The "Droit de Suite" and the Contemporary Art Appraisal

A recent piece by Whitney Kimball over at Art F City drew my attention to the “Negotiated Resale Right”, a product/idea being marketed by Level Rights, a New York company started by attorney and art advisor Franklin Boyd.  You can see the article here: http://artfcity.com/2014/05/22/time-for-artist-resale-royalties.   The idea is a twist on the droit de suite, a legal concept emanating from French legal thought.  According to Art Law, written by Ralph Lerner and Judith Bresler, a law was passed in France in the early 1920s to try to assist widows and orphans of artists killed in WW1.  It is a fairly straightforward notion:  the artist or their heirs get paid a royalty whenever one of their works is resold.  In practice, of course, it has proved rather tricky to implement.  In the United States, the law, for the most part, does not exist; it has never been passed at the federal level.  California did adopt droit de suite, requiring 5% of the gross selling price to be given to the creator, but the Supreme Court declared the law unconstitutional in May, 2012.  Interestingly, Georgia has a 1987 law on its books granting resale royalty rights to artists whose work is acquired by the state, although it requires the exact percentage to be negotiated at the time of the acquisition.

In this way, the Georgia law is actually similar to Level Right’s Negotiated Resale Right (NRR).  The NRR is to be included as part of the bargain: when a buyer purchases a work from a gallery or artist, the buyer specifically agrees to allow the gallery and/or artist to get a piece of the action if and when the work is resold.  It is not clear from what I read what that percentage would be, but I would assume it would be negotiated, probably along the lines of the 5% that the California law required.  The NRR can be sold on by the original holder, and Level Rights keeps track of it all and presumably earns a fee for this service either at the front or back end of the transaction.  Level Rights explains it on their site: http://www.levelrights.com. The Art F City article mentions that some collectors would enter into these agreements out of charity, while others might obtain a larger discount by entering into such a contract.

From an appraisal standpoint, this got me thinking.  How does the droit de suite and the NRR (which apparently has already been used in transactions) affect the valuation of art? 

Right off the bat, appraisers need to ask owners if they have entered into an NRR or any similar as yet uninvented financial product.  This may be something my fellow appraisers have been doing all along, but this recent article made me realize that there are a number of factors we need to consider.  This question has particular relevance if the most appropriate marketplace for an artist is where the droit de suite is in force (at this point, primarily Europe).

What is crucial to note here is that these payments and fees are universally paid by the seller, off the top of the selling price.   FMV, of course, is defined in a few parts of the tax code, one of which is Treasury Regulation 1.170A-1 (c) (2), which lays out the familiar concept: “The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”    It is also settled law that commissions to brokers who would be involved in selling property are to be included in calculating FMV (decisions in the 1953 case of Publicker v. Commissioner make this clear). 

Thus, fees and expenses that are additive to the selling price must be considered.  However, since the droite de suite is subtractive, calculated after the bargain is reached, it would appear not to affect our calculation of FMV. 

Looking more deeply, might one argue that the existence of the droit de suite affect the value by its mere existence?  In other words, might a seller’s behavior be altered by the requirement to break off a piece of their proceeds to the artist, their heirs or assigns?   In the case of the way the law is currently set up in the European Union, this seems unlikely.  As I understand it, there is a sliding scale for calculating what one has to pay:  4% of the first 50,000 Euro; then 3% up to 200,000 Euro and so on like that, with the overall fee capped at 12,500 Euro.  Interestingly, according to Christie’s website, the royalty is calculated on the hammer price, not including the buyer’s premium.  So, if an auction seller’s work received a hammer price of 190,000 Euro, they would owe the artist 6,200 Euro.  Which is a lot of money, but it would not appear to be so large as to affect a seller’s behavior.   What the seller wants is the most money possible in their pocket.  If Europe was the place where a work of art will get the best price, it seems unlikely that a seller would avoid the market to dodge the 6,200 euro haircut; the risk of getting a substantially lower price for their property seems to outweigh the pain of shelling out money to the creator of the original work.   And if there was a market where the seller could dodge the fee and still get the same price (Switzerland, say), then our calculation of FMV is unaffected…the selling price is the same.  A buyer doesn't care who gets the money...what they want is the art, so none of this really affects the price one is willing to pay.  

The equation changes dramatically when the value under consideration is marketable cash value, or if the appraiser is assisting in determining liquidation or salvage values.  Here, the droite de suite, NRR, and any other such payments need to be backed out of the final number.  The droite de suite, at least in Europe is payable to the copyright holder, so in the case of severe damage, the artist may have renounced authorship of the work, which gets you off the hook.   Copyright is an ever-moving goalpost, but generally, the artist needs to be dead for 70 years before it expires.  So, if you have an artist alive after WW2, you need to be aware of the droite de suite, in cases where the artist is European.  The EU regulations are unsurprisingly complicated, but there are a number of helpful organizations who collect the fees on behalf of the artists.  One useful site is the Artist’s Collecting Society, which had a handy calculator  http://artistscollectingsociety.org. 

The concept of the droite de suite is a noble one and like most laws that try to assist the supposedly downtrodden, it probably has not brought as much comfort as its supporters hoped.  Franklin Boyd, with the Negotiated Resale Right, has brought a real sense of fairness and transparency to the table, which is unsurprising.  Anyone who has come across her knows that she is all advocate for doing business the right way, which will benefit all of us.  The droite de suite because it is a presence in the marketplace it must be accounted for when trying to value contemporary art. An appraiser ignores it at their peril.