Home Borrower Borrowing and Renting in the Metaverse: The Disputes Are Still Ahead

Borrowing and Renting in the Metaverse: The Disputes Are Still Ahead


Second Life, which was made virtual by Linden Lab in 2003, is widely recognized as the first “metaverse” in which individuals could acquire, build and, if desired, sell virtual land. Coming to life long before the advent of cryptocurrency, the kingdom’s currency was the US 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 an auction and acquire a property below market value. Second Life took over the land and all the other virtual lands belonging to Woebegone, in a jiffy, thus carrying out the first ever non-judicial virtual seizure.
Bragg vs. Linden Lab, 487 F. Supp. 2d 593 (ED Pa. 2007). The case ended up being settled.

Nearly 20 years later, since Second Life welcomed its first resident avatars, it seems inevitable that if the Metaverse succeeds to the degree that JP 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 across multiple metaverses” (including Decentraland, where there are currently around 200 properties), while offering “a full-service real estate, including buying, leasing, building, tenant representation, and premium brokerage services.” TerraZero rents and sells its land to individuals and businesses.

Interestingly, TerraZero deliberately attributes many of the characteristics of traditional real estate to its properties, i.e. “LAND is a non-fungible digital asset maintained in an Ethereum smart contract. divided into parts are referenced using unique Cartesian x,y coordinates,” and “each LAND token includes a record of its coordinates, owner, and reference to a content description file or parcel manifest that describes and encodes the content that the owner wishes to broadcast on his land.” In other words, just like in real life, the land is intended to be unique and bears a title similar to that found in a traditional deed. Unlike the owner of Second Life, who said, “You have to remember this stuff isn’t real. It’s a computer game,” TerraZero and others view their land as more than just a game. Evans v. Linden Research2012 WL 5877579, at *2 (ND Cal. 20 November 2012).

Indeed, TerraZero will lend US dollars to individuals and businesses to enable them to purchase property. To secure these loans, NFTs are pledged by the borrower as collateral. Once the debt is paid, TerraZero returns the NFTs to the borrower. It is not clear from the website whether a landlord can sell the land subject to a mortgage or whether they can borrow more against the property and grant security to a third party, who would potentially have their own recourse rights in the event of default. .

Not the same

Presumably, there will come a time when a TerraZero borrower defaults and challenges the forfeiture of their collateral and loss of rights to the property. Although the “land” is given the attributes of traditional real estate, it is hard to believe that a court will find the land so similar to virtual real estate that it will compel TerraZero to initiate the notice and other related proceedings. in judicial or non-judicial proceedings. foreclosures, since the property does not exist in any particular state and the rules of traditional foreclosure would be difficult to apply sensibly in the virtual world.

But it is much more difficult to know if the requirements of Article 9 of the Uniform Commercial Code (UCC or Code) must be followed if TerraZero flips the switch, extinguishes the rights of its borrower and declares ownership of the NFTs it held as collateral. Do the Code’s notification requirements (which differ depending on whether the borrower is a consumer or a business), redemption requirements and collateral sale rules apply? It is only a matter of time before these arguments are made, and although in traditional contracts some elements of the UCC may be waived by agreement, the applicable laws are generally not waived under state law.

Equally certain is the possibility of a dispute if TerraZero decides that a tenant has breached their lease and “evicts” (again, at the flick of a switch) their tenant. Would the higher protections, such as laws prohibiting debt acceleration, offered by many states to individual tenants in the real world apply? Would a persistent coding error violate a virtual implicit commitment to habitability? And on an even more basic level, will leases be subject to the many requirements (font size, etc.) that apply in the real world?

It seems likely that virtual property owners, landlords and brokers will argue that despite the nomenclature resembling real estate in the non-virtual world, their arrangements are subject to their terms of use, and the state laws that govern the sale and rental of real estate simply do not apply. However, many questions remain unanswered, including whether the terms of service should distinguish between consumers and commercial entities in the manner often required by Article 9. But like the housing market in Decentraland and other metaverses like heat up, he probably won’t be fine before a brick-and-mortar court takes place.

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