How do I select a custom Terminal in Preferences?

Presumably seeking to default to the Warp terminal app.

That configuration setting shown is not a means to establish a replacement for Terminal.app, that’s a path to a shell command to execute when Terminal.app opens.

I don’t know of a supported means to change the default app used for Terminal. AFAIK there isn’t such a setting. There isn’t a default terminal app.

Closest to what you seem to seek here is changing which app is opened for certain file types; for .command, .term, etc., and changing the handler for URIs involving ssh, telnet, etc.

PS: might want to see whether the Vttest passes the emulation. Hopefully, the folks that wrote it tried that.