To create a peering between two virtual networks, the address spaces of the virtual networks must not overlap. VNet1 has an address space of 10.0.0.0/16, which overlaps with VNet2's address space of 10.2.0.0/16. Therefore, you need to modify the address space of VNet1 to a non-overlapping range, such as 10.1.0.0/16, before you can create the peering. You do not need to configure a service endpoint, add a gateway subnet, or create a subnet on either virtual network for the peering to work. Then, Reference: [Virtual network peering] [Modify a virtual network's address space]