Till Vere-Hodge is a senior associate at Constantine Cannon LLP. He advises international private collectors, art dealers and auction houses, galleries and museums, as well as art investors and advisors in relation to both, contentious and non-contentious Art and Cultural Property matters.
Over the past decade, broad macroeconomic trends have persuaded more and more investors to diversify their portfolios and look innovatively at alternative investment opportunities.
One such opportunity has undoubtedly been the art market. According to Deloitte’s Art and Finance Report (2017), 55% of all wealth managers have recently reported that their clients are asking for help with investments in art and collectibles.
At the same time, the art market is infamous for its lack of transparency and a high level of trust tends to be placed in the subjective views of important players, such as major auction houses or connoisseurs.
All the while, investors are meant to ensure that they are investing in something that is precisely what they are told it is and/or what they think it is. The principle of caveat emptor – ‘let the buyer beware’ – means that a great deal of due diligence responsibility rests with the buyer of an artwork, in particular if artworks are sold on an “as is” basis.
In addition to a host of pitfalls concerning attribution and authenticity of artworks, does an investor receive full and marketable title to the purchased artwork? It’s not always certain.
If an investor buys a stolen artwork, the asset may be subject to a claim by the artwork’s original owner, the person from whom it was stolen. It will depend on the law applicable to the case whether the original owner can actually claim the artwork from the investor-purchaser, who could then be left out-of-pocket. It’s worth noting that decades after the end of WWII art works looted by the Nazis are still being found and, eventually, returned to their rightful owners or their descendants.
As a matter of English law, once the artwork has been sold in good faith, the bona fide purchaser will acquire good title (one that is legally valid) no sooner than six years after acquisition of the artwork. In other civil law jurisdictions, the doctrine of acquisitive prescription automatically extinguishes the original owner’s title after a certain specified period of time.
However, the situation is dramatically different in various US states. In New York, for example, a high degree of emphasis is placed on the rule of nemo dat quod non habet: the rule that nobody can pass a better title than they themselves hold. As a result, New York law is much more favourable to the original owner who lost the artwork as a result of theft.
Special circumstances: 1933-1945 and restitution claims
To make matters even more complicated, a specific framework has developed in relation to artworks looted between 1933 and 1945. Even if a claim is out-of-time as a matter of law (under the applicable national law), claimants can make what is referred to as a ‘moral claim’ rather than a ‘legal claim’ by registering the artwork on a database, such as lostart.de.
The art market will avoid offering artworks for sale that have hanging over them the cloud of such a moral claim. The artwork’s marketability and saleability will suffer tremendously on the open market and its commercial value will drop. Once the claimant and current possessor/legal owner have settled the claim, however, the market value shoots back up and may, on occasion, even exceed its previous estimate.
Antiquities that were illegally removed from countries of origin may equally be subject to restitution claims. In this context, however, it is more likely that the claim is made by a state actor, rather than a natural person. Investors should also be particularly wary of artefacts looted from war zones, such as Iraq or Syria, as specific sanctions regimes may also apply.
Even where artworks illegally cross borders and there is no threat of a third-party claim, the faulty import or export may permanently undermine the free and marketable title the investor-purchaser requires to realise the resale potential of any investment. Such a scenario may arise in the event of an artwork having been imported and exported without the required paperwork or in breach of wildlife protection laws.
Apart from so-called ‘art due diligence’ (experts who will investigate an artwork’s authenticity and attribution), ‘legal due diligence’ is therefore of critical importance for any investor-purchaser. It is imperative to investigate and be shielded from (as far as possible) any risk that the object was stolen, looted, dug up and removed illegally or shipped across borders in breach of any applicable law. Only then, proceed to invest.