Can UE4 Be Used to Create a Garry's Mod Type Game?

Hello, I have a small community of aspiring developers with me and we want to take on a big task.

We used to run a server on Garry’s Mod and developed for it, using LUA scripting, and other applications. However, the game simply isn’t optimized, and it can’t be used for the type of content we want to create, and give others the potential to create as well, so I began looking into Unreal Engine 4.

I’ve gotten rather familiar with the world building part of UE4 and have begun learning the Blueprint style coding and combining that with learning c++ as well (Already done some research and have learned that it’s best to use both in certain areas for better optimization and workflow.) Though, I have a few questions in mind. I did a bit of research, but was unable to really get the answers I was looking for, so I would like to ask a few questions about the potential creation of a Garry’s Mod type game.

Question 1: How well does the Engine handle physics? One of the few things Source Engine still gets praise for is how beautifully flushed out its physics is. Could it handle pieces of buildings falling apart, people launching props at enemies, etc. I have read mixed answers to this, so just a bit of a straight answer is what I’m looking for.

Question 2: Is it possible to use UE4 and make a large and adaptable modding community such as the one Garry’s Mod has? If I implement a way to use the Steam Workshop for the game, or any other external source, could mods for games be easily accessible and downloaded so that anyone who downloads them can make a custom gamemode for others to enjoy?

Question 3: Last Question: Are there any legality issues that I would need to concern myself with when allowing for a large modding community to exist. Including anything to do with people selling mods, people who would make mods that could purpose some kind of copyright problem. (I.E. someone makes a Star Wars mod for people to play on) I know if things are made for free (which I intend that to be the idea, our team would not allow for mods to be sold through any means by us) then most it would fall under fair use? However, after being a part of Garry’s Mod for so long, it is pretty obvious that people can make a lot of money through “donations” to servers that use that type of content.
Short version, can our team get in trouble for the User Generated Content that others make, and potentially sell through external means, not through us.

Thank you for any answers, you guys can provide. If I asked questions that have already been answered I apologize, I simply couldn’t find them, and if any of the questions seem ignorant, I apologize for that as well.