Security Over Art: An Introduction

A number of particular issues and difficulties arise in taking security over art as opposed to other assets. This briefing paper is a general introduction to the subject, and highlights some traps for the unwary.

Key Points

in addition to the valuation of the art, due diligence will include issues such as provenance, title, export licences, and a search of the Art Loss Register if the art work is pre 1945, changed hands in the years before or during the second world war and was at this time in Germany or other occupied territories, it is necessary to consider the risk of a holocaust restitution claim where security over art is given by an individual, the Bills of Sale Acts 1878-1882 (the "Acts") mean that it is usually impracticable to take a mortgage or charge it is sometimes possible to avoid the problems arising under the Acts by taking security in the form of a pledge, which depends upon actual or constructive possession of the work of art by the lender the Acts do not apply to companies, but a charge over art by a company incorporated or registered in the UK must be registered under the UK Companies Act 2006 in the usual way realisation of the security will require appropriate advice on the best method of disposal, and may involve issues such as whether or not the art can be moved to another jurisdiction the lender's position needs to be protected if the art is to be loaned out for exhibition the Factors Act and the Sale of Goods Act may affect security over works of art changes to the Consumer Credit Act have brought many more secured loans to individuals within the consumer credit regime and these may include loans secured on works of art. Valuation and Title

The valuation of, and title to, a work of art offered as security are, of course, key issues. The lender will require valuation advice from one or more specialist valuers, and that advice should consider the provenance of the work of art; that is, its origin and authenticity. In addition, the lender will of course wish to investigate the borrower's title to the work of art. This will include checking that any necessary export licences were obtained on previous dealings with the art, and considering whether any will be required if the security has to be enforced. It will also include checking whether the art work might be vulnerable to a holocaust restitution claim or, indeed, if the surrounding circumstances indicate any other restitution claim.

The lender should also check whether or not the work of art is registered with any register of stolen art. There are various registers - the Art Loss Register in the UK is one example - against which searches can be made, but the coverage of these registers is not complete.

In addition, the lender should consider whether or not there are any ancillary rights over which security can be taken, such as rights against a seller or valuer. Where the borrower is purchasing the art, however, the seller seldom gives an outright guarantee of authenticity, and an auction house is likely to restrict its potential liability by the terms of the auction contract1.

Form of Security

General

Under English law, the security may be in the form of a mortgage, charge or pledge. The most appropriate form of security is likely to depend on the nature of the security provider, and the location where the art is to be held. A key issue is whether the art is stored by or on behalf of the lender or left in the possession of the borrower. For both legal and obvious practical reasons, a lender requiring watertight security over a work of art is best advised...