Consultation outcome

Strengthening the Process for Retaining National Treasures - Government response to public consultation

Updated 19 December 2020

Executive summary

The export control system for cultural objects provides a last opportunity to save our national treasures from permanently leaving the UK.

Following instances where the export deferral system was deemed to have failed, and an independent examination, the government sought views on the potential introduction of a legally binding mechanism into the process. The intention was to avoid wasted fundraising efforts by public institutions, by ensuring that Owners of very special cultural objects honour their commitment to accept a matching offer to purchase.

In the consultation document respondents were invited to submit their views on all aspects of the proposed mechanism, including the draft template Option Agreement, which can be viewed or downloaded on the main consultation page.

Of the 42 responses analysed, 28 supported the proposal to introducing a mechanism to introduce legally binding offers. There was widespread recognition of the benefits of ensuring that public institutions can fundraise with confidence. Of the remaining 14 responses, 13 were against the principle of introducing binding offers, and one was neutral. Most of these 14 (and also several of those in favour) included opinions on how the proposals could be clarified, strengthened, or simplified.

Following consideration of the responses to the consultation, the government has decided to introduce a mechanism of legally binding offers through amendments to statutory guidance.

The government will introduce legally binding offers through amendments to statutory guidance. Amended guidance will be laid before Parliament on 1 January 2021 and the new mechanism will therefore begin on that date. Arts Council England, who manage the export licensing system for the whole of the UK on behalf of the Department for Digital, Culture, Media and Sport (DCMS), will also update their guidance titled: ‘Procedures and guidance for exporters of works of art and other cultural goods’.

After considering comments received the government has simplified the proposal. Efforts to improve the efficiency of the export controls process for cultural objects will continue and the government has also made available funds for the development of a new digital system for export licences. The effectiveness of the export deferral process should be reviewed within five years of the new process being introduced.

1. Introduction

The UK is home to a wide variety of exceptional cultural objects: our ‘national treasures’, which enrich the culture, heritage and scholarship of audiences today and will do so for future generations. We are able to retain many of these very special objects due to the current export control system. The requirement to apply for a licence to export provides an opportunity to save our most significant cultural objects from leaving the UK.

Any cultural object manufactured or produced more than 50 years before the date of export and valued above certain thresholds requires an export licence in order to be exported from the UK. Every such item is considered by an expert adviser^{[footnote 1]}. When it appears to the adviser that an object may qualify as a national treasure, it is referred to the Reviewing Committee on the Export of Works of Art and Objects of Cultural Interest (RCEWA) which judges the importance of any object against what are known as the Waverley criteria.

There are three elements to judging the importance of a cultural object (the ‘Waverley criteria’):

1. Is it closely connected with our history and national life?

2. Is it of outstanding aesthetic importance?

3. Is it of outstanding significance for the study of some particular branch of art, learning or history?

Should the RCEWA decide that an object meets one or more of these criteria, and its loss from the UK would be a misfortune, it will normally recommend to the Secretary of State that a decision on whether to grant an export licence should be deferred for a specified period. This deferral provides an opportunity for a UK Buyer to express a wish to purchase the item at the fair market price. Upon receipt of a serious intention to raise funds with a view to making an offer to purchase the object from an interested party, the export is postponed for a further limited time. This gives the interested party - a museum or gallery, as well as private individuals - an opportunity to raise funds to purchase the object and so keep it in the UK. The potential purchaser in this context must be either a UK public institution or a private individual or company who will keep the object in the UK with a commitment to ensure reasonable public access, satisfactory conservation and security arrangements for the object.

2. Why we consulted

Whilst this process has generally worked well, a few high profile cases over the years have tested the credibility of the system and appeared not to conform with the spirit in which the Waverley system is intended to operate.

Museums, galleries and funding organisations, which run intensive campaigns to raise funds to purchase national treasures, have repeatedly expressed concerns about the ability of Owners to reconsider their (currently non-binding) agreement to sell upon receipt of a matching offer, or to withdraw from the process at an earlier stage, while the institution is fundraising.

Although a rare occurrence, the significant problems that arise as a result of applicants withdrawing their licence applications during the fundraising stage, having previously committed to accepting a matching offer, have persisted. As a result, the issue of whether or not to introduce binding offers has been reviewed and considered at least five times in the previous 20 years, as well as being highlighted as an option by the RCEWA in their annual reports.

Previous governments have been reluctant to introduce a legally binding mechanism due to a lack of clarity surrounding the extent of the problem. However, following an incident involving the Pontormo painting ‘Young Man in a Red Cap’, which the National Gallery had sought to acquire in 2016^{[footnote 2]}, then Ministers asked for an independent assessment of the effectiveness of the export control process for national treasures. This was carried out by Sir Nigel Carrington (Vice Chancellor of the University of the Arts, London), and included interviews with key stakeholders. Sir Nigel considered how the export deferral system currently operates, and identified potential improvements to make the process more effective in saving national treasures whilst ensuring that the rights of Owners are protected.

Independent assessment of the effectiveness of the export control process for national treasures

Sir Nigel Carrington’s four recommendations to Ministers were:

1. the introduction of a legally binding mechanism

2. tightening tax exemption requirements

3. making available to purchasing institutions the tax paid that would normally have been exempt if originally sold to a public institution

4. improving the end-to-end administration of the process

Ministers were inclined to agree to the recommendations subject to further advice on implementation. This consultation, therefore, specifically considered the recommendation to introduce a legally binding mechanism into the export control process, to bring certainty for all parties during the final stages of the export control process when fundraising plans are launched. The purpose would be to ensure that fundraising efforts to acquire national treasures are not wasted.

Work to examine and improve the end-to-end administration of the process has continued, culminating in Ministers taking steps to digitise the export licence system and bring utmost efficiency to the process. The two further recommendations will be considered in conjunction with HM Treasury.

Who we consulted

The consultation ran for 10 weeks and 42 responses were considered, from a range of organisations and individuals. The consultation had particular relevance to:

• individuals and businesses who export or may wish to export objects of national treasure quality
• associations representing individuals and businesses who have exported or may wish to export objects of national treasure quality
• individuals and businesses working within the UK art market
• organisations which fund the acquisition of national treasures for public institutions
• public institutions such as museums and galleries
• individuals and organisations with an interest in the administration of the export control process

A list of organisations which submitted responses can be found below in section 5

This document sets out the main points to emerge from the responses and the position the government has adopted after reviewing these comments, including its rationale for taking forward or amending the original proposals.

3. What we asked

The consultation launched in December 2018 and outlined proposals to introduce legally binding offers. The consultation asked 19 questions and sought views on both the scope of the policy and the proposed implementation of legally binding offers. Views were sought on the potential impacts on funding organisations, cultural institutions, art market practitioners and individuals who apply for export licences. In looking to strengthen the system whilst protecting the rights of Owners, the consultation also sought views on measures aimed at bringing commercial neutrality for Owners.

Under the proposed mechanism, an Owner would retain the ability to withdraw an application for an export licence up to the end of the first deferral period during which time public institutions are considering whether or not to put forward a serious expression of interest to purchase the object.

However, for a second deferral period to formally commence, an Owner would be required to enter into an ‘option agreement’, which would give an interested purchaser an option (in the form of a contractual right) to purchase the object if they are able to meet the purchase price.

The Option Agreement would be a binding contract. This would result in an Owner being obliged to sell to the interested purchaser they have entered the Option Agreement with, if the purchaser has sufficient funds available at the end of the second deferral period to make the matching offer.

In addition to seeking views on the principle of introducing a legally binding mechanism, the consultation also sought views on the operation of the Option Agreement: the preparation of condition reports, the sufficiency of the warranties, the provisions in relation to delivery and transfer of risk, and the provision in relation to storage, security and viewing arrangements during the second deferral period (the Option Period).

The Consultation also invited general comments on the proposed policy and content of the Option Agreement.

4. Detailed response to the public consultation

42 responses from a variety of commercial art businesses, cultural bodies, legal practitioners, funding organisations and individuals were considered (list of respondents).

All suggestions and comments have been carefully reviewed, considered and assessed as part of this response. Not all questions were answered by all respondents and several responses took the form of a narrative text, giving views on the principle and implementation of binding offers and also addressing some of the questions. We have sought to interpret the points raised and to address these in this response.

4.1 Views on the principle of introducing a legally binding mechanism into the export deferral process

Question 1: Do you agree with the proposal to introduce a legally binding mechanism into the export control system for national treasures in the UK?

28 respondents supported the principle of introducing binding offers, with widespread recognition of the benefits of ensuring that public institutions can fundraise with confidence. However, there were areas where respondents (both for and against the proposal) felt the proposals could be clarified, strengthened, or simplified. Several issues raised merit in-depth consideration.

The government’s response in respect of the principle of introducing binding offers therefore considers responses to the questions posed, and the main themes that emerged on the proposed introduction of binding offers, from both those for, against, and neutral on the proposal.

4.1.1 Proportionality

The proportionality of introducing binding offers as a solution for wasted fundraising was not the subject of a question in the consultation. However, statistics were used by both those for and against the introduction of binding offers in responses, in order to make the point that they believed the introduction of binding offers is either proportionate or disproportionate.

Each year the RCEWA lays before Parliament an annual report of the ‘Export of Objects of Cultural Interest’ which details the cases considered by the Committee, and the outcome of each. The statistics in these annual reports were used in various ways to present differing conclusions. 13 respondents claimed that introducing binding offers would be a disproportionate response in relation to the relatively few cases of Owners withdrawing or refusing matching offers during the second deferral period. 6 respondents claimed that previous opportunities to save national treasures had been missed and fundraising plans were wasted when live fundraising campaigns had been halted by Owners either withdrawing their licence application or refusing a matching offer to purchase.

Government’s response
Where an export licence application is withdrawn during the second deferral period, or a matching offer refused at the end of that period, there is a significant detrimental impact on the public institution involved. The potential for this to occur constitutes a clear flaw in the system as it currently operates and undermines the confidence of institutions to make matching offers and embark on fundraising. The impact of the issue is therefore not limited to the individual cases in which an Owner reconsiders a commitment to accept a matching offer. In addition, the benefits to be gained by introducing a greater degree of certainty are not only dependent on the number of past cases in which the system failed to function as intended.

The government has carried out detailed analysis of all cases brought before the RCEWA in the previous 10 years. The binding offers mechanism aims to avoid wasted fundraising efforts in the second deferral period resulting from withdrawals during that period and refusals of matching offers following successful fundraising. As now, it will remain the Owner’s choice whether or not to enter the second deferral period.

Furthermore, the government stresses that, in attempting to quantify the extent of the problem (and analysing all responses which raise this point), it considers that the statistics alone do not convey the full picture as they do not account for the unique and unusual circumstances of each case to reach the RCEWA, and they do not convey the full nature of the challenges that public institutions face when intensive and high profile fundraising campaigns fail.

The soaring price of art and the significance of institutions’ reputations when they raise funds means that there is considerable risk to their standing if a single fundraising campaign for a (usually very expensive and culturally significant) national treasure publicly fails.

Introducing binding offers at the stage set out in the consultation would introduce much needed certainty and would formalise Owners’ willingness (or not) to accept a matching offer by an agreed date.

Some respondents questioned whether the proposal would cause greater interference with property rights. This aspect has been considered during previous reviews. Although the introduction of a binding offers mechanism would potentially engage with individuals’ property rights under Article 1 of Protocol 1 to the European Convention on Human Rights (A1P1), the government considers that this proposal is a proportionate means to achieve the legitimate aim of correcting the flaw in the system as it currently operates, and ultimately of protecting national treasures. The terms of the Option Agreement have been drafted with Owners’ property rights as one of the central considerations, and every attempt has been made to make the agreement as commercially neutral between the parties as possible.

4.1.2 Applying binding offers only to applicants who have previously withdrawn their application for an export licence during the second deferral period

This was not the subject of a question in the consultation, but was suggested by respondents.

Eight respondents suggested a possible compromise: instead of introducing binding offers to all applicants, it should just apply to Owners who have previously caused fundraising efforts to be wasted. None of those who favoured this approach suggested how this might work in practice.

Government’s response
Applying binding offers to selected individuals has been considered and rejected previously. In 2004 DCMS considered that, whilst demanding an undertaking from selected individuals was probably acceptable, objective criteria for doing so could not be identified.

In addressing this question again, the government considers that questions remain on which Owners this proposal would be applied to.

One approach could be to apply binding offers only to persons who have previously refused a matching offer or withdrawn their application for a licence during the second deferral period. However, this approach would give rise to significant practical risks because it cannot be reliably known whether an Owner has previously withdrawn their application for a licence or refused an offer. For example, an Owner’s name may not necessarily have previously been disclosed by the applicant for an export licence, or this approach might incentivise applicants to try to slip through the net by applying through a different name or company.

Finally, targeting those applicants who have previously caused fundraising efforts to be wasted by withdrawing their licence application or refusing a matching offer would only work to achieve a benefit on second and subsequent exports by the same Owner, regardless of the object. It would not address the structural problem with the system.

The government considers that if binding offers are implemented uniformly there will be more instances of institutions expressing a serious intention to raise funds as the risk of the Owner pulling out of the process will diminish.

For these reasons the government does not consider it appropriate to introduce a system of binding offers which only applies to those who have already reneged from a commitment to accept a matching offer in the past.

4.1.3 Private purchasers

The consultation proposed that binding offers would also apply to relevant private purchasers as well as public institutions. This was not the subject of a question in the consultation.

Eight respondents who were against the principle of binding offers also raised concerns about the proposal to include private purchasers as eligible purchasers as part of the Option Agreement. The reasons given were that private purchasers usually do not depend on public money, or do not have a need to raise funds. They argued that the aim of the proposal is to stem the time and resources wasted by public institutions when they are prevented from acquiring a national treasure after undertaking significant fundraising efforts.

Respondents also considered that, whilst overseas Buyers might be understanding of the need to step aside for public institutions to raise funds, they might find it more difficult to accept an offer from a private Buyer.

Those respondents who opposed applying binding offers to private purchasers also argued that allowing them to step in late in the process and make an offer without having to enter into an Option Agreement (i.e. if fundraising by a public institution is unsuccessful) could also have a negative impact on the perceived fairness of the system.

Government’s response
The government considers that binding offers should apply to private purchasers as well as public institutions. As noted in the consultation paper, in cases involving private purchasers (as with public institutions) the Option Agreement will only be applicable to those who will keep the object in the UK with a commitment to ensure reasonable public access, satisfactory conservation and security arrangements for the object.

Given such a private purchaser would be required to fulfil the requirements set out above, the public interest would be served by bringing the object into their ownership. Extending the Option Agreement to private purchasers would provide continued surety in the process to save national treasures for the public benefit (the overarching objective of the deferral process). To not include private purchasers would therefore only partially address the flaw in the current system: Owners could still withdraw their licence application late in the day, or refuse a matching offer. Therefore it seems reasonable that such private purchasers should be afforded the same protection offered by the Option Agreement as public institutions.

Whilst the government accepts the points raised by respondents that private purchasers may not need to fundraise in the way that public institutions do, it is not inconceivable that a private purchaser might need to amass the necessary funds.

Some respondents were concerned by the ability of private purchasers to step in and make an offer for the object if the Buyer who is party to the Option Agreement chooses not to exercise the option. However, the government considers that it is important to retain this as a final safety net. Moreover, it is both private purchasers and public institutions that are able to step in at this stage. In such circumstances, if the Buyer chooses not to exercise the option then another appropriate purchaser (with sufficient funds and a signed undertaking to the Minister to allow appropriate public access, conservation and security) may step forward with a matching offer. Whilst the Owner will not be compelled to sell to the new purchaser (as the option agreement cannot generally be assigned), if the Owner refuses this later offer, an export licence will normally be refused.

4.1.4 Potential impacts on interested parties of introducing binding offers

Question 2: Do you have any views on how the proposal to introduce a legally binding mechanism into the export control system would affect individuals applying for a licence to export a cultural object? Please provide evidence to support these views.

Question 3: Do you have any views on how the proposal to introduce a legally binding mechanism into the export control system would affect public institutions such as museums and galleries? Please provide evidence to support these views.

Question 4: Do you have any views on how the proposal to introduce a legally binding mechanism into the export control system would affect the UK art market? Please provide evidence to support these views.

Question 5: Do you have any views on how the proposal to introduce a legally binding mechanism into the export control system would affect organisations that fund public art acquisitions? Please provide evidence to support these views.

The consultation asked what the potential impacts of binding offers might be on interested parties. Respondents tended to refer to impacts on their own particular sector or sectors.

Responses were received from a number of practitioners in the UK art market, several of whom claim that the introduction of binding offers could deter overseas Buyers from entering the UK market.

Responses from public institutions and funding organisations were generally in favour of binding offers. Some claimed introducing binding offers would make it more likely that institutions and funding organisations would commit the resources required to embark on a fundraising campaign. This is because the risk that the campaign would fail, for reasons other than lack of funds, is removed. This assurance, they claimed, could lead to more national treasures being retained in the UK.

Government’s response
The UK art market is very successful and the government is proud that the UK is host to the second-largest (value) art market in the world. The environment in which works of art are traded and exhibited has evolved since the early days of Waverley to become an increasingly international multi-billion pound business. The soaring price of art, and competitiveness of the market, means that for each national treasure to be temporarily barred from export, the stakes are high. Institutions claim there is considerable risk to their reputations if a fundraising campaign for a (usually very expensive and culturally significant) national treasure fail.

The government’s aim is to increase certainty for all parties when a special cultural object is considered to meet the Waverley criteria, to strike a balance between the protection of our national treasures; the rights of the Owner; and the reputation of the UK as a world leading international art market. The desirability of bringing certainty to the final, fundraising stage was widely acknowledged in the responses to this consultation.

The government considers that introducing binding offers will formalise and strengthen an existing process. The government’s aim is to re-establish the careful balance of interests and certainty for all parties that are integral to the success - and longevity - of the Waverley system. At no point in the process will the Owner be compelled to sell without their agreement. Binding offers will only come into play upon the receipt of serious expressions of interest to purchase at the end of the first deferral period. Owners will be entirely free to decide whether or not they wish to proceed with that process and validate their intention to sell to a UK institution or private purchaser.

The introduction of binding offers will also allow a short consideration period of 15 Business Days between the first and second deferral period. This is to allow the Owner to reflect upon the Minister’s decision and, if they decide to enter the second deferral period, for the exchange of the Option Agreement to take place. The overall time frame for each case is now being monitored and tightened wherever this is possible. We will continue this important work, as well as improving efficiency through digitisation.

The Option Agreement will remove the current uncertainty, where continuous reassurances are sought by repeatedly asking Owners if they will be prepared to sell. Whilst well-intentioned, this practice can reflect poorly on the effective running of the process. With the introduction of binding offers, Owners will be informed of the process at the time of their application for a licence, but will not be asked for a decision until they receive a serious intention to purchase their object.

Length of process:Many respondents raised concerns that the export deferral process can be lengthy, and takes longer than it should to complete in many cases. DCMS is working with Arts Council England and the RCEWA secretariat to scrutinise every stage of the administration of the process to improve ways of working.

4.2 Application of the Option Agreement

4.2.1 Applying the Option Agreement where more than one purchaser expresses an interest in purchasing by the end of the second deferral period

Question 7: Do you have any views on an appropriate process for applying the Option Agreement where more than one relevant purchaser puts forward an expression of interest by the end of the first deferral period? Please provide evidence to support these views.

The consultation proposed a method for dealing with instances where more than one prospective purchaser comes forward by the end of the first deferral period. 19 responses were received on this question.

Those in favour of binding offers were also largely in favour of the approach proposed whereby the Secretary of State or another public body enters the Option Agreement on the basis that, at the end of the second deferral process, they would assign a final purchaser where more than one institution wanted to buy the object. This would be on the basis that the purchaser had raised necessary funds. However, several respondents also pointed out that public institutions are capable of deciding among themselves which one would be the best fit, as happens currently.

Some respondents were keen to see the continuation of the current practice of allowing the Owner to choose to whom they wish to sell, at the end of the first deferral period. From a practical perspective, a number of respondents claimed that the proposed process for dealing with multiple prospective purchasers could engender uncertainty and complexity for the Owner, and for the system as a whole.

Government’s response
This issue was finely balanced. The proposal sought to address all potential issues which might arise in a situation when more than one serious expression of interest is received at the end of the first deferral period.

After consulting, the government considers that the decision on who enters into the Option Agreement at the end of the first deferral period should, as currently, remain with the Owner. The effectiveness of this approach should be reviewed within five years from the date that Option Agreements are introduced through amendments to statutory guidance.

In reaching this conclusion the government took into account that fundraising need not be competitive; expressions of interest do need to be serious; and there could be a risk the proposed process does not achieve our aim of establishing a fair and predictable system for all parties.

Additionally, if the proposed method was to be adopted, public funds and other funding sources could be stretched unnecessarily thin, and complex and expensive administrative processes might need to be established which could run counter to our aim of simplifying the export deferral process.

4.2.2 Value threshold

Question 8: Do you have any views on the proposal to introduce a value threshold which would mean that export deferred items with a value equal to or below £100,000 would not be subject to the ‘binding offers’ system? Do you have any views on setting this value threshold at £100,000? Please provide evidence to support these views.

Several respondents expressed concerns that the value threshold would create a two-tier system where objects above the threshold value would be perceived to be of higher national importance than those below. This is not the aim of the proposal (and is not how the Waverley system was designed to operate). Several respondents also suggested that smaller public institutions who were looking to fundraise at the proposed threshold amount (or below) would proportionally encounter similar risks to items valued above.

Other respondents favoured the threshold approach, but wanted to see the limit set at a higher amount, for example £1 million. Another method proposed, with the aim of limiting the application of binding offers, was to allow the use of binding offers to be optional for the participating public institution.

Government’s response
The aim of the proposed value threshold was to bring about a proportionate approach to binding offers, given there is less risk for public institutions and funding bodies to fundraise for lower value objects.

The government considers that some of the arguments put forward against a threshold are compelling. In particular, any sum of money could be difficult for a smaller museum to raise - the safety net provided should apply universally. For this reason too the argument for a higher limit is not convincing: although increasing the threshold to £1 million would considerably reduce the number of instances where binding offers would be required, the added risk for public institutions would not correspond to the aim of the proposal.

The government also agrees with views put forward that there could be a disproportionate impact on archaeological artefacts, which tend to fall below the £100,000 threshold proposed, and so would be generally less secure if they are not valuable enough to benefit from the certainty of an Option Agreement.

For these reasons, we do not propose to introduce a value above which binding offers will apply.

4.3 Reducing commercial risk for the Seller

4.3.1 Proposal to allow the Seller to choose the currency in which the option is priced and proposal to allow Buyers to choose the mechanism by which exchange rate fluctuations are mitigated under the Option Agreement

Question 9: Do you have any views on the impact of the proposal to allow Sellers who purchased the cultural object in a currency other than sterling to require the purchase price to be specified in (or by reference to) that currency? Please provide evidence to support these views.

Question 10: Do you have any views on the impact of the proposal to allow Buyers to choose the mechanism by which exchange rate fluctuations are mitigated under the Option Agreement? Please provide evidence to support these views.

Question 11: What are the practicalities involved for interested institutions purchasing an object in a currency other than sterling?

The consultation invited views on two proposed methods aimed at reducing commercial risk for Owners who choose to enter an Option Agreement. The first method is to specify the purchase price in a currency other than sterling. The second method is to specify the price in another currency, and then for it to be converted into sterling using the exchange rate on the last Business Day pre-sale.

We proposed that an Owner who agrees to sell would be eligible for these arrangements if they can prove they bought the object in a currency other than sterling. The Buyer should be able to choose between the two alternative methods.

Seventeen respondents offered views in response to these questions. Whilst the general principle of seeking commercial neutrality for the Seller was widely commended by nearly all who commented, several respondents pointed out that allowing the Seller to specify a currency other than sterling risks creating disparity and disagreement between the parties. Funding organisations also pointed out that whilst the second option and use of alternative currencies would not be impossible from their perspective, to do so would create an additional layer of administration because funding applications are always assessed in sterling.

Government’s response
The government stresses the importance of striking a balance between all interested parties involved in the export deferral process, and ensuring commercial neutrality for Sellers where this is possible.

The government concludes that whilst the two options appear to offer a degree of commercial protection for the Seller, neither option would be straightforward for the parties to administer. However, the government considers that it is important to reduce commercial risk for the Seller during the period of the Option Agreement. To this end, both proposed mechanisms will be allowed in instances where funds have been transferred and the Seller proves that they paid for the object in a currency other than sterling.

Therefore, the Option Agreement ultimately provides three options for payment of the Consideration for the Works (Schedule 1, Part B of the Option Agreement):

1. The Consideration is specified and paid in Pound Sterling
   

2. The Consideration is specified and paid in a currency other than Pound Sterling.
   This option is available to the Seller if the Seller can prove that they paid for the Works in this currency, and if the Buyer is content to pay the Consideration in that other currency
   

3. The Consideration is specified in a currency other than Pound Sterling, and then this amount is converted into Pound Sterling using the exchange rate on the last Business Day immediately prior to the date of Completion.
   This option is available to the Seller if the Seller can prove that they paid for the Works in this currency, and if the Buyer is content to pay the Consideration in Pound Sterling and bear the exchange rate risk.
   

If the sale is arranged as a private treaty sale and the Buyer has not paid, then the Seller is not given options 2 or 3. If there is no sale, then the default currency will be sterling.

During the first deferral period, it is for the Owner to insure against currency fluctuations, as stated in the current export deferral guidance.

The government agrees that public institutions should also be encouraged to consider measures such as insurance to protect themselves against currency fluctuations during the second deferral period.

4.3.2 Limit on the length of the second deferral period

Question 12: Do you have any views on the impact of the proposal to cap the length of the second deferral period? Please provide evidence to support these views.

The consultation proposed limiting the length of the second deferral period to six months as a mechanism for protecting the rights of Owners, adding more certainty and therefore proportionality into the system, and reducing commercial risk.

Twenty-three responses were received on this question. Most were in favour of the cap, which attempts to strike a fair balance between respecting the rights of the Owner and providing certainty to potential Buyers. Some respondents pointed out that, in practice, the length of the second deferral period has not exceeded six months. A number of respondents expressed concern that capping the period to six months would not leave enough flexibility for institutions to raise sufficient funds from a variety of philanthropic sources. Other respondents claimed that limited time would allow for a focused and targeted fundraising campaign.

Government’s response
The government concludes that limiting the length of the second deferral period to six months, except for exceptionally expensive objects when more time may be needed to raise the funds, would be a useful mechanism for protecting the rights of Owners and reducing commercial risk. The RCEWA will continue to advise the Secretary of State in such cases and will retain flexibility to recommend an appropriate length for the second deferral period based on the value of the object and its assessment of the challenge of fundraising.

4.4 Template Option Agreement

A draft of the template Option Agreement, which we proposed would be used as a legally-binding mechanism, accompanied the consultation. We were keen to understand potential impacts on export licence applicants, the art market, public institutions (such as museums and galleries), and funding organisations.

4.4.1 Condition reports (clauses 2 and 8)

Question 13: Do you have any views on the clauses in the Option Agreement concerning the preparation of condition reports and the consequences where damage is shown to have occurred, and the impact of those provisions on the process and parties (clauses 2 and 8)?

Clause 2 of the draft Option Agreement provides that the Buyer would prepare a condition report for the object before the Agreement is signed by the parties, and if the Owner objects to the report, the parties must jointly instruct an independent third party to prepare a further report. If the parties are still unable to agree, the President of the Law Society of England and Wales nominates a suitable third party.

Clause 8 provides for a further condition report to be prepared by the Buyer after the Option Agreement has been signed and once they have raised the required funds to purchase, but before completion of the sale. If the report shows that the object has sustained damage since the first condition report, then a proportionate reduction will be made to the purchase price, determined by an independent third party agreed by the Buyer and Seller (or nominated by the President of the Law Society of England and Wales if the parties are unable to agree). Alternatively, where the object has sustained damage, the Buyer can revoke their exercise of the option, either immediately or when the price reduction has been determined.

Nine respondents specifically referred to these proposed arrangements.

Clause 2: Several comments were received on the timing of the first condition report in relation to the signing of the Option Agreement. Respondents from the UK art market considered the 5 Business Day time limit in which the Seller must indicate if they are not content with the first condition report to be too short. Some respondents, both from the art market and public institutions, also questioned the preparedness of public institutions to carry out timely condition reports.

Clause 8: Some respondents suggested it was unfair that, if a second condition report shows the object has been damaged during the second deferral period, the Buyer has a choice to either purchase the object at a reduced rate or to withdraw from the purchase. The Seller however is not afforded the option to withdraw from the sale if the object is damaged. Some respondents also proposed that only damage above a certain threshold should trigger the Buyer’s right to change their mind or purchase at reduced price, but gave no further information on how this might be achieved in practice.

Government’s response
The government agrees with respondents who said that Owners should have longer to indicate if they are not content with the first condition report, and accepts the need to increase the proposed 5 Business Day time limit to 10 Business Days.

In instances where the second condition report determines that an object is damaged, a reduced price is then determined by an independent expert. The government’s expectation is that the cost of the independent expert would be shared 50:50 between the parties. If the Buyer then decides to withdraw from the purchase, then the Seller will normally be granted an export licence. To provide the same right to withdraw to the Seller and so remove the Buyer’s contractual right to purchase the object, even if it is damaged, would undermine the fundraising process and be counter to the aim of binding offers.

The government considers that submitting a serious expression of interest to purchase a national treasure is a significant undertaking and that public institutions should plan for the steps they need to take in order to play their part. Signing of the Option Agreement and preparedness for condition reports should be included in any plan for purchasing.

The government will not require Sellers to part with possession of the object during second deferral period, but if the parties are happy to agree between themselves for the prospective Buyer to take possession of the object (which could also aid fundraising), this might make the condition reports more straightforward and could be an arrangement for prospective Buyers to offer in their serious expressions of interest.

4.4.2 Warranty and indemnity (clause 9)

Question 14: Do you have any views on whether the warranties set out in clause 9 of the Option Agreement (and repeated in clause 4 of the form of Transfer Deed at Annex 2 to the Option Agreement) are sufficient?

Clause 9 of the Option Agreement requires the Seller to give warranties in relation to various matters, including their authority to enter into the agreement, their ownership of the cultural object, and that they are not aware of any charge, pledge or other encumbrance affecting their right and title to the object.

13 respondents submitted comments and questions on the warranties, asking the following questions:

• How the Option Agreement might work in the event of sales which are subject to the granting of an export licence, claiming a new owner might not be able to give all of the warranties?
• Whether the warranties work in a situation where the object is being sold by trustees with the consent of beneficiaries?
• Whether an allowance be included for the Seller to make any disclosures that will be cleared on completion?

Eight respondents claimed that the proposed warranties were too onerous and went beyond what would normally be expected during an art market transaction.

Government’s response
We would expect a Seller to have undertaken appropriate due diligence prior to their purchase of the object and, accordingly, should be able to give the warranties stipulated. Even if a Seller has purchased the object at auction, we would expect them to make appropriate enquiries following that purchase and prior to resale.

We would also expect trustees selling an object with the consent of beneficiaries to have a legal obligation to discharge their duties and would not wish the warranties to be diluted.

Our understanding is that practice in the sector varies widely and it is frequently the case that works of art are purchased without the benefit of the warranties which have been included in the Option Agreement. It is our view, however, that purchasers might reasonably expect a degree of protection from the terms of the document.

The Option Agreement has been amended following consideration of responses, to allow the Seller to make disclosures against any of the warranties. Moreover, the warranty regarding provenance of the object is limited to the Seller’s knowledge and belief, having made all due and reasonable enquiries.

We also agree that an amendment should be catered for where a provisional sale agreement exists. This is a situation whereby, prior to entering into the Option Agreement, the Owner has entered into an agreement with an overseas Buyer to sell the cultural object, and the sale is conditional on an export licence being granted for this object. In these particular circumstances, the warranty regarding unencumbered ownership of the work of art may now be qualified if a provisional sale agreement exists.

However, we do not consider it necessary to allow negotiation of other amendments, which could have the potential to delay the process, and is therefore not desirable. In any event, the warranties set out in the Option Agreement are, in our view, broadly consistent with the “Principles of conduct of the UK art market” adopted by members of the British Art Market Federation.

4.4.3 Allowing the parties to agree, on case by case basis, the provisions in relation to delivery and transfer of risk (clause 8.3.4), and viewing arrangements (clause 5.2)

Question 15: Do you have any views on the approach of allowing for the parties to agree, on a case by case basis, the provisions in relation to delivery and transfer of risk (see clause 8.3.4)?

Question 16: Do you have any views on the approach of allowing for the parties to agree, on a case by case basis, the provisions in relation to storage, security and viewing arrangements during the Option Period (see clause 5.2)?

Clause 8.3 of the Option Agreement provides for the parties to agree between them, prior to entering the Option Agreement, the process for delivery of the object to the Buyer on completion of the sale, and the point at which risk passes to the Buyer.

Clause 5.2 of the Option Agreement requires the Seller and the Buyer to agree, when the Option Agreement is being signed, the terms that will apply to the storage of the object during the Option Period. The approach will depend on the nature of the object and the circumstances at the time. In many instances, objects may be packed and stored, in the Seller’s name, at an art repository which has been agreed by the Seller and Buyer. Alternatively, the object may be retained by the Seller and the only stipulation might be that there must be a climate controlled, secure space

Eight respondents addressed these questions. Views were mixed: some museums requested minimum provisions as these negotiations can be complex; some art market representatives said it should be made clear in the Option Agreement that purchasing institutions should pay transfer costs.

Government’s response
The practice varies widely, which is why the Option Agreement allows the parties to agree on a case-by-case basis to the provisions relating to delivery, transfer of risk and viewing arrangements during the second deferral period. We considered the request from some museums for minimum standards and provisions to be met by the Owner, but on balance, we consider that these provisions should be left for the parties to agree rather than include minimum provisions which may not be appropriate in each case.

4.4.4 Other issues raised in relation to the Option Agreement

Question 17: Do you have any other comments about the drafting of the Option Agreement, in addition to the points covered in questions 13 to 16?

Question 18: Do you have any views on the scenarios outlined above detailing circumstances in which an export licence would or would not be granted? Please provide evidence to support these views.

Question 19: Do you have any other comments about the proposed introduction of a legally binding mechanism into the export control system for cultural objects?

In response to comments from respondents, the following footnotes have been added to the Option Agreement:

• To provide for consideration to include the copyright in the sale (although note that this will not always be relevant)
  
• To provide for either party to refer a dispute to arbitration
  
• To require the Seller to provide a receipt on completion (clause 8.3.3)

Further suggestions from respondents

Solicitors: Some respondents claimed that the parties should not be required to instruct solicitors when choosing to enter the Option Agreement, especially as much of the Option Agreement is non-negotiable.

We consider that having the structure of solicitors acting on both sides of the transaction would provide additional security. However, a footnote is now included in the Option Agreement to the effect that the parties can elect to use the services of an escrow agent, or an alternative mechanism, if they so wish.

VAT: One respondent commented to the effect that the reference to ‘plus VAT’ in the Option Agreement did not take into account all circumstances where VAT may or may not apply.

A footnote has been added to Schedule 1 of the Option Agreement to allow not only for “plus VAT” sales but also for an alternative margin scheme VAT-inclusive consideration, to which no further VAT would be added.

Completion Date: One response provided that the Completion Date of 5-10 days after exercising the option does not give enough time for Sellers, and that this should instead provide for completion to occur on a date agreed by parties acting reasonably and within 30 days of exercise notice.

In principle, we have no objection to this comment, albeit the intention was to provide a shorter period so that the Seller could be in receipt of proceeds quicker. Accordingly, we consider that the provision should remain as drafted.

4.4.5 Enforceability of the Option Agreement

Question 18: Do you have any views on the scenarios outlined above detailing circumstances in which an export licence would or would not be granted? Please provide evidence to support these views.

Note: The usual civil legal remedies would be available to enforce the Option Agreement should the Seller not comply with their legal obligation to deliver the object to the purchaser. The Option Agreement includes an acknowledgement that damages alone would not provide an adequate remedy for breach of the agreement, and that an order requiring the Seller to perform their contractual obligation would be appropriate.

Several respondents, in highlighting a situation in which a Seller might breach the Option Agreement, argued that the government should take responsibility for enforcing the Agreement, or support the Buyer in doing so. The principal reason provided for these arguments was that the legal costs of enforcing it could be a significant burden on smaller institutions. Two respondents suggested that compulsory purchase legislation should be introduced, which would enable the Secretary of State to take ownership of an item if a Seller were to breach the Agreement.

Government’s response
We believe that providing the government with the ability to enforce the Option Agreement and compulsory purchase rights (which would involve changes to primary legislation) would not be a proportionate response to the potential issue of a Seller breaching the agreement. This would result in significantly greater interference by government in Owners’ property rights. As such, it will be the parties’ responsibility to enforce the terms of the agreement.

The existence of a formal agreement will mean that there are likely to be very limited cases where breaches will occur, due to the enhanced reputational damage for the Seller. Furthermore, a breach of the Option Agreement would be taken into consideration by the Secretary of State in future export licence applications.

4.4.6 Implementation of the Option Agreement

In considering the circumstances in which a licence to export would or would not be granted, the following considerations apply.

If the Buyer chooses not to exercise the option because they fail to raise the necessary funds, or they revoke the agreement because the option is damaged, then a licence would normally be granted.

However, an export licence will normally be refused if:

• The Seller is not able to give the warranties required in the Option Agreement
  
• The sale does not take place (i.e. because the Seller tells the Buyer that the warranties have been breached)
  
• The Buyer chooses not to exercise the option but another appropriate purchaser (with sufficient funds and a signed undertaking to the Minister to allow appropriate public access, conservation and security) steps forward with a matching offer. Whilst the Seller will not be compelled to sell to the new purchaser (as the option agreement cannot generally be assigned), if the Seller refuses this later offer, an export licence will normally be refused

The effectiveness of this system will continue to be monitored, and this point will be considered in the five-year review following the introduction of the Option Agreement.

5. List of respondents to the consultation

We received 43 written responses, including from the following organisations. Individual respondents have not been named.

All Party Parliamentary Archaeology Group (APPAG)
Art Fund
Arts Council England
Association of Independent Museums
BDB Pitmans LLP
Ben Elwes Fine Art
Boodle Hatfield LLP
British Antique Dealers’ Association
British Library
British Museum
Christie’s
Council for British Archaeology
Forsters LLP
Heritage Group of Advisers, Farrer & Co
Historic Houses Association
Institute of Art & Law
Museums Association
Museums Galleries Scotland
National Gallery
National Galleries of Scotland
National Lottery Heritage Fund
National Museum Directors’ Council
National Museum Wales
National Museums Scotland
National Trust
Nevill Keating Pictures Ltd
RESCUE, The British Archaeological Trust
Reviewing Committee on the Export of Works of Art (RCEWA)
Society of London Art Dealers
Sotheby’s UK and Ireland
Stephenson Harwood LLP
Tate
V&A

6. Glossary of relevant terms

Appropriate purchaser: a UK public institution, or an individual or company who will keep the object in the UK with a commitment to ensure reasonable public access, satisfactory conservation and security arrangements for the object.

Arts Council England: an executive non-departmental public body, sponsored by the Department for Digital, Culture, Media and Sport. The operation of the export control regime for cultural goods is the responsibility of the Export Licensing Unit (ELU) within the Arts Council.

Business Day: a day, other than a Saturday, Sunday or public holiday in England, when banks in London are open for business.

Buyer: the potential purchaser of the cultural object (whether a UK public institution or private appropriate purchaser), in their capacity as a party to the option agreement; or, in cases where there are multiple potential purchasers, potentially the Secretary of State or another public body, in their capacity as a party to the option agreement (for the purpose of assigning the agreement to a potential purchaser prior to exercise of the option).

Consideration period: period of time between the first and second deferral period. This is to allow the Owner to reflect upon the Minister’s decision and, if they decide to enter the second deferral period, for the exchange of the Option Agreement to take place.

Deferral period: if the RCEWA concludes the object is a national treasure, it recommends to the Secretary of State that the decision on issuing a licence should be deferred for a period of time. The Secretary of State can defer the decision for a certain period of time (‘a deferral period’) to allow a purchaser to seek to acquire the object and keep it in the UK. The first deferral period provides an opportunity for a compensating offer to purchase the object to be made by a UK Buyer, and begins once an Owner agrees that they would be willing to accept a matching offer. The second deferral period, invoked when the Option Agreement is signed, allows for fundraising and is the period at the end of which the sale must be completed.

Due diligence: investigation or exercise of care that a person would normally be expected to take before entering into an agreement or contract with another party, particularly in identifying the source and history of an item offered for acquisition before acquiring it.

Expert adviser: usually a director, senior keeper or curator in a national museum or gallery who can object to the granting of an export licence by scrutinising, against the Waverley criteria, whether the object is of national importance. If an expert adviser objects to the granting of a licence, the licence application is referred to the RCEWA.

Legally binding mechanism (or a ‘binding offer’): the method by which an Owner, who has entered the export deferral process, is legally required to accept a matching offer for the object to be purchased (if they have agreed to accept such an offer).

National treasure: a cultural object judged to be of outstanding national importance to the United Kingdom. An object must meet one or more of the Waverley criteria to be deemed a national treasure.

Option agreement: the legally binding agreement to be entered into between the Owner and the Buyer at the end of the first deferral period. Under the Option Agreement the potential purchaser will have a contractual right (but not an obligation) to buy the cultural object from the Owner at the fair market price, by serving a notice in writing before the end of the option period (the second deferral period).

Owner: the legal owner of the cultural object to which the export licence application relates.

Reviewing Committee on the Export of Works of Art and Objects of Cultural Interest (RCEWA): the RCEWA is an independent body which advises the Secretary of State on whether a cultural object that is the subject of an application for an export licence is a national treasure in the context of the Waverley criteria.

Seller: the Owner (and usually the licence applicant), in their capacity as a party to the option agreement.

Waverley criteria: the Waverley criteria are used to decide whether an object should be considered a national treasure on the basis that the object’s departure from the UK would be a misfortune (see Introduction for further detail).

1. An expert adviser is usually a director, senior keeper or curator in a national museum or gallery who can object to the granting of an export licence by scrutinising, against the Waverley criteria, whether the object is of national importance. ↩

2. In February 2017 the Secretary of State refused a permanent export licence for the painting ‘Portrait of a Man in a Red Cap’, following protracted negotiations between the Owner who subsequently withdrew their application for a licence, and the National Gallery (who had raised £30m to purchase). ↩