Bloomberg Law
May 17, 2022, 8:00 AM

The Metaverse Real Estate Market: Freehold, Leasehold, No Holds Barred?

Geraldine  Pigot
Geraldine Pigot
Covington & Burling
Stuart Irvin
Stuart Irvin
Covington & Burling

The digital land rush is on. Celebrities, venture capitalists, crypto millionaires, utopian dreamers, and average investors looking for an above-average return are acquiring “real estate” on metaverse platforms. According to a January 2022 report from the Centre for Finance, Technology and Entrepreneurship, two of the most popular metaverse platforms (The Sandbox and Decentraland), had $350m and $110 respectively in virtual land transactions in 2021.

So, how does it all work? What are the risks associated with purchasing real estate in the metaverse?

Applying the processes developed for real world land transactions to digital land deals reveals some unique risk factors associated with metaverse real estate.

For example, how does an investor know that the seller of a plot of virtual land is the actual owner of that plot? How does the investor ensure that the plot being acquired is in the same highly desirable neighborhood as Snoop Dogg’s mega mansion and not in a digital backwater?

For physical land, comfort around these concerns can be obtained by a review of title documents, searches of public registers, purchase of title insurance, valuations based on comparables, physical inspections of the land and longstanding regulation in respect of land ownership. These forms of diligence are not readily available in the metaverse and the legal framework is completely different, which leaves investors relying almost solely on contractual representations and covenants and on related tort claims like fraud in the inducement.

Have You Tried Rebooting Your Building?

Virtual real estate is a digital visualization of land on an online platform, which means physical inspection is not possible. Title is typically represented by a non-fungible token (NFT) on a blockchain, which is not registered in a public land registry. Because of this, the diligence required to assess the value of digital real estate is still unfamiliar to many.

In addition, while NFTs are generally secure from hacking, the digital land that the NFT represents has value as part of a larger group of parcels that make up the visualization of a building, neighborhood or city within the metaverse. The virtual land is only as secure and reliable as the metaverse platform that hosts the systems that allow access to it. What happens if the platform is hacked, discontinues user access, or simply stops supporting the necessary software?

We looked at the terms of use for Decentraland and The Sandbox, to consider some of these questions.

Decentraland’s terms of use make it clear that no assurances are given that its virtual world, and therefore the digital land acquired on it, will continue to exist. Similarly the terms for The Sandbox reserve the right to remove assets from the platform “without prior notice, for any reason or for no reason at all”.

This means that The Sandbox can change or remove anything built on a digital land plot. A real world equivalent to this would be the enforced demolition of a building without notice or recourse.

Both platforms also reserve the unilateral right to modify their terms of use. In a worst case scenario, depending on the change, this could deprive the owner of the digital land of its utility and value. In the real world, many jurisdictions require governments to go through legal procedures before enforcing such changes for real property.

‘This Land Is Your Land, This Land Is My Land … .’

Digital land can be rapidly duplicated at marginal cost. Physical land is, by its very nature, finite. As Mark Twain once famously said: “Buy land, they’re not making it anymore.”

Is it therefore safe for the buyer of digital duplex on Park Avenue to assume that there is only one such apartment when making an investment? What are a buyer’s remedies in the event the metaverse platform develops Manhattan 2.0, or floods the market with new, identical Park Avenue real estate?

The terms of use do not provide much comfort on this, although they do include references to the creation of decentralized autonomous organizations, which could theoretically involve land owners in a future rule-setting or zoning process. However, any such process will still be subject to the overriding rights of the metaverse platform provider to modify or amend the terms of use, which could make these governance rights largely illusory.

As noted above, the operators of The Sandbox and Decentraland do not commit to continuously update, maintain, and support the platform nor unambiguously promise to never create more digital land. But what would happen if they did? What are the remedies in the event of a breach of those (entirely hypothetical) undertakings?

In the hypothetical posited above, there may be a claim for breach of contract where property values have been reduced or destroyed. But damages for users of The Sandbox and Decentraland platforms are capped at an astonishingly low $100.

There may, though this is as yet untested, be equitable remedies available for breach or class action claims, but those are harder to assert and in any event an injunction requiring a platform operator to update software that it doesn’t want to update is unlikely to result in the latest and most feature-rich technology.

Bottom Line on Real Estate Risk

No investment is risk-free. However, digital real estate investors have few of the protections afforded to owners of real property in the real world and what limited contract remedies are not disclaimed in terms of use may be insufficient to assure long-term investor confidence. That said, operators will not want to arbitrarily damage value in their own platforms, so there is some non-contractual comfort there.

It will be interesting to see how investment in digital land develops and whether there will ultimately be a demand for greater security in the same way as exists for physical land.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Geraldine Pigot is special counsel with Covington in London and heads the firm’s London real estate practice.

Stuart Irvin is of counsel with Covington in Washington, D.C., and founder of the firm’s Video Games and Esports practice.

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