The emergence of art as a financial asset class has seen a significant increase in the settlement of artworks into trust with the consequence being that trustees are increasingly required to manage and administer art collections.
With the art market being entirely unregulated and artworks being a notoriously high risk investment, this sector is a hot bed for disputes. We set out a brief summary of the various pitfalls trustees should be aware of when dealing within the art market:
Purchasing and/or selling artworks:
Disputes as to the legal title in pieces of artwork are common. Unlike real estate, there is no central system which records the ownership of art and this can make it very difficult to verify the true owner of an artwork. The possession of a piece of art does not necessarily equate to legal and beneficial ownership, particularly in the art sector as sellers of art typically consign their works to art dealers, and buyers interact only with those dealers.
The opaque nature of art ownership increases the risks that the seller may be withholding information which could raise problems in the future. It is therefore very important that when trustees are purchasing artwork on behalf of a trust they conduct proper due diligence prior to concluding any transaction to ensure that the Seller does in fact own the artwork in question, that they are obtaining an unencumbered title and that the artwork is of the provenance and value that they believe it to be.
A prudent trustee should take steps to:
- Purchase through a reputable auction house or established gallery;
- Make enquiries of the seller as to the history of the artwork in question;
- Request sight of previous purchase and sale paperwork;
- Consider instructing an independent expert to verify the provenance, authenticity and value of the artwork;
- Negotiate contractual warranties within any contract of sale to address the risk that the art is not sold with good title;
- Obtain insurance to provide protection in the event that the trustees face a claim from a third party to ownership of the art;
- Ensure that terms of the engagement of an art advisor and/or art dealer to assist in the identification and purchase of art works is properly documented.
Managing and administering artworks:
Artworks require ongoing careful management to ensure that they are maintained properly and continue to hold their value.
A trustee needs to be mindful of the following:
- Sourcing appropriate transportation and storage of the artworks;
- Maintaining a record of the artworks’ value;
- Maintaining appropriate insurance of the artworks;
Consideration of the tax treatment of artworks. For example, if artworks are kept in a beneficiary’s residence for their enjoyment, this can potentially give rise to tax implications.