<PAGE>
 
                                                                [Execution Copy]



                        FIRST AMENDMENT AND RESTATEMENT

                           Dated as of June 20, 1997


                                       TO


                                LEASE AGREEMENT
                         Dated as of December 15, 1994
<PAGE>
 
                               TABLE OF CONTENTS
                               -----------------

                                                                           
                                                                           
<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                             <C>
SECTION 1.  Definitions.........................................................  iii

SECTION 2.  Lease of Leased Premises............................................  iii

SECTION 4.  Rent................................................................    3

SECTION 5.  Net Lease Agreement.................................................    3

SECTION 6.  Use of Leased Premises..............................................    4

SECTION 7.  Compliance with Laws................................................    5

SECTION 8.  Property Taxes and Assessments......................................    5

SECTION 9.  Maintenance and Repair of Property; Alterations.....................    6

SECTION 10. Insurance...........................................................    6

SECTION 11. Assignment and Subletting...........................................    9

SECTION 12. Liens...............................................................   11

SECTION 13. Certain Personal Property...........................................   11

SECTION 14. Loss, Damage or Destruction.........................................   12

SECTION 15. Lessee's Rights of Purchase and Renewal; Purchase Obligation........   13

SECTION 16. Sale of Leased Premises.............................................   14

SECTION 17. Late Charges........................................................   15

SECTION 18. No Warranties.......................................................   15

SECTION 19. Events of Default...................................................   16

SECTION 20. Remedies Upon Default...............................................   17

SECTION 21. Certain Waivers.....................................................   23

SECTION 22. Memorandum of Lease.................................................   24

SECTION 23. Lessor's Right to Perform for the Lessee............................   25
</TABLE>
                                       i
<PAGE>
 
<TABLE> 
<S>                                                                                <C> 
SECTION 24. Notices.............................................................    25
 
SECTION 25. Nature of Transaction...............................................    25
 
SECTION 26. Operating Lease.....................................................    26
 
SECTION 27. Governing Law.......................................................    26
 
SECTION 28. Miscellaneous.......................................................    26
</TABLE>

                                      ii
<PAGE>
 
     FIRST AMENDMENT AND RESTATEMENT, dated as of June 20, 1997, to LEASE
AGREEMENT (the "Original Lease Agreement"), dated as of December 15, 1994,
between FLEET NATIONAL BANK (as successor to Shawmut Bank Connecticut, National
Association), a national banking association, not in its individual capacity but
solely as Owner Trustee under the Trust Agreement (the "Lessor") and SMART &
FINAL INC., a Delaware corporation (the "Lessee").

     The parties hereto hereby agree that the Original Lease Agreement is
amended and restated to read in its entirety as follows:

     SECTION 1.     Definitions.  All capitalized terms used and not defined
                    -----------                                             
herein shall have the respective meanings ascribed thereto in Exhibit A to the
First Amendment and Restatement, dated as of June 20, 1997, to the Participation
Agreement dated as of December 15, 1994, among the parties hereto, Credit
Lyonnais New York Branch, as Agent, and the Lenders and Equity Participant named
therein, as amended from time to time.

     The words "this Lease Agreement", "herein", "hereunder", "hereof" or other
like words mean and include this Lease Agreement, each Lease Supplement, and
each amendment and supplement hereto and thereto.

     SECTION 2.     Lease of Leased Premises.
                    ------------------------ 

     (a) Subject to the terms and conditions hereof, the Lessor agrees to lease
to the Lessee any and all of the Leased Premises for the Lease Term.  The Lessor
shall not be obligated to acquire any Leased Premises for lease hereunder
unless:

          (i) the Purchase Price plus the Estimated Improvement Cost of such
     Leased Premises and all other Leased Premises leased hereunder does not
     exceed $30,000,000;

          (ii) the Lessee causes the conveyance of title to such Leased Premises
     to the Lessor as provided in Section 3.02 of the Participation Agreement;

          (iii)  at the time any such Leased Premises is to be leased hereunder,
     there exists no Event of Default or Unmatured Event of Default; and

          (iv) the other terms and conditions hereof and of the Participation
     Agreement including without limitation the terms and conditions of Article
     III thereof are satisfied.

          (b) The lease of each of the Leased Premises to the Lessee under this
Lease Agreement shall be evidenced by the execution and delivery by the Lessor
and the Lessee of a Lease Supplement.  In addition, each Advance made by the
Lessor to the Lessee under the Agency Agreement shall be evidenced by a Lease
Supplement. All Closing Dates which may occur hereunder or under any of the
Transaction Documents have occurred.

          (c) Execution by the Lessee of a Lease Supplement shall constitute (i)
in the case of a Lease Supplement evidencing the lease of Leased Premises, (x)
acknowledgment by the Lessee that possession of the Leased Premises specified 
therein has been delivered to the 
<PAGE>
 
Lessee in good condition and has been accepted for lease hereunder by the Lessee
as of the Closing Date, and (y) acknowledgment by the Lessee that the Leased
Premises specified therein are subject to all of the covenants, terms and
conditions of this Lease Agreement and such Lease Supplement, or (ii) in the
case of a Lease Supplement evidencing an Advance under the Agency Agreement, (x)
acknowledgment by the Lessee that all the Work performed and Improvements
constructed to date are a part of the Leased Premises and subject to the Lease
Agreement and (y) acknowledgment that the amount of such Advance shall be added
to, and become a part of, the Outstanding Property Cost on such Advance Date.

     (d) So long as the Lessee pays the Basic Rent, any Supplemental Rent and
any other sums payable hereunder as the same become due and fully complies with
all of the terms of this Lease Agreement and the other Transaction Documents and
fully performs its obligations hereunder and thereunder, and so long as no Event
of Default has occurred and is continuing, the Lessor covenants that, subject to
the terms of this Lease Agreement and the other Transaction Documents, neither
the Lessor nor anyone claiming by, through or under the Lessor shall interfere
with the Lessee's peaceful and quiet enjoyment of the Leased Premises (except in
respect of claims which the Lessee is obligated to indemnify any Indemnified
Party pursuant to Section 4.02 of the Participation Agreement and claims arising
from encumbrances on any Leased Premises existing on the Closing Date thereof).
No failure by the Lessor to comply with the foregoing covenant shall give the
Lessee any right to cancel or terminate this Lease Agreement or to abate, reduce
or make a deduction from or offset against the Basic Rent, Supplemental Rent or
any other amount payable under this Lease Agreement, or to fail to perform any
other obligation of Lessee hereunder.

     SECTION 3.     Term.
                    ---- 

     (a) The "Base Term" for the Leased Premises described in a Lease Supplement
shall commence on the Closing Date set forth in such Lease Supplement, which (as
described in the Participation Agreement) is the date on which such Leased
Premises is accepted for lease hereunder by the Lessee, and shall continue until
December 31, 2001, unless terminated earlier pursuant to Section 14, 15, 16 or
20 hereof.

     (b) Subject to the conditions set forth in Section 15(b) hereof, each
"Renewal Term" shall be for a period of one (1) year and shall commence on the
first day following the last day of the Base Term (in the case of the first
Renewal Term) or the last day of the preceding Renewal Term (in the case of
subsequent Renewal Terms), unless terminated earlier pursuant to Section 14, 15,
16 or 20 hereof.   There may be a maximum of twenty-three (23) Renewal Terms
elected by the Lessee as provided in Section 15 hereof.

     (c) The "Lease Term" shall consist of the Base Term and all Renewal Terms;
provided, however, that the Lease Term shall not, in any event, extend beyond
--------                                                                     
the first to occur of (i) December 31, 2024 and (ii) the Maturity Date of the
Notes.

     (d) If the Lessee remains in possession of the Leased Premises after the
expiration of the Lease Term, such continued possession shall, if rent is paid
by the Lessee and accepted by the Lessor, create a month-to-month tenancy on the
terms and conditions herein specified but at a Basic Rent equal to the Basic
Rent that would have been payable during the period of the hold-over had the
Lessee exercised its right to extend the Lease Term for the Renewal Term

                                       2
<PAGE>
 
immediately following the expiration of the Lease Term except that the Finance
Rate used in calculating the Basic Rent shall be the Late Payment Rate, and said
tenancy may be terminated at any time by either party by 30 days' prior written
notice to the other party.

     SECTION 4.     Rent.
                    ---- 

     (a) The Lessee hereby agrees to pay to the Lessor on each Payment Date
during the Lease Term the Basic Rent due on such date.

     (b) The Lessee also agrees to pay to the Lessor, or to whomsoever shall be
entitled thereto as expressly provided herein or in the Participation Agreement,
all Supplemental Rent, promptly as the same shall become due and owing, or if no
due date is specified, upon demand by the Lessor, and in the event of any
failure on the part of the Lessee so to pay any such Supplemental Rent hereunder
the Lessor shall have all rights, powers and remedies provided for herein or by
law or equity or otherwise in the case of nonpayment of Basic Rent.

     (c) Until the indebtedness evidenced by the Notes shall have been fully
paid and discharged, all payments (other than Excluded Amounts) required to be
made by the Lessee to the Lessor hereunder shall be made to the Agent, by wire
transfer of federal or other immediately available funds no later than 11:00
a.m. New York City time and identifying each payment in such manner and payable
to such account of the Agent as provided in Section 4.05 and the signature pages
of the Participation Agreement.  Thereafter, all payments required to be made by
the Lessee to the Lessor hereunder shall be paid to the Lessor in such manner as
the Lessor has reasonably requested.  All Excluded Amounts shall be paid
directly to the Person entitled thereto as specified in the preceding sentence.
Time is of the essence in connection with the payment of Basic Rent,
Supplemental Rent and all other payments hereunder.

     SECTION 5.     Net Lease Agreement.  The lease of the Leased Premises
                    -------------------                                   
hereunder is a net lease and the Lessee shall pay all costs and expenses of
every character, whether foreseen or unforeseen, ordinary or extraordinary or
structural or nonstructural, in connection with the use, operation, maintenance,
repair and reconstruction of the Leased Premises.  Notwithstanding any other
provision of this Lease Agreement, it is intended that Basic Rent and
Supplemental Rent shall be paid without notice, demand, counterclaim, setoff,
deduction or defense and without abatement, suspension, deferment, diminution or
reduction.  The obligations and liabilities of the Lessee hereunder shall in no
way be released, discharged or otherwise affected (except as may be expressly
provided herein) for any reason, including, without limitation: (a) any defect
in the condition, quality or fitness for use of the Leased Premises or any
portion thereof; (b) any damage to, removal, abandonment, salvage, loss or
destruction of or any requisition, condemnation, taking of, or the occurrence of
any Event of Loss with respect to the Leased Premises or any portion thereof;
(c) any restriction, prevention or curtailment of or interference with any use
of the Leased Premises or any part thereof, whether as a result of force majeure
                                                                   ----- -------
or otherwise; (d) any defect in or any Lien on the title to the Leased Premises
or any part thereof; (e) any change, waiver, extension, indulgence or other
action or omission in respect of any obligation or liability of the Lessee, the
Lessor or any other Person; (f) any bankruptcy, insolvency, reorganization,
composition, adjustment, dissolution, liquidation or other like proceeding
relating to the Lessee,the Lessor or any other Person, or any action taken with
respect to this Lease Agreement by any trustee or receiver of the Lessee, the
Lessor or any other Person, or by any court; (g) any claim that the Lessee has
or may have against the Lessor or

                                       3
<PAGE>
 
any other Person; (h) any failure on the part of the Lessor, the Equity
Participant, any Lender or the Agent to perform or comply with any of the terms
hereof or of any other Transaction Documents; (i) any invalidity or
unenforceability or disaffirmance of this Lease Agreement or any provision
hereof or any of the other Transaction Documents or any provision of any
thereof; (j) any change in the tax or other laws of the United States, any state
or any political subdivision of any thereof; (k) any assignment, novation,
merger, consolidation, sale or transfer of assets, leasing or other similar
transaction of or affecting either the Lessee, whether with or without the
approval of the Lessor or any other Person; (l) any acts or circumstances that
may constitute a foreclosure under this Lease Agreement; or (m) any other
occurrence whatsoever, whether similar or dissimilar to the foregoing, whether
or not either the Lessee shall have notice or knowledge of any of the foregoing.
This Lease Agreement shall be noncancellable by the Lessee and, except as
expressly provided herein, the Lessee, to the extent permitted by law, waives
all rights now or hereafter conferred by statute or otherwise to quit, terminate
or surrender this Lease Agreement or to any diminution or reduction of Rent or
Supplemental Rent payable by the Lessee hereunder. Except as expressly provided
herein, all payments by the Lessee shall be final and the Lessee shall not seek
to recover any such payment or any part thereof for any reason whatsoever.
Except as otherwise expressly provided herein or in other Transaction Documents,
the Lessee shall pay to the parties respectively entitled thereto, as
Supplemental Rent, all utility charges, taxes, insurance premiums, operating
charges, repair and maintenance charges and any other costs and expenses that
may accrue or become due and payable during the Lease Term relating to any
Leased Premises or any buildings, improvements, fixtures, machinery, equipment
or personal property now or hereafter constituting a part thereof, or arising
from the construction, management, maintenance, preservation or operation of,
or from any use, occupancy or activity conducted in, on or about any Leased
Premises and any buildings, improvements, fixtures, machinery, equipment or
personal property now or hereafter constituting a part thereof.

     SECTION 6.     Use of Leased Premises.
                    ---------------------- 

     The Lessee shall be permitted to use the Leased Premises for any lawful
uses, subject, however, to applicable zoning ordinances, applicable laws and any
governmental rules and regulations now in effect or hereafter adopted by any
governmental authority having or asserting jurisdiction, and such conditions,
restrictions and other encumbrances, if any, to which the Leased Premises are
subject at the time of execution and delivery of the Lease Supplement applicable
thereto.  The Lessee shall not use or occupy or permit any Leased Premises to be
used or occupied, nor do or permit anything to be done in or on any Leased
Premises or any part thereof, in a manner that would in any way violate any
certificate of occupancy affecting such Leased Premises or make void or voidable
any insurance then in force with respect thereto, or that may make it impossible
to obtain fire or other insurance thereon required to be furnished hereunder by
the Lessee, or that will cause or be likely to cause structural injury to such
Leased Premises, or that will constitute a public or private nuisance or waste.
Nothing contained in this Lease Agreement and no action or inaction by the
Lessor shall be deemed or construed to mean that the Lessor has granted to the
Lessee any right, power or permission to do any act or to make any agreement
that may create, give rise to, or be the foundation for, any right, title,
interest, lien, charge or other encumbrance upon the estate of the Lessor in the
Leased Premises.

                                       4
<PAGE>
 
     SECTION 7.     Compliance with Laws.
                    -------------------- 

     (a) The Lessee shall, throughout the Lease Term, and at the Lessee's cost
and expense, promptly comply, or cause compliance (including, without
limitation, in connection with the making of any required alterations, repairs
or improvements to the Leased Premises): (i) with all applicable laws, rules,
regulations, licenses, judgments, orders or decrees of any government,
governmental body or court having jurisdiction over the Lessee or the Leased
Premises, and (ii) with any agreements, contracts, easements and restrictions
affecting any Leased Premises or any part thereof or the ownership, occupancy or
use thereof existing on the Closing Date for such Leased Premises or hereafter
created by the Lessee, or consented to or requested by the Lessee.  In
furtherance, and not in limitation of, the preceding sentence, the Lessee will
comply with all Environmental Laws governing each Leased Premises.

     (b) No abatement, diminution or reduction in Basic or Supplemental Rent or
any other charges required to be paid by the Lessee pursuant hereto shall be
claimed by or allowed to the Lessee for any inconvenience or interruption,
cessation, or loss of business caused directly or indirectly, by any present or
future laws or regulations, or by priorities, rationing or curtailment of labor
or materials, or by war, civil commotion, strikes or riots, or any manner or
thing resulting therefrom, or by any other cause or causes beyond the control of
the Lessor or the Lessee, nor shall this Lease Agreement be affected by any such
causes; and no diminution in the amount of the space used by the Lessee caused
by legally required changes in the construction, equipment, fixtures, motors,
machinery, operation or use of any Leased Premises shall entitle the Lessee to
any abatement, diminution or reduction of the Basic Rent or any other charges
required to be paid by the Lessee pursuant to this Lease Agreement.

     SECTION 8.     Property Taxes and Assessments.
                    ------------------------------ 

     (a) The Lessee shall pay when due and shall be obligated for all real
estate taxes and assessments assessed against any Leased Premises or any part of
any thereof.  Such real estate taxes and assessments shall be hereinafter
referred to as "Real Estate Taxes."  Real Estate Taxes shall also include any
tax, assessment, charge or fee in substitution for or in addition to such real
estate taxes or assessments, and a tax on rents in substitution for or in
addition to such real estate taxes or assessments, but shall not include any
Taxes specified in clauses (x) or (y) of Section 4.02(b) of the Participation
Agreement.  The Lessee agrees to pay all such Real Estate Taxes on the Leased
Premises on or before the due date for payment of such Real Estate Taxes.

     (b) The Lessee shall have the right to contest the amount or validity of
the Real Estate Taxes which the Lessee is required to pay hereunder, and for
that purpose, the Lessee shall have the right to file in the name of the Lessor
all such protests or petitions and to institute and prosecute such proceedings
as the Lessee may deem necessary for the purpose of such contest.  The Lessee
shall pay the cost of prosecuting such contest.  If payment is necessary in
order to avoid penalties or interest accruing thereon the Lessee must pay such
Real Estate Taxes prior to such protest or proceeding.  Any refund of any Real
Estate Taxes paid by the Lessee shall be the property of the Lessee, and the
Lessor agrees to pay the same to the Lessee promptly in the event payment
thereof is initially made to the Lessor.

     (c) The Lessee shall pay promptly when due all personal property taxes
assessed during the Lease Term upon the Lessee's fixtures, furnishing, equipment
and stock in trade or 

                                       5
<PAGE>
 
upon the Lessee's leasehold interest under this Lease Agreement or upon any
other personal property situated in or upon the Leased Premises.

     SECTION 9.     Maintenance and Repair of Property; Alterations.
                    ----------------------------------------------- 

     (a) The Lessee shall, at all times during the Lease Term, at its own cost
and expense and without any cost or expense to the Lessor, preserve and maintain
the Leased Premises (including parking areas, access drives and landscaping) in
good condition and repair, consistent with industry standards, subject to
ordinary physical depreciation and wear and tear but in no event shall such
standards be lower than the standards followed by the Lessee for the maintenance
and repair of similar property owned by the Lessee, which obligation shall
include, without limitation, the maintenance and repair of both the exterior and
interior of the Leased Premises, structural components, roof membrane, interior
and exterior surfaces, window and door glass, plumbing, heating, ventilation,
and air conditioning systems and equipment, and electrical systems and
equipment.  The foregoing undertaking to maintain the Leased Premises in good
condition and repair shall apply regardless of the cause necessitating repair
and regardless of whether the Lessee has possession of the Leased Premises, and
as between the Lessor and the Lessee, all risks of damage to the Leased Premises
are assumed by the Lessee.

     (b) The Lessee may, at its own cost and expense,  make additions to, and
alterations of, the Leased Premises, provided that (i) the then Appraised Value
of any Leased Premises shall not be decreased thereby, (ii) such work shall be
expeditiously completed in a good and workman like manner under the supervision
of a licensed architect or engineer in accordance with plans and specifications
and cost estimates prepared by such architect or engineer and in compliance with
all applicable laws, rules, regulations, licenses (including all notice
requirements thereof), (iii) no structural alteration shall be made unless the
Lessor's prior written consent shall have been obtained, which consent will not
be unreasonably withheld or delayed, and (iv) no material improvements shall be
demolished or maded unless the Lessor's prior written consent shall have been
obtained, which consent will not be unreasonably withheld or delayed.  If the
estimated cost of any single or connected series of such additions, alterations
or improvements exceeds $1,000,000 (other than the Improvements made pursuant to
the Agency Agreement), the Lessee will (x) give the Lessor and the Agent advance
notice thereof, (y) provide the Lessor and the Agent for its review preliminary
and final plans and specifications and any material amendments thereto, and (z)
use only reputable general contractors and subcontractors, licensed to the
extent required by the provisions of applicable law.  All such additions,
alterations and improvements shall be and remain the property of the Lessor,
shall be deemed part of the Leased Premises and shall be subject to this Lease
Agreement.

     SECTION 10.    Insurance.
                    --------- 

     (a) The Lessee will maintain the following insurance in respect of each of
the Leased Premises in each case in amounts and with carriers acceptable to the
Lessor and the Agent:

          (i) property insurance (including coverage for business interruption)
     against all risks of direct physical loss, including loss by fire,
     lightning, windstorm (if commercially reasonable to obtain), hail,
     explosion, riot and civil commotion, aircraft and vehicles, smoke, flood
     (if commercially reasonable to obtain), earthquake (if 

                                       6
<PAGE>
 
     commercially reasonable to obtain) and other risks which at the time are
     included under usual and customary extended coverage endorsements in
     amounts sufficient to prevent the Lessor and the Lessee from becoming a co-
     insurer of any loss, but in any event not less than the actual replacement
     value of the buildings and improvements on the Leased Premises or the
     Termination Value, whichever is greater (and in any event not less than the
     coverage obtained by the Lessee on similar properties); provided, however
                                                             --------  -------
     that any deductible under such insurance policies shall not be in excess 
     of an amount acceptable to Lessor and the Agent and, provided further, 
                                                          -------- -------
     that the Lessee may provide for property insurance (including coverage for
     business interruption) against such claims under a blanket property
     insurance policy of at least $100,000,000 coverage per occurrence and
     $100,000,000 aggregate per annum covering all Premises owned, leased or
     occupied by the Lessee including the Leased Premises;

          (ii) commercial general liability insurance against claims for bodily
     injury, death or property damage occurring on, in or about the Leased
     Premises, and any claims arising out of the ownership, operation,
     maintenance, condition and use of the Leased Premises, in the minimum
     amount of $50,000,000 in respect of personal injury or death to any one
     person, in the minimum amount of $50,000,000 in respect of any one accident
     and in the minimum amount of $10,000,000 in respect of property damage;
     provided, however, that the Lessee may provide for commercial general
     --------  -------                                                    
     liability insurance against such claims under an umbrella liability policy;

          (iii)  to the extent required by the law of the state in which the
     Leased Premises are located, worker's compensation insurance, including
     employer's liability, disability and similar insurance; and

          (iv) prior to the date that the Work is Substantially Complete
     builder's risk insurance on a completed value, nonreporting basis for the
     Estimated Improvement Cost and worker's compensation insurance as required
     by applicable law and regulations; provided, however, that any deductible
                                        --------  -------                     
     amounts exceeding $25,000 under the builder's risk policy shall be subject
     to the approval of the Lessor and the Agent.

          Notwithstanding the foregoing, the Lessee shall at all times comply
with any provisions of applicable law affecting any Leased Premises regarding
insurance that are more stringent than the foregoing provisions.  All insurance
shall be written or substantially underwritten by companies of nationally
recognized financial standing, which are legally qualified to issue such
insurance.

     (b)  Every such policy shall:

          (i) designate (except in the case of workers' compensation insurance
     and employer liability insurance) the Lessor, the Trust Company, the Owner
     Trustee (in its individual capacity), each Lender, the Equity Participant
     and the Agent as additional insureds as their interests may appear and the
     Lessor as the sole loss payee;

          (ii) provide (except for workers' compensation, public and employer
     liability insurance) that all insurance proceeds shall be payable to the
     Lessor;

                                       7
<PAGE>
 
          (iii)  provide that there shall be no recourse to the Lessor, the
     Trust Company, the Equity Participant, any Lender or the Agent for the
     payment of premiums or commissions or (if such policies provide for the
     payment thereof) additional premiums or assessments;

          (iv) provide that such insurance shall be primary insurance without
     any right of contribution from any other insurance carried by the Lessor,
     the Trust Company, the Equity Participant, each Lender or the Agent, and
     that all provisions thereof, except the limits of liability (which shall be
     applicable to all insurers as a group) and liability for premiums (which
     shall be solely a liability of the Lessee), shall operate in the same
     manner as if there were a separate policy covering each insured;

          (v) provide that the Lessor and the Agent will be furnished with at
     least 30 days' advance written notice of any material change or
     cancellation or expiration or non-renewal of coverage, and that such
     material change, cancellation or expiration shall not be effective as to
     the Lessor, the Equity Participant, any Lender or the Agent prior to the
     expiration of such period after notice to the Agent and the Lessor;

          (vi) waive any right of subrogation of the insurers thereunder against
     the Lessor, the Equity Participant, each Lender or the Agent, and any right
     of the insurers to any setoff or counterclaim or any other deduction,
     whether by attachment or otherwise, with respect to any liability of any
     such person insured under such policy;

          (vii)  provide that any losses recovered under the insurance described
     in this Section 10 shall not be invalidated notwithstanding (A) any act,
     failure to act or negligence or violation of warranties, declarations, or
     conditions contained in such policy by any named insured or owner of the
     property, (B) the occupation or use of any Leased Premises for purposes
     more hazardous than permitted by the terms thereof, (C) any foreclosure or
     other action or proceeding or notice of sale relating to the property or
     (D) any change in title or ownership of the property; and

          (viii)  Within 120 days after the end of each calendar year, the
     Lessee shall deliver to the Lessor, the Equity Participant  and the Agent
     (i) a list prepared as of the last day of such year describing all
     insurance maintained in accordance with this Section 10 (and in particular
     describing risks insured against, coverage, amounts, deductibles, the
     identity of insurers and expiration dates) and (ii) an officer's
     certificate of the Lessee, confirmed by an insurance certificate of the
     respective insurers, to the effect that all premiums due under such
     policies have been paid in full and that such insurance meets all
     requirements of this Section 10.

     (c) The Lessee will deliver to the Lessor, the Equity Participant, or the
Agent, promptly upon any request therefor, (i) the originals or copies certified
by the insurer of all policies evidencing all insurance required to be
maintained under this Section 10 and (ii) evidence as to the payment of all
premiums due thereon; provided, however, that the Lessor, the Equity
                      --------  -------                             
Participant, any Lender or the Agent shall not be deemed by reason of their
respective custody of such policies to have knowledge of the contents thereof.
The Lessee will use its best efforts to deliver to the Lessor, the Equity
Participant and the Agent, a new policy or certificate evidencing such new
policy as replacement for any expiring policy at least 30 days 

                                       8
<PAGE>
 
prior to the date of such expiration, but in any event the Lessee shall so
deliver such policy or certificate prior to the date of such expiration.

     (d) In addition to the foregoing, if the Lessee shall be in default in
respect of its obligations to obtain insurance pursuant to this Section 10, the
Lessor or the Agent shall have the right (but not the obligation), and without,
in any way, limiting or otherwise modifying any other rights or remedies of the
Lessor or the Agent under this Lease Agreement by reason of such default or
otherwise, to obtain such insurance at  the Lessor or the Agent, as the case may
be, upon demand for the cost thereof, together with interest thereon at the Late
Payment Rate.

     (e) The Lessee hereby irrevocably assigns to the Lessor any compensation or
insurance proceeds to which the Lessee may become entitled by reason of the
Lessee's interest in the Leased Premises if any Leased Premises or any part
thereof is damaged or destroyed by fire or other casualty.  If any Leased
Premises or any part of any thereof is damaged or destroyed by fire or other
casualty, and if the estimated cost of rebuilding, replacing or repairing the
same exceeds $500,000, the Lessee promptly shall notify the Lessor and the Agent
thereof.  Subject to the next sentence, Lessee shall negotiate, prosecute and
adjust any claim for any compensation or insurance payment on account of any
such damage or destruction and may unilaterally settle any such negotiation,
prosecution or adjustment, but the Lessor shall be entitled to participate in
any such negotiation, prosecution and adjustment.  If Net Casualty Proceeds (as
hereinafter defined) are reasonably expected to exceed $500,000, the Lessee
shall not settle such negotiation, prosecution or adjustment without the consent
of the Lessor.  Any compensation or insurance payment shall be paid to and held
in trust in a separate account and applied in accordance with this Lease
Agreement by the Agent.  All amounts paid in connection with any such damage or
destruction shall be applied pursuant to Section 14 hereof and all such amounts
paid or payable in connection therewith (minus the expenses of collecting such
amounts) are herein called the "Net Casualty Proceeds".  The Lessee shall pay
all reasonable costs and expenses in connection with each such negotiation,
prosecution and adjustment for which costs and expenses the Lessee shall be
reimbursed out of any compensation or insurance payment received.

     SECTION 11.    Assignment and Subletting.
                    ------------------------- 

     (a) The Lessee shall sublease each of the Leased Premises to either of its
wholly owned subsidiaries, Smart & Final Stores Corporation, or Port Stockton
Food Distributors, Inc. (the "Permitted Sublessees") which will use such Leased
Premises in its business.  The Lessee shall effectively assign to the Lessor
(and the Lessor, in turn, will assign to the Agent for the benefit of the
Lenders and the Equity Participant), each such sublease and all Basic Rent and
Supplemental Rent and any other amounts payable thereunder.  Each Permitted
Sublessee shall enter into a Sublease in the form attached hereto as Exhibit A
(a "Subsidiary Sublease") with the Lessee contemporaneously with the execution
and delivery hereof.  The sublease of each Leased Premises thereunder by the
Lessee to a Subsidiary Sublessee shall be evidenced by the execution and
delivery of a Sublease Supplement for such Leased Premises.

     (b) If a Permitted Assignee or other transferee defaults under this Lease
Agreement, the Lessor may proceed directly against the Lessee without pursuing
remedies against the 

                                       9
<PAGE>
 
transferee. The Lessor's acceptance of rent from any other Person is not waiver
of any provision of this Section 11.

     (c) No portion of the Leased Premises or of the Lessee's interest in this
Lease Agreement may be acquired by any other Person other than the Permitted
Sublessees as provided in Section 11(a) hereof, whether by sale, assignment,
mortgage, sublease, transfer, operation of law, or act of the Lessee, without
the Lessor's prior written consent, which may be withheld in the Lessor's sole
discretion; provided, however, that to the extent, but only to the extent, that
applicable law prohibits the Lessor from withholding such consent in its sole
discretion, the following shall apply:

     (i) No portion of the Leased Premises or of the Lessee's interest in this
Lease Agreement may be acquired by any other Person other than the Permitted
Sublessees, whether by sale, assignment, mortgage, sublease, transfer, operation
of law, or act of the Lessee, without the Lessor's prior written consent, except
as provided in clause (ii) below.  The Lessor has the right to grant or withhold
its consent as provided in clause (ii) below.  Notwithstanding anything to the
contrary set forth in Section 12 hereof, any attempted transfer without consent
shall be void and shall constitute a non-curable breach of this Lease.  Should
the Lessee desire to sublease or assign this Lease Agreement for all or a
portion of the Leased Premises, the Lessee shall first give the Lessor 60 days
prior written notice of its intent to offer all or a portion of any Leased
Premises for sublease or assignment, which notice shall be given before offering
such Leased Premises for sublease or assignment.

     (ii) The Lessee's request for consent to any transfer described in Section
11(c)(i) hereof shall set forth in writing the details of the proposed transfer,
including the name, business and financial condition of the prospective
transferee, financial details of the proposed transfer (e.g., the term of and
the rent and security deposit payable under any proposed assignment or
sublease), and any other information the Lessor deems relevant.  The Lessor
shall have the right to withhold consent, if reasonable, or to grant consent,
based on the following factors: (i) the business of the proposed assignee or
subtenant and the proposed use of the Leased Premises; (ii) the net worth and
financial reputation of the proposed assignee or subtenant; (iii) the Lessee's
compliance with all of its obligations under the Lease Agreement; and (iv) such
other factors as the Lessor may reasonably deem relevant.  If the Lessor objects
to a proposed assignment solely because of the net worth and/or financial
reputation of the proposed assignee, the Lessee may nonetheless sublease (but
not assign), all or a portion of the Leased Premises to the proposed transferee,
but only on the other terms of the proposed transfer. In the event of any
proposed sublease or assignment, the Lessee shall submit such financial and
related information concerning the proposed sublessee or assignee as the Lessor
shall require in its sole discretion, and the Lessor shall have a reasonable
period of time to complete its review of such information from the date the
Lessee delivers to the Lessor a complete submittal of all such information
responsive to the Lessor's request.

     (d) Any assignment or sublease of any Leased Premises made pursuant to
clause (c) above shall be expressly subject and subordinate to all the terms and
conditions of this Lease Agreement (including without limitation, the rights of
the Lessor and the Agent to enforce remedies under Section 19 hereof), and any
such assignment or sublease shall not in any manner whatsoever relieve the
Lessee from any obligations under this Lease Agreement (it being understood and
agreed that the Lessee shall remain primarily liable for such obligations 

                                       10
<PAGE>
 
notwithstanding any such assignment or sublease) and all other Transaction
Documents to which each is a party, such liability to be unconditional
irrespective of any circumstances whatsoever which might constitute a legal or
equitable discharge or defense of a surety or guarantor, and the Lessee hereby
waives any rights they may now have or hereafter acquire to avoid any such
obligations by reason of such assignment or sublease or any circumstances
arising from such assignment or sublease. Any such assignment or sublease shall
be evidenced by a written instrument executed by the Lessee and the assignee or
sublessee, as the case may be, which written instrument shall be in form and
substance acceptable to the Lessor and the Agent (a "Sublease"). The Lessee
agrees to deliver notice of any such Sublease to the Lessor, together with an
execution copy of such assignment or sublease. The Lessee agrees to indemnify
and hold the Lessor, the Agent and the Lenders harmless against any and all
reasonable out-of-pocket expenses, claims, demands and liabilities, of whatever
nature, relating to or in any way arising out of any such sublease, including,
without limitation, all reasonable out-of-pocket costs, damages, charges,
attorneys' fees and expenses arising out of or necessitated by assertion of any
such claim or demand with regard to such assignment or sublease. Any sublease or
assignment entered into in violation of this Section shall be void.

     (e) In addition to the assignment of this Lease Agreement under the
Mortgage and Assignment Agreements, to which the Lessee hereby consents, the
Lessor may, subject to the Mortgage and Assignment Agreements, assign its
interest under this Lease Agreement as provided in the other Transaction
Documents.  If the Lessor assigns its interest under this Lease Agreement
together with fee title to the Leased Premises, the Lessor shall be relieved of
any and all future obligations and liabilities under this Lease Agreement
accruing from and after the date of such conveyance, and the Lessee shall
deliver to the Lessor a written release so stating, provided that any assignee
or successor of the Lessor shall provide the Lessee with a written assumption
agreement for the benefit of the Lessee and the Lessor whereby such assignee or
successor assumes and agrees to punctually perform all of the obligations and
liabilities of the Lessor hereunder.

     SECTION 12.    Liens.  The Lessee will not directly or indirectly create,
                    -----                                                     
incur, assume or suffer to exist any Lien on or with respect to any Leased
Premises or any part of any thereof, or interest therein, or this Lease
Agreement or any of the Lessor's or the Lessee's interests hereunder, except any
Permitted Lien.  The Lessee, at its own expense, will promptly pay, satisfy and
otherwise take such actions as may be necessary to keep this Lease Agreement and
the Leased Premises free and clear of, and to duly discharge or eliminate or
bond in a manner reasonably satisfactory to the Lessor and the Agent, any such
Lien not excepted above if the same shall arise at any time.  The Lessee will
notify the Lessor and Agent in writing promptly upon a Senior Financial Officer
becoming aware of any Lien (other than any Permitted Lien) that shall attach to
any Leased Premises or any part thereof or interest therein, and of the full
particulars thereof.

     SECTION 13.    Certain Personal Property.  Any equipment, signs and other
                    -------------------------                                 
movable property installed in or attached to the Leased Premises by and at the
expense of the Lessee shall remain the property of the Lessee, and upon request
the Lessor agrees to disclaim any interest in said property. The Lessee may
finance or refinance the purchase price of all or any part of its furnishings,
equipment and signs and in connection therewith may grant security interests in
and liens upon such items, provided that no Liens may be granted or placed upon
                           --------
the Lessor's fee interest in the Leased Premises. The Lessor agrees to execute
and deliver such
                                       11
<PAGE>
 
subordination or waivers of lien as the Lessee or its respective equipment
lenders may reasonably request with respect to such furnishings, equipment and
signs in connection with any such financing or refinancing. The Lessee shall
have the right, prior to the expiration of the Lease Term, to remove any and all
of its trade fixtures, equipment and other movable property which it may have
stored, attached to, or installed in the Leased Premises; provided, however,
                                                          --------  -------
that the Lessee may not remove any fixtures (except trade fixtures) or other
items which cannot be removed without causing structural damage to the Leased
Premises, and the Lessee will repair any and all damage to the Leased Premises
occasioned by such removal.

     SECTION 14.    Loss, Damage or Destruction.
                    --------------------------- 

     (a) The Lessee hereby assumes all risk of loss, damage, taking,
destruction, confiscation, requisition or commandeering, partial or complete, of
the Leased Premises or any part thereof or of any interest therein, however
caused or occasioned, such risk to be borne by the Lessee with respect to the
Leased Premises.  No occurrence specified in the preceding sentence nor the
resulting loss of use of any Leased Premises (including without limitation any
period while such Leased Premises is being repaired, replaced or rebuilt) shall
impair, in whole or in part, any obligation of the Lessee under this Lease
Agreement, including, without limitation, the obligation to pay Basic Rent and
Supplemental Rent, and this Lease Agreement shall continue in full force and
effect with respect to any Leased Premises suffering any such occurrence unless
and until the lease of such Leased Premises hereunder is terminated pursuant to
subsection (b) below).  If such occurrence does not constitute an Event of Loss,
then the Lessee promptly will commence and diligently will proceed to rebuild,
repair or replace any damage caused by such occurrence in conformity to Section
9(b) hereof to its condition immediately prior to such occurrence and any
insurance proceeds received by the Lessor shall  in connection therewith
promptly be paid to the Lessee, provided no Event of Default has occurred and is
                                --------                                        
continuing.

     (b) Upon an Event of Loss with respect to any Leased Premises, the Lessee
shall give the Lessor and the Agent prompt notice thereof.  Except as provided
in subsection (c) below, on the Payment Date next following more than 45 days
after an Event of Loss with respect to any Leased Premises, the Lessee shall
purchase such Leased Premises for a purchase price equal to the Termination
Value of such Leased Premises.  Upon receipt by the Lessor of the purchase
price, the Basic Rent due on such date, any Supplemental Rent and all other
amounts then due and owing hereunder, the Lessor shall transfer title to such
Leased Premises (together with any claim for unpaid insurance proceeds or
condemnation award) by a quit-claim deed to the Lessee, on an as-is basis,
without any warranty of any kind (other than the absence of Lessor Liens) by, or
recourse of any kind to, the Lessor.  Any insurance proceeds or condemnation
award received by the Lessor shall be retained by the Lessor and applied to said
payment of the purchase price of such Leased Premises.

     (c) If any Leased Premises subject to an Event of Loss can be fully
repaired and restored to the condition thereof immediately prior to such Event
of Loss within one year of the Payment Date next following the occurrence of
such Event of Loss (the "Restoration Date"), in lieu of the application
described in subsection (b) above, the Lessee on 30 days' written notice to the
Lessor may elect to repair and reconstruct such Leased Premises to its condition
immediately prior to such Event of Loss (assuming compliance by the Lessee with
the terms and conditions of this Lease Agreement and the other Transaction
Documents). If the Lessee so

                                       12
<PAGE>
 
elects, it shall, at its own cost and expense, promptly commence and diligently
proceed to rebuild, replace or repair the damage to such Leased Premises caused
by such Event of Loss in conformity with requirements of Section 9(b) hereof so
as to restore the Leased Premises to the fair market value and to the condition
thereof immediately prior to such Event of Loss. Prior to any such rebuilding,
the Lessor and the Lessee shall agree on the maximum cost of such rebuilding
(the "Casualty Restoration Cost"); the Casualty Restoration Cost shall be paid
first out of Lessee's own funds to the extent that the Casualty Restoration Cost
exceeds the amount of the Net Casualty Proceeds. After such expenditure, and so
long as no Event of Default has occurred and is continuing hereunder, the Lessee
shall be entitled to receive the Net Casualty Proceeds, but only against a
certification (made no more frequently than once each month) describing the work
for which the Lessee is requesting payment and the cost incurred by the Lessee
in connection therewith and stating that the Lessee has not theretofore received
payment for such work. Any Net Casualty Proceeds remaining after final payment
has been made for such work shall be paid to the Lessee and if the cost of the
work required to be made by the Lessee pursuant to this subsection exceeds the
amount of such Net Casualty Proceeds, the deficiency shall be paid by the
Lessee. If such Leased Premises are not restored or reconstructed to their
condition prior to such Event of Loss prior to the Restoration Date, then the
Lessee shall purchase such Leased Premises on the next following Payment Date in
accordance with subsection (b) above.

     SECTION 15.    Lessee's Rights of Purchase and Renewal; Purchase
                    -------------------------------------------------
Obligation.
----------

     (a) So long as no Event of Default has occurred and is continuing,
commencing December 31, 1997, the Lessee shall have the right, upon 90 days'
prior written notice to the Lessor, to purchase all, but not less than all, of
the Leased Premises at the end of any Payment Period for an amount equal to the
Termination Value on such date.  Upon receipt by the Lessor of said purchase
price, the Basic Rent due on such date, any Supplemental Rent and all other
amounts then due and owing hereunder, the Lessor shall transfer title to the
Leased Premises, by quit-claim deeds, to the Lessee, on an as-is basis without
any warranty of any kind (other than the absence of Lessor Liens) by, or any
recourse of any kind to, the Lessor. In the event that the Lessee fails, for any
reason, to exercise the sale option provided by Section 16 at least 360 days
prior to the end of the Lease Term, the Lessee shall be deemed to exercise the
purchase option provided by this Section 15(a) to purchase all the Leased
Premises at the end of the Lease Term for an amount equal to the Termination
Value on such date.

     (b) If (i) no Event of Default shall have occurred and be continuing and
(ii) this Lease Agreement shall not have been earlier terminated, the Lessee
may, by irrevocable written notice to the Lessor and the Agent 360 days prior to
the end of the Lease Term, request that the Lease Term of all, but not less then
all, of the Leased Premises for a one-year period (a "Renewal Term") provided
that no Renewal Term shall extend beyond the first to occur of (x) December 31,
2024 and (y) the Maturity Date of the Notes. Such request shall be granted only
if each of the Lenders, in their sole discretion, shall by notice to the Lessee
and the Agent not later than 30 days prior to the then end of the Lease Term,
consent to such extension; provided that in no event shall the Lease Term be
extended without the written consent of all Lenders except to the extent
alternative financing acceptable to all parties is obtained. Except as otherwise
provided herein each extension of this Lease Agreement shall be on the same
terms and conditions for the Base Term.

                                       13
<PAGE>
 
     (c) If an Environmental Put Event occurs with respect to any Leased
Premises, then, upon written notice to the Lessee, the Lessor may require the
Lessee to purchase such Leased Premises on the next Payment Date which occurs at
least 15 days after the date of such notice for a purchase price equal to the
Termination Value of such Leased Premises on such date.  Upon receipt by the
Lessor of said purchase price, the Basic Rent due on such date, any Supplemental
Rent and all other amounts then due and owing hereunder, the Lessor shall
transfer title to such Leased Premises, by quit-claim deed, to the Lessee, on an
as-is basis without any warranty of any kind (other than the absence of Lessor
Liens) by, or any recourse of any kind to, the Lessor.

     SECTION 16.    Sale of Leased Premises.
                    ----------------------- 

     (a)  If (i) no Event of Default shall have occurred and be continuing and
(ii) this Lease Agreement shall not have been earlier terminated, the Lessee
may, by irrevocable written notice to the Lessor and the Agent not more than 390
days and not less than 360 prior to the end of the Lease Term, elect to cause
all, but not less than all, of the Lease Premises then owned by the Lessor
hereunder to be sold as follows:

     (i) on the last day of the Lease Term the Lessee shall pay the Lessor the
Basic Rent then due and any Supplemental Rent and all other amounts then due and
owning hereunder plus the Residual Guaranty Payment as of such date; and

     (ii) at, or prior to, the end of the Lease Term, the Lessee shall vacate
the Leased Premises and arrange for the sale of the Leased Premises to one or
more buyers unrelated to the Lessee or its Affiliates prior to the end of the
Lease Term, as the agent of the Lessor, and receipt by the Lessor of the sale
proceeds thereof (the Lessee shall pay all expenses of sale) on or before the
last day of the Lease Term; provided that the Lessor may designate itself or a
third party as sales agent to sell the Leased Premises instead of or in addition
to the Lessee.  Lessee will use its best efforts to sell the Leased Property for
its Fair Market Sales Value.

     All above payments shall be made on the date the sale proceeds are due and
payable to the Lessor.  Each of the Leased Premises shall be in substantially
the same physical and operating condition as when such Leased Premises were
Substantially Complete, capable of being occupied by a third party and otherwise
in full compliance with the terms and conditions hereof.  Prior to the sale of
the Leased Premises pursuant to this Section, at the request of the Lessor, the
Lessee will provide (at its own cost and expense) a current "Phase I"
environmental assessment of each Leased Premise performed by the Environmental
Consultant, the results of which must be satisfactory to the Lessor and each of
the Lenders.

     (b) Upon receipt by the Lessor of such sale proceeds, the Basic Rent due on
the last day of the Lease Term, any Supplemental Rent and all other amounts then
due and owing hereunder, the Lessor shall transfer title to the Leased Premises
to the purchasers designated by the Lessee on an as-is basis, without any
warranty of any kind (other than the absence of Lessor Liens) by, or any
recourse of any kind to, the Lessor; and, provided no Event of Default or
Default shall exist and be continuing, if the sum of (i) such aggregate net
proceeds of sale for all the Leased Premises plus (ii) the Residual Guaranty
Payment is greater than the Termination Value on such date, the Lessor shall pay
to the Lessee the amount by which such sum exceeds such Termination Value.  If
such aggregate net proceeds of sale are less than the excess of the

                                       14
<PAGE>
 
Termination Value over the Residual Guaranty Payment on such date, in addition
to the other amounts specified above, the Lessee shall pay to the Lessor an
amount equal to the additional amount, if any, not greater than such deficiency,
by which such sale price is less than the Fair Market Sales Value as a
consequence of any failure by the Lessee to maintain or repair the Leased
Premises as provided by Sections 9 or 14 hereof.

     The Lessor shall have no obligation to make any payment required of it
under this paragraph (b) above until the Lessor shall have received the sale
proceeds, Residual Guaranty Payment, Basic Rent, any Supplemental Rent and all
other amounts then due and owing hereunder.

     (c) The provisions of Sections 15 and 16 hereof are of the essence of this
Lease Agreement, and time is of the essence for any payment and performance of
the obligations of the Lessee set forth therein.

     SECTION 17.    Late Charges.  The Lessee shall pay to the Lessor, upon
                    ------------                                           
demand, to the extent permitted by applicable law, interest on any installment
of Basic Rents not paid when due, and on any Supplemental Rent or other amount
payable under this Lease Agreement which is not paid when due, for any period
for which any of the same is overdue (without regard to any grace period) at a
rate equal to the Late Payment Rate so long as an Event of Default has not
occurred.  Upon the occurrence and during the continuance of an Event of Default
or in respect of any payments made under Section 3(d) hereof, the Basic Rent
shall be calculated using a Late Payment Rate instead of the Finance Rate and
overdue Basic Rent shall bear interest at the Late Payment Rate.  Payments under
this Section 17 are due and payable on demand.

     SECTION 18.    No Warranties.  THE LEASED PREMISES ARE LEASED ON AN AS-IS
                    -------------                                             
BASIS AND EXCEPT AS PROVIDED IN SECTION 2(d) HEREOF THE LESSOR EXPRESSLY
DISCLAIMS AND MAKES NO REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED,
AS TO THE DESIGN, CONDITION, QUALITY, CAPACITY, MERCHANTABILITY, DURABILITY,
SUITABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF, OR ANY OTHER MATTER
CONCERNING, THE LEASED PREMISES AND THE DESIGN OR CONDITION OF THE LEASED
PREMISES. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, THE LESSOR SHALL NOT
BE LIABLE OR RESPONSIBLE FOR ANY DEFECTS, EITHER PATENT OR LATENT (WHETHER OR
NOT DISCOVERABLE BY THE LESSEE), IN THE LEASED PREMISES, OR FOR ANY DIRECT OR
INDIRECT DAMAGE TO PERSONS OR LEASED PREMISES RESULTING THEREFROM, OR FOR THE
LESSEE'S LOSS OF USE OF THE LEASED PREMISES OR FOR ANY INTERRUPTION IN THE
LESSEE'S BUSINESS CAUSED BY THE LESSEE'S INABILITY TO USE THE LEASED PREMISES
FOR ANY REASON WHATSOEVER. THE LESSEE HEREBY WAIVES ANY CLAIM (INCLUDING ANY
CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT OR INFRINGEMENT) IT MIGHT
HAVE AGAINST THE LESSOR FOR ANY LOSS, DAMAGE (INCLUDING INCIDENTAL OR
CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED BY THE LEASED PREMISES OR BY THE
LESSEE'S LOSS OF USE THEREOF FOR ANY REASON WHATSOEVER. During the Lease Term
and so long and only so long as an Event of Default shall not have occurred and
be continuing, the Lessor authorizes the Lessee, at the Lessee's expense, to
assert for the Lessor's account, all rights and powers of the Lessor under any
contractor's, manufacturer's, vendor's or warranty on the Leased Premises or any
part thereof;

                                       15
<PAGE>
 
provided, however, that the Lessee shall indemnify, protect, save, defend and
hold harmless the Lessor from and against any and all claims, and all costs,
expenses, damages, losses and liabilities incurred or suffered by the Lessor in
connection therewith, as a result of, or incident to, any action by the Lessee
pursuant to the foregoing authorization.

     SECTION 19.    Events of Default.  Each of the following shall be deemed an
                    -----------------                                           
Event of Default:

     (a) Failure of the Lessee to pay Basic Rent for more than 3 days after such
payment is due pursuant to Section 4 hereof, or failure of the Lessee to pay
Supplemental Rent or any other amount payable by the Lessee hereunder for more
than 10 days after such payment is due; or

     (b) Failure to maintain the insurance required by Section 10 hereof or
default in the performance of the covenant contained in Section 10(c) hereof; or

     (c) Default in the performance of any other obligation or covenant of the
Lessee pursuant to this Lease Agreement and the continuance of such default for
10 days after written notice to the Lessee by the Lessor; or

     (d) The occurrence of an Event of Default under the Participation Agreement
or the Agency Agreement; or

     (e) The entry of a decree or order for relief in respect of the Lessee by a
court having jurisdiction in the premises in an involuntary case under the
federal bankruptcy laws, as now or hereafter constituted, or any other
applicable federal or state bankruptcy, insolvency or other similar law or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator
(or similar official) of the Lessee or of any substantial part of its property,
or ordering the winding up or liquidation of its affairs, and the continuance of
any such decree or order unstayed and in effect for a period of 30 consecutive
days; or

     (f) The suspension or discontinuance of the Lessee's business operations,
its insolvency (however evidenced) or its admission of insolvency or bankruptcy,
or the seeking by it of reorganization or relief or the commencement by the
Lessee of a voluntary case under the federal bankruptcy laws, as now or
hereafter constituted, or any other applicable federal or state bankruptcy,
insolvency or other similar law, or the consent by it to the appointment of or
taking possession by a receiver, litial part of its property, or the making by
it of an assignment for the benefit of creditors, or the failure of the Lessee
generally to pay its debts as such debts become due, or the taking of corporate
action by the Lessee in furtherance of any such action; or

     (g) A default or event of default, the effect of which is to permit the
lender or lenders of any instrument, or a trustee or agent on behalf of such
lender or lenders, to cause the indebtedness evidenced by such instrument to
become due prior to its stated maturity shall occur under the provisions of any
instrument evidencing indebtedness for borrowed money of the Lessee or any
Affiliate thereof (or under the provisions of any agreement pursuant to which
such instrument was issued) or any obligation of the Lessee or any Affiliate
thereof for the payment

                                       16
<PAGE>
 
of such indebtedness shall become or be declared to be due and payable prior to
its stated maturity, or shall not be paid when due; or

     (h) Any representation or warranty made by the Lessee in this Lease
Agreement any other Transaction Document or any document contemplated hereby or
thereby proves to be false or inaccurate in any material respect; or

     (i) A final judgment or judgments entered by a court of competent
jurisdiction for the payment of money in excess of $5,000,000 in the aggregate
(excluding any insured portions) shall be rendered against the Lessee and shall
remain in force undischarged, unstayed or unbonded for a period of more than 60
days; or

     (j) (i)  Any Person shall engage in any "prohibited transaction" (as
defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan,
(ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA),
whether or not waived, shall exist with respect to any Plan or any Lien in favor
of the PBGC or a Plan shall arise on the assets of the Lessee or any Affiliate
thereof, (iii) a Reportable Event shall occur with respect to, or proceedings
shall commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any single employer plan, which Reportable Event or
commencement of proceedings or appointment of a trustee is, in the reasonable
opinion of the Lessor, likely to result in the termination of such Plan for
purposes of Title IV of ERISA, (iv) any single employer plan shall terminate for
purposes of Title IV of ERISA, or (v) the Lessee or any Affiliate thereof shall,
or in the reasonable opinion of the Lessor is likely to, incur any liability in
connection with a withdrawal from, or the insolvency or reorganization of, a
multiemployer Plan; and in each case in clauses (i) through (vi) above, such
event or condition, together with all other such events or conditions, if any,
could reasonably be expected to have a Material Adverse Effect.

     SECTION 20.    Remedies Upon Default.
                    --------------------- 

     (a) Upon the occurrence of any Event of Default and at any time thereafter
so long as the same shall be continuing, the Lessor may exercise one or more of
the following remedies as the Lessor in its sole discretion shall elect:

     (i) The Lessor shall have the right to terminate this Lease Agreement upon
written notice to the Lessee.  Whether or not the Lease Agreement shall have
been terminated, the Lessor shall have the right to reenter and repossess the
Leased Premises or any thereof and the right to remove all persons and property
therefrom by summary proceedings, ejectment, any other legal action or in any
lawful manner the Lessor determines to be necessary or desirable.  The Lessor
shall be under no liability by reason of any such reentry, repossession or
removal.  No such reentry, repossession or removal shall be construed as an
election by the Lessor to terminate this Lease Agreement unless a notice of such
termination is given to the Lessee pursuant to this Section or unless such
termination is decreed by a court.

     (ii) The Lessor may demand, by written notice to the Lessee specifying a
purchase date, that the Lessee purchase the Leased Premises from the Lessor, and
the Lessee shall purchase the Leased Premises from the Lessor, on the purchase
date specified in such notice (on an as is basis, without any warranty of any
kind (other than the absence of Lessor Liens) by, 

                                       17
<PAGE>
 
or any recourse of any kind to the Lessor, as liquidated damages for loss of
bargain and not as a penalty (in lieu of the Basic Rent and Supplemental Rent
due after the payment date specified in such notice)), for a price equal to (x)
the Termination Value on such date plus (y) any unpaid Basic Rent accrued and
unpaid through the payment date specified in such notice (together with interest
thereon at the Late Payment Rate from the payment date specified in such notice
to the date of actual payment) and any Supplemental Rent or other amounts due
and unpaid.

     (iii) If the Lessee defaults under Section 20(a)(ii) hereof, upon 15
days' written notice to the Lessee of the date, time and place of any proposed
sale (which notice the Lessee agrees is reasonable) and subject to any
requirements of applicable law, sell in good faith and in a commercially
reasonable manner, all or any part of the Leased Premises or its interest
therein, at public or private sale, as the Lessor may determine, or otherwise
dispose of, in good faith and in a commercially reasonable manner, all or any
part of the Leased Premises or its interest therein, as the Lessor may
determine, in each case free and clear of any rights of the Lessee and without
any duty to account to the Lessee with respect to such action or inaction or for
any proceeds with respect thereto (except to the extent required under Section
20(b)(iii) hereof, in the event that the Lessor elects to exercise its right
under Section 20(a)(iii) hereof, in which event the Lessee's obligation to pay
Basic Rent hereunder for periods commencing after the date of such sale shall be
terminated or proportionately reduced, as the case may be (except to the extent
that Basic Rent is to be included in the computation under Section 20(a)(i) or
(ii) hereof, if the Lessor shall elect to exercise its right thereunder)).

     (iv)  If the Lessor shall have sold the entire Leased Premises or its
entire interest therein pursuant to Section 20(a)(iii) hereof, the Lessor may
demand that the Lessee pay to the Lessor and the Lessee shall pay to the Lessor
on the date of such sale, as liquidated damages for loss of a bargain and not a
penalty (in lieu of Basic Rent due for any period commencing after the date of
such sale), any accrued and unpaid Basic Rent through the date of such sale,
plus the amount by which the amount required to be paid by the Lessee under
Section 20(a)(ii) hereof determined as of such purchase date exceeds the amount
obtained pursuant to Section 20(a)(iii) hereof and any Supplemental Rent due and
unpaid as of the date of actual payment (together with interest thereon at the
Late Payment Rate from the payment date specified in such notice to the date of
actual payment and any Supplemental Rent due and unpaid).

     (v)   THE LESSOR AND THE LESSEE AGREE AND ACKNOWLEDGE THAT IT WOULD BE
IMPRACTICAL AND EXTREMELY DIFFICULT TO ESTIMATE THE ACTUAL DAMAGES WHICH THE
LESSOR WOULD SUFFER IN THE EVENT THAT THE LESSEE DEFAULTS AND FAILS TO COMPLETE
THE PURCHASE OF THE LEASED PREMISES IN ACCORDANCE WITH THE TERMS OF THIS LEASE
AGREEMENT INCLUDING SECTION 20(b)(i) AND (ii) HEREOF.  THE PARTIES HEREBY AGREE
THAT A REASONABLE ESTIMATE OF THE TOTAL NET DETRIMENT THAT THE LESSOR WOULD
SUFFER IN THE EVENT OF THE LESSEE'S DEFAULT AND FAILURE TO COMPLETE THE PURCHASE
OF THE LEASED PREMISES IS AND SHALL BE AN AMOUNT EQUAL TO THE DAMAGES SET 
FORTH IN CONFORMANCE WITH  SECTION 20(a)(ii) AND SECTION 20(a)(iv) HEREOF.

     (vi)  No termination of the Lease Term pursuant to this Section, by
operation of law, or otherwise, and 

                                       18
<PAGE>
 
no reletting of the Leased Premises pursuant to this Section or otherwise, shall
relieve the Lessee of its liabilities and obligations under this Lease Agreement
all of which shall survive such termination, reentry, repossession, removal or
reletting.

     (vii) Additionally, the Lessor may exercise any other right or remedy which
may be available to it under applicable law or common practice, including,
without limitation, proceeding by appropriate court action to enforce the terms
hereof or to recover damages for the breach hereof or to rescind this Lease
Agreement.

     (b) This Section 20(b) shall be in addition to each and every right and
remedy granted to the Lessor hereunder, and shall apply to the extent, but only
to the extent, that either (i) a court of competent jurisdiction determines that
the laws of the State of California or of the State of Florida must be applied,
or (ii) the Lessor determines in its sole discretion that it is necessary to
apply the procedural laws of the State of California or of the State of Florida,
as the case may be, in order for the Lessor to fully and effectively exercise
its rights and remedies hereunder, in which event, upon the occurrence of any
Lease Event of Default and at any time thereafter, the Lessor may exercise one
or more of the following remedies as the Lessor in its sole discretion shall
elect:

     (i) Whether or not the Lease Agreement shall have been terminated, to
reenter and repossess the Leased Premises or any thereof and the right to remove
all persons and property therefrom by summary proceedings, ejectment, any other
legal action or in any lawful manner the Lessor determines to be necessary or
desirable.  The Lessor shall be under no liability by reason of any such
reentry, repossession or removal.  No such reentry, repossession or removal
shall be construed as an election by the Lessor to terminate this Lease
Agreement unless a notice of such termination is given to the Lessee pursuant to
this Section 20 or unless such termination is decreed by a court.

    (ii) In this Section or as permitted by law, the Lessee shall quit and
surrender the Leased Premises to the Lessor, and the Lessor may without further
notice enter upon, reenter, possess and repossess the same by summary
proceedings, ejectment or otherwise, and again have, repossess and enjoy the
same as if this Lease Agreement had not been made, and in any such event neither
the Lessee nor any Person claiming through or under the Lessee by virtue of any
law or an order of any court shall be entitled to possession or to remain in
possession of the Leased Premises but shall forthwith quit and surrender the
Leased Premises, and the Lessor shall, notwithstanding any other provision of
this Lease Agreement and in lieu of all other claims for damages on account of
such termination, be entitled to recover from the Lessee the aggregate of all
amounts the Lessor is permitted to recover from the Lessee, including:

     (1) the worth at the time of award, as computed below, of the unpaid rent
(including, without limitation, Basic Rent and Supplemental Rent (other than
Termination Value)) which had been earned at the time of termination of this
Lease Agreement;

     (2) the worth at the time of award of the amount by which the unpaid rent
(including, without limitation, Basic Rent and Supplemental Rent (other than
Termination Value)) which would have been earned after the time of termination
of this Lease Agreement until the time of

                                       19
<PAGE>
 
award exceeds the amount of such rental loss that the Lessee proves could
have been reasonably avoided;

     (3) the worth at the time of award of the amount by which the unpaid rent
(including, without limitation, Basic Rent and Supplemental Rent (other than
Termination Value)) for the balance of the term after the time of award exceeds
the amount of such rental loss for said balance of the term that the Lessee
proves could be reasonably avoided; and

     (4) any other amount necessary to compensate the Lessor for all the
detriment proximately caused by the Lessee's failure to perform its obligations
under this Lease Agreement or which in the ordinary course of things would be
likely to result therefrom; including without limitation any loss or damage
arising out of the failure of the Lessor to receive the benefit of the
performance by the Lessee of any obligation to purchase the Leased Premises
under the provisions of this Lease Agreement.  The Lessee acknowledges and
agrees that, in reliance upon this Lease Agreement and the Lessee's covenants
and agreements hereunder and the creditworthiness and financial condition of the
Lessee, the Lessor has entered into certain special transactions to finance the
costs of developing the Leased Premises and constructing the Improvements on the
Leased Premises and, in connection with such financing transactions, Lessor has
incurred and will continue to incur indebtedness and liabilities under and
pursuant to the Loan Agreement, and the other Transaction Documents.  The Lessee
acknowledges and agrees that an Event of Default will cause the Lessor
substantial damage and detriment due to its obligations and liabilities under
the Loan Agreement, and thelities of the Lessor will be accelerated and
materially altered and increased by an Event of Default.  Accordingly, in order
to compensate the Lessor for all detriment proximately caused by the Lessee's
failure to perform its obligations under this Lease, the Lessor shall be
permitted to recover from the Lessee all amounts payable under the Lease
Agreement inasmuch as such amounts equal the amounts payable by the Lessor under
or pursuant to the Loan Agreement as a result of an Event of Default hereunder
and a substantially proportionate amount in respect of the investment of the
Equity Participant.

     The "worth at the time of award" of the amounts referred to in the
foregoing Sections 20(b)(ii)(1) and (2) shall be computed by allowing interest
at the Late Payment Rate on each rental installment from the date the same was
due hereunder to the time of award.  The "worth at the time of award" of the
amount referred to in the foregoing Section 20(b)(ii)(3) shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award plus one percent (1%).  As used herein, the
term "time of award" shall mean either (A) the date upon which the Lessee pays
to the Lessor the amount recoverable by the Lessor as hereinabove set forth or
(B) the date of entry of any determination, order or judgment of any court,
other legally constituted body, or any arbitrator(s), determining the amount
recoverable, whichever first occurs.  If the time of award is determined under
clause (B) of the preceding sentence, then the amount recoverable by the Lessor
hereunder shall bear interest from the time of award until paid at the Default
Rate (or at the highest rate permitted by applicable law, whichever is less).
Nothing herein contained shall limit or prejudice the right of the Lessor, and
the Lessor is hereby expressly granted the right, in any bankruptcy or
reorganization or insolvency proceedings, to prove for and obtain as damages 
by reason of such term to the maximum allowed by any statute or rule of law 
whether such amount shall be greater or less than the amounts referred to above.

                                       20
<PAGE>
 
     THE LESSOR AND THE LESSEE AGREE AND ACKNOWLEDGE THAT IT WOULD BE
IMPRACTICAL AND EXTREMELY DIFFICULT TO FIX THE ACTUAL AMOUNT OF ALL DAMAGES
WHICH THE LESSOR WOULD SUFFER IN THE EVENT OF THE LESSEE'S DEFAULT AND FAILURE
TO PERFORM ITS OBLIGATIONS IN ACCORDANCE WITH THE TERMS OF THIS LEASE AGREEMENT.
THE PARTIES HEREBY AGREE THAT A REASONABLE ESTIMATE OF THE OTHER AMOUNTS
NECESSARY TO COMPENSATE THE LESSOR FOR ALL THE DETRIMENT THAT THE LESSOR WOULD
SUFFER IN THE EVENT OF THE LESSEE'S DEFAULT IS AN AMOUNT DETERMINED AT THE TIME
OF THE AWARD EQUAL TO THE SUM OF (A) THE AGGREGATE PRINCIPAL AMOUNT OF THE NOTES
THEN OUTSTANDING PLUS (B) INTEREST ACCRUED ON THE AMOUNT THEN OUTSTANDING TO THE
DATE OF ACTUAL PAYMENT PLUS (C) THE CERTIFICATE BALANCE THEN OUTSTANDING PLUS
THE CERTIFICATE RATE ACCRUED THEREON TO THE DATE OF ACTUAL PAYMENT PLUS (D) A
PREMIUM EQUAL TO THE MAKE-WHOLE AMOUNT LESS THE SUM OF THE AMOUNTS AWARDED TO
THE LESSOR UNDER CLAUSES (1), (2) AND (3) OF THIS SECTION 20(b)(ii) AND THE
LESSEE SHALL PAY TO THE LESSOR AND THE LESSOR SHALL BE ENTITLED TO RECOVER FROM
THE LESSEE SUCH AMOUNT AS LIQUIDATED DAMAGES AND NOT AS A PENALTY.

     (iii) In addition to the other rights and remedies set forth herein, the
Lessor shall have the right to continue this Lease Agreement in effect and, as
permitted by Section 1951.4 of the California Civil Code (with respect to any
Leased Premises located in California), to enforce, by suit or otherwise, all
covenants and conditions hereof to be performed or complied with by the Lessee
and exercise all of the Lessor's rights and remedies under this Lease Agreement,
including, without limitation, the right to recover Basic Rent from the Lessee
as it becomes due under this Lease Agreement, even though the Lessee has
breached this Lease Agreement and abandoned the Leased Premises. Acts of
maintenance or preservation, or efforts by the Lessor or on the Lessor's behalf
to relet the Leased Premises, or the appointment of a receiver upon the
initiative of the Lessor to protect the Lessor's interest under this Lease
Agreement shall not constitute a termination of the Lessee's right to possession
of the Leased Premises; provided, however, that the foregoing enumeration shall
not be construed as in any way limiting the actions the Lessor may take without
terminating the Lessee's right to possession. In furtherance of the rights
hereby granted to the Lessor, and to the extent permitted by law, the Lessee
hereby appoints the Lessor as its agent and attorney-in-fact, which appointment
shall be deemed to be coupled with an interest and is irrevocable, with power of
substitution, to enter the Leased Premises upon an Event of Default hereunder
and remove therefrom all persons and property (with the right to store such
property on the Leased Premises in a public warehouse or elsewhere at the cost
and risk and for the account of the Lessee) and to alter the Leased Premises in
such manner as the Lessor may deem necessary or advisable so as to put the
Leased Premises in good order and to make the same rentable and from time to
time sublet the Leased Premises or any part thereof for such term or terms
whether or not extending beyond the then current term of this Lease Agreement
(but such sublease may provide for a new and successive lease to commence
immediately upon the termination of this Lease), at such rentals and upon such
other terms as the Lessor in its sole discretion may deem advisable, and with
the right to make alterations and repairs to the Leased Premises; and the Lessee
agrees to pay to the Lessor on demand all reasonable expenses incurred by the
Lessor in such subletting, and in altering, repairing and putting the Leased
Premises in good order and condition, and in reletting the same,

                                       21
<PAGE>
 
including fees of attorneys and architects, and all other reasonable expenses or
commissions; provided that the Lessor will not sublet the Leased Premises
without first giving the Lessee thirty (30) days after the Event of Default to
sublet the Leased Premises or assign this Lease Agreement on the Lessee's own
initiative in accordance with the provisions of this Lease Agreement governing
assignment and subletting. The Lessor shall be the Lessee's agent and
representative on the Leased Premises in respect of all matters arising under or
in connection with any such sublease made for the Lessee by the Lessor. Under
each such sublease, the Lessee shall retain the right to enter upon and use the
Leased Premises, subject to the terms and conditions of such sublease and the
rights of the sublessee thereunder. The Lessee further agree to pay to the
Lessor, following the date of such subletting, to and including the date
provided in this Lease Agreement for the expiration of the Lease Term, the sums
of money which would have been payable by the Lessee as Basic Rent and
Supplemental Rent, deducting only the net amount of rent, if any, which the
Lessor shall actually receive (after deducting from the gross receipts the
expenses, costs and payments of the Lessor which in accordance with the terms of
this Lease Agreement would have been borne by the Lessee) in the meantime from
and by any such subletting of the Leased Premises, and the Lessee hereby agrees
to remain liable for all sums otherwise payable by the Lessee under this Lease,
including, but not limited to, the expenses of the Lessor aforesaid, as well as
for any deficiency aforesaid. The Lessor shall have the right from time to time
to begin and maintain successive actions or other legal proceedings against the
Lessee for the recovery of such deficiency, expenses or damages or for a sum
equal to any installments of Basic Rent or Supplemental Rent and other sums
payable hereunder, and to recover the same upon the liability of the Lessee
herein provided, which liability it is expressly covenanted shall survive the
commencement or determination of any action to secure possession of the Leased
Premises. Nothing herein contained shall be deemed to require the Lessor to wait
to begin such action or other legal proceedings until the date when this Lease
Agreement would have expired had there been no such Event of Default.
Notwithstanding any such subletting, pursuant to the terms hereof, the Lessor
shall retain the right to and may at any time thereafter elect to terminate this
Lease Agreement or the Lessee's right to possession of the Leased Premises for
any previous breach which remains uncured or for any subsequent breach by giving
the Lessee written notice thereof as herein provided, and in such event the
Lessee shall forfeit any rights or interest under any such sublease and
thereafter the obligations of any such sublessee shall run directly to the
Lessor for its own account. Upon application by the Lessor, a receiver may be
appointed to take possession of the Leased Premises, exercise all rights granted
to the Lessor as agent and attorney-in-fact for the Lessees set forth in this
Section 20(b)(iii) and apply any rentals collected from the Leased Premises as
hereinabove provided. No taking of possession of the Leased Premises or other
act by the Lessor as the agent and attorney-in-fact for the Lessee pursuant to
the foregoing provisions, nor any subletting by the Lessor for the Lessee
pursuant to the foregoing provisions, nor any such appointment of a receiver
shall constitute or be construed as an election by the Lessor to terminate this
Lease Agreement or the Lessee's right to possession of the Leased Premises
unless a written notice of such intention be given to the Lessee.

     (c) In addition to each and every other provision of this Section 20, the
Lessee shall be liable for all costs and expenses, including reasonable
attorney's fees, incurred by the Lessor or Agent by reason of the occurrence of
any Event of Default or the exercise of the Lessor's remedies with respect
thereto. No remedy referred to in this Section is intended to be exclusive, but
each shall be cumulative and in addition to any other remedy referred to above
or otherwise available to the Lessor at law or in equity; and the exercise or
beginning of exercise by the

                                       22
<PAGE>
 
Lessor of any one or more of such remedies shall not constitute the exclusive
election of such remedies and shall not preclude the simultaneous or later
exercise by the Lessor of any or all of such other remedies under this Lease
Agreement. No express or implied waiver by the Lessor of any Event of Default
shall in any way be, or be construed to be, a waiver of any future or subsequent
Event of Default. To the extent permitted by applicable law, the Lessee hereby
waives any rights now or hereafter conferred by statute or otherwise which may
require the Lessor to sell, lease or otherwise use the Leased Premises in
mitigation of the Lessor's damages as set forth in this Section or which may
otherwise limit or modify any of the Lessor's rights and remedies in this
Section.

     SECTION 21.    Certain Waivers.  (a)  To the extent this Lease Agreement is
                    ---------------                                             
interpreted to be a guarantee of the Notes, the Lessee hereby expressly waives:

     (i)    notice of the acceptance by the Lessee of this Lease Agreement and
the other Transaction Documents;

     (ii)   notice of the existence or creation or non-payment of all or any of
the obligations under this Lease Agreement or the other Transaction Documents;

     (iii)  presentment, demand, notice of dishonor, protest, notice of protest
and all other notices whatsoever;

     (iv)   all diligence in collection or protection of or realization upon the
obligations under this Lease Agreement or the other Transaction Documents or any
thereof, any obligation hereunder or any security for or guaranty of any of the
foregoing;

     (v)    any right to direct or affect the manner or timing of either the
Agent's or a Lender's enforcement of its rights or remedies;

     (vi)   any defense, right of set-off or other claim whatsoever (other than
payment in full and performance in full of all of the obligations under this
Lease Agreement or under any other Transaction Documents in accordance with the
terms hereof or thereof) that the Lessee or any third party may or might have to
the payment or performance of the obligations under the Transaction Documents;

     (vii)  any and all benefits and defenses to or discharges of liability
that may arise from any insolvency, bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution, liquidation, or similar proceeding with
respect to the Lessor or the Lessee;

     (viii) any and all defenses which would otherwise arise upon the occurrence
of any Event of Default hereunder or under any other Transaction Document, or
upon the taking of any action by the Agent or the Lenders permitted hereunder or
thereunder;

     (ix)   any defense, right of set-off, claim or counterclaim whatsoever
(other than payment and performance in full of all of the obligations under this
Lease Agreement or the other Transaction Documents in accordance with the terms
hereof or thereof and the documents securing those obligations), and any and all
other rights, benefits, protections and other defenses which the Lessee may
have, now or at any time hereafter, to full payment or performance of the
obligations pursuant to the terms of this Lease Agreement and the other
Transaction

                                       23
<PAGE>
 
Documents, including, without limitation, under California Civil Code Sections
2809, 2810, 2819, 2821, 2845, 2849, 2850 and 2855, and California Code of Civil
Procedure Sections 580a, 580b and 580d, and all successor sections;

     (x)  any and all defenses against any claim by the Agent or any Lender
following the Agent's or any Lender's nonjudicial foreclosure of any Mortgage
securing the obligations under this Lease Agreement or the other Transaction
Documents, including, but not limited to, the defense that would otherwise have
been available to the Lessee by virtue of the Agent's or any Lender's
nonjudicial foreclosure of such Mortgage having destroyed the right to pursue a
deficiency against the Lessor, to which the Lessee would have otherwise been
subrogated, in accordance with California Civil Code Section 580(d), or any
subsequent enactments, modifications, and recodifications thereof; and

     (xi) all other principles or provisions of Law, if any, that conflict with
the terms of this Lease Agreement or the other Transaction Documents, including,
without limitation, the effect of any circumstances that may or might constitute
a legal or equitable discharge of a guarantor or surety.

     (b) In addition to the specific waivers set forth in this Section 21, the
Lessee does hereby waive and shall have no right of subrogation, reimbursement,
exoneration, contribution or indemnity against the Lessor or any other Person
for any reason, including but not limited to, by reason of any payments made or
acts performed by the Lessee in compliance with the obligations of the Lessee
hereunder or any actions taken by the Agent or any Lender pursuant to this Lease
Agreement or pursuant to the other Transaction Documents.

     (c) Nothing contained in this Lease Agreement or the other Transaction
Documents shall prevent the Agent or any Lender from suing to collect on the
obligations under this Lease Agreement or the other Transaction Documents or
from exercising concurrently or successively any rights available to it at law
or in equity or under any of the Transaction Documents, and that the exercise of
any of the aforesaid rights shall not constitute a legal or equitable discharge
of the Lessee.  The Lessee hereby authorizes and empowers the Agent or any
Lender to exercise, in its sole discretion, any rights and remedies, or any
combination thereof, which may then be available, since it is the intent and
purpose of the Lessee that the obligations hereunder shall be absolute,
independent, and unconditional under any and all circumstances.  Notwithstanding
any foreclosure of the lien of any deed of trust or security agreement with
respect to any or all of any real or personal property secured thereby, whether
by the exercise of the power of sale contained therein, by an action for
judicial foreclosure, or by the acceptance of a deed or possession of any other
collateral in lieu of foreclosure, the Lessee shall remain bound under this
Lease Agreement and the other Transaction Documents.

     SECTION 22.    Memorandum of Lease.
                    ------------------- 

     This Lease Agreement shall not be recorded, but a Memorandum of Lease, in
the form attached hereto as Exhibit B, shall be executed and acknowledged by the
parties and recorded by the Lessee, at its own expense, in the county where the
Leased Premises are located as soon as reasonably possible after full execution
and delivery of this Lease.

                                       24
<PAGE>
 
     SECTION 23.    Lessor's Right to Perform for the Lessee.  If the Lessee
                    ----------------------------------------                
fails to pay any Supplemental Rent or fails to perform or comply with any of its
agreements contained herein, the Lessor may itself, after notice to the Lessee,
make such payment or perform or comply with such agreement, and the amount of
such payment and the amount of the reasonable expenses of the Lessor incurred in
connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest thereon at the rate
specified in Section 17 hereof, shall, if not paid by the Lessee to the Lessor
on demand, be deemed a Supplemental Payment hereunder; provided, however, that
                                                       -----------------      
no such payment, performance or compliance by the Lessor shall be deemed to cure
any Event of Default hereunder.

     SECTION 24.    Notices.  All notices provided for or required under the
                    -------                                                 
terms and provisions hereof shall be given in the manner provided for and the
addresses specified in Section 6.02 of the Participation Agreement.

     SECTION 25.    Nature of Transaction.
                    --------------------- 

     (a) It is the intention of the parties that for federal, state and local
     income or franchise tax, bankruptcy (including the substantive law upon
     which bankruptcy proceedings are based), real estate and Uniform Commercial
     Code purposes:

     (i) this overall transaction constitutes a loan by the Lenders and Equity
Participant to Lessee and preserves beneficial ownership in the Leased Premises
in Lessee, and obligations of Lessee to pay Basic Rent shall be treated as
payments of interest; and

     (ii) the Mortgage and the Assignment Agreements create liens and security
interests in the Leased Premises in favor of Agent for the benefit of the
Lenders and Equity Participant.

     Accordingly, and notwithstanding any provision of this Lease to the
contrary, the parties hereto agree and declare that: (i) the transactions
contemplated by this Lease are intended to have a dual, rather than single form,
as evidenced by the statements set forth in Section 26 hereof, and (ii) all
references in the Transaction Documents to the "lease" of the Leased Premises
which fail to reference such dual form do so as a matter of convenience only and
do not reflect the intent of the parties hereto as to the true characterization
of such arrangements.  Notwithstanding the intentions of the parties set forth
above, Lessee acknowledges and agrees that none of Agent, any Lender, the Equity
Participant or their representatives have made any representations or warranties
concerning the tax, accounting or legal characteristics of the Transaction
Documents and that Lessee has obtained and relied upon such tax, accounting and
legal advice from its own experts concerning the Transaction Documents as it
deems appropriate.

     (b) Specifically, without limiting the generality of paragraph (a) of this
Section 25, the Lessor and the Lessee intend and agree that with respect to the
nature of the transactions evidenced by this Lease in the context of the
exercise of remedies under the Transaction Documents, including, without
limitation, in the case of any 

                                       25
<PAGE>
 
insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any state thereof affecting the Lessee, the Lessor, any
Lender or the Equity Participant or any enforcement or collection actions, the
transactions evidenced by this Lease are loans made by the Equity Participant
and the Lenders as unrelated third party lenders to the Lessee secured by the
Leased Premises pursuant to the Mortgage and Assignment Agreements.

     (c) The Lessor agrees that it will not file any federal, state or local
income tax returns during the Lease Term that are inconsistent with the
treatment of the Lessee as owner of the Leased Premises for federal, state and
local income tax purposes.  The Lessee agrees to file all applicable state and
local property returns, reports, forms and notices with respect to the Leased
Premises during the Lease Term consistent with the treatment of the Lessee as
the owner of the Leased Premises for state and local property tax purposes.

     SECTION 26.    Operating Lease.  Notwithstanding the provisions of Section
                    ---------------                                            
25 hereof, the Lessor and the Lessee hereby declare that it is their mutual
intent that for accounting purposes this Lease Agreement be an operating lease
(for purposes of FASB Statement 13) and not an instrument or evidence of
indebtedness, and that the relationship between the Lessor and the Lessee under
this Lease Agreement shall always be that of lessor and lessee only.

     SECTION 27.    Governing Law.  The provisions of Section 6.06 of the
                    --------------                                       
Participation Agreement are hereby incorporated herein by reference.

     SECTION 28.    Miscellaneous.
                    ------------- 

     (a) The Lessee will promptly execute and deliver all further instruments
and documents and take all further action that may be necessary in order to give
effect to the provisions of this Lease Agreement and the other Transaction
Documents.  The Lessee, at its own cost and expense, will take all such actions
as may be reasonably requested by the Lessor, the Agent, or any Lender, in order
to establish, preserve and perfect (a) the Lessor's good and marketable title to
the Leased Premises and the Lessor's rights under this Lease Agreement and the
other Transaction Documents, and (b) the first and prior perfected Lien of the
Agent in the Leased Premises and this Loan Agreement, including, without
limitation, procuring, executing and delivering from time to time any
endorsements, assignments, financing statements, deeds of trust and other
writings reasonably deemed necessary or appropriate by the Lessor or the Agent.

     (b) All rights and obligations under this Lease Agreement shall bind, and
inure to the benefit of, the parties hereto and their successors and permitted
assigns.

     (c) If any term or provision of this Lease Agreement or the application
thereof to any person or circumstances shall to any extent be invalid and
unenforceable, the remainder of this Lease Agreement or the application of such
term or provision to persons or circumstances other than those as to which it is
invalid or 

                                       26
<PAGE>
 
unenforceable, shall not be affected thereby, and each term and provision of
this Lease Agreement shall be valid and shall be enforced to the extent
permitted by law.

     (d) The failure of a party to insist upon a strict performance of any of
the terms, conditions and covenants herein shall not be deemed a waiver of any
rights or remedies that said party may have, and shall not be deemed a waiver of
any subsequent breach or default in the terms, conditions and covenants herein
contained.

     (e) No change in the provisions of this Lease Agreement shall be effective
unless made in writing and signed by the Lessor and the Lessee.

     (f) The headings preceding the text of sections of this Lease Agreement are
for convenience only and shall not modify or affect the substantive provisions
of this Lease.

     (g) There are no oral, verbal, or other agreements (unless attached hereto
or specifically referred to herein) which modify or affect this Lease.  This
Lease Agreement supersedes any and all prior agreements executed by or on behalf
of the parties hereto regarding the Leased Premises.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

                                       27
<PAGE>
 
  IN WITNESS WHEREOF, the parties hereto have caused this Lease Agreement to be
  duly executed by their duly authorized officers as of the date first written
  above.

   
                              FLEET NATIONAL BANK,
                                 not in its individual capacity
                                 but solely as Owner Trustee
                                 under the Trust Agreement



                              By: /s/ Elizabeth C. Hammer
                                 ----------------------
                                 Elizabeth C. Hammer
                                 Vice President

                              SMART & FINAL INC.


                              By: /s/ Donald G. Alvarado 
                                  ----------------------
                                  Senior Vice President
                                  Law/Development

                                       28
<PAGE>
 
                                   EXHIBIT A
                               TO LEASE AGREEMENT


                            FORM OF LEASE SUPPLEMENT



     ALL ADVANCES HAVE ALREADY BEEN FUNDED. ACCORDINGLY THE FORM OF LEASE
SUPPLEMENT ATTACHED TO THE ORIGINAL LEASE AGREEMENT IS HEREBY INCORPORATED
HEREIN BY REFERENCE.

                                       29
<PAGE>
 
                                   EXHIBIT B
                               TO LEASE AGREEMENT



                          FORM OF SUBSIDIARY SUBLEASE

    Since all Advances have been fully funded, the form of Sublease from the
      Original Lease Agreement is hereby incorporated herein by reference.

                                       30
<PAGE>
 
                                   EXHIBIT C
                               TO LEASE AGREEMENT



                          FORM OF MEMORANDUM OF LEASE



Since all Advances have been fully funded, the form of Memorandum of Lease from
the Original Lease Agreement is hereby incorporated herein by reference.

                                       31