This article was originally published in EPrivateClient, 8 June 2022, and can be found here.
Failure to agree on the distribution of artwork during divorce proceedings: What can be done?
As private client advisors will know, clients’ art collections may be among their most treasured assets, valued beyond their financial worth. The recent New York divorce of Linda and Harry Macklowe, resulting in the liquidation of their renowned collection at auction for $922.2 million, drew attention to what may be an unanticipated consequence of marital breakdown. We consider how the situation would be resolved under English law, and how couples can retain control over their assets should their marriage end.
The first stage in financial proceedings on divorce is to compute the available financial resources. The parties must provide financial disclosure, listing and valuing their assets. If values cannot be agreed, a judge may order an independent valuation, which will generally be accepted by the court. Art can, of course, be particularly difficult to assess: in the Macklowes’ case, each party instructed their own expert, and they produced disparate figures – $625 million and $788 million (both, as it turned out, far short of the realised value at auction). Uncertainty about the collection’s true value was a factor in the New York court’s decision to order that the majority of it be sold; the judge noted that only the market could determine its true worth, enabling its equal distribution between the parties.
The court will approach the division of assets by focusing on two concepts, “needs” and “sharing”. The “needs” principle, which takes priority, requires the court to ensure that, so far as possible, both parties can meet their future financial needs. This includes capital needs, usually housing, and income needs, with first priority given to the needs of any children.
The concept of “need” is relative, determined with regard to the parties’ standard of living during the marriage. Where a couple lived very comfortably, their “needs” can run into many millions of pounds, and assets may need to be liquidated to enable needs to be met. This appears to have been a factor in the collection’s sale in the Macklowes’ case; the judge remarked that the sale would provide each party with “needed cash to enable them each to enjoy their lifestyles”.
Where a couple’s financial resources exceed their needs, the court will consider the “sharing” principle. This provides that “matrimonial” assets should generally be shared equally between the parties, whilst “non-matrimonial” assets should be retained by the owning party. Matrimonial assets are those generated by the parties during the marriage. Non-matrimonial assets derive from a source outside the marriage, e.g. inheritance or pre-marital acquisition.
Therefore, art inherited by one party during the marriage will be their non-matrimonial asset, whereas a painting parties purchased using income earned during the marriage will be deemed matrimonial. However, the concept of “need” predominates, so if one party’s needs can only be met by a portion of the other’s non-matrimonial property being transferred to them, or by matrimonial property being divided unequally in their favour, then “need” takes precedence.
If a couple’s matrimonial property is to be shared between them, and it includes art works, the parties will need to agree (or the court will need to decide) how to divide the collection. It could be shared in specie, with each party receiving items whose total value is broadly equal. This would allow the parties to retain favoured art works. However, if there is a dispute as to who is to retain a particular piece, the court will need to resolve it. Factors such as who first purchased the item, each party’s reasons for wishing to retain it, and their degree of connection to it, are likely to be relevant. The alternative is for the collection (or parts of it) to be sold and the proceeds shared. Very often, a carefully curated collection is more valuable as a whole than the individual pieces comprising it, adding further difficulties to reaching agreement as to allocation and a sale may be the only way forward.
Divorcing couples with extensive art collections may wish to consider using family law arbitration to resolve disputes around their art, rather than court proceedings. This enables the parties to select an arbitrator with a good understanding of art and the issues likely to arise. Arbitrators can also be asked to resolve specific points, meaning that if there is an agreement save as to the art, the arbitrator could address this issue in an efficient and cost-effective process.
For those advising owners of art collections (or emerging artists) who are married or contemplating marriage, a nuptial agreement should be considered. Nuptial agreements will now generally be upheld by the English courts so long as the terms enable both parties’ needs to be met, and the parties understood the agreement and its implications when it was made. A nuptial agreement setting out what should happen to the parties’ assets, including their art, in the event of divorce, can save much stress and costs in the long run. Finer points, such as ownership of an art collection in its infancy at the outset of marriage (which is anticipated to increase in size and value in the following decades) can be recorded in a prenup and be ringfenced, with certain caveats, in potential divorce proceedings.