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Non-Fungible Tokens (NFT) Newsroom

Leasing in the Metaverse

Leasing in the Metaverse

As commercial real estate recovers from the COVID-19 pandemic, a new breed of commercial leasing is gaining traction in the metaverse. The NFT Newsroom previously explored the virtual real estate boom happening in the metaverse. Now that we own a parcel of virtual real estate, what do we do next? Of course, there are a few options, sell it, hold it or… lease it! Rather than holding your virtual real estate investment, leasing it can start bringing in income now. As metaverse activity continues to grow in 2022, a growing number of brands and businesses are looking for a way to be seen in their favorite metaverse platform without fully investing in a parcel of virtual real estate.

Leasing virtual real estate in the metaverse, may, in some instances, be a simplified (and cheaper) alternative to leasing real estate in the physical world. Without any physical buildings or materials to deal with, a virtual real estate developer and future landlord need not worry about zoning regulations or the laws of physics. Pixels and electrons are the building blocks of all electronic devices and buildings in the metaverse are no different.

Whether you own a raw parcel or developed parcel of virtual real estate, the first step is to find a renter. Like in the physical world, the service of a real estate agent, in this case, a “virtual real estate” agent (a living, breathing person, not a virtually generated real estate agent, though I’d bet we are headed that way!) is a great place to start.

Once you’ve identified a renter, it’s reasonable to expect that the standard commercial leasing terms will be negotiated on a traditional lease form to be executed by the parties. These terms could include, the portion of the property covered by the lease, the term, base rent, use (including use restrictions), preparation of the premises (by Landlord or by Tenant and including any required build-out), security deposit and tenant allowances, just to name a few. This is where the differences between leasing virtual real estate and physical real estate are most apparent. Some lease terms may be deemed more important in actual real estate leasing as opposed to virtual real estate leasing. For example, the parties may decide that a security deposit is unnecessary in a virtual real estate lease as the tenant does not physically occupy the property and there is no risk of a holdover by the tenant if the landlord has the ability to automatically end the tenancy at the end of the lease term (essentially, the landlord can erase the tenant’s brand name or other signage from the virtual land). Conversely, it’s entirely possible for a particular deal to require the tenant to demolish at the end of the lease term, the virtual building it constructed at the beginning of the lease term. In this case, the interests of the landlord may be best protected if the tenant has some “skin in the game” in the form of a forfeitable security deposit. As with commercial leasing in the physical world, the negotiation of traditional lease terms in a virtual real estate lease should be decided by the parties on a case by case basis and the counsel of an attorney with commercial leasing experience is always recommended.

Another interesting difference between commercial real estate lease and virtual real estate leasing is the short-term nature of virtual real estate leases. Most virtual real estate leases last just a few days or weeks as opposed to one or more years. Given the short-term nature of these agreements, some parties may prefer a simplified agreement as opposed to a lengthy lease document. It’s entirely possible to negotiate a short lease form that covers the key terms, however another type of governing document has been used in these transactions, smart contracts. The smart contract is intended to specify the term of the agreement, the amount of rent due, and the due date. The smart contract is supposed to automatically collect the rent without any intervention and automatically evict a tenant who does not pay their rent on time. The concept of the smart contract is interesting, however a smart contract may be best utilized as a supplemental tool used in conjunction with a physical lease due to the possibility of technical glitches and the relative novelty of smart contracts.

Stay tuned to Ingram’s NFT Newsroom to learn more about the latest developments with NFTs.

By: Michael A. Mulia