ROYAL INSTITUTION OF CHARTERED SURVEYORS THE ARTS SURVEYOR APRIL 2012 ART RESALE ROYALTY LAWS AMERICA AND EUROPE ALEXANDRA DARRABY DISCUSSES THE NEW UK RESALE REGULATIONS [Excerpted] Alexandra Darraby Alexandra Darraby is the principal in the Art Law Firm, an international art law practice. A former gallery owner and art law professor, she has taught appraisal practice and advised American appraisal societies. The author of Art, Artifact, Architecture And Museum Law, she chairs Intellectual Property in the International Section of the American Bar Association.

2012 UK Resale Right Regulations

On 1 January, 2012, UK Intellectual Property Law, Statutory Instrument (SI) 2011 No 2873, became law and supplements the UK’s Artist’s Resale Right Regulations, SI 2006 No 346. Artists and their heirs and beneficiaries for up to 70 years after the artist’s death are owed money (a royalty) on every resale of art that satisfies the UK regulations. A resale royalty is owed if the same artwork sells multiple times, regardless of whether the sales occur in short time span or over the course of the duration of the resale right.

Common law and civil law

Monies owed to artists based upon resales of their works as a matter of law and policy are unknown in common law. This civil law resale right, known as the droit de suite, is part of the droit moral, a civil law concept known as moral rights, imported into UK common law because the UK is a member of the European Union, and thus subject to civil law directives of the European Commission (EC), including the Resale Right Directive (2001/84/EC). This directive is based on Article 14ter, a resale right provision in an international copyright treaty referred to as the Berne Convention.

The US is a member of the Berne Convention, but the US Congress decided in the 1980s that an American resale law was not necessary to satisfy its membership and to harmonise its laws with the Berne Convention. The UK, however, has Member responsibilities of EU compliance. Both the 2006 and 2011 UK resale regulations are the UK’s responses to harmonise common law with the EU Directive.

What is a resale right?

A resale right is the right to collect an added cost on a sales price on the resale of certain artworks, payable to a living artist and the artist’s heirs or beneficiaries. In California and the UK, this add-on cost is called a resale royalty. The artist is entitled to a resale royalty on each and every qualifying resale of art. In the UK, collecting societies are authorised to manage the royalties, if the artist so chooses, in return for a fixed fee or percentage of the royalty.

The UK regulations expressly tie the resale right to resale of copyrighted works. The California law is silent on copyright. In fact, certain artworks that would constitute ‘fine art’ for the purposes of the California law would not be defined under American federal copyright law as ‘works of original authorship’, a requisite for American copyright ownership.

What type of artworks are covered by resale rights?

UK Regulation 4(1), based on the EU Directive, and California law defines broadly the types of artworks subject to the resale right. California amended the Resale Royalty Act to include glassworks, but as the statute has not been challenged in a court, it remains to be determined whether other works, like new media, techno-based works, or ceramic art, as examples, would qualify. UK Regulation 4(2) contemplates ‘copies’ such as editions of prints or sculptures, commonly called ‘multiples’ in the US, by opening the door for copies of works. The right thus applies to the “copy if it is one of a limited number…made by the author or under his authority”.

Duration of the resale right

In the UK, the new 2012 law makes the royalty payable to the artist’s heirs and beneficiaries for 70 years after the artist’s death (in Copyright Bar parlance, this is referred to as ‘life plus 70’). The extension of the resale right to heirs makes the UK term of the resale right the same as the copyright term. In California, the resale right continues by state statute for 20 years after the artist’s death, or life plus 20. This term is inconsistent with the American term of copyright for natural persons.

Can buyers and sellers contract out of the resale?

The resale amount owed, whether in California or in the UK, is established by law and is non-waivable and non-negotiable. A willing buyer and a willing seller (or willing artist) cannot opt out of the resale, or reduce the amount owing.

Who is liable for payment of the resale?

The resale royalty in California is imposed by law on the seller, unlike the UK where the resale is a joint and several liability owed by the seller and the ‘relevant person’ listed as the seller’s agent, or if none, the buyer’s agent, or in the absence of that agency, the seller and buyer. A key issue in the challenge to the California law is who is the seller for purposes of owing payment – the auction house, dealer or ultimate collector? The California statute does not define the terms ‘seller’ or ‘agent’. One argument is that the collector who consigns the artwork to an auction house for sale like a collector is not the ultimate seller, because a separate provision of the California law requires auction houses, galleries and other agents to find the artist and pay the 5% royalty.

Auction sales

In the UK, certain auction houses describe the resale right and how the royalty will be collected at the time of purchase. Christie’s, for example, has imposed the liability on the buyer alone.

Is the resale right imposed only on ‘sales’?

The trade name for the resale art market is the secondary market, but the California law and UK regulations may apply more broadly. The UK regulations refer to “any sale of the work which is resale subsequent to the first transfer of ownership by the artist,” defined as one in which the resale price is at least £838 (€1,000) and either the buyer or seller, or their respective agents, are “acting in the course of a business of dealing in works of art….”

It is important to note that the resale right in the UK applies not just to the artist’s first sale, but to various types of transfers initiated by the artist.

How is the resale royalty calculated?

The amount of the resale is calculated by applying a factor percentage to the total sales price. In California, this is a flat rate 5%. In the UK, SI 2011/2873 3(3) provides for an inverse sliding scale based upon increasing sales price increments, denominated in euros in the text of the UK regulations. For sales from £0-41,900 (€0-50,000) the resale is 4% decreasing to 0.25% for sales above £419,000 (€500,000). Some EU members impose 5% for sales under £4,190 (€5,000): others exclude from the resale right lowend sales under a certain minimum, ranging from £1,257-2,514 (€1,500-3,000). In the UK, resales less than £838 (€1,000) are exempt from the royalty right. In California, no resale royalty is owed for resales at $1,000 or less.

What is the ‘sale price’ upon which the resale amount is based?

Californian law does not define ‘sale price’. According to UK Regulation 3(4), the sale price “is the price obtained for the sale, net of the tax, payable on the sale, and converted into euros at the European Central Bank reference rate” on the contract date. VAT is excluded from the right and is not part of the
royalty calculation.

Are auction premiums part of the ‘sales price’?

The auctioneer calls out the ‘hammer price’ after the final bid is accepted, not the total price owed by the buyer with the premium add-on. However, certain auction price indexes include the premium in the published auction sales price.

Christie’s in the UK has decided that the hammer price is the sale price for purposes of calculatingthe royalty, thus excluding the premium from the resale calculation. Neither California law nor the UK regulations expressly address auction premiums.

In the California litigation, the artist contended that the seller owed 5% of the hammer price plus 5% of the buyer’s premium, which could be as much as 20% added to the hammer price. Should an artist be owed a resale on a post-sale administrative cost imposed by the auction house that is controlled by and paid to, the auction house for its own return, as part of the moral right of resale? No American court has yet ruled on this.

Do dealer discounts reduce the ‘sales price’?

Galleries may offer certain collectors, museums, architects and designers a reduced price in the form of a discount or offset. Is the ‘sales price’ for calculating the resale based upon the net price after deducting the discount, or the invoice price prior to deducting the discount? The only aspect of the ‘net’ mentioned in the UK regulations is taxes, which are expressly excluded from the sales price for purposes of calculating the resale. Thus, if the price were £83,800 (€100,000) and the discount were 10%, is the royalty owed on £83,800 booked or £75,420 (€90,000) paid?

According to UK Regulation 3(4), the sale price “is the price obtained for the sale, net of the tax, payable on the sale, and converted into euros at the European Central Bank reference rate” on the contract date. VAT is excluded from the right and is not part of the royalty calculation

Is there a cap on the resale owed?

In the UK, the total resale royalty payable on any single sale cannot exceed £10,475 (€12,500). In California, there is neither a sliding scale nor a cap. Thus on a $10m resale under California law, the seller owes a hefty royalty of $500,000. If the resale were made by an auction house and the buyer’s premium was hypothetically 20%, an additional $100,000 could be owed. In the UK, by comparison, the royalty owed under intellectual property (IP) 3(3) would max out at £8,694 (€10,375) and for any resale the royalty could never exceed £10,475 (€12,500).

Is a royalty due when art is traded without the exchange of money?

It is not uncommon for collectors to barter works or trade with galleries or dealers. In the California case, the artist claimed a resale royalty on the value of a trade of various works, of which his work was one piece. Neither the UK regulations nor the California law address non-monetary barter, in which noneconomic factors and often multiple works are bundled together to close the deal. Under UK regulations, trades appear to create a resale right if undertaken by one “acting in the course of a business of dealing in works of art…” Appraisers may well be called upon to test and provide values, even in trades where the dealers have set a ‘price’ for an individual object in a bundled trade.

The California law refers to royalties imposed on sales, except for certain excluded transfers between galleries and dealers. UK Regulation 3(5) makes clear that a royalty is owed where the work transfers by a will or intestacy, is distributed through the artist’s estate, or disposed of by a receiver or trustee in bankruptcy winding-up liabilities on the artist’s estate.

Both California and the UK exclude the ‘first transfer of ownership’. In California, where primary market operates largely on consignment, the sales by the gallery representing the artist, which hold the work as consignees, are implementing the initial transfer from the artist to the buyer upon the sale. No resale royalty would be owed.

However, under the UK law, a gallery that buys inventory from the artist and then sells it, even though this is the first non-artist sale to a third party, would be subject to the royalty. This highlights the common practice of many galleries to pay artists an advance against sales or purchase to support the artist before or after an exhibition. Dealers and artists need to know how to structure this form of financing in view of the resale obligations.

Does the resale royalty apply to donated gifts to museums?

The US system of federal income tax permits individual taxpayers to deduct from their personal income tax liability charitable contributions to qualified
organisations like hospitals and museums. This is a significant effort by the Internal Revenue Code to incentivise transfer of private assets to arts institutions and museums, which do not receive governmental funding in the same way as UK museums.

The California plaintiff contended that the resale royalty should apply to artwork donated to museums. In that scenario, collectors and the collectors’ estates would owe the artist or artist’s heirs 5% of the appraised value of the donation, even though no ‘sales’ were taking place. In a private market-driven art market, this means that for donations, collectors would not recoup any financial benefit from purchasing the artwork, nor would they participate in its investment profitability, and their philanthropy would be subject to 5% of the appraised value of the donation.

Here is where it gets interesting for appraisers, particularly for artists whose works are singular, unique, do not have an established market or lack reasonable comparable markets (e.g. site-specific works, installations, as well as innovative new media and technological works, if deemed to be covered).

Would the royalty be calculated on the appraised value? Would there be differing appraised values, with the artist asserting higher values? Who will be responsible for the administrative costs of assessing non-sale transfers? What about the privacy afforded donors: are philanthropic donations of artwork going to bear the additional costs and scrutiny?

Art owned by a British collector may be viewed in Dubai, auctioned in Europe and 
sold to a collector in Shanghai

Global changes in art markets

The 21st century is the era of a global art market. From the 1970s-2011, dramatic changes in the way art is bought and sold on the internet have altered appraisal and trade more than any trade practice during the 500 years between the Renaissance and the 1970s. Today an appraiser of contemporary and modern art, to which the resale applies, must examine and evaluate world auction prices.

The internet, the global price margins on art, the published price indices, mean art owned by a British collector may be viewed in Dubai, auctioned in
Europe and sold to a collector in Shanghai, all of which would affect the artist’s market around the globe and impact the galleries dealing in the work, the museums promoting it and the collectors purchasing it.

Auction houses like Christie’s, Sotheby’s and Bonhams launch international tours of important collections, post and publish glossy catalogues, exhibit and conduct sales on the internet and travel collections to exotic international destinations for museum-like public viewings. A resale royalty imposed in California on art sold inside and outside California and in the UK impacts not only the country and the art community where it is imposed, but the entire art trade.

In the next part of this article, we will consider the resale right in other EU countries, the conclusions of the EU on the economic efficacy of the right, the practical applications for UK appraisers, including how to communicate and disclose to clients the royalty in the valuation, and guidelines for best practices regarding the royalty in a professional appraisal practice.                

Further information 
www.artlawfirm.com
Alexandra Darraby is an American art lawyer in private practice
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