Auction House Guarantee | ART

An Auction House "Guarantee" or “Price Guarantee at a Minimum Amount" is an agreement by which the "Seller" or "Consignor" agrees to consign their work or collection to an Auction House and the Auction House agrees to guarantee to the seller that, whatever the outcome of the Auction, the Seller will receive a minimum sale price for the work or collection.  Guarantees offer a high level of certainty; the Auction House secures a consignment and the Seller receives a minimum price, whatever the outcome of the sale, even if the work does not sell or does not meet the minimum estimate.  

How does an Auction House Guarantee work in practice?

The exact way in which a guarantee will operate will depend on the terms and conditions that have been negotiated between the Auction House and the Seller in advance of the sale. However, the usual potential outcomes of an Auction House guarantee are as follows:

• The lot fails to sell at all: the Auction House becomes the owner of the Lot and pays the Seller the full guarantee amount.

• The lot sells for less than the guarantee amount: the "Successful Bidder" or winning Bidder becomes the owner of the Lot, and the Auction House pays the Seller the hammer price plus the difference between the hammer price and the guarantee amount.

• The lot sells for more than the guarantee amount: the the "Successful Bidder" or winning Bidder becomes the owner of the lot and the Auction House receives a proportion of the excess of the guarantee amount from the Seller.

Why do Auction Houses offer Guarantees?

There are three primary reasons: certainty for the Seller, securing works for Auction, and hedged risk. The guarantee provides certainty that the item will “sell” and therefore commission will be received, which is a win-win for the Seller and Auction House.  If an Auction House offers a Seller a guarantee as an incentive, they may secure the consignment of works that would otherwise have gone to their rival.  If a lot sells for more than the guarantee amount, this can provide a source of profits for the Auction House. 

Does the Auction House take on all of this risk itself?

In giving guarantees, Auction Houses are taking a financial risk. This risk could be substantial, especially if the Auction House is guaranteeing a number of high value works in the same period.  Risk can be mitigated by Third-Party Guarantees, and may reduce its financial exposure under auction guarantees through contractual risk and reward sharing arrangements.

If you are a Buyer, how do you know if an item is subject to a guarantee?

Lots which are subject to a guarantee are marked in the Catalogue with a symbol and the symbol key in the Auction House’s conditions of sale provides an explanation. The Auctioneer may also disclose at the start of a sale that some works will be sold with guarantees. If a third-party guarantors choose to bid on the lot over and above their irrevocable written bid, they are required to inform the Auction House, and the Auctioneer will, before offering the Lot for sale, make a saleroom and/or online announcement that the third-party will be bidding so that other Bidders are aware that someone with a financial interest may be bidding on the Lot. However, the amount of the guarantee is not disclosed.

NOTE: Guarantees by the Auction House are indicated in the Catalogue by a little sign (a dot or a circle).  The Seller or Buyer should seek their own legal advice prior to selling or bidding with the use of a guarantee.

A "third-party guarantee" typically works by the third-party agreeing, for a fee, to place an irrevocable written bid for an undisclosed amount on the lot before the Auction (known as a "third-party guarantee"). The amount of the bid can be up to or exceeding the guarantee amount. As a result the third-party guarantor takes on all or part of the risk of the lot not being sold. Third-party guarantors may then also participate in the Auction themselves and choose to bid on the lot over and above their irrevocable written bid. If the lot sells for less than the irrevocable bid the third-party pays the bid amount, less the fee, and secures the work. If the :ot sells for more than the irrevocable written bid, and the irrevocable written Bidder was not the winning Bidder, they receive their fee and a share of the profits above the guarantee amount.

Why does a third-party guarantee work? 

Third-party guarantees—which offer Auction Houses and sellers a useful tool to hedge their bets, can be in many variations.  Depending on how the third-party guarantee deal is structured, an auction house might offer a couple of incentives to entice potential outside guarantors, such as a percentage of the upside and buyer’s premium (also known as “financing fees”) from a successful bid. In return, the third-party guarantor agrees to take on part of or all of the risk by placing an irrevocable written bid on the lot. The basic structure of third-party guarantees is generally similar, but the form they take differs depending on the policies of the individual Auction House.

Who are third-party guarantees? 

There are funds specializing in art, dealers, banks and occasionally certain collectors.

What is an example of a third-party guarantee?  

Consider the following scenarios if an artwork is given an Auction House minimum price guarantee, usually the low estimate, and in this case a guarantee of $1 million, which is partially or wholly guaranteed by a third-party who does not bid at Auction:

• Scenario 1: The artwork sells for $1.5 million hammer price at Auction. There is an upside of $500,000 ($1.5 million less $1 million), but now the Auction House has to share its portion of that upside, typically 20%, and perhaps even the financing fees with the third-party guarantor. Regardless of the outcome of the auction, the Seller receives the guarantee.

• Scenario 2: The highest bid for the artwork is $800,000, which is $200,000 or twenty (20% percent) less than the guaranteed amount of $1 million. Prior to the auction, the third-party guarantor places an irrevocable bid at $900,000. Because no bids above the irrevocable bid are placed during the auction, the third-party obtains the artwork (and at a discount if the third-party guarantor receives financing fees from the Auction House of up to $40,000, or in this case 20% of $1 million); and further, the Auction House has to pay the difference to the Seller. Regardless of the outcome of the auction, the seller receives the guarantee.

If you are a Buyer, how do you know if an item is subject to a guarantee?

Lots which are subject to a guarantee are marked in the Catalogue with a symbol and the symbol key in the Auction House’s conditions of sale provides an explanation. The Auctioneer may also disclose at the start of a sale that some works will be sold with guarantees. If a third-party guarantors choose to bid on the lot over and above their irrevocable written bid, they are required to inform the Auction House, and the Auctioneer will, before offering the Lot for sale, make a saleroom and/or online announcement that the third-party will be bidding so that other Bidders are aware that someone with a financial interest may be bidding on the Lot. However, the amount of the guarantee is not disclosed.

NOTE: Guarantees by the Auction House are indicated in the Catalogue by a little sign (a dot or a circle).  The Seller or Buyer should seek their own legal advice prior to selling or bidding with the use of a guarantee.