Observer Art’s Guide to Resale Restrictions for Art Collectors

What does it mean to own a work of art? One might think, a painting or a sculpture is mine, and I can do with it what I want. But not really. If the artwork is of “recognized stature,” I cannot destroy it or alter it in some way without fear of being sued by the artist, largely as the result of the federal Visual Artists Rights Act of 1990. If the artwork is damaged in some way or restored poorly, the artist may disavow the piece, effectively draining it of all value so that I would have a difficult, if not impossible, time selling it. In a way, owning a piece of notable art legally means sharing it with the artist. But there’s more. To even purchase the artwork, I may have to accept restrictions on my right to sell it. A purchase agreement might prohibit me from selling the piece for three years or more, forbid me from selling it via an auction house, require me to consign the artwork back to that same dealer or even stipulate that I donate it to a museum, should I ever decide to divest myself of it. On top of all that, some dealers require that buyers agree to what the art trade refers to as BOGO deals—arrangements stipulating that if I want to acquire one work by a sought-after artist, I will need to purchase two: one that I will donate to a museum and one to keep.

But I really want the artwork, so I sign the sales agreement. That agreement is, of course, a contract, and I am ostensibly bound by law to abide by its terms. The question is whether these contracts are really enforceable, and there are two answers. First, it depends, and second, there haven’t been many relevant cases that have made it all the way to court and so there isn’t yet a clear precedent governing the ins and outs of art ownership.

In 1992, New York’s highest court sided with the art gallery Wildenstein & Co., after it sued film producer Hal Wallis who had consigned his collection of Impressionist and Modern paintings to Christie’s rather than honor his agreement to offer the art gallery the right of first refusal. That agreement required Wallis to give Wildenstein at least thirty days prior notice of the terms of any proposed sale of a painting and granted Wildenstein the option to purchase it within twenty days on the same terms as the purchase offer. The exclusive consignment right required Wallis, if he wished to sell any painting at auction, to first consign it exclusively to Wildenstein for six months. The court found that the resale restrictions to which Wallis agreed were not unreasonable restraints and upheld them.

In a more recent decision from April of this year, a New York district court sided with Ghanaian artist Cornelis Annor, who consigned a painting to the global art trading platform Live Art with the provision that the artwork could not be resold for at least three years after its initial sale. Live Art did not inform the painting’s Belgian buyer of the resale restriction. Less than a year and a half after the purchase, the buyer consigned the artwork to Phillips auction house, which was told of the sales restriction and pulled the painting from the sale. The buyer sued Live Art, and the court concluded that the company failed to comply with the contract’s requirements and the transfer of title was flawed.

These rulings offer only partial guidance. Kate Lucas, an associate at the law firm Grossman LLP, noted that the Wildenstein decision “does not address blanket bans on resale for a set period of time after a purchase, nor a ban on resale via certain methods, for example, a ban on auctions for a fixed period of time.”

It’s also unclear how much further such restrictions can go, temporally or otherwise. “Resale restrictions are probably enforceable,” Steven Schindler, a partner in the Manhattan law firm Schindler Cohen & Hochman, told Observer—a conclusion that begs more than answers the question. A determining factor that a court could use is what Tyler Bloom, an attorney with the New York law firm Hughes Hubbard, called the “common-law rule against unreasonable restraints.” An unreasonable restraint is a “resale restriction that effectively prohibits the transfer of property,” which likely would be deemed invalid. Assuming what is and isn’t reasonable is clearly defined, of course.

Why are some art resales restricted?

Resale restrictions are not purely arbitrary but are based on real concerns, the most significant one being “art flipping.” That usually involves buying a piece on the primary market from a gallery, then putting it up for sale within a few months—usually in an auction where everyone can see how well or poorly it did. Flipping entered the lexicon after half a dozen cable TV programs went viral, and the reason you don’t hear realtors complaining that it damages the real estate market is that real estate flippers add value to the property. With artworks, however, dealers assert that flipping can cause market instability that makes art less attractive to other buyers. If an artist’s work fails to sell at auction or sells for below the prices listed at a gallery, prospective collectors may balk at buying other pieces from the dealer, damaging the overall market for that artist. If, on the other hand, a work sells for an unexpectedly high price, collectors who’d been considering selling may start flooding the market with pieces by that artist, eventually driving prices back down. A price spike can also make an artist’s works seem inaccessible to collectors with less money to spend and thus lower demand for the artist’s works, pushing prices down. Surging auction prices can also put the works of a rising artist out of the reach of museums, which can hurt the artist in both the short term and the long term.

Dealers looking to nurture the careers of contemporary artists, especially those at the earlier stages of their careers, try to carefully increase exposure and prices in a controlled manner. Auctions and flipping upend the narratives they’re trying to create.

That said, there may be legitimate reasons driving a collector to sell fast, rather than waiting and/or consigning the artwork back to the original dealer. An art collector’s financial situation may change, or the collector may change their mind about the artist and want to dispose of his or her work sooner rather than later.

And dealers may not want to or be able to follow through on the agreements they signed with buyers, particularly those stipulating that collectors must offer the work back to the originating gallery rather than another gallery or auction house. Sales agreements often give these galleries the right of first refusal to repurchase the artwork at fair market value within thirty days. “Does the gallery have the capital to buy back the work? A lot of them don’t,” Alex Glauber, an art advisor in Manhattan, told Observer. “Galleries have an incentive to sell primary market works, because they generally receive a 50 percent commission, whereas sales on the secondary market only have a 10-20 percent commission.”

When one of the aforementioned BOGO deals goes wrong—if, for example, the buyer keeps both works and refuses to donate one—a dealer “could go to court to force the donation,” Schindler said, but he added that was “hard to envision. Litigation is expensive, and it would cost the dealer a lot of money just to get vindication since there is nothing in it for the dealer.” As a result, he described BOGO agreements as “enforceable theoretically.”

To throw another wrench in the works, the museum at the heart of this donation scheme might also announce it doesn’t really want the artwork, leaving the dealer hung out to dry. Collectors may also sour on the donation if there are personnel changes at the institution—perhaps a new director or curator with whom the collector no longer sees eye-to-eye—or evolving priorities that no longer make the gifted art a good fit.

“When I negotiate a sales agreement on behalf of a client looking to buy a work from a gallery,” Leila Amineddoleh, a New York lawyer with a specialty in the arts, told Observer, “I usually look to include a way out of the deal if circumstances change.”

In general, art collectors tend to abide by the sales agreements they sign because the primary art market is based on relationships and access. Angering a dealer by breaking a promise would jeopardize both. A collector’s “access to great works comes through a dealer,” art advisor Kevin Moore told Observer. “What collector would burn that bridge by behaving badly?”

Still, it happens. Bringing a lawsuit against a collector who breaks an agreement may be warranted, but the fact that there are so few actual rulings suggests a reluctance on the part of artists and their dealers to take legal action, which brings up the degree to which anyone wants to enforce it. So, it depends. “Threatening clients, or suing them, is not good for business,” art advisor Todd Levin told Observer. “There are multiple instances where promises are made and the collectors just do what they want.” He added that “collectors go rogue all the time.”

He noted that some buyers do get blackballed by art dealers; dealers may refuse to sell to them, “or they won’t be offered top works again, or only works on the secondary market.” But in some cases, Levin added, nothing is done and everything resumes as it was. High ethical standards are all well and good, but who turns down money?

“It is rare that violating an agreement made with a dealer winds up in court because lawsuits are very expensive and the process is very slow,” Susan Duke Biederman, a New York lawyer who regularly works with art collector clients, told the Observer. “Enforcement takes place privately, through conversations and negotiations that keep the relationships going.”

Steven Schindler discourages his clients from signing sales agreements that have numerous restrictions and conditions. “The more things you have in your agreement, the more trouble you may get into.” He added that “the more obligations you take on, the more questions there are about ownership of the artwork.” Art collectors are people willing and eager to spend, in some instances, large amounts of money to get what they want, and dealer demands become just one more hurdle to getting it.

Sales agreements with restrictions are legally binding but perhaps more suggestive of proper behavior on the part of buyers—a form of etiquette rather than a prescriptive legal requirement. The restrictions are legally binding to the extent that someone involved in the purchase wants to enforce them, and, as Amineddoleh pointed out, “no one wants to sue over this. Artists and dealers don’t want to be seen as litigious.”