I would like to see the PVP toggle that is already in the towny commands actually work.  I don't know if this can be enabled while having overworld PVP off.  That is what this suggestion is for, because I did notice that you can turn Fire on in a town allowing people can place fires in their plots, so long as the toggle is on.  But I have never tested it for PVP so I do not know if it works.  But if it doesn't I would like to see that implemented if at all possible.  I'm sure many people would like to make their own PVP arenas for their towns or any other game that would require PVP, Like snowball fights or king of the ladder off the top of my head.

Maybe use death control so you don't lose items like in PvP, so you aren't losing your stuff.

Yeah, more of a private thing or for parties or fun.  Like the pvp has to be toggled on the exact plot for it to work.  It is off by default of course.  And the moderation would just have to be the staff of the town or the players involved.  Maybe have a mod check the area after it's built to make sure it is a fair facility and it doesn't cause too much lag with possible redstone functionality.

And I think death control may be hard to implement in specs across the entire map.  I would say don't take anything you want don't want to lose.  No fun in hardcore diamond armor anyways.  Makes it too hard to kill the each other.

But yeah, don't allow it for the whole town.  Just plots that have it enabled.  Maybe allow it to where a town official has to enable it for it to become active so random plots through the town don't have pvp.