Articles

Art: The importance of due diligence in the underlying assets in an art fund

Given the current economic turmoil in markets that are supposed to be regulated, the importance of due diligence is self evident. The art market requires special attention at all times. There is little regulation. There is no central registry of art ownership. Art is often on the move. Authentic artwork can be exposed as fake or forged many years after sale, if at all. Attribution of work to a certain artist can and does change over time. New artworks deteriorate and old ones are badly restored. Deals are done on a handshake with little or adequate documentation. These are just some of the reasons why thorough due diligence is essential.

The art in a fund can be broad ranging or very specific. Fine art, contemporary art, collectibles (such as musical instruments or memorabilia) and antiques throw up a variety of different issues. Owner­ship, attribution, authenticity, condition and provenance are nonetheless relevant to all art forms. They affect value and potential onward sale. The purpose of an art fund is the profitable disposal of the art which is its underlying asset. Imagine therefore how unfortunate it would be if when it came to sale of an asset at auction, a third party claimed ownership? Not only could it delay the sale but it may also render the art unsaleable. This was the case with the 18th Century portrait by Zoffany withdrawn from Sotheby’s sale of the contents of Versace’s Villa in Lake Como recently. The descen­dants of the subject of the portrait claimed the work had been stolen from them 30 years ago.

A common misconception exists that a good faith purchaser automatically acquires good title to a work of art. This is not so. Rights to ownership are won and lost depending on the national laws of the country where art is bought, sold and found at the time ownership is disputed. The passage of time also has an effect on the transfer of ownership rights. In the UK the Courts will determine on the facts whether an item has been purchased in good faith. This helps to establish whether a purported owner has run out of time to sue for the return of the art. In some civil law countries (for example France) the rights of the possessor are favoured and those in possession may automatically acquire ownership rights.

Insurance exists against defective title. However policies usually exclude cover if defect in title could have been discovered by reasonable and proper enquiry. Understanding the chain of ownership ought to be a prerequisite for any art acquisition. New detailed research should be carried out each time art is the subject of a transaction. It very often is not and the consequences are potentially disastrous.

There are a number of stolen art data­bases but none is a complete worldwide record of stolen art. Some are privately funded and some are publically funded. They are a good starting point for owner­ship research but are not conclusive.

Artworks can change hands several times and be bought and sold at auction before a claim by a true owner emerges. This is particularly so with spoliation cases where for example work was illegally looted during the Nazi period. It has taken many years for the rightful owners to surface. Even if they had been able to make claims sooner there was not the same social, moral or legal pressures to restitute their works as there is today.

Stolen works which change hands pri­vately also often go into hiding and then re­appear many years later on the open mar­ket. Prior sales at auction are no guarantee of clear ownership or indeed anything else. Vital clues as to authenticity, provenance or ownership can be missed by auction houses at the time of cataloguing sales. Many people rely simply on the fact that an artwork has been sold at a reputable auction house to satisfy themselves that the work is problem free. Most auction houses warn against such behaviour encouraging the buyer (albeit often in the small print) to carry out independent investigations.

Authenticity can also be a cause for concern in relation to art. This is usually most problematic for Old Masters. Checks can be made through art historians or cata­logue raisonées. Specialist conservators use scientific methods such as x-rays and paint analysis to pinpoint a work in time. All this helps to authenticate a work.

Recently however authentication problems have also emerged with living artists. In the case of Banksy for example, a relatively new authentication body called “Pest Control” is providing (or declining) authentication of the work. This has cre­ated a problem for certain pieces sold as “by Banksy” in recent years but which are now failing to obtain the authentication body’s approval. Vast sums of money have changed hands on the basis that the work was authentic.

Mistakes are still made despite rigorous checks because artworks can be manipu­lated to cover their true identity. The granite sculpture of the Head of Amenhotep III, recently repatriated to Egypt (with the help of the writer) is a good example. It was ille­gally excavated in Egypt and smuggled out of the country dressed as a tourist trinket. It was sold to unsuspecting purchasers by the invention of fake provenance and its placing in an academic journal to give the provenance credence. It was even given as security for a large loan to a bank. It was left as part of a legacy under a will. The Head had been used as evidence in two criminal cases (in the UK and in New York) to convict two dealers for dishon­est handling. When the Arab Republic of Egypt sought its return many other claims to ownership were made delaying its return home for many years.

Condition and conservation of artworks are another potential danger zone. No art should be purchased without a personal inspection having been carried out. The writer acted in a case involving the sale a restored Masters Painting which had been pierced by a fork lift truck during storage at a fine art specialist warehouse.

Consider also the deterioration of the shark [suspended in a tank of formalde­hyde] in the Damien Hirst 1991 piece: “The Physical Impossibility Of Death In The Mind Of Someone Living”. It was sold for £6.5 million in 2005. In 2006, the artist agreed to replace the shark because it had deteriorated. Opinion remains divided as to whether the piece with a replacement shark is the same artwork. No fund wants to acquire underlying assets which are in bad condition, not durable or well insured. The above examples highlight some of the pitfalls which can occur in relation to the buying and selling of art but are by no means a definitive guide. This potential minefield should not be navigated without experts close at hand or tightly drafted written agreements. It is rare however to see fully documented sale and purchase agreements in relation to art.

Properly documented art sale and purchase agreements would afford some comfort for a fund if one of its assets was discovered to have problems after purchase. Without such a document it is very hard to argue successfully that any guarantees were given by the seller to the buyer. Reluctance or readiness to provide written warranties can often test the probity and resources of the seller.

Nowhere does the maxim “caveat emp­tor” (“buyer beware”) have such resonance as in the art world. Neither dealers nor deals are subject to any kind of scrutiny. Many sales of art were historically trans­acted by a handshake. While this is less so today the history of ownership affects present day rights to artworks.

There is no direct contractual relation­ship between the auction rooms and the buyer. The seller is the person responsible when things go wrong and that seller may not be in a position to reimburse a disappointed art fund. Sotheby’s sales catalogue clearly states for example that “Sotheby’s is not able and does not carry out exhaustive due diligence on each lot”. If nothing else, this is stark proof of the importance of the level of due diligence required by an art fund itself in relation to its underlying assets.

Art Fund Register

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