EX-10.81.01

[Project Bond Lease Portfolio #1]
[Dartmouth, Massachusetts - Property #1151]
[Elk Grove, California - Property #1152]
[Baltimore, Maryland - Property #1153]
[Little Rock, Arkansas - Property #1154]
[Hemet, California - Property #1156]
[Hoffman Estates, Illinois - Property #1157]
[Plymouth, Massachusetts - Property #1158]
[Willoughby, Ohio - Property #1159]
[Tulsa, Oklahoma - Property #1160]
[Orland Park, Illinois - Property #1162]
[Palm Springs, California - Property #1168]
[Atlanta, Georgia - Property #1169]
[Edgewood, Kentucky - Property #1170]
[Oklahoma City, Oklahoma - Property #1171]
[Bellevue, Washington - Property #1173]
[Lynnwood, Washington - Property #1174]
[Snohomish, Washington - Property #1175]

NOT TO BE RECORDED IN PUBLIC RECORDS

 

 
MASTER LEASE AND SECURITY AGREEMENT
 
AMONG

EACH OF THOSE PERSONS LISTED ON SCHEDULE A ATTACHED HERETO AS “LESSOR,”
 
as their interests may appear, as Lessor
 
AND
 
EMERITUS CORPORATION,
 
as Lessee
 
Dated as of October 12, 2010
 

 

 

 

 
 

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TABLE OF CONTENTS
Page
ARTICLE I.
 
1
1.1
Leased Property; Term.
1
ARTICLE II.
 
2
2.1
Definitions
2
ARTICLE III.
 
22
3.1
Rent
22
3.2
Additional Charges
25
3.3
Late Payment of Rent.
26
3.4
Net Lease
27
ARTICLE IV.
 
27
4.1
Impositions
27
4.2
Utilities
28
4.3
Insurance
29
4.4
Impound Account
29
4.5
Tax Service
29
ARTICLE V.
 
29
5.1
No Termination, Abatement, etc
29
5.2
Termination with Respect to Fewer than All of the Facilities
30
5.3
Abatement Procedures
30
ARTICLE VI.
 
30
6.1
Ownership of the Leased Property
30
6.2
Personal Property
30
6.3
Transfer of Personal Property and Capital Additions to Lessor
31
ARTICLE VII.
 
31
7.1
Condition of the Leased Property
31
7.2
Use of the Leased Property
31
7.3
Lessor to Grant Easements, etc
32
7.4
Preservation of Facility Value
33
ARTICLE VIII.
 
34
8.1
Compliance with Legal and Insurance Requirements, Instruments, etc.
34

 
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ARTICLE IX.
 
34
9.1
Maintenance and Repair.
34
9.2
Encroachments, Restrictions, Mineral Leases, etc
35
9.3
On-Going Capital Projects
36
9.4
Inspections; Due Diligence Fee
39
9.5
Planned Capital Refurbishment Projects.
39
ARTICLE X.
 
45
10.1
Construction of Capital Additions to the Leased Property
45
ARTICLE XI.
 
45
11.1
Liens
45
ARTICLE XII.
 
46
12.1
Permitted Contests
46
ARTICLE XIII.
 
46
13.1
General Insurance Requirements
46
13.2
Replacement Cost
48
13.3
Additional Insurance
49
13.4
Waiver of Subrogation
49
13.5
Evidence of Insurance
49
13.6
Increase in Limits
50
13.7
Blanket Policies and Policies Covering Multiple Locations
50
13.8
No Separate Insurance
50
13.9
Insurance Requirements Under the Facility Loan Documents
50
ARTICLE XIV.
 
51
14.1
Insurance Proceeds
51
14.2
Insured Casualty.
51
14.3
Uninsured Casualty
52
14.4
No Abatement of Rent
52
14.5
Waiver
52
ARTICLE XV.
 
52
15.1
Condemnation
52
ARTICLE XVI.
 
53
16.1
Events of Default
53

 
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16.2
Certain Remedies
56
16.3
Damages
56
16.4
Receiver
57
16.5
Lessee's Obligation to Purchase
57
16.6
Waiver
58
16.7
Application of Funds
58
16.8
Facility Operating Deficiencies
58
16.9
[Intentionally Omitted].
59
16.1
Grant of Security Interest; Appointment of Collateral Agent
59
16.11
Leases and Residential Care Agreements
61
ARTICLE XVII.
 
62
17.1
Lessor's Right to Cure Lessee's Default
62
ARTICLE XVIII.
 
62
18.1
Purchase of the Leased Property; Rights of Lessee Prior to Closing.
62
ARTICLE XIX.
 
64
19.1
Extended Term(s)
64
19.2
Lessor's Extension and Early Termination Rights
65
ARTICLE XX.
 
65
20.1
Holding Over
65
ARTICLE XXI.
[INTENTIONALLY OMITTED]
66
ARTICLE XXII.
 
66
22.1
Risk of Loss
66
ARTICLE XXIII.
 
66
23.1
General Indemnification
66
ARTICLE XXIV.
 
67
24.1
Transfers.
67
ARTICLE XXV.
 
76
25.1
Officer's Certificates and Financial Statements.
76
ARTICLE XXVI.
 
78

 
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26.1
Lessor's Right to Inspect and Show the Leased Property
78
ARTICLE XXVII.
 
78
27.1
No Waiver
78
ARTICLE XXVIII.
 
78
28.1
Remedies Cumulative
78
ARTICLE XXIX.
 
79
29.1
Acceptance of Surrender
79
ARTICLE XXX.
 
79
30.1
No Merger
79
ARTICLE XXXI.
 
79
31.1
Conveyance by Lessor
79
31.2
New Lease
79
ARTICLE XXXII.
 
80
32.1
Quiet Enjoyment
80
ARTICLE XXXIII.
 
81
33.1
Notices
81
ARTICLE XXXIV.
 
81
34.1
Appraiser
81
ARTICLE XXXV.
 
82
35.1
Lessee's Option to Purchase the Leased Property.
82
35.2
Defaults.
84
35.3
Escrow Provisions.
85
35.4
Assurances
86
ARTICLE XXXVI.
 
86
36.1
Lessor May Grant Liens
86
36.2
Attornment
87
36.3
Compliance with Facility Mortgage Documents
87

 
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ARTICLE XXXVII.
 
89
37.1
Hazardous Substances
89
37.2
Notices
89
37.3
Remediation
89
37.4
Indemnity
90
37.5
Environmental Inspection
90
37.6
Pre-Existing Environmental Conditions
91
ARTICLE XXXVIII.
92
38.1
Memorandum of Lease
92
ARTICLE XXXIX.
 
92
39.1
Sale of Assets
92
ARTICLE XL.
 
92
40.1
Subdivision
92
ARTICLE XLI.
 
93
41.1
Certain Representations and Warranties by Lessee
93
ARTICLE XLII.
 
94
42.1
Attorneys' Fees
94
42.2
Set-Up Costs
94
ARTICLE XLIII.
 
94
43.1
Brokers
94
ARTICLE XLIV.
 
95
44.1
SUBMISSION TO ARBITRATION.
95
ARTICLE XLV.
 
97
45.1
Miscellaneous.
97
ARTICLE XLVI.
 
102
46.1
Provisions Relating to Master Lease
102
46.2
Treatment of Lease
102
ARTICLE XLVII.
 
102

 
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47.1
Delays in Delivery of Possession and Commencement Date
102
ARTICLE XLVIII.
 
104
48.1
Lessor's Conditions to Continued Effectiveness of Lease
104
48.2
Lessee's Conditions to Continued Effectiveness of Lease.
107
48.3
Amendment to Lease
108
ARTICLE XLIX.
 
108
49.1
Certain Specific State Law Matters and Other Matters
108
     
Exhibits:
         
Exhibit A
Legal Description of the Land
 
Exhibit B
List of Lessor's Personal Property
 
Exhibit C
Description of Facilities and Certain Material Terms
 
Exhibit D
Form of Amendment to Lease
 
Exhibit E
Form of Agreement Regarding Subleases
       
Schedules:
         
Schedule A
List of Persons Comprising Lessor and Facility Owned by such Person(s)
 
Schedule 7.4.1
Excluded Facilities
 

 

 
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MASTER LEASE AND SECURITY AGREEMENT
 
THIS MASTER LEASE AND SECURITY AGREEMENT (“Lease”) is dated as of October 12,
2010 (the “Effective Date”), and is among each of those Persons listed on
Schedule A attached hereto and whose signatures also appear on the signature
pages hereto under the heading “Lessor” (collectively, as their interests may
appear, “Lessor”) and EMERITUS CORPORATION, a Washington corporation (“Lessee”
or sometimes “Emeritus”).
 
ARTICLE I.                      
 
       1.1 Leased Property; Term.
 
Upon and subject to the terms and conditions hereinafter set forth, Lessor
leases to Lessee and Lessee leases from Lessor all of Lessor’s rights and
interests in and to the following with respect to each Facility (as defined
below) (collectively the “Leased Property”):
 
(a) subject to the provisions of Section 45.1.9 below, the real property or
properties described in Exhibits A-1 through A-17 attached hereto (collectively,
the “Land”);
 
(b) all buildings, structures, Fixtures (as hereinafter defined) and other
improvements of every kind now or hereafter located on the Land including,
alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines
(on-site and off-site to the extent Lessor has obtained any interest in the
same), parking areas and roadways appurtenant to such buildings and structures
and Capital Additions funded by Lessor of each such Facility (collectively, the
“Leased Improvements”);
 
(c) all easements, rights and appurtenances relating to the Land and the Leased
Improvements of each Facility (collectively, the “Related Rights”);
 
(d) all equipment, machinery, fixtures, and other items of real and/or personal
property, including all components thereof, now and hereafter located in, on or
used in connection with and permanently affixed to or incorporated into the
Leased Improvements, including all furnaces, boilers, heaters, electrical
equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling and
air-conditioning systems, apparatus, sprinkler systems, fire and theft
protection equipment, and built-in oxygen and vacuum systems, all of which, to
the greatest extent permitted by law, are hereby deemed to constitute real
estate, together with all replacements, modifications, alterations and additions
thereto of each Facility (collectively, the “Fixtures”); and
 
(e) the machinery, equipment, furniture and other personal property described on
Exhibit B attached hereto, together with all replacements and substitutes
therefor of each Facility (collectively, “Lessor’s Personal Property”).
 
SUBJECT, HOWEVER, to the easements, encumbrances, covenants, conditions and
restrictions and other matters which affect the Leased Property of each Facility
as of the Commencement Date (as hereinafter defined), or which are created
thereafter as permitted
 

 
1

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hereunder to have and to hold for (1) the Fixed Term (as defined below), and (2)
the Extended Term(s) (if any) provided for in Article XIX, unless this Lease is
earlier terminated as hereinafter provided.
 
ARTICLE II.                      
 
2.1 Definitions.  For all purposes of this Lease, except as otherwise expressly
provided or unless the context otherwise requires, (i) the terms defined in this
Article have the meanings assigned to them in this Article and include the
plural as well as the singular; (ii) all accounting terms not otherwise defined
herein have the meanings assigned to them in accordance with GAAP as at the time
applicable; (iii) all references in this Lease to designated “Articles,”
“Sections” and other subdivisions are to the designated Articles, Sections and
other subdivisions of this Lease; (iv) the word “including” shall have the same
meaning as the phrase “including, without limitation,” and other similar
phrases; and (v) the words “herein,” “hereof” and “hereunder” and other similar
words refer to this Lease as a whole and not to any particular Article, Section
or other subdivision:
 
1031 Exchange:  As defined in Section 18.3.
 
AAA:  As defined in Article XLIV.
 
Accommodator:  As defined in Section 18.1.3.
 
Additional Charges:  As defined in Article III.
 
Additional Rent: The sum of the Allocated Additional Rent for all of the
Facilities.
 
Affiliate:  Any Person which, directly or indirectly (including through one or
more intermediaries), controls or is controlled by or is under common control
with any other Person, including any Subsidiary of a Person.  For purposes of
this definition, the definition of “Controlling Person” below, and Article XXIV
below, the term “control” (including the correlative meanings of the terms
“controlled by” and “under common control with”), as used with respect to any
Person, shall mean the possession, directly or indirectly (including through one
or more intermediaries), of the power to direct or cause the direction of the
management and policies of such Person, through the ownership of voting
securities, partnership interests or other equity interests.  Without limiting
the generality of the foregoing, when used with respect to any corporation, the
term “Affiliate” shall also include (i) any Person which owns, directly or
indirectly (including through one or more intermediaries), Fifty Percent (50%)
or more of any class of voting security or equity interests of such corporation,
(ii) any Subsidiary of such corporation and (iii) any Subsidiary of a Person
described in clause (i).  Notwithstanding anything to the contrary in this
definition, with respect to Lessee and any Guarantor, the term “Affiliate” shall
exclude any Person that is an affiliate of Daniel R. Baty and that but for its
relationship with Daniel R. Baty would not otherwise be considered an Affiliate
of Lessee or such Guarantor.
 
Aggregate Costs of the Planned Capital Refurbishment Project:  With respect to
each Planned Capital Refurbishment Project for a Facility, the actual
out-of-pocket costs actually
 

 
2

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incurred by Lessee pursuant to the provisions of this Lease in connection with
such Planned Capital Refurbishment Project for such Facility, including all
costs of design, construction, installation and obtaining all governmental
approvals and permits with respect to such Planned Capital Refurbishment
Project) for such Facility, the Planned Capital Refurbishment Project Site
Review Fees for such Facility and the Planned Capital Refurbishment Project
Lessor Costs for such Facility.  Notwithstanding anything to the contrary in
this Lease, the Aggregate Costs of the Planned Capital Refurbishment Project for
any Planned Capital Refurbishment Project for any Facility shall not count
towards the Annual Minimum Capital Project Amount with respect to such Facility,
and Lessee’s expenditure or reimbursement of any portion of such Aggregate Costs
of the Planned Capital Refurbishment Project for any Facility shall be in
addition to the Annual Minimum Capital Project Amount with respect to such
Facility.
 
Allocated Additional Rent:  With respect to each Facility, the amount of
Additional Rent allocated to such Facility as determined pursuant to Section
3.1.2; provided, however, that Lessor and Lessee acknowledge and agree that such
allocation is solely for purposes of implementing the provisions of Sections
5.2, 5.3 and 31.2 hereof and the determination of Transfer Consideration for
purposes of Section 24.1.2.2.  Except for such Sections, the Minimum Rent,
Additional Rent and other Rent payable hereunder is payable for all Facilities
as a single, integrated and indivisible economic unit, and that but for such
integration, the Minimum Rent, Additional Rent and other Rent payable under this
Lease would have been computed on a different basis.
 
Allocated Additional Rent Increase Amount:  As defined in Section 3.1.2.
 
Allocated Minimum Purchase Price:  With respect to each Facility, the sum of (i)
the “Allocated Minimum Purchase Price” allocated to such Facility as set forth
on Exhibit C attached hereto, plus (ii) all Capital Addition Costs paid, funded
or accrued by Lessor for such Facility; provided, however, that Lessor and
Lessee acknowledge and agree that such allocation is solely for purposes of
implementing the provisions of Sections 14.2, 15.1.4, 16.5 and 31.2
hereof.  Notwithstanding foregoing, with respect to the Purchase Option
Facilities, the Purchase Option Price payable hereunder is payable for all
Purchase Option Facilities as a single, integrated and indivisible economic
unit, and Lessor and Lessee acknowledge and agree that but for such integration,
the Purchase Option Price payable under this Lease would have been computed on a
different basis.
 
Allocated Minimum Rent:  With respect to each Facility, the amount of Minimum
Rent allocated to such Facility as set forth on Exhibit C attached hereto (or
any amendment or supplement thereto) (subject to increase as set forth in
Article III or any other express provision of this Lease or any amendment hereto
providing for an increase in Minimum Rent); provided, however, that Lessor and
Lessee acknowledge and agree that such allocation is solely for purposes of
implementing the provisions of Sections 5.2, 5.3 and 31.2 hereof and the
determination of Transfer Consideration for purposes of Section
24.1.2.2.  Except for such Sections, the Minimum Rent, Additional Rent and other
Rent payable hereunder is payable for all Facilities as a single, integrated and
indivisible economic unit, and that but for such integration, the Minimum Rent,
Additional Rent and other Rent payable under this Lease would have been computed
on a different basis.
 

 
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Allocated Planned Capital Refurbishment Project Tier 1 Allowance:  With respect
to each Facility, a total aggregate allowance for all Planned Capital
Refurbishment Project(s) at such Facility equal to the lesser of (i) the
“Allocated Planned Capital Refurbishment Project Tier 1 Allowance” specified for
and allocated to such Facility as set forth on Exhibit C attached hereto
(provided that Lessor shall not unreasonably withhold its approval to the
reallocation of the “Allocated Planned Capital Refurbishment Project Tier 1
Allowance” for any Facility among the other Facilities covered by this Lease so
long as the total Allocated Planned Capital Refurbishment Project Tier 1
Allowance for all Facilities does not exceed $3,000,000.00, notwithstanding such
reallocation), or (ii) the actual Aggregate Costs of the Planned Capital
Refurbishment Project(s) with respect to such Facility.
 
Allocated Planned Capital Refurbishment Project Tier 2 Allowance:  With respect
to each Facility, a total aggregate allowance for all Planned Capital
Refurbishment Project(s) at such Facility equal to the lesser of (i) the
“Allocated Planned Capital Refurbishment Project Tier 2 Allowance” specified for
and allocated to such Facility as set forth on Exhibit C attached hereto
(provided that Lessor shall not unreasonably withhold its approval to the
reallocation of the “Allocated Planned Capital Refurbishment Project Tier 2
Allowance” for any Facility among the other Facilities so long as the total
Allocated Planned Capital Refurbishment Project Tier 2 Allowance for all
Facilities does not exceed $6,500,000.00, notwithstanding such reallocation), or
(ii) the actual Aggregate Costs of the Planned Capital Refurbishment Project(s)
with respect to such Facility in excess of the Planned Capital Refurbishment
Project Tier 1 Allowance for such Faciltiy.
 
Annual Minimum Capital Project Amount:  During each Lease Year, the following
amounts:
 
(i)           With respect to the first (1st) and second (2nd) Lease Years,
subject to Section 9.5 below, Zero Dollars ($0).
 
(ii)           With respect to the third (3rd) Lease Year for each Facility,
Five Hundred Fifty Dollars ($550.00) per living unit located on the Leased
Property of such Facility.
 
(iii)           With respect to the fourth (4th) Lease Year for each Facility,
Six Hundred Dollars ($600.00) per living unit located on the Leased Property of
such Facility.
 
(iv)           With respect to the fifth (5th) Lease Year for each Facility, Six
Hundred Fifty Dollars ($650.00) per living unit located on the Leased Property
of such Facility.
 
Commencing upon the expiration of the fifth (5th) Lease Year, and upon the
expiration of each Lease Year thereafter during the Term, the then current
Annual Minimum Capital Project Amount shall be equal to the Annual Minimum
Capital Project Amount in effect as of the expiration of the immediately prior
Lease Year, as increased by a percentage equal to the greater of Three Percent
(3.0%) or the applicable CPI Increase.

Annual Minimum Capital Project Amount Overage:  Subject to the provisions of
Section 9.3.4, with respect to each Facility for any Lease Year, an amount equal
to (a) the sum of (i) the Capital Project Costs incurred and paid by Lessee in
funding Capital Projects for such Facility in the immediately preceding two (2)
Lease Years and for which Lessor has received
 

 
4

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paid invoices, receipts or other commercially reasonable evidence or supporting
information as is customary to evidence such expenditures, verifying the cost
and payment of funding such Capital Projects, and an Officer’s Certificate
certifying that the applicable item(s) of Capital Projects have been completed,
less (ii) the amounts disbursed by Lessor to Lessee from any Replacement Reserve
on account of such Capital Projects to such Facility in accordance with the
terms of Section 9.3.1, in excess of (b) the Annual Minimum Capital Project
Amount for such Facility for such prior two (2) Lease Year period.
 
Applicable Lease Rate:  As of the date of any payment, funding or accrual of any
Aggregate Costs of the Planned Capital Refurbishment Project for any Planned
Capital Refurbishment Project for any Facility (other than on account of the
Allocated Planned Capital Refurbishment Project Tier 1 Allowance), an annual
rate equal to the greater of (i) Eight and One-Half Percent (8.5%) or (ii) the
ten-year U.S. Treasury Note rate published in the Wall Street Journal as of the
date of each such particular payment, funding or accrual by Lessor of such
Aggregate Costs of the Planned Capital Refurbishment Project for any Planned
Capital Refurbishment Project for such Facility (other than on account of the
Allocated Planned Capital Refurbishment Project Tier 1 Allowance), plus Three
and Eight-Tenths Percent (3.8%).  If the ten-year U.S. Treasury Note rate is
discontinued prior to any such payment, funding or accrual thereof with respect
to any such Facility, then such calculation shall be made instead by reference
to a substitute rate reasonably selected by Lessor that is comparable with the
ten-year U.S. Treasury Note rate.  Similarly, if the Wall Street Journal is
discontinued, a substitute publication reasonably selected by Lessor shall be
used.
 
Appraiser:  As defined in Article XXXIV.
 
Architect:   With respect to each Planned Capital Refurbishment Project for a
Facility, the architect and/or engineer selected by Lessee in connection with
the design and construction of such Planned Capital Refurbishment Project for
such Facility and approved by Lessor, which approval shall not be unreasonably
withheld or delayed so long as such architect is licensed in the State in which
such Facility is located and has experience with the type and scope of the
project for which he/she is being retained.
 
Award:  All compensation, sums or anything of value awarded, paid or received on
a total or partial Condemnation.
 
Bankruptcy Code:  The United States Bankruptcy Code (11 U.S.C. § 101 et seq.),
and any successor statute or legislation thereto.
 
Base Period:  The period commencing on that date which is eighteen (18) months
prior to the date any appraisal of any Facility is made pursuant to the
provisions of Article XXXIV and ending on the date which is six (6) months prior
to the date any such appraisal of such Facility is made.
 
BLS:  Bureau of Labor Statistics, U.S. Department of Labor.
 
Business Day:  Each Monday, Tuesday, Wednesday, Thursday and Friday which is not
a day on which national banks in the City of New York, New York are authorized,
or obligated, by law or executive order, to close.
 

 
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Capital Additions:  With respect to any Facility, one or more new buildings, or
one or more additional structures annexed to any portion of any of the Leased
Improvements of such Facility, or the material expansion of existing
improvements, which are constructed on any parcel or portion of the Land of such
Facility, during the Term, including construction of a new wing or new story, or
the renovation of existing improvements on the Leased Property of such Facility
in order to provide a functionally new facility needed to provide services not
previously offered in such Facility. Notwithstanding anything to the contrary in
this Lease, each Planned Capital Refurbishment Project with respect to a
Facility shall at all times be deemed a Capital Addition to such Facility for
all purposes of this Lease.
 
Capital Addition Costs:  The costs of any Capital Addition made to the Leased
Property whether paid for by Lessee or Lessor, including (i) all permit fees and
other costs imposed by any governmental authority, the cost of site preparation,
the cost of construction including materials and labor, the cost of supervision
and related design, engineering and architectural services, the cost of any
fixtures, and if and to the extent approved by Lessor, the cost of construction
financing; (ii) fees paid to obtain necessary licenses and certificates; (iii)
if and to the extent approved by Lessor in writing and in advance, the cost of
any land contiguous to the Leased Property which is to become a part of the
Leased Property purchased for the purpose of placing thereon the Capital
Addition or any portion thereof or for providing means of access thereto, or
parking facilities therefor, including the cost of surveying the same; (iv) the
cost of insurance, real estate taxes, water and sewage charges and other
carrying charges for such Capital Addition during construction; (v) the cost of
title insurance; (vi) reasonable fees and expenses of legal counsel; (vii)
filing, registration and recording taxes and fees; (viii) documentary stamp and
similar taxes; and (ix) all reasonable costs and expenses of Lessor and any
Person which has committed to finance the Capital Addition, including (a) the
reasonable fees and expenses of their respective legal counsel; (b) printing
expenses; (c) filing, registration and recording taxes and fees; (d) documentary
stamp and similar taxes; (e) title insurance charges and appraisal fees; (f)
rating agency fees; and (g) commitment fees charged by any Person advancing or
offering to advance any portion of the financing for such Capital Addition.
Notwithstanding anything to the contrary in this Lease, all Aggregate Costs of
the Planned Capital Refurbishment Project for any Planned Capital Refurbishment
Project for any Facility paid, funded or accrued by Lessor under this Lease
(other than any portion of the applicable Allocated Planned Capital
Refurbishment Project Tier 1 Allowance, but including any portion of the
Allocated Planned Capital Refurbishment Project Tier 2 Allowance, in either case
paid, funded or accrued by Lessor on account thereof as provided in this Lease)
shall be at all times deemed Capital Addition Costs paid, funded or accrued by
Lessor under this Lease, including for purposes of determining the Allocated
Minimum Purchase Price for such Facility.
 
Capital Project:  Repairs and replacements to the Leased Property, or any
portion thereof, which are categorized under GAAP as a capital expense and not
as an operating expense; provided, however, that in no event shall the term
“Capital Project” be deemed to include any Capital Additions.
 
Capital Project Costs:  All out-of-pocket costs reasonably incurred by Lessee in
connection with a Capital Project, excluding, however, any amounts that are
financed by Lessee and secured by a lien on the Personal Property relating
thereto.
 

 
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Close of Escrow:  As defined in Section 35.3.
 
Code:  The Internal Revenue Code of 1986, as amended.
 
Collateral:  As defined in Section 16.10.1.
 
Collateral Agent:  As defined in Section 16.10.2.
 
Commencement Date:  As defined in Section 47.1.
 
Commercial Occupancy Arrangement:  Any commercial (as opposed to resident or
patient) Occupancy Arrangement.
 
Completion Date: With respect to each Planned Capital Refurbishment Project for
a Facility, the date on which the construction/performance of such Planned
Capital Refurbishment Project for such Facility has been “substantially
completed” and that Lessor has received the following:  (i) a certificate of
substantial completion from the Architect in a form reasonably acceptable to
Lessor, (ii) to the extent applicable based upon the nature of such Planned
Capital Refurbishment Project for such Facility, a certificate of occupancy or
its equivalent issued in accordance with all Legal Requirements and by the
appropriate governmental authority having jurisdiction over the Leased Property
of such Facility which permits the occupancy and use of the improvements
constructed as part of such Planned Capital Refurbishment Project for such
Facility and (iii) all other licenses, authorizations and permits, if any,
required by any governmental authority for the use and operation of such Planned
Capital Refurbishment Project for such Facility as part of the Facility for its
Primary Intended Use.  For purposes of this definition, “substantially
completed” shall mean that the improvements being constructed/performed as part
of such Planned Capital Refurbishment Project for such Facility have been
substantially completed in accordance with the Plans and Specifications
therefor, except for Punch List Items that remain to be completed.
 
CON:  As defined in Section 48.1.1.
 
Condemnation:  The exercise of any governmental power, whether by legal
proceedings or otherwise, by a Condemnor or a voluntary sale or transfer by
Lessor to any Condemnor, either under threat of condemnation or while legal
proceedings for condemnation are pending.
 
Condemnor:  Any public or quasi-public authority, or private corporation or
individual, having the power of Condemnation.
 
Consolidated Financials:  For any fiscal year or other accounting period for any
Person and its consolidated Subsidiaries, statements of earnings and retained
earnings and of changes in financial position for such period and for the period
from the beginning of the respective fiscal year to the end of such period and
the related balance sheet as of the end of such period, together with the notes
thereto, all in reasonable detail and setting forth in comparative form the
corresponding figures for the corresponding period in the preceding fiscal year,
and prepared in accordance with GAAP.
 

 
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Consolidated Net Worth:  At any time, the sum of the following for any Person
and its consolidated Subsidiaries, on a consolidated basis determined in
accordance with GAAP:
 
(i)           Shareholders’ Equity of such Person, minus
 
(ii)           goodwill of such Person.
 
Construction Contracts:  With respect to each Planned Capital Refurbishment
Project for a Facility, the contracts between Lessee and the General Contractor,
Lessee and the Architect and/or Lessee or any other contractor (including
subcontractors) relating to rendering of services or furnishing of materials in
connection with the construction/performance of such Planned Capital
Refurbishment Project for such Facility, contracts between the General
Contractor and any subcontractor and contracts between any of the foregoing and
any other Person relating to rendering of services or furnishing of materials in
connection with construction/performance of such Planned Capital Refurbishment
Project for such Facility.
 
Controlling Person:  Any (i) Person(s) which, directly or indirectly (including
through one or more intermediaries), controls Lessee and would be deemed an
Affiliate of Lessee, including any partners, shareholders, principals, members,
trustees and/or beneficiaries of any such Person(s) to the extent the same
control Lessee and would be deemed an Affiliate of Lessee, and (ii) Person(s)
which controls, directly or indirectly (including through one or more
intermediaries), any other Controlling Person(s) and which would be deemed an
Affiliate of any such Controlling Person(s).
 
Cost of Living Index:  The Consumer Price Index for All Urban Consumers, U.S.
City Average (1982-1984 = 100), published by the BLS, or such other renamed
index.  If the BLS changes the publication frequency of the Cost of Living Index
so that a Cost of Living Index is not available to make a cost-of-living
adjustment as specified herein, the cost-of-living adjustment shall be based on
the percentage difference between the Cost of Living Index for the closest
preceding month for which a Cost of Living Index is available and the Cost of
Living Index for the comparison month as required by this Lease.  If the BLS
changes the base reference period for the Cost of Living Index from 1982-84 =
100, the cost-of-living adjustment shall be determined with the use of such
conversion formula or table as may be published by the BLS.  If the BLS
otherwise substantially revises, or ceases publication of the Cost of Living
Index, then a substitute index for determining cost-of-living adjustments,
issued by the BLS or by a reliable governmental or other nonpartisan
publication, shall be reasonably selected by Lessor.
 
County:  With respect to each Facility, the County or Township in which the
Leased Property of such Facility is located.
 
CPI Increase:  The percentage increase, if any, in (i) the Cost of Living Index
published for the month which is two (2) months prior to the commencement of the
applicable Lease Year, over (ii) the Cost of Living Index published for the
month which is fourteen (14) months prior to the commencement of the applicable
Lease Year.
 
Current Facility Documents: With respect to each Facility, the Current Lease and
Current Management Agreement for such Facility and any other agreement, document
or other instrument by, between or among any Person comprising “Lessor” under
this Lease or its
 

 
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Affiliates, any Current Manager or its Affiliates, or any Current Lessee or its
Affiliates the subject matter of which is the leasing, use, operation and/or
management of such Facility.
 
Current Facility Documents Termination: With respect to each Facility, the
expiration or earlier termination of the applicable Current Facility Documents
for such Facility by any means, including by means of the exercise of any right,
remedy or option of the applicable Person comprising “Lessor” under this Lease
or its Affiliates to effect an earlier termination of such Current Facility
Documents, any early termination thereof by mutual agreement of the applicable
parties thereto or otherwise.
 
Current Lease or Current Leases:  As defined in Section 47.1.
 
Current Lessee or Current Lessees:  As defined in Section 47.1.
 
Current Manager or Current Managers:  As defined in Section 47.1.
 
Current Management Agreements or Current Management Agreements:  As defined in
Section 47.1.
 
Date of Taking:  The date the Condemnor has the right to possession of the
property being condemned.
 
Effective Date:  As defined in the preamble.
 
Emeritus:  Emeritus Corporation, a Washington corporation.
 
Environmental Costs:  As defined in Article XXXVII.
 
Environmental Laws:  Any and all federal, state, municipal and local laws,
statutes, ordinances, rules, regulations, guidances, policies, orders, decrees,
judgments, whether statutory or common law, as amended from time to time, now or
hereafter in effect, or promulgated, pertaining to the environment, public
health and safety and industrial hygiene, including the use, generation,
manufacture, production, storage, release, discharge, disposal, handling,
treatment, removal, decontamination, clean-up, transportation or regulation of
any Hazardous Substance, including the Clean Air Act, the Clean Water Act, the
Toxic Substances Control Act, the Comprehensive Environmental Response
Compensation and Liability Act, the Resource Conservation and Recovery Act, the
Federal Insecticide, Fungicide, Rodenticide Act, the Safe Drinking Water Act and
the Occupational Safety and Health Act.
 
Escrow:  As defined in Section 35.1.
 
Escrow Holder:  As defined in Section 35.1.
 
Event of Default:  As defined in Article XVI.
 
Excess Value:  The sum of (i) the positive amount, if any, by which the
aggregate Fair Market Value of the Leased Property of all Purchase Option
Facilities then subject to the terms of this Lease and any New Lease(s)
hereafter with or in favor of Lessor or any Affiliate of Lessor exceeds the
Minimum Purchase Option Price for such Purchase Option Facilities
 

 
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hereunder and the aggregate Minimum Purchase Option Price(s) for any such
Purchase Option Facilities under any New Lease(s) hereafter with or in favor of
Lessor or any Affiliate of Lessor, plus (ii) if applicable, the positive amount,
if any, by which the purchase price paid by Lessee for any Purchase Option
Facility acquired by Lessee pursuant to any of Articles XIV or XV or Section
16.5 exceeds the Allocated Minimum Purchase Price for such Purchase Option
Facility.
 
Excluded Facilities:  As defined in Section 7.4.1.
 
Extended Term(s): As defined in Article XIX.
 
Facility:  Each facility being (and to be) operated or proposed to be operated
on, the Leased Property as more particularly described on Exhibit C attached
hereto, together with any Capital Additions.
 
Facility Mortgage:  Any mortgage, deed of trust or other security agreement
encumbering the Leased Property, or any portion thereof, and securing an
indebtedness of Lessor or any Affiliate of Lessor or any ground lease or other
title retention agreement with respect to the Leased Property or any portion
thereof.
 
Facility Mortgage Documents:  With respect to each Facility Mortgage and
Facility Mortgagee, the applicable Facility Mortgage, loan or credit agreement,
lease, note, collateral assignment instruments, guarantees, indemnity agreements
and other documents or instruments evidencing, securing or otherwise relating to
the loan made, credit extended, lease or other financing vehicle pursuant
thereto.
 
Facility Mortgagee:  The holder or beneficiary of a Facility Mortgage and any
other rights of the lender, credit party or lessor under the Facility Mortgage
Documents.
 
Facility Operating Deficiency:  With respect to any Facility, a deficiency in
the conduct of the operation of such Facility which, in the reasonable
determination of Lessor, if not corrected within a reasonable time, would have
the likely effect of jeopardizing such Facility’s licensure or certification
under government reimbursement programs or third party provider agreements.
 
Fair Market Rental:  With respect to each Facility, the fair market rental value
of the Leased Property of such Facility, or applicable portion thereof
(including any periodic increases therein), determined in accordance with the
appraisal procedures set forth in Article XXXIV.
 
Fair Market Value:  With respect to each Facility, the fair market value of the
Leased Property and all Capital Additions of such Facility, or applicable
portion(s) thereof, determined in accordance with the appraisal procedures set
forth in Article XXXIV and this definition.  Fair Market Value shall be the
higher value obtained by assuming that the Leased Property and all Capital
Additions of such Facility is either unencumbered by this Lease or encumbered by
this Lease.  Further, in determining Fair Market Value the Leased Property of
such Facility and all Capital Additions of such Facility shall be valued at
their highest and best use which shall be presumed to be as a fully-permitted
Facility operated in accordance with the provisions of this Lease.  Fair Market
Value of the Leased Property and all Capital Additions of
 

 
10

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such Facility shall not include “going concern” or “business enterprise” value
attributable to factors other than the highest and best use of the Leased
Property and all Capital Additions of such Facility.  In addition, the following
specific matters shall be factored in or out, as appropriate, in determining
Fair Market Value:
 
(i)           The negative value of (a) any deferred maintenance or other items
of repair or replacement of the Leased Property or any Capital Additions of such
Facility reasonably required to restore such Lease Property or Capital Additions
to the condition required pursuant to Section 9.1.1 below, (b) any then current
or prior licensure or certification violations and/or admissions holds and (c)
any other breach or failure of Lessee to perform or observe its obligations
hereunder shall not be taken into account; rather, the Leased Property and all
Capital Additions of such Facility, and every part thereof, shall be deemed to
be in the condition required by this Lease (i.e., good order and repair) and
Lessee shall at all times be deemed to have operated such Facility in compliance
with and to have performed all obligations of the Lessee under this Lease.
 
(ii)           The occupancy level of the applicable Facility shall be deemed to
be the greatest of (a) the occupancy level as of the date any appraisal of such
Facility is performed in accordance with the provisions of Article XXXIV or (b)
the average occupancy during the Base Period.
 
(iii)           If the applicable Facility’s Primary Intended Use includes a
mixed use, then whichever of the following produces the highest positive value
shall be taken into account: (a) the resident mix, patient mix, case mix, and/or
diagnostic related group or acuity mix, as applicable, as of the date any
appraisal of such Facility is performed in accordance with the provisions of
Article XXXIV; or (b) the average of such mix during the Base Period.
 
Finally, in determining Fair Market Value in connection with a sale or transfer
of the Leased Property and all Capital Additions of any Facility to Lessee
pursuant to the terms of this Lease, the positive or negative effect on the
value of the Leased Property and all Capital Additions of such Facility
attributable to such factors as the interest rate, amortization schedule,
maturity date, prepayment penalty and other terms and conditions of any
encumbrance placed thereon by Lessor which will not be removed at or prior to
the date of such sale or transfer shall be taken into account.
 
Fixed Term:  The period of time commencing on the Commencement Date and ending
on the Fixed Term Expiration Date.
 
Fixed Term Expiration Date:  With respect to each Facility, the expiration of
the fifteenth (15th) Lease Year.
 
 Fixtures:  With respect to each Facility, the Fixtures (as defined in Article
I) of such Facility.
 
GAAP:  U.S. generally accepted accounting principles.
 

 
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General Contractor:  With respect to each Planned Capital Refurbishment Project
for a Facility, the general contractor selected by Lessee and approved by Lessor
in connection with the construction/performance of such Planned Capital
Refurbishment Project for such Facility, which approval of such general
contractor shall not be unreasonably withheld or delayed so long as such general
contractor has all required State and local licenses and permits, is bondable
and has sufficient experience with the size, type and scope of such Planned
Capital Refurbishment Project for such Facility.
 
Gross Revenues:  With respect to each Facility, all revenues received or
receivable from or by reason of the operation of such Facility or any other use
of the Leased Property of such Facility, Lessee’s Personal Property and all
Capital Additions, including all revenues received or receivable for the use of
or otherwise attributable to units, rooms, beds and other facilities provided,
meals served, services performed (including ancillary services), space or
facilities subleased or goods sold on or from the Leased Property and all
Capital Additions of such Facility; provided, however, that Gross Revenues shall
not include:
 
(i)           bad debt in accordance with GAAP;
 
(ii)           non-operating revenues such as interest income or income from the
sale of assets not sold in the ordinary course of business; and
 
(iii)           federal, state or local excise taxes and any tax based upon or
measured by such revenues, where any such federal, state or local excise tax is
added to or made a part of the amount billed to the patient or other recipient
of such services or goods, whether included in the billing or stated separately.
 
Gross Revenues for each Lease Year of such Facility shall reflect all cost
report settlement adjustments, whether positive or negative, received in or
payable during such Lease Year in accordance with GAAP relating to health care
accounting, regardless of the year that such settlement amounts are applicable
to; provided, however, that to the extent settlement amounts are applicable to
years, or portions thereof, prior to the Commencement Date, such settlement
amounts shall not be included in Gross Revenues for the Lease Year of such
Facility in which such settlement amounts are received or paid.  Gross Revenues
shall also include the Gross Revenues of any Occupant under a Commercial
Occupancy Arrangement, i.e., the Gross Revenues generated from the operations
conducted on or from such subleased, licensed or other used or occupied portion
of the Leased Property and all Capital Additions of such Facility shall be
included directly in the Gross Revenues; provided, however, that the rent
received or receivable by Lessee from or under such Commercial Occupancy
Arrangement shall be excluded from Gross Revenues for such purpose.
 
Guarantors:  Any future guarantor of Lessee’s obligations (or any portion
thereof) under this Lease pursuant to a written Guaranty (each, a
“Guarantor”).  Lessor and Lessee acknowledge that, as of the Effective Date,
there is no Guarantor of Lessee’s obligations under this Lease.
 
Guaranties:  Collectively, any future written guaranties of Lessee’s obligations
under this Lease made by any Guarantor.
 

 
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Handling:  As defined in Article XXXVII.
 
Hazardous Substances:  Collectively, any petroleum, petroleum product or
byproduct or any substance, material or waste regulated or listed pursuant to
any Environmental Law.
 
HCP:  HCP, Inc., a Maryland corporation, and its successors and assigns.
 
Health Care License:  As defined in Section 48.1.1.
 
HSR Act:  The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
 
Increased Annual Minimum Capital Project Amount: As defined in Section 9.3.4.
 
Impositions:  Collectively, all taxes, including capital stock, franchise and
other state taxes of Lessor (and, if Lessor is not HCP, of HCP as a result of
its investment in Lessor), ad valorem, sales, use, single business, gross
receipts, gross margins, transaction privilege, rent or similar taxes;
assessments including assessments for public improvements or benefits, whether
or not commenced or completed prior to the date hereof and whether or not to be
completed within the Term; water, sewer and other utility levies and charges;
excise tax levies; fees including license, permit, inspection, authorization and
similar fees; and all other governmental charges, in each case whether general
or special, ordinary or extraordinary, or foreseen or unforeseen, of every
character in respect of the Leased Property, any Capital Additions and/or the
Rent and all interest and penalties thereon attributable to any failure or delay
in payment by Lessee (unless such failure or delay in payment is due to the acts
or omissions of Lessor) which at any time prior to, during or in respect of the
Term hereof may be assessed or imposed on or in respect of or be a lien upon (i)
Lessor or Lessor’s interest in the Leased Property or any Capital Additions,
(ii) the Leased Property, any Capital Additions or any parts thereof or any rent
therefrom or any estate, right, title or interest therein, or (iii) any
occupancy, operation, use or possession of, or sales from or activity conducted
on or in connection with the Leased Property, any Capital Additions or the
leasing or use of the Leased Property, any Capital Additions or any parts
thereof; provided, however, that nothing contained in this Lease shall be
construed to require Lessee to pay (a) any tax based on net income (whether
denominated as a franchise or capital stock or other tax) imposed on Lessor or
any other Person, (b) any transfer, or net revenue tax of Lessor or any other
Person except Lessee and its successors, (c) any tax imposed with respect to the
sale, exchange or other disposition by Lessor of any Leased Property, any
Capital Additions or the proceeds thereof, or (d) except as expressly provided
elsewhere in this Lease, any principal or interest on any indebtedness on the
Leased Property for which Lessor is the obligor, except to the extent that any
tax, assessment, tax levy or charge, of the type described in any of clauses
(a), (b), (c) or (d) above is levied, assessed or imposed in lieu of or as or as
a substitute for any tax, assessment, levy or charge which is otherwise included
in this definition of an “Imposition.”
 
Insurance Requirements:  The terms of any insurance policy required by this
Lease and all requirements of the issuer of any such policy and of any insurance
board, association, organization or company necessary for the maintenance of any
such policy.
 

 
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Intangible Property:  With respect to each Facility, all accounts, proceeds of
accounts, rents, profits, income or revenues derived from the use of rooms or
other space within the Leased Property of such Facility or the providing of
services in or from the Leased Property and all Capital Additions of such
Facility; documents, chattel paper, instruments, contract rights, deposit
accounts, general intangibles, causes of action, now owned or hereafter acquired
by Lessee (including any right to any refund of any Impositions) arising from or
in connection with Lessee’s operation or use of the Leased Property and all
Capital Additions of such Facility; all licenses and permits now owned or
hereinafter acquired by Lessee, which are necessary or desirable for Lessee’s
use of the Leased Property and all Capital Additions of such Facility for its
Primary Intended Use, including, if applicable, any certificate of need or
similar certificate; the right to use any trade name or other name associated
with such Facility (excluding, however, the names “Summerville,” “Emeritus,”
“Loyalton” and “Village Oaks” and any variation thereof); and any and all
third-party provider agreements (including Medicare and Medicaid).
 
Interim Licensure Arrangements: As defined in Section 48.1.1(b).
 
Land:  With respect to each Facility, the Land (as defined in Article I)
relating to such Facility.
 
Lease:  As defined in the preamble.
 
Lease Year:  With respect to such Facility, the first Lease Year for each
Facility shall be the period of twelve (12) full calendar months from and after
the Commencement Date, unless the Commencement Date is a day other than the
first (1st) day of a calendar month, in which case the first Lease Year for such
Facility shall be the period commencing on the Commencement Date and ending on
the last day of the eleventh (11th) month following the month in which the
Commencement Date occurs and each subsequent Lease Year for such Facility shall
be each period of twelve (12) full calendar months after the last day of the
prior Lease Year; provided, however, that the last Lease Year for such Facility
during the Term may be a period of less than twelve (12) full calendar months
and shall end on the last day of the Term for such Facility.
 
Leased Improvements:  With respect to each Facility, the Leased Improvements (as
defined in Article I) of such Facility.
 
Leased Property:  With respect to each Facility, the Leased Property (as defined
in Article I) of such Facility.
 
Leasehold FMV:  With respect to each Facility, the fair market value of Lessee’s
leasehold interest relating to such Facility if exposed on the open market
taking into account, among other relevant factors, the income generated from the
Leased Property and any Capital Additions for such Facility, determined by
appraisal in accordance with the appraisal procedures set forth in Article
XXXIV.
 
Legal Requirements:  (i) All federal, state, county, municipal and other
governmental statutes, laws (including common law and Environmental Laws),
rules, policies, guidance, codes, orders, regulations, ordinances, permits,
licenses, covenants, conditions, restrictions, judgments, decrees and
injunctions, including those affecting any of the Leased
 

 
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Property, Lessee’s Personal Property and all Capital Additions or the
construction, use or alteration thereof, whether now or hereafter enacted and in
force, including any which may (A) require repairs, modifications or alterations
in or to any of the Leased Property, Lessee’s Personal Property and all Capital
Additions, (B) in any way adversely affect the use and enjoyment thereof, or (C)
regulate the transport, handling, use, storage or disposal or require the
cleanup or other treatment of any Hazardous Substance, and (ii) all covenants,
agreements, restrictions and encumbrances either now or hereafter of record or
known to Lessee (other than encumbrances created by Lessor without the consent
of Lessee except as otherwise expressly permitted hereunder) affecting any of
the Leased Property or any Capital Additions.
 
Lessee:  As defined in the preamble.
 
Lessee’s Affidavit:  With respect to each Planned Capital Refurbishment Project
for a Facility, a sworn affidavit of Lessee, in form and substance satisfactory
to Lessor, stating that to the best of Lessee’s knowledge, all labor and
material bills of every kind and character incurred by Lessee to the date of
such affidavit in connection with such Planned Capital Refurbishment Project for
such Facility have been paid in accordance with the payment provisions of the
applicable Construction Contracts except for the unpaid bills to be paid from
the proceeds of the current Request for Advance, and that the builder’s risk
insurance described in Section 9.5.4(e) contains sufficient coverage for the
construction/performance of such Planned Capital Refurbishment Project for such
Facility, including the value of materials stored off the Leased Property of
such Facility.
 
Lessee’s Personal Property:  With respect to each Facility, the Personal
Property other than Lessor’s Personal Property, allocable or relating to such
Facility.
 
Lessee’s Set-Up Costs:  Collectively, (a) all fees and expenses of and
disbursements made by Lessee in connection with (i) the negotiation, execution
and delivery of this Lease, the Exhibits hereto and the other agreements
contemplated hereby, (ii) obtaining any third party reports, (iii) the review of
diligence materials, documents and other information relating to the Leased
Property and (iv) the consummation of the transactions contemplated hereby and
thereby, including any legal or other professional fees and costs of Lessee; (b)
any and all state, municipal or other documentary, transfer, stamp, sales, use
or similar taxes payable in connection with the delivery of any instrument or
document provided in or contemplated by this Lease or the Exhibits hereto or the
transactions contemplated herein; and (c) all expenses of or related to the
issuance of any leasehold title insurance commitment or policy requested by
Lessee (including the costs of any survey required by Lessee or any title
insurer of Lessee).
 
Lessee’s Shared Appreciation Amount:  An amount equal to the sum of:
 
(i)           Twenty-Five Percent (25%) of all Excess Value, if any, up to
Fifteen Million Dollars ($15,000,000) of the Excess Value, if any, plus
 
(ii)           Thirty-Five Percent (35%) of all Excess Value, if any, above the
first Fifteen Million Dollars ($15,000,000) of the Excess Value, if any, up to
Thirty Million Dollars ($30,000,000) of the Excess Value, if any, plus
 

 
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(iii)           Forty Percent (40%) of all the Excess Value, if any, above the
first Thirty Million Dollars ($30,000,000) of the Excess Value, if any.
 
Lessor:  As defined in the preamble.
 
Lessor’s Personal Property:  With respect to each Facility, Lessor’s Personal
Property (as defined in Article I) allocable or relating to such Facility.
 
Lessor’s Set-Up Costs:  All fees and expenses of and disbursements made by
Lessor in connection with the negotiation, execution and delivery of this Lease,
the Exhibits hereto and the other agreements contemplated hereby, the review of
diligence materials, documents and other information relating to Lessee and the
consummation of the transactions contemplated hereby and thereby through the
Effective Date, including any legal or other professional fees and costs of
Lessor.
 
Lists:  As defined in Section 41.1.
 
Master Sublease:  With respect to any Facility, any Commercial Occupancy
Arrangement with respect to more than Ten Percent (10%) of the square footage
within such Facility in the aggregate to any Person and/or its Affiliates,
directly or indirectly, or through one or more step transactions or tiered
transactions (including subleases or sub-subleases).
 
Minimum Purchase Option Price:  The sum of the Allocated Minimum Purchase Price
for all of the Purchase Option Facilities then subject to this Lease and of any
Purchase Option Facility(ies) subject to any New Lease.  As of the Commencement
Date, and subject to any Capital Addition Costs paid, funded or accrued by
Lessor for such Purchase Option Facilities, the Minimum Purchase Option Price
for all of the Purchase Option Facilities is One Hundred Forty Million and
no/100 Dollars ($140,000,000).
 
Minimum Rent:  The sum of Allocated Minimum Rent for all of the Facilities.
 
New Lease:  As defined in Section 31.2.1.
 
New Lease Effective Date:  As defined in Section 31.2.1.
 
Non-Capital Need Facility: As defined in Section 9.3.4.
 
Occupancy Arrangement:  Any sublease, license or other arrangement with a Person
for the right to use, occupy or possess any portion of the Leased Property
and/or any Capital Additions.
 
Occupant:  Any Person under an Occupancy Arrangement.
 
OFAC:  As defined in Section 41.1.
 
Officer’s Certificate:  A certificate of Lessee signed by an officer authorized
to so sign by its board of directors, by-laws or equivalent governing documents
or managers.
 
Opening Deposit:  As defined in Section 35.1.
 

 
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Operations Transfer Agreement(s):  As defined in Section 48.1.1(b).
 
Option Exercise Notice:  As defined in Section 35.1.
 
Option Period:  As defined in Section 35.1.
 
Order:  As defined in Section 41.1.
 
Other Licenses:  As defined in Section 48.1.1.
 
Outside Closing Date:  As defined in Section 35.1.
 
Outside Planned Capital Refurbishment Project Completion Date:  With respect to
each Planned Capital Refurbishment Project for a Facility, as defined in Section
9.5.4.
 
Overdue Rate:  On any date, a rate equal to Two Percent (2%) above the Prime
Rate, but in no event greater than the maximum rate then permitted under
applicable law.
 
Payment Date:  Any due date for the payment of the installments of Minimum Rent,
Additional Rent or any other sums payable under this Lease.
 
Permitted Affiliate Transaction:  As defined in Section 24.1.12.
 
Person:  Any individual, corporation, partnership, joint venture, association,
joint stock company, limited liability company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other form of entity.
 
Personal Property:  With respect to each Facility, all machinery, furniture and
equipment, including phone systems and computers, trade fixtures, inventory,
supplies and other personal property used or useful in the use of the Leased
Property and any Capital Additions of such Facility for its Primary Intended
Use, other than (i) Fixtures and (ii) Lessee’s proprietary materials, such as
policy and procedure manuals, marketing materials containing the “Summerville,”
“Emeritus,” “Loyalton” and/or “Village Oaks” names or logos and Lessee’s
financial statements.
 
Planned Capital Refurbishment Project(s):  With respect to each Facility, as
defined in Section 9.5.1.
 
Planned Capital Refurbishment Project Lessor Funding Amount:  The total
aggregate of the sum of the Allocated Planned Capital Refurbishment Project Tier
1 Allowance and the Allocated Planned Capital Refurbishment Project Tier 2
Allowance for all of the Facilities; provided, however, that in no event shall
the total aggregate Planned Capital Refurbishment Project Lessor Funding Amount
for all Facilities exceed $9,500,000.00, notwithstanding the actual Aggregate
Costs of the Planned Capital Refurbishment Project(s) for all Facilities.
 
Planned Capital Refurbishment Project Lessor Costs:  With respect to each
Planned Capital Refurbishment Project for a Facility, as defined in Section
9.5.3.
 

 
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Planned Capital Refurbishment Project Site Review Fees:  With respect to each
Planned Capital Refurbishment Project for a Facility, as defined in Section
9.5.3.
 
Plans and Specifications: With respect to each Planned Capital Refurbishment
Project for a Facility, as defined in Section 9.5.3.
 
Pre-Commencement Date Period:  The period from the Effective Date to and until
the earlier of the Commencement Date or the termination of this Lease pursuant
to Article XLVIII hereof.
 
Pre-Existing Environmental Condition:  Any Hazardous Substances in, on or about
the Leased Property in violation of any applicable Environmental Laws as of the
Commencement Date.
 
Primary Intended Use:  With respect to each Facility, the “Primary Intended Use”
as set forth on Exhibit C attached hereto.
 
Prime Rate:  On any date, a rate equal to the annual rate on such date announced
by Bank of America, N.A. to be its prime, base or reference rate for 90-day
unsecured loans to its corporate borrowers of the highest credit standing but in
no event greater than the maximum rate then permitted under applicable law.  If
Bank of America N.A. discontinues its use of such prime, base or reference rate
or ceases to exist, Lessor shall designate the prime, base or reference rate of
another state or federally chartered bank based in Los Angeles or New York to be
used for the purpose of calculating the Prime Rate hereunder.
 
Principal Licenses:  As defined in Section 48.1.1.
 
Prohibited Area:  As defined in Section 7.4.1.
 
Project Budget: With respect to each Planned Capital Refurbishment Project for a
Facility, as defined in Section 9.5.3.
 
Punch List Items:  With respect to each Planned Capital Refurbishment Project
for a Facility, minor details of construction, mechanical adjustments or
decorations which remain to be completed with respect to such Planned Capital
Refurbishment Project for such Facility following the applicable Completion Date
therefor and which do not (i) prevent the issuance of a certificate of occupancy
(or the local equivalent thereof) for such Planned Capital Refurbishment Project
for such Facility (if applicable) and/or (ii) materially interfere with Lessee’s
use of such Facility (including such Planned Capital Refurbishment Project) for
its Primary Intended Use.
 
Purchase Option Closing Date:  As defined in Section 35.1.
 
Purchase Option Facility:  Each Facility which is designated a Purchase Option
Facility on Exhibit C attached hereto.
 
Purchase Option Price:  The greater of (i) the sum of the Fair Market Value for
all of the Facilities then subject to the terms of this Lease and any
Facility(ies) subject to a New Lease hereafter with or in favor of Lessor or any
Affiliate of Lessor, less Lessee’s Shared
 

 
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Appreciation Amount or (ii) the sum of the Minimum Purchase Option Price
hereunder and the aggregate Minimum Purchase Option Price(s) under any New
Lease(s) hereafter with or in favor of Lessor or any Affiliate of Lessor.
 
Purchase Right/Obligation Exercise:  As defined in Section 18.1.2.
 
Put Event:  With respect to any Facility an Event of Default hereunder pursuant
to any of Sections 16.1(a) (arising out of any material default under any such
other lease or other agreement or instrument), 16.1(c), 16.1(e) (arising out of
(i) a breach or default by Lessee during the Term of any of its obligations or
covenants pursuant to Sections 7.2.1, 7.2.2, 7.2.3, 7.2.5, 7.4, 37.1 or 37.2 or
(ii) any other failure of Lessee to obtain and maintain all material licenses,
permits and other authorizations to use and operate such Facility for its
Primary Intended Use in accordance with all Legal Requirements), 16.1(j)
relating to such Facility, 16.1(k) (arising out of a breach of any material
representation or warranty of Lessee or any Guarantor in any such document
relating to such Facility), 16.1(l) relating to such Facility and/or 16.1(o)
relating to such Facility.  Notwithstanding that Lessor and Lessee have
specifically defined a “Put Event” for the limited purpose of setting forth the
circumstances under which Lessor shall be entitled to the remedy set forth in
Section 16.5, in no event shall this definition derogate the materiality of any
other Event of Default (including any Event of Default which does not constitute
a Put Event) or otherwise limit Lessor’s rights and remedies upon the occurrence
of any such Event of Default, including those rights and remedies set forth in
Sections 16.2, 16.3, 16.4, 16.8 and/or 16.10.
 
Reallocated Annual Minimum Capital Project Amount: As defined in Section 9.3.4.
 
Rent:  Collectively, the Minimum Rent, Additional Rent and Additional Charges.
 
Replacement Reserve:  As defined in Section 9.3.
 
Request for Advance:  With respect to each Planned Capital Refurbishment Project
for a Facility, certificates of Lessee and, to the extent applicable, the
Architect, in each case on the appropriate AIA form, including form G702
together with attached AIA form G703 (or equivalent, which AIA form G703 or
equivalent shall be modified to include columns for the original estimate of
scheduled values for each line item, changes to the scheduled values for each
line item and a revised scheduled value for each line item after any such
change) and/or such other form(s) as Lessor may hereafter reasonably request
which shall:  (i) set forth the Persons to whom money is owed and the amount
owed each; (ii) certify among other things that such amounts represent payments
due for services actually rendered or materials actually acquired or furnished
in connection with the construction/performance of such Planned Capital
Refurbishment Project; (iii) state that the sum requested is a Planned Capital
Refurbishment Project Cost within the applicable Project Budget for such item
and that, in the opinion of the Architect (if any) and Lessee, the remaining
amounts which Lessor has agreed to fund on account thereof are sufficient to pay
the cost to complete such Planned Capital Refurbishment Project pursuant to the
Plans and Specifications therefore and to pay for all labor, material and other
expenses in connection therewith; (iv) be accompanied by copies of billing
statements, fee schedules, documentation supporting all costs to date, copies of
all subcontracts not previously
 

 
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submitted and vouchers or invoices from the Persons named therein, in form
reasonably satisfactory to Lessor; (v) refer to an attached schedule, to be
verified by the Architect (if any) or other reliable Person reasonably
acceptable to Lessor prior to the advance being requested, identifying in a
manner reasonably satisfactory to Lessor all materials not yet affixed or
incorporated into such Planned Capital Refurbishment Project but which have been
covered by certificates submitted to date, including the current certificate;
(vi) contain a statement, to be verified by the Architect (if any) or other
reliable Person reasonably acceptable to Lessor prior to the advance being
requested, that all such materials not yet affixed or incorporated into such
Planned Capital Refurbishment Project have been stored at the Leased Property of
such Facility or at one or more other bonded locations approved by Lessor
identified therein (specifying the materials located at each location) under
adequate safeguards to minimize the possibility of loss, damage or commingling
with other materials or projects, and that builder’s risk insurance coverage for
such materials stored off the Leased Property of such Facility is not less than
the full replacement cost (as defined below in Section 13.2) of such materials
then being stored off the Leased Property of such Facility; and (vii) be
accompanied by appropriate waivers of lien rights (to the extent not previously
received and approved by Lessor) with respect to work and materials for which
funds have already been advanced by either Lessee or Lessor pursuant to Section
9.5 of this Lease executed by the General Contractor (if any) and all
contractors, subcontractors, mechanics and materialmen no more than one month in
arrears and who have furnished labor or material to date and whose charges are
or will be greater than Five Thousand Dollars ($5,000.00) and, unless Lessee has
provided a statutory payment bond in accordance with applicable Legal
Requirements, by all other contractors, subcontractors, mechanics and
materialmen.  Notwithstanding anything set forth herein to the contrary, the
Request for Advance for the first advance of funds by Lessor hereunder for any
Planned Capital Refurbishment Project for a Facility and for each advance that
is for an item on the applicable Project Budget therefore that is not a hard
cost shall mean such certificate with respect thereto as Lessor may reasonably
request.   To the extent that any payment, funding or accrual of the Aggregate
Costs of the Planned Capital Refurbishment Project for any Planned Capital
Refurbishment Project by Lessor hereunder is attributable or allocable to one or
more of the categories comprising such Planned Capital Refurbishment Project,
Lessor shall allocate such Aggregate Costs of the Planned Capital Refurbishment
Project among such categories as Lessor shall reasonably determine.
 
Required Governmental Approvals:  As defined in Section 48.1.1(a).
 
SEC:  Securities and Exchange Commission.
 
Separated Property:  As defined in Section 31.2.
 
Separation Event:
 
(i)           The sale, conveyance or other transfer by Lessor of all or any
portion of its interest in the Leased Property of one (1) or more Facilities;
 
(ii)           The sale, conveyance or other transfer of all or any portion of
the stock, partnership, membership or other equity interests in Lessor;
 
(iii)           Any financing by Lessor or any Affiliate of Lessor of all or any
portion of its interests in the Leased Property of one (1) or more Facilities,
including
 

 
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through a Facility Mortgage, the pledge of the stock, partnership, membership or
other equity interests in Lessor or other means; or
 
(iv)           The succession by any lender to Lessor or any Affiliate, whether
directly or indirectly, to the interests of Lessor under this Lease, including
through foreclosure or deed or other conveyance in lieu of foreclosure or in
satisfaction of debt.
 
Shareholders’ Equity:  With respect to any Person, the shareholders’, members’
or partners,’ beneficiaries’ or other equity of such Person, determined on a
consolidated basis in accordance with GAAP.
 
State:  With respect to each Facility, the State or Commonwealth in which the
Leased Property for such Facility is located.
 
Subsidiaries:  Corporations, partnerships, limited liability companies, business
trusts or other legal entities with respect to which a Person owns, directly or
indirectly (including through one or more intermediaries), more than fifty
percent (50%) of the voting stock or partnership, membership or other equity
interest, respectively.
 
Target Property:  As defined in Section 35.5.1(a).
 
Term:  The Fixed Term (i.e.,  the period commencing upon the Commencement Date
and ending with respect to each Facility at 11:59 p.m., local time at such
Facility, on the Fixed Term Expiration Date) and any Extended Terms (i.e., the
period commencing on the first day of any such Extended Term and ending with
respect to each Facility at 11:59 p.m., local time at such Facility, on the last
day of such Extended Term), unless earlier terminated pursuant to the provisions
hereof.
 
Transfer:  As defined in Article XXIV.
 
Transfer Consideration:  With respect to any Transfer constituting a Master
Sublease of a Facility, “Transfer Consideration” shall mean Fifty Percent (50%)
of the positive difference, if any, between the Fair Market Rental and the sum
of the Allocated Minimum Rent and Allocated Additional Rent payable by Lessee
under this Lease determined on a monthly basis with respect to such Facility,
prorating such Allocated Minimum Rent and Allocated Additional Rent as
appropriate, if less than all of the applicable Facility is Master
Subleased.  Fifty Percent (50%) of such positive difference shall be paid by
Lessee to Lessor monthly when the Allocated Minimum Rent and Allocated
Additional Rent are due for such Facility; provided, however, that in no event
shall the total Transfer Consideration to which Lessor is entitled in connection
with any such Master Sublease exceed the Total Consideration (as hereinafter
defined) payable directly or indirectly to Lessee, to any Controlling Person(s)
or to any other Person in exchange for, in connection with, related to or
arising out of the transaction(s) as to which such Master Sublease is a
part.  With respect to any other Transfer relating to any Facility or all
Facilities (i.e., a Transfer other than pursuant to a Master Sublease) “Transfer
Consideration” shall mean Fifty Percent (50%) of the positive Leasehold FMV of
such Facility(ies); provided, however, that in no event shall the total Transfer
Consideration to which Lessor is entitled in connection with any such other
Transfer exceed the Total Consideration payable directly or indirectly to
Lessee, to any Controlling Person(s) or to any other Person in
 

 
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exchange for, in connection with, related to or arising out of the
transaction(s) as to which such other Transfer is a part.  As used herein, the
term “Total Consideration” shall mean and include money and the fair market
value of any services, property and other things of value, including payment of
costs, cancellation or forgiveness of indebtedness, discounts, rebates, barter
and the like.  For purposes of Section 24.1.2.2 and the payment of Transfer
Consideration to Lessor as provided in this Lease, if any Transfer Consideration
otherwise payable is due from and based on Total Consideration payable to
Lessee, any Controlling Person(s) or to any other Person in exchange for, in
connection with, related to or arising out of such Transfer as provided above,
(a) where such Total Consideration is payable on a deferred basis (the “Deferred
Total Consideration”), then the amount of the Transfer Consideration due from
and based on any such Deferred Total Consideration shall be payable to Lessor as
and when paid to Lessee, to any Controlling Person(s) or to any such other
Person or (b) where such Total Consideration is payable in a form other than
immediately available cash, then the amount of Transfer Consideration due from
and based on the fair market value of such non-cash Total Consideration shall be
payable to Lessor in the form of immediately available cash promptly following
receipt by or credit to Lessee, any Controlling Person(s) or any such other
Person of such non-cash Total Consideration.  Lessee acknowledges and agrees
that the terms under which Lessor is entitled to the payment of Transfer
Consideration pursuant to this Lease and the amount thereof has been freely
negotiated and represents a fair and equitable division with Lessor of the
consideration payable in connection with a Transfer taking into account, among
other things, Lessor’s investment in the Leased Property, the terms of this
Lease and the inherent risks of owning and leasing real property.
 
Unsuitable for Its Primary Intended Use:  With respect to each Facility, a state
or condition of such Facility such that by reason of damage or destruction or
Condemnation, in the good faith judgment of Lessor, such Facility cannot be
operated on a commercially practicable basis for its Primary Intended Use.
 
Washington Licensure Laws: As defined in Section 49.1.4.
 
ARTICLE III.                                
 
3.1 Rent.  From and after the Commencement Date, Lessee shall pay to Lessor in
lawful money of the United States of America which shall be legal tender for the
payment of public and private debts, without offset or deduction, the amounts
set forth hereinafter as Minimum Rent and Additional Rent during the
Term.  Payments of Minimum Rent and Additional Rent shall be made by wire
transfer of funds initiated by Lessee to Lessor’s account or to such other
Person as Lessor from time to time may designate in writing, in advance on or
before the first day of each calendar month.
 
3.1.1 Minimum Rent.
 
(a) For the period from the Commencement Date through the expiration of the
fifth (5th) Lease Year, Lessee shall pay to Lessor as monthly “Allocated Minimum
Rent” for each Facility one-twelfth (1/12) of the amounts allocated to and set
forth opposite such Facility on Exhibit C attached hereto.  The first monthly
payment of Allocated
 

 
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Minimum Rent for each Facility shall be payable on the Commencement Date
(prorated as to any partial calendar month at the beginning of the Term).
 
(b) Monthly Minimum Rent (and applicable Allocated Minimum Rent for each
Facility) for the sixth (6th) Lease Year of the Fixed Term shall be equal to the
sum of (i) the monthly Minimum Rent (and applicable Allocated Minimum Rent for
each Facility) in effect as of the expiration of the fifth (5th) Lease Year,
plus (B) the monthly Additional Rent (and applicable Allocated Additional Rent
for each Facility) in effect as of the expiration of the fifth (5th) Lease Year,
in each case as increased for such sixth (6th) Lease Year by a percentage equal
to the greater of (i) Three Percent (3%) or (ii) the applicable CPI Increase.
 
(c) Upon the commencement of the seventh (7th) Lease Year and upon the
commencement of each Lease Year thereafter during the Fixed Term, the monthly
Minimum Rent (and applicable Allocated Minimum Rent for each Facility) shall be
equal to the monthly  Minimum Rent (and applicable Allocated Minimum Rent for
each Facility) in effect as of the expiration of the immediately preceding Lease
Year, as increased by the greater of (i) Three Percent (3%) or (ii) the
applicable CPI Increase.
 
(d) Monthly Minimum Rent (and applicable Allocated Minimum Rent for each
Facility) for the first Lease Year of each Extended Term, if any, shall be the
greater of (i) the lesser of (A) one-twelfth (1/12th)  of the aggregate annual
Fair Market Rental with respect to all Facilities then subject to this Lease
(and with respect to Allocated Minimum Rent, one-twelfth (1/12th)  of the annual
Fair Market Rental with respect to each Facility) as of the commencement of such
Extended Term or (B) One Hundred Six Percent (106%) of the monthly Minimum Rent
(and applicable Allocated Minimum Rent for each Facility) in effect as of the
expiration of the immediately prior Term, and (ii) the monthly Minimum Rent (and
applicable Allocated Minimum Rent for each Facility) in effect as of the
expiration of the immediately preceding Term, as increased by the greater of (A)
Three Percent (3%) or (B) the applicable CPI Increase.
 
(e) Upon the commencement of the second (2nd) Lease Year of each Extended Term
and upon the commencement of each Lease Year thereafter during such Extended
Term, the monthly Minimum Rent (and applicable Allocated Minimum Rent for each
Facility) shall be equal to the monthly  Minimum Rent (and applicable Allocated
Minimum Rent for each Facility) in effect as of the expiration of the
immediately preceding Lease Year, as increased by the greater of (i) Three
Percent (3%) or (ii) the applicable CPI Increase.
 
(f) If any increase in monthly Minimum Rent (and applicable Allocated Minimum
Rent for each Facility) as provided in Sections 3.1.1(b), (c), (d), or (e) above
shall not have been made at the commencement of the Lease Year for which
applicable, Lessee shall continue to pay monthly Minimum Rent (and applicable
Allocated Minimum Rent for each Facility) at the last rate applicable until
Lessee receives Lessor’s written notice as to such increase.  Within ten (10)
days after Lessee’s receipt of Lessor’s written notice, Lessee shall pay to
Lessor an amount equal to the new monthly Minimum Rent (and applicable Allocated
Minimum Rent for each Facility) times the number of months
 

 
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from the commencement of the then current Lease Year, as applicable, to the date
of receipt of Lessor’s written notice, less the aggregate amount paid by Lessee
on account of monthly Minimum Rent (and applicable Allocated Minimum Rent for
each Facility) for the same period.  Thereafter, Lessee shall pay monthly
Minimum Rent (and applicable Allocated Minimum Rent for each Facility) for the
applicable period at the new rate set forth in Lessor’s written notice.
Following any increase in the monthly Minimum Rent (and applicable Allocated
Minimum Rent for each Facility) pursuant to any of Sections 3.1.1(b), (c), (d),
or (e) above, at the request of either Lessor or Lessee, the parties shall
execute a written confirmation setting forth the same, in form and substance
reasonably acceptable to Lessor.  Notwithstanding the foregoing, the failure of
either Lessor or Lessee to request and/or the failure of either party to execute
and deliver any such written confirmation shall not affect Lessor’s good faith
determination of the monthly Minimum Rent (and applicable Allocated Minimum Rent
for each Facility) payable under this Lease.
 
3.1.2 Additional Rent for the First Five Lease Years of the Fixed Term.  For the
period from the Commencement Date through the expiration of the fifth (5th)
Lease Year of the Fixed Term, Lessee shall pay as monthly “Additional Rent” (and
monthly “Allocated Additional Rent” with respect to each Facility) the amount
determined pursuant to this Section 3.1.2.
 
(a) As of the Commencement Date for each Facility, such monthly Allocated
Additional Rent for such Facility shall initially be zero dollars ($0.00).
 
(b) The monthly Additional Rent (and the Allocated Additional Rent with respect
to each applicable Facility) then in effect shall be increased from time to time
on the date of any payment, funding or accrual by Lessor of any Aggregate Costs
of the Planned Capital Refurbishment Project for any Planned Capital
Refurbishment Project for such Facility (other than any portion of the Allocated
Planned Capital Refurbishment Project Tier 1 Allowance, but including any
portion of the Allocated Planned Capital Refurbishment Project Tier 2 Allowance,
in either case paid, funded or accrued by Lessor on account thereof as provided
in this Lease), by an amount equal to one-twelfth (1/12) of the product of (i)
the amount of payment, funding or accrual by Lessor of any such Aggregate Costs
of the Planned Capital Refurbishment Project for any Planned Capital
Refurbishment Project for such Facility (other than on account of the Allocated
Planned Capital Refurbishment Project Tier 1 Allowance), times (ii) the
Applicable Lease Rate in effect as of the date of such payment, funding or
accrual by Lessor. The amount of each increase in such monthly Allocated
Additional Rent with respect to each Facility pursuant to this Section 3.1.2
shall be referred to herein as the “Allocated Additional Rent Increase
Amount.”  The Allocated Additional Rent with respect to any Facility as so
increased by the applicable Allocated Additional Rent Increase Amount shall
remain in effect until any subsequent increase as provided in this Section
3.1.2. If the effective date of any Allocated Additional Rent Increase Amount
for any Facility does not occur on the first (1st) day of a calendar month, then
the applicable Allocated Additional Rent Increase Amount for such Facility shall
be prorated based upon the number of days in such calendar month in which the
effective date of such Allocated Additional Rent Increase Amount for such
Facility occurs.
 

 
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(c) In addition to any increases in monthly Additional Rent (and the Allocated
Additional Rent with respect to each applicable Facility) that may occur during
any applicable Lease Year pursuant to Section 3.1.2(b) above, upon the
commencement of the second (2nd) Lease Year of the Fixed Term and upon the
commencement of each Lease Year thereafter through the commencement of the fifth
(5th) Lease Year during the Fixed Term, the monthly Additional Rent (and
applicable Allocated Additional Rent for each applicable Facility) shall be
equal to the monthly  Additional Rent (and applicable Allocated Additional Rent
for each applicable Facility) in effect as of the expiration of the immediately
preceding Lease Year, as increased by the greater of (i) Three Percent (3%) or
(ii) the applicable CPI Increase.
 
(d) If any increase in monthly Additional Rent (and applicable Allocated
Additional Rent) (i) as provided for in Section 3.1.2(c) above shall not have
been made at the commencement of the Lease Year for which applicable, or (ii) as
provided for in Section 3.1.2(b) above shall not have been made on the effective
date of any Allocated Additional Rent Increase Amount, Lessee shall continue to
pay monthly Additional Rent (and applicable Allocated Additional Rent for each
Facility) at the last rate applicable until Lessee receives Lessor’s written
notice as to such increase.  Within ten (10) days after Lessee’s receipt of
Lessor’s notice, Lessee shall pay to Lessor an amount equal to the new monthly
Additional Rent times the number of months (or prorated for any partial month in
the case of any increase as provided in Section 3.1.2(b) above) from the
commencement of the then current Lease Year or the effective date of any
Allocated Additional Rent Increase Amount to the date of receipt of Lessor’s
notice, less the aggregate amount paid by Lessee on account of monthly
Additional Rent for the same period.  Thereafter, Lessee shall pay monthly
Additional Rent (and applicable Allocated Additional Rent for each Facility) for
the applicable period at the new rate set forth in Lessor’s notice. Following
any increase in the Additional Rent (and applicable Allocated Additional Rent
for each Facility) pursuant to either of Sections 3.1.2(b) or (c), at the
request of either Lessor or Lessee, the parties shall execute a written
confirmation setting forth the same, in form and substance reasonably acceptable
to Lessor.  Notwithstanding the foregoing, the failure of either Lessor or
Lessee to request and/or the failure of either party to execute and deliver any
such written confirmation shall not affect Lessor’s good faith determination of
the Additional Rent (and applicable Allocated Additional Rent for each Facility)
payable under this Lease.
 
(e) For avoidance of doubt, Lessor and Lessee acknowledge and agree that
commencing with the sixth (6th) Lease Year of the Fixed Term, and thereafter,
there shall be no further Additional Rent (or applicable Allocated Additional
Rent for any Facility) accruing and payable under this Lease, it being further
acknowledged that commencing with the sixth (6th) Lease Year of the Fixed Term,
all monthly Additional Rent (and applicable Allocated Additional Rent for each
Facility) payable for the last month of the fifth (5th) Lease Year shall be
taken into account for purposes of determining the monthly Minimum Rent (and
applicable Allocated Minimum Rent for each Facility) for such sixth (6th) Lease
Year of the Fixed Term and thereafter (to the extent applicable) as provided in
Section 3.1.1.
 
3.2 Additional Charges.  In addition to the Minimum Rent and Additional Rent,
(i) Lessee shall also pay and discharge as and when due and payable all other
amounts,
 

 
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liabilities, obligations and Impositions which Lessee assumes or agrees to pay
under this Lease; and (ii) in the event of any failure on the part of Lessee to
pay any of those items referred to in clause (i) above, Lessee shall also
promptly pay and discharge every fine, penalty, interest and cost which may be
added for nonpayment or late payment of such items (the items referred to in
clauses (i) and (ii) above being referred to herein collectively as the
“Additional Charges”), except where such failure is due to the acts or omissions
of Lessor, in which case Lessee shall not be responsible for any such fine,
penalty, interest or cost.
 
       3.3 Late Payment of Rent.
 
(a) LESSEE HEREBY ACKNOWLEDGES THAT LATE PAYMENT BY LESSEE TO LESSOR OF RENT
WILL CAUSE LESSOR TO INCUR COSTS NOT CONTEMPLATED HEREUNDER, THE EXACT AMOUNT OF
WHICH IS PRESENTLY ANTICIPATED TO BE EXTREMELY DIFFICULT TO ASCERTAIN.  SUCH
COSTS MAY INCLUDE PROCESSING AND ACCOUNTING CHARGES AND LATE CHARGES WHICH MAY
BE IMPOSED ON LESSOR BY THE TERMS OF ANY LOAN AGREEMENT AND OTHER EXPENSES OF A
SIMILAR OR DISSIMILAR NATURE.  ACCORDINGLY, IF ANY INSTALLMENT OF RENT OTHER
THAN ADDITIONAL CHARGES PAYABLE TO A PERSON OTHER THAN LESSOR SHALL NOT BE PAID
WITHIN THREE (3) BUSINESS DAYS AFTER ITS DUE DATE, LESSEE WILL PAY LESSOR ON
DEMAND A LATE CHARGE EQUAL TO THE LESSER OF (I) FIVE PERCENT (5%) OF THE AMOUNT
OF SUCH INSTALLMENT OR (II) THE MAXIMUM AMOUNT PERMITTED BY LAW.  THE PARTIES
AGREE THAT THIS LATE CHARGE REPRESENTS A FAIR AND REASONABLE ESTIMATE OF THE
COSTS THAT LESSOR WILL INCUR BY REASON OF LATE PAYMENT BY LESSEE.  THE PARTIES
FURTHER AGREE THAT SUCH LATE CHARGE IS RENT AND NOT INTEREST AND SUCH ASSESSMENT
DOES NOT CONSTITUTE A LENDER OR BORROWER/CREDITOR RELATIONSHIP BETWEEN LESSOR
AND LESSEE.  IN ADDITION, THE AMOUNT UNPAID, INCLUDING ANY LATE CHARGES, SHALL
BEAR INTEREST AT THE OVERDUE RATE COMPOUNDED MONTHLY FROM THE DUE DATE OF SUCH
INSTALLMENT TO THE DATE OF PAYMENT THEREOF, AND LESSEE SHALL PAY SUCH INTEREST
TO LESSOR ON DEMAND.  THE PAYMENT OF SUCH LATE CHARGE OR SUCH INTEREST SHALL NOT
CONSTITUTE WAIVER OF, NOR EXCUSE OR CURE, ANY DEFAULT UNDER THIS LEASE, NOR
PREVENT LESSOR FROM EXERCISING ANY OTHER RIGHTS AND REMEDIES AVAILABLE TO
LESSOR.
 
Lessor’s Initials:                                /s/ SMT
 
Lessee’s Initials:                                /s/ EM
 
(b) If Lessee shall, during any six (6) month period, be more than five (5)
Business Days delinquent in the payment of any Rent due and payable by Lessee
hereunder on three (3) or more occasions then, notwithstanding anything herein
to the contrary, Lessor may, by written notice to Lessee, elect to require
Lessee to pay all Minimum Rent and Additional Rent payable hereunder quarterly
in advance.  Such right of Lessor shall be in addition to and not in lieu of any
other right of remedy available to Lessor hereunder or at law on
 

 
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account of an Event of Default by Lessee hereunder.  For purposes of this
Section 3.3(b), the following terms and conditions shall apply:
 
(i) If at any given time Lessee shall be more than five (5) Business Days
delinquent in the payment of any Rent due and payable hereunder with respect to
more than one (1) Facility, such delinquency shall only constitute a single
occasion of delinquency, despite the fact that such delinquency has occurred
with respect to the payment of Rent for more than one (1) Facility.
 
(ii) If the date upon which any Rent is due and payable hereunder is not a
Business Day, such date shall be deemed to be the next Business Day following
such date.
 
3.4 Net Lease. This Lease is and is intended to be what is commonly referred to
as a “net, net, net” or “triple net” lease.  The Rent shall be paid absolutely
net to Lessor, so that this Lease shall yield to Lessor the full amount of the
installments of Minimum Rent, Additional Rent and Additional Charges throughout
the Term.
 
ARTICLE IV.                                
        4.1 Impositions
 
4.1.1 Subject to Article XII relating to permitted contests, Lessee shall pay,
or cause to be paid, all Impositions before any fine, penalty, interest or cost
may be added for non-payment.  Lessee shall make such payments directly to the
taxing authorities where feasible, and promptly furnish to Lessor copies of
official receipts or other satisfactory proof evidencing such
payments.  Lessee’s obligation to pay Impositions shall be absolutely fixed upon
the date such Impositions become a lien upon the Leased Property, any Capital
Additions or any part(s) thereof.  If any Imposition may, at the option of the
taxpayer, lawfully be paid in installments, whether or not interest shall accrue
on the unpaid balance of such Imposition, Lessee may pay the same, and any
accrued interest on the unpaid balance of such Imposition, in installments as
the same respectively become due and before any fine, penalty, premium, further
interest or cost may be added thereto.
 
4.1.2 Lessor shall prepare and file all tax returns and reports as may be
required by Legal Requirements with respect to Lessor’s net income, gross
receipts, franchise taxes and taxes on its capital stock, and Lessee shall
prepare and file all other tax returns and reports as may be required by Legal
Requirements.
 
4.1.3 Any refund due from any taxing authority in respect of any Imposition paid
by Lessee shall be paid over to or retained by Lessee if no Event of Default
shall have occurred hereunder and be continuing.  Any other refund shall be paid
over to or retained by Lessor.
 
4.1.4 Lessor and Lessee shall, upon request of the other, provide such data as
is maintained by the party to whom the request is made with respect to the
Leased Property and all Capital Additions as may be necessary to prepare any
required returns and reports.  If any property covered by this Lease is
classified as personal property for tax
 

 
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purposes, Lessee shall file all personal property tax returns in such
jurisdictions where it must legally so file.  Lessor, to the extent it possesses
the same, and Lessee, to the extent it possesses the same, shall provide the
other party, upon request, with cost and depreciation records necessary for
filing returns for any property so classified as personal property.  Where
Lessor is legally required to file personal property tax returns and to the
extent practicable, Lessee shall be provided with copies of assessment notices
indicating a value in excess of the reported value in sufficient time for Lessee
to file a protest.
 
4.1.5 Lessee may, upon notice to Lessor, at Lessee’s option and at Lessee’s sole
cost and expense, protest, appeal, or institute such other proceedings as Lessee
may deem appropriate to effect a reduction of real estate or personal property
assessments and Lessor, at Lessee’s expense as aforesaid, shall reasonably
cooperate with Lessee in such protest, appeal, or other action but at no cost or
expense to Lessor.  Billings for reimbursement by Lessee to Lessor of personal
property or real property taxes shall be accompanied by copies of a bill
therefor and payments thereof which identify the personal property or real
property with respect to which such payments are made.
 
4.1.6 Lessor shall give prompt notice to Lessee of all Impositions payable by
Lessee hereunder of which Lessor has knowledge, but Lessor’s failure to give any
such notice shall in no way diminish Lessee’s obligations hereunder to pay such
Impositions.
 
4.1.7 Impositions imposed or assessed in respect of the tax-fiscal period during
which the Term terminates with respect to any Facility shall be adjusted and
prorated between Lessor and Lessee with respect to such Facility, whether or not
such Imposition is imposed before or after such commencement or termination and
Lessee’s obligation to pay its prorated share thereof shall survive such
termination with respect to such Facility.  Lessor and Lessee acknowledge and
agree that Impositions imposed or assessed in respect of the tax-fiscal period
during which the Term commences or for any prior periods are or will be prorated
and adjusted between Current Lessee, Current Manager and Lessee pursuant to the
applicable Operations Transfer Agreement(s) and, accordingly, Lessee shall be
responsible for paying the same from and after the Commencement Date, whether or
not such Impositions relate to any periods prior to the Commencement Date.
 
4.2 Utilities.  Lessee shall pay or cause to be paid all charges for
electricity, power, gas, oil, water and other utilities used in the Leased
Property and all Capital Additions.  Lessee shall also pay or reimburse Lessor
for all costs and expenses of any kind whatsoever which at any time may be
imposed against Lessor by reason of any of the covenants, conditions and/or
restrictions affecting the Leased Property of any such Facility, any Capital
Additions of any such Facility and/or any part(s) thereof, or with respect to
easements, licenses or other rights over, across or with respect to any adjacent
or other property which benefits the Leased Property and/or any Capital
Additions of any such Facility, including any and all costs and expenses
associated with any utility, drainage and parking easements.  Lessor and Lessee
acknowledge and agree that, to the extent any of the foregoing charges and
expenses relate to any period prior to the Commencement Date, the same are or
will be prorated and adjusted between Current Lessee, Current Manager and Lessee
pursuant to the applicable Operations Transfer Agreement(s) and, accordingly,
Lessee shall be responsible for paying the same from and after
 

 
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the Commencement Date, whether or not the same relate to any periods prior to
the Commencement Date.
 
4.3 Insurance.  During the Term, Lessee shall pay or cause to be paid all
premiums for the insurance coverage required to be maintained by Lessee
hereunder.
 
4.4 Impound Account.  Lessor may, at its option to be exercised by thirty (30)
days’ written notice to Lessee, require Lessee to deposit, at the time of any
payment of Minimum Rent and Additional Rent, an amount equal to one-twelfth
(1/12th) of Lessee’s estimated annual taxes, of every kind and nature, required
pursuant to Section 4.1 plus, if Lessee fails to pay any insurance premium in a
timely manner as required by this Lease, one-twelfth (1/12th)of Lessee’s
estimated annual insurance premiums required pursuant to Section 4.3 into an
impound account as directed by Lessor.  Such amounts shall be applied to the
payment of the obligations in respect of which said amounts were deposited in
such order of priority as Lessor shall determine, on or before the respective
dates on which the same or any of them would become delinquent.  The cost of
administering such impound account shall be paid by Lessee.  Nothing in this
Section 4.4 shall be deemed to affect any right or remedy of Lessor hereunder.
 
4.5 Tax Service.  If requested by Lessor, Lessee shall, at its sole cost and
expense, cause to be furnished to Lessor a tax reporting service, to be
designated by Lessor, covering the Leased Property and all Capital Additions.
 
ARTICLE V.                                
 
5.1 No Termination, Abatement, etc.  Except as otherwise specifically provided
in this Lease, Lessee shall remain bound by this Lease in accordance with its
terms and shall not seek or be entitled to any abatement, deduction, deferment
or reduction of Rent, or set-off against the Rent.  Except as otherwise
specifically provided in this Lease, the respective obligations of Lessor and
Lessee shall not be affected by reason of (i) any damage to or destruction of
the Leased Property, any Capital Additions and/or any part(s) thereof from
whatever cause and/or any Condemnation of the Leased Property, any Capital
Additions and/or any part(s) thereof; (ii) the lawful or unlawful prohibition
of, or restriction upon, Lessee’s use of the Leased Property, any Capital
Additions and/or any part(s) thereof, or the interference with such use by any
Person other than by reason of (A) any such Person claiming by or through
Lessor, or (B) a condition existing on or prior to the Commencement Date; (iii)
any claim that Lessee has or might have against Lessor by reason of any default
or breach of any warranty by Lessor hereunder or under any other agreement
between Lessor and Lessee or to which Lessor and Lessee are parties; (iv) any
bankruptcy, insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding up or other proceedings affecting Lessor or any assignee or
transferee of Lessor; or (v) for any other cause, whether similar or dissimilar
to any of the foregoing, other than a discharge of Lessee from any such
obligations as a matter of law.  Lessee hereby specifically waives all rights
arising from any occurrence whatsoever which may now or hereafter be conferred
upon it by law (a) to modify, surrender or terminate this Lease or quit or
surrender the Leased Property, any Capital Additions and/or any part(s) thereof;
or (b) which may entitle Lessee to any abatement, reduction, suspension or
deferment of the Rent or other sums payable by Lessee hereunder, except as
otherwise specifically provided in this Lease.  The obligations of Lessor and
Lessee hereunder shall be separate and independent covenants and
 

 
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agreements and the Rent and all other sums payable by Lessee hereunder shall
continue to be payable in all events unless the obligations to pay the same
shall be terminated pursuant to the express provisions of this Lease or by
termination of this Lease other than by reason of an Event of Default.
 
5.2 Termination with Respect to Fewer than All of the Facilities.  Wherever in
this Lease the action of terminating the Lease with respect to a Facility (or
action of similar import) is discussed, such action shall mean the termination
of Lessee’s rights in and to the Leased Property relating to such
Facility.  Notwithstanding anything in this Lease to the contrary, if this Lease
shall be terminated by Lessor or Lessee pursuant to rights granted hereunder
with respect to any Facility, such termination shall not affect the applicable
Term of this Lease with respect to the balance of the Facilities not so
terminated, and this Lease shall continue in full force and effect with respect
to each other such Facility, except that the total Minimum Rent and Additional
Rent payable hereunder shall be reduced by the amount of Allocated Minimum Rent
and Allocated Additional Rent with respect to such Facility as to which this
Lease has so terminated.  Nothing contained in this Section 5.2 shall serve in
any way to limit Lessor’s ability (a) pursuant to Section 16.2 below, to
terminate this Lease with respect to any or all of the Facilities if an Event of
Default shall have occurred under this Lease, regardless of whether such Event
of Default emanated primarily from a single Facility, or (b) in the event of a
termination because of an Event of Default, to recover damages or otherwise
exercise its remedies with respect to such Facility(ies) as provided in Article
XVI.
 
5.3 Abatement Procedures.  In the event of a partial taking by Condemnation of
any Facility as described in Section 15.1.2, which taking by Condemnation does
not render the Leased Property of such Facility Unsuitable for its Primary
Intended Use, this Lease shall not terminate with respect to the Leased Property
of such Facility, but the monthly Allocated Minimum Rent and Additional Rent for
such Facility shall be abated in the manner and to the extent that is fair, just
and equitable to both Lessee and Lessor, primarily taking into consideration,
along with other relevant factors, the number of usable beds affected by such
partial taking by Condemnation.  If Lessor and Lessee are unable to agree upon
the amount of such abatement within sixty (60) days after such partial taking by
Condemnation, either party may submit the matter to arbitration as provided in
Article XLIV below.
 
ARTICLE VI.                                
 
6.1 Ownership of the Leased Property.  Lessee acknowledges that the Leased
Property is the property of Lessor and that Lessee has only the right to the
exclusive possession and use of the Leased Property upon the terms and
conditions of this Lease.  Upon the expiration or earlier termination of this
Lease with respect to any Facility Lessee shall, at its expense, repair and
restore the Leased Property relating to such Facility to the condition required
by Section 9.1.4.
 
6.2 Personal Property.  During the Term, Lessee shall, as necessary and at its
expense, install, affix or assemble or place on any parcels of the Land or in
any of the Leased Improvements, any items of Lessee’s Personal Property and
replacements thereof which shall be the property of and owned by Lessee.  Except
as provided in Sections 6.3 and 16.10, Lessor shall have no rights to Lessee’s
Personal Property.  With respect to each Facility, Lessee shall provide
 

 
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and maintain during the entire Term applicable to such Facility all Personal
Property necessary in order to operate such Facility in compliance with all
licensure and certification requirements, all Legal Requirements and all
Insurance Requirements and otherwise in accordance with customary practice in
the industry for its Primary Intended Use.
 
6.3 Transfer of Personal Property and Capital Additions to Lessor.  Upon the
expiration or earlier termination of this Lease with respect to a Facility, all
Capital Additions not owned by Lessor and Lessee’s Personal Property relating to
such Facility shall become the property of Lessor, free of any encumbrance and
Lessee shall execute all documents and take any actions reasonably necessary to
evidence such ownership and discharge any encumbrance.
 
ARTICLE VII.                                
 
7.1 Condition of the Leased Property.  On and as of the Commencement Date,
Lessee acknowledges receipt and delivery of possession of the Leased Property
and Lessee hereby confirms that, pursuant to Article XLVIII hereof, Lessee has
had the opportunity to examine and inspect the Leased Property and otherwise has
knowledge of the condition of the Leased Property prior to the Commencement Date
and has found the same to be in good order and repair, free from Hazardous
Substances not in compliance with Legal Requirements, and satisfactory for its
purposes hereunder.  Regardless, however, of any examination or inspection made
by Lessee and whether or not any patent or latent defect or condition was
revealed or discovered thereby, Lessee is leasing the Leased Property “AS IS” in
its present condition.  Lessee waives any claim or action against Lessor in
respect of the condition of the Leased Property of each Facility including any
defects or adverse conditions not discovered or otherwise known by Lessee either
as of the Effective Date or as of the Commencement Date.  LESSOR MAKES NO
WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED
PROPERTY OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR
CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO THE NATURE OR
QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, OR THE EXISTENCE OF ANY
HAZARDOUS SUBSTANCE, IT BEING AGREED THAT ALL SUCH RISKS, LATENT OR PATENT, ARE
TO BE BORNE SOLELY BY LESSEE INCLUDING ALL RESPONSIBILITY AND LIABILITY FOR ANY
ENVIRONMENTAL REMEDIATION AND COMPLIANCE WITH ALL ENVIRONMENTAL
LAWS.  Notwithstanding the foregoing, Lessor hereby acknowledges its obligation
to fund a portion of the Planned Capital Refurbishment Project(s) in accordance
with the provisions of Section 9.5 below.
 
       7.2 Use of the Leased Property
 
7.2.1 Lessee covenants that it will obtain and maintain all authorization and
approvals needed to use and operate the Leased Property, all Capital Additions
and each Facility for such Facility’s respective Primary Intended Use and any
other use conducted on the Leased Property and any Capital Additions as may be
permitted from time to time hereunder in accordance with Legal Requirements
including applicable licenses, provider agreements, permits, and Medicare and/or
Medicaid certification.
 

 
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7.2.2 Lessee shall use or cause to be used the Leased Property, all Capital
Additions and the improvements thereon of each Facility for its Primary Intended
Use.  Lessee shall not use the Leased Property, any Capital Additions or any
part(s) thereof for any other use without the prior written consent of Lessor,
which consent Lessor may withhold in its sole discretion.
 
7.2.3 Lessee shall operate continuously the entire Leased Property and all
Capital Additions of each Facility in accordance with its Primary Intended Use;
provided, however, that Lessee shall be relieved of such obligation to
continuously operate the Leased Property and all Capital Additions of each
Facility to the extent reasonably necessary (a) to complete any repair or
restoration of the Leased Property and Capital Additions of any Facility
pursuant to the terms of Sections 14.2, 14.3 and 15.1.3, as applicable, (b) to
complete any Capital Additions to the Leased Property or any Facility that are
consented to by Lessor in accordance with the terms of Section 10.1 below, and
(c) as a result of any cause described in Section 45.1.16 below.  Lessee shall
devote the entirety of each Facility and all Capital Additions thereto to the
Primary Intended Use, except for areas reasonably required for office or storage
space uses incidental to the Primary Intended Use.  Lessee shall not modify the
services offered or take any other action (e.g., removing patients or residents
from any Facility or directing patients or residents, or prospective patients or
residents, to another Facility) which would materially reduce Gross Revenues or
the Fair Market Value of any such Facility.  Lessee shall at all times maintain
an adequate staff for the service of its residents and/or patients, in each case
assuming an occupancy and/or use level for each Facility which is not less than
the average occupancy and/or use level for similar facilities in the
State.  Lessee shall employ its best judgment, efforts and abilities to operate
the entirety of each Facility in such a manner so as to maximize Gross Revenues
and to enhance the reputation and attractiveness of each Facility.
 
7.2.4 Lessee shall conduct its business at each Facility in conformity with the
highest standards of patient or resident care practice provided in similar
facilities in the State.
 
7.2.5 Lessee shall not commit or suffer to be committed any waste on the Leased
Property and/or on or to any Capital Additions or cause or permit any nuisance
to exist thereon or with respect thereto.
 
7.2.6 Lessee shall neither suffer nor permit the Leased Property, any Capital
Additions, or any part(s) thereof, or Lessee’s Personal Property, to be used in
such a manner as (i) might reasonably tend to impair Lessor’s title thereto or
to any portion thereof or (ii) may make possible a claim of adverse use or
possession, or an implied dedication of the Leased Property, any Capital
Additions or any part(s) thereof.
 
7.3 Lessor to Grant Easements, etc.  Lessor shall, from time to time so long as
no Event of Default has occurred and is continuing, at the request of Lessee and
at Lessee’s cost and expense, but subject to the approval of Lessor, which
approval shall not be unreasonably withheld or delayed (i) grant easements and
other rights in the nature of easements; (ii) release existing easements or
other rights in the nature of easements which are for the benefit of the Leased
Property; (iii) dedicate or transfer unimproved portions of the Leased Property
for road,
 

 
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highway or other public purposes; (iv) execute petitions to have the Leased
Property annexed to any municipal corporation or utility district; (v) execute
amendments to any covenants, conditions and restrictions affecting the Leased
Property; and (vi) execute and deliver to any Person any instrument appropriate
to confirm or effect such grants, releases, dedications and transfers to the
extent of its interest in the Leased Property, but only upon delivery to Lessor
of an Officer’s Certificate stating that such grant release, dedication,
transfer, petition or amendment is not detrimental to the proper conduct of the
business of Lessee on the Leased Property and does not materially reduce the
value of the Leased Property.
 
7.4 Preservation of Facility Value.  Lessee acknowledges that a fair return to
Lessor on its investment in the Leased Property of each Facility and all Capital
Additions thereto is dependent, in part, on the concentration on the Leased
Property of each Facility during the Term of the assisted living and skilled
nursing business of Lessee and its Affiliates in operating such Facility for its
Primary Intended Use in the geographical area of the Leased Property of such
Facility.  Lessee further acknowledges that diversion of residents and/or
patients, as applicable, from any Facility to other facilities or institutions
owned, operated or managed, whether directly or indirectly, by Lessee or its
Affiliates will have a material adverse impact on the value and utility of the
Leased Property and all Capital Additions.  Accordingly, Lessor and Lessee agree
as follows:
 
7.4.1 During the Term with respect to each Facility and for a period of two (2)
years thereafter, neither Lessee nor any of its Affiliates, directly or
indirectly, shall operate, own, manage or have any interest in or otherwise
participate in or receive revenues from any other facility or institution
providing services or similar goods to those provided in connection with any
Facility and the Primary Intended Use within a five (5) mile radius outward from
the outside boundary of the Leased Property of such Facility (the “Prohibited
Area”).  All distances shall be measured on a straight line rather than on a
driving distance basis.  In the event that any portion of such other facility or
institution is located within such Prohibited Area the entire facility or
institution shall be deemed located within such Prohibited Area.
 Notwithstanding the foregoing, the provisions of this Section 7.4.1 shall not
apply to (collectively, the “Excluded Facilities”): (a) those facilities set
forth on Schedule 7.4.1 attached hereto and (b) any other facilities which after
the Commencement Date become part of the assets of Lessee or any of its
Affiliates or which either Lessee or any of its Affiliates otherwise operates,
owns, leases or manages, as a result of the acquisition (whether direct or
indirect) of a portfolio of senior housing facilities consisting of three (3) or
more facilities in a single transaction or series of related transactions;
provided, however, that if more than fifty percent (50%) of the facilities
acquired in such portfolio transaction are located within the Prohibited Area
or, if as of the date of the closing of such portfolio transaction, the
applicable Facility affected by such portfolio transaction has an occupancy rate
of less than the lesser of (i) ninety percent (90%) or (ii) the occupancy rate
of such Facility as of the Commencement Date, then the foregoing exception
described in clause (b) above shall not apply, and such competing facilities
shall not be deemed “Excluded Facilities” for purposes of this Section 7.4.1.
 
7.4.2 Except as is necessary (a) to provide residents or patients with an
alternative level of care not available at a Facility, (b) as a result of the
failure of the applicable resident or patient to pay Lessee for its stay at the
Facility, or (c) to ensure the
 

 
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health and welfare of other residents of a Facility, prior to and after the
expiration or earlier termination of this Lease, Lessee shall not recommend or
solicit the removal or transfer of any resident or patient from any Facility to
any other facility or institution owned, operated or managed, whether directly
or indirectly, by Lessee or its Affiliates.
 
ARTICLE VIII.                                
 
8.1 Compliance with Legal and Insurance Requirements, Instruments, etc. Subject
to Article XII regarding permitted contests, Lessee, at its expense, shall
promptly (i) comply with all Legal Requirements and Insurance Requirements
regarding the use, operation, maintenance, repair and restoration of the Leased
Property, Lessee’s Personal Property and all Capital Additions whether or not
compliance therewith may require structural changes in any of the Leased
Improvements or any Capital Additions thereto or interfere with the use and
enjoyment of the Leased Property and (ii) procure, maintain and comply with all
licenses, certificates of need, provider agreements and other authorizations
required for the use of the Leased Property, Lessee’s Personal Property and all
Capital Additions for the applicable Primary Intended Use and any other use of
the Leased Property, Lessee’s Personal Property and all Capital Additions then
being made, and for the proper erection, installation, operation and maintenance
of the Leased Property, Lessee’s Personal Property and all Capital
Additions.  If Lessee shall fail to comply with any such Legal Requirements or
Insurance Requirements or shall fail to procure, maintain and/or comply with any
such licenses, certificates of need, provider agreements or other
authorizations, then, upon ten (10) days’ prior written notice (except (a) in
the event of an emergency, in which case no prior notice shall be required or
(b) in the case of any other express provision of this Lease that permits Lessor
to self-help rights or remedies on less than ten (10) day’s prior written notice
or upon no notice, in which case such shorter or no notice shall be required in
connection therewith, as applicable), Lessor, without waving or releasing any
obligation or default of Lessee as a result thereof, may, but shall not be
obligated to, enter upon the Leased Property and all Capital Additions thereto
and take such actions and incur such reasonable costs and expenses to effect
such compliance, procurement or maintenance as it deems necessary or advisable
to protect its interest in the Leased Property and all Capital Additions
thereto, and Lessee shall reimburse Lessor for all such reasonable costs and
expenses incurred by Lessor in connection with such actions.  Lessee covenants
and agrees that the Leased Property, Lessee’s Personal Property and all Capital
Additions shall not be used by Lessee or any Person claiming by, through or
under Lessee for any unlawful purpose.
 
ARTICLE IX.                               
 
        9.1 Maintenance and Repair.
 
9.1.1 Lessee, at its expense, shall maintain the Leased Property, and every
portion thereof, Lessee’s Personal Property and all Capital Additions, and all
private roadways, sidewalks and curbs appurtenant to the Leased Property, and
which are under Lessee’s control in good order and repair whether or not the
need for such repairs occurs as a result of Lessee’s use, any prior use, the
elements or the age of the Leased Property, Lessee’s Personal Property and all
Capital Additions, and, with reasonable promptness, make all necessary and
appropriate repairs thereto of every kind and nature, including those necessary
to comply with changes in any Legal Requirements, whether interior or exterior,
structural or
 

 
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nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by
reason of a condition existing prior to the Commencement Date.  All repairs
shall be at least equivalent in quality to the original work.  Lessee will not
take or omit to take any action the taking or omission of which might materially
impair the value or the usefulness of the Leased Property of any Facility or any
part thereof or any Capital Addition thereto for its Primary Intended Use.
 
9.1.2 Lessor shall not under any circumstances be required to (i) build or
rebuild any improvements on the Leased Property or any Capital Additions; (ii)
make any repairs, replacements, alterations, restorations or renewals of any
nature to the Leased Property, whether ordinary or extraordinary, structural or
nonstructural, foreseen or unforeseen, or to make any expenditure whatsoever
with respect thereto; or (iii) maintain the Leased Property or any Capital
Additions in any way.  Lessee hereby waives, to the extent permitted by law, the
right to make repairs at the expense of Lessor pursuant to any law in effect at
the time of the execution of this Lease or hereafter enacted.
 
9.1.3 Nothing contained in this Lease and no action or inaction by Lessor shall
be construed as (i) constituting the consent or request of Lessor, expressed or
implied, to any contractor, subcontractor, laborer, materialman or vendor to or
for the performance of any labor or services or the furnishing of any materials
or other property for the construction, alteration, addition, repair or
demolition of or to the Leased Property or any part thereof or any Capital
Addition thereto; or (ii) giving Lessee any right, power or permission to
contract for or permit the performance of any labor or services or the
furnishing of any materials or other property in such fashion as would permit
the making of any claim against Lessor in respect thereof or to make any
agreement that may create, or in any way be the basis for, any right, title,
interest, lien, claim or other encumbrance upon the estate of Lessor in the
Leased Property, or any portion thereof or any Capital Addition thereto.
 
9.1.4 Unless Lessor shall convey any of the Leased Property to Lessee pursuant
to the provisions of this Lease, Lessee shall, upon the expiration or earlier
termination of the Term with respect to a Facility, vacate and surrender the
Leased Property, Lessee’s Personal Property and all Capital Additions, in each
case with respect to such Facility, to Lessor in the condition in which such
Leased Property was originally received from Lessor and such Lessee’s Personal
Property and Capital Additions were originally introduced to such Facility,
except as repaired, rebuilt, restored, altered or added to as permitted or
required by the provisions of this Lease and except for ordinary wear and tear.
 
9.2 Encroachments, Restrictions, Mineral Leases, etc.  If any of the Leased
Improvements or Capital Additions shall, at any time, encroach upon any
property, street or right-of-way, or shall violate any restrictive covenant or
other agreement affecting the Leased Property, or any part thereof or any
Capital Addition thereto, or shall impair the rights of others under any
easement or right-of-way to which the Leased Property is subject, or the use of
the Leased Property or any Capital Addition thereto is impaired, limited or
interfered with by reason of the exercise of the right of surface entry or any
other provision of a lease or reservation of any oil, gas, water or other
minerals, then promptly upon the request of Lessor or any Person affected by any
such encroachment, violation or impairment, Lessee, at its sole cost and
expense, but
 

 
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subject to its right to contest the existence of any such encroachment,
violation or impairment, shall protect, indemnify, save harmless and defend
Lessor from and against all losses, liabilities, obligations, claims, damages,
penalties, causes of action, costs and expenses (including reasonable
attorneys’, consultants’ and experts’ fees and expenses) based on or arising by
reason of any such encroachment, violation or impairment.  In the event of an
adverse final determination with respect to any such encroachment, violation or
impairment, Lessee shall either (i) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
encroachment, violation or impairment, whether the same shall affect Lessor or
Lessee; or (ii) make such changes in the Leased Improvements and any Capital
Addition thereto, and take such other actions, as Lessee in the good faith
exercise of its judgment deems reasonably practicable, to remove such
encroachment or to end such violation or impairment, including, if necessary,
the alteration of any of the Leased Improvements or any Capital Addition
thereto, and in any event take all such actions as may be necessary in order to
be able to continue the operation of the Leased Improvements and any Capital
Addition thereto for the Primary Intended Use substantially in the manner and to
the extent the Leased Improvements and Capital Additions were operated prior to
the assertion of such encroachment, violation or impairment.  Lessee’s
obligations under this Section 9.2 shall be in addition to and shall in no way
discharge or diminish any obligation of any insurer under any policy of title or
other insurance and, to the extent the recovery thereof is not necessary to
compensate Lessor for any damages incurred by any such encroachment, violation
or impairment, Lessee shall be entitled to a credit for any sums recovered by
Lessor under any such policy of title or other insurance.
 
        9.3 On-Going Capital Projects
 
9.3.1 Without in any way limiting Lessee’s obligations under this Article IX
(including Section 9.5 hereof), subject to the provisions of Section 9.3.4
hereof, Lessee shall expend during each Lease Year for each Facility, no less
than the Annual Minimum Capital Project Amount for such Facility for Capital
Projects to such Facility.  Such Capital Projects shall be performed and
completed in compliance with the applicable provisions of this Lease.  Promptly
following the expiration of each Lease Year for each Facility, Lessee shall
furnish to Lessor reasonable documentary evidence as to the completion of all
Capital Projects for such Lease Year required pursuant to this Section 9.3,
together with the costs thereof.  Subject to the provisions of Section 9.3.4
below, if Lessee fails to expend during any Lease Year the applicable Annual
Minimum Capital Project Amount for Capital Projects for any Facility, then
Lessee shall promptly deposit with Lessor as a repair and replacement reserve
with respect to such Facility (a “Replacement Reserve”) for Capital Projects to
such Facility, an amount equal to (a) the Annual Minimum Capital Project Amount
for such Facility less (b) the sum of (i) the amounts expended by Lessee during
such Lease Year on account of Capital Projects to such Facility and (ii) the
Annual Minimum Capital Project Amount Overage for such Facility, and, so long as
Lessee otherwise maintains such Facility in the condition required by this
Lease, once such deposit has been made Lessee shall not be deemed to be in
default of its obligations under this Section 9.3 for Lessee’s failure to expend
during such Lease Year the applicable Annual Minimum Capital Project Amount for
Capital Projects for such Facility.  So long as no Event of Default or event or
circumstance which with notice or passage of time, or both, would constitute an
Event of Default hereunder has occurred, if (i) a Replacement Reserve has been
established for any Facility and (ii) Lessee
 

 
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expends in any Lease Year an amount in excess of the applicable Annual Minimum
Capital Project Amount for Capital Projects for such Facility, Lessor shall, to
the extent funds are available for such purpose in such Replacement Reserve,
disburse to Lessee the Capital Project Costs incurred and paid by Lessee during
such Lease Year in performing such Capital Projects to such Facility in excess
of the applicable Annual Minimum Capital Project Amount for such Facility for
such Lease Year.  Any such disbursement from any Replacement Reserve shall be
paid by Lessor to Lessee within fifteen (15) days following: (a) receipt by
Lessor of a written request from Lessee for disbursement from the Replacement
Reserve for such Facility and a certification by Lessee in form and substance
reasonably satisfactory to Lessor that the applicable item of Capital Project
for such Facility has been completed; (b) delivery to Lessor of paid invoices,
receipts or other evidence reasonably satisfactory to Lessor, verifying (1) the
Capital Project Costs for such Capital Project and (2) that, subject to the
provisions of Section 9.3.4 hereof, Lessee has expended in the applicable Lease
Year an amount in excess of the applicable Annual Minimum Capital Project Amount
for Capital Projects for such Facility; and (c) delivery to Lessor of
affidavits, lien waivers or other evidence satisfactory to Lessor showing that
all materialmen, laborers, subcontractors and any other parties who might or
could claim statutory or common law liens and are furnishing or have furnished
material or labor to the Leased Property of such Facility have been paid all
amounts due for labor and materials furnished to the Leased Property of such
Facility.  Lessor shall not be required to make advances from any Replacement
Reserve more frequently than once in any thirty (30) day period.  Except as
provided in Section 9.3.4 hereof, amounts held in the Replacement Reserve for
any Facility may not be used to pay for or reimburse Lessee for Capital Project
Costs for any other Facility.
 
9.3.2 No Replacement Reserve shall be or be deemed to be escrow or trust funds,
but, at Lessor’s option and in Lessor’s discretion, may either be held in a
separate account or be commingled by Lessor with the general funds of
Lessor.  Lessee shall not be entitled to any interest on any funds contained in
any Replacement Reserve.  The Replacement Reserves are solely for the protection
of Lessor and the Leased Property of the Facilities and entail no responsibility
on Lessor’s part beyond the payment of the respective items for which they are
held following receipt of bills, invoices or statements therefor in accordance
with the terms of this Section 9.3 and beyond the allowing of due credit for the
sums actually received.  Upon assignment of this Lease by Lessor, any funds in
any Replacement Reserve shall be turned over to the assignee and any
responsibility of Lessor, as assignor, with respect thereto shall terminate.
 
9.3.3 If any funds remain in any Replacement Reserve upon the expiration or
earlier termination of this Lease (other than as a result of the purchase of the
Leased Property of the applicable Facility by Lessee, in which case all of such
funds in the applicable Replacement Reserve shall be remitted by Lessor to
Lessee upon the closing of such purchase or offset against the purchase price
payable by Lessee for the Leased Property of such Facility) and Lessor
determines in its reasonable discretion that Lessee has failed to maintain any
Facility in accordance with the requirements of this Lease, then the funds held
in such Replacement Reserve shall be paid over to Lessor as an Additional Charge
and Rent under this Lease for purposes of making necessary repairs to the
Facilities and shall be in addition to Minimum Rent, Additional Rent and all
other Additional Charges payable hereunder.
 

 
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9.3.4 Notwithstanding anything to the contrary in this Section 9.3, if, for any
Lease Year, Lessee reasonably determines that the expenditure by Lessee of all
or a portion of the Annual Minimum Capital Project Amount for Capital Projects
for a Facility pursuant to this Section 9.3 is not required or necessary in
order to maintain such Facility in the condition required by this Lease (herein,
an “Non-Capital Need Facility”), and Lessee desires to expend more than the
applicable Annual Minimum Capital Project Amount for any other Facility(ies) for
Capital Projects for such Lease Year, then Lessee may, in advance and in
writing, request Lessor’s consent to the reallocation and expenditure of all or
such portion of such Annual Minimum Capital Project Amount for such Non-Capital
Need Facility for Capital Projects to such other Facility(ies) during such Lease
Year.  Lessor hereby agrees not to unreasonably withhold its consent to any such
reallocation and expenditure of all or such portion of the Annual Minimum
Capital Project Amount for any such Non-Capital Need Facility for Capital
Projects to such other Facility(ies) for an applicable Lease Year so long as (a)
no Event of Default has occurred and is continuing hereunder, (b) Lessee is
otherwise maintaining such Non-Capital Need Facility in the condition required
by this Lease and reasonably demonstrates to Lessor that all or such portion of
the Annual Minimum Capital Project Amount for such Non-Capital Need Facility
requested by Lessee to be so reallocated (herein, the “Reallocated Annual
Minimum Capital Project Amount”) is not needed or required for such Non-Capital
Need Facility for such Lease Year and will instead be expended by Lessee, in
addition to the applicable Annual Minimum Capital Project Amount for such other
Facility(ies) , for Capital Projects to such other Facility(ies) during such
Lease Year, and (c) such reallocation and expenditure has been approved by any
Facility Mortgagee, to the extent required under the terms of any Facility
Mortgage Documents.   If Lessor consents to such reallocation and expenditure
for any Lease Year of the Reallocated Annual Minimum Capital Project Amount for
a Non-Capital Need Facility to any such other Facility(ies), then the following
shall apply:
 
(a) The Annual Capital Project Amount for such Non-Capital Need Facility for
such Lease Year shall be reduced for such Lease Year by the Reallocated Annual
Minimum Capital Project Amount, but not below zero (-0-);
 
(b) Lessee shall expend during such Lease Year for each such other Facility(ies)
the Allocated Minimum Capital Project Amount for Capital Projects for such
Facility(ies), together with the amount of the Reallocated Annual Minimum
Capital Project Amount that has been reallocated to such Facility(ies) with the
approval of Lessor as provided above (with respect to each such Facility the
amount so reallocated, the “Increased Annual Minimum Capital Project Amount”);
 
(c) Any portion of the Increased Annual Minimum Capital Project Amount expended
by Lessee for Capital Projects for any such Facility for any Lease Year shall
not be counted towards the Annual Minimum Capital Project Amount Overage for
such Facility for any subsequent Lease Years; and
 
(d) If Lessee fails to expend during such Lease Year for any other Facility(ies)
the amount required pursuant to clause (b) above, then any portion of such
Increased Annual Minimum Capital Project Amount for such Facility(ies) not so
expended shall be reallocated back to the Non-Capital Need Facility for such
Lease Year, and if not
 

 
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expended for Capital Projects for such Non-Capital Need Facility for such Lease
Year, then Lessee shall promptly deposit with Lessor into the Replacement
Reserve for such Non-Capital Need Facility the amount that has not been so
expended on such other Facility(ies).
 
        9.4 Inspections; Due Diligence Fee.  Without limiting Lessor’s rights
pursuant to Section 26.1 hereof, from time to time during the Term, Lessor and
its agents shall have the right to inspect the Leased Property and any portion
thereof and all systems contained therein at any reasonable time to determine
Lessee’s compliance with its obligations under this Lease.  Lessor shall provide
Lessee with at least two (2) Business Days’ prior written notice prior to any
inspections of the Leased Property pursuant to the terms of this Section 9.4,
except in the event of an emergency, in which case no prior notice shall be
required.  Lessee shall reimburse Lessor for all costs and expenses incurred by
Lessor in connection with the inspections provided for in this Section 9.4
promptly following its receipt of Lessor’s invoice therefore, which costs shall
not exceed One Thousand Dollars ($1,000.00) annually.
 
        9.5 Planned Capital Refurbishment Projects.
 
9.5.1 Nature of Planned Capital Refurbishment Projects.  Lessor and Lessee
acknowledge and agree that the Facilities are currently in need of certain
capital refurbishments/replacements in order to bring the same into good order
and repair and to improve their overall competitive position in the respective
marketplaces in which they are located.  Accordingly, promptly following the
Effective Date, Lessor and Lessee shall reasonably and in good faith agree in
writing upon those capital refurbishments/replacements to each Facility as are
necessary to bring each such Facility into good order and repair and to improve
its overall competitive position in the respective marketplace in which it is
located, including the general scope of such capital refurbishments/replacements
and estimated cost budget(s) therefor (with respect to each Facility, the
“Planned Capital Refurbishment Project”).  Such Planned Capital Refurbishment
Project for each Facility shall be proposed by Lessee in writing and approved in
advance by Lessor, which approval shall not be unreasonably withheld,
conditioned or delayed, so long as the Planned Capital Refurbishment Project for
each Facility includes a general scope of work and estimated budget therefor.
 
9.5.2 Funding of Planned Capital Refurbishment Project(s) Generally.  In
connection with the approved Planned Capital Refurbishment Project(s) for the
Facilities, Lessor shall provide to Lessee the Planned Capital Refurbishment
Project Lessor Funding Amount as provided for herein in accordance with and
subject to the provisions of this Section 9.5.  Lessee shall be solely
responsible to perform all Planned Capital Refurbishment Project(s) and to pay
or fund the Aggregate Costs of the Planned Capital Refurbishment Project(s)
therefor in excess of (a) the Planned Capital Refurbishment Project Lessor
Funding Amount for all Facilities and (b) the sum of the Allocated Planned
Capital Refurbishment Project Tier 1 Allowance and the Allocated Planned Capital
Refurbishment Project Tier 2 Allowance for any one Facility (subject to
reallocation of such funding among the Facilities in accordance with the
definitions of “Allocated Planned Capital Refurbishment Project Tier 1
Allowance” and “Allocated Planned Capital Refurbishment Project Tier 2
Allowance”).
 

 
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9.5.3 Certain Approvals (Plans and Specifications, Project Budget(s),
Etc).  Once approved in concept pursuant to Section 9.5.1 above, and prior to
commencing any work relating to any Planned Capital Refurbishment Project for
any Facility, Lessee shall provide Lessor with the following, each of which
shall be subject to Lessor’s reasonable approval: (a) detailed plans and
specifications for the work to be performed in connection with such Planned
Capital Refurbishment Project for such Facility (with respect to each Facility,
the “Plans and Specifications”); (b) a detailed final budget, which budget shall
also provide a detailed cost breakdown of all construction costs (with respect
to each Facility, the “Project Budget”); (c) any other detailed budget
information as Lessor may reasonably request and approve from Lessee; (d) if
applicable based on the nature of the Planned Capital Refurbishment Project for
such Facility, copies of all building permits and other authorizations from any
applicable governmental authorities with jurisdiction required in connection
with such Planned Capital Refurbishment Project for such Facility; and (e)
evidence that Lessee has filed, recorded or posted a notice of
non-responsibility in favor of Lessor in connection with such Planned Capital
Refurbishment Project for such Facility.  The Project Budget with respect to
each Planned Capital Refurbishment Project for a Facility shall include, and
Lessee shall be responsible for paying to Lessor, (i) an amount equal to
$1,650.00 for each site visit per Facility for the purpose of inspecting such
Planned Capital Refurbishment Project for such Facility, provided that Lessor
shall not be entitled to such amount for more than one (1) visit for each
Facility (except that Lessor shall be entitled to make an additional site visit
to a Facility and receive such amount in connection with each Request for
Advance in which the amount requested to be disbursed by Lessor therefor is
$100,000.00 or more) (with respect to each Capital Refurbishment Project for a
Facility, collectively, the “Planned Capital Refurbishment Project Site Review
Fees”) and (ii) all legal fees, expenses and disbursements incurred by Lessor in
connection with the review of diligence materials, documents and other
information relating to such Planned Capital Refurbishment Project for such
Facility, including engineering fees, accountants and other professional fees
(with respect to each Capital Refurbishment Project for a Facility,
collectively, the “Planned Capital Refurbishment Project Lessor Costs”).  The
Planned Capital Refurbishment Project Site Review Fees and the Planned Capital
Refurbishment Project Lessor Costs for each Facility shall be deducted from the
Allocated Planned Capital Refurbishment Project Tier 1 Allowance and Allocated
Planned Capital Refurbishment Project Tier 2 Allowance, as applicable, for such
Facility prior to disbursement of any portion thereof to Lessee as provided in
Section 9.5.5 hereof, but for all purposes of this Lease shall be deemed part of
the Allocated Planned Capital Refurbishment Project Tier 1 Allowance and
Allocated Planned Capital Refurbishment Project Tier 2 Allowance, as applicable,
for such Facility disbursed by Lessor and allocated to such Facility as provided
for herein.
 
9.5.4 Additional Covenants and Obligations of Lessee Relating to Planned Capital
Refurbishment Project(s).  With respect to each Planned Capital Refurbishment
Project for a Facility, Lessee covenants and agrees as follows:
 
(a) Lessee shall be responsible to arrange, supervise, coordinate and carry out
all services necessary for the construction, performance and completion of each
Planned Capital Refurbishment Project for a Facility in accordance with the
Plans and Specifications therefor and this Lease, and Lessee undertakes and
accepts such
 

 
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responsibility with the understanding that the Aggregate Costs of the Planned
Capital Refurbishment Project in excess of the amount(s) that Lessor is
obligated to fund hereunder are the sole responsibility of Lessee.
 
(b) From and after commencement of construction and/or performance of such
Planned Capital Refurbishment Project, Lessee shall diligently prosecute the
same to completion in accordance with the terms of this Lease and the Plans and
Specifications therefor and, in any event cause the Completion Date therefor to
occur on or before that date which is twenty-four (24) months following the
Commencement Date (with respect to each Planned Capital Refurbishment Project
for a Facility, the “Outside Planned Capital Refurbishment Project Completion
Date”), as such date may be extended in the event of the occurrence of any of
the events described in Section 45.1.16.
 
(c) All Punch List Items, other than those reasonably requiring more than thirty
(30) days to complete due to long scheduling or ordering time or other
reasonable factors, shall be completed within thirty (30) days after the
applicable Completion Date, but in no event later than thirty (30) days after
the Outside Completion Date.  Any Punch List Items reasonably requiring more
than thirty (30) days to complete shall be diligently pursued and completed as
promptly as practicable, but in no event later than sixty (60) days after the
Outside Planned Capital Refurbishment Project Completion Date.
 
(d) Construction/performance of such Planned Capital Refurbishment Project shall
be prosecuted by Lessee in accordance with the Plans and Specifications therefor
in a good and workmanlike manner and in accordance with sound building and
engineering practices and all applicable Legal Requirements and all restrictive
covenants affecting the Leased Property of such Facility.  All materials,
fixtures or articles used in the construction/performance of such Planned
Capital Refurbishment Project, or to be used in the operation thereof shall be
substantially in accordance with the Plans and Specifications therefor as
approved by Lessor.
 
(e) To the extent not already maintained or covered by Lessee pursuant to
Article XIII, Lessee shall at all times maintain or cause to be maintained the
following insurance during the construction/performance of such Planned Capital
Refurbishment Project (including through the date of completion of the Punch
List Items): (i) Builder’s risk insurance covering the construction/performance
of such Planned Capital Refurbishment Project, in a face amount of not less than
the full replacement cost (as defined below in Section 13.2) of such Planned
Capital Refurbishment Project and materials supplied in connection therewith,
with appropriate provisions made to include coverage of materials stored off the
Leased Property of such Facility in an amount not less than the full replacement
cost (as defined below in Section 13.2) of such materials stored off the Leased
Property of such Facility from time to time, and (ii) errors and omissions
insurance by the Architect in an amount reasonably acceptable to Lessor,
covering the entire period of design and construction/performance of such
Planned Capital Refurbishment Project, including completion of the Punch List
Items.  All such insurance maintained or caused to be maintained by Lessee
pursuant to clauses (i) and (ii) of this subsection (e) shall name Lessor as an
additional insured, all insurance maintained or caused to be maintained by
Lessee pursuant to clause (i) of this subsection (e) shall name Lessee, Lessor
and any General
 

 
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Contractor or other contractor, jointly, as loss payee and all such insurance to
be maintained or caused to be maintained by Lessee shall otherwise, to the
extent applicable, comply with the provisions of and shall be in addition to the
insurance specified in Article XIII of this Lease.
 
(f) Lessee shall not at any time during the performance of the work, make or
cause to be made, or permit any General Contractor or any other contractor to
make, any contract for materials or equipment of any kind or nature whatsoever
to be incorporated in or to become a part of the Leased Property of any
Facility, title to which is not good or which is subject to any lien or title
retention arrangement other than inchoate mechanic’s liens.  Lessee will deliver
to Lessor, on demand, true copies of any contracts, bills of sale, statements,
receipted vouchers, or agreements, under which Lessee claims title to any
materials, fixtures, or articles used in the construction/performance of such
Planned Capital Refurbishment Project.
 
(g) Lessee shall expend all the proceeds of each advance by Lessor under this
Section 9.5 for such Planned Capital Refurbishment Project in the amounts and
for the purposes specified in the Request for Advance and for no other purpose
whatsoever.
 
(h) From time to time as requested by Lessor and as soon as practicable
following the applicable Completion Date for such Planned Capital Refurbishment
Project, Lessee shall supply or cause to be supplied to Lessor such reasonable
documents and information pertaining to such Planned Capital Refurbishment
Project and the construction, performance and/or completion of the same as
Lessor shall request.
 
(i) At the reasonable request of Lessor, Lessee shall assign to Lessor each
Construction Contract to which Lessee is a party utilizing an assignment
instrument in form and substance acceptable to Lessor and shall use commercially
reasonable efforts to cause each other party to such Construction Contract to
consent to such assignment, if required by the terms thereof.
 
9.5.5 Disbursement of Allocated Planned Capital Refurbishment Project Tier 1
Allowance and Allocated Planned Capital Refurbishment Project Tier 2 Allowance.
 
(a) Subject to the satisfaction by Lessee of the disbursement conditions set
forth in Section 9.5.5(e) below, Lessor shall advance to Lessee funds with
respect to each Planned Capital Refurbishment Project for a Facility up to (i)
the Allocated Planned Capital Refurbishment Project Tier 1 Allowance for such
Facility, and (ii) to the extent that all of the Allocated Planned Capital
Refurbishment Project Tier 1 Allowance has been advanced with respect to such
Facility, the Allocated Planned Capital Refurbishment Project Tier 2 Allowance
for such Facility (in each case less all applicable Planned Capital
Refurbishment Project Site Review Fees and Planned Capital Refurbishment Project
Lessor Costs) for the purpose of paying or reimbursing Lessee for the payment of
the Aggregate Costs of the Planned Capital Refurbishment Project therefor. For
the avoidance of doubt, Lessor and Lessee agree that each Request for Advance
with respect to each Planned Capital Refurbishment Project for a Facility shall
reflect the full amount of Aggregate Costs of the
 

 
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Planned Capital Refurbishment Project expended by Lessee through the date
thereof on the work or materials which are the subject of the Request for
Advance but that Lessor’s funding obligation shall be limited to the maximum
amount that Lessor is required to advance hereunder.
 
(b) Notwithstanding anything to the contrary in this Section 9.5, Lessor shall
not be obligated to advance to Lessee any sums on account of any Planned Capital
Refurbishment Project for any Facility (i) in excess of the sum of the Allocated
Planned Capital Refurbishment Project Tier 1 Allowance and the Allocated Planned
Capital Refurbishment Project Tier 2 Allowance therefor, (ii) when the total
amount funded by Lessor pursuant to this Section 9.5 for all Facilities equals
the total aggregate Planned Capital Refurbishment Project Lessor Funding Amount,
(iii) for which a Request for Advance is received more than sixty (60) days
after the Outside Planned Capital Refurbishment Project Completion Date, or (iv)
when any of the disbursement conditions set forth in Section 9.5.5(e) below have
not been met or fulfilled.
 
(c) With respect to each Planned Capital Refurbishment Project for a Facility,
draw requests will be reviewed monthly and will be based on the pro rata share
completion to date of each construction line item listed in the applicable
Project Budget; provided, however, that no draw request for any Planned Capital
Refurbishment Project for a Facility shall be less than $100,000, or the balance
of the amount Lessor is required to fund on account thereof.  All advances of
funds under this Section 9.5 shall be made by Lessor in accordance with a
Request for Advance.  Each Request for Advance shall be honored within ten (10)
Business Days of receipt of the same delivered in accordance with the notice
provisions of this Lease together with the information required therein,
subject, however, to the limitations herein.  In no event shall Lessor be
required to make any advance for a particular line item with respect to any
Planned Capital Refurbishment Project for a Facility which, when aggregated with
prior advances, is in excess of the applicable Project Budget for such line item
except to the extent amounts from contingency line items are unused and/or to
the extent savings, in Lessor’s reasonable good faith discretion, in other
budget line items remain unused.  Lessor shall issue checks payable to, or
otherwise advance funds to, Lessee, the payees designated in a Request for
Advance or jointly to Lessee and such payees, as Lessor shall reasonably
determine.  Advances of funds to such payees or jointly to Lessee and any such
payee shall constitute an advance hereunder as though advanced directly to
Lessee.
 
(d) With respect to each Planned Capital Refurbishment Project for a Facility,
any advances for costs and expenses of labor and materials connected with the
construction/performance for such Planned Capital Refurbishment Project shall be
limited to Ninety Percent (90%) of the portion of such costs and expenses for
which Lessor is responsible under the terms of this Lease and shall be made in
accordance with the payment schedule of the Construction Contract with any
General Contractor or other contractor.  With respect to each Planned Capital
Refurbishment Project for a Facility, the final advance of proceeds representing
the Ten Percent (10%) retainage of the portion of such costs and expenses for
which Lessor is responsible under this Lease for any particular item will not be
made until the last to occur of (i) the applicable Completion Date, (ii)
completion of all Punch List Items and (iii) the date Lessor receives, as
applicable, (1) all final and
 

 
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unconditional lien releases and waivers provided for herein, (2) an “As-Built”
set of Plans and Specifications (if reasonably requested by Lessor based upon
the nature of such Capital Renovation Project), (3) an ALTA “As-Built” survey
(if reasonably requested by Lessor based upon the nature of such Planned Capital
Refurbishment Project), and (4) such other documents as Lessor may reasonably
request.  In no event shall any portion of such retainage for any such Planned
Capital Refurbishment Project be paid if any mechanics’ and/or materialmen’s
liens or other encumbrances have been filed and remain on the Leased Property
(except for permitted contests pursuant to Article XII of this Lease).
 
(e) With respect to any Planned Capital Refurbishment Project for a Facility,
Lessor shall not be obligated to make any advance of funds under this Section
9.5, including the first advance, unless and until the following conditions
shall have been satisfied (with proof thereof in form and sufficiency as may be
reasonably requested by Lessor):
 
(i) To the extent not theretofore received and approved by Lessor, Lessor shall
have received and approved (A) the applicable Plans and Specifications (and any
material changes thereto); (B) the applicable Project Budget; (C) if applicable
based on the nature of such Planned Capital Refurbishment Project, all
Construction Contracts with any General Contractor, any Architect and any other
contractor or material supplier that may be requested by Lessor; and (D) if
applicable based on the nature of such  Planned Capital Refurbishment Project,
all authorizations and permits required by any governmental authority with
jurisdiction for the construction/performance of such Planned Capital
Refurbishment Project, including building permits and such other authorizations
and permits as are required for the use and operation of such Facility for its
Primary Intended Use, which are then presently procurable.
 
(ii) To the extent applicable to such Planned Capital Refurbishment Project as
reasonably determined by Lessor, Lessor shall have received evidence
satisfactory to Lessor that, following completion of such Planned Capital
Refurbishment Project, (A) all existing public utilities, including telephone,
water, sewage, electricity and gas are adequate for such Facility; and (B) all
existing means of ingress and egress, parking, access to public streets and
drainage facilities are adequate for such Facility.
 
(iii) To the extent applicable to such Planned Capital Refurbishment Project as
reasonably determined by Lessor, Lessor shall have received and approved test
borings, engineering reports and such other site analysis as Lessor may require,
all of which must indicate that the soil is adequate for the proposed
construction/performance of such Planned Capital Refurbishment Project in
accordance with the applicable Plans and Specifications.
 
(iv) Lessor shall have received and approved the insurance required to be
maintained by Lessee as provided in Section 9.5.4(e) above.
 

 
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(v) No Event of Default shall have occurred and be continuing under this Lease
and no event or condition shall exist which, with notice and/or lapse of time,
or both, would constitute such an Event of Default under this Lease.
 
(vi) No Condemnation shall be pending or threatened and no casualty shall have
occurred, in either case with respect to the Leased Property of such Facility or
any portion thereof.
 
(vii) Lessor shall have received and approved (A) a Request for Advance
accompanied by all necessary documents and certificates as set forth in the
definition thereof; (B) to the extent applicable to such Planned Capital
Refurbishment Project as reasonably determined by Lessor, a Lessee’s Affidavit;
and (C) to the extent applicable, a certificate from the Architect, or if no
Architect, from an officer of Lessee or any other reliable Person acceptable to
Lessor, to the effect that in such Person’s opinion (1) the
construction/performance of such Planned Capital Refurbishment Project
theretofore performed is in accordance with the applicable Plans and
Specifications and (2) the amount requested is appropriate in light of the
percentage of construction completed and amount of stored material.
 
(viii) To the extent applicable to the Planned Capital Refurbishment Project as
reasonably determined by Lessor, Lessor shall have received from each of the
Architect, General Contractor, and major subcontractors a letter, in form and
substance satisfactory to Lessor, which, among other things, (A) states that, in
the event of a default by Lessee under the contract with the undersigned, the
undersigned agrees to perform for Lessor at Lessor’s request under the terms of
the applicable Construction Contract, (B) to the best knowledge of the
undersigned certifies to Lessor that the applicable Plans and Specifications
comply with all Legal Requirements, and that the work performed by the
undersigned has been completed in accordance with the applicable Plans and
Specifications, and (C) confirms such other matters consistent with the terms
and provisions of this Section 9.5.5 (e).
 
ARTICLE X.                                
 
10.1 Construction of Capital Additions to the Leased Property.  Without the
prior written consent of Lessor which consent may be withheld or granted by
Lessor in its sole and absolute discretion, Lessee shall make no Capital
Additions on or structural alterations to the Leased Property and shall not
enlarge or reduce the size of any Facility.
 
ARTICLE XI.                                
 
11.1 Liens.  Subject to the provisions of Article XII relating to permitted
contests, Lessee will not directly or indirectly create or allow to remain and
will promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon the Leased Property of any Facility or any
Capital Addition thereto or any attachment, levy, claim or encumbrance in
respect of the Rent, excluding, however, (i) this Lease; (ii) the matters
 

 
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that existed as of the Commencement Date; (iii) restrictions, liens and other
encumbrances which are consented to in writing by Lessor, or any easements
granted pursuant to the provisions of Section 7.3; (iv) liens for Impositions
which Lessee is not required to pay hereunder; (v) subleases permitted by
Article XXIV; (vi) liens for Impositions not yet delinquent; (vii) liens of
mechanics, laborers, materialmen, suppliers or vendors for amounts not yet due;
and (viii) any liens which are the responsibility of Lessor pursuant to the
provisions of Article XXXVI.
 
ARTICLE XII.                                
 
12.1 Permitted Contests.  Lessee, upon prior written notice to Lessor, on its
own or in Lessor’s name, at Lessee’s expense, may contest, by appropriate legal
proceedings conducted in good faith and with due diligence, the amount, validity
or application, in whole or in part, of any licensure or certification decision,
Imposition, Legal Requirement, Insurance Requirement, lien, attachment, levy,
encumbrance, charge or claim; subject, however, to the further requirement that
(i) in the case of an unpaid Imposition, lien, attachment, levy, encumbrance,
charge or claim, the commencement and continuation of such proceedings shall
suspend the collection thereof from Lessor and from the Leased Property or any
Capital Addition thereto; (ii) neither the Leased Property or any Capital
Addition thereto, the Rent therefrom nor any part or interest in either thereof
would be in any danger of being sold, forfeited, attached or lost pending the
outcome of such proceedings; (iii) in the case of a Legal Requirement, neither
Lessor nor Lessee would be in any danger of civil or criminal liability for
failure to comply therewith pending the outcome of such proceedings; (iv) if any
such contest shall involve a sum of money or potential loss in excess of Fifty
Thousand Dollars ($50,000), Lessee shall deliver to Lessor and its counsel an
opinion of legal counsel reasonably acceptable to Lessor to the effect set forth
in clauses (i), (ii) and (iii) above, to the extent applicable; (v) in the case
of a Legal Requirement, Imposition, lien, encumbrance or charge, Lessee shall
give such reasonable security as may be required by Lessor to insure ultimate
payment of the same and to prevent any sale or forfeiture of the Leased Property
or any Capital Addition thereto or the Rent by reason of such nonpayment or
noncompliance; and (vi) in the case of an Insurance Requirement, the coverage
required by Article XIII shall be maintained.  If any such contest is finally
resolved against Lessor or Lessee, Lessee shall promptly pay the amount required
to be paid, together with all interest and penalties accrued thereon, or comply
with the applicable Legal Requirement or Insurance Requirement.  Lessor, at
Lessee’s expense, shall execute and deliver to Lessee such authorizations and
other documents as may reasonably be required in any such contest, and, if
reasonably requested by Lessee or if Lessor so desires, Lessor shall join as a
party therein.  The provisions of this Article XII shall not be construed to
permit Lessee to contest the payment of Rent or any other amount payable by
Lessee to Lessor hereunder.  Lessee shall indemnify, defend, protect and save
Lessor harmless from and against any liability, cost or expense of any kind that
may be imposed upon Lessor in connection with any such contest and any loss
resulting therefrom.
 
ARTICLE XIII.                                
 
13.1 General Insurance Requirements.  During the Term, Lessee shall at all times
keep the Leased Property, and all property located in or on the Leased Property,
including all Capital Additions, the Fixtures and the Personal Property, insured
with the kinds and amounts of insurance described below.  Each element of the
insurance described in this Article shall be
 

 
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maintained with respect to the Leased Property of each Facility, including all
Capital Additions, the Fixtures and the Personal Property and operations
thereon. This insurance shall be written by companies authorized to do insurance
business in the State in which the Leased Property is located.  All of the
policies of insurance referred to in this Article shall be written in form
satisfactory to Lessor and by insurance companies with a policyholder rating
of  A-IX in the most recent version of Best’s Key Rating Guide.  Additionally,
except as otherwise provided in this Lease, all of the insurance referred to in
this Article shall be on an occurrence (rather than a claims-made) basis, with
the exception of the medical professional liability insurance referred to in
Section 13.1.5.  Each policy may have a deductible or deductibles, if any, which
are no greater than $100,000 per occurrence except for (a) coverage for the
perils of earthquake, windstorm and flood where the maximum deductible shall be
5% of the replacement cost (as defined below in Section 13.2) of such Leased
Property, (b) commercial general liability coverage required pursuant to Section
13.1.4 below, which shall have a maximum deductible no greater than $500,000,
(c) medical professional liability coverage required pursuant to Section 13.1.5
below, which shall have a maximum deductible no greater than $500,000, and (d)
workers compensation insurance required pursuant to Section 13.1.7 below, which
shall have a maximum deductible no greater than $500,000. All liability type
policies must name Lessor (and its directors, officers, employees and agents)
and Facility Mortgagee, if any, as an “additional insured” and shall be
considered primary insurance without recourse to any insurance maintained by
Lessor.  All property, flood, boiler & machinery, loss of rental and business
interruption type policies shall name Lessor as an “additional insured and loss
payee.”  Any loss adjustment shall require the written consent of Lessor and any
Facility Mortgagee.  All insurance maintained be Lessee shall be primary and
non-contributory to any insurance maintained by Lessor. The policies shall
insure against the following risks with respect to each Facility:
 
13.1.1 All Risk property insurance including coverage for loss or damage by
fire, vandalism and malicious mischief, including earthquake (including earth
movement), flood and windstorm in an amount not less than the replacement cost
(as defined below in Section 13.2) therefor and including demolition, law &
ordinance, increased cost of construction and coverage endorsement with limits
not less than $5 million;
 
13.1.2 Loss or damage by explosion of steam boilers, pressure vessels or similar
apparatus, including what is normally covered by a standard boiler and machinery
policy, including HVAC, refrigeration systems and electrical systems, now or
hereafter installed in each Facility, in such limits with respect to any one
accident as may be reasonably requested by Lessor from time to time;
 
13.1.3 Business Interruption or Loss of rental value in an amount not less than
twelve (12) months’ Rent payable hereunder or business interruption in an amount
not less than twelve (12) months of income and normal operating expenses and
Rent payable hereunder and at least ninety (90) days ordinary payroll expense
with an endorsement extending the period of indemnity by at least (x) one
hundred eighty (180) days for any Facilities located within a Tier One windstorm
zone or 100 year flood plain zone and for any Facilities located in California
or in any other high hazard earthquake zone, and (y) ninety (90) days for any
Facilities located outside of any of the zones described in clause (x),
(Building Ordinance - Increased Period of Restoration Endorsement) necessitated
by the occurrence of any of the hazards described in Sections 13.1.1, 13.1.2 or
13.1.3;
 

 
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13.1.4 Claims on an occurrence basis for bodily injury or property damage under
a policy of commercial general liability insurance (including broad form
property damage and broad form contractual liability) with amounts not less than
One Million and No/100 Dollars ($1,000,000.00) per occurrence and combined
single limit and Three Million No/100 Dollars ($3,000,000.00) in the annual
aggregate;
 
13.1.5 Medical professional liability with amounts not less than One Million
Dollars ($1,000,000) per claim or wrongful act combined single limit and Three
Million Dollars ($3,000,000) in the annual aggregate.  If the policy has a
claims-made coverage trigger, the retroactive date shall always be no later than
the inception date of the Lease.  In addition, if claims-made coverage is
maintained, Lessee shall either such claims-made coverage for two years after
the end of the Lease period or purchase a two year extended reporting period
under the policy in force at the expiration or earlier termination of  Term;
 
13.1.6 Vehicle insurance covering the liability arising out of any owned, hired
or non-owned vehicle used at any Facility with a combined single limit of not
less than One Million dollars ($1,000,000) per accident for bodily injury or
property damage; and
 
13.1.7 Workers compensation insurance having the limits required by statute in
the domicile where any Facility is located covering all persons employed by
Lessee in the conduct of its operations at such Facility (including an all
states endorsement if applicable) and Employers Liability coverage in an amount
not less than One Million dollars ($1,000,000), each accident and  One Million
dollars ($1,000,000) for bodily injury by disease.  Such policy shall include a
waiver of subrogation in favor of Lessor (and its directors, officers, employees
and agents) and Facility Mortgagee, if any.
 
13.1.8 Excess Liability insurance providing excess coverage for general
liability with a limit not less than Five Million Dollars ($5,000,000) in the
aggregate.
 
13.2 Replacement Cost.  The term “replacement cost” shall mean the actual
replacement cost of the insured property from time to time with new materials
and workmanship of like kind and quality.  If either party believes that the
replacement cost has increased or decreased at any time during the Term, it
shall have the right to have such replacement cost redetermined by an impartial
appraisal company reasonably acceptable to both parties (the “impartial
appraiser”).  The party desiring to have the replacement cost so redetermined
shall forthwith, on receipt of such determination by the impartial appraiser,
give written notice thereof to the other party hereto.  The determination of the
impartial appraiser shall be final and binding on the parties hereto, and Lessee
shall forthwith increase or decrease the amount of the insurance carried
pursuant to this Article to the amount so determined by the impartial
appraiser.  Each party shall pay one-half (1/2) of the fee, if any, of the
impartial appraiser.  If Lessee has made improvements to the Leased Property of
any Facility, including any Capital Additions thereto, Lessor may at Lessee’s
expense have the replacement cost of the Leased Property of such Facility
redetermined at any time after such improvements are made, regardless of when
the replacement cost was last determined.
 

 
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13.3 Additional Insurance.  In addition to the insurance described above, Lessee
shall maintain such additional insurance as may be reasonably required from time
to time by any Facility Mortgagee and shall further at all times maintain
adequate workers’ compensation coverage and any other coverage required by Legal
Requirements for all Persons employed by Lessee on the Leased Property of any
Facility and any Capital Additions thereto in accordance with Legal
Requirements.
 
13.4 Waiver of Subrogation.  All insurance policies carried by either party
covering the Leased Property of any Facility and any Capital Additions thereto
and Lessee’s Personal Property including contents, employees and liability
insurance, shall expressly waive any right of subrogation on the part of the
insurer against the other party.  Each party waives any claims it has against
the other party to the extent such claim is covered by insurance, except for
such matters as are subject to any indemnifications or hold harmless provision
in favor of such other party pursuant to the provisions of this Lease.
 
13.5 Evidence of Insurance.  Evidence of insurance shall be deposited with
Lessor on or prior to the Commencement Date of this Lease and prior to the
renewal of any required coverages.  Evidence of property insurance  required in
Sections 13.1.1, 13.1.2 and 13.1.3 shall be provided on a certificate form no
less broad than ACORD 27. Lessee shall also supply any Facility Mortgagee(s)
with any evidence of insurance as such  Facility Mortgagee(s) may
require.  Lessee shall also provide complete copies of any insurance policies as
Lessor or any Facility Mortgagee(s) may request.  If any provision of any
Facility Mortgage requires deposits of insurance to be made with such Facility
Mortgagee, Lessee shall either pay to Lessor monthly the amounts required and
Lessor shall transfer such amounts to each such Facility Mortgagee, or, pursuant
to written direction by Lessor, Lessee shall make such deposits directly with
such Facility Mortgagee.   If Lessee fails to provide evidence of insurance as
required by this Lease, then, upon ten (10) days’ prior written notice (except
with respect to Lessee’s failure to provide evidence of the insurance required
pursuant to any of Sections 13.1.1, 13.1.3 and/or 13.1.3, in which case no prior
notice shall be required), Lessor, without waving or releasing any obligation or
default of Lessee as a result thereof, may, but shall not be obligated, to
effect such insurance and pay the premiums therefor, in which event the cost
thereof, together with interest thereon at the Overdue Rate, shall be repayable
to Lessor upon demand therefor.  No cancellation or material alteration to the
required insurance shall take effect prior to Lessor and any Facility
Mortgagee(s) receiving thirty (30) days’ written notice except for cancellation
due to non-payment in which such cancellation shall not take place until ten
(10) days written notice has been provided to Lessor.  All evidence of insurance
shall note the cancellation/material alteration requirements for the benefit of
Lessor and any Facility Mortgagee(s).  If Lessee fails to maintain any insurance
required in this Lease, Lessee shall be liable for all losses and costs suffered
or incurred by Lessor (including litigation costs and attorneys’ fees and
expenses) resulting from such failure.  Failure of Lessor to demand such
certificates, endorsements or other evidence of full compliance with the
insurance requirements of this Lease, or failure of Lessor to identify a
deficiency from evidence provided will not be construed as a waiver of the
Lessee’s obligation to maintain such insurance.  The acceptance of delivery by
Lessor of any certificates, endorsements or other evidence of insurance does not
constitute approval or agreement by Lessor that the insurance requirements have
been met, that the insurance policies evidenced are in compliance with the
requirements of this Lease or of any Facility Mortgagee(s), or that the
insurance requirements are sufficient to fully protect Lessor from liability.
 

 
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13.6 Increase in Limits. If Lessor shall at any time believe that the limits of
the insurance required hereunder are insufficient, Lessor shall have the right
to notify Lessee in writing of the same and the parties shall thereafter
endeavor to agree in writing on the proper and reasonable limits for such
insurance to be carried.  If the parties shall be unable to agree thereon, the
proper and reasonable limits for such insurance to be carried shall be
determined by an impartial third party reasonably selected by Lessor, and
approved by Lessee, which approval shall not be unreasonably withheld,
conditioned or delayed, and the determination of such impartial third party
shall be binding; provided, however, that in no event shall the limits for
earthquake and windstorm be less than the expected insured loss associated with
the 250 return period for all locations insured under the applicable policy
using the latest version of the applicable catastrophe risk model issued by Risk
Management Solutions, Inc. (or its successor organization).  Upon agreement by
the parties or determination by such third party, the new increased limits as so
agreed upon or determined, as the case may be, shall be in effect and carried by
Lessee until further change pursuant to the provisions of this Section.  Nothing
herein shall permit the amount of insurance to be reduced below the amount or
amounts required by any of the Facility Mortgagees or the amounts required to be
maintained under this Lease prior to the date, if at all, that Lessor notifies
Lessee that Lessor believes the limits of the insurance required under this
Lease are insufficient.
 
13.7 Blanket Policies and Policies Covering Multiple Locations.  Notwithstanding
anything to the contrary contained in this Article, Lessee’s obligations to
carry the casualty insurance provided for herein may be brought within the
coverage of a blanket policy or policies of insurance carried and maintained by
Lessee; provided, however, that the coverage afforded Lessor for a loss related
to a Facility will not be reduced or diminished or otherwise be different from
that which would exist under a separate policy for such Facility meeting all
other requirements of this Lease by reason of the use of such blanket policy of
insurance, and provided further that the requirements of this Article XIII
(except those that would prohibit or restrict blanket policy coverage) are
otherwise satisfied.  For any liability policies covering one or more Facilities
or any other facilities in addition to the Facilities, Lessor may require excess
limits as Lessor reasonably determines.
 
13.8 No Separate Insurance.  Lessee shall not, on Lessee’s own initiative or
pursuant to the request or requirement of any third party, (i) take out separate
insurance concurrent in form or contributing in the event of loss with that
required in this Article to be furnished by, or which may reasonably be required
to be furnished by, Lessee or (ii) increase the amounts of any then existing
insurance by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Lessor and all Facility Mortgagees, are included therein
as additional insured and the loss is payable under such insurance in the same
manner as losses are payable under this Lease.  Lessee shall immediately notify
Lessor of the taking out of any such separate insurance or of the increasing of
any of the amounts of the then existing insurance by securing an additional
policy or additional policies.
 
13.9 Insurance Requirements Under the Facility Loan Documents. Nothing contained
in this Article XIII shall serve to in any manner limit or restrict Lessee’s
obligations pursuant to the terms of Section 36.3 below to procure and maintain
all insurance coverages required under any Facility Mortgage Documents.
 

 
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ARTICLE XIV.                                
 
14.1 Insurance Proceeds. All proceeds payable by reason of any loss or damage to
the Leased Property, any Capital Additions or any part(s) or portion(s) thereof,
under any policy of insurance required to be carried hereunder shall be paid to
Lessor and made available by Lessor to Lessee from time to time for the
reasonable costs of reconstruction or repair, as the case may be, of any damage
to or destruction of the Leased Property, any Capital Additions or any part(s)
or portion(s) thereof.  Any excess proceeds of insurance remaining after the
completion of the restoration or reconstruction of the Leased Property and any
Capital Additions (or in the event neither Lessor nor Lessee is required or
elects to repair and restore, all such insurance proceeds) shall be retained by
Lessor except as otherwise specifically provided below in this Article XIV.  All
salvage resulting from any risk covered by insurance shall belong to Lessor.
 
       14.2 Insured Casualty.
 
14.2.1 If the Leased Property and/or any Capital Additions of a Facility are
damaged or destroyed from a risk covered by insurance carried by Lessee such
that such Facility thereby is rendered Unsuitable for its Primary Intended Use,
Lessee shall either (i) restore such Leased Property and such Capital Additions
to substantially the same condition as existed immediately before such damage or
destruction and Lessor shall, pursuant to the terms of Section 14.1 above, make
available to Lessee from time to time the insurance proceeds received by Lessor
on account of such damage or destruction to the extent necessary for the
reasonable costs of such restoration, or (ii) offer to acquire the Leased
Property of such Facility from Lessor for a purchase price equal to the greater
of (a) the Fair Market Value for such Facility immediately prior to such damage
or destruction, or (b) the Allocated Minimum Purchase Price for such
Facility.  If Lessor does not accept Lessee’s offer to so purchase the Leased
Property of such Facility, Lessee may either withdraw such offer and proceed to
restore the Leased Property of such Facility to substantially the same condition
as existed immediately before such damage or destruction or terminate this Lease
in which event Lessor shall be entitled to retain the insurance proceeds.
 
14.2.2 If the Leased Property and/or any Capital Additions of a Facility are
damaged from a risk covered by insurance carried by Lessee, but such Facility is
not thereby rendered Unsuitable for its Primary Intended Use, Lessee shall
restore such Leased Property and such Capital Additions to substantially the
same condition as existed immediately before such damage and Lessor shall,
pursuant to the terms of Section 14.1 above, make available to Lessee from time
to time the insurance proceeds received by Lessor on account of such damage or
destruction to the extent necessary for the reasonable costs of such
restoration.  Such damage shall not terminate this Lease; provided, however,
that if Lessee cannot within a reasonable time after diligent efforts obtain the
necessary government approvals needed to restore and operate such Facility for
its Primary Intended Use, Lessee may offer to purchase the Leased Property of
such Facility for a purchase price equal to the greater of (a) the Fair Market
Value for such Facility immediately prior to such damage or destruction or (b)
the Allocated Minimum Purchase Price for such Facility.  If Lessee shall make
such offer and Lessor does not accept the same, Lessee may either (i) withdraw
such offer and proceed to restore the Leased Property of such Facility to
substantially the same
 

 
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condition as existed immediately before such damage or destruction and in such
event Lessor shall, pursuant to the terms of Section 14.1 above, make available
to Lessee from time to time the insurance proceeds received by Lessor on account
of such damage or destruction to the extent necessary for the reasonable costs
of such restoration, or (ii) terminate the Lease with respect to such Facility,
in which event Lessor shall be entitled to retain the insurance proceeds.
 
14.2.3 If the cost of the repair or restoration of a Facility exceeds the amount
of proceeds received by Lessor from the insurance required to be carried
hereunder, Lessee shall contribute any excess amounts, as well as any
deductibles or retentions, needed to restore such Facility.  Such difference
shall be paid by Lessee to Lessor together with any other insurance proceeds,
for application to the cost of repair and restoration.
 
14.2.4 If Lessor accepts Lessee’s offer to purchase the Leased Property of a
Facility, this Lease shall terminate as to such Facility upon payment of the
purchase price and Lessor shall remit to Lessee all insurance proceeds
pertaining to the Leased Property of such Facility then held by Lessor.
 
       14.3 Uninsured Casualty.  If the Leased Property and/or any Capital
Additions of a Facility is damaged or destroyed from a risk not covered by
insurance carried by Lessee, whether or not such damage or destruction renders
such Facility Unsuitable for its Primary Intended Use, Lessee at its expense
shall restore the Leased Property of such Facility to substantially the same
condition it was in immediately before such damage or destruction and such
damage or destruction shall not terminate this Lease.
 
       14.4 No Abatement of Rent. This Lease shall remain in full force and
effect and Lessee’s obligation to pay the Rent and all other charges required by
this Lease shall remain unabated during the period required for adjusting
insurance, satisfying Legal Requirements, repair and restoration.
 
       14.5 Waiver.
 
ARTICLE XV.                                
 
        15.1 Condemnation
 
15.1.1 Total Taking.  If the Leased Property and any Capital Additions of a
Facility is totally and permanently taken by Condemnation, this Lease shall
terminate with respect to such Facility as of the day before the Date of Taking
for such Facility.
 
15.1.2 Partial Taking.  If a portion of the Leased Property and any Capital
Additions of a Facility is taken by Condemnation, this Lease shall remain in
effect if the affected Facility is not thereby rendered Unsuitable for Its
Primary Intended Use, but if such Facility is thereby rendered Unsuitable for
its Primary Intended Use, this Lease shall terminate with respect to such
Facility as of the day before the Date of Taking for such Facility.
 

 
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15.1.3 Restoration.  If there is a partial taking of the Leased Property and any
Capital Additions of a Facility and this Lease remains in full force and effect
pursuant to Section 15.1.2, Lessor shall make available to Lessee the portion of
the Award necessary and specifically identified for restoration of such Leased
Property and any such Capital Additions and Lessee shall accomplish all
necessary restoration whether or not the amount provided by the Condemnor for
restoration is sufficient.
 
15.1.4 Award-Distribution.  The entire Award for any total Condemnation or
partial Condemnation described in Section 15.1.2 above that renders the affected
Facility Unsuitable for Its Primary Intended Use shall belong to and be paid to
Lessor, except that, subject to the rights of the Facility Mortgagees, Lessee
shall be entitled to receive from the Award, if and to the extent such Award
specifically includes such item, lost profits value and moving expenses,
provided, that in any event Lessor shall receive from the Award, subject to the
rights of the Facility Mortgagees no less than the greater of (a) the Fair
Market Value for such Facility immediately prior to institution of the
Condemnation or (b) the Allocated Minimum Purchase Price for such Facility.  The
entire Award for any partial Condemnation described in Section 15.1.2 above that
does  not render the affected Facility Unsuitable for Its Primary Intended Use
shall belong to and be paid to Lessor, subject to Lessor’s obligations pursuant
to Section 15.1.3 above.
 
15.1.5 Temporary Taking.  The taking of the Leased Property, any Capital
Additions and/or any part(s) thereof, shall constitute a taking by Condemnation
only when the use and occupancy by the taking authority has continued for longer
than 180 consecutive days.  During any shorter period, which shall be a
temporary taking, all the provisions of this Lease shall remain in full force
and effect and the Award allocable to the Term shall be paid to Lessee.
 
15.1.6 Sale Under Threat of Condemnation.  A sale by Lessor to any Condemnor,
either under threat of Condemnation or while Condemnation proceedings are
pending, shall be deemed a Condemnation for purposes of this Lease.  Lessor may,
without any obligation to Lessee, agree to sell and/or convey to any Condemnor
all or any portion of the Leased Property free from this Lease and the rights of
Lessee hereunder without first requiring that any action or proceeding be
instituted or pursued to judgment; provided, however, that Lessor shall provide
Lessee with at least sixty (60) days’ prior written notice of such sale or
conveyance, subject to the requirements of any such Condemnor.
 
ARTICLE XVI.                                
 
16.1 Events of Default.  Any one or more of the following shall constitute an
“Event of Default”:
 
(a) a default shall occur under any other lease or other agreement or
instrument, now or hereafter with or in favor of Lessor or any Affiliate of
Lessor and made by or with Lessee or any Affiliate of Lessee where the default
is not cured within any applicable grace period set forth therein;
 

 
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(b) A default shall occur under any New Lease hereafter with or in favor of
Lessor or any Affiliate of Lessor and made by or with Lessee or any Affiliate of
Lessee where the default is not cured within any applicable grace period set
forth therein;
 
(c) Lessee shall fail to pay any installment of Rent when the same becomes due
and payable and such failure is not cured by Lessee within a period of five (5)
days after notice thereof from Lessor; provided, however, that such notice shall
be in lieu of and not in addition to any notice required under applicable law
with respect to such non-payment of Rent;
 
(d) [Intentionally Omitted];
 
(e) except as otherwise specifically provided for in this Section 16.1, if
Lessee shall fail to observe or perform any other term, covenant or condition of
this Lease and such failure is not cured by Lessee within thirty (30) days after
notice thereof from Lessor, unless such failure cannot with due diligence be
cured within a period of thirty (30) days, in which case such failure shall not
be deemed to be an Event of Default if Lessee proceeds promptly and with due
diligence to cure the failure and diligently completes the curing thereof;
provided, however, that such notice shall be in lieu of and not in addition to
any notice required under applicable law;
 
(f) Lessee or any Guarantor shall:
 
(i) admit in writing its inability to pay its debts generally as they become
due,
 
(ii) file a petition in bankruptcy or a petition to take advantage of any
insolvency act,
 
(iii) make an assignment for the benefit of its creditors,
 
(iv) consent to the appointment of a receiver of itself or of the whole or any
substantial part of its property, or
 
(v) file a petition or answer seeking reorganization or arrangement under the
Federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state thereof;
 
(g) Lessee or any Guarantor shall be adjudicated as bankrupt or a court of
competent jurisdiction shall enter an order or decree appointing, without the
consent of Lessee, a receiver of Lessee or of the whole or substantially all of
its property, or approving a petition filed against it seeking reorganization or
arrangement of Lessee under the Federal bankruptcy laws or any other applicable
law or statute of the United States of America or any state thereof, and such
judgment, order or decree shall not be vacated or set aside or stayed within
sixty (60) days from the date of the entry thereof;
 

 
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(h) Lessee or any Guarantor shall be liquidated or dissolved, or shall begin
proceedings toward such liquidation or dissolution, or shall, in any manner,
permit the sale or divestiture of substantially all its assets;
 
(i) the estate or interest of Lessee in the Leased Property, any Capital
Additions or any part(s) thereof shall be levied upon or attached in any
proceeding and the same shall not be vacated or discharged within the later of
ninety (90) days after commencement thereof or thirty (30) days after receipt by
Lessee of notice thereof from Lessor; provided, however, that such notice shall
be in lieu of and not in addition to any notice required under applicable law;
 
(j) any Transfer occurs without Lessor’s consent, if such consent is required
under Article XXIV;
 
(k) any of the representations or warranties made by Lessee hereunder or any
Guarantor in the applicable Guaranty proves to be untrue when made in any
material respect which materially and adversely affects Lessor;
 
(l) any applicable license or third-party provider reimbursement agreements
material to a Facility’s operation for its Primary Intended Use are at any time
terminated or revoked or suspended for more than twenty (20) days;
 
(m) any local, state or federal agency having jurisdiction over the operation of
any Facility removes Ten Percent (10%) or more of the patients or residents
located in such Facility;
 
(n) Lessee fails to give notice to Lessor not later than ten (10) Business Days
after Lessee’s receipt thereof of any Class A or equivalent fine notice from any
governmental authority or officer acting on behalf thereof relating to any
Facility;
 
(o) Lessee fails to cure or abate any Class A or equivalent violation occurring
during the Term that is claimed by any governmental authority, or any officer
acting on behalf thereof, of any law, order, ordinance, rule or regulation
pertaining to the operation of any Facility, and within the time permitted by
such authority for such cure or abatement;
 
(p) Lessee fails to notify Lessor within three (3) Business Days after receipt
of any written notice from any governmental agency terminating or suspending or
threatening termination or suspension, of any material license or certification
relating to any Facility;
 
(q) Lessee fails to give notice to Lessor not later than ten (10) Business Days
after any written notice, claim or demand from any governmental authority or any
officer acting on behalf thereof, of any violation of any law, order, ordinance,
rule or regulation with respect to the operation of any Facility;
 

 
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(r) any proceedings are instituted against Lessee by any governmental authority
which are reasonably likely to result in (i) the revocation of any license
granted to Lessee for the operation of any Facility, (ii) the decertification of
any Facility from participation in the Medicare or Medicaid reimbursement
program, or (iii) the issuance of a stop placement order against Lessee with
respect to any Facility which is not remedied by Lessee or rescinded by the
issuing authority within 180 days after issuance;
 
(s) any default and acceleration of any indebtedness of Lessee or any Affiliate
of Lessee or Guarantor in an amount in excess of $1,000,000 has occurred; and
 
(t) any material default shall occur under any guaranty of Lessee’s obligations
hereunder (including any Guaranty).
 
16.2 Certain Remedies.  If an Event of Default shall have occurred, Lessor may
terminate this Lease with respect to the Facility from which such Event of
Default emanated, if any, and any one or more (including all, if so elected by
Lessor) of the Facilities, regardless of whether such Event of Default emanated
primarily from a single Facility, by giving Lessee notice of such termination
and the Term shall terminate and all rights of Lessee under this Lease shall
cease with respect to all such Facilities as to which Lessor has elected to so
terminate this Lease.  Lessor shall have all rights at law and in equity
available to Lessor as a result of any Event of Default.  Lessee shall pay as
Additional Charges all costs and expenses incurred by or on behalf of Lessor,
including reasonable attorneys’ fees and expenses, as a result of any Event of
Default hereunder.  If an Event of Default shall have occurred and be
continuing, whether or not this Lease has been terminated with respect to any
one or more (including all, if so elected by Lessor) of the Facilities pursuant
to this Section 16.2, Lessee shall, to the extent permitted by law, if required
by Lessor so to do, immediately surrender to Lessor possession of the Leased
Property and any Capital Additions of the Facilities as to which Lessor has so
elected to terminate this Lease and quit the same and Lessor may enter upon and
repossess such Leased Property and such Capital Additions thereto by reasonable
force, summary proceedings, ejectment or otherwise, and may remove Lessee and
all other Persons and any of Lessee’s Personal Property from such Leased
Property and such Capital Additions thereto.
 
16.3 Damages.  (i)  The repossession of the Leased Property and any Capital
Additions of any Facility; (ii) the failure of Lessor, notwithstanding
reasonable good faith efforts, to relet the Leased Property or any portion
thereof; (iii) the reletting of all or any portion of the Leased Property; or
(iv) the failure or inability of Lessor to collect or receive any rentals due
upon any such reletting, shall not relieve Lessee of its liabilities and
obligations hereunder, all of which shall survive any such repossession or
reletting.  In addition, the termination of this Lease with respect to any one
or more of the Facilities shall not relieve Lessee of its liabilities and
obligations hereunder with respect to such terminated Facility(ies) that are
intended to survive the termination of this Lease, including, without
limitation, the obligations set forth in this Section 16.3, and Sections 16.5,
23.1, 37.4 and 45.1.6.  If any such termination occurs, Lessee shall forthwith
pay to Lessor all Rent due and payable with respect to the Facility terminated
to and including the date of such termination.  Thereafter following any such
termination, Lessee shall forthwith pay to Lessor, at Lessor’s option, as and
for liquidated and agreed current damages for an Event of Default by Lessee, the
sum of:
 

 
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(a) the worth at the time of award of the unpaid Rent which had been earned at
the time of termination with respect to the terminated Facility(ies),
 
(b) the worth at the time of award of the amount by which the unpaid Rent which
would have been earned after termination with respect to the terminated
Facility(ies) until the time of award exceeds the amount of such rental loss
that Lessee proves could have been reasonably avoided,
 
(c) the worth at the time of award of the amount by which the unpaid Rent for
the balance of the Term for the terminated Facility(ies) after the time of award
exceeds the amount of such rental loss that Lessee proves could be reasonably
avoided, plus
 
(d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee’s failure to perform its obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom.
 
As used in clauses (a) and (b) above, the “worth at the time of award” shall be
computed by allowing interest at the Overdue Rate.  As used in clause (c) above,
the “worth at the time of award” shall be computed by discounting such amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus One Percent (1%).
 
Alternatively, if Lessor does not elect to terminate this Lease, then without
termination of Lessee’s right to possession of the Leased Property, Lessee shall
pay to Lessor, at Lessor’s option, as and for agreed damages for such Event of
Default, each installment of said Rent and other sums payable by Lessee to
Lessor under the Lease as the same becomes due and payable, together with
interest at the Overdue Rate from the date when due until paid, and Lessor may
enforce, by action or otherwise, any other term or covenant of this Lease.
 
16.4 Receiver.  Upon the occurrence of an Event of Default, and upon
commencement of proceedings to enforce the rights of Lessor hereunder, Lessor
shall be entitled, as a matter of right, to the appointment of a receiver or
receivers acceptable to Lessor of the Leased Property and any Capital Addition
thereto of the revenues, earnings, income, products and profits thereof, pending
the outcome of such proceedings, with such powers as the court making such
appointment shall confer.
 
16.5 Lessee’s Obligation to Purchase.  Upon the occurrence of a Put Event with
respect to any Facility, Lessor shall be entitled to require Lessee to purchase
the Leased Property of such Facility on the first Minimum Rent Payment Date
occurring not less than thirty (30) days after the date specified in a notice
from Lessor requiring such purchase for an amount equal to the greater of (a)
the Fair Market Value for such Facility or (b) the Allocated Minimum Purchase
Price for such Facility, plus, in either event, all Rent then due and payable
(excluding the installment of Minimum Rent and Additional Rent due on the
purchase date) with respect to such Facility.  If Lessor exercises such right,
Lessor shall convey the Leased Property of such Facility to Lessee on the date
fixed therefor in accordance with the provisions of Article XVIII upon receipt
of the purchase price therefor and this Lease shall thereupon terminate with
respect to such Facility.  Any purchase by Lessee of the Leased Property of a
Facility pursuant to this Section shall be in lieu of the damages specified in
Section 16.3 with respect to such Facility.
 

 
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16.6 Waiver. If Lessor initiates judicial proceedings or if this Lease is
terminated by Lessor pursuant to this Article with respect to a Facility, Lessee
waives, to the extent permitted by applicable law, (i) any right of redemption,
re-entry or repossession; and (ii) the benefit of any laws now or hereafter in
force exempting property from liability for rent or for debt.
 
16.7 Application of Funds.  Any payments received by Lessor under any of the
provisions of this Lease during the existence or continuance of any Event of
Default which are made to Lessor rather than Lessee due to the existence of an
Event of Default shall be applied to Lessee’s obligations in the order which
Lessor may determine or as may be prescribed by the laws of the State.
 
16.8 Facility Operating Deficiencies.  On notice or request therefor by Lessor
to Lessee, upon the occurrence of a Facility Operating Deficiency specified with
particularity in Lessor’s notice, and for a period equal to the greater of six
(6) months or the time necessary fully to remedy the Facility Operating
Deficiency, Lessee shall engage the services of a management company,
unaffiliated with Lessee and approved by Lessor, to assume responsibility for
management of the applicable Facility for the purpose of taking all steps
reasonably necessary to remedy the Facility Operating Deficiency(ies).  Pursuant
to a written agreement among the management company, Lessee and Lessor, the
management company will have complete responsibility for operation of the
applicable Facility, subject to Lessee’s retaining only such power and authority
as shall be required by the State as the minimum level of power and authority to
be possessed by the licensed operator of a facility of the type of such Facility
in the State.  The management company shall provide the following services:
 
(a) furnish an on-site, full-time licensed administrator and controller (or
financial officer) approved by Lessor who shall be an employee of the management
company;
 
(b) take all steps reasonably necessary to keep such Facility fully licensed by
the State, certified as a provider under applicable government reimbursement
programs and duly accredited by applicable agencies and bodies;
 
(c) perform all of Lessee’s obligations hereunder with respect to maintenance
and repair of such Facility;
 
(d) conduct at the onset of the management company’s engagement, and monthly
thereafter, reviews and/or audits of Facility operations in at least the
following departments and services:  patient and resident care, activities and
therapy, dietary, medical records, drugs and medicines, supplies, housekeeping
and maintenance, and report the results of such reviews and/or audits in writing
to Lessor no later than five (5) days after the end of each calendar month;
 
(e) immediately upon receipt thereof, deliver to Lessor by overnight courier
copies of all communications received from any regulatory agency with respect to
such Facility; and
 

 
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(f) with respect to the Facility Operating Deficiency(ies) which gave rise to
the request to Lessee to engage the management company, prepare and deliver to
Lessor within five (5) days after the commencement of the management company’s
responsibilities at such Facility a comprehensive written report of the nature
and extent of the Facility Operating Deficiency(ies) and advise Lessor orally by
telephone no later than noon local time on each Friday thereafter as to steps
being taken by the management company to remedy the same and the status of any
threatened or actual governmental administrative action with respect thereto.
 
The management company shall have complete access to such Facility, its records,
offices and facilities, in order that it may carry out its duties.  If Lessee
shall fail to designate a management company acceptable to Lessor within five
(5) days after receipt of the notice of request therefor, Lessor may designate
such management company by further notice to Lessee.  Lessee shall be
responsible for payment of all fees and expenses reasonably charged and incurred
by the management company in carrying out its duties, provided that the
management fee chargeable by a management company designated by Lessor, as
hereinabove provided, shall not exceed Seven Percent (7%) of Gross Revenues.
 
          16.9 [Intentionally Omitted].
 
16.10 Grant of Security Interest; Appointment of Collateral Agent.  The parties
intend that if an Event of Default occurs under this Lease, Lessor will control
Lessee’s Personal Property and the Intangible Property so that Lessor or its
designee or nominee can operate or re-let each Facility intact for its Primary
Intended Use.  Accordingly, to implement such intention, and for the purpose of
securing the payment and performance obligations of Lessee hereunder, Lessor and
Lessee agree as follows:
 
16.10.1  Grant of Security Interest.
 
(a) Lessee, as debtor, hereby grants to Collateral Agent, for the benefit of
Collateral Agent and the Persons comprising “Lessor” hereunder, a security
interest and an express contractual lien upon all of Lessee’s right, title and
interest in and to Lessee’s Personal Property and in and to the Intangible
Property and any and all products, rents, leases (including all rights under any
leases or residential care agreements, including Lessee’s right, power and
authority to modify the terms of any such lease or residential care agreement or
extend or terminate such lease or residential care agreement) with respect to
all or any portions of the Facilities), issues, proceeds and profits thereof in
which Lessee now owns or hereafter acquires an interest or right, including any
leased Lessee’s Personal Property (collectively, the “Collateral”).  This Lease
constitutes a security agreement covering all such Collateral.  The security
interest granted to Collateral Agent with respect to Lessee’s Personal Property
in this Section 16.10 is intended by Collateral Agent and Lessee to be
subordinate to any security interest granted in connection with the financing or
leasing of all or any portion of the Lessee’s Personal Property so long as the
lessor or financier of such Lessee’s Personal Property agrees to give Collateral
Agent written notice of any default by Lessee under the terms of such lease or
financing arrangement, to give Collateral Agent a reasonable time following such
notice to cure any such default and consents to Collateral Agent’s written
assumption of such lease or financing arrangement upon Collateral Agent’s
 

 
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curing of any such defaults.  This security agreement and the security interest
created herein shall survive the expiration or earlier termination of this Lease
with respect to any or all of the Facilities.
 
(b) Lessee hereby authorizes Collateral Agent to file such financing statements,
continuation statements and other documents as may be necessary or desirable to
perfect or continue the perfection of Collateral Agent’s security interest in
the Collateral.  In addition, if required by Collateral Agent at any time during
the Term, Lessee shall execute and deliver to Collateral Agent in form
reasonably satisfactory to Collateral Agent additional security agreements,
financing statements, fixture filings and such other documents as Collateral
Agent may reasonably require to perfect or continue the perfection of Collateral
Agent’s security interest in the Collateral.  In the event Lessee fails to
execute any financing statement or other documents for the perfection or
continuation of Collateral Agent’s security interest, Lessee hereby appoints
Collateral Agent as its true and lawful attorney-in-fact to execute any such
documents on its behalf, which power of attorney shall be irrevocable and is
deemed to be coupled with an interest.
 
(c) Lessee will give Collateral Agent at least thirty (30) days’ prior written
notice of any change in Lessee’s name, identity, jurisdiction of organization or
corporate structure.  With respect to any such change, Lessee will promptly
execute and deliver such instruments, documents and notices and take such
actions, as Collateral Agent deems necessary or desirable to create, perfect and
protect the security interests of Collateral Agent in the Collateral.
 
(d) Upon the occurrence of an Event of Default, Collateral Agent shall be
entitled to exercise any and all rights or remedies available to a secured party
under the Uniform Commercial Code, or available to a lessor under the laws of
the State, with respect to Lessee’s Personal Property and the Intangible
Property, including the right to sell the same at public or private sale.
 
16.10.2   Appointment of Collateral Agent.
 
(a) Each Person comprising “Lessor” hereunder hereby irrevocably appoints HCP
MA2 California, LP, a Delaware limited partnership (the “Collateral Agent”) as
the collateral agent hereunder and under all other documents related hereto and
authorizes Collateral Agent in such capacity, to take such actions on its behalf
and to exercise such powers as are delegated to Collateral Agent in such
capacity by the terms hereof or thereof, together with such actions and powers
as are reasonably incidental thereto.  In performing its functions and duties
hereunder, Collateral Agent shall act for itself and as agent for each other
Person, if any, comprising “Lessor” hereunder and does not assume and shall not
be deemed to have assumed any obligation towards or relationship of agency or
trust with or for Lessee.  The provisions of this Section 16.10.2 are solely for
the benefit of Collateral Agent and each Person comprising “Lessor” hereunder,
and Lessee shall no rights as a third party beneficiary(ies) of any of such
provisions.
 

 
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(b) The Collateral Agent may perform any and all of its duties and exercise its
rights and powers hereunder by or through any one or more sub-agents appointed
by the Collateral Agent.
 
(c) The Collateral Agent may at any time give notice of its resignation to the
Person(s) comprising “Lessor” hereunder and Lessee.  Upon receipt of any such
notice of resignation, the Person(s) comprising “Lessor” hereunder shall have
the right to appoint a successor Collateral Agent.  If no such successor shall
have been so appointed by the Person(s) comprising “Lessor” hereunder and shall
have accepted such appointment within ten (10) days after the retiring
Collateral Agent gives notice of its resignation, then the retiring Collateral
Agent may, on behalf of each Person comprising “Lessor” hereunder, appoint a
successor Collateral Agent; provided, however, that if the Collateral Agent
shall notify Lessee and each Person comprising “Lessor” hereunder that no such
successor is willing to accept such appointment, then such resignation shall
nonetheless become effective in accordance with such notice and (i) the retiring
Collateral Agent shall be discharged from its duties and obligations hereunder
(except that in the case of any Collateral held by the Collateral Agent on
behalf of each Person comprising “Lessor” hereunder, the Collateral Agent may
continue to hold such Collateral until such time as a successor Collateral Agent
is appointed and such Collateral is assigned to such successor Collateral Agent)
and (ii) all payments, communications and determinations provided to be made by,
to or through the Collateral Agent shall instead be made by or to each Person
comprising “Lessor” hereunder directly, until such time as the Person(s)
comprising “Lessor” hereunder appoint a successor Collateral Agent.
 
(d) Upon the acceptance of a successor’s or replacement’s appointment as
Collateral Agent, such successor or replacement shall succeed to and become
vested with all of the rights, powers, privileges and duties of the retiring
Collateral Agent and the retiring Collateral Agent shall be discharged from all
of its duties and obligations hereunder.  After the retiring Collateral Agent’s
resignation hereunder, the provisions of this Section 16.10.2 shall continue in
effect for the benefit of such retiring Collateral Agent and its sub-agents in
respect of any actions taken or omitted to be taken by any of them while the
retiring Collateral Agent was acting in such capacity.
 
16.11 Leases and Residential Care Agreements.  Lessee shall comply with and
observe in all material respects Lessee's obligations under all leases and
residential care agreements, including Lessee's obligations pertaining to the
maintenance and disposition of resident or tenant security deposits (if
any).  Upon delivery of notice by Lessor or Collateral Agent to Lessee of
Lessor’s or Collateral Agent’s exercise of its respective rights under this
Article, at any time after the occurrence of an Event of Default, and without
the necessity of Lessor  or Collateral Agent entering upon and taking and
maintaining control of any Facility directly, by a receiver, or by any other
manner or proceeding permitted by applicable Legal Requirements, Lessor  and/or
Collateral Agent immediately shall have, to the extent permitted by applicable
Legal Requirements, all rights, powers and authority granted to Lessee under any
lease or residential care agreement relating to such Facility, including the
right, power and authority to modify the terms of any such lease or residential
care agreement for such Facility, or extend or terminate any such lease or
residential care agreement for such Facility.  Following an Event of Default,
unless Lessor and/or Collateral Agent elects in its sole discretion to assume
the
 

 
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obligations of Lessee under any lease or residential care agreement for any
Facility, neither Lessor nor Collateral Agent shall (i) be obligated to perform
any of the terms, covenants or conditions contained in such lease or residential
care agreement relating to such Facility (or otherwise have any obligation with
respect to such lease or residential care agreement relating to such Facility)
or (ii) be obligated to appear in or defend any action or proceeding relating to
such lease or residential care agreement relating to such
Facility.  Notwithstanding anything to the contrary in this Section 16.11, but
subject to the other terms and conditions contained in this Lease, prior to the
occurrence of an Event of Default, Lessee shall be entitled to exercise any and
all rights under any Occupancy Arrangements relating to any Facility, including
Lessee’s right, power and authority to modify the terms of any such Occupancy
Arrangements or extend or terminate such Occupancy Arrangements.
 
ARTICLE XVII.                                
 
17.1 Lessor’s Right to Cure Lessee’s Default.  If Lessee shall fail to make any
payment or to perform any act required to be made or performed hereunder, upon
at least thirty (30) days’ prior written notice (except (a) in the event of an
emergency, in which case no prior notice shall be required or (b) in the case of
any other express provision of this Lease that permits Lessor to self-help
rights or remedies on less than thirty (30) day’s prior written notice or upon
no notice, in which case such shorter or no notice shall be required in
connection therewith, as applicable) Lessor, without waiving or releasing any
obligation or default, may, but shall be under no obligation to, make such
payment or perform such act for the account and at the expense of Lessee, and
may, to the extent permitted by law, enter upon the Leased Property and any
Capital Addition thereto for such purpose and take all such action thereon as,
in Lessor’s opinion, may be necessary or appropriate therefor.  No such entry
shall be deemed an eviction of Lessee.  All sums so paid by Lessor and all
reasonable costs and expenses, including reasonable attorneys’ fees and
expenses, so incurred, together with interest thereon at the Overdue Rate from
the date on which such sums or expenses are paid or incurred by Lessor, shall be
paid by Lessee to Lessor on demand.
 
ARTICLE XVIII.                                
 
       18.1 Purchase of the Leased Property; Rights of Lessee Prior to Closing.
 
18.1.1 Generally.  If Lessee purchases the Leased Property of any Facility from
Lessor pursuant to any provision of this Lease, Lessor shall, upon receipt from
Lessee of the applicable purchase price, together with full payment of any
unpaid Rent due and payable with respect to any period ending on or before the
date of the purchase, deliver to Lessee an appropriate special or limited
warranty deed or other appropriate conveyance instrument conveying the entire
interest of Lessor in and to such Leased Property to Lessee free and clear of
all encumbrances other than (i) those that Lessee has agreed hereunder to pay or
discharge; (ii) those mortgage liens, if any, which Lessee has agreed in writing
to accept and to take title subject to; (iii) those liens and encumbrances which
were in effect on the date of conveyance of such Leased Property to Lessor
(excluding any liens securing Facility Mortgages which Lessee has not agreed in
writing to accept); and (iv) any other encumbrances permitted hereunder to be
imposed on such Leased Property which are assumable at no cost to Lessee or to
which Lessee may take subject without cost to Lessee,
 

 
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and this Lease shall terminate as to such Facility upon Lessor’s receipt of such
purchase price.  The difference between the applicable purchase price and the
total of the encumbrances assumed or taken subject to shall be paid to Lessor or
as Lessor may direct in immediately available funds.  All expenses of such
conveyance, including the cost of title insurance, attorneys’ fees incurred by
Lessor in connection with such conveyance and release, transfer taxes and
recording and escrow fees, shall be paid by Lessee.
 
18.1.2 Rights of Lessee Prior to Closing.  Notwithstanding anything to the
contrary in this Lease, or at law or in equity, if Lessee exercises any right or
option of Lessee to purchase or acquire the Leased Property of any Facility
pursuant to any of the provisions of this Lease, or Lessor shall exercise its
right to require Lessee to purchase the Lease Property of any Facility pursuant
to Section 16.5 hereof (herein, a “Purchase Right/Obligation Exercise”), the
following shall pertain:
 
(a) Such Purchase Right/Obligation Exercise (and any purchase or other separate
contract formed upon such Purchase Right/Obligation Exercise) shall not under
any circumstances cause a termination of this Lease, and this Lease shall remain
in full force and effect to and until the consummation of the closing in
accordance with the terms thereof;
 
(b) Lessee hereby acknowledges and agrees that Lessee shall not under any
circumstances be entitled to possession of the Leased Property of any Facility
under the terms of any purchase or other separate contract formed upon such
Purchase Right/Obligation Exercise until the closing thereof, and that, prior
thereto, Lessee’s possession of the Leased Property of such Facility shall be
solely by way of this Lease;
 
(c) In no event shall Lessee be deemed a vendee in possession;
 
(d) In the event that an Event of Default shall occur at anytime during the
period from such Purchase Right/Obligation Exercise to and until closing, Lessor
shall be entitled to exercise any and all rights or remedies available to a
landlord against a defaulting tenant, whether at law or equity, including those
set forth in Article XVI hereof, and specifically including the right to recover
possession of the Leased Property of such Facility through summary proceedings
(such as unlawful detainer or other similar action permitted by law), and in no
event shall Lessor be required to bring an action for ejectment or any other
similar non-expedited proceeding; and
 
(e) It shall be a condition to the closing of the purchase of the Leased
Property of such Facility, for the benefit of both Lessor and Lessee, that
either (i) Lessor and Lessee shall have mutually determined based upon the
advise of their respective legal counsel that the purchase of the Leased
Property of such Facility by Lessee from Lessor is exempt from filing under the
HSR Act or (ii) the waiting period under the HSR Act applicable to the purchase
of the Leased Property of such Facility by Lessee from Lessor shall have expired
or been earlier terminated.  Lessor and Lessee shall each promptly cooperate in
good faith and cause their respective legal counsel to cooperate in good faith
to review the HSR Act and the provisions of this Lease relating to the purchase
of the Leased Property of such Facility by Lessee from Lessor, and take such
other commercially
 

 
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reasonable steps as such party and its legal counsel deem reasonably appropriate
to determine whether an exemption from filing under the HSR Act is available,
and, if Lessor and Lessee cannot mutually agree in good faith based upon advice
from their respective counsel that such an exemption is available, then Lessor
and Lessee shall each (x) promptly make their respective filings and thereafter
make any other required submissions under the HSR Act with respect to the
purchase of the Leased Property of such Facility by Lessee from Lessor, and (y)
cooperate in good faith with the other party and use commercially reasonable
efforts with respect to the same.
 
18.1.3 Lessor’s Election of 1031 Exchange.  If Lessee purchases the Leased
Property of any Facility from Lessor pursuant to any provision of this Lease,
Lessor may elect to sell the Leased Property to Lessee in the form of a
tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Code of
1986, as amended (“1031 Exchange”).  In the event that Lessor shall so elect,
Lessor shall give written notice to Lessee and any escrow holder of such
election and the following shall apply:
 

(a) Lessor may attempt to identify before the closing other property which
qualifies as “like-kind” property for a 1031 Exchange (the “Target Property”) by
giving written notice to Lessee and any escrow holder and identifying to such
escrow holder the Target Property prior to the closing.
 
(b) If Lessor has not so identified the Target Property before the closing, then
Lessor shall proceed with the closing unless Lessor at its option enters into an
exchange agreement with an accommodation party (“Accommodator”) in order to
facilitate a non-simultaneous exchange.  If an Accommodator is so designated,
Lessor shall cause the Accommodator (i) to acquire title to the Leased Property
from Lessor at or before the closing and (ii) to transfer title in the Leased
Property to Lessee on closing for the applicable purchase price.
 
(c) Lessee shall fully cooperate with any such 1031 Exchange, including but not
limited to executing and delivering additional documents requested or approved
by Lessor; provided, that Lessee shall not be required to incur any additional
costs or liabilities or financial obligation as a consequence of any of the
foregoing exchange transactions.
 
ARTICLE XIX.                                
 
19.1 Extended Term(s).  Provided that no Event of Default, or event which, with
notice or lapse of time or both, would constitute an Event of Default, has
occurred and is continuing, either at the date of exercise or upon the
commencement of an Extended Term (as hereunder defined), then Lessee shall have
the right to renew this Lease with respect to all (but not less than all) of the
Facilities then covered by this Lease for two (2) consecutive ten (10) year
renewal terms (each an “Extended Term”), upon (i) giving written notice to
Lessor of such renewal not less than twelve (12) months prior to the expiration
of the then current Term, (ii) delivering to Lessor concurrent with such notice
a reaffirmation of the Guaranty(ies) executed by Guarantor(s) stating, in
substance, that Guarantor’s(s’) obligations under the Guaranty(ies) shall
 

 
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extend to this Lease, as extended by the Extended Term and (iii) with respect to
any Facility(ies) subject to a New Lease hereafter with or in favor of Lessor or
any Affiliate of Lessor, the concurrent exercise by the “Lessee” thereunder of
the renewal of each such New Lease for the corresponding and co-terminus
“Extended Term” thereof.  During each Extended Term, all of the terms and
conditions of this Lease shall continue in full force and
effect.  Notwithstanding anything to the contrary in this Section 19.1, Lessor,
in its sole discretion, may waive the condition to Lessee’s right to renew this
Lease that no Event of Default, or event which, with notice or lapse of time or
both, would constitute an Event of Default, have occurred or be continuing, and
the same may not be used by Lessee as a means to negate the effectiveness of
Lessee’s exercise of its renewal right for such Extended Term.
 
19.2 Lessor’s Extension and Early Termination Rights. In order to facilitate the
transfer of the operations of each Facility to a third party and/or to locate a
replacement lessee, Lessor shall have the one time right with respect to each
Facility to either (i) terminate this Lease with respect to such Facility up to
four (4) months early or (ii) extend the Term of this Lease with respect to such
Facility for up to one (1) year.  Such right of early termination shall be
exercised by Lessor, if at all, by written notice from Lessor to Lessee given
not less than sixty (60) days prior to the date Lessor desires to terminate this
Lease with respect to such Facility and stating the date of such termination
(which date shall not be earlier than four (4) months prior to the expiration of
the Term).  In the event that Lessor shall exercise such right of early
termination within the time and in the manner herein provided, this Lease shall
terminate with respect to the specified Facility on the date of termination
specified in Lessor’s notice.  Such right of extension shall be exercised by
Lessor, if at all, by written notice from Lessor to Lessee given not less than
four (4) months prior to the expiration of the Term with respect to such
Facility and stating the date through which Lessor is extending the Term of this
Lease with respect to such Facility (which date shall not be later than one (1)
year after the originally scheduled expiration date).  In the event that Lessor
shall exercise its right to extend the applicable Term pursuant to this Section
19.2 with respect to any Facility, all of the terms and conditions of this Lease
shall continue in full force and effect with respect to such Facility, and
Lessee shall continue to pay Rent applicable to such Facility for and during
such extension period at the same Minimum Rent rates as were in effect upon the
expiration of the originally scheduled Term for such Facility; provided,
however, that Lessor shall have the right to terminate this Lease with respect
to such Facility during any such extension period upon not less than sixty (60)
days prior written notice to Lessee.  In such event, this Lease, as previously
extended, shall terminate with respect to such Facility upon the date specified
in Lessor’s notice of termination.
 
ARTICLE XX.                                
 
20.1 Holding Over.  Except as provided in Section 19.2, if Lessee shall for any
reason remain in possession of the Leased Property and/or any Capital Additions
of a Facility after the expiration or earlier termination of the Term, such
possession shall be as a month-to-month tenant during which time Lessee shall
pay as Minimum Rent and Additional Rent each month twice the sum of (i) monthly
Minimum Rent and Additional Rent applicable to the prior Lease Year for such
Facility, plus (ii) all Additional Charges and all other sums payable by Lessee
pursuant to this Lease.  During such period of month-to-month tenancy, Lessee
shall be obligated to perform and observe all of the terms, covenants and
conditions of this Lease, but
 

 
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shall have no rights hereunder other than the right, to the extent given by law
to month-to-month tenancies, to continue its occupancy and use of the Leased
Property and/or any Capital Additions of such Facility.  Nothing contained
herein shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination of this
Lease.
 
ARTICLE XXI.
 

 
[INTENTIONALLY OMITTED]
 
ARTICLE XXII.                                
 
22.1 Risk of Loss.  The risk of loss or of decrease in the enjoyment and
beneficial use of the Leased Property and any Capital Additions as a consequence
of the damage or destruction thereof by fire, the elements, casualties, thefts,
riots, wars or otherwise, or in consequence of foreclosures, attachments, levies
or executions (other than by Lessor and Persons claiming from, through or under
Lessor) is assumed by Lessee, and, except as otherwise provided herein, no such
event shall entitle Lessee to any abatement of Rent.
 
ARTICLE XXIII.                                
 
23.1 General Indemnification. In addition to the other indemnities contained
herein, and notwithstanding the existence of any insurance carried by or for the
benefit of Lessor or Lessee, and without regard to the policy limits of any such
insurance, Lessee shall protect, indemnify, save harmless and defend Lessor from
and against all liabilities, obligations, claims, damages, penalties, causes of
action, costs and expenses, including reasonable attorneys’, consultants’ and
experts’ fees and expenses, imposed upon or incurred by or asserted against
Lessor by reason of:  (i) any accident, injury to or death of Persons or loss of
or damage to property occurring on or about the Leased Property or adjoining
sidewalks; (ii) any use, misuse, non-use, condition, maintenance or repair by
Lessee of the Leased Property; (iii) any failure on the part of Lessee to
perform or comply with any of the terms of this Lease; (iv) the non-performance
of any of the terms and provisions of any and all existing and future subleases
of the Leased Property to be performed by any party thereunder; (v) any claim
for malpractice, negligence or misconduct committed by any Person on or working
from the Leased Property; and (vi) the violation of any Legal Requirement.  Any
amounts which become payable by Lessee under this Article shall be paid within
ten (10) days after liability therefor is finally determined by litigation or
otherwise, and if not timely paid shall bear interest at the Overdue Rate from
the date of such determination to the date of payment.  Lessee, at its sole cost
and expense, shall contest, resist and defend any such claim, action or
proceeding asserted or instituted against Lessor or may compromise or otherwise
dispose of the same as Lessee sees fit; provided, however, that any legal
counsel selected by Lessee to defend Lessor shall be reasonably satisfactory to
Lessor.  All indemnification covenants are intended to apply to losses, damages,
injuries, claims, etc. incurred directly by the indemnified parties and their
property, as well as by the indemnifying party or any third party, and their
property.  For purposes of this Article XXIII, any acts or omissions of Lessee,
or by employees, agents, assignees, contractors, subcontractors or others acting
for or on behalf of Lessee (whether or not they are negligent, intentional,
willful or unlawful), shall be strictly attributable to Lessee.  It is
understood and agreed that payment shall not be a condition precedent to
enforcement of the foregoing indemnification obligations.
 

 
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ARTICLE XXIV.                                
 
        24.1 Transfers.
 
24.1.1 Prohibition.  Subject to the provisions of Sections 24.1.10, 24.1.11 and
24.1.12 below, Lessee shall not, without Lessor’s prior written consent, which
consent may not be unreasonably withheld or delayed (except as provided in the
last sentence hereof), either directly or indirectly or through one or more step
transactions or tiered transactions, voluntarily or by operation of law, (i)
assign, convey, sell, pledge, mortgage, hypothecate or otherwise encumber,
transfer or dispose of all or any part of this Lease or Lessee’s leasehold
estate hereunder, (ii) Master Sublease all or any part of the Leased Property
and/or any Capital Additions of any Facility, (iii) engage the services of any
Person that is not an Affiliate of Lessee for the management or operation of
more than Ten Percent (10%) of the Leased Property and/or any Capital Additions
of any Facility, (iv) convey, sell, assign, transfer or dispose of any stock or
partnership, membership or other interests (whether equity or otherwise) in
Lessee (which shall include any conveyance, sale, assignment, transfer or
disposition of any stock or partnership, membership or other interests (whether
equity or otherwise) in any Controlling Person(s)), if such conveyance, sale,
assignment, transfer or disposition results in a change in control of Lessee (or
in any Controlling Person(s)), (v) dissolve, merge or consolidate Lessee (which
shall include any dissolution, merger or consolidation of any Controlling
Person) with any other Person, if such dissolution, merger or consolidation
results in a change in control of Lessee or in any Controlling Person(s), (vi)
sell, convey, assign, or otherwise transfer all or substantially all of the
assets of Lessee (which shall include any sale, conveyance, assignment, or other
transfer of all or substantially all of the assets of any Controlling Person) or
(vii) consummate or permit to be consummated any agreement or arrangement to do
any of the foregoing (each of the aforesaid acts referred to in clauses (i)
through (vii) being referred to herein as a “Transfer”).  Lessor’s consent shall
not be required for any Occupancy Arrangement transaction that does not
constitute a Master Sublease or for the engagement the services of any Person
for the management or operation of Ten Percent (10%) or less of the Leased
Property and/or any Capital Additions of any Facility, and with respect to any
such Occupancy Arrangement or management engagement for which such consent is
not required, Lessee shall, within ten (10) days of entering into any such
Occupancy Arrangement or management engagement, notify Lessor of the existence
of such Occupancy Arrangement or management engagement and the identity of the
Occupant or manager, as the case may be, and supply Lessor with a copy of the
agreement relating to such Occupancy Arrangement or management engagement and
any other related documentation, materials or information reasonably requested
by Lessor; provided, however, that the foregoing shall not apply to any
Occupancy Arrangement for patients or residents of any Facility (i.e., any
non-Commercial Occupancy Arrangements).  Notwithstanding the foregoing or any
other provisions of this Lease to the contrary, Lessee acknowledges that (x) it
is Lessor’s practice not to permit any mortgages, hypothecations, pledges or
other encumbrances of leasehold interests by its lessees, and (y) Lessor shall
have the right to approve or disapprove of any such mortgages hypothecation,
pledge or other encumbrance of the leasehold estate created hereby by Lessee
(whether directly or indirectly) in Lessor’s sole and absolute discretion, and
(z) if Lessor shall approve the same Lessor shall be entitled to impose such
conditions in connection therewith as Lessor deems appropriate in its sole and
absolute discretion.
 

 
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24.1.2 Consent.
 
24.1.2.1                 Subject to the provisions of Sections 24.1.10, 24.1.11
and 24.1.12 below, prior to any Transfer, Lessee shall first notify Lessor of
its desire to do so and shall submit in writing to Lessor, as applicable: (a)
the name of the proposed Occupant, assignee, manager or other transferee; (b)
the terms and provisions of the Transfer, including any agreements in connection
therewith; and (c) such financial information as Lessor may reasonably request
concerning the proposed Occupant, assignee, manager or other transferee.  In
exercising its right of reasonable approval or disapproval to a proposed
Transfer, Lessor shall be entitled to take into account any fact or factor that
is commercially reasonable to the making of such decision, including the
following, all of which are agreed to be reasonable factors for Lessor’s
consideration:
 
(i)           The financial strength of the proposed Occupant, assignee, manager
or other transferee, including the adequacy of its working capital.  In
connection with a Transfer resulting from a merger or consolidation to which
Lessee (including Emeritus, if Emeritus is the Lessee) or any Controlling Party
is a party, Lessor shall be entitled to compare the Consolidated Net Worth and
debt to equity ratio of the surviving party following the effectiveness of such
event as compared to the Consolidated Net Worth and debt to equity ratio of
Lessee (including Emeritus, if Emeritus is the Lessee) or any Controlling Party
is a party  prior to such event.
 
(ii)           The operating experience of the proposed Occupant, assignee,
manager or other transferee with respect to businesses of the nature, type and
size of the applicable Facility.
 
(iii)           The quality and reputation of the proposed Occupant, assignee,
manager or other transferee.
 
(iv)           Whether such Transfer will cause a breach or violation of any
material agreements to which Lessee or any Controlling Person is a party.
 
(v)           Whether there then exists any uncured Event of Default by Lessee
pursuant to this Lease; provided, however, that if (A) Lessee is proposing to
enter into a Master Sublease with respect to one or more Facilities, (B) there
is no uncured monetary Event of Default under this Lease, (C) a non-monetary
Event of Default has occurred at another Facility (i.e., a Facility that Lessee
is not proposing to Master Sublease), Lessor has not yet exercised any of its
rights or remedies on account thereof pursuant to Article XVI hereof, and Lessee
is diligently and in good faith proceeding to cure such non-monetary Event of
Default at such other Facility, then Lessor shall not take the same into account
as the sole basis for withholding its consent to any such proposed Master
Sublease of such other Facility(ies).
 
Moreover, Lessor shall be entitled to be reasonably satisfied that each and
every covenant, condition or obligation imposed upon Lessee by this Lease and
each and every right, remedy or benefit afforded Lessor by this Lease is not
materially impaired or diminished by such Transfer.  Lessee acknowledges,
however, that any proposed partial
 

 
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assignment, conveyance, sale, transfer or other disposition of this Lease or
Lessee’s leasehold estate hereunder with respect to less than all of the
Facilities would materially impair the covenants, conditions and obligations
imposed upon Lessee by this Lease and the rights, remedies and benefits afforded
Lessor by this Lease as single, integrated and indivisible agreement and
economic unit with respect to all Facilities, and therefore it would be
reasonable for Lessor to withhold its consent to any such partial assignment,
conveyance, sale, transfer or other disposition of this Lease or Lessee’s
leasehold estate hereunder with respect to less than all the Facilities on such
basis.  No withholding of consent by Lessor for any commercially reasonable
reason shall give rise to any claim by Lessee or any other Person or entitle
Lessee to terminate this Lease or to any abatement of Rent.
 
24.1.2.2                 Subject to the provisions of Sections 24.1.10, 24.1.11
and 24.1.12 below, in connection with any Transfer, Lessor shall be entitled to
receive the applicable Transfer Consideration, if any.
 
24.1.2.3                 In connection with any Transfer, Lessor shall be
entitled to require as a condition to any such Transfer that the obligations of
any Occupant, assignee, manager or other transferee which is an Affiliate of
another Person be guaranteed by its ultimate parent or other ultimate
Controlling Person pursuant to a written guaranty in form and substance
reasonably acceptable to Lessor and that, subject to Section 24.1.3 below, any
existing Guaranty of this Lease be reaffirmed by the applicable Guarantor
notwithstanding such Transfer.
 
24.1.2.4                 The consent by Lessor to any Transfer shall not
constitute Lessor’s consent to any subsequent Transfer or to any subsequent or
successive Transfer.  Any purported or attempted Transfer contrary to the
provisions of this Article shall be void and, at the option of Lessor, shall
terminate this Lease.
 
24.1.3 Release of Existing Lessee and Guarantors Upon Certain Transfers.  Upon
the consummation of any Transfer by Lessee that (a) constitutes an assignment of
Lessee’s entire interest in this Lease, (b) requires Lessor’s prior written
consent pursuant to the terms of this Article XXIV, and (c) receives such prior
written consent by Lessor, Lessor shall release Lessee and any current Guarantor
from all obligations arising under this Lease and any current Guaranty, as
applicable, following the effective date of such Transfer, so long as each of
the following conditions is met:
 
(i) The Consolidated Net Worth of the assignee, immediately following the
effectiveness of such Transfer shall be equal to or greater than an amount equal
to the Consolidated Net Worth of Emeritus as of the Commencement Date as
reasonably determined by Lessor.
 

 
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(ii) The debt to equity ratio of the assignee following the effectiveness of
such Transfer shall be equal to or less than an amount equal to the debt to
equity ratio of Emeritus as of the Commencement Date as reasonably determined by
Lessor.  For purposes of this clause (ii), “debt” shall include the capitalized
value of any leases required to be capitalized in accordance with GAAP to which
Emeritus and/or such assignee (and/or their consolidated Subsidiaries) are
parties and the same shall be demonstrated by financial statements prepared in
accordance with GAAP and reasonably satisfactory to Lessor.
 
(iii) The assignee shall have adequate experience and skill in (i) operating
facilities comparable to the applicable Facility(ies) and (ii) a business of the
nature, type and size of the business of Emeritus immediately prior to the
effectiveness of such Transfer, as determined by Lessor in its reasonable
discretion.
 
24.1.4 Attornment and Related Matters.  Any Commercial Occupancy Arrangement
(including any Master Sublease) or management engagement shall be expressly
subject and subordinate to all applicable terms and conditions of this
Lease.  With respect to any Commercial Occupancy Arrangement or management
agreement, Lessor, at its option and without any obligation to do so, may
require any Occupant under any such Commercial Occupant Arrangement or manager
to attorn to Lessor, in which event Lessor shall undertake the obligations of
Lessee, as sublessor, licensor or otherwise under such Commercial Occupancy
Arrangement or management engagement from the time of the exercise of such
option to the termination of such Commercial Occupancy Arrangement or management
engagement and in such case Lessor shall not be liable for any prepaid rents,
fees or other charges or for any prepaid security deposits paid by such Occupant
under any such Commercial Occupant Arrangement to Lessee or for any other prior
defaults of Lessee under such Commercial Occupancy Arrangement or management
engagement.  In the event that Lessor shall not require such attornment with
respect to any such Commercial Occupancy Arrangement or management engagement,
then such Commercial Occupancy Arrangement or management engagement shall
automatically terminate upon the expiration or earlier termination of this
Lease, including any early termination by mutual agreement of Lessor and
Lessee.  Furthermore, any such Commercial Occupancy Arrangement, management
engagement or other agreement regarding a Transfer shall expressly provide that
the Occupant, assignee, manager or other transferee shall furnish Lessor with
such financial, operational or other information about the physical condition of
the applicable Facility, including the information required by Section 25.1.2
herein, as Lessor may request from time to time.
 
24.1.5 Assignment of Lessee’s Rights Against Occupant Under a Master
Sublease.  If Lessor shall consent to a Master Sublease, then the written
instrument of consent, executed and acknowledged by Lessor, Lessee and the
Occupant under such Master Sublease, as the case may be, shall contain a
provision substantially similar to the following:
 
(a) Lessee and such Occupant hereby agree that, if such Occupant shall be in
default of any of its obligations under the Master Sublease, which default also
constitutes an Event of Default by Lessee under this Lease (subject to the
express
 

 
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provisions of Section 16.11 hereof), then Lessor shall be permitted to avail
itself of all of the rights and remedies available to Lessee against such
Occupant in connection therewith.
 
(b) Without limiting the generality of the foregoing, Lessor shall be permitted
(by assignment of a cause of action or otherwise) to institute an action or
proceeding against such Occupant in the name of Lessee in order to enforce
Lessee’s rights under the Master Sublease, and also shall be permitted to take
all ancillary actions (e.g., serve default notices and demands) in the name of
Lessee as Lessor reasonably shall determine to be necessary.
 
(c) Lessee agrees to cooperate with Lessor, and to execute such documents as
shall be reasonably necessary, in connection with the implementation of the
foregoing rights of Lessor.
 
(d) Lessee expressly acknowledges and agrees that the exercise by Lessor of any
of the foregoing rights and remedies shall not constitute an election of
remedies, and shall not in any way impair Lessor’s entitlement to pursue other
rights and remedies directly against Lessee.
 
24.1.6 Costs.  Lessee shall reimburse Lessor for Lessor’s reasonable costs and
expenses incurred in conjunction with the processing and documentation of any
request for consent as required under this Article XXIV, including reasonable
attorneys’, architects’, engineers’ or other consultants’ fees whether or not
the transaction for which consent is requested is actually consummated.
 
24.1.7 No Release of Lessee’s Obligations.  Except as expressly set forth in
Section 24.1.3 above, no Transfer shall relieve Lessee of its obligation to pay
the Rent and to perform all of the other obligations to be performed by Lessee
hereunder.  Except as expressly set forth in Section 24.1.3 above, the liability
of Lessee named herein and any immediate and remote successor in interest of
Lessee (i.e., by means of any Transfer), and the due performance of the
obligations of this Lease on Lessee’s part to be performed or observed, shall
not in any way be discharged, released or impaired by any (i) agreement which
modifies any of the rights or obligations of the parties under this Lease, (ii)
stipulation which extends the time within which an obligation under this Lease
is to be performed, (iii) waiver of the performance of an obligation required
under this Lease, or (iv) failure to enforce any of the obligations set forth in
this Lease.  Except as expressly set forth in Section 24.1.3 above, if any such
Occupant, assignee, manager or other transferee defaults in any performance due
hereunder, Lessor may proceed directly against the Lessee named herein and/or
any immediate and remote successor in interest of Lessee without exhausting its
remedies against such Occupant, assignee, manager or other transferee.
 
24.1.8 REIT Protection.  Anything contained in this Lease to the contrary
notwithstanding, no Transfer shall be consummated on any basis such that, based
on the reasonable advice of Lessor’s outside counsel, the status of Lessor as a
real estate investment trust could be jeopardized because (i) the rental or
other amounts to be paid by the Occupant, assignee, manager or other transferee
thereunder would be based, in whole or in part, on the income or profits derived
by the business activities of the Occupant, assignee, manager or
 

 
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other transferee; (ii) the Transfer is with any Person in which Lessee or Lessor
owns an interest, directly or indirectly (by applying constructive ownership
rules set forth in Section 856(d)(5) of the Code); or (iii) the Transfer is to
be consummated with a Person or in a manner which could cause any portion of the
amounts received by Lessor pursuant to this Lease or any Occupancy Arrangement
to fail to qualify as “rents from real property” within the meaning of Section
856(d) of the Code, or any similar or successor provision thereto or which could
cause any other income of Lessor to fail to qualify as income described in
Section 856(c)(2) of the Code.  Lessee shall provide such information as
Lessor’s outside counsel may reasonably request to provide its advice regarding
the foregoing, and in rendering such advice, Lessor’s counsel shall be entitled
to rely on factual representations from Lessee and Lessor; provided, however,
that Lessee shall have no liability therefor if Lessee has provided such
information and representations in good faith and after a reasonably diligent
review and inquiry of the subject matter thereof.
 
24.1.9 Transfers In Bankruptcy.  It is the intent of the parties hereto that in
the event of a Transfer pursuant to the provisions of the Bankruptcy Code, all
consideration payable or otherwise to be delivered in connection with such
Transfer shall be paid or delivered to Lessor, shall be and remain the exclusive
property of Lessor and shall not constitute property of Lessee or of the estate
of Lessee within the meaning of the Bankruptcy Code.  Any consideration
constituting Lessor’s property pursuant to the immediately preceding sentence
and not paid or delivered to Lessor shall be held in trust for the benefit of
Lessor and be promptly paid or delivered to Lessor.  For purposes of this
Section 24.1.9, the term “consideration” shall mean and include money, services,
property and any other thing of value such as payment of costs, cancellation or
forgiveness of indebtedness, discounts, rebates, barter and the like.  If any
such consideration is in a form other than cash (such as in kind, equity
interests, indebtedness earn-outs, or other deferred payments, consulting or
management fees, etc.) Lessor shall be entitled to receive in cash the then
present fair market value of such consideration.  Notwithstanding any provision
of this Lease to the contrary, including this Section 24.1.9, it is expressly
understood and agreed that it is the intention of the parties hereto that,
notwithstanding any provision of the Bankruptcy Code, including Section 365(f)
thereof, Lessee is precluded from effecting any Transfer of a Facility except as
may otherwise be expressly provided in this Lease.
 
24.1.10 Public Offering/Public Trading.  Notwithstanding anything to the
contrary in this Article XXIV, (i) Lessor’s consent shall not be required in
connection with, and the other provisions of this Article XXIV shall not apply
to any transfer of any stock of Lessee as a result of a public offering of
Lessee’s stock (which transfers shall be deemed not to be “Transfers” hereunder)
which (a) constitutes a bona fide public distribution of such stock pursuant to
a firm commitment underwriting or a plan of distribution registered under the
Securities Act of 1933 and (b) results in such stock being listed for trading on
the American Stock Exchange or the New York Stock Exchange or authorized for
quotation on the NASDAQ National Market immediately upon the completion of such
public offering, (ii) for so long as the stock of Lessee or any Controlling
Person(s) is listed for trading on the American Stock Exchange or the New York
Stock Exchange or authorized for quotation on the NASDAQ National Market, the
transfer or exchange of such stock over such exchange or market (which transfers
or exchanges shall be deemed not to be “Transfers” hereunder).
 

 
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24.1.11 Certain Other Transfers.  Notwithstanding anything to the contrary in
this Article XXIV, but subject to the provisions of Section 24.1.8 above, so
long as Emeritus has other material assets other than its interest (whether
direct or indirect) in this Lease, the Facilities and any other leases of
facilities between Lessor or an Affiliate of Lessor and Emeritus or an Affiliate
of Emeritus, Lessor shall consent to any Transfer resulting from (a) a sale or
transfer of all or substantially all of the outstanding capital stock of
Emeritus or a sale or transfer of all or substantially all of the assets of
Emeritus, in each case to a single purchaser or transferee in a single
transaction or (b) a merger, consolidation or stock exchange to which Emeritus
is a party, and the provisions of Section 24.1.2.2 shall not apply  (i.e., there
shall not be any Transfer Consideration payable) in connection with or related
to such Transfer, so long as each of the following conditions is met:
 
(i) The Consolidated Net Worth of the purchaser or transferee resulting from a
Transfer pursuant to clause (a) above or the surviving party resulting from a
Transfer pursuant to clause (b) above, as the case may be, following the
effectiveness of such event shall be equal to or greater than the average
Consolidated Net Worth of Emeritus for the twelve (12) month period immediately
prior to the effectiveness of such event, as reasonably determined by Lessor;
 
(ii) The debt to equity ratio of the purchaser or transferee resulting from a
Transfer pursuant to clause (a) above or the surviving party resulting from a
Transfer pursuant to clause (b) above, as the case may be, following the
effectiveness of such event shall be equal to or less than the average debt to
equity ratio of Emeritus for the twelve (12) month period immediately prior to
the effectiveness of such event, as reasonably determined by Lessor.  For
purposes of this clause (ii), “debt” shall include the capitalized value of any
leases required to be capitalized in accordance with GAAP to which Emeritus
and/or such transferee or surviving entity (and/or their consolidated
Subsidiaries) are parties and the same shall be demonstrated by financial
statements prepared in accordance with GAAP and reasonably satisfactory to
Lessor;
 
(iii) The purchaser or transferee resulting from a Transfer pursuant to clause
(a) above or the other party(s) to the Transfer pursuant to clause (b) above, as
the case may be, shall have sufficient operating experience and history with
respect to a business of the nature, type and size of the business of Emeritus
as the same exists prior to the effectiveness of such event, as reasonably
determined by Lessor.  Such purchaser or transferee or other party to such
Transfer, as the case may be, shall be deemed to have “sufficient operating
experience and history” if, (A) the core management team of such purchaser,
transferee or other party, as the case may be, has an average of not less than
three (3) years’ operating experience with respect to the operation and
management of facilities of the type and nature operated and/or managed by
Emeritus and its Subsidiary(ies), or (B) such transferee or purchaser or other
party, as the case may be, shall immediately following the effectiveness of such
Transfer, and for a period of not less than one (1) year thereafter, retain
and/or hire in a full-time management or consulting capacity a majority of the
principal officers of Emeritus who were in the employment of Emeritus prior to
the effectiveness of such Transfer;
 

 
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(iv) Except in the case of a Transfer as to which such transferee or purchaser
or surviving party, as the case may be, assumes the obligations of Lessee
hereunder and any Guarantor under the applicable Guaranty as a matter of law,
such transferee or purchaser or surviving party shall execute a written
assumption of this Lease and with respect to each Guaranty, either (A) a written
assumption of such Guaranty in form and substance reasonably acceptable to
Lessor or (B) a new guaranty of this Lease consistent in form and substance with
each such Guaranty.  In addition, if any such transferee, purchaser or surviving
party is an Affiliate of another Person, its ultimate parent or other ultimate
Controlling Person shall execute a written guaranty of Lessee’s obligations
under this Lease pursuant to a written guaranty in form and substance reasonably
acceptable to Lessor;
 
(v) No Event of Default shall have occurred and be continuing hereunder;
 
(vi) [Intentionally Omitted]; and
 
(vii) Lessor shall receive the applicable information required by Section
24.1.2.1(i) with respect to each such proposed Transfer and the proposed
purchaser or transferee resulting therefrom.
 
As used in this Section 24.1.11, “other material assets” shall mean that
Emeritus has other net assets as determined in accordance with GAAP, whether
direct or indirect, other than its interests (whether direct or indirect) in
this Lease, the Facilities and the facilities covered thereby and any other
facilities leased by Emeritus or an Affiliate of Emeritus from Lessor or an
Affiliate of Lessor, which in the aggregate total not less than $100,000,000 or
represent at least Forty Percent (40%) of the total net assets as determined in
accordance with GAAP of Emeritus, including its interests (whether direct or
indirect) in the Facilities and any other facilities leased by Emeritus or any
Affiliate of Emeritus from Lessor or an Affiliate of Lessor.
 
24.1.12 Affiliate Transactions.  Notwithstanding anything to the contrary
contained in this Article XXIV but subject to the provisions of Section 24.1.8
above, Lessor’s consent shall not be required in connection with, and the
provisions of Section 24.1.2.2 shall not apply (i.e., there shall not be any
Transfer Consideration payable) in connection with or related to, any assignment
of Lessee’s interest in this Lease to one or more Affiliate(s) of Lessee (if
more than one, jointly and severally as “Lessee” hereunder) or  a Master
Sublease of all or any portion of the Leased Property to an Affiliate of Lessee
(each, a “Permitted Affiliate Transaction”), so long as in connection therewith,
each of the following conditions is met:
 
(a) In connection with such Permitted Affiliate Transaction, there is no change
in the use of the Leased Property of any Facility from its Primary Intended Use;
 
(b) No Event of Default shall have occurred and be continuing hereunder;
 

 
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(c) In the case of such an assignment, (i) the assignee(s) shall assume (jointly
and severally) all of the obligations of Lessee hereunder accruing subsequent to
the effective date of such assignment by an instrument in writing in form and
substance reasonably satisfactory to Lessor, and a copy thereof shall be
delivered to Lessor along with the notice specified in clause (g) below, (ii)
the original Lessee shall not be released from any of the obligations of the
Lessee hereunder, whether occurring prior to or after the effective date of such
transaction, and if requested by Lessor, shall execute a written guaranty of the
“Lessee’s” obligations under this Lease in a form satisfactory to Lessor, and
(iii) a copy of such executed assumption shall be delivered to Lessor along with
the notice;
 
(d) In the case of any Master Sublease, (i) such Master Sublease shall be
subject to the provisions of Section 24.1.4 above and such Master Sublease shall
comply with all of the applicable provisions of this Article XXIV (except for
the Lessor consent requirement), and a copy of such Master Sublease shall be
delivered to Lessor along with the notice specified in clause (g) below, and
(ii) Lessee shall not be released from any of the obligations of Lessee
hereunder, whether occurring prior to or after the effective date of such
transaction;
 
(e) In connection with any Permitted Affiliate Transaction, no Guarantor shall
be released of any of its obligations under a Guaranty, and shall execute a
written reaffirmation of its obligations under such Guaranty in form and
substance reasonably satisfactory to Lessor and deliver the same to Lessor along
with the notice specified in clause (g) below;
 
(f) Concurrently with the effective date of any such Permitted Affiliate
Transaction, Lessee shall cause its Affiliate to grant to Lessor a security
interest in form and substance reasonably satisfactory to Lessor with respect to
such Affiliate’s personal property (whether tangible or intangible) consistent
with (and subject to the same limitations and exclusions (if any) from such
grant as) the security interest granted to Lessor pursuant to Section 16.10
hereof by Lessee, in each case, as additional security for Lessee’s obligations
under this Lease and the obligations of any such Affiliate under this Lease
and/or other such Master Sublease, as applicable, and such agreement granting
such security interest shall be delivered to Lessor along with the notice
specified in clause (g) below; and
 
(g) Not less than ten (10) days prior to the effectiveness of any Permitted
Affiliate Transaction, Lessee shall notify Lessor in writing of Lessee’s
intention to enter into such Permitted Affiliate Transaction, the effective date
thereof, the facts placing the same within the provisions of this Section 24.2.2
and any other change in the address for billings and notices to the Lessee
pursuant to this Lease, accompanied by a copy of any documents and/or
instruments required under the provisions of this Section 24.2.2, and Lessee
shall deliver to Lessor executed copies of such documents and/or instruments on
or prior to the effective date thereof.
 

 
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ARTICLE XXV.                                
 
        25.1 Officer’s Certificates and Financial Statements.
 
25.1.1 Officer’s Certificate.  At any time and from time to time upon Lessee’s
receipt of not less than ten (10) days’ prior written request by Lessor, Lessee
shall furnish to Lessor an Officer’s Certificate certifying (i) that this Lease
is unmodified and in full force and effect, or that this Lease is in full force
and effect as modified and setting forth the modifications; (ii) the dates to
which the Rent has been paid; (iii) whether or not, to the best knowledge of
Lessee, Lessor is in default in the performance of any covenant, agreement or
condition contained in this Lease and, if so, specifying each such default of
which Lessee may have knowledge; and (iv) responses to such other questions or
statements of fact as Lessor, any ground or underlying lessor, any purchaser or
any current or prospective Facility Mortgagee shall reasonably
request.  Lessee’s failure to deliver such statement within such time shall
constitute an acknowledgement by Lessee that (x) this Lease is unmodified and in
full force and effect except as may be represented to the contrary by Lessor;
(y) Lessor is not in default in the performance of any covenant, agreement or
condition contained in this Lease; and (z) the other matters set forth in such
request, if any, are true and correct.  Any such certificate furnished pursuant
to this Article may be relied upon by Lessor and any current or prospective
Facility Mortgagee, ground or underlying lessor or purchaser of the Leased
Property.
 
25.1.2 Statements.  Lessee shall furnish the following statements to Lessor:
 
(a) within 120 days after the end of each of Lessee’s and each Guarantor’s (if
any) fiscal years, a copy of the audited consolidated balance sheets of Lessee,
its consolidated Subsidiaries and each Guarantor (if any) as of the end of such
fiscal year, and related audited consolidated statements of income, changes in
common stock and other stockholders’ equity and changes in the financial
position of Lessee, its consolidated Subsidiaries and each Guarantor (if any)
for such fiscal year, prepared in accordance with GAAP applied on a basis
consistently maintained throughout the period involved, such consolidated
financial statements to be certified by nationally recognized certified public
accountants;
 
(b) within 120 days after the end of each of Lessee’s and each Guarantor’s (if
any) fiscal years, and together with the annual audit report furnished in
accordance with clause (a) above, an Officer’s Certificate stating that to the
best of the signer’s knowledge and belief after making due inquiry, Lessee is
not in default in the performance or observance of any of the terms of this
Lease, or if Lessee shall be in default, specifying all such defaults, the
nature thereof, and the steps being taken to remedy the same;
 
(c) within thirty (30) days after the end of each calendar month, all monthly
financial reports Lessee produces for reporting purposes and detailed statements
of income and detailed operational statistics regarding occupancy rates, patient
and resident mix and patient and resident rates by type for each Facility for
each such calendar month;
 

 
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(d) within 120 days after the end of each of Lessee’s fiscal years, a copy of
each cost report filed with the appropriate governmental agency for each
Facility;
 
(e) within forty-five (45) days after the end of each fiscal quarter (other than
the last fiscal quarter during any fiscal year of the applicable Person), Lessee
shall furnish to Lessor (i) a copy of the unaudited consolidated balance sheets
of Lessee, each Guarantor (if any) and their respective consolidated
Subsidiaries as of the end of such fiscal quarter, and related unaudited
consolidated statements, changes in common stock and other stockholders’ equity
and changes in the financial position of Lessee, each Guarantor (if any) and
their respective consolidated Subsidiaries for such fiscal quarter, and (ii) a
statement of income of Lessee, each Guarantor (if any) and their respective
consolidated Subsidiaries that sets forth the results for both such fiscal
quarter and year-to-date, in all cases prepared in accordance with GAAP applied
on a basis consistently maintained throughout the applicable period;
 
(f) not later than fifteen (15) days before the end of each calendar year during
the Term, a capital expenditure and operations budget for the next calendar year
for each Facility, setting forth an estimate, on a monthly basis, of Gross
Revenues, together with an explanation of anticipated changes to resident
charges, payroll rates and positions, non-wage cost increases, and all other
factors differing from the current calendar year;
 
(g) within thirty (30) days after they are required to be filed with the SEC,
copies of any annual reports and of information, documents and other reports, or
copies of such portions of any of the foregoing as the SEC may prescribe, which
Lessee is required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934;
 
(h) immediately upon Lessee’s receipt thereof, copies of all written
communications received by Lessee from any regulatory agency relating to
(i) surveys of any Facility for purposes of licensure, Medicare and Medicaid
certification and accreditation and (ii) any proceeding, formal or informal,
with respect to cited deficiencies with respect to services and activities
provided and performed at any Facility, including patient and resident care,
patient and resident activities, patient and resident therapy, dietary, medical
records, drugs and medicines, supplies, housekeeping and maintenance, or the
condition of such Facility, and involving an actual or threatened warning,
imposition of a fine or a penalty, or suspension, termination or revocation of
such Facility’s license to be operated in accordance with its Primary Intended
Use;
 
(i) [Intentionally Omitted];
 
(j) immediately upon Lessee’s receipt thereof, copies of all claims, reports,
complaints, notices, warnings or asserted violations relating in any way to the
Leased Property or any Capital Additions or Lessee’s use thereof; and
 
(k) with reasonable promptness, such other information respecting (i) the
financial and operational condition and affairs of Lessee, any Guarantor and
 

 
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each Facility, (ii) the physical condition of the Leased Property and any
Capital Addition thereto and (iii) any suspected Transfer, in each case as
Lessor or any Facility Mortgagee may reasonably request, in the form of a
questionnaire or otherwise, from time to time.
 
25.1.3 Charges.  Lessee acknowledges that the failure to furnish Lessor with any
of the certificates or statements required by this Article XXV will cause Lessor
to incur costs and expenses not contemplated hereunder, the exact amount of
which is presently anticipated to be extremely difficult to
ascertain.  Accordingly, if Lessee fails to furnish Lessor with any of the
certificates or statements required by this Article XXV, Lessee shall pay to
Lessor upon demand $1,000 for each such failure as Additional Charges.  The
parties agree that this charge represents a fair and reasonable estimate of the
costs that Lessor will incur by reason of Lessee’s failure to furnish Lessor
with such certificates and statements.
 
25.1.4 Lessee’s Submission of Certificates/Statements.  Lessee shall be
obligated to furnish Lessor with all certificates and statements required under
this Article XXV by (i) delivery of printed copies of the same to Lessor at its
address set forth in Article XXXIII below or any other address that Lessor may
from time to time designate in writing and (ii) electronic delivery of the same
to Lessor in Microsoft® Office Excel format (or such other format as Lessor may
from time to time reasonably require) at any electronic mail address that Lessor
may from time to time designate in writing.
 
ARTICLE XXVI.                                
 
26.1 Lessor’s Right to Inspect and Show the Leased Property.  Lessee shall
permit Lessor and its authorized representatives upon two (2) Business Days’
prior notice to (i) inspect the Leased Property of any Facility and any Capital
Addition thereto and (ii) exhibit the same to prospective purchasers and
lenders, and during the last twelve (12) months of the Term, to prospective
lessees or managers, in each instance during usual business hours and subject to
any reasonable security, health, safety or confidentiality requirements of
Lessee or any Legal Requirement or Insurance Requirement.  Lessee shall
cooperate with Lessor in exhibiting the Leased Property of any Facility and any
Capital Additions thereto to prospective purchasers, lenders, lessees and
managers.
 
ARTICLE XXVII.                                
 
27.1 No Waiver.  No failure by Lessor to insist upon the strict performance of
any term hereof or to exercise any right, power or remedy hereunder and no
acceptance of full or partial payment of Rent during the continuance of any
default or Event of Default shall constitute a waiver of any such breach or of
any such term.  No waiver of any breach shall affect or alter this Lease, which
shall continue in full force and effect with respect to any other then existing
or subsequent breach.
 
ARTICLE XXVIII.                                
 
28.1 Remedies Cumulative.  Each legal, equitable or contractual right, power and
remedy of Lessor now or hereafter provided either in this Lease or by statute or
otherwise shall be cumulative and concurrent and shall be in addition to every
other right, power and remedy and the exercise or beginning of the exercise by
Lessor of any one or more of such
 

 
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rights, powers and remedies shall not preclude the simultaneous or subsequent
exercise by Lessor of any or all of such other rights, powers and remedies.
 
ARTICLE XXIX.                                
 
        29.1 Acceptance of Surrender.  No surrender to Lessor of this Lease or
of the Leased Property or any Capital Additions or any part(s) thereof or of any
interest therein, shall be valid or effective unless agreed to and accepted in
writing by Lessor and no act by Lessor or any representative or agent of Lessor,
other than such a written acceptance by Lessor, shall constitute an acceptance
of any such surrender.
 
ARTICLE XXX.                                
 
30.1 No Merger. There shall be no merger of this Lease or of the leasehold
estate created hereby by reason of the fact that the same Person may acquire,
own or hold, directly or indirectly, (i) this Lease or the leasehold estate
created hereby or any interest in this Lease or such leasehold estate and (ii)
the fee estate in the Leased Property or any part(s) thereof.
 
ARTICLE XXXI.                                
 
31.1 Conveyance by Lessor.  If Lessor or any successor owner of the Leased
Property shall convey the Leased Property other than as security for a debt,
Lessor or such successor owner, as the case may be, shall thereupon be released
from all future liabilities and obligations of the Lessor under this Lease
arising or accruing from and after the date of such conveyance or other transfer
and all such future liabilities and obligations shall thereupon be binding upon
the new owner.
 
31.2 New Lease.  Lessor shall have the right, in connection with any Separation
Event during the Term for any purpose, by written notice to Lessee, to require
Lessee to execute an amendment to this Lease whereby the Leased Property of one
or more Facilities affected by such Separation Event (individually, a “Separated
Property” or collectively, the “Separated Properties”) is separated and removed
from this Lease, and to simultaneously execute a substitute lease with respect
to such Separated Property(ies), in which case:
 
31.2.1 Lessor and Lessee shall execute a new lease (the “New Lease”) for such
Separated Property(ies), effective as of the date specified in Section 31.2.3.
below (the “New Lease Effective Date”), in the same form and substance as this
Lease, but with such changes thereto as necessary to reflect the separation of
the Separated Property(ies) from the balance of the Leased Property, including
specifically the following:
 
(a) The total monthly Minimum Rent and Additional Rent payable under such New
Lease shall be the total applicable monthly Allocated Minimum Rent and Allocated
Additional Rent with respect to such Separated Property(ies);
 
(b) All Minimum Rent and Additional Rent rental escalations under such New Lease
shall be at the times and in the amounts set forth in this Lease for Minimum
Rent and Additional Rent increases for the applicable Separated Property(ies);
 

 
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(c) The Minimum Purchase Option Price payable under such New Lease shall be the
aggregate of the Allocated Minimum Purchase Price for such Separated
Property(ies); and
 
(d) Such New Lease shall provide that the lessee thereunder shall be responsible
for the payment, performance and satisfaction of all duties, obligations and
liabilities arising under this Lease, insofar as they relate to the Separated
Property(ies), that were not paid, performed and satisfied in full prior to the
effective date of such New Lease (and Lessee under this Lease shall also be
responsible for the payment, performance and satisfaction of the aforesaid
duties, obligations and liabilities not paid, performed and satisfied in full
prior to the effective date of such New Lease).
 
31.2.2 Lessor and Lessee shall also execute an amendment to this Lease effective
as of such New Lease Effective Date reflecting the separation of the Separated
Property(ies) from the balance of the Leased Property and making such
modifications to this Lease as are necessitated thereby.
 
31.2.3 In the case of any New Lease that is entered into in accordance with this
Section 31.2 such New Lease shall be effective on the date which is the earlier
of (i) the date such New Lease is fully executed and delivered by the parties
thereto and (ii) the date specified in the written notice from Lessor to Lessee
requiring such New Lease as described above, which date shall be no sooner than
ten (10) days after the date such notice is issued.
 
31.2.4 Lessee and Lessor shall take such actions and execute and deliver such
documents, including without limitation such New Lease and an amendment to this
Lease, as are reasonably necessary and appropriate to effectuate the provisions
and intent of this Section 31.2.
 
31.2.5 Each party shall bear its own costs and expenses in connection with any
such New Lease entered into in accordance with this Section 31.2.
 
ARTICLE XXXII.                                
 
32.1 Quiet Enjoyment.  So long as Lessee shall pay the Rent as the same becomes
due and shall fully comply with all of the terms of this Lease and fully perform
its obligations hereunder, Lessee shall peaceably and quietly have, hold and
enjoy the Leased Property of each Facility for the Term, free of any claim or
other action by Lessor or anyone claiming by, through or under Lessor, but
subject to all liens and encumbrances of record as of the Commencement Date or
created thereafter as permitted hereunder or thereafter consented to by
Lessee.  No failure by Lessor to comply with the foregoing covenant shall give
Lessee any right to cancel or terminate this Lease or abate, reduce or make a
deduction from or offset against the Rent or any other sum payable under this
Lease, or to fail to perform any other obligation of Lessee
hereunder.  Notwithstanding the foregoing, Lessee shall have the right, by
separate and independent action to pursue any claim it may have against Lessor
as a result of a breach by Lessor of the covenant of quiet enjoyment contained
in this Article.
 

 
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ARTICLE XXXIII.                                
 
33.1 Notices.  Any notice, consent, approval, demand or other communication
required or permitted to be given hereunder (a “notice”) must be in writing and
may be served personally or by U.S. Mail.  If served by U.S. Mail, it shall be
addressed as follows:
 
 
If to Lessor

 
 
or Collateral Agent:
c/o HCP, Inc.

 
 
3760 Kilroy Airport Way, Suite 300

 
 
Long Beach, California 90806

 
 
Attn:  Legal Department

 
 
Fax:  (562) 733-5200

 
 
with a copy to:
Latham & Watkins LLP

 
 
650 Town Center Drive, 20th Floor

 
 
Costa Mesa, California 92626

 
 
Attn:  David C. Meckler, Esq.

 
 
Fax:  (714) 755-8290

 
 
If to Lessee:
Emeritus Corporation

 
 
3131 Elliott Avenue, Suite 500

 
 
Seattle, Washington 98121

 
 
Attn:  Eric Mendelsohn

 
 
Fax:  (206) 357-7388

 
 
with a copy to:
Riddell Williams P.S.

 
 
1001 Fourth Avenue, Suite 4500

 
 
Seattle, Washington 98154

 
 
Attn:  David D. Buck, Esq.

 
 
Fax:  (206) 389-1708

 
Any notice which is personally served shall be effective upon the date of
service; any notice given by U.S. Mail shall be deemed effectively given, if
deposited in the United States Mail, registered or certified with return receipt
requested, postage prepaid and addressed as provided above, on the date of
receipt, refusal or non-delivery indicated on the return receipt.  In lieu of
notice by U.S. Mail, either party may send notices by facsimile or by a
nationally recognized overnight courier service which provides written proof of
delivery (such as U.P.S. or Federal Express).  Any notice sent by facsimile
shall be effective upon confirmation of receipt in legible form, and any notice
sent by a nationally recognized overnight courier shall be effective on the date
of delivery to the party at its address specified above as set forth in the
courier’s delivery receipt.  Either party may, by notice to the other from time
to time in the manner herein provided, specify a different address for notice
purposes.
 
ARTICLE XXXIV.                                
 
34.1 Appraiser.  If it becomes necessary to determine the Fair Market Value,
Fair Market Rental or Leasehold FMV of any Facility for any purpose of this
Lease, the same
 

 
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shall be determined by an independent appraisal firm, in which one or more of
the members, officers or principals of such firm are Members of the Appraisal
Institute (or any successor organization thereto), as may be reasonably selected
by Lessor (the “Appraiser”).  Lessor shall cause such Appraiser to determine the
Fair Market Value, Fair Market Rental or Leasehold FMV of such Facility as of
the relevant date (giving effect to the impact, if any, of inflation from the
date of the Appraiser’s decision to the relevant date) and the determination of
such Appraiser shall be final and binding upon the parties.  A written report of
such Appraiser shall be delivered and addressed to each of Lessor and
Lessee.  To the extent consistent with sound appraisal practice as then existing
at the time of any such appraisal, an appraisal of Fair Market Value for
purposes of this Lease shall take into account and shall give appropriate
consideration to all three customary methods of appraisal (i.e., the cost
approach, the sales comparison approach and the income approach), and no one
method or approach shall be deemed conclusive simply by reason of the nature of
Lessor’s business or because such approach may have been used for purposes of
determining the fair market value of such Facility at the time of acquisition
thereof by Lessor.  This provision for determination by appraisal shall be
specifically enforceable to the extent such remedy is available under applicable
law, and any determination hereunder shall be final and binding upon the parties
except as otherwise provided by applicable law.  Lessor and Lessee shall each
pay one-half (1/2) of the fees and expenses of the Appraiser and one-half (1/2)
of all other costs and expenses incurred in connection with such appraisal.
 
ARTICLE XXXV.                                
 
35.1 Lessee’s Option to Purchase the Leased Property.  Provided no Event of
Default, or event which, with notice or lapse of time or both, would constitute
an Event of Default, has occurred and is continuing hereunder then Lessee shall
have the option to purchase the Leased Property of all (but not less than all)
of the Purchase Option Facilities then subject to the terms of this Lease and
any Purchase Option Facility(ies) subject to a New Lease hereafter with or in
favor of Lessor or any Affiliate of Lessor upon the expiration of the tenth
(10th) Lease Year of the Fixed Term and at any point thereafter prior to the
Fixed Term Expiration date (the “Option Period”), at the Purchase Option
Price.  Lessee may exercise such option to purchase the Leased Property of all
(but not less than all) of the Purchase Option Facilities then subject to the
terms of this Lease and any Purchase Option Facility(ies) subject to a New Lease
hereafter with or in favor of Lessor or any Affiliate of Lessor by (i) opening
an escrow (the “Escrow”) by depositing either (1) cash or (2) a letter of credit
from a financial institution and in form in each case acceptable to Lessor, the
sum  (the “Opening Deposit”) of Two and One-Half Percent (2½%) of the Minimum
Purchase Option Price (determined on the date of the Opening Deposit) and a copy
of this Lease and each New Lease covering any Purchase Option Facility(ies) with
a national title company reasonably acceptable to Lessor (“Escrow Holder”), (ii)
giving written notice to Lessor of such deposit with Escrow Holder (the “Option
Exercise Notice”) and specifying the date on which Lessee shall acquire the
Leased Property of all (but not less than all) of the Purchase Option Facilities
then subject to the terms of this Lease and any Purchase Option Facility(ies)
subject to a New Lease hereafter with or in favor of Lessor or any Affiliate of
Lessor (the “Purchase Option Closing Date”), which Purchase Option Closing Date
shall not be (A) earlier than twelve (12) months following the date of Lessee's
notice or (B) later than the Fixed Term Expiration Date, and (iii) if
applicable, delivering to Lessor concurrent with the Option Exercise Notice a
reaffirmation of each Guaranty executed by the applicable Guarantor stating, in
substance, that such Guarantors’ obligations under such Guaranty shall extend to
the
 

 
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purchase contract formed by Lessor and Lessee upon proper and timely exercise of
such option.  For the avoidance of doubt, Lessor and Lessee agree that, if
Lessee desires to exercise its purchase option as herein provided and acquire
the Leased Property on the Fixed Term Expiration Date, Lessee shall deliver
notice of such exercise to Lessor and satisfy the other conditions set forth
herein, no later than twelve (12) months prior to the Fixed Term Expiration
Date.  If Lessee shall not be entitled to exercise such option (e.g., by reason
of an Event of Default) or shall be entitled to exercise the same but shall fail
to do so within the time and in the manner herein provided, such option shall
lapse and thereafter not be exercisable by Lessee.  No failure by Lessor to
notify Lessee of any defect in any attempted exercise of the foregoing option
shall be deemed a waiver by Lessor of the right to insist upon Lessee’s exercise
of such option in strict accordance with the provisions hereof.  In the event
that Lessee shall properly and timely exercise such option, then such
transaction shall be consummated on the applicable Purchase Option Closing Date
(the “Outside Closing Date”).
 

Notwithstanding anything to the contrary herein, if Lessee shall be entitled to
and shall exercise its option to purchase the Leased Property of all (but not
less than all) of the Facilities then subject to this Lease and any
Facility(ies) subject to a New Lease pursuant to this Section 35.1, Lessee shall
have a one-time right to cancel and rescind in writing to Lessor Lessee’s
exercise of the same within ten (10) Business Days after the Purchase Option
Price is “finally determined”; provided, however, that in no event shall Lessee
be entitled to exercise such right of cancellation and rescission less than
twelve (12) months prior to the Fixed Term Expiration Date, irrespective of
whether the Purchase Option Price has been finally determined as of such date.
For purposes of the foregoing, the Purchase Option Price shall be “finally
determined” upon the earlier of (x) the date the parties agree in writing upon
the Purchase Option Price or (y) the date the Purchase Option Price is
determined pursuant to the procedures set forth in Article XXXIV hereof and
Lessee receives notice thereof.  If Lessee is entitled to and does not elect to
cancel and rescind such purchase option within the time and manner herein
provided, then Lessee shall proceed to purchase the Leased Property of all (but
not less than all) of the Facilities then subject to this Lease and any
Facility(ies) subject to a New Lease on the applicable Purchase Option Closing
Date, at the Purchase Option Price, and otherwise in accordance with the
provisions of Article XVIII and Sections 35.2 and 35.3 hereof.  If Lessee is
entitled to and shall elect to cancel and rescind such purchase option within
the time and manner herein provided, then the following shall occur:  (1) the
purchase contract formed by Lessee’s exercise of such purchase option shall be
cancelled and terminated; (2) the Escrow opened upon such exercise shall be
cancelled and Lessee shall pay all title, Escrow and other cancellation charges
incurred or imposed in connection therewith; (3) the Opening Deposit and all
interest accrued thereon shall be returned to Lessee, notwithstanding anything
in Section 35.2(a) to the contrary; (4) Lessee shall pay all fees and expenses
of the Appraiser appointed pursuant to Article XXXIV hereof, notwithstanding
anything in such Article XXXIV to the contrary, (5) this Lease shall continue in
full force and effect in accordance with the terms hereof; and (6) all future
purchase rights or options of Lessee contained in this Section 35.1 shall
automatically terminate and lapse and Lessee shall not thereafter have any right
to purchase the Leased Property pursuant to this Section 35.1.
 

 
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     35.2 Defaults.
 
(a) Liquidated Damages.  IF, FOLLOWING A VALID AND PROPER EXERCISE OF THE
FOREGOING OPTION, LESSEE FAILS TO COMPLETE THE PURCHASE OF THE LEASED PROPERTY
AND SUCH FAILURE CONSTITUTES A BREACH HEREOF, THEN LESSOR, AT ITS OPTION, MAY
TERMINATE THE PURCHASE CONTRACT FORMED BY LESSEE’S EXERCISE OF SUCH OPTION AND
THE ESCROW BY GIVING WRITTEN NOTICE TO LESSEE AND ESCROW HOLDER AND, THEREUPON,
THE ESCROW SHALL BE CANCELLED, ALL DOCUMENTS SHALL BE RETURNED TO THE RESPECTIVE
PARTIES WHO DEPOSITED THE SAME, AND LESSEE SHALL PAY ALL TITLE AND ESCROW
CANCELLATION CHARGES AND ALL OF LESSOR’S REASONABLE LEGAL FEES AND
COSTS.  IN ADDITION, LESSOR AND LESSEE AGREE THAT, BASED ON THE CIRCUMSTANCES
NOW EXISTING, KNOWN OR UNKNOWN, IT WOULD BE EXCESSIVELY COSTLY AND IMPRACTICABLE
TO ESTABLISH LESSOR’S DAMAGES BY REASON OF LESSEE’S DEFAULT RESULTING IN A
FAILURE OF THE ESCROW TO CLOSE, AND, THEREFORE, LESSOR AND LESSEE AGREE THAT IT
WOULD BE REASONABLE TO AWARD LESSOR LIQUIDATED DAMAGES IN THE AMOUNT OF THE
OPENING DEPOSIT PLUS ANY ACCRUED INTEREST ON THE OPENING DEPOSIT.  BY THEIR
RESPECTIVE INITIALS SET FORTH BELOW, LESSOR AND LESSEE ACKNOWLEDGE AND AGREE
THAT THE OPENING DEPOSIT, PLUS ANY INTEREST ACCRUED ON THE OPENING DEPOSIT,
TOGETHER WITH PAYMENT OF LESSOR’S LEGAL FEES AND COSTS, IS REASONABLE AS
LIQUIDATED DAMAGES FOR A DEFAULT OF LESSEE UNDER THE PURCHASE CONTRACT FORMED BY
LESSEE’S EXERCISE OF SUCH OPTION  THAT RESULTS IN A FAILURE OF THE ESCROW TO
CLOSE AND SHALL BE IN LIEU OF ANY OTHER RELIEF, RIGHT OR REMEDY, AT LAW OR IN
EQUITY, TO WHICH LESSOR MIGHT OTHERWISE BE ENTITLED BY REASON OF A LESSEE’S
DEFAULT THAT RESULTS IN A FAILURE OF THE ESCROW TO CLOSE, BUT NOTHING CONTAINED
HEREIN SHALL LIMIT LESSOR’S RIGHTS AND REMEDIES FOR LESSEE’S DEFAULT OCCURRING
AFTER THE CLOSE OF ESCROW OR FOR LESSEE’S DEFAULT UNDER THIS LEASE.  ESCROW
HOLDER IS HEREBY AUTHORIZED AND INSTRUCTED TO RELEASE THE OPENING DEPOSIT PLUS
ACCRUED INTEREST THEREON TO LESSOR UPON THE DELIVERY OF UNILATERAL WRITTEN
INSTRUCTIONS THEREOF TO ESCROW HOLDER BY LESSOR AND ABSENT ANY OBJECTION ON THE
PART OF LESSEE THERETO, AND ESCROW HOLDER IS HEREBY RELIEVED OF ALL LIABILITY
THEREFOR.  IF LESSEE ATTEMPTS TO INTERFERE WITH THE RELEASE OF ANY SUCH SUMS BY
ESCROW HOLDER TO LESSOR, OR COMMENCES ANY ACTION AGAINST LESSOR OR THE LEASED
PROPERTY ARISING OUT OF THIS ARTICLE, THEN LESSOR SHALL NOT BE LIMITED IN THE
AMOUNT OF DAMAGES IT MAY RECOVER FROM LESSEE.
 
Lessor’s Initials:                                /s/ SMT
 
Lessee’s Initials:                                /s/ EM
 
(b) Other Defaults by Lessee or its Affiliates.  A default under any other lease
or other agreement or instrument, including any purchase contract formed upon
 

 
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exercise of any other option, with or in favor of Lessor or any Affiliate of
Lessor and made by or with Lessee or any Affiliate of Lessee where such default
is not cured within the applicable time period, if any, shall be deemed a
default under this Article XXXV and the purchase contract formed upon proper
exercise by Lessee of the option herein provided, entitling Lessor, as seller,
at its option, to terminate such purchase contract and the Escrow and upon any
such termination the Opening Deposit plus all accrued interest thereon shall be
paid over to Lessor as provided in Section 35.2(a) above.
 
(c) Defaults by Lessor.  Subject to the provisions of Article XXXIX, if
following a valid and proper exercise of the foregoing option to purchase the
Leased Property of the Facilities, Lessor fails to complete the sale of the
Leased Property of the Facilities at the time required herein, Lessee shall have
the right to seek specific performance of the provisions of this Article XXXV.
 
          35.3 Escrow Provisions.
 
(a) Opening of Escrow.  Escrow shall be deemed open when the Opening Deposit and
a copy of this Lease are delivered to Escrow Holder.
 
(b) General and Supplemental Instructions.  Lessee and Lessor each shall
execute, deliver and be bound by such further escrow instructions or other
instruments as may be reasonably requested by the other party or by Escrow
Holder from time to time, so long as the same are consistent with the provisions
of this Lease.
 
(c) Disposition of Opening Deposits.  Escrow Holder shall hold the Opening
Deposit in interest-bearing accounts.  All interest earned on the Opening
Deposit shall accrue to Lessee’s benefit unless Lessor is entitled thereto under
Section 35.2(a).  With full knowledge that Escrow shall not have closed, Lessee
nevertheless agrees to relieve Escrow Holder of all liabilities in making such
payment and for any failure to recover said sum in the event that Escrow does
not close at anytime thereafter; provided, however, that the foregoing release
shall not extend to any willful misconduct by Escrow Holder or any negligent
acts by Escrow Holder or other acts by Escrow Holder that are inconsistent with
the terms of this Article XXXV.  The Opening Deposit plus interest thereon shall
be (i) applied against the Purchase Option Price if Escrow closes, (ii) returned
to Lessee in full if Escrow does not close for any reason other than Lessee’s
default, or (iii) be paid to Lessor as nonrefundable liquidated damages under
Section 35.2(a), if Escrow fails to close under the provisions hereof as a
result of Lessee’s default.
 
(d) Closing Funds.  Prior to the Close of Escrow (as hereinafter defined),
Escrow Holder shall calculate and Lessee shall wire cash into Escrow (using
wiring instructions reasonably satisfactory to Escrow Holder) in an amount
which, when added to the Opening Deposit and all accrued interest shall equal
the Purchase Option Price for the Leased Property plus any other sums payable by
Lessee pursuant to the provisions hereof.
 
(e) Close of Escrow.  Escrow shall close on the Outside Closing Date.  The term
“Close of Escrow” as used in this Article shall mean the time and date that an
appropriate deed or other conveyance document conveying Lessor’s entire interest
in the Leased Property, subject to the permitted liens and encumbrances
described in Article XVIII hereof, is
 

 
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recorded in appropriate records of the county in which the Leased Property of
each Facility is located (or, if deeds and conveyance documents are not
customarily recorded on the day of closing in the county in which the Leased
Property of such Facility is located, then the date and time that such deed or
other conveyance document is delivered or deemed delivered to Lessee).  The
Outside Closing Date shall not be extended for any reason.
 
(f) Closing Costs.  The closing costs of consummating the purchase of the Leased
Property shall be paid by Lessee as provided in Article XVIII.
 
35.4 Assurances.  At any time within one hundred twenty (120) days of the
anticipated date of Close of Escrow, Lessor may request Lessee to provide
reasonable assurances that it will be able to consummate the purchase of the
Leased Property, has sufficient liquidity to pay any balance of the purchase
price owing by Lessee on the date of the Close of Escrow; provided, however,
that in no event shall Lessee be entitled to exercise such option conditioned
upon Lessee obtaining any such financing.
 
ARTICLE XXXVI.                                
 
36.1 Lessor May Grant Liens.  Without the consent of Lessee, Lessor may, from
time to time, directly or indirectly, create or otherwise cause to exist any
Facility Mortgage upon the Leased Property and any Capital Additions or any
part(s) or portion(s) thereof or interests therein.  This Lease is and at all
times shall be subject and subordinate to any Facility Mortgage which may now or
hereafter affect the Leased Property and/or any Capital Additions or any part(s)
or portion(s) thereof or interests therein and to all renewals, modifications,
consolidations, replacements and extensions thereof.  This clause shall be
self-operative and no further instrument of subordination shall be required;
provided, however, that in confirmation of such subordination, Lessee shall
execute promptly any certificate or document that Lessor or any Facility
Mortgagee may request for such purposes; provided further, however, that any
such subjection and subordination of this Lease or Lessee’s leasehold interest
hereunder to any Facility Mortgage imposed after the Effective Date shall be
conditioned upon the execution Facility Mortgagee and delivery to Lessee of a
non-disturbance and attornment agreement in form reasonably satisfactory to
Lessor, Lessee and such Facility Mortgagee and which provides, in substance,
that so long as no Event of Default has occurred, such Facility Mortgagee shall
not disturb either Lessee’s leasehold interest or possession of the Leased
Property in accordance with the terms hereof.  Lessee shall also promptly
execute and deliver to Lessor and such Facility Mortgagee such non-disturbance
and attornment agreement if requested by Lessor and/or such Facility
Mortgagee.  If, in connection with obtaining new financing or in connection with
any refinance of an existing Facility Mortgage, a Facility Mortgagee or
prospective Facility Mortgagee shall request reasonable modifications to this
Lease as a condition to such financing or refinancing, Lessee shall not withhold
or delay its consent thereto; provided, however, that Lessee shall not be
required to enter into to any modifications which increase the Minimum Rent,
Additional Rent or Additional Charges due hereunder, reduce the Term or which
otherwise, in the reasonable, good faith judgment of Lessee, would reasonably be
expected to materially and adversely affect the other rights or obligations of
Lessee hereunder.  Further, Lessee shall cooperate with Lessor in connection
with Lessor’s efforts to encumber any Facility with a Facility Mortgage and with
Lessor’s negotiations with any such prospective Facility Mortgagee.
 

 
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36.2 Attornment. If Lessor’s interest in the Leased Property and/or any Capital
Additions or any part(s) or portion(s) thereof is sold or conveyed upon the
exercise of any remedy provided for in any Facility Mortgage, or otherwise by
operation of law:  (i) at the new owner’s option, Lessee shall attorn to and
recognize the new owner as Lessee’s Lessor under this Lease or enter into a new
lease substantially in the form of this Lease with the new owner, and Lessee
shall take such actions to confirm the foregoing within ten (10) days after
request; and (ii) the new owner shall not be (a) liable for any act or omission
of Lessor under this Lease occurring prior to such sale or conveyance, (b)
subject to any offset, abatement or reduction of rent because of any default of
Lessor under this Lease occurring prior to such sale or conveyance, (c) bound by
any previous modification or amendment to this Lease or any previous prepayment
of more than one month’s rent, unless such modification, amendment or prepayment
shall have been approved in writing by such Facility Mortgagee or, in the case
of such prepayment, such prepayment of rent has actually been delivered to such
successor lessor, or (d) liable for any security deposit or other collateral
deposited or delivered to Lessor pursuant to this Lease unless such security
deposit or other collateral has actually been delivered to such successor
lessor.
 
       36.3 Compliance with Facility Mortgage Documents
 
36.3.1 With respect to any new financing or refinancing of the Leased Property
of any Facility with one or more new Facility Mortgage(s), prior to the
execution and delivery of any Facility Mortgage Documents relating thereto,
Lessor shall provide copies of the same to Lessee for Lessee’s review and, in
the event that the applicable Facility Mortgagee requests modifications to this
Lease, Lessor shall obtain Lessee’s consent thereto in accordance with Section
36.1 above.
 
36.3.2 Lessee acknowledges that any Facility Mortgage Documents executed by
Lessor will impose certain obligations on the “Borrower” thereunder to comply
with or cause the operator and/or lessee of the Facilities to comply with all
representations, covenants and warranties contained therein relating to such
Facilities and the operator and/or lessee of such Facilities, including,
covenants relating to (a) the maintenance and repair of the Facilities, (b)
maintenance and submission of financial records and accounts of the operation of
each Facility and related financial and other information regarding the operator
and/or lessee of such Facilities and the Facilities themselves, (c) the
procurement of insurance policies with respect to the Facilities and (d) without
limiting the foregoing, compliance with all Legal Requirements relating to the
Facilities and the operation thereof for their Primary Intended Use.  For so
long as any Facility Mortgages encumber the Leased Property, or any portion
thereof, Lessee covenants and agrees, at its sole cost and expense and for the
express benefit of Lessor, to operate the Facilities in strict compliance with
the terms and conditions of the Facility Mortgage Documents (other than payment
of any indebtedness evidenced or secured thereby) and to timely perform all of
the duties, covenants and obligations of Lessor and the operator and/or lessee
of such Facilities relating thereto, or to the extent that any of such duties,
covenants and/or obligations may not properly be performed by Lessee, Lessee
shall cooperate with and assist Lessor in the timely performance thereof (other
than payment of any indebtedness evidenced or secured thereby); provided,
however, that Lessor shall use good faith efforts to ensure that the duties and
obligations imposed upon Lessee by the Facility Mortgage Documents relating
thereto and
 

 
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this Section 36.3 are not materially more burdensome to Lessee than Lessee’s
obligations to Lessor under this Lease.
 
36.3.3  Without limiting Lessee’s obligations pursuant to any other provision of
this Section 36.3, during the Term of this Lease, Lessee acknowledges and agrees
that, except as expressly provided elsewhere in this Lease, it shall undertake
at its own cost and expense the performance of any and all repairs,
replacements, capital improvements, maintenance items and all other requirements
relating to the condition of each Facility which are required by any Facility
Mortgage Documents (subject to the proviso in the last sentence of Section
36.3.2 above), and Lessee shall be solely responsible and hereby covenants to
fund and maintain any and all impound, escrow or other reserve or similar
accounts required under any Facility Mortgage Documents (subject to the proviso
in the last sentence of Section 36.3.2 above) as security for or otherwise
relating to any operating expenses of the Facilities, including any capital
repair or replacement reserves and/or impounds or escrow accounts for
Impositions or insurance premiums (each a “Facility Mortgage Reserve
Account”);  provided, however, that Lessor shall request in good faith that any
Facility Mortgage not require the funding or maintenance of any Facility
Mortgage Reserve Account in connection therewith.  During the Term of this Lease
and provided that no Event of Default shall have occurred and be continuing
hereunder, Lessee shall, subject to the terms and conditions of such Facility
Mortgage Reserve Account and the requirements of the Facility Mortgagee(s)
thereunder, have access to and the right to apply or use (including for
reimbursement) to the same extent of Lessor all monies held in each such
Facility Mortgage Reserve Account for the purposes and subject to the
limitations for which such Facility Mortgage Reserve Account is maintained, and
Lessor agrees to reasonably cooperate with Lessee in connection therewith.
 
36.3.4 Notwithstanding any conflicting provision of this Lease, if any new
Facility Mortgage Documents entered into by Lessor following the Effective Date
in connection with any new financing for the Leased Property of any Facility
and/or any Capital Additions thereto, imposes additional obligations or
requirements upon Lessee that were not already obligations or requirements of
Lessee under this Lease, and Lessee’s compliance with such additional
obligations or requirements results in any additional out-of-pocket costs or
expenses to Lessee, then Lessor shall reimburse Lessee for all additional and
reasonable out-of-pocket costs or expenses incurred by Lessee in order to comply
with such additional obligations or requirements under any such new Facility
Mortgage Documents for any Facility in excess of $15,000.00 per Facility per
Lease Year; provided, however, that prior to incurring any such additional
out-of-pocket costs and expenses for any Facility, Lessee shall provide to
Lessor a written notice specifying in reasonable detail the nature of the
additional obligations or requirements imposed upon Lessee by any such new
Facility Mortgage Documents for such Facility and an estimate of the
out-of-pocket costs or expenses that Lessee anticipates it will incur connection
therewith. Upon receipt of such notice, Lessor shall have the right (but not the
obligation), at its sole cost and expense, to seek a written waiver from any
Facility Mortgagee of Lessee’s compliance with any such additional obligation(s)
or requirement(s), and, if Lessor elects to seek and thereafter obtains the
same, Lessor shall provide a copy of any such waiver received by Lessor to
Lessee and Lessee shall, during the term of any such waiver, be relieved from
complying with any such additional obligation(s) or requirement(s) with respect
to such Facility as are so waived by
 

 
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such Facility  Mortgagee.  If Lessor elects not to seek any such waiver, or is
unable to obtain the same, then Lessee shall timely observe and comply with such
additional obligation(s) or requirement(s) imposed by any such new Facility
Mortgage Documents with respect to each applicable Facility, and Lessor shall
reimburse to Lessee any amount owing by Lessor under this Section 36.3.4 within
ten (10) days after Lessee’s delivery to Lessor of reasonable documentary
evidence as to any such additional out-of-pocket costs or expenses incurred by
Lessee in excess of $15,000.00 per Facility per Lease Year.
 
ARTICLE XXXVII.                                           
 
37.1 Hazardous Substances.  Lessee shall not allow any Hazardous Substance to be
located in, on, under or about the Leased Property or incorporated in any
Facility; provided, however, that Hazardous Substances may be brought, kept,
used or disposed of in, on or about the Leased Property or any Capital Additions
of any Facility in quantities and for purposes similar to those brought, kept,
used or disposed of in, on or about similar facilities used for purposes similar
to the Primary Intended Use of such Facility or in connection with the
construction of facilities similar to such Facility and which are brought, kept,
used and disposed of in strict compliance with Legal Requirements.  Lessee shall
not allow the Leased Property or any Capital Additions to be used as a waste
disposal site or, except as permitted in the immediately preceding sentence, for
the manufacturing, handling, storage, distribution or disposal of any Hazardous
Substance.
 
37.2 Notices.  Lessee shall provide to Lessor promptly, and in any event
immediately upon Lessee’s receipt thereof, a copy of any notice, or notification
with respect to, (i) any violation of a Legal Requirement relating to Hazardous
Substances located in, on, or under the Leased Property or any Capital Additions
or any adjacent property thereto; (ii) any enforcement, cleanup, removal, or
other governmental or regulatory action instituted, completed or threatened with
respect to the Leased Property or any Capital Additions; (iii) any claim made or
threatened by any Person against Lessee or the Leased Property or any Capital
Additions relating to damage, contribution, cost recovery, compensation, loss,
or injury resulting from or claimed to result from any Hazardous Substance; and
(iv) any reports made to any federal, state or local environmental agency
arising out of or in connection with any Hazardous Substance in, on, under or
removed from the Leased Property or any Capital Additions, including any
complaints, notices, warnings or asserted violations in connection therewith.
 
37.3 Remediation.  Subject to the provisions of Section 37.6 hereof, if Lessee
becomes aware of a violation of any Legal Requirement relating to any Hazardous
Substance in, on, under or about the Leased Property or any Capital Additions or
any adjacent property thereto, or if Lessee, Lessor or the Leased Property or
any Capital Additions becomes subject to any order of any federal, state or
local agency to repair, close, detoxify, decontaminate or otherwise remediate
the Leased Property and any Capital Additions, Lessee shall immediately notify
Lessor of such event and, at its sole cost and expense, cure such violation or
effect such repair, closure, detoxification, decontamination or other
remediation.  Subject to the provisions of Section 37.6 hereof, if Lessee fails
to implement and diligently pursue any such cure, repair, closure,
detoxification, decontamination or other remediation, Lessor shall have the
right, but not the obligation, to carry out such action and to recover from
Lessee all of Lessor’s costs and expenses incurred in connection therewith.
 

 
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37.4 Indemnity.  Subject to the provisions of Section 37.6 hereof, Lessee shall
indemnify, defend, protect, save, hold harmless, and reimburse Lessor for, from
and against any and all costs, losses (including, losses of use or economic
benefit or diminution in value), liabilities, damages, assessments, lawsuits,
deficiencies, demands, claims and expenses (collectively, “Environmental Costs”)
(whether or not arising out of third-party claims and regardless of whether
liability without fault is imposed, or sought to be imposed, on Lessor) incurred
in connection with, arising out of, resulting from or incident to, directly or
indirectly, before or during the Term (i) the production, use, generation,
storage, treatment, transporting, disposal, discharge, release or other handling
or disposition of any Hazardous Substances from, in, on or about the Leased
Property or any Capital Additions or any part(s) or portion(s) thereof
(collectively, “Handling”), including the effects of such Handling of any
Hazardous Substances on any Person or property within or outside the boundaries
of the Leased Property or any Capital Additions, (ii) the presence of any
Hazardous Substances in, on, under or about the Leased Property or any Capital
Additions or any part(s) or portion(s) thereof and (iii) the violation of any
Legal Requirements (including Environmental Laws).  “Environmental Costs”
include interest, costs of response, removal, remedial action, containment,
cleanup, investigation, design, engineering and construction, damages (including
actual, consequential and punitive damages) for personal injuries and for injury
to, destruction of or loss of property or natural resources, relocation or
replacement costs, penalties, fines, charges or expenses, attorney’s fees,
expert fees, consultation fees, and court costs, and all amounts paid in
investigating, defending or settling any of the foregoing.
 
Without limiting the scope or generality of the foregoing, but subject to the
provisions of Section 37.6 hereof, Lessee expressly agrees to reimburse Lessor
for any and all costs and expenses incurred by Lessor:
 
(a) In investigating any and all matters relating to the Handling of any
Hazardous Substances, in, on, from, under or about the Leased Property or any
Capital Additions or any part(s) or portion(s) thereof;
 
(b) In bringing the Leased Property or any Capital Additions into compliance
with all Legal Requirements; and
 
(c) Removing, treating, storing, transporting, cleaning-up and/or disposing of
any Hazardous Substances used, stored, generated, released or disposed of in,
on, from, under or about the Leased Property or any Capital Additions or any
part(s) or portion(s) thereof or offsite.
 
If any claim is made hereunder, Lessee agrees to pay such claim promptly, and in
any event to pay such claim within thirty (30) calendar days after receipt by
Lessee of notice thereof.  If any such claim is not so paid and Lessor is
ultimately found or agrees to be responsible therefore, Lessee agrees also to
pay interest on the amount paid from the date of the first notice of such claim,
at the Overdue Rate.
 
37.5 Environmental Inspection.  Lessor shall have the right, from time to time,
and upon not less than five (5) days’ written notice to Lessee, except in the
case of an emergency in which event no notice shall be required, to conduct an
inspection of the Leased Property and
 

 
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all Capital Additions or any part(s) or portion(s) thereof at any reasonable
time to determine the existence or presence of Hazardous Substances on or about
such Leased Property or any such Capital Additions, if Lessor has reasonable
belief to suspect that Lessee has not fully complied with the terms of this
Article XXXVII.  Lessor shall have the right to enter and inspect the Leased
Property and all Capital Additions, conduct any testing, sampling and analyses
it deems necessary and shall have the right to inspect materials brought into
the Leased Property or any such Capital Additions; provided, however, that
Lessor shall (i) conduct its activities on the Leased Property or any such
Capital Additions pursuant to the terms of this Section 37.5 in a commercially
reasonable manner designed to minimize the impact of such activities on Lessee’s
operation of the applicable Facility, (ii) restore the Leased Property and any
such Capital Additions to substantially the same condition as existed
immediately prior to Lessor’s inspection thereof and (iii) indemnify, defend,
protect, save, hold harmless, and reimburse Lessee for, from and against any and
all loss, cost or expense, including costs and reasonable legal fees, arising
out of any damage to persons or property occurring in or about the Leased
Property and any such Capital Additions, or any liens filed against the Leased
Property or any such Capital Additions, in either case resulting directly from
Lessor’s inspection of the Leased Property and any such Capital Additions
pursuant to the terms of this Section 37.5.  Lessor may, in its discretion,
retain such experts to conduct the inspection, perform the tests referred to
herein, and to prepare a written report in connection therewith.  All costs and
expenses incurred by Lessor under this Section shall be paid on demand as
Additional Charges by Lessee to Lessor.  Failure to conduct an environmental
inspection or to detect unfavorable conditions if such inspection is conducted
shall in no fashion be intended as a release of any liability for environmental
conditions subsequently determined to be associated with or to have occurred
during Lessee’s tenancy.  Lessee shall remain liable for any environmental
condition related to or having occurred during its tenancy regardless of when
such conditions are discovered and regardless of whether or not Lessor conducts
an environmental inspection at the termination of the Lease.  The obligations
set forth in this Article shall survive the expiration or earlier termination of
the Lease.
 
37.6 Pre-Existing Environmental Conditions.  Notwithstanding anything to the
contrary in this Lease, including this Article XXXVII, Lessee shall have no
responsibility (whether as to performance or payment of costs) or any other
liability (a) to cure, repair, remove, close, detoxify, decontaminate or
otherwise to commence or complete any other remediation with respect to any
Pre-Existing Environmental Condition, or (b) to indemnify, defend, protect,
save, hold harmless or reimburse Lessor for, from or against any Environmental
Costs or other liabilities arising out of, resulting from or incident to, any
Pre-Existing Environmental Condition, unless the need for such cure, repair,
removal, closure, detoxification, decontamination or other remediation with
respect to any Pre-Existing Environmental Condition or any such Environmental
Costs associated therewith result directly from or arise directly out of any
actions of Lessee, its Affiliates, Occupants, employees, agents or contractors
that exacerbate any Pre-Existing Environmental Condition, in which case the
provisions of this Article XXXVII shall apply to the extent of any such
exacerbation.  In no event, however, shall the foregoing exculpation of Lessee
from any such responsibility or liability for any Pre-Existing Environmental
Conditions be deemed or construed to be an agreement by Lessor to assume or
otherwise be responsible for the same or to otherwise indemnify, defend,
protect, save, hold harmless or reimburse Lessee for, from or against any
Environmental Costs or other liabilities associated therewith.  If, however, a
claim or action is brought by a third party or governmental entity against
either Lessor or Lessee for any Pre-Existing Environmental Condition, Lessor
 

 
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hereby agrees to pursue in good faith any and all rights and claims (including
any right or claim to indemnification or defense) that Lessor may have (or, at
the option of Lessor, to assign such rights to Lessee to the extent the same are
assignable) against any third party responsible for any such Pre-Existing
Environmental Condition, including any such rights or claims that Lessor may
have against Current Lessees or Current Manager under the Current Leases or the
Current Management Agreements or otherwise.
 
ARTICLE XXXVIII.                                           
 
38.1 Memorandum of Lease.  Lessor and Lessee shall, promptly upon the request of
either, enter into one or more short form memoranda of this Lease, in form
suitable for recording under the laws of the applicable State.  Lessee shall pay
all costs and expenses of recording any such memoranda.  Lessee covenants and
agrees, both on its own behalf and on behalf of its successors and assigns to
execute a quitclaim deed or other recordable instrument sufficient to remove any
such memoranda from record title to the Land upon the expiration of sooner
termination of this Lease and appoints and constitutes Lessor its
attorney-in-fact, which power shall be coupled with an interest and shall not be
recoverable or terminable, to execute and deliver and to record such quitclaim
deed or other instrument in the name of Lessee upon the expiration or
termination of the Term.
 
ARTICLE XXXIX.                                
 
39.1 Sale of Assets.  Notwithstanding any other provision of this Lease, Lessor
shall not be required to (i) sell or transfer the Leased Property, or any
portion thereof, which is a real estate asset as defined in Section
856(c)(5)(B), or functionally equivalent successor provision, of the Code, to
Lessee if Lessor’s counsel advises Lessor that such sale or transfer may not be
a sale of property described in Section 857(b)(6)(C), or functionally equivalent
successor provision, of the Code or (ii) sell or transfer the Leased Property,
or any portion thereof, to Lessee if Lessor’s counsel advises Lessor that such
sale or transfer could result in an unacceptable amount of gross income for
purposes of the Ninety-Five percent (95%) gross income test contained in Section
856(c)(2), or functionally equivalent successor provision, of the Code.  If
Lessee has the right or obligation to purchase the Leased Property or any
portion thereof pursuant to the terms herein, and if Lessor determines not to
sell such Leased Property or any portion thereof pursuant to the above sentence,
then Lessee shall purchase such Leased Property or any portion thereof, upon and
subject to all applicable terms and conditions set forth in this Lease,
including the provisions of Article XXXV, at such time as the transaction, upon
the advice of Lessor’s counsel, would be a sale of property (to the extent the
Leased Property is a real estate asset) described in Section 857(b)(6)(C), or
functionally equivalent successor provision, of the Code, and would not result
in an unacceptable amount of gross income for purposes of the Ninety-Five
Percent (95%) gross income test contained in Section 856(c)(2), or functionally
equivalent successor provision of the Code and until such time Lessee shall
lease the Leased Property and all Capital Additions from Lessor at the Fair
Market Rental.
 
ARTICLE XL.                                
 
40.1 Subdivision.  If the Land is in excess of that which is required to operate
any Facility in accordance with its Primary Intended Use, Lessor may, with
Lessee’s prior
 

 
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consent, which consent shall not be unreasonably withheld, conditioned or
delayed, subdivide the Land and amend this Lease and the legal description
attached hereto as Exhibit A such that the Land contains only so much of the
Land as is necessary to operate such Facility in accordance with its Primary
Intended Use.  If Lessor subdivides the Land relating to any Facility there
shall be no change in the Rent payable hereunder.  After any such subdivision,
Lessee shall have no rights to any land which is no longer part of the Leased
Property and Lessor may sell, lease or develop any land which is no longer part
of the Leased Property; provided, however, that Lessor will not develop or allow
such land to be used for any purpose that would materially adversely affect
Lessee’s use of such Facility, including, without limitation, as a facility or
institution providing services or similar goods to those provided in connection
with such Facility and its Primary Intended Use.  If Lessor elects to subdivide
the Land Lessee shall cooperate with Lessor and take all actions reasonably
requested by Lessor to effect such subdivision.
 
ARTICLE XLI.                                
 
41.1 Certain Representations and Warranties by Lessee.  Lessee represents and
warrants to Lessor as follows:
 
(a) Lessee is duly organized, validly existing and in good standing under the
laws of its state of organization/formation, is qualified to do business and in
good standing in the State and has full power, authority and legal right to
execute and deliver and to perform and observe the provisions of this Lease to
be observed and/or performed by Lessee.
 
(b) This Lease has been duly authorized, executed and delivered by Lessee, and
constitutes and will constitute the valid and binding obligations of Lessee
enforceable against Lessee in accordance with its terms, except as such
enforceability may be limited by creditors rights, laws and general principles
of equity.
 
(c) Lessee is solvent, has timely and accurately filed all tax returns required
to be filed by Lessee, and is not in default in the payment of any taxes levied
or assessed against Lessee or any of its assets, or subject to any judgment,
order, decree, rule or regulation of any governmental authority which would, in
each case or in the aggregate, adversely affect Lessee’s condition, financial or
otherwise, or Lessee’s prospects or the Leased Property.
 
(d) Except for the Required Governmental Approvals to use and operate each
Facility for its Primary Intended Use, no other consent, approval or other
authorization of, or registration, declaration or filing with, any governmental
authority is required for the due execution and delivery of this Lease, or for
the performance by or the validity or enforceability of this Lease against
Lessee.
 
(e) Subject to Lessee’s receipt of the Required Governmental Approvals, the
execution and delivery of this Lease and compliance with the provisions hereof
will not result in (i) a breach or violation of (A) any Legal Requirement
applicable to Lessee now in effect; (B) the organizational or charter documents
of such party; (C) any judgment, order or decree of any governmental authority
binding upon Lessee; or (D)
 

 
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any agreement or instrument to which Lessee is a counterparty or by which it is
bound; or (ii) the acceleration of any obligation of Lessee.
 
(f) Lessee is in compliance with the requirements of Executive Order No. 13224,
66 Fed. Reg. 49079 (Sept. 25, 2001) (the “Order”) and other similar requirements
contained in the rules and regulations of the Office of Foreign Assets Control,
Department of Treasury (“OFAC”) and in any enabling legislation or other
Executive Orders or regulations in respect thereof (the Order and such other
rules, regulations, legislation or orders collecting called the
“Orders”).  Neither Lessee nor any of its Affiliates (A) is listed on the
Specially Designated Nationals and Blocked Person List maintained by OFAC
pursuant to the Order and/or on any other list of terrorists or terrorist
organizations maintained pursuant to any of the rules and regulations of OFAC or
pursuant to any other applicable Orders (such lists are collectively referred to
as the “Lists”), (B) is a Person (as defined in the Order) who has been
determined by competent authority to be subject to the prohibitions contained in
the Orders; or (C) is owned or controlled by (including without limitation by
virtue of such Person being a director or owning voting shares or interests), or
acts for or on behalf of, any person on the Lists or any other person who has
been determined by competent authority to be subject to the prohibitions
contained in the Orders.
 
ARTICLE XLII.                                
 
42.1 Attorneys’ Fees.  If Lessor or Lessee brings an action or other proceeding
(including an arbitration pursuant to Article XLIV) against the other to enforce
any of the terms, covenants or conditions hereof or any instrument executed
pursuant to this Lease, or by reason of any breach or default hereunder or
thereunder, the party prevailing in any such action or proceeding and any appeal
thereupon shall be paid all of its costs and reasonable attorneys’ fees incurred
therein.  In addition to the foregoing and other provisions of this Lease that
specifically require Lessee to reimburse, pay or indemnify against Lessor’s
attorneys’ fees, Lessee shall pay, as Additional Charges, all of Lessor’s
reasonable attorneys’ fees incurred in connection with the administration or
enforcement of this Lease, including attorneys’ fees incurred in connection with
Lessee’s exercise of its option to purchase the Leased Property, the review of
any letters of credit, the review, negotiation or documentation of any
subletting, assignment, or management arrangement or any consent requested in
connection therewith, and the collection of past due Rent.
 
42.2 Set-Up Costs.  Lessor shall be responsible for and shall pay all Lessor’s
Set-Up Costs and Lessee shall be responsible for and shall pay all Lessee’s
Set-Up Costs.
 
ARTICLE XLIII.                                
 
43.1 Brokers.  Lessee warrants that it has not had any contact or dealings with
any Person or real estate broker which would give rise to the payment of any fee
or brokerage commission in connection with this Lease, and Lessee shall
indemnify, protect, hold harmless and defend Lessor from and against any
liability with respect to any fee or brokerage commission arising out of any act
or omission of Lessee.  Lessor warrants that it has not had any contact or
dealings with any Person or real estate broker which would give rise to the
payment of
 

 
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any fee or brokerage commission in connection with this Lease, and Lessor shall
indemnify, protect, hold harmless and defend Lessee from and against any
liability with respect to any fee or brokerage commission arising out of any act
or omission of Lessor.
 
ARTICLE XLIV.                                
 
        44.1 SUBMISSION TO ARBITRATION.
 
44.1.1 EXCEPT AS PROVIDED IN SECTION 44.1.2 BELOW, ANY CONTROVERSY, DISPUTE OR
CLAIM OF WHATSOEVER NATURE ARISING OUT OF, IN CONNECTION WITH, OR IN RELATION TO
THE INTERPRETATION, PERFORMANCE OR BREACH OF THIS LEASE, INCLUDING ANY CLAIM
BASED ON CONTRACT, TORT OR STATUTE, SHALL BE DETERMINED BY FINAL AND BINDING,
CONFIDENTIAL ARBITRATION ADMINISTERED BY THE AMERICAN ARBITRATION ASSOCIATION
(“AAA”) IN ACCORDANCE WITH ITS THEN-EXISTING COMMERCIAL ARBITRATION RULES BY A
SOLE ARBITRATOR SELECTED IN ACCORDANCE WITH SUCH AAA RULES.  ANY ARBITRATION
HEREUNDER SHALL BE GOVERNED BY THE UNITED STATES ARBITRATION ACT, 9 U.S.C. 1-16
(OR ANY SUCCESSOR LEGISLATION THERETO), AND JUDGMENT UPON THE AWARD RENDERED BY
THE ARBITRATOR MAY BE ENTERED BY ANY STATE OR FEDERAL COURT HAVING JURISDICTION
THEREOF.  NEITHER LESSOR, LESSEE NOR THE ARBITRATOR SHALL DISCLOSE THE
EXISTENCE, CONTENT OR RESULTS OF ANY ARBITRATION HEREUNDER WITHOUT THE PRIOR
WRITTEN CONSENT OF ALL PARTIES; PROVIDED, HOWEVER, THAT EITHER PARTY MAY
DISCLOSE THE EXISTENCE, CONTENT OR RESULTS OF ANY SUCH ARBITRATION TO ITS
PARTNERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, ATTORNEYS AND ACCOUNTANTS AND
TO ANY OTHER PERSON TO WHOM DISCLOSURE IS REQUIRED BY APPLICABLE LEGAL
REQUIREMENTS, INCLUDING PURSUANT TO AN ORDER OF A COURT OF COMPETENT
JURISDICTION.  UNLESS OTHERWISE AGREED BY THE PARTIES, ANY ARBITRATION HEREUNDER
SHALL BE HELD AT A NEUTRAL LOCATION SELECTED BY THE ARBITRATOR IN LOS ANGELES,
CALIFORNIA.  THE COST OF THE ARBITRATOR AND THE EXPENSES RELATING TO THE
ARBITRATION (EXCLUSIVE OF LEGAL FEES) SHALL BE BORNE EQUALLY BY LESSOR AND
LESSEE UNLESS OTHERWISE SPECIFIED IN THE AWARD OF THE ARBITRATOR.  SUCH FEES AND
COSTS PAID OR PAYABLE TO THE ARBITRATOR SHALL BE INCLUDED IN “COSTS AND
REASONABLE ATTORNEYS’ FEES” FOR PURPOSES OF ARTICLE XLII AND THE ARBITRATOR
SHALL SPECIFICALLY HAVE THE POWER TO AWARD TO THE PREVAILING PARTY PURSUANT TO
SUCH ARTICLE XLII SUCH PARTY’S COSTS AND EXPENSES INCURRED IN SUCH ARBITRATION,
INCLUDING FEES AND COSTS PAID TO THE ARBITRATOR.
 
44.1.2 THE PROVISIONS OF THIS ARTICLE XLIV SHALL NOT APPLY TO:
 
(a) ANY UNLAWFUL DETAINER OR OTHER SIMILAR SUMMARY OR EXPEDITED PROCEEDING FOR
EJECTMENT OR
 

 
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RECOVERY OF POSSESSION OF THE LEASED PROPERTY AND CAPITAL ADDITIONS OR ANY
PORTION(S) THEREOF INSTITUTED BY LESSOR IN ACCORDANCE WITH APPLICABLE LEGAL
REQUIREMENTS AS THE RESULT OF AN EVENT OF DEFAULT OR ALLEGED EVENT OF DEFAULT BY
LESSEE PURSUANT TO THIS LEASE.  IN ADDITION, IF PERMITTED BY APPLICABLE LEGAL
REQUIREMENTS, LESSOR SHALL BE ENTITLED IN CONNECTION WITH ANY SUCH PROCEEDING TO
SEEK ANY DAMAGES TO WHICH IT IS ENTITLED AT LAW, INCLUDING THOSE SET FORTH IN
ARTICLE XVI.
 
(b) ANY SPECIFIC CONTROVERSY, DISPUTE, QUESTION OR ISSUE AS TO WHICH THIS LEASE
SPECIFICALLY PROVIDES ANOTHER METHOD OF DETERMINING SUCH CONTROVERSY, DISPUTE,
QUESTION OR ISSUE AND PROVIDES THAT A DETERMINATION PURSUANT TO SUCH METHOD IS
FINAL AND BINDING, UNLESS BOTH LESSOR AND LESSEE AGREE IN WRITING TO WAIVE SUCH
PROCEDURE AND PROCEED INSTEAD PURSUANT TO THIS ARTICLE XLIV.
 
(c) ANY REQUEST OR APPLICATION FOR AN ORDER OR DECREE GRANTING ANY PROVISIONAL
OR ANCILLARY REMEDY (SUCH AS A TEMPORARY RESTRAINING ORDER OR INJUNCTION) WITH
RESPECT TO ANY RIGHT OR OBLIGATION OF EITHER PARTY TO THIS LEASE, AND ANY
PRELIMINARY DETERMINATION OF THE UNDERLYING CONTROVERSY, DISPUTE, QUESTION OR
ISSUE AS IS REQUIRED TO DETERMINE WHETHER OR NOT TO GRANT SUCH RELIEF.  A FINAL
AND BINDING DETERMINATION OF SUCH UNDERLYING CONTROVERSY, DISPUTE, QUESTION OR
ISSUE SHALL BE MADE BY AN ARBITRATION CONDUCTED PURSUANT TO THIS ARTICLE XLIV
AFTER AN APPROPRIATE TRANSFER OR REFERENCE TO THE ARBITRATOR SELECTED PURSUANT
TO THIS ARTICLE XLIV UPON MOTION OR APPLICATION OF EITHER PARTY HERETO.  ANY
ANCILLARY OR PROVISIONAL RELIEF WHICH IS GRANTED PURSUANT TO THIS CLAUSE (C)
SHALL CONTINUE IN EFFECT PENDING AN ARBITRATION DETERMINATION AND ENTRY OF
JUDGMENT THEREON PURSUANT TO THIS ARTICLE XLIV.
 
44.1.3 NOTICE:  BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY
DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE “ARBITRATION OF DISPUTES”
PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU
ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A
COURT OR JURY TRIAL.  BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR
JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY
INCLUDED IN THE “ARBITRATION OF DISPUTES” PROVISION.  IF YOU REFUSE TO SUBMIT TO
ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE
 

 
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UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE.  YOUR AGREEMENT
TO THIS ARBITRATION PROVISION IS VOLUNTARY.
 
WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE “ARBITRATION OF DISPUTES” PROVISION TO
NEUTRAL ARBITRATION.
 
Lessor’s Initials:                                /s/ SMT
 
Lessee’s Initials:                                /s/ EM
 
ARTICLE XLV.                                
 
          45.1 Miscellaneous.
 
45.1.1 Survival.  Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities and indemnities of, Lessee
or Lessor arising prior to the expiration or earlier termination of the Term
shall survive such expiration or termination.  In addition, all claims against,
and all liabilities and indemnities hereunder of Lessee shall continue in full
force and effect and in favor of the Lessor named herein and its successors and
assigns, notwithstanding any conveyance of the Leased Property to Lessee.
 
45.1.2 Severability.  If any term or provision of this Lease or any application
thereof shall be held invalid or unenforceable, the remainder of this Lease and
any other application of such term or provision shall not be affected thereby.
 
45.1.3 Non-Recourse.  Lessee specifically agrees to look solely to the Leased
Property for recovery of any judgment from Lessor.  It is specifically agreed
that no constituent partner in Lessor or officer, director or employee of Lessor
shall ever be personally liable for any such judgment or for the payment of any
monetary obligation to Lessee.  The provision contained in the foregoing
sentence is not intended to, and shall not, limit any right that Lessee might
otherwise have to obtain injunctive relief against Lessor, or any action not
involving the personal liability of Lessor.  Furthermore, except as otherwise
expressly provided herein, in no event shall Lessor ever be liable to Lessee for
any indirect or consequential damages suffered by Lessee from whatever cause.
 
45.1.4 Licenses.  Upon the expiration or earlier termination of the Term with
respect to any Facility, Lessee shall use commercially reasonable efforts to
transfer to Lessor or Lessor’s nominee a fully operational Facility and shall
cooperate with Lessor or Lessor’s designee or nominee in connection with the
processing by Lessor or Lessor’s designee or nominee of any applications for all
licenses, operating permits and other governmental authorization, all contracts,
including contracts with governmental or quasi-governmental entities, business
records, data, patient and resident records, and patient and resident trust
accounts, which may be necessary or useful for the operation of such Facility;
provided, however, that the costs and expenses of any such transfer or the
processing of any such application shall be paid by Lessor or Lessor’s designee
or nominee; and provided further, however, that nothing herein shall be
construed to require Lessee to allow Lessor or Lessor’s nominee to operate such
Facility under Lessee’s license.  Lessee
 

 
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shall not commit any act or be remiss in the undertaking of any act that would
jeopardize the licensure or certification of such Facility, and Lessee shall
comply with all requests for an orderly transfer of the same upon the expiration
or early termination of the Term.  In addition, upon request upon the expiration
or earlier termination of the Term with respect to any Facility, Lessee shall
promptly deliver copies of all books and records relating to the Leased Property
of such Facility and all Capital Additions and operations thereon to Lessor or
Lessor’s designee or nominee but Lessee shall not be required to deliver
corporate financial records or proprietary materials.  Lessee shall indemnify,
defend, protect and hold harmless Lessor from and against any loss, damage, cost
or expense incurred by Lessor or Lessor’s designee or nominee in connection with
the correction of any and all deficiencies of a physical nature identified by
any governmental authority responsible for licensing the Leased Property of any
Facility and all Capital Additions thereon in the course of any change of
ownership inspection and audit to the extent that the remediation of such
deficiencies is required solely as a result of retrofit requirements in
connection with the change of ownership of such Facility.  The provisions of
this Section 45.1.4 shall not apply if the expiration or earlier termination of
the Term with respect to a Facility arises from (i) the purchase of such
Facility by Lessee, (ii) the damage to or destruction of or taking of such
Facility or (iii) the execution of a New Lease with respect to such Facility.
 
45.1.5 Successors and Assigns.  This Lease shall be binding upon Lessor and its
successors and assigns and, subject to the provisions of Article XXIV, upon
Lessee and its successors and assigns.
 
45.1.6 Termination Date.  If this Lease is terminated by Lessor or Lessee under
any provision hereof with respect to any one or more (including all, if
applicable) of the Facilities, and upon the expiration of the Term applicable to
a Facility (collectively, the “termination date”), the following shall pertain:
 
(a) Lessee shall vacate and surrender the Leased Property, Lessee’s Personal
Property and all Capital Additions relating to the applicable Facility to Lessor
in the condition required by Section 9.1.4.  Prior to such vacation and
surrender, Lessee shall remove any items which Lessee is permitted or required
to remove hereunder.  Lessee shall, at Lessee’s cost, repair any damage to such
Leased Property and any Capital Additions caused by such vacation and/or removal
of any items which Lessee is required or permitted hereunder to remove.  Any
items which Lessee is permitted to remove but fails to remove prior to the
surrender to Lessor of such Leased Property, Lessee’s Personal Property and
Capital Additions shall be deemed abandoned by Lessee, and Lessor may retain or
dispose of the same as Lessor sees fit without claim by Lessee thereto or to any
proceeds thereof.  If Lessor elects to remove and dispose of any such items
abandoned by Lessee, the cost of such removal and disposal shall be an
Additional Charge payable by Lessee to Lessor upon demand.
 
(b) Without limiting the provisions of Section 45.1.1 above, upon any such
termination or expiration of this Lease with respect to a Facility, the
following shall pertain:
 

 
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(i) Lessee agrees to defend, protect, indemnify, defend and hold harmless Lessor
from and against any and all claims, costs, losses, expenses, damages, actions,
and causes of action for which Lessee is responsible under this Lease (including
Lessee’s indemnification obligations under Articles XXIII and XXXVII) and which
accrue or have accrued on or before the termination date.
 
(ii) Lessee shall remain liable for the cost of all utilities used in or at the
Leased Property and any Capital Additions relating to such Facility through the
termination date and accrued and unpaid, whether or not then billed, as of the
termination date until full payment thereof by Lessee.  Lessee shall obtain
directly from the companies providing such services closing statements for all
services rendered through the termination date and shall promptly pay the
same.  If any utility statement with respect to such Leased Property and any
Capital Additions includes charges for a period partially prior to and partially
subsequent to the termination date, such charges shall be prorated as between
Lessor and Lessee, with Lessee responsible for the portion thereof (based upon a
fraction the numerator of which is the number of days of service on such
statement through the termination date and the denominator of which is the total
number of days of service on such statement) through the termination date and
Lessor shall be responsible for the balance.  The party receiving any such
statement which requires proration hereunder shall promptly pay such statement
and the other party shall, within ten (10) days after receipt of a copy of such
statement, remit to the party paying the statement any amount for which such
other party is responsible hereunder.
 
(iii) Lessee shall remain responsible for any and all Impositions imposed
against the Leased Property, the Personal Property and any Capital Additions
with a lien date prior to the termination date (irrespective of the date of
billing therefor) and for its pro rata share of any Impositions imposed in
respect of the tax-fiscal period during which the Term terminates as provided in
Section 4.1.7, and Lessee shall indemnify and hold Lessor harmless with respect
to any claims for such Impositions or resulting from nonpayment thereof.
 
(iv) Lessee shall (y) execute all documents and take any actions reasonably
necessary to (1) cause the transfer to Lessor of all of Lessee’s Personal
Property and any Capital Additions not owned by Lessor, as provided in Section
6.3 in each case free of any encumbrance, as provided in Section 6.3 and (2)
remove this Lease and/or any memorandum hereof as a matter affecting title to
the Leased Property as provided in Article XXXVIII and (z) comply with its
covenants set forth in Section 45.1.4.
 
(v) Lessee shall continue to observe the covenants of Lessee set forth in
Sections 7.4.1 and 7.4.2 and any other covenant or agreement of Lessee in this
Lease which is intended to survive the expiration or sooner termination of this
Lease.
 
45.1.7 Governing Law.  THIS LEASE WAS NEGOTIATED IN THE STATE OF CALIFORNIA,
WHICH STATE THE PARTIES AGREE HAS A
 

 
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SUBSTANTIAL RELATIONSHIP TO THE PARTIES AND TO THE UNDERLYING TRANSACTION
EMBODIED HEREBY.  ACCORDINGLY, IN ALL RESPECTS THIS LEASE (AND ANY AGREEMENT
FORMED PURSUANT TO THE TERMS HEREOF) SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
(WITHOUT REGARD OF PRINCIPLES OR CONFLICTS OF LAW) AND ANY APPLICABLE LAWS OF
THE UNITED STATES OF AMERICA, EXCEPT THAT ALL PROVISIONS HEREOF RELATING TO THE
CREATION OF THE LEASEHOLD ESTATE AND ALL REMEDIES SET FORTH IN ARTICLE XVI
RELATING TO RECOVERY OF POSSESSION OF THE LEASED PROPERTY OF ANY FACILITY (SUCH
AS AN ACTION FOR UNLAWFUL DETAINER OR OTHER SIMILAR ACTION) SHALL BE CONSTRUED
AND ENFORCED ACCORDING TO, AND GOVERNED BY, THE LAWS OF THE STATE IN WHICH THE
LEASED PROPERTY OF SUCH FACILITY IS LOCATED.
 
45.1.8 Waiver of Trial by Jury.  EACH OF LESSOR AND LESSEE ACKNOWLEDGES THAT IT
HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL
BY JURY UNDER THE CONSTITUTION OF THE UNITED STATES, THE STATE OF CALIFORNIA AND
THE STATES IN WHICH THE LEASED PROPERTY OF ANY OF THE FACILITIES IS
LOCATED.  EACH OF LESSOR AND LESSEE HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL
BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS
LEASE (OR ANY AGREEMENT FORMED PURSUANT TO THE TERMS HEREOF) OR (ii) IN ANY
MANNER CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF LESSOR AND
LESSEE WITH RESPECT TO THIS LEASE (OR ANY AGREEMENT FORMED PURSUANT TO THE TERMS
HEREOF) OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREINAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; EACH OF LESSOR AND LESSEE HEREBY AGREES AND CONSENTS THAT,
SUBJECT TO THE PROVISIONS OF ARTICLE XLIV ABOVE, ANY SUCH CLAIM, DEMAND, ACTION
OR CAUSE OF ACTION SHALL BE DECIDED BY A COURT TRIAL WITHOUT A JURY, AND THAT
EITHER PARTY MAY FILE A COPY OF THIS SECTION WITH ANY COURT AS CONCLUSIVE
EVIDENCE OF THE CONSENT OF EACH SUCH PARTY TO THE WAIVER OF ITS RIGHT TO TRIAL
BY JURY.
 
Lessor’s Initials:                                /s/ SMT
 
Lessee’s Initials:                                /s/ EM
 
45.1.9 Legal Descriptions.  Notwithstanding anything to the contrary in this
Lease, Lessor and Lessee shall cooperate to confirm the exact legal description
for the Land of each Facility prior to the Commencement Date.  In the event that
the exact legal description for the Land of any Facility differs from the legal
description attached hereto for the Land of such Facility, then Lessor and
Lessee shall cooperate to substitute the correct
 

 
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legal description for the Land of such Facility for the incorrect legal
description attached hereto as Exhibit A.
 
45.1.10 Entire Agreement.  This Lease, the Exhibits hereto and such other
documents as are contemplated hereunder or thereunder, constitutes the entire
agreement of the parties with respect to the subject matter hereof, and may not
be changed or modified except by an agreement in writing signed by the parties.
Lessor and Lessee hereby agree that all prior or contemporaneous oral
understandings, agreements or negotiations relative to the leasing of the Leased
Property are merged into and revoked by this Lease.  Without limiting the
generality of the foregoing, any schedules, abstracts and any other materials
prepared in connection with this Lease are hereby merged into and revoked by
this Lease.
 
45.1.11 Headings.  All titles and headings to sections, subsections, paragraphs
or other divisions of this Lease are only for the convenience of the parties and
shall not be construed to have any effect or meaning with respect to the other
contents of such sections, subsections, paragraphs or other divisions, such
other content being controlling as to the agreement among the parties hereto.
 
45.1.12 Counterparts; Electronically Transmitted Signatures.  This Lease may be
executed in any number of counterparts, each of which shall be a valid and
binding original, but all of which together shall constitute one and the same
instrument.  Signatures transmitted via facsimile or other electronic means
(including emailed PDF files) may be used in place of original signatures on
this Lease, and Lessor and Lessee both intend to be bound by such signatures
hereto transmitted via facsimile or other electronic means.
 
45.1.13 Joint and Several.  If more than one Person is the Lessee under this
Lease, the liability of such Persons under this Lease shall be joint and
several.
 
45.1.14 Interpretation.  Both Lessor and Lessee have been represented by counsel
and this Lease and every provision hereof has been freely and fairly
negotiated.  Consequently, all provisions of this Lease shall be interpreted
according to their fair meaning and shall not be strictly construed against any
party.
 
45.1.15 Time of Essence.  Time is of the essence of this Lease and each
provision hereof in which time of performance is established.
 
45.1.16 Force Majeure.  In the event that either Lessor or Lessee is delayed in
performing its respective obligations pursuant to this Lease by any cause beyond
the reasonable control of the party required to perform such obligation, the
time period for performing such obligation shall be extended by a period of time
equal to the period of the delay.  For purposes of this Lease:
 
(a) A cause shall be beyond the reasonable control of a party to this Lease when
such cause would affect any person similarly situated (such as power outage,
labor strike, Act of God or trucker’s strike) but shall not be beyond the
reasonable control of such party when peculiar to such party (such as financial
inability or failure to order long lead time material sufficiently in advance).
 

 
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(b) This Section shall not apply to any obligation to pay money or otherwise
perform any financial obligation hereunder.
 
(c) In the event of any occurrence which a party believes constitutes a cause
beyond the reasonable control of such party and which will delay any performance
by such party, such party shall promptly in writing notify the other party of
the occurrence and nature of such cause, the anticipated period of delay and the
steps being taken by such party to mitigate the effects of such delay.  Failure
to give such notice promptly, shall deem such occurrence or event not to be a
cause beyond the reasonable control of such party.
 
45.1.17 Further Assurances.  The parties agree to promptly sign all documents
reasonably requested to give effect to the provisions of this Lease.
 
45.1.18 Public Disclosure.  From and after the Effective Date, any press release
or other written release to the public of information with respect to this Lease
or any matters regarding the transaction contemplated hereby shall be made only
in a form reasonably approved in writing by Lessor and Lessee; provided,
however, that any release of such information or other matters required by
applicable law or deemed prudent (in the disclosing party’s judgment) under SEC
or other federal or state securities’ laws or the rules and regulations of the
NYSE, NASDAQ or American Stock Exchange, shall not require approval from the
other party.
 
ARTICLE XLVI.                                
 
46.1 Provisions Relating to Master Lease.  Lessor and Lessee hereby acknowledge
and agree that, except as otherwise expressly provided herein to the contrary
and for the limited purposes so provided, this Lease is and the parties intend
the same for all purposes to be treated as a single, integrated and indivisible
agreement and economic unit.  Lessee acknowledges that in order to induce Lessor
to lease the Leased Property of each Facility to Lessee pursuant to this Lease
and as a condition thereto, Lessor insisted that the parties execute this Lease,
thereby covering all of the Facilities in a single, integrated and indivisible
agreement and economic unit, and that but for such agreement Lessor would not
have leased the Leased Property of the Facilities to Lessee under the terms and
conditions set forth herein.
 
46.2 Treatment of Lease.  Lessor and Lessee hereby acknowledge and agree that
this Lease shall be treated as an operating lease for all purposes and not as a
synthetic lease, financing lease or loan, and that Lessor shall be entitled to
all the benefits of ownership of the Leased Property, including depreciation for
all federal, state and local tax purposes.
 
ARTICLE XLVII.                                
 
       47.1 Delays in Delivery of Possession and Commencement Date.
 
47.1.1 Lessee acknowledges that (a) the Leased Property of each Facility is
currently leased to Summit Companies or Harbor Retirement Associates, LLC (or
Affiliates of each of them) (each a “Current Lessee,” and collectively, the
“Current Lessees”) pursuant to the terms of certain written leases (each, a
“Current Lease,” and collectively, the
 

 
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“Current Leases”) between the applicable Current Lessee and the applicable
Person comprising Lessor, (b) each Current Lessee has engaged Sunrise Senior
Living, Inc. or an Affiliate thereof (each, a “Current Manager,” and
collectively, the “Current Managers”) to manage the respective Facility pursuant
to the terms of certain written management agreements between the applicable
Current Lessee and the Current Manager (each, a “Current Management Agreement, ”
and collectively, the “Current Management Agreements”), and accordingly, the
applicable Current Manager is currently in possession of and operating each
Facility pursuant to the terms of the applicable Current Management Agreement
for and on behalf of the applicable Current Lessee, and (c) Lessor’s ability to
tender or cause the tender of delivery of possession of and Lessee’s ability to
obtain possession of the Leased Property of each Facility is conditioned upon
(i) a Current Facility Documents Termination with respect to each such Facility
immediately prior to the Commencement Date, (ii) fulfillment of the conditions
precedent to each Current Lessee’s and Current Manager’s obligations under one
or more Operations Transfer Agreements (as hereinafter defined), and (iii) each
Current Lessee’s and Current Manager’s surrender of the Leased Property of each
applicable Facility, which is expected to occur upon satisfaction of the last of
the conditions to continued effectiveness of this Lease as provided in Sections
48.1 and 48.2 below.
 
47.1.2 Prior to the Commencement Date, Lessor and Lessee shall be in the
Pre-Commencement Date Period.  The “Commencement Date” of this Lease shall be
the earlier of (a) the date Lessee takes possession of or commences use of the
Leased Property for any purpose whatsoever (exclusive of any temporary access
for purposes of conducting Lessee’s due diligence review) or (b) the date of
tender of delivery of possession of the Leased Property to Lessee following
satisfaction or waiver of the last of the conditions to the continued
effectiveness of the Lease as provided in Sections 48.1 and 48.2 below.  From
and after the Commencement Date, Lessee shall observe and perform all
obligations of the “Lessee” pursuant to this Lease, including the payment of all
Minimum Rent, Additional Rent and Additional Charges as and when due.
 
47.1.3 The scheduled Commencement Date for all Facilities shall be November 1,
2010 unless otherwise agreed between Lessor and Lessee; provided, however, that
if the Commencement Date shall not have occurred with respect to all Facilities
on the scheduled Commencement Date, this Lease shall not be void or voidable,
nor shall Lessor be liable for any loss or damage resulting therefrom.  Instead
this Lease shall continue in full force and effect to and until occurrence of
the Commencement Date for all Facilities, unless earlier terminated as herein
provided.  Lessor and Lessee acknowledge and agree that, subject to conditions
to the continued effectiveness of the Lease as provided in Sections 48.1 and
48.2 below, each of them shall (subject to the terms of any Current Facility
Documents Termination, Operations Transfer Agreement(s) and/or Interim Licensure
Arrangements), attempt to coordinate the Commencement Date so that the same
occurs on either the first or last day of a calendar month.  Notwithstanding
anything to the contrary in this Lease, however, the Commencement Date must
occur simultaneous with respect to all of the Facilities, and Lessee shall not
take possession of or commence any use of any Facility until all of the
conditions to the continued effectiveness of this Lease as provided in Sections
48.1 and 48.2 below have been satisfied or waived with respect to all
Facilities.
 

 
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ARTICLE XLVIII.                                
 
       48.1 Lessor’s Conditions to Continued Effectiveness of Lease
 
48.1.1 Notwithstanding anything to the contrary contained in this Lease, Lessor
and Lessee acknowledge and agree that the continued effectiveness of this Lease
and Lessor’s obligations hereunder are expressly conditioned upon the
satisfaction or waiver in writing by Lessor of each of the following:
 
(a) On or before 5:00 p.m. (California time) on the Effective Date, Lessee shall
have submitted evidence reasonably satisfactory to Lessor that Lessee has
applied for any state facility license (the “Health Care License”) and
certificate of need approval or exemption (the “CON,” and together with the
Health Care License, the “Principal Licenses”) required for the operation of
each Facility for its Primary Intended Use, and thereafter Lessee shall promptly
apply for all other licenses, permits, accreditations, authorizations and
certifications from all governmental or quasi-governmental authorities,
agencies, departments or otherwise which are material to or required for the
operation of each Facility for its Primary Intended Use, including without
limitation any accreditations or certifications from Medicare and/or Medicaid
(the “Other Licenses,” and together with the Principal Licenses, the “Required
Governmental Approvals”).  Lessee hereby represents and warrants to Lessor that,
as of the Effective Date, Lessee has applied for all Principal Licenses;
 
(b) On or before 5:00 p.m. (California time) on October 15, 2010, Lessee shall
have submitted evidence reasonably satisfactory to Lessor that Lessee, on one
hand, and each Current Lessee and/or Current Manager, on the other hand, have
entered into one or more transfer agreements in form and substance acceptable to
Lessor, Lessee and each such Current Lessee and Current Manager (the “Operations
Transfer Agreement(s)”) to arrange for a transition of full operational
responsibility for each of the Facilities to Lessee from such Current Lessee and
Current Manager on and as of the Commencement Date, which Operations Transfer
Agreement(s) may include, or as to which such Current Lessee, Current Manager
and Lessee may negotiate separate documents containing, customary interim
management, sublease and/or sub-sublease agreements to the extent that Lessee
reasonably anticipates that Lessee will not have obtained all Required
Governmental Approvals relating to any Facility on or prior to the Commencement
Date and whereby Lessee shall be permitted to use such Current Lessee’s or
Current Manager’s license or provider numbers for a reasonable period of time
following the Commencement Date (which period shall not exceed one year for any
Facility located within the state of California and 120 days for any Facility
not located within the state of California) until Lessee has obtained all
Required Governmental Approvals (collectively, the “Interim Licensure
Arrangements”); provided, however, that any such Interim Licensure Arrangements
shall be subject to Lessor’s prior written consent, which consent shall not be
unreasonably withheld so long as the same are permitted by applicable Legal
Requirements, but may be conditioned upon Lessee, such Current Lessee and such
Current Manager executing and delivering to Lessor a consent agreement relating
thereto in Lessor’s customary form for such arrangements;
 
(c) [Intentionally Omitted];
 

 
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(d) On or before 5:00 p.m. (California time) on October 29, 2010, Lessee shall
have delivered to Lessor either (i) copies of, or other reasonable evidence that
Lessee has obtained, all of the Required Governmental Approvals for each
Facility effective as of the Commencement Date or (ii) reasonable assurance that
either (A) such Required Governmental Approvals will be obtained promptly after
the Commencement Date and will be effective as of the Commencement Date or (B)
Lessee may lawfully operate such Facility for its Primary Intended Use between
the Commencement Date and the date on which Lessee receives such Required
Governmental Approvals and such Required Governmental Approvals will relate back
to the Commencement Date, or (iii) evidence that, with the consent of Lessor as
provided in Section 48.1.1(b) above and to the extent permitted by applicable
Legal Requirements, the applicable Current Lessee and/or Current Manager, on one
hand, and Lessee, on the other hand, have entered into Interim Licensure
Arrangements prior to such date with respect to any Facility for which such
Required Governmental Approvals have not been obtained, in which case Lessee
shall diligently work to obtain all of the Required Governmental Approvals with
respect to each such Facility within a reasonable period of time following the
Commencement Date (which period shall not exceed one year for any Facility
located within the state of California and 120 days for any Facility not located
within the state of California), and in any event prior to the expiration of the
Interim Licensure Arrangements;
 
(e) [Intentionally Omitted];
 
(f) Prior to, or concurrent with, the Commencement Date, a Current Facility
Documents Termination shall have occurred with respect to each Facility; and
 
(g) The “closing” or “effective date” of each Operations Transfer Agreement and
any Interim Licensure Arrangements, and the Commencement Date hereunder shall
have occurred on or before December 1, 2010.
 
48.1.2 In the event that any of the conditions set forth in Section 48.1.1 above
are not satisfied within the time period specified therein or Lessor determines
in good faith at any time during the Pre-Commencement Period that any such
conditions cannot or will not be satisfied, then Lessor shall have the option to
terminate this Lease.  Such option shall be exercised, if at all, by written
notice from Lessor to Lessee given at anytime after the date by which such
condition must be satisfied or Lessor determines such that such condition cannot
or will not be satisfied and prior to the date the same is satisfied; provided,
however, that Lessor may in its sole discretion waive in writing any such
condition or delay the date the same is required to be satisfied.  If Lessor is
entitled to terminate this Lease pursuant to this Section 48.1.2 and timely and
properly exercises such option, this Lease shall terminate on the date of
Lessee’s receipt of Lessor’s notice of termination, Lessor shall bear Lessor’s
Set-Up Costs, Lessee shall bear Lessee’s Set-Up Costs, each party shall bear any
of their other costs and fees incurred in the negotiation and preparation of
this Lease and in performing its respective obligations hereunder through the
date of such termination and neither party shall have any further obligation to
the other hereunder except for those obligations which are intended to survive
the earlier termination of this Lease prior to the
 

 
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Commencement Date, if any.  Pending any such termination by Lessor pursuant to
this Section 48.1.2, each party shall perform its respective obligations
pursuant to this Lease.
 
48.1.3 Promptly upon execution and delivery of this Lease, Lessee shall use good
faith efforts to satisfy the conditions set forth in Sections 48.1.1(a), (b),
(d) and (g) and cooperate with Lessor in Lessor’s efforts to satisfy the
condition in Section 48.1.1(f) above, including: (a) attempting to reach
agreement in principle and, if such agreement in principle with each Current
Lessee and each Current Manager is reached, to thereafter negotiate for and
enter into one or more definitive and binding Operations Transfer Agreement(s)
and any Interim Licensure Arrangements; and (b) promptly and timely making
application for and using commercially reasonable efforts to diligently pursue
and obtain all such Required Governmental Approvals.  Lessor hereby agrees that
it will cooperate with Lessee in connection with Lessee’s efforts to satisfy the
conditions set forth in such Sections 48.1.1(a), (b), (d) and (g) as reasonably
requested by Lessee (including, executing such documents and instruments as are
reasonably required in connection therewith), but without requirement that
Lessor incur any out-of-pocket costs or assume any obligations (financial or
otherwise) in connection therewith.  Lessee hereby acknowledges and agrees,
however, that there can be no assurances that the Current Lessees or Current
Managers will cooperate and/or continue to cooperate, and no such
non-cooperation or cessation of cooperation by the Current Lessees or Current
Managers shall relieve Lessee from its obligation to use commercially reasonable
efforts to satisfy the conditions set forth in Sections 48.1.1(a), (b), (d) and
(g) above.  From and after the Effective Date, Lessee shall keep Lessor
reasonably apprised of the status of Lessee’s efforts to satisfy such conditions
for the benefit Lessor including all material communications with all applicable
governmental or quasi-governmental authorities, the status of obtaining the
Required Governmental Approvals and the status of obtaining the Operations
Transfer Agreement(s) and any Interim Licensure Arrangements, each of which
Lessor shall have the right to approve, which approval shall not be unreasonably
withheld.  Lessee shall promptly deliver to Lessor copies of the fully executed
Operations Transfer Agreement(s) and any Interim Licensure Arrangements (if and
when obtained) and, and copies of all application(s) for new licenses, permits,
accreditations, authorizations and certifications (when made) and all Required
Governmental Approvals issued in connection therewith (if and when obtained).
 
48.1.4 Promptly upon execution and delivery of this Lease, Lessor shall use good
faith efforts to satisfy the condition set forth in Section 48.1.1(f) including
exercising any right Lessor may have to effect a Current Facility Documents
Termination with respect to each Facility.  Lessee hereby agrees that it will
cooperate with Lessor in connection with the same as reasonably requested by
Lessor (including, executing such documents and instruments as are reasonably
required in connection therewith).  Lessee hereby acknowledges and agrees,
however, that there can be no assurances that the Lessor will be able to satisfy
the condition set forth in Section 48.1.1 (f).  From and after the Effective
Date, Lessor shall keep Lessee reasonably apprised of the status of Lessor’s
efforts to satisfy such conditions, including the status of negotiations with
the Current Lessees and Managers and all material communications with third
parties.  Lessor shall promptly notify Lessee if and when Lessor has been able
to effect a Current Facility Documents Termination with respect to each of the
Facilities, and the anticipated effective date thereof (if at all).
 

 
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48.2 Lessee’s Conditions to Continued Effectiveness of Lease.
 
48.2.1 Notwithstanding anything to the contrary contained in this Lease, Lessor
and Lessee acknowledge and agree that the continued effectiveness of this Lease
and Lessee’s obligations hereunder are expressly conditioned upon the
satisfaction or waiver in writing by Lessee of each of the following:
 
(a) On or before 5:00 p.m. (California time) on October 15, 2010, Lessee shall
have been satisfied with the results of its due diligence review of the Leased
Property, the Facilities and the operations thereof, and the transactions
contemplated by this Lease shall have been approved by the Board of Directors of
Lessee;
 
(b) On or before 5:00 p.m. (California time) on October 15, 2010, Lessee, each
Current Lessee and each Current Manager shall have entered the Operations
Transfer Agreement(s) and any Interim Licensure Arrangements;
 
(c) On or before 5:00 p.m. (California time) on October 29, 2010, Lessee shall
have either (i) obtained all of the Required Governmental Approvals for each
Facility effective as of the Commencement Date or (ii) provided reasonable
assurance to Lessor that either (A) such Required Governmental Approvals will be
obtained promptly after the Commencement Date and will be effective as of the
Commencement Date or (B) Lessee may lawfully operate such Facility for its
Primary Intended Use between the Commencement Date and the date on which Lessee
receives such Required Governmental Approvals and such Required Governmental
Approvals will relate back to the Commencement Date, or (iii) entered into
Interim Licensure Arrangements with the applicable Current Lessee and/or Current
Manager with respect to any Facility for which such Required Governmental
Approvals have not been obtained, with the consent of Lessor as provided in
Section 48.1.1(b) above and to the extent permitted by applicable Legal
Requirements;
 
(d) [Intentionally Omitted];
 
(e) Prior to, or concurrent with, the Commencement Date, a Current Facility
Documents Termination shall have occurred with respect to each Facility; and
 
(f) The “closing” or “effective date” of each Operations Transfer Agreement and
any Interim Licensure Arrangements, and the Commencement Date hereunder shall
have occurred on or before December 1, 2010.
 
48.2.2 Subject to Lessee’s obligations pursuant to Sections 48.1.3 and 48.1.4,
in the event that any condition set forth in Section 48.2.1 is not satisfied
within the time period specified therein, Lessee shall have the option to
terminate this Lease. Such option shall be exercised, if at all, with respect to
any such condition by written notice to Lessor delivered on or before the
applicable date specified therefor and specifying in reasonable detail the
particular condition(s) which has or have not been satisfied and the reasons
therefor.  If Lessee is entitled to terminate this Lease pursuant to this
Section 48.2.2 and timely and properly exercises such option, this Lease shall
terminate on the date of
 

 
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Lessor’s receipt of Lessee’s notice of termination, Lessor shall bear Lessor’s
Set-Up Costs, Lessee shall bear Lessee’s Set-Up Costs, each party shall bear any
of their other costs and fees incurred in the negotiation and preparation of
this Lease and in performing its respective obligations hereunder through the
date of such termination and neither party shall have any further obligation to
the other hereunder except for those obligations which are intended to survive
the earlier termination of this Lease prior to the Commencement Date, if
any.  Pending any such termination by Lessee pursuant to this Section 48.2.2,
each party shall perform its respective obligations pursuant to this Lease.  If
Lessee shall fail to give a notice of termination in the manner and within the
time period specified in this Section 48.2.2 with respect to any such condition,
such condition set forth in Section 48.2.1 shall be deemed satisfied or waived
by Lessee and this Lease shall continue in full force and effect in accordance
with the terms hereof.
 
          48.3 Amendment to Lease
 
.  Following the Commencement Date, the parties shall execute an amendment to
this Lease in substantially the form of Exhibit D to confirm certain matters,
including the Commencement Date and the Fixed Term Expiration
Date.  Notwithstanding the foregoing, the failure of Lessor to prepare and/or
Lessee to execute and deliver any such amendment shall not affect the matters
which would have been confirmed thereby.
 
ARTICLE XLIX.                                
 
          49.1 Certain Specific State Law Matters and Other Matters
 
49.1.1 Elk Grove Mello Roos.  Lessor and Lessee hereby acknowledge that the Land
of the Elk Grove, California Facility is subject to two separate community
facilities districts known as “Elk Grove School Bonds Mello Roos” and “Laguna
CFD Mello Roos” (collectively, the “Elk Grove Mello Roos”), for which amounts
are accrued and payable in addition to other real property taxes.  Without
limiting any other provision hereof, Lessor and Lessee hereby agree that (i) the
term “Impositions” defined in Section 2.1 hereof shall include any and all
amounts assessed pursuant to the Elk Grove Mello Roos, and (ii) Lessee shall pay
all such amounts accrued during the Term with respect to the Elk Grove,
California Facility pursuant to Section 4.1 hereof.
 
49.1.2 Oklahoma City CC&Rs.  Lessee hereby acknowledges that the Land of the
Oklahoma City, Oklahoma Facility is subject to that certain Declaration of
Covenants, Conditions and Restrictions, recorded on October 31, 1997 in the
official records of Oklahoma County, Oklahoma in Book 7182, Page 6 (the
“Oklahoma CC&Rs”).  Lessee further acknowledges that Lessee has had the
opportunity to review the Oklahoma CC&Rs.  Without limiting any other provision
hereof, in accordance with Section 3.3 of the Oklahoma CC&Rs, Lessee hereby
assumes the rights and obligations of Lessor under the Oklahoma CC&Rs for the
Term.
 
49.1.3 Washington State Law Provisions.
 
(a) Waiver of Worker’s Compensation Immunity.  Solely for the purpose of
effectuating Lessee’s indemnification obligations under this Lease, and not for
the benefit of any third parties (including but not limited to employees of
Lessee), Lessee
 

 
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specifically and expressly waives any immunity that may be granted it under the
Washington State Industrial Insurance Act, Title 51 RCW.  Furthermore, the
indemnification obligations under this Lease shall not be limited in any way by
any limitation on the amount or type of damages, compensation or benefits
payable to or for any third party under Worker Compensation Acts, Disability
Benefit Acts or other employee benefit acts now or hereafter in effect in the
State of Washington.  The parties acknowledge that the foregoing provisions of
this paragraph have been specifically and mutually negotiated between the
parties.
 
(b) Reentry of Premises.  Should Lessor reenter any Facility under any
provisions of this Lease relating to an Event of Default by Lessee
hereunder,  Lessor shall not be deemed to have terminated this Lease, or the
liability of Lessee to pay the Rent thereafter accruing, or to have terminated
Lessee’s liability for damages under any of the provisions of this Lease, by any
such reentry or by any action, in unlawful detainer or otherwise, to obtain
possession of such Facility, unless Lessor shall have notified Lessee in writing
that Lessor had elected to terminate this Lease.  Lessee further covenants that
the service by Lessor of any notice pursuant to the unlawful detainer statutes
of the State of Washington and/or the surrender of possession pursuant to such
notice shall not (unless Lessor elects to the contrary at the time of or at any
time subsequent to the serving of such notices and such election is evidenced by
a written notice to Lessee) be deemed to be a termination of this Lease.
 
(c) No Authority to Cause Liens.  Notwithstanding anything to the contrary
contained elsewhere in this Lease, Lessee shall have no right or authority to
cause or allow the Facility or the Lessor’s estate or interest therein or in and
to this Lease to be subjected to any such lien.
 
49.1.4 Washington Limitation on Lessor’s Remedies.  Unless otherwise permitted
by the applicable requirements of Washington law governing the licensing of
facilities providing long term care or assisted living services as the same may
be amended or modified from time to time during the term of this Lease (the
“Washington Licensure Laws”), upon the occurrence of an Event of Default and the
exercise by Lessor of any remedies available to Lessor as a result thereof:
 
(a) there shall be no transfer or assignment of Lessee’s Health Care Licenses to
any other Person as a result of such Event of Default, termination of this Lease
on account thereof or otherwise, it being understood and acknowledged that under
Washington Licensure Laws a nursing home license is not transferable; provided,
however, nothing herein shall be construed as prohibiting a new lessee or
operator from securing a license to operate any Facility located within the
state of Washington in its own name; and provided, further, that Lessee shall,
to the extent permitted by applicable Washington Licensure Laws, comply with its
obligations pursuant to Section 45.1.4 hereof;
 
(b) there shall be no transfer of resident agreements or records related to any
Facility located within the state of Washington to any Person upon termination
of this Lease unless and until such Person is licensed to operate the applicable
Facility in compliance with applicable Washington Licensure Laws;
 

 
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(c) no Person other than Lessee (or its managing agent) and other Persons
authorized by applicable Washington Licensure Laws shall have the right to
review resident records at any Facility located in the state of Washington; and
 
(d) the operational responsibility for any Facility located in the state of
Washington shall be vested only in an operator that is licensed in compliance
with applicable Washington Licensure Laws.
 
For the avoidance of doubt, nothing in this Section 49.1.4 is intended to
prohibit Lessor from applying, in accordance with the terms of this Lease and
the requirements of applicable law, including, if applicable, the Washington
Licensure Laws, for the appointment of a receiver upon the occurrence and during
the continuance of an Event of Default.
 
49.1.5 Acknowledgement Pursuant to Kentucky Law.  Lessor and Lessee acknowledge
and agree that agree that the provisions of Section 20.1 and are intended to
operate in lieu of any applicable holdover provisions prescribed by Kentucky
law.
 

 
[SIGNATURE PAGE FOLLOWS]
 

 

 

 

 
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IN WITNESS WHEREOF, the parties have caused this Lease to be executed and
attested by their respective officers thereunto duly authorized.
 
LESSOR:
 
 
 
HCP DARTMOUTH MA, LP, a Delaware limited partnership
 
HCP LAGUNA CREEK CA, LP, a Delaware limited partnership
 
HCP TOWSON MD, LP, a Delaware limited partnership
 
By:HCP MA1 GP, LLC, a Delaware limited liability company, their general partner
 
By: /s/ Susan M. Tate
Name:  Susan M. Tate
Title:    Executive Vice President
 
 

State of California             
          
County of Los Angeles     

On October 13, 2010 before me, Kelly J. Howze, notary public, personally
appeared Susan M. Tate who proved to me on the basis of satisfactory evidence to
be the person whose name is subscribed to the within instrument and acknowledged
to me that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature: /s/ Kelly J. Howze (seal)

[Signatures continue on the following page]

 
S - 1

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LESSOR (continued):
 
 
 
HCP MA2 ARKANSAS, LP, a Delaware limited partnership
 
HCP MA2 CALIFORNIA, LP, a Delaware limited partnership
 
HCP MA2 ILLINOIS, LP, a Delaware limited partnership
 
HCP MA2 MASSACHUSETTS, LP, a Delaware limited partnership
 
HCP MA2 OHIO, LP, a Delaware limited partnership
 
HCP MA2 OKLAHOMA, LP, a Delaware limited partnership
 
By:HCP MA2 GP Holding, LLC, a Delaware limited liability company, their general
partner
 
By: /s/ Susan M. Tate
Name:  Susan M. Tate
Title:    Executive Vice President
 

State of California    
         
County of Los Angeles    

On October 13, 2010 before me, Kelly J. Howze, notary public, personally
appeared Susan M. Tate who proved to me on the basis of satisfactory evidence to
be the person whose name is subscribed to the within instrument and acknowledged
to me that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature: /s/ Kelly J. Howze (seal)

[Signatures continue on the following page]

 
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LESSOR (continued):
 
 
 
HCP PARTNERS, LP, a Delaware limited partnership
 
By:HCP GP Corp., a Delaware corporation, its general partner
 
By: /s/ Susan M. Tate
Name:  Susan M. Tate
Title:    Executive Vice President
 

State of California                   
           
County of Los Angeles         

On October 13, 2010 before me, Kelly J. Howze, notary public, personally
appeared Susan M. Tate who proved to me on the basis of satisfactory evidence to
be the person whose name is subscribed to the within instrument and acknowledged
to me that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature: /s/ Kelly J. Howze (seal)

[Signatures continue on the following page]

 
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LESSOR (continued):
 
 
 
HCP MA3 CALIFORNIA, LP, a Delaware limited partnership
 
HCP MA3 GEORGIA, LP, a Delaware limited partnership
 
HCP MA3 KENTUCKY, LP, a Delaware limited partnership
 
HCP MA3 OKLAHOMA, LP, a Delaware limited partnership
 
HCP MA3 WASHINGTON, LP, a Delaware limited partnership
 
By:HCP MA3 A Pack GP, LLC, a Delaware limited liability company, their general
partner
 
By: /s/ Susan M. Tate
Name:  Susan M. Tate
Title:    Executive Vice President
 
 

State of California                    
           
County of Los Angeles         

On October 13, 2010 before me, Kelly J. Howze, notary public, personally
appeared Susan M. Tate who proved to me on the basis of satisfactory evidence to
be the person whose name is subscribed to the within instrument and acknowledged
to me that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument the person, or the entity upon behalf of
which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature: /s/ Kelly J. Howze (seal)

[Signatures continue on the following page]

 
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LESSEE:
EMERITUS CORPORATION,

 
 
a Washington corporation

 
By:/s/ Eric Mendelsohn
 
Name: Eric Mendelsohn
 
Title: SVP Corporate Development
 

 
State of Washington                           )
) ss.
County of King                                    )

     On this 13th day of October, 2010, before me personally appeared Eric
Mendelsohn, to me known to be the SVP Corporate Development of the corporation
that executed the within and foregoing instrument, and acknowledged said
instrument to be the free and voluntary act and deed of said corporation, for
the uses and purposes therein mentioned, and on oath stated that he was
authorized to execute said instrument and that the seal affixed is the corporate
seal of said corporation.

     In Witness Whereof I have hereunto set my hand and affixed my official seal
the day and year first above written.

/s/ Melanie Pennington
Notary Public Melanie Pennington
My commission expires: 07/09/11.

 

 
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EXHIBIT A-1
 
LEGAL DESCRIPTION
 
(Hemet, California)
 

 

 
Exhibit A - Page 1

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EXHIBIT A-2
 
LEGAL DESCRIPTION
 
(Elk Grove, California)
 

 

 
Exhibit A - Page 2

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EXHIBIT A-3
 
LEGAL DESCRIPTION
 
(Dartmouth, Massachusetts)
 

 

 
Exhibit A - Page 3

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EXHIBIT A-3 - CONTINUED
 
LEGAL DESCRIPTION
 
(Dartmouth, Massachusetts)
 

 

 
Exhibit A - Page 4

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EXHIBIT A-4
 
LEGAL DESCRIPTION
 
(Plymouth, Massachusetts)
 

 

 
Exhibit A - Page 5

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EXHIBIT A-5
 
LEGAL DESCRIPTION
 
(Willoughby, Ohio)
 

 

 
Exhibit A - Page 6

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EXHIBIT A-5 - CONTINUED
 
LEGAL DESCRIPTION
 
(Willoughby, Ohio)
 

 

 
Exhibit A - Page 7

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EXHIBIT A-6
 
LEGAL DESCRIPTION
 
(Bellevue, Washington)
 

 

 
Exhibit A - Page 8

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EXHIBIT A-7
 
LEGAL DESCRIPTION
 
(Palm Springs, California)
 

 

 
Exhibit A - Page 9

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EXHIBIT A-8
 
LEGAL DESCRIPTION
 
(Lynnwood, Washington)
 

 

 
Exhibit A - Page 10

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EXHIBIT A-9
 
LEGAL DESCRIPTION
 
(Snohomish, Washington)
 

 

 
Exhibit A - Page 11

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EXHIBIT A-10
 
LEGAL DESCRIPTION
 
(Baltimore, Maryland)
 

 

 

 
Exhibit A - Page 12

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EXHIBIT A-10 - CONTINUED
 
LEGAL DESCRIPTION
 
(Baltimore, Maryland)
 

 

 
Exhibit A - Page 13

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EXHIBIT A-11
 
LEGAL DESCRIPTION
 
(Edgewood, Kentucky)
 

 

 
Exhibit A - Page 14

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EXHIBIT A-11 - CONTINUED
 
LEGAL DESCRIPTION
 
(Edgewood, Kentucky)
 

 

 
Exhibit A - Page 15

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EXHIBIT A-11 - CONTINUED
 
LEGAL DESCRIPTION
 
(Edgewood, Kentucky)
 

 

 
Exhibit A - Page 16

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EXHIBIT A-12
 
LEGAL DESCRIPTION
 
(Little Rock, Arkansas)
 

 
Exhibit A - Page 17

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EXHIBIT A-13
 
LEGAL DESCRIPTION
 
(Orland Park, Illinois)
 

 
Exhibit A - Page 18

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EXHIBIT A-14
 
LEGAL DESCRIPTION
 
(Oklahoma City, Oklahoma)
 

 
Exhibit A - Page 19

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EXHIBIT A-14 - CONTINUED
 
LEGAL DESCRIPTION
 
(Oklahoma City, Oklahoma)
 

 

 
Exhibit A - Page 20

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EXHIBIT A-15
 
LEGAL DESCRIPTION
 
(Tulsa, Oklahoma)
 

 
Exhibit A - Page 21

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EXHIBIT A-16
 
LEGAL DESCRIPTION
 
(Hoffman Estates, Illinois)
 

 

 

 
Exhibit A - Page 22

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EXHIBIT A-16 - CONTINUED
 
LEGAL DESCRIPTION
 
(Hoffman Estates, Illinois)
 

 

 
Exhibit A - Page 23

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EXHIBIT A-17
 
LEGAL DESCRIPTION
 
(Atlanta, Georgia)
 

 

 
Exhibit A - Page 24

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EXHIBIT A-17 - CONTINUED
 
LEGAL DESCRIPTION
 
(Atlanta, Georgia)
 

 

 

 
Exhibit A - Page 25

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EXHIBIT A-17 - CONTINUED
 
LEGAL DESCRIPTION
 
(Atlanta, Georgia)
 

 

 

 
Exhibit A - Page 26

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EXHIBIT B
 
List of Lessor’s Personal Property
 
With respect to each Facility, all of Lessor’s right, title and interest in and
to all machinery, equipment, furniture, furnishings, moveable walls or
partitions, computers or trade fixtures or other tangible personal property
located in, on or about the Leased Property of such Facility on and as of the
Commencement Date, excluding items, if any included within the definition of
Fixtures, but specifically including all right, title and interest of Lessor in
and to those items of tangible personal property described in Schedule 1 hereto,
if any.
 

 
B - 1

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Schedule 1
 
Itemization of Lessor’s Personal Property
 
To be mutually agreed upon by Lessor and Lessee prior to the Commencement
Date.  When agreed upon, the same shall be initialed by each of Lessor and
Lessee and attached to Exhibit B as Schedule 1, and will thereafter form a part
of this Lease.  Failure of either Lessor or Lessee to prepare and/or initial
such Schedule 1 shall not affect the definition of or what personal property
constitutes Lessor’s Personal Property in accordance with Exhibit B.
 

 
B - 2

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EXHIBIT C
Description of Facilities and Certain Material Terms

Facility
Allocated Minimum Rent
Allocated Minimum Purchase Price as of the Commencement Date
Allocated Planned Capital Refurbishment Project Tier 1 Allowance
Allocated Planned Capital Refurbishment Project Tier 2 Allowance
Primary Intended Use
Purchase Option Facility
Little Rock, Arkansas
1st Lease Year: $738,000
2nd Lease Year: $797,000
3rd Lease Year: $929,000
4th Lease Year: $1,025,000
5th Lease Year: $1,178,000
 
$21,078,000
$151,000
$327,000
137-unit independent living and 26-unit assisted living care facility and such
other uses necessary or incidental to such use.
No
Elk Grove, California
1st Lease Year: $704,000
2nd Lease Year: $897,000
3rd Lease Year: $1,036,000
4th Lease Year: $1,174,000
5th Lease Year: $1,265,000
 
$10,315,000
$82,000
$177,000
60-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Hemet, California
1st Lease Year: $698,000
2nd Lease Year: $726,000
3rd Lease Year: $839,000
4th Lease Year: $960,000
5th Lease Year: $1,044,000
 
$8,508,000
$78,000
$169,000
56-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Palm Springs, California
1st Lease Year: $25,000
2nd Lease Year: $150,000
3rd Lease Year: $314,000
4th Lease Year: $495,000
5th Lease Year: $623,000
 
$6,388,000
$80,000
$173,000
58-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Atlanta, Georgia
1st Lease Year: $25,000
2nd Lease Year: $181,000
3rd Lease Year: $380,000
4th Lease Year: $599,000
5th Lease Year: $755,000
 
$12,976,000
$106,000
$229,000
90-unit assisted living care and 24-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes

 
C - 1

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Hoffman Estates, Illinois
1st Lease Year: $1,138,000
2nd Lease Year: $1,249,000
3rd Lease Year: $1,436,000
4th Lease Year: $1,600,000
5th Lease Year: $1,775,000
 
$15,123,000
$96,000
$209,000
80-unit assisted living care and 24-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No
Orland Park, Illinois
1st Lease Year: $1,014,000
2nd Lease Year: $1,124,000
3rd Lease Year: $1,304,000
4th Lease Year: $1,453,000
5th Lease Year: $1,612,000
 
$26,479,000
$96,000
$209,000
80-unit assisted living care and 24-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No
Edgewood, Kentucky
1st Lease Year: $1,075,000
2nd Lease Year: $1,276,000
3rd Lease Year: $1,394,000
4th Lease Year: $1,468,000
5th Lease Year: $1,613,000
 
$7,763,000
$96,000
$209,000
80-unit assisted living care and 24-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No
Dartmouth, Massachusetts
1st Lease Year: $815,000
2nd Lease Year: $888,000
3rd Lease Year: $1,027,000
4th Lease Year: $1,174,000
5th Lease Year: $1,277,000
 
$12,123,000
$78,000
$169,000
70-unit assisted living care and 14-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Plymouth, Massachusetts
1st Lease Year: $954,000
2nd Lease Year: $1,002,000
3rd Lease Year: $1,158,000
4th Lease Year: $1,325,000
5th Lease Year: $1,440,000
 
$9,464,000
$78,000
$169,000
56-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Baltimore, Maryland
1st Lease Year: $1,061,000
2nd Lease Year: $1,265,000
3rd Lease Year: $1,403,000
4th Lease Year: $1,478,000
5th Lease Year: $1,624,000
 
$18,397,000
$82,000
$179,000
66-unit assisted living care and 23-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No

 
C - 2

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Willoughby, Ohio
1st Lease Year: $903,000
2nd Lease Year: $1,044,000
3rd Lease Year: $1,183,000
4th Lease Year: $1,218,000
5th Lease Year: $1,340,000
 
$10,209,000
$80,000
$173,000
58-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Oklahoma City, Oklahoma
1st Lease Year: $651,000
2nd Lease Year: $683,000
3rd Lease Year: $790,000
4th Lease Year: $903,000
5th Lease Year: $982,000
 
$7,871,000
$96,000
$209,000
82-unit assisted living care and 22-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No
Tulsa, Oklahoma
1st Lease Year: $1,143,000
2nd Lease Year: $1,189,000
3rd Lease Year: $1,312,000
4th Lease Year: $1,369,000
5th Lease Year: $1,445,000
 
$10,102,000
$94,000
$205,000
80-unit assisted living care and 22-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
No
Bellevue, Washington
1st Lease Year: $1,263,000
2nd Lease Year: $1,387,000
3rd Lease Year: $1,594,000
4th Lease Year: $1,776,000
5th Lease Year: $1,970,000
 
$17,971,000
$107,000
$231,000
90-unit assisted living care and 25-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Lynnwood, Washington
1st Lease Year: $25,000
2nd Lease Year: $154,000
3rd Lease Year: $323,000
4th Lease Year: $508,000
5th Lease Year: $676,000
 
$11,061,000
$56,000
$120,000
40-unit assisted living care and 20-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes
Snohomish, Washington
1st Lease Year: $25,000
2nd Lease Year: $173,000
3rd Lease Year: $363,000
4th Lease Year: $571,000
5th Lease Year: $760,000
 
$15,105,000
$78,000
$169,000
56-unit assisted living care and 28-unit Alzheimer’s care facility and such
other uses necessary or incidental to such use.
Yes

 
C - 3

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EXHIBIT D
 
Form of Amendment to Lease
 
_____ AMENDMENT TO MASTER LEASE AND SECURITY AGREEMENT
 
This _____Amendment to Master Lease and Security Agreement (“Amendment”) is
dated as of ______________, 2010 by and among each of those Persons identified
on the signature pages hereto as “Lessor” (as their interests may appear,
“Lessor”) and  EMERITUS CORPORATION (“Emeritus” or “Lessee”)
 
RECITALS
 
A.           Lessor and Lessee entered into a Master Lease and Security
Agreement dated as of October 12, 2010 [list any previous amendments] (the
“Lease”) for the lease of certain separate assisted-living care, Alzheimer’s
care and/or  skilled nursing facilities located in the States of Arkansas,
California, Georgia, Illinois, Kentucky, Massachusetts, Maryland, Ohio, Oklahoma
and Washington, on the Land, as more particularly described in the Lease.
 
B.           Lessor and Lessee desire to memorialize their understanding
regarding certain provisions of the Lease.
 
AGREEMENT
 
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Lease.  Lessor and Lessee hereby agree as follows:
 
1.           The Commencement Date of the Lease is _____________, 201_;
 
2.           The Fixed Term Expiration Date of the Lease is _______________,
201_;
 
3.           The first Lease Year for the Lease commences on ____________, 201_
and ends on ____________, 201_;
 
Except as amended above, the Lease between Lessor and Lessee shall remain in
full force and effect.  This Amendment may be executed in any number of
counterparts, all of which together shall constitute one and the same
instrument.
 
[Signatures appear on the following page]
 

 
D - 1

--------------------------------------------------------------------------------

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
as of the day and year first above written.
 

LESSOR:
 
 
 
HCP DARTMOUTH MA, LP, a Delaware limited partnership
 
HCP LAGUNA CREEK CA, LP, a Delaware limited partnership
 
HCP TOWSON MD, LP, a Delaware limited partnership
 
By:HCP MA1 GP, LLC, a Delaware limited liability company, their general partner
 
By:
Name:
Title:
 
 

State of California                                           
 
County of _____________                                         

 
On _________________, 2010 before me, _______________, notary public, personally
appeared ______________ who proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument the person, or the entity upon
behalf of which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature:                                                                
(seal)

[Signatures continue on the following page]

 
D - 2

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LESSOR (continued):
 
 
 
HCP MA2 ARKANSAS, LP, a Delaware limited partnership
 
HCP MA2 CALIFORNIA, LP, a Delaware limited partnership
 
HCP MA2 ILLINOIS, LP, a Delaware limited partnership
 
HCP MA2 MASSACHUSETTS, LP, a Delaware limited partnership
 
HCP MA2 OHIO, LP, a Delaware limited partnership
 
HCP MA2 OKLAHOMA, LP, a Delaware limited partnership
 
By:HCP MA2 GP Holding, LLC, a Delaware limited liability company, their general
partner
 
By:
Name:
Title:
 

State of California                                         
 
County of _____________                                           

On _________________, 2010 before me, _______________, notary public, personally
appeared ______________ who proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument the person, or the entity upon
behalf of which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature:                                                                
(seal)

[Signatures continue on the following page]

 
D - 3

--------------------------------------------------------------------------------

 

LESSOR (continued):
 
 
 
HCP PARTNERS, LP, a Delaware limited partnership
 
By:HCP GP Corp., a Delaware corporation, its general partner
 
By:
Name:
Title:
 

State of California                                        
 
County of _____________                                         

On _________________, 2010 before me, _______________, notary public, personally
appeared ______________ who proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument the person, or the entity upon
behalf of which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature:                                                                
(seal)

[Signatures continue on the following page]

 
D - 4

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LESSOR (continued):
 
 
 
HCP MA3 CALIFORNIA, LP, a Delaware limited partnership
 
HCP MA3 GEORGIA, LP, a Delaware limited partnership
 
HCP MA3 KENTUCKY, LP, a Delaware limited partnership
 
HCP MA3 OKLAHOMA, LP, a Delaware limited partnership
 
HCP MA3 WASHINGTON, LP, a Delaware limited partnership
 
By:HCP MA3 A Pack GP, LLC, a Delaware limited liability company, their general
partner
 
By:
Name:
Title:
 
 

State of California                                         
 
County of _____________                                      

On _________________, 2010 before me, _______________, notary public, personally
appeared ______________ who proved to me on the basis of satisfactory evidence
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument the person, or the entity upon
behalf of which the person acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California
that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.

Signature:                                                                
(seal)

[Signatures continue on the following page]

 
D - 5

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LESSEE:
EMERITUS CORPORATION,

 
 
a Washington corporation

 
By:                                                                
 
Name:                                                                
 
Title:                                                                
 

 
State of __________                                                    
         
             ss.
County of _________          
                                           

     On this ____ day of ____________, 2010, before me personally appeared
__________, to me known to be the _____________ of the corporation that executed
the within and foregoing instrument, and acknowledged said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that he was authorized to execute said
instrument and that the seal affixed is the corporate seal of said corporation.

     In Witness Whereof I have hereunto set my hand and affixed my official seal
the day and year first above written.

Notary Public
My commission expires:                                                      .

 
D - 6

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SCHEDULE A

LIST OF PERSONS COMPRISING LESSOR AND FACILITIES OWNED

Person Comprising Lessor
Facility Owned
HCP Dartmouth MA, LP, a Delaware limited partnership (“HCP Dartmouth”)
1151 Dartmouth, Massachusetts – Sunrise of Dartmouth
HCP Laguna Creek CA, LP, a Delaware limited partnership (“HCP Laguna Creek”)
1152 Elk Grove, California – Sunrise at Laguna Creek
HCP Towson MD, LP, a Delaware limited partnership (“HCP Towson”)
1153 Baltimore, Maryland – Brighton Gardens of Towson
HCP MA2 Arkansas, LP, a Delaware limited partnership (“HCP MA2 Arkansas”)
1154 Little Rock, Arkansas – Pleasant Hills
HCP MA2 California, LP, a Delaware limited partnership (“HCP MA2 California”)
1156 Hemet, California – Sunrise of Hemet
HCP MA2 Illinois, LP, a Delaware limited partnership (“HCP MA2 Illinois”)
1157 Hoffman Estates, Illinois – Brighton Gardens of Hoffman Estates
HCP MA2 Massachusetts, LP, a Delaware limited partnership (“HCP MA2
Massachusetts”)
1158 Plymouth, Massachusetts – Sunrise of Plymouth
HCP MA2 Ohio, LP, a Delaware limited partnership (“HCP MA2 Ohio”)
1159 Willoughby, Ohio – Sunrise of Willoughby
HCP MA2 Oklahoma, LP, a Delaware limited partnership (“HCP MA2 Oklahoma”)
1160 Tulsa, Oklahoma – Brighton Gardens of Tulsa
HCP Partners, LP, a Delaware limited partnership (“HCP Partners”)
1162 Orland Park, Illinois – Brighton Gardens of Orland Park
HCP MA3 California, LP, a Delaware limited partnership (“HCP MA3 California”)
1168 Palm Springs, California – Sunrise of Palm Springs
HCP MA3 Georgia, LP, a Delaware limited partnership (“HCP MA3 Georgia”)
1169 Atlanta, Georgia – Brighton Gardens of Vinings
HCP MA3 Kentucky, LP, a Delaware limited partnership (“HCP MA3 Kentucky”)
1170 Edgewood, Kentucky – Brighton Gardens of Edgewood
HCP MA3 Oklahoma, LP, a Delaware limited partnership (“HCP MA3 Oklahoma”)
1171 Oklahoma City, Oklahoma – Brighton Gardens of Oklahoma City
HCP MA3 Washington, LP, a Delaware limited partnership (“HCP MA3 Washington”)
1173 Bellevue, Washington – Brighton Gardens of Bellevue
HCP MA3 Washington
174 Lynnwood, Washington – Sunrise of Lynnwood
HCP MA3 Washington
1175 Snohomish, Washington – Sunrise of Snohomish

 
Schedule A - 1

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SCHEDULE 7.4.1

EXCLUDED FACILITIES

·  
Court at Vinings (within Prohibited Area of Atlanta, Georgia Facility)

·  
Statesman Club (within Prohibited Area of Oklahoma City, Oklahoma Facility)

·  
Manchester House (within Prohibited Area of Oklahoma City, Oklahoma Facility)

·  
Emerald Estates (within Prohibited Area of Baltimore, Maryland Facility)

·  
Kirkland Lodge (within Prohibited Area of Bellevue, Washington Facility)

 
Schedule 7.4.1 - 1

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