In recent weeks the major auction houses have adopted measures to reduce their financial risk before the fall auctions, particularly after October’s London sales showed clear signs that the economy is weighing on demand for contemporary art (ANL, 10/28/08).
NEW YORK—In recent weeks the major auction houses have adopted measures to reduce their financial risk before the fall auctions, particularly after October’s London sales showed clear signs that the economy is weighing on demand for contemporary art (ANL, 10/28/08).
Sotheby’s and Christie’s both reported that they have reduced the level of guarantees—advances made to consignors regardless of how the lot performs at auction—they extended to sellers this season. In a filing with the U.S. Securities and Exchange Commission on Oct. 23, Sotheby’s said that as a result of certain guaranteed property failing to sell or selling for prices that were lower than expected at fall auctions in Hong Kong and London, the house has incurred a pretax loss of approximately $15 million, which will be recognized in its third-quarter result. (Sotheby’s was to report its third-quarter earnings on Nov. 7; Christie’s, as a privately held company, is not required to disclose detailed financial information.).
Owing to the guaranteed property’s failure to sell, Sotheby’s owns inventory worth about $11 million with a mid-estimate price of about $14 million, according to the filing. “In light of the current uncertainty in the global economy and volatility in the financial markets,” the filing said in part, “the Company expects to continue to substantially reduce its use of auction guarantees.”
Christie’s recently instituted a new policy under which buyers may no longer take possession of items they have purchased until payment is made in full. Representatives say that extended payment terms will remain in place, however. The auction house also recently included a notice in its catalogue mailings reminding clients that “Christie’s does not accept payments from third parties. This also applies to agents.”
Auctioneers have also taken measures to provide greater transparency in their business practices, including improved disclosure of guarantees and of their own financial interests—as well as cases in which outside or third-party guarantors have assumed risk—by publishing more detailed language about such arrangements in their auction catalogues. In its fall Impressionist and modern art catalogues, Sotheby’s introduced a new symbol to denote lots on which an “irrevocable bid” has been submitted. For example, the catalogue entry for Kazimir Malevich’s Suprematist Composition, 1916, which carried an unpublished estimate of $60 million and which sold for that price (including premium) at Sotheby’s Impressionist and modern evening sale on Nov. 3, is marked with both an irrevocable-bid symbol and a guarantee symbol.
Under such an agreement, a potential buyer provides Sotheby’s with a contractually binding bid that is executed during the sale. The bidder can go higher than the irrevocable bid during the sale if he or she wishes. If the bidder wins the lot in question, he or she must pay the full buyer’s premium. In the event that the work sells to someone else, the irrevocable bidder is compensated, on the basis of the hammer price, for having shared the risk with the house. For Sotheby’s, such arrangements help to mitigate the financial exposure the auction house may have assumed through a guarantee or through some other financial interest.
Previously Sotheby’s method for identifying lots for which such an arrangement has been made consisted of an announcement immediately before the sale, specifying particular lots on which “persons with a financial interest may be bidding” during the auction.
While Christie’s still relies on this method and its catalogue does not include a specific symbol, the house also put updated language in its recent fall catalogues. The auction house’s catalogues now include this notice: “When a third party agrees to finance all or part of Christie’s interest in a lot, it takes on all or part of the risk of the lot not being sold, and will be remunerated in exchange for accepting this risk.” According to Christie’s spokesperson Toby Usnik, if this third party turns out to be the successful bidder, he or she may also receive remuneration net of the final purchase price.
Bonhams Touts ‘Best Business Practices’
Meanwhile, London auctioneer Bonhams recently became a member of the Royal Institution of Chartered Surveyors (RICS), a London-based nonprofit organization that sets and oversees professional practice standards for property-related companies. As an example of its “best business practices,” Bonhams spokesperson Julian Roup notes that the auctioneer maintains a Trust Accounting system that segregates client money from other company cash flow.
“It is placed in escrow, which means that if anything happens to the organization the client’s money is secure,” Roup told ARTnewsletter. The concept of placing consignor funds in escrow at art galleries already exists in 31 U.S. states, including New York, but this practice does not extend to most auction houses. Representatives of several major auction houses stated that they do not separate consignor money from other company funds .