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19 May 2021

A wealth of advice: A spotlight on art - buyers beware

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Buying and selling art has recently come under the spotlight, following the UK's implementation of the EU's 5th anti-money laundering directive which contains specific processes that need to be followed by all auction houses, art dealers and art galleries (Art Market Participants, ("AMPs")) based in the EU and shall require all UK AMP's to be registered with HMRC in June 2021. The step has been taken in an attempt to curtail the perceived increase in money laundering associated with art, and to bring it into line with the standards which apply to other asset classes.

In the Middle East we have certainly seen an increase in the awareness of the benefits of art as an investment opportunity for UHNW families. "Art related events" and commercial activities connected to the art world, seem to be consistently increasing, with many famous works of art becoming coveted treasures.

Like all investments, acquiring art comes with an element of risk and due consideration of important factors relating to the art is essential. As such, I share the below questions and answers conversation with experts Roland Foord (Senior partner) and Alice Vink (Senior associate) from our firm's global art team regarding such matters, including the trends, the pitfalls to watch out for and the types of disputes that may arise, in relation to buying and selling art.

Q1. There are many pitfalls that one may be exposed to when investing in art, what are the common issues that you see clients being faced with and how can these be avoided?

Experience tells us that, when purchasing a work of art, a client will need to take particular care to check its authenticity, its provenance, that the seller has good title and any specific issues that may arise from the nature of the object such as its state of conservation or its origin. For example, in the area of antiquities great care is needed in due diligence to ensure that the antiquity has not been illegally excavated or exported and that dealing in it does not involve a breach of sanctions legislation. Acquisition due diligence is still not something that every buyer of a high value object does enough of and consideration should always be given to employing an expert to advise on authenticity and condition. In the right case suitable scientific tests can usefully be commissioned. Specialised provenance researchers can also be instructed where there are potential issues with the provenance.

Q2. What does provenance mean and why is it important in the context of buying and selling works of art?

Provenance refers both to the origin and the ownership history of a work of art. Provenance should ideally provide buyers with a chain of title stretching from the date the artwork was created up to the present day. However, that is not always available. A clear origin and ownership history of a work can support its authenticity, whilst an unknown origin and/or gaps in the ownership history may raise questions about the authenticity of the work and raise legal or ownership issues. Issues with the provenance of a work are not always suspicious. Sometimes they stem from a lack of records or from a desire for privacy in the changing of ownership.

A purchaser should always be wary of a work of art that changed ownership during 1933-45 in Europe as this work may have been a Nazi-era looted work and may be subject to restitution claims in the future.

In the context of antiquities, unless the antique can be traced back to the precise place it was unearthed and unless it can be shown that the unearthing was lawful, then that antiquity is without provenance. Where an antiquity is being purchased, the purchaser should be wary of an unclear origin as the work could have been wrongfully excavated and removed from its country of origin.

Q3. What recent disputes have you seen arise from the purchase of art?

With the increase in conflicts in the Middle East in recent decades, we are currently dealing with several disputes in relation to antiquities involving allegations of unlawful excavation and exportation. To avoid being involved in such disputes, it is recommended that when purchasing an antique from a region with conflict, it should be purchased from a reputable dealer or auction house and there should be a thorough review of the object's provenance. Where there are gaps in the ownership history or an unclear ownership, this may raise suspicions about unlawful excavation and exportation and diminish the value of the antiquity.

Other recent disputes include restitution claims relating to cultural objects that left their country of origin in tragic or questionable circumstances. An example of this is the Benin Bronzes from Nigeria. Whilst restitution claims have mainly been focused on Nazi-era looted art, there is an increase in countries demanding that their cultural objects be returned and museums are sometimes now more willing to consider voluntarily returning these culturally-significant objects to their country of origin.

Finally, we are also seeing disputes in relation to fakes, forgeries, and misattribution. We recently acted for Mark Weiss Limited, an established London Old Master dealer, in a dispute over a painting sold privately through Sotheby's. The painting was a recent discovery which can be a warning sign, but its authenticity was supported by all the leading connoisseurs of the artist. Modern materials were found in the painting and Sotheby's purported to unwind the sale saying the painting was a forgery. They reimbursed the buyer and sought to recover the price paid from our client and its co-seller. The scientific evidence relied on was disputed and the case illustrated that scientists, as well as connoisseurs, can disagree on what they see.

Q4. Do you advise many family offices in relation to the purchase of art and are you seeing an increase of interest from family offices and individuals?

Art has always been a popular asset class; it's a thing of beauty which appeals to something emotional as well as being a popular investment. It's rare that a family office or an individual interested in acquiring art buys only one piece. More often, those first forays into the art world are the start of an obsession.

We are fortunate to be able to advise clients (both family offices and individuals) on the purchase of art, and from all angles. We help with the structures to hold art, how to protect artworks once acquired, disputes and disagreements relating to the works and who owns them, as well as how to move them around the world and pass them on safely to the next generation. For many art lovers, the decision to create an art collection (whether through the family office, or personally) is as much a desire to build a legacy for future generations; a different means of leaving a piece of their identity for their children and grandchildren.

I think we see two contrasting approaches to art amongst our clients: the one where the current owner is the present custodian of the piece, enjoying it for a time but ultimately seeing it as their gift to preserve it for the future; the other where the work is an investment, to be sold, like other investments, at a time when the market has shifted in its favour. We're currently seeing a shift in the perception of the place of art within the wider investment portfolio, with younger investors in the art market increasingly viewing art as a short to medium term investment. In general, art can be more stable than equities (although not without its risks; a change in provenance can alter a multi-million old master to a no less beautiful, but significantly less valuable, work by a student or contemporary, in a heartbeat) and a significant collection of works by a single artist or a known group, can provide a return far in excess of the respective sum of their parts. That's not to say that the art world isn't without its inflated prices too; we've seen clients so besotted with a particular work that the hammer price they've eventually paid, has far outstripped anything the experts predicted, but that's just the nature of the game!

There's also, of course, the draw of having something beautiful to proudly display in the family home. I think we're also seeing more wealthy individuals who view their collection as something to be available to them wherever they are in the world. It's certainly something that keeps us busy with export licences and tax concerns!

Finally, art remains, at least for the moment, one of the only truly private asset classes. There are no beneficial ownership registers for art. For private individuals frustrated with the demands to divulge their net wealth to governments and, in some cases, the public, this is an increasingly attractive characteristic.

Q5. How should one protect the ownership and succession of such assets within a family?

In many respects, the issues in play to protect the ownership and succession of art are no different from those for other asset classes. However, art is regularly more emotive and can be more divisive too. What's to one person's taste will not be to another's, which can be a tricky tightrope to walk when considering what to leave to your children. In addition, it's generally harder to split a valuable sculpture between three different people than it is a portfolio of stocks and shares or cash.

Protecting a collection on succession can be down to as little as good communication. If the collector knows what his or her family's views are in relation to the collection before the testamentary documents are drafted, it can avoid post-death disputes at a time when emotions are heightened. It can also mean that questions around, for example, where the collection will be housed, can be dealt with well in advance of death.

Alternatively, this can be the moment where setting up a sensible structure comes into its own. Using a trust, company or foundation (whether charitable or otherwise) to hold the collection can help to preserve it beyond the next generation whilst also providing value to children or grandchildren if appropriate. Issues around the costs of maintaining the collection, insurance, storage, as well as keeping the collection together as a whole, can be improved if decision-making rests in a single point. It can also be more tax efficient to hold the collection within a structure than for it to be held by individuals.

A structure can also be a means to protect the collection, for example from future creditors of children, or grandchildren, or on divorce. As with all such intentions, care needs to be taken early to ensure that the structure is a robust as possible to provide the desired protection.

Q6. Can such assets generate an income for clients, if so, how and why?

We don't often see art collections being used to generate an income stream in the same way as, say, a residential property. However, the principles are the same and work could be rented out to generate income in much the same way.

What we are seeing more regularly is art being used as collateral for loan finance, indicating a change in mindset towards making the collection work harder for the collector. We have recently helped a number of clients with this process, which because of the complexities around valuations, the need for condition reports and clear provenance, requires specialist advice. In addition to the specialist lenders, private banks and auction houses who will lend against art, we have also worked with mainstream lenders who are beginning to provide loan finance against art – again showing how this is becoming more widespread.

Q7. How can foundations be used in conjunction with a significant portfolio of art?

Holding a portfolio of art within a structure can make a significant difference when considering succession and protection of the assets. We have seen foundations become more popular with clients for two main reasons:

  • Unlike a trust, a foundation is an entity legally separate from those who control or administer it (we describe it as having "separate legal personality") which means it can contract, sue and be sued in its own name, much like a company. Also like a company, the persons controlling the foundation have limited personal liability in relation to the foundation's liabilities.
  • However, unlike a company, a foundation has no shareholders. The purpose behind a foundation is closer to that of a trust in that the foundation council, (much like a board of directors), runs the foundation and delivers its objectives for the benefit of beneficiaries or a specific purpose. There is also no need to deal with transfers of shares (or other interests) between individuals or other entities if the ownership structure needs to change, or on death of an individual.

The foundation therefore occupies a middle ground between a trust and a company which can be particularly useful when holding an art collection.

Without shareholders, there's no need for the council to be focussed on delivering a profit but, unlike a trust, the councillors have personal protection should anything go wrong. The purchase of artwork for the collection is completed in the name of the foundation, which can help to keep the name of the family out of the public gaze, although some disclosure will be necessary between the parties as part of the purchase process.

Several of our clients have chosen to use foundations to hold their art collections for this enhanced privacy, alongside the structural security provided by a legally independent entity given their versatility. Foundations work especially well in this area and should most definitely be considered alongside trusts or companies when considering how to hold art for the long-term benefit of a family.

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KEY CONTACT

Roland Foord

Roland Foord
Partner

T:  +44 20 7809 2315 M:  Email Roland | Vcard Office:  London

Alice Vink

Alice Vink
Senior associate

T:  +44 20 7809 2098 M:  +44 78 2538 4394 Email Alice | Vcard Office:  London

Sunita Singh-Dalal

Sunita Singh-Dalal
Of counsel

T:  +971 50 384 2410 M:  +971 52 477 7768 Email Sunita | Vcard Office:  Dubai