must protect themselves by confirming the veracity of their purchase”. In addition, who is selling the artwork is just as important a matter and “often gets overlooked” according to Amanda Gray, a partner in Mishcon Private specializing in art law. “Do your research on the dealer or seller, so that you feel comfortable with how they operate.”
“The journey of most art collectors starts with galleries and auction houses”, said Rudy Capildeo, an art law partner at Charles Russell Speechlys. According to the Art Basel and UBS Global Art Market Report 2019, 46 per cent of global art sales in 2018 were made at auction while the remaining 54 per cent were made by dealers.
When working with an art dealer, it’s important to investigate whether the dealer typically deals in the type of artwork, and if the dealer is an agent of the owner of the artwork, that the agent is authorized to sell that piece of art on behalf of the owner.
Sometimes, the reputation of a gallery precedes itself and it can be all too easy to rely on that gallery’s reputation but a Google search on a story about a New York gallery called, Knoedler Gallery, illustrates how convoluted an art purchase and consequent lawsuit can get.
The Knoedler Gallery was founded in 1846 in New York and was considered one of the most venerable art galleries in the US. It abruptly closed its doors in 2011, following a series of lawsuits for selling forged artworks. Knoedler’s sole manager and director at the time, procured a collection of forgeries, primarily Abstract Expressionist art, then sold more than 30 pieces of the art and when arrested in May 2013 confessed that the paintings were all created by a Chinese immigrant artist, Pei-Shen Quan, in his home in Queens.
Jasani commented: “A total of ten lawsuits were filed against Knoedler and Freedman alleging that they knowingly sold inauthentic works of art to their unsuspecting buyers, including to the Chairman of Sotheby’s Board of Directors, making approximately US$32 million in profit. The Knoedler litigation underscores the importance of conducting independent due diligence before buying art. Exclusively relying on the seller’s reputation or prestige is hardly sufficient.”
Forensics tell a new story
Even the best-known auction houses can succumb to art fraud. Earlier this year, a settlement was reached between Sotheby’s and British art dealer Mark Weiss over a portrait bearing Frans Hals’ signature, which has been part of a major Old Masters forgery. Sotheby’s, acting on behalf of Mark Weiss, sold the painting privately in 2011 to the American collector Richard Hedreen for $11.2million. James Martin, Sotheby’s director of scientific research and the founder of the Sotheby’s-owned Orion Analytical laboratory, declared the painting to be a modern forgery. In 2016, Sotheby’s refunded Hedreen in full, but filed a lawsuit against Weiss and Fairlight Arts Venture, the co-owner of the painting, to recoup its losses. While Sotheby’s has settled its claim against Weiss, Sotheby’s claim against Fairlight Arts Venture ended in a two-week long trial and is currently awaiting judgment.
Auction v private dealer warranties
Jasani points out that Sotheby’s authenticity warranty, usually given for a period of five years from the date of sale, would have enabled the buyer to cancel the sale and get his money back. By contrast, where a buyer purchases from a dealer, an authenticity warranty is rarely on the table. As case law demonstrates, courts are hardly sympathetic to buyers in scenarios where they buy art on an ‘as seen’ or ‘as is’ basis without any warranties. In such situations, there is no recourse for the buyer, unless the buyer can prove fraud on part of the seller or there is a breach of an implied warranty that cannot be excluded by law. “The importance of securing proper warranties from the seller by using carefully drafted sale and purchase agreements cannot be overstated”, said Jasani.
However, reputable galleries, caught in an unexpected storm, will often make a private settlement to avoid a scandal.
A further case earlier this year, again highlights the importance of conducting your own due diligence, particularly in the context of the price of the artwork. In this case, Gary Klesch, the famous American fund manager and industrialist, issued Court proceedings against Richard Green (Fine Paintings) of Mayfair, over two paintings he purchased for a total of €5m at The European Fine Art Fair in Maastricht saying he overpaid. Klesch discovered that the gallery had bought the paintings at auction for less than half the amount he had paid, less than a year earlier. Klesch alleges that the gallery had deliberately omitted the auction sales from the provenance information he received, and that he would not have bought them had he known about the previous sales. Klesch is seeking to rescind the sale, return the paintings, and recover his money, on the basis of the law of mistake. However, Becky Shaw, senior associate at Boodle Hatfield comments that: “Unfortunately these types of claims can be difficult, particularly if the Court decides that there has been a lack of proper due diligence by the buyer. Due to the principle of buyer beware, the Court may consider that Mr Klesch, could, for example, have looked up the paintings in the ArtNet database, or in auction records online, and found details of the previous sales. He could also have hired an art advisor or other professional to give him a second opinion or to carry out due diligence on his behalf.”
Bricks or clicks?
As buyers become more accustomed to making all sorts of purchases online, art is no exception. The Art Market Report estimates that in 2018 the online art market reached a new high of $6billion. Of this market, 4 per cent of collectors had spent $1million or higher on a work of art online. So how is the buyer to navigate this new marketplace?
Capildeo said: “Not seeing an artwork in person means the buyer is relying upon the resolution of the image on the website and the accompanying description. It may not be possible to see any damage or have a real feel for the work in terms of colours, material or size by looking at an online image. Having said that, provided the buyer is resident in the EU and provided there is no opportunity to view the artwork in person, they will benefit from consumer protections that exist for any online purchase allowing a buyer to cancel a purchase within a cancellation period which is normally 14 days after delivery of the artwork.”
EU consumer protection online
With this scenario the buyer does not have to give any reason for cancelling the purchase and must be given a full refund including the cost of standard delivery explained Capildeo. “Although they can be made liable for the costs of return as well as certain other specified costs. The key is to read the auction house’s online terms and conditions before purchasing”, he added. Given these protections, it might not be surprising to see online art sales increase throughout Europe.
Purchasing a piece of art can also have considerable tax implications that buyers should be aware of. Nic Arnold, Head of PwC Luxury Asset Advisory points out that the geographical footprint of the buyer and seller, and of course the art piece itself is often not considered until the last minute and can have a dramatic impact on the finances of the transaction. “Ownership is often transferred behind the closed doors of a free-port or ‘customs warehouse’, suspending a concern about indirect taxes until the piece is removed; but this doesn’t remove a need to think about other taxes. In some instances UK resident owners of artwork being moved to the UK will have to consider exactly what the artwork was originally purchased with to check they don’t trigger a tax bill of up to 45%. For transactions that take place outside a customs warehouse VAT maybe applicable and attention should be given to the location of the sale to ensure the tax implications are understood”, she said.
As with all passion investments, the key is to “remove the passion without removing the fun, gain as much knowledge as possible about the artwork prior to sale, and treat the purchase as you would any other high value transaction.”, finishes Capildeo.
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