A Primer on Art Loans

Summer 2015Art & Advocacy, Summer 2015, Volume 20

There are many reasons a private collector would want to loan a work of art to a museum. Museum loans present a philanthropic opportunity for lenders to share their works with the general public in a controlled and safe environment. Additionally, the borrowing museum may provide new scholarly information about the works. Inclusion in a museum exhibition could also bolster an artwork's provenance, potentially increasing the work's monetary value through public exposure.1 Many museums, however, frown upon the sale of a loaned work shortly after an exhibition. These museums often include a provision in their loan agreements that prohibits a sale within a specified period after the close of the exhibition. These periods can range from as short as three months to as long as two years after the conclusion of the loan.

Before loaning a work of art, a potential lender must first consider whether it is appropriate to lend a particular work, taking into account safety and damage concerns. Once these issues are addressed, the potential lender must then determine what should be included in the loan agreement once a work is approved for exhibition.

Preliminary Considerations
As a starting point, a potential lender should determine whether an artwork is sufficiently robust to withstand the stress of travel. Even objects that are stable while not in transit may become vulnerable to damage when moved, and this risk should be carefully assessed. Once travel is deemed safe for a particular work, a conservator should prepare a detailed condition report before the artwork leaves the lender's possession. That way, both the lender and the borrower can determine if the work was damaged while in transit.

The next issue to consider is security, both while the work is on exhibit and while in storage. For example, a lender may want to examine the security cases and/or the location of the objects during the exhibition in relation to the viewing public. It is also a good idea to become familiar with the security systems and protocols in place at the borrowing museum.

Owners should also consider if the loan creates a use tax liability. This tax applies on account of a property's use within a taxing jurisdiction (in contrast to the sales tax, which applies on account of a property's sale within a taxing jurisdiction). For example, if a painting is purchased in State A, and five years later is loaned to a museum in State B, the use of that painting in State B (i.e., its exhibition at a State B museum) may subject it to a use tax. Generally, sales tax paid on a property will be credited against the owner's use tax liabilities, if any. The challenge, therefore, is mainly for works that were protected from sales tax, whether on account of happenstance or creative tax planning. The circumstances that create a sales tax exemption or discount tend to vary from state to state, and a work that has not been subject to sales tax might become subject to use tax on account of a loan to a museum situated in an inhospitable taxing jurisdiction. In those circumstances, a lender may face a use tax that is prohibitively expensive.

Another preliminary issue for the lender to consider is whether there are any provenance questions regarding the artwork. If there are competing claims to a work, these may open the artwork to the risk of judicial seizure. Countries that currently have a law on immunity from seizure include the United States, Canada (at provincial level), the United Kingdom, France, Switzerland, Belgium, Austria, Germany, Israel, Australia, and Japan.

In the United States, the Immunity from Judicial Seizure statute, 22 U.S.C. § 2459, protects certain objects from seizure by the U.S. Government. Pursuant to the federal statute, any not-for-profit museum, cultural, or educational institution may apply to the U.S. Department of State for a determination that art to be loaned from abroad for exhibition is culturally significant and that the exhibition is in the national interest. If the application is granted, the art is immunized from judicial seizure by the federal government. At the state level, New York, Rhode Island, Tennessee, and Texas have anti-seizure laws for cultural objects. These statutes have provisions similar to those in the federal Immunity from Judicial Seizure statute, but only protect such objects from seizure by state, as opposed to federal, government authorities.

Unlike with individual collectors, where the lender is a cultural institution owned by a foreign state, there are added issues to consider. Under the Foreign Sovereign Immunities Act (FSIA), a foreign state and its agencies and instrumentalities are immune from suit in U.S. courts unless certain exceptions apply. See 23 U.S.C. §§ 1602, et seq. Nevertheless, an artwork's presence in the U.S. may become the basis for jurisdiction even where the object is immune from seizure. This was the case in Malewicz v. City of Amsterdam, in which the heirs of Kazimir Malevich brought a restitution claim to recover 14 Malevich works that were on loan in the U.S. from the Stedlijk Museum in Amsterdam. Prior to the loan of the artworks to the U.S. museums, the museums secured immunity from seizure from the U.S. State Department. Nonetheless, the heirs were able to establish jurisdiction under the FSIA based on one of the statute's enumerated exceptions. Id., 362 F. Supp. 2d 298 (D.D.C. 2005); Malewicz v. City of Amsterdam, 517 F. Supp. 2d 322 (D.D.C. 2007).

Following this decision, in 2012, federal legislation was introduced in the U.S. House of Representatives to overrule Malewicz and essentially provide for immunity from lawsuits for foreign states that obtain immunity from seizure for artworks on loan to the U.S. The legislation, called the "Foreign Cultural Exchange Jurisdictional Immunity Clarification Act," passed the House, but the Congressional session ended while it was pending in the Senate. The bill was reintroduced in March 2014, but it again failed to pass the Senate. The bill has now been reintroduced a third time and is currently pending.2

The Loan Agreement
Collectors lending to museums should also carefully consider the loan agreement with the museum. Although art loans raise legal concerns that touch on a variety of issues, the forms provided by the borrowing museum are often quite short and inadequate for purposes of the lender. To maximize protection, lenders should not hesitate to negotiate and add any terms reasonably necessary to protect their interests to the loan agreement. A few key areas to focus on include:

a. Insurance: The agreement should describe the insurance coverage for the artwork, including the work’s insurance value. The lender typically provides this number. International loan agreements should also take into account whether any government insurance will be provided. For example, the UK has a Government Indemnity Scheme, as does the U.S. In the U.S., if the exhibition is insured through the Arts and Artifacts Indemnity Act of 1975, the U.S. Government will pay insurance claims in addition to the insurance coverage provided by the borrowing museum. This insurance applies to artworks loaned to U.S. exhibitions, where the artworks are of educational, cultural, or scientific value, and are certified by the Secretary of State as being in the national interest.

b. Taxes: For international loans, the loan agreement should take into account any tax considerations that are specific to the host country. For example, in the U.S., the Internal Revenue Code, Section 2105(c), provides that artworks loaned to a public gallery or museum in the U.S. will not be subject to estate taxes, if such works remain on loan at the time of the owner’s death, as long as the owner is a non-resident who is not a U.S. citizen.

c. Copyright: The loan agreement may need to include copyright provisions. If the borrowing institution plans to photograph the artwork for publicity materials or commercial purposes, and the artwork is under an existing copyright, the borrower will have to obtain permission from both
the owner and the copyright holder.

d. Force Majeure: The agreement should address the lender’s concerns about circumstances beyond the parties’ control, including war, natural disaster, and political unrest. Many loan agreements excuse performance of certain provisions where events of this kind make performance of the contract dangerous.

Art loans will never be risk-free. But for every loan, there is a cost-benefit analysis that must be made. It is up to the lenders and borrowers to assess the risk and, if they decide to go forward with the loan, to ensure that steps are taken to maximize the safety and security of the artwork.

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1See generally Traditional Fine Arts Organization, "A TFAO Report: Lending Art to Museums for Special Exhibitions," http://www.tfaoi.com/aa/7aa/7aa993.htm; Chubb Group of Insurance Companies, "Loaning Art to Museums and Cultural Institutions," https://www.chubb.com/cpiebcontent/cpihomepage/pdf/02010424_LoaningtoMuseums.pdf.
2 See generally https://www.congress.gov/bill/114th-congress/house-bill/889.