Friday, September 07, 2007

What is the buyer's premium?

THE buyer's premium is a charge paid by the buyer of a lot at auction, required by the auctioneers, usually in the form of a percentage of the hammer price.

An example is the auctioneers T W Gaze (whose architectural salvage auctions are regularly featured in SalvoNEWS) who charge 10 per cent buyer's premium to which UK vat is added, bringing the premium to 11.75 per cent including tax.

The buyer's premium is described by the Royal Institute of Chartered Surveyors, the trade body to which most UK auctioneers belong, as an obligation that the auctioneer's 'Conditions of sale' require buyers to pay. Others describe the buyer's premium as a commission charge. Others call it a levy - which is illegal under European laws.

Specialist lawyers believe that the refusal of a buyer to pay the auctioneer's premium could result in the buyer winning in court, mainly because the auctioneer is not offering any service for its premium. Milton Silverman of Streathers in London wrote that the courts have been alive to the possible conflict of interest when an auctioneer provides a service to both seller and buyer, and an increase in buyer's premium will certainly increase the acuteness of this conflict. [The courts may start to look at buyer's premium more closely now - Antiques Trade Gazette 1 Sep 2007]

A potted history of the buyer's premium

Prior to 1979, auctioneers only charged seller's a premium in order to cover their costs in holding the auction, requiring seller's to pay the auctioneer a percentage of the hammer price, or in the event that the lot failed to reach its minimum price, known as the reserve, a fee often based on a percentage of the estimated value of the lot. The seller's premium was usually around ten per cent.

Competition to attract sellers between Sotheby's and Christie's resulted in deals being offered to reduce the seller's premium. The reduction in seller's premium had to be compensated for somehow, so in 1979 both Christie's and Sotheby's introduced a ten per cent buyer's premium, initially levied on lower value lots. This resulted in an outcry of protest from the art and antiques trade.

Sotheby's and Christie's buyer's premium remained at ten per cent until 1992. The buyer's premium then gradually increased until now, in 2007, both Sotheby's and Christie's have raised the buyer's premium from 20 up to 25 per cent for lower value lots, with the premium reducing for higher value lots. This now allows both auction houses to dispense with the seller's premium completely for their most prestigious clients, and even to offer them a guaranteed return from an auction.

In 2007 Sotheby's outstanding auction guarantees jumped from $274m to $378m which suggests, failing a market collapse, that Sotheby's will do well in the second half of 2007. Forbes reported that:
Sotheby's disclosed in the regulatory filing that its outstanding auction guarantees have jumped to $378 million, from the previously reported total of $274.9 million on Aug. 7. Auction guarantees are made to ensure the consignors a minimum price on an auction sale. Sotheby's is typically entitled to a share of the excess proceeds if the property sells above the auction guarantee price. If the property sells for less than the minimum price, Sotheby's must pay the difference. The auction house said the property related to the current guarantees is being offered primarily in the second half of the year.

Sotheby's and Christie's have identical buyer's premiums in September 2007, which are:
25 per cent on items up to £10,000 ($20,000 or €5,000)
20 per cent on items between £10k ($20k or €5k) and £250k ($500k or €400k)
12 per cent on items higher than £250k ($500k or €400k)
To these premium figures local sales tax will be added, which in the UK is 17.5 per cent VAT.

Therefore an item with a hammer price of £10,000 will cost the buyer £12,937.50.

A spokesman for Christie's justifies the premium, saying that buyers are paying extra for Christie's "bringing a work of art to market and making it available. They benefit from us sourcing things globally and offering them in appropriate places; from our cataloguing, research, and condition reports and from access to our specialists." Sotheby's justifies the premium on much the same grounds. But critics of the premium believe that the buyer receives little in terms of services or protection in return for the payment. In the recent case brought by the Canadian heiress Taylor Thomson against Christie's over some very expensive urns, even the judge seemed at a loss to know what the payment of the premium was for. They also ask how, if the salerooms are acting as agents for the seller to obtain the highest possible price, they can simultaneously represent the buyer without a conflict of interests. The auction houses deny there is such a conflict. "The auctions houses' roles are made clear to both sellers and buyers," says Sotheby's. David Mason, chairman of the MacConnal-Mason Gallery, describes the level of charges, in which the salerooms can take as much as 45 per cent from buyer and seller, as "inappropriate" and "obscene".[Art sales: Anger at 'obscene' saleroom levy - by Colin Gleadell, Telegraph online 9sep07]

RICS Model conditions of business for an auctioneer | Christie's buyer's premiums explained | Forbes | Telegraph online

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