Works of art can also be used as collateral for financing

1. Context

Fine art has long been a very popular investment product.

Although investments in artworks can be particularly profitable, access to cash is often hampered by the time and significant costs involved in trading works of art.

In order to facilitate short-term access to liquid assets for owners of works of art, certain financial institutions are prepared to accept works of art as collateral for financing.

Similar to the traditional model of collateral, this system consists of a loan keeping into account the value of the artwork that is pledged for a predetermined period of time, after which the borrower pays back the money he has borrowed from the lender.

This specialised type of art-secured lending gives players on the art market the opportunity to take advantage of their art collection in order to obtain funds for new investments, to refinance other loans or simply to purchase new works of art.

The costs of transport, insurance and maintenance of artworks are so high that at least considering a non-possessory pledge is highly recommended

This model was used by artists Christo and Jeanne-Claude, who, in order to fund their large-scale projects, used Christo's extensive art collection as collateral for several loans. However, the model is equally suitable for art investors as well as for any other passionate art lover or collector looking to expand his collection.

Until now, art collectors where rather reluctant to use their artworks as collateral for financing. But as a result of the recent changes to the Belgian Security Law (Pledge Act), art-secured lending can also become more popular in our country.

Much like in our neighbouring countries, a non-possessory pledge on movable goods was introduced that is opposable to third parties provided the goods have been registered in the National Pledge Register.

The purpose of this reform was to introduce a more efficient credit system as well as new forms of financing. This new law may stimulate the Belgian Art & Finance market, leading to an increase in Belgian competitiveness on the international art market, further influencing important players such as passionate art collectors as well as investors.

The new provisions regarding the Pledge Act are listed below.

2. Pledges : consensual agreements with or without transfer of possession

The Law on Pledges introduced the possibility of obtaining a non-possessory pledge on movable property, while retaining the possessory pledge.

Belgian Law traditionally defined the pledge as  a contract forcing debtors to give an object to his creditor as security for the debt. Transfer of possession was a requirement for the existence of the agreement. In other words, if the goods were not handed over to the creditor, the contract would become void and the pledge between both parties non-existent.

As a result of the new Law, transfer of possession is now only an alternative form of enforceability against third parties, and no longer an essential part, so that the pledge is now a consensual agreement.

It is interesting to note that under the former regime, in addition to the traditional collateral, the legislator also provided a non-possessory, avant la lettre pledge on a business, enabling the debtor to continue the exploitation of his business despite its pledge. This system certainly met the needs of entrepreneurs, such as museums and galeries, who are often unable to provide any other assets as security for a loan or credit line, other than the business they operate. However, pledges on a business could only be made in favour of credit institutions or certain authorised financial institutions under penalty of nullity.

From now on, any creditor, irrespective of the nature of the debt, will be able to obtain a non-possessory pledge, opening the way for new providers of financing such as private banks, but also private lenders and auction houses. 

3. The rights and obligations of the pledgor and the pledgee

If the parties choose to insure their pledge by means of an depossession, i.e. by placing the property under the effective control of the creditor, the pledgor will transfer ownership of the pledge until the execution of the pledge. The pledgee is a mere custodian of the goods as a guarantee of his pledge.

As a result, the pledgee is not entitled to use the encumbered goods unless and to the extent that this is necessary for their preservation. The creditor therefore agrees to take care of the encumbered goods, as he is liable for the loss of or any damages done to the pledge resulting from his negligence.

The pledgor may not recover the pledge until he has paid the pledged debt in full, except in the case of serious violations by the pledgee, which the parties should contractually establish. The pledgee in turn has the right to claim back from the pledgor any costs incurred for the preservation of the property.

However, in the case of works of art, the costs of transport, insurance and maintenance are so high that at least considering a non-possessory pledge is highly recommended.

In that case, the law stipulates that the pledgor must take care of the encumbered goods, while the pledgee is entitled to inspect the goods at any time. The pledgor has the right to reasonable use of the pledged goods, in accordance with their intended purpose.

The law also stipulates that, unless otherwise agreed, the pledger will have free disposition over the encumbered goods within the normal course of business.

This is particularly the case when the pledge relates to a business. The pledgor may not intentionally reduce the value of the business, for example by selling at low prices. However, the pledgor cannot guarantee the preservation of the total value of the business. This value is dependent on the whims of the economy and can therefore fluctuate without the pledgor being accountable. 

The same reasoning can apply to works of art, whose value can fluctuate in accordance with the movements, fashions and whims of the art market.

4. To which extent can artworks be subject to a pledge agreement?

Any movable property, even a future one, can be subject to a right of pledge by registration or dispossession, provided that the good is transferable.

From now on, a pledge can also be granted on a set of movable tangible or intangible assets, which is a particularly interesting novelty for private collectors who cannot rely on the notion of the commercial fund.

Belgian law does not define or treat the "business" as such. According to the prevailing view, the business can be defined as a set of tangible and intangible assets brought together for a common purpose, i.e. the preservation of the client base with the aim to usefully exploit a particular business. While it can easily be assumed that a gallery or museum could be subject to a pledge on the trade fund, this is not the case with a collection of works of art.

Following the new Pledge Law, on the other hand, a private collector will now be able to pledge a collection of valuable works of art, whether this collection be a legal or a de facto universality. This must be determined but not individualised.

The advantage of this model is also that in this way reference can be made to, for example, an art installation or set-up, as is more common in contemporary art.

However, a collection of goods can only be subject to a registered pledge. In the context of a dispossession however, it is required that the encumbered goods be individualised. 

The question arises as to whether the whole of the property can also include immovable property. Some art installations may be regarded as a good that has become immovable through incorporation. As a result of the new Pledge Law, a pledge may already consist of a good that was movable by nature but that became immovable through destination. The immovability of the encumbered goods shall not affect the rights of the pledgee.

Finally, future goods, physical or intangible, may also be pledged. This includes not only all goods still to be made, but also those belonging to a third party at the time of the closing of the pledge agreement.

The law also stipulates the fate of goods intended for processing. Works of art that were commissioned, can therefore also be subject to a registered pledge. 

5. Special rules for the pledgor consumer 

The legislator pays particular attention to the pledger who is also a consumer.

For example, the Pledge Law stipulates that if the pledger is a consumer, the validity of the contract must be attested by a document stating the value of the pledged good(s).

Additionally, it stipulates that if the pledgor is a consumer, the value of the pledged good(s) may not exceed twice the amount of the pledge.

The law also contains other rules on consumer protection, however without defining the term 'consumer' itself. The law refers to the Belgian Code of Economic Law, which defines the consumer as any natural person who is acting for purposes which are outside his trade, business, craft or profession.

In concrete terms, the purpose for which a natural person acts must be monitored. If it is mainly for private purposes, this person can be considered a consumer. If it is mainly for professional purposes, he cannot be considered a consumer.

Additionally, it must be ascertained whether or not the acquired and the encumbered goods are intended for private or professional purposes. If the good is primarily intended for a professional activity, the pledgor does not have the status of consumer and vice versa.

It should be noted that the consumer protection provisions must also be respected and must not be limited to contracts with undertakings or entities acting within their professional activity. In other words, the rules protecting the pledgor-consumer must also be respected when a pledge is granted for the benefit of a creditor who is not acting within his professional activity but who is himself a consumer. 

6. The resale right and the  business subrogation

The pledgee has a resale right, meaning that the pledge will be transferred along the encumbered goods, no matter who they are transferred to. Any transferee of an encumbered good becomes a pledgor from the moment of transfer.

There are several exceptions to this rule in a number of hypotheses that are described by the law. 

Works of art, being valuable objects, are exposed to many risks

Works of art, being valuable objects, are exposed to many risks.

The Law on Pledges provides a business subrogation mechanism. The right of pledge therefore extends to all claims regarding encumbered goods, including those arising from their transfer, as well as those arising from compensation for the elimination, damage or loss of value of the encumbered goods.

In the event of a work of art being stolen or destroyed in a fire, the amount owed for the collateral by the insurer shall replace the work of art.

7. The enforceability of the National Pledge Register

An important innovation of the Law on Pledges is the introduction of the pledge register. This entered into force on 1 January 2018. Henceforth, each pledgee is obliged to insure his pledge autonomously by means of registration in the pledge register in order to make it enforceable against third parties.

As mentioned before, the pledge register enforces the non-possessory pledge against third parties. More specifically, the Pledge Register  is a public register, organised nationally and directly accessible as a computerised system for entering data as well as consulting said data.

However, while the register is accessible to everyone for consultation, registration of the data itself is reserved for the pledgee or his or her representative. 

Additionally, the pledgor can use the consultation history to determine which persons have consulted his data during the last six months.

Since access to the Pledge Register is only possible by means of an identity card and its code, foreign pledgees or holders of a retention of title must call on a Belgian intermediary, a proxy holder, to register in the Pledge Register.

It is specified that the ranking of the pledge is to be determined according to the chronological order of its registration. If there is more than one pledgee, their ranking will be determined according to the date of registration or acquisition of the property. If the registration date is easy to determine, this is not necessarily the same for the date of possession, which should encourage the creditor to provide such evidence. 

The registration expires after 10 years, but can be renewed for a new term of 10 years.

8. Right of execution

If the claim is due and payable but is not met, the pledgee will be entitled to demand fulfilment in and out of court. 

The execution of this collection right varies according to the status of the pledgor.

If the pledgor is a consumer, the pledgee may not, in the event of non-payment, have the pledge at his disposition, but he can have ordered by the court that it remain with him, in payment and to the extent of the debt, in accordance with an estimate by experts, or that the pledge be sold publicly or by private deed. The pledgee is not entitled to act as a buyer in the event of a private sale. Any stipulation authorising the pledgee to appropriate or dispose of the pledge, disregarding the foregoing, shall be null and void.

If the pledgor is not a consumer, the pledgee shall, in the event of non-payment, be entitled to exercise his right of pledge by selling or leasing all or part of the pledged goods to settle the guaranteed claim. If the debtor fails, the pledgee shall be entitled to dispose of the property encumbered by the pledge. If the pledgor or any person holding the encumbered property objects opposes against it , the pledgee must apply to the court. Enforcement must be carried out in good faith and in a way that is economically justifiable. The pledgee will not be able to limit their liability, should this be the case. The burden of proof of shortcomings on the part of the pledgee lies with the pledgor.

In accordance with the law, both parties may agree on the method of enforcement at the time the pledge agreement is concluded, or at a later date. Important to note is that the execution of works of art requires a special form of expertise. Therefore, both parties could agree to appoint an expert for a pre-execution valuation or to appoint an auction house for the sale of the encumbered goods.

9. Conclusion

Until the new Law on Pledges came into force, pledges on movable goods were restricted by the transfer of possession of the pledged property, severely limiting the possibilities of owners of works of art to find securities.

Henceforth, the law offered collectors the possibility to pay off their debt with works of art, all the while keeping them in their possession - regardless of whether the possession was motivated by aesthetic or economic reasons -.

Creditors of art collectors looking to protect themselves against the insolvency of their debtors also benefit from this new system. The new Pledge Register allows (part of) a collection to be registered as a security, without having to turn to artificial constructions.