Borrowing And Renting In The Metaverse: The Disputes Are Yet To Come

• Published date: 15 September 2022
• Subject Matter: Real Estate and Construction, Technology, Real Estate, Landlord & Tenant - Leases, Fin Tech
• Law Firm: Holland & Knight
• Author: Metaverse Strategy Team

Second Life, which was brought to virtual life by Linden Lab in 2003, is widely acknowledged as the first "metaverse" in which individuals could acquire, build on and, if they wished, sell virtual land. Coming to life long before the advent of cryptocurrency, the coin of the realm was the U.S. dollar, and land could be acquired through auctions held by Second Life. In 2006, Second Life concluded that an avatar named Marc Woebegone had found a way to hack into an auction and acquire a property below market value. Second Life took back the land, and all other virtual land owned by Woebegone, with the flip of a switch, effectively accomplishing the first ever non-judicial virtual foreclosure. Bragg v. Linden Lab, 487 F. Supp. 2d 593 (E.D. Pa. 2007). The matter eventually settled.

Almost 20 years later since Second Life welcomed its first avatar residents, it seems inevitable that if the metaverses succeed to the degree that J.P. Morgan and many others hope, virtual land disputes will only become more common. For example, TerraZero Technologies, founded in 2021, promotes that it "owns, acquires, leases and develops real estate within multiple Metaverses" (including Decentraland, where there currently are roughly 200 properties), while also providing "a full service real estate experience, including buying, leasing, construction, tenant representation and white-glove brokerage services." TerraZero rents and sells its land to individual consumers and businesses alike.

Interestingly, TerraZero deliberately attributes its properties with many of the characteristics of traditional real estate, i.e., "LAND is a non-fungible digital asset maintained in an Ethereum smart contract . divided into parties are referenced using unique x,y Cartesian coordinates," and "each LAND token includes a record of its coordinates, its owner and a reference to a content description file or parcel manifest that describes and encodes the content the owner wishes to serve on his or her land." In other words, just as in real life, the land purports to be unique and has a title resembling that found in a traditional deed. Unlike Second Life's owner, which claimed, "You have to remember this stuff isn't real. It's a game on a computer," TerraZero and others consider their land as more than just a game. Evans v. Linden Research, 2012 WL 5877579, at *2 (N.D. Cal. Nov. 20, 2012).

Indeed, TerraZero will loan U.S. dollars to individuals and businesses to allow them to buy property. To secure...