Co-Investing in Art: What Every Collector Needs to Know

While the idea of co-owning works of fine art is not a new one, art collectors have been increasingly turning to co-ownership arrangements as a means to further diversify their art portfolios and share the high carrying costs of art ownership.

While many collectors assume that proof of payment for one’s share of an artwork is sufficient to establish their interest in the co-ownership arrangement, there are a number of foreseeable and unforeseeable events that can occur during the term of the parties’ relationship that can frustrate their intentions regarding the ownership of, and anticipated benefits from, the co-owned artwork. As a result, prospective co-owners of artwork should take the time to formalize the mechanics of their relationship, preferably prior to acquiring the subject artwork.

How Are Art Co-Ownership Arrangements Created?
As a general rule, art  co-ownerships are created through the agreement (oral or written) of the co-owners or through the creation of a jointly owned “special purpose vehicle” (SPV) that is formed to acquire one or more artworks.

If one elects to form a SPV, the parties choose a form of legal entity and draft the governing documents for the SPV to define the nature of the co-ownership arrangement. Annual expenses relating to the ownership, management, storage and transportation of the artwork are generally contributed by the owners of the SPV pro rata based upon the ownership interests in the artwork.

Important Mechanics of Co-Ownership Relationship.
In crafting a co-ownership arrangement, co-owners should address and agree upon the following decisions relating to the subject artwork:

Ownership Interests.
The particular ownership interests of the respective co-owners in the jointly owned artwork should be clearly delineated either through an express understanding in the coownership agreement or by way of the underlying equity interests of each party in the SPV owning the given artwork.

To the extent that the parties intend to allocate profit interests and/ or responsibilities for paying the costs of owning the artwork—other than based upon their pro rata payment of the purchase price—such understandings should be expressly addressed in the co-ownership agreement or the governing documents of the SPV, as applicable.

In particular, the parties should agree whose responsibility it is to fund storage costs, insurance premiums, transportation  expenses, cataloging fees and litigation costs to defend the work against competing title claims or attribution problems, conservation costs and legal fees relating to purchase/sale agreements, consignment agreements and loan agreements.

Moreover, the parties should discuss the consequences of any party failing to meet their ownership obligations. A particularly useful option is for the nondefaulting party to be able to fund ownership expenses on behalf of the defaulting party at a predefined interest rate with such advanced sums and accrued interest being taken first from the proceeds of any sale of the co-owned artwork.

Of primary importance in a co-ownership structure is how the artwork will be managed. While it may seem that the coowners have a comity of interest in owning the artwork, the reality is that each owner has his own specific needs and objectives that in many cases may contradict those of their fellow co-owners. As a result, the parties should address how the following decisions will be made between them:

Who has the right to possess the artwork? Will the artwork be stored in an independent warehouse or will one or more of the owners have rights to display the work in their respective homes?

Museum Loans.
Who decides when, where and for how long a coowned artwork will be exhibited at a museum or fine art gallery? Who will negotiate and sign off on the terms of such a museum/gallery loan? Will anyone be named in the exhibition catalog as the owner of the artwork or is anonymity preferred?

Who determines how, when and on what terms the coowned artwork is to be sold? Is it better to sell a work via a private sale or public auction? What is the sale price for the piece or the minimum reserve price, if consigning it to an auction house? Who determines who will sell the co-owned artwork?

Who determines the need for, and character of, any interventions on the co-owned artwork such as repairs, restorative work, cleaning, fumigation and/or  framing/reframing? Who will be engaged to perform such intervention and on what terms?

During the term of co-ownership arrangements, anticipated and unanticipated events can occur that threaten the constancy of ownership of the underlying artwork.
As with any relationship, the parties may have a falling out, one party’s finances may change thereby requiring a sale of their art holdings, or the parties may have differing views as to the future benefits of continuing to own the artwork. Regardless of the motivation, it is not unreasonable for an owner to wish to sell his interest in the co-owned artwork, which brings with it the prospect of the remaining owner(s) being forced to sell the artwork against their wishes or to suffer the inclusion of a new,  unwanted co-owner.

To prevent such unwanted outcomes and permit an owner to alienate his interests in the co-owned artwork, one can employ a “right of first refusal” granting the remaining  owner(s) the right to match any bona-fide third-party offer received by the selling owner. If artworks are owned equally by two  individuals, a “shotgun” provision can be used, whereby a selling party must provide a value for his interest in the artwork that the other party can then either accept or require the departing party to purchase his interest at the same value.

Even when the relationship between the co-owners remains intact, certain events can and do arise that end the co-ownership relationship—namely, death, bankruptcy or divorce. In such cases, the affected owner’s heirs, creditors or former spouse, as applicable, could seek to frustrate the remaining owner(s)’ intentions regarding the continued ownership of the artwork. To prevent any such interference, a buy-out right in favor of the remaining owner(s) in the event of the death, bankruptcy or divorce of an owner is often incorporated into the co-ownership agreement or the governing documents of the SPV, as applicable.

A co-ownership arrangement of artwork is characterized by various events that dramatically impact its management and ownership structure. Potential co-owners of artwork should focus their attention on such events and agree upon the ways to handle them at the onset of their relationship in order to ensure a smooth and beneficial art investment during the best and worst of  times.