**Exhibit 10.1**

 

 

**STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - NET****AMERICANINDUSTRIAL REAL ESTATE ASSOCIATION**

 

1.                                       **BasicProvisions (“Basic Provisions”)**.

 

1.1                              **Parties:** This Lease **(“Lease”)**, dated for reference purposesonly September 26, 2003, is made by and between Thornmint I, a California Limited PartnershipI, a California Limited Partnership **(“Lessor”)**and Imageware Systems, Inc.  **(“Lessee”)**, (collectively the**“Parties”**, or individually a **“Party”**).

 

1.2(a)                   **Premises:**  That certain portion of the Project (asdefined below), including all improvements therein or to be provided by Lessorunder the terms of this Lease, commonly known by the street address of 10883 Thornmint Road, located in theCity of San Diego, County of San Diego, State of California, with zip code 92127, as outlined onExhibit A attached hereto **(“Premises”)** and generally described as(describe briefly the nature of the Premises): A one and two-storyoffice building attached to a part of a one-story manufacturing/warehousebuilding.

 

In addition to Lessee’s rights to use andoccupy the Premises as hereinafter specified, Lessee shall have non-exclusiverights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafterspecified, but shall not have any rights to the roof, exterior walls or utilityraceways of the building containing the Premises **(“Building”)** or to any other buildings in the Project.  The Premises, the Building, the CommonAreas, the land upon which they are located, along with all other buildings andimprovements thereon, are herein collectively referred to as the **“Project.”** (See also Paragraph 2)

 

1.2(b)                  **Parking:** Forty-eight (48) unreserved vehicleparking spaces **(“Unreserved Parking Spaces”)**;and Zero (0) reserved vehicleparking spaces **(“Reserved Parking Spaces”)**.  (See also Paragraph 2.6)

 

1.3                                 **Term:** Three (3) years and Zero (0) months **(“Original Term”)**commencingOctober 1, 2003 **(“CommencementDate”)** and ending September 30,2006 **(“Expiration Date”)**. (See also Paragraph 3)

 

1.4                                 **EarlyPossession:** NA **(“EarlyPossession Date”)**. (See also Paragraphs 3.2 and 3.3)

 

1.5                                 **BaseRent:** $16,340.40 per month **(“Base Rent”)**, payable on the 1st day of each month commencing December 1, 2003.  (See also Paragraph 4)

 

ý  If this box ischecked, there are provisions in this Lease for the Base Rent to be adjusted.

 

1.6                                 **Lessee’sShare of Common Area Operating Expenses:** SeeAdd. 1, Item 61 percent (---  %) **(“Lessee’sShare”)**.

 

1.7                                 **BaseRent and Other Monies Paid Upon Execution:**

 

(a)                                  **BaseRent:** $16,340.40 for the period December 1-31, 2003.

 

(b)                                 **CommonArea Operating Expenses:**  $2,563.20 (EST) for the period October 1-31, 2003.

 

(c)                                  **SecurityDeposit:** $21,306.60 **(“SecurityDeposit”)**.  (See also Paragraph 5) (Credited from previous lease.)

 

(d)                                 **Other:** $NA for                              .

 

(e)                                  **TotalDue Upon Execution of this Lease:** $2,563.20 (1.7b).

 

1.8                                 **AgreedUse:**  Generaloffice, research and development, computer integration use consistent withCounty of San Diego zoning and laws.  (Seealso Paragraph 6)

 

1.9                                 **InsuringParty**.  Lessor is the **“Insuring Party”**.  (See also Paragraph 8)

 

1.10                        **RealEstate Brokers:**  (See also Paragraph 15)

 

(a)                                  **Representation:**  The following real estate brokers (the **“Brokers”**) and brokerage relationshipsexist in this transaction (check applicable boxes):

 
| ý  CB Richard Ellis, Inc. represents Lessor  exclusively (**“Lessor’s Broker”**);                                                                                                                                                                                  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ý  Irving Hughes, Inc. represents Lessee  exclusively (**“Lessee’s Broker”**);  or                                                                                                                                                                                 |
| o                                     represents  both Lessor and Lessee (**“Dual Agency”**). |

 

(b)                                 **Paymentto Brokers:**  Upon execution and delivery ofthis Lease by both Parties, Lessor shall pay to the Brokers the brokerage feeagreed to in a separate written agreement (See Addendum 1, Paragraph 58) (or if there is no such agreement, the sumof              or      %of the total Base Rent for the brokerage services rendered by the Brokers).

 

1.11                           **Guarantor**.  The obligations of the Lessee under thisLease are to be guaranteed by N/A**(“Guarantor”)**.  (See alsoParagraph 37)

 

1.12                           **Addendaand Exhibits**.  Attached hereto is an Addendumor Addenda consisting of Paragraphs 50 through 61 and Exhibits A through D, all of which constitute a part of this Lease.

 

2.                                       **Premises**.

 

                2.1                                 **Letting**. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor,the Premises, for the term, at the rental, and upon all of the terms, covenantsand conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth inthis Lease, or that may have been used in calculating Rent, is an approximationwhich the Parties agree is reasonable and any payments based thereon are notsubject to revision whether or not the actual size is more or less.

 

2.2                                 **Condition**.  Lessor shall deliver that portion of thePremises contained within the Building **(‘Unit”)**to Lessee broom clean and free of debris on the Commencement Date or the EarlyPossession Date, whichever first occurs **(“StartDate”)**, and, so long as the required service contracts described inParagraph 7.1(b) below are obtained by Lessee and in effect within thirty daysfollowing the Start Date, warrants that the existing electrical, plumbing, firesprinkler, lighting, heating, ventilating and air conditioning systems **(“HVAC”)**, loading doors, if any, and allother such elements in the Unit, other than those constructed by Lessee, shallbe in good operating condition on said date and that the structural elements ofthe roof, bearing walls and foundation of the Unit shall be free of materialdefects.  If a non-compliance with suchwarranty exists as of the Start Date, or if one of such systems or elementsshould malfunction or fail within the appropriate warranty period, Lessorshall, as Lessor’s sole obligation with respect to such matter, except asotherwise provided in this Lease, promptly after receipt of written notice fromLessee setting forth with specificity the nature and extent of suchnon-compliance, malfunction or failure, rectify same at Lessor’s expense.  The warranty periods shall be as follows:(i) 6 months as to the HVAC systems, and (ii) 30 days as to the remainingsystems and other elements of the Unit. If Lessee does not give Lessor the required notice within theappropriate warranty period, correction of any such non-compliance, malfunctionor failure shall be the obligation of Lessee at Lessee’s sole cost and expense(except for

 
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| **© 1999 - American Industrial Real Estate Association** |   | REVISED |   | **FORM MTN-2-2/99E** |
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the repairs to the fire sprinkler systems,roof, foundations, and/or bearing walls - see Paragraph 7)

 

2.3                              **Compliance**.  Lessor warrants that the improvements on thePremises and the Common Areas comply with the building codes that were ineffect at the time that each such improvement, or portion thereof, wasconstructed, and also with all applicable laws, covenants or restrictions ofrecord, regulations, and ordinances in effect on the Start Date **(“Applicable Requirements”)**.  Said warranty does not apply to the use towhich Lessee will put the Premises or to any Alterations or UtilityInstallations (as defined in Paragraph 7.3(a)) made or to be made byLessee.  **NOTE: Lessee is responsible for determining whether or not the ApplicableRequirements, and especially the zoning, are appropriate for Lessee’s intendeduse, and acknowledges that past uses of the Premises may no longer be allowed**.  If the Premises do not comply with saidwarranty, Lessor shall, except as otherwise provided, promptly after receipt ofwritten notice from Lessee setting forth with specificity the nature and extentof such non-compliance, rectify the same at Lessor’s expense.  If Lessee does not give Lessor writtennotice of a non-compliance with this warranty within 6 months following theStart Date, correction of that non-compliance shall be the obligation of Lesseeat Lessee’s sole cost and expense.  Ifthe Applicable Requirements are hereafter changed so as to require during theterm of this Lease the construction of an addition to or an alteration of theUnit, Premises and/or Building, the remediation of any Hazardous Substance, orthe reinforcement or other physical modification of the Unit, Premises and/orBuilding **(“Capital Expenditure”)**,Lessor and Lessee shall allocate the cost of such work as follows:  

 

(a)                                  Subject toParagraph 2.3(c) below, if such Capital Expenditures are required as a resultof the specific and unique use of the Premises by Lessee as compared with usesby tenants in general, Lessee shall be fully responsible for the cost thereof,provided, however that if such Capital Expenditure is required during the last2 years of this Lease and the cost thereof exceeds 6 months’ Base Rent, Lesseemay instead terminate this Lease unless Lessor notifies Lessee, in writing,within 10 days after receipt of Lessee’s termination notice that Lessor haselected to pay the difference between the actual cost thereof and the amountequal to 6 months’ Base Rent.  If Lesseeelects termination, Lessee shall immediately cease the use of the Premiseswhich requires such Capital Expenditure and deliver to Lessor written noticespecifying a termination date at least 90 days thereafter.  Such termination date shall, however, in noevent be earlier than the last day that Lessee could legally utilize thePremises without commencing such Capital Expenditure.

 

(b)                                 If such CapitalExpenditure is not the result of the specific and unique use of the Premises byLessee (such as, governmentally mandated seismic modifications), then Lessorand Lessee shall allocate the obligation to pay for the portion of such costsreasonably attributable to the Premises pursuant to the formula set out inParagraph 7.1(d); provided, however, that if such Capital Expenditure isrequired during the last 2 years of this Lease or if Lessor reasonably determinesthat it is not economically feasible to pay its share thereof, Lessor shallhave the option to terminate this Lease upon 90 days prior written notice toLessee unless Lessee notifies Lessor, in writing, within 10 days after receiptof Lessor’s termination notice that Lessee will pay for such CapitalExpenditure. If Lessor does not elect to terminate, and fails to tender itsshare of any such Capital Expenditure, Lessee may advance such funds and deductsame, with Interest, from Rent until Lessor’s share of such costs have beenfully paid.  If Lessee is unable tofinance Lessor’s share, or if the balance of the Rent due and payable for theremainder of this Lease is not sufficient to fully reimburse Lessee on an offsetbasis, Lessee shall have the right to terminate this Lease upon 30 days writtennotice to Lessor.

 

(c)                                  Notwithstanding theabove, the provisions concerning Capital Expenditures are intended to applyonly to non-voluntary, unexpected, and new Applicable Requirements.  If the Capital Expenditures are insteadtriggered by Lessee as a result of an actual or proposed change in use, changein intensity of use, or modification to the Premises then, and in that event,Lessee shall be fully responsible for the cost thereof, and Lessee shall nothave any right to terminate this Lease.

 

2.4                                 **Acknowledgements**.  Lessee acknowledges that:  (a) it has been advised by Lessor and/orBrokers to satisfy itself with respect to the condition of the Premises(including but not limited to the electrical, HVAC and fire sprinkler systems,security, environmental aspects, and compliance with Applicable Requirementsand the Americans with Disabilities Act), and their suitability for Lessee’sintended use, (b) Lessee has made such investigation as it deems necessary withreference to such matters and assumes all responsibility therefor as the samerelate to its occupancy of the Premises, and (c) neither Lessor, Lessor’sagents, nor Brokers have made any oral or written representations or warrantieswith respect to said matters other than as set forth in this Lease.  In addition, Lessor acknowledges that: (i)Brokers have made no representations, promises or warranties concerningLessee’s ability to honor the Lease or suitability to occupy the Premises, and(ii) it is Lessor’s sole responsibility to investigate the financial capabilityand/or suitability of all proposed tenants.

 

2.6                                 **VehicleParking**.  Lessee shall be entitled touse the number of Unreserved Parking Spaces and Reserved Parking Spacesspecified in Paragraph 1.2(b) on those portions of the Common Areas designatedfrom time to time by Lessor for parking. Lessee shall not use more parking spaces than said number.  Said parking spaces shall be used forparking by vehicles no larger than full-size passenger automobiles or pick-uptrucks, herein called **“Permitted SizeVehicles.”**  Lessor mayregulate the loading and unloading of vehicles by adopting Rules andRegulations as provided in Paragraph 2.9. No vehicles other than Permitted Size Vehicles may be parked in the CommonArea without the prior written permission of Lessor.

 

(a)                                  Lessee shall notpermit or allow any vehicles that belong to or are controlled by Lessee orLessee’s employees, suppliers, shippers, customers, contractors or invitees tobe loaded, unloaded, or parked in areas other than those designated by Lessorfor such activities.

 

(b)                                 Lessee shall notservice or store any vehicles in the Common Areas.

 

(c)                                  If Lessee permitsor allows any of the prohibited activities described in this Paragraph 2.6,then Lessor shall have the right, in addition to such other rights and remediesthat it may have, to remove or tow away the vehicle involved and charge thecost to Lessee, which cost shall be immediately payable upon demand by Lessor.

 

2.7                                 **CommonAreas - Definition**.  The term **“Common Areas”** is defined as all areas andfacilities outside the Premises and within the exterior boundary line of theProject and interior utility raceways and installations within the Unit thatare provided and designated by the Lessor from time to time for the generalnon-exclusive use of Lessor, Lessee and other tenants of the Project and theirrespective employees, suppliers, shippers, customers, contractors and invitees,including parking areas, loading and unloading areas, trash areas, roadways,walkways, driveways and landscaped areas.

 

2.8                                 **Common Areas - Lessee’s Rights**.  Lessor grants to Lessee, for the benefit ofLessee and its employees, suppliers, shippers, contractors, customers andinvitees, during the term of this Lease, the non-exclusive right to use, incommon with others entitled to such use, the Common Areas as they exist fromtime to time, subject to any rights, powers, and privileges reserved by Lessorunder the terms hereof or under the terms of any rules and regulations orrestrictions governing the use of the Project. Under no circumstances shall the right herein granted to use the CommonAreas be deemed to include the right to store any property, temporarily orpermanently, in the Common Areas.  Anysuch storage shall be permitted only by the prior written consent of Lessor orLessor’s designated agent, which consent may be revoked at any time.  In the event that any unauthorized storageshall occur then Lessor shall have the right, without notice, in addition tosuch other rights and remedies that it may have, to remove the property andcharge the cost to Lessee, which cost shall be immediately payable upon demandby Lessor.

 

                                                2.9                                 **CommonAreas - Rules and Regulations**.  Lessor orsuch other person(s) as Lessor may appoint shall have the exclusive control andmanagement of the Common Areas and shall have the right, from time to time, toestablish, modify, amend and enforce reasonable rules and regulations **(“Rules and Regulations”)** for themanagement, safety, care, and cleanliness of the grounds, the parking andunloading of vehicles and the preservation of good order, as well as for theconvenience of other occupants or tenants of the Building and the Project andtheir invitees.  Lessee agrees to abideby and conform to all such Rules and Regulations, and to cause its employees,suppliers, shippers, customers, contractors and invitees to so abide andconform. Lessor shall not be responsible to Lessee for the non-compliance withsaid Rules and Regulations by other tenants of the Project.

 

2.10                           **CommonAreas - Changes**.  Lessor shall have the right,in Lessor’s sole discretion, from time to time:

 

(a)                                  To make changes tothe Common Areas, including, without limitation, changes in the location, size,shape and number of driveways, entrances, parking spaces, parking areas,loading and unloading areas, ingress, egress, direction of traffic, landscapedareas, walkways and utility raceways;

 

(b)                                 To closetemporarily any of the Common Areas for maintenance purposes so long asreasonable access to the Premises remains available;

 

(c)                                  

 

(d)                                 To add improvementsto the Common Areas;

 

(e)                                  To use the CommonAreas while engaged in making additional improvements, repairs or alterationsto the Project, or any portion thereof; and

 

(f)                                    To do and performsuch other acts and make such other changes in, to or with respect to theCommon Areas and Project as Lessor may, in the exercise of sound businessjudgment, deem to be appropriate.

 

3.                                       **Term**.

 

3.1                                 **Term**.  The Commencement Date, Expiration Date andOriginal Term of this Lease are as specified in Paragraph 1.3.

 

3.2                                 **EarlyPossession**.   If Lessee totally orpartially occupies the Premises prior to the Commencement Date, the obligationto pay Base Rent shall be abated for the period of such early possession.  All other terms of this Lease (including butnot limited to the obligations to pay Lessee’s Share of Common Area OperatingExpenses, Real Property Taxes and insurance premiums and to maintain thePremises) shall, however, be in effect during such period.  Any such early possession shall not affectthe Expiration Date.

 

3.3                                 **DelayIn Possession**.  Lessor agrees to use its bestcommercially reasonable efforts to deliver possession of the Premises to Lesseeby the Commencement Date.  If, despitesaid efforts, Lessor is unable to deliver possession as agreed, Lessor shallnot be subject to any liability therefor, nor shall such failure affect thevalidity of this Lease. Lessee shall not, however, be obligated to pay Rent orperform its other obligations until it receives possession of thePremises.  If possession is notdelivered within 60 days after the Commencement Date, Lessee may, at itsoption, by notice in writing within 10 days after the end of such 60 dayperiod, cancel this Lease, in which event the Parties shall be discharged fromall obligations hereunder.  If suchwritten notice is not received by Lessor within said 10 day period, Lessee’sright to cancel shall terminate.  Exceptas otherwise provided, if possession is not 

 
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tendered to Lessee by the Start Date andLessee does not terminate this Lease, as aforesaid, any period of rentabatement that Lessee would otherwise have enjoyed shall run from the date ofdelivery of possession and continue for a period equal to what Lessee wouldotherwise have enjoyed under the terms hereof, but minus any days of delaycaused by the acts or omissions of Lessee. If possession of the Premises is not delivered within 4 months after theCommencement Date, this Lease shall terminate unless other agreements arereached between Lessor and Lessee, in writing.

 

3.4                                 **LesseeCompliance**.  Lessor shall not be requiredto tender possession of the Premises to Lessee until Lessee complies with itsobligation to provide evidence of insurance (Paragraph 8.5).  Pending delivery of such evidence, Lesseeshall be required to perform all of its obligations under this Lease from andafter the Start Date, including the payment of Rent, notwithstanding Lessor’selection to withhold possession pending receipt of such evidence ofinsurance.  Further, if Lessee isrequired to perform any other conditions prior to or concurrent with the StartDate, the Start Date shall occur but Lessor may elect to withhold possessionuntil such conditions are satisfied.

 

4.                                       **Rent**.

 

4.1                                 **RentDefined**.  All monetary obligations ofLessee to Lessor under the terms of this Lease (except for the SecurityDeposit) are deemed to be rent **(“Rent”)**.

 

4.2                                 **CommonArea Operating Expenses**.  Lesseeshall pay to Lessor during the term hereof, in addition to the Base Rent,Lessee’s Share (as specified in Paragraph 1.6) (See Addendum 1, Item 61)  of allCommon Area Operating Expenses, as hereinafter defined, during each calendaryear of the term of this Lease, in accordance with the following provisions:

 

(a)                                  **“CommonArea Operating Expenses”**  aredefined, for purposes of this Lease, as all costs incurred by Lessor relatingto the ownership and operation of the Project, including, but not limited to,the following:

 

(i)                                     The operation,repair and maintenance, in neat, clean, good order and condition of thefollowing: 

 

(aa)                            The Common Areasand Common Area improvements, including parking areas, loading and unloadingareas, trash areas, roadways, parkways, walkways, driveways, landscaped areas,bumpers, irrigation systems, Common Area lighting facilities, fences and gates,elevators, roofs, and roof drainage systems.

 

(bb)                          Exterior signs andany tenant directories.

 

(cc)                            Any fire detectionand/or sprinkler systems.

 

(ii)                                  The cost of water,gas, electricity and telephone to service the Common Areas and any utilitiesnot separately metered.

 

(iii)                               Trash disposal,pest control services, property management, security services, and the costs ofany environmental inspections.

 

(iv)                              Reserves set asidefor maintenance and repair of Common Areas.

 

(v)                                 Real Property Taxes(as defined in Paragraph 10).

 

(vi)                              The cost of thepremiums for the insurance maintained by Lessor pursuant to Paragraph 8.

 

(vii)                           Any deductibleportion of an insured loss concerning the Building or the Common Areas.

 

(viii)                        The cost of anyCapital Expenditure to the Building or the Project not covered under theprovisions of Paragraph 2.3

 

provided;however, that Lessor shall allocate the cost of any such Capital Expenditureover the useful life ascalculated in accordance with GAAP) and Lessee shall not be required to pay more thanLessee’s Pro Rata Share of the amortization in accordance with GAAP of the cost of suchCapital Expenditure in any given month.

 

(ix)                                Any other servicesto be provided by Lessor that are stated elsewhere in this Lease to be a CommonArea Operating Expense.

 

However, notwithstanding anything to the contrary contained in thisLease, the following shall not be included within Comon Area OperatingExpenses:

 

(x)                                   Leasing commissions, attorneys’ fees, costs,disbursement, and other expenses incurred in connection with negotiations ordisputes with tenants, or in connection with leasing, renovating, or improvingspace for tenants or other occupants or prospective tenants or other occupantsof the Project.

 

(xi)                                The cost of any service sold to any tenant(including Lessee) or other occupant for which Lessor is entitled to bereimbursed as an additional charge or rental over an above the basic rent andescalations payable under the lease with that tenant.

 

(xii)                             Any depreciation on the Project.

 

(xiii)                          Costs of capital improvements and alterations.

 

(xiv)                         Expenses in connection with services or other benefitsof a type that are not provided to Lessee but which are provided another tenantor occupant of the Project.

 

(xv)                            Overhead profit increments paid to Lessor’’ssubsidiaries or affiliates for management or other services on or to thebuilding or for supplies or other materials to the extent that the cost of theservices, supplies, or materials exceeds the cost that would have been paid hadthe services, supplies, or materials been provided by unaffiliated parties on acompetitive basis.

 

(xvi)                         All interest, loan fees and other carryingcosts related to any mortgage or deed of trust or related to any capital item,and all rental and other payable due under any ground or underlying lease, orany lease for any equipment ordinarily considered to be of a capital nature(except janitorial equipment which is not affixed to the Project.)

 

(xvii)                      Any compensation paid to clerks, attendants,or other persions in commercial concessions operated by Lessor.

 

(xviii)                   Advertising and promotional expenditures.

 

(xix)         Costs of repairs and other work occasioned by fire,windstorm, or other casualty of an insurable nature to the extent Landlordrecovers from their insurance company.

 

(xx)          Any costs, fines or penalties incurred due to violations byLessor of any governmental rule or authority, this Lease or any other lease inthe Project, or due to Lessor’s negligence or willful misconduct.

 

(xxi)         The cost of correcting any building code or other violationsthat were violations prior to the commencement date of this Lease.

 

(xxii)        The cost of containing, removing, or otherwise remediatingany contamination of the Project (including the underlying land and groundwater) by any toxic or hazardous materials (including, without limitation,asbestos and “PCB’s”) where such contamination was not caused by Lessee.

 

(xxiii)       Management costs to the extent theyexceed management costs charged for similar facilities in the area and in anyevent, to the extent they exceed five percent (5%) of all other Common AreaOperating Expenses.

 

(xxiv)       Costs for sculpture, paintings, or other objects of art (andinsurance thereon or extraordinary security in connection therewith).

 

(xxv)        Wages, salaries, or other compensation paid to any executiveemployees above the grade of building manager at a resonable rate for servicesprovided.

 

(xxvi)       Any other expense that under generally accepted accountingprinciples and practice consistently applied would not be considered a normalmaintenance or operating expense.

 

(b)                                 Any Common AreaOperating Expenses and Real Property Taxes that are specifically attributableto the Unit, the Building or to any other building in the Project or to theoperation, repair and maintenance thereof, shall be allocated entirely to suchUnit, Building, or other building. However, any Common Area Operating Expensesand Real Property Taxes that are not specifically attributable to the Buildingor to any other building or to the operation, repair and maintenance thereof,shall be equitably allocated by Lessor to all buildings in the Project.

 

(c)                                  The inclusion ofthe improvements, facilities and services set forth in Subparagraph 4.2(a)shall not be deemed to impose an obligation upon Lessor to either have saidimprovements or facilities or to provide those services unless the Projectalready has the same, Lessor already provides the services, or Lessor hasagreed elsewhere in this Lease to provide the same or some of them.

 

(d)                                 Lessee’s Share ofCommon Area Operating Expenses shall be payable by Lessee within 10 days aftera reasonably detailed statement of actual expenses is presented to Lessee.  At Lessor’s option, however, an amount maybe estimated by Lessor from time to time of Lessee’s Share of annual CommonArea Operating Expenses and the same shall be payable monthly or quarterly, asLessor shall designate, during each 12 month period of the Lease term, on thesame day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within 60 days after the expiration ofeach calendar year a reasonably detailed statement showing Lessee’s Share ofthe actual Common Area Operating Expenses incurred during the preceding year.If Lessee’s payments under this Paragraph 4.2(d) during the preceding yearexceed Lessee’s Share as indicated on such statement, Lessor shall credit theamount of such over-payment against Lessee’s Share of Common Area OperatingExpenses next becoming due.  If Lessee’spayments under this Paragraph 4.2(d) during the preceding year were less thanLessee’s Share as indicated on such statement, Lessee shall pay to Lessor theamount of the deficiency within 10 days after delivery by Lessor to Lessee ofthe statement.

 
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(e)                                  Within ninety (90) days after receipt ofLessor’s Statement, Lessee shall have the right to audit at Lessor’s localoffices, at Lessee’s expense, Lessor’s accounts and records relating to CommonArea Operating Expenses.  Such auditshall be conducted by a certified public accountant approved by Lessee, whichapproval shall not be unreasonably withheld. If such audit reveals that Lessor has overcharged Lessee, the amountovercharged shall be paid to Lessee with thirty (30) days after the audit isconcluded, together with interest thereon at the rate of ten percent (10%) perannum, from the date the Statement was delivered to Lessee until payment of theovercharge is made to Lessee.  Inaddition, if the Statement exceeds the actual Common Area Operating Expenseswhich should have been charged to Lessee by more than five percent (5%), thecost of the audit shall be paid by Lessor in an amount not to exceed fivehundred dollars ($500.00).

 

4.3                                 **Payment**.  Lessee shall cause payment of Rent to bereceived by Lessor in lawful money of the United States, without offset ordeduction (except as specifically permitted in this Lease), on or before theday on which it is due.  Rent for anyperiod during the term hereof which is for less than one full calendar monthshall be prorated based upon the actual number of days of said month.  Payment of Rent shall be made to Lessor atits address stated herein or to such other persons or place as Lessor may fromtime to time designate in writing. Acceptance of a payment which is less than the amount then due shall notbe a waiver of Lessor’s rights to the balance of such Rent, regardless ofLessor’s endorsement of any check so stating. In the event that any check, draft, or other instrument of payment givenby Lessee to Lessor is dishonored for any reason, Lessee agrees to pay toLessor the sum of $25 in addition to any late charges which may be due.

 

5.                                       **SecurityDeposit**.  Lessee has deposited with Lessor the Security Deposit as security for Lessee’s faithfulperformance of its obligations under this Lease.  If Lessee fails to pay Rent, or otherwise Defaults under thisLease, Lessor may use, apply or retain all or any portion of said SecurityDeposit for the payment of any amount due Lessor or to reimburse or compensateLessor for any liability, expense, loss or damage which Lessor may suffer orincur by reason thereof.  If Lessor usesor applies all or any portion of the Security Deposit, Lessee shall within 10days after written request therefor deposit monies with Lessor sufficient torestore said Security Deposit to the full amount required by this Lease.  If the Base Rent increases during the termof this Lease, Lessee shall, upon written request from Lessor, depositadditional monies with Lessor so that the total amount of the Security Depositshall at all times bear the same proportion to the increased Base Rent as theinitial Security Deposit bore to the initial Base Rent.  Should the Agreed Use be amended toaccommodate a material change in the business of Lessee or to accommodate asublessee or assignee, Lessor shall have the right to increase the Security Depositto the extent necessary, in Lessor’s reasonable judgment, to account for anyincreased wear and tear that the Premises may suffer as a result thereof.  If a change in control of Lessee occursduring this Lease and following such change the financial condition of Lesseeis, in Lessor’s reasonable judgment, significantly reduced, Lessee shalldeposit such additional monies with Lessor as shall be sufficient to cause theSecurity Deposit to be at a commercially reasonable level based on such changein financial condition.  Lessor shallnot be required to keep the Security Deposit separate from its generalaccounts.  Within 14 days after theexpiration or termination of this Lease, if Lessor elects to apply the SecurityDeposit only to unpaid Rent, and otherwise within 30 days after the Premiseshave been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return thatportion of the Security Deposit not used or applied by Lessor.  No part of the Security Deposit shall beconsidered to be held in trust, to bear interest or to be prepayment for anymonies to be paid by Lessee under this Lease.

 

6.                                       **Use**.

 

6.1                                 **Use**.  Lessee shall use and occupy the Premisesonly for the Agreed Use, or any other legal use which is reasonably comparablethereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner thatis unlawful, creates damage, waste or a nuisance, or that disturbs occupants ofor causes damage to neighboring premises or properties.  Lessor shall not unreasonably withhold ordelay its consent to any written request for a modification of the Agreed Use,so long as the same will not impair the structural integrity of theimprovements on the Premises or the mechanical or electrical systems therein,and/or is not significantly more burdensome to the Premises.  If Lessor elects to withhold consent, Lessorshall within 7 days after such request give written notification of same, whichnotice shall include an explanation of Lessor’s objections to the change in theAgreed Use.

 

6.2                              **HazardousSubstances**.

 

(a)                                  **ReportableUses Require Consent**.  The term **“Hazardous Substance”** as used in this Leaseshall mean any product, substance, or waste whose presence, use, manufacture,disposal, transportation, or release, either by itself or in combination withother materials expected to be on the Premises, is either: (i) potentiallyinjurious to the public health, safety or welfare, the environment or thePremises, (ii) regulated or monitored by any governmental authority, or (iii) abasis for potential liability of Lessor to any governmental agency or thirdparty under any applicable statute or common law theory.  Hazardous Substances shall include, but notbe limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or anyproducts, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises whichconstitutes a Reportable Use of Hazardous Substances without the express priorwritten consent of Lessor and timely compliance (at Lessee’s expense) with allApplicable Requirements.  **“Reportable Use”** shall mean (i) theinstallation or use of any above or below ground storage tank, (ii) thegeneration, possession, storage, use, transportation, or disposal of aHazardous Substance that requires a permit from, or with respect to which areport, notice, registration or business plan is required to be filed with, anygovernmental authority, and/or (iii) the presence at the Premises of aHazardous Substance with respect to which any Applicable Requirements requiresthat a notice be given to persons entering or occupying the Premises orneighboring properties.  Notwithstandingthe foregoing, Lessee may use any ordinary and customary materials reasonablyrequired to be used in the normal course of the Agreed Use, so long as such useis in compliance with all Applicable Requirements, is not a Reportable Use, anddoes not expose the Premises or neighboring property to any meaningful risk ofcontamination or damage or expose Lessor to any liability therefor.  In addition, Lessor may condition itsconsent to any Reportable Use upon receiving such additional assurances asLessor reasonably deems necessary to protect itself, the public, the Premisesand/or the environment against damage, contamination, injury and/or liability,including, but not limited to, the installation (and removal on or before Leaseexpiration or termination) of protective modifications (such as concreteencasements) and/or increasing the Security Deposit.

 

(b)                                 **Dutyto Inform Lessor**.  If Lessee knows, or hasreasonable cause to believe, that a Hazardous Substance has come to be locatedin, on, under or about the Premises, other than as previously consented to byLessor, Lessee shall immediately give written notice of such fact to Lessor,and provide Lessor with a copy of any report, notice, claim or otherdocumentation which it has concerning the presence of such Hazardous Substance.

 

(c)                                  **LesseeRemediation**.  Lessee shall not cause orpermit any Hazardous Substance to be spilled or released in, on, under, orabout the Premises (including through the plumbing or sanitary sewer system)and shall promptly, at Lessee’s expense, take all investigatory and/or remedialaction reasonably recommended, whether or not formally ordered or required, forthe cleanup of any contamination of, and for the maintenance, security and/ormonitoring of the Premises or neighboring properties, that was caused ormaterially contributed to by Lessee, or pertaining to or involving anyHazardous Substance brought onto the Premises during the term of this Lease, byor for Lessee, or any third party.

 

                                (d)                                 **LesseeIndemnification**.  Lessee shall indemnify,  defend and hold Lessor, its agents,employees, lenders and ground lessor, if any, harmless from and against any andall loss of rents and/or damages, liabilities, judgments, claims, expenses,penalties, and attorneys’ and consultants’ fees arising out of or involving anyHazardous Substance brought onto the Premises by or for Lessee, or any thirdparty (provided, however, that Lessee shall have no liability under this Leasewith respect to underground migration of any Hazardous Substance under thePremises from areas outside of the Project). Lessee’s obligations shallinclude, but not be limited to, the effects of any contamination or injury toperson, property or the environment created or suffered by Lessee, and the costof investigation, removal, remediation, restoration and/or abatement, and shallsurvive the expiration or termination of this Lease.  No termination, cancellation or release agreement entered into byLessor and Lessee shall release Lessee from its obligations under this Leasewith respect to Hazardous Substances, unless specifically so agreed by Lessorin writing at the time of such agreement.

 

(e)                                  **Lessor Indemnification**.  Lessor and its successors and assigns shallindemnify, defend, reimburse and hold Lessee, its employees and lenders,harmless from and against any and all environmental damages, including the costof remediation, which existed as a result of Hazardous Substances on thePremises prior to the Start Date or which are caused by the gross negligence orwillful misconduct of Lessor, its agents or employees.  Lessor’s obligations, as and when required by the ApplicableRequirements, shall include, but not be limited to, the cost of investigation,removal, remediation, restoration and/or abatement, and shall survive theexpiration or termination of this Lease.

 

(f)                                    **Investigationsand Remediations**.  Lessor shall retain theresponsibility and pay for any investigations or remediation measures requiredby governmental entities having jurisdiction with respect to the existence ofHazardous Substances on the Premises prior to the Start Date, unless suchremediation measure is required as a result of Lessee’s use (including“Alterations”, as defined in paragraph 7.3(a) below) of the Premises, in whichevent Lessee shall be responsible for such payment.  Lessee shall cooperate fully in any such activities at therequest of Lessor, including allowing Lessor and Lessor’s agents to havereasonable access to the Premises at reasonable times in order to carry outLessor’s investigative and remedial responsibilities.

 

(g)                                 **LessorTermination Option**.  If a Hazardous SubstanceCondition (see Paragraph 9.1(e)) occurs during the term of this Lease, unlessLessee is legally responsible therefor (in which case Lessee shall make theinvestigation and remediation thereof required by the Applicable Requirementsand this Lease shall continue in full force and effect, but subject to Lessor’srights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor’soption, either (i) investigate and remediate such Hazardous SubstanceCondition, if required, as soon as reasonably possible at Lessor’s expense, inwhich event this Lease shall continue in full force and effect, or (ii) if theestimated cost to remediate such condition exceeds 12 times the then monthlyBase Rent or $100,000, whichever is greater, give written notice to Lessee,within 30 days after receipt by Lessor of knowledge of the occurrence of suchHazardous Substance Condition, of Lessor’s desire to terminate this Lease as ofthe date 60 days following the date of such notice.  In the event Lessor elects to give a termination notice, Lesseemay, within 10 days thereafter, give written notice to Lessor of Lessee’scommitment to pay the amount by which

 
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the cost of the remediation of such HazardousSubstance Condition exceeds an amount equal to 12 times the then monthly BaseRent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurancethereof within 30 days following such commitment.  In such event, this Lease shall continue in full force andeffect, and Lessor shall proceed to make such remediation as soon as reasonablypossible after the required funds are available.  If Lessee does not give such notice and provide the requiredfunds or assurance thereof within the time provided, this Lease shall terminateas of the date specified in Lessor’s notice of termination.

 

6.3                                 **Lessee’sCompliance with Applicable Requirements**. Except as otherwise provided in this Lease, Lessee shall, at Lessee’ssole expense, fully, diligently and in a timely manner, materially comply withall Applicable Requirements, the requirements of any applicable fire insuranceunderwriter or rating bureau, without regard to whether said requirements arenow in effect or become effective after the Start Date.  Lessee shall, within 10 days after receiptof Lessor’s written request, provide Lessor with copies of all permits andother documents, and other information evidencing Lessee’s compliance with anyApplicable Requirements specified by Lessor, and shall immediately uponreceipt, notify Lessor in writing (with copies of any documents involved) ofany threatened or actual claim, notice, citation, warning, complaint or reportpertaining to or involving the failure of Lessee or the Premises to comply withany Applicable Requirements.

 

6.4                              **Inspection;Compliance**.  Lessor and Lessor’s **“Lender”** (as defined in Paragraph 30) andconsultants shall have the right to enter into Premises at any time, in thecase of an emergency, and otherwise at reasonable times andwith prior notification, for the purpose of inspecting the condition of the Premises and forverifying compliance by Lessee with this Lease.  The cost of any such inspections shall be paid by Lessor, unlessa violation of Applicable Requirements, or a contamination is found to exist orbe imminent, or the inspection is requested or ordered by a governmentalauthority.  In such case, Lessee shallupon request reimburse Lessor for the cost of such inspection, so long as suchinspection is reasonably related to the violation or contamination.

 

7.                                       **Maintenance;Repairs, Utility Installations; Trade Fixtures and Alterations**.

 

7.1                                 **Lessee’sObligations**.

 

(a)                                  **InGeneral**.  Subject to the provisions ofParagraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee’s Compliance withApplicable Requirements), 7.2 (Lessor’s Obligations), 9 (Damage orDestruction), and 14 (Condemnation), Lessee shall, at Lessee’s sole expense,keep the Premises, Utility Installations (intended for Lessee’s exclusive use,no matter where located), and Alterations in good order, condition and repair(whether or not the portion of the Premises requiring repairs, or the means ofrepairing the same, are reasonably or readily accessible to Lessee, and whetheror not the need for such repairs occurs as a result of Lessee’s use, any prioruse, the elements or the age of such portion of the Premises), including, butnot limited to, all equipment or facilities, such as plumbing, HVAC equipment,electrical, lighting facilities, boilers, pressure vessels, fixtures, interiorwalls, interior surfaces of exterior walls, ceilings, floors, windows, doors,plate glass, and skylights but excluding any items which are the responsibilityof Lessor pursuant to Paragraph 7.2. Lessee, in keeping the Premises in good order, condition and repair,shall exercise and perform good maintenance practices, specifically includingthe procurement and maintenance of the service contracts required by Paragraph7.1(b) below. Lessee’s obligations shall include restorations, replacements orrenewals when necessary to keep the Premises and all improvements thereon or apart thereof in good order, condition and state of repair.

 

(b)                                 **ServiceContracts**.  Lessor shall, at Lessee’s sole expense, procure and maintain contracts, withcopies to Lessee in customary form and substance for, and withcontractors specializing and experienced in the maintenance of the followingequipment and improvements, if any, if and when installed on the Premises:  (i) HVAC equipment, (ii) boiler and pressurevessels, (iii) clarifiers, and (iv) any other equipment, if reasonably requiredby Lessor.  However, Lessor reserves theright, upon notice to Lessee, to procure and maintain any or all of suchservice contracts, and if Lessor so elects, Lessee shall reimburse Lessor, upondemand, for the cost thereof.

 

(c)                                  **Failureto Perform**.  If Lessee fails to performLessee’s obligations under this Paragraph 7.1, Lessor may enter upon thePremises after 10 days’ prior written notice to Lessee (except in the case ofan emergency, in which case no notice shall be required), perform suchobligations on Lessee’s behalf, and put the Premises in good order, conditionand repair, and Lessee shall promptly reimburse Lessor for the cost thereof.

 

(d)                                 **Replacement**. Subject toLessee’s indemnification of Lessor as set forth in Paragraph 8.7 below, andwithout relieving Lessee of liability resulting from Lessee’s failure toexercise and perform good maintenance practices, if an item described inParagraph 7.1(b) cannot be repaired other than at a cost which is in excess of50% of the cost of replacing such item, then such item shall be replaced byLessor, and the cost thereof shall be prorated between the Parties and Lesseeshall only be obligated to pay, each month during the remainder of the term ofthis Lease, on the date on which Base Rent is due, an amount equal to theproduct of multiplying the cost of such replacement by a fraction, thenumerator of which is one, and the denominator of which is 144 (ie. 1/144th ofthe cost per month).  Lessee shall payinterest on the unamortized balance at a rate that is commercially reasonablein the judgment of Lessor’s accountants. Lessee may, however, prepay its obligation at any time.

 

7.2                                 **Lessor’sObligations**.  Subject to the provisions ofParagraphs 2.2 (Condition), 2.3 (Compliance), 4.2 (Common Area OperatingExpenses), 6 (Use), 7.1 (Lessee’s Obligations), 9 (Damage or Destruction) and14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2,shall keep in good order, condition and repair exterior roof, fire sprinklersystem, Common Area fire alarm and/or smoke detection systems, fire hydrants,parking lots, walkways, parkways, driveways, landscaping, fences, signs andutility systems serving the Common Areas and all parts thereof, as well asproviding the services for which there is a Common Area Operating Expensepursuant to Paragraph 4.2.  Lessor shallnot be obligated to paint the exterior surfaces of exterior walls nor shallLessor be obligated to maintain, repair or replace windows, doors or plate glassof the Premises.  Lessee expresslywaives the benefit of any statute now or hereafter in effect to the extent itis inconsistent with the terms of this Lease.  Replacement and repair of structural items including foundations,structural walls and underground utilities shall be at Lessor’s sole cost.

 

7.3                                 **UtilityInstallations; Trade Fixtures; Alterations**.

 

(a)                               **Definitions**.  The term **“UtilityInstallations”** refers to all floor and window coverings, air lines,power panels, electrical distribution, security and fire protection systems,lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises.The term **“Trade Fixtures”** shallmean Lessee’s machinery and equipment and Lessee’s installed communication systems that can be removedwithout doing material damage to the Premises. The term **“Alterations”**shall mean any modification of the improvements, other than UtilityInstallations or Trade Fixtures, whether by addition or deletion.  **“LesseeOwned Alterations and/or Utility Installations”** are defined asAlterations and/or Utility Installations made by Lessee that are not yet ownedby Lessor pursuant to Paragraph 7.4(a).

 

                                (b)                                 **Consent**. Lessee shall not make any Alterations or Utility Installations to thePremises without Lessor’s prior written consent. Lessee may, however, makenon-structural Utility Installations to the interior of the Premises (excludingthe roof) without such consent but upon notice to Lessor, as long as they arenot visible from the outside, do not involve puncturing, relocating or removingthe roof or any existing walls, and the cumulative cost thereof during thisLease as extended does not exceed a sum equal to 3 month’s Base Rent in theaggregate or a sum equal to one month’s Base Rent in any one year.  Notwithstanding the foregoing, Lessee shallnot make or permit any roof penetrations and/or install anything on the roof without theprior written approval of Lessor. Lessor may, as a precondition to granting such approval, require Lesseeto utilize a contractor chosen and/or approved by Lessor.  Any Alterations or Utility Installationsthat Lessee shall desire to make and which require the consent of the Lessorshall be presented to Lessor in written form with detailed plans.  Consent shall be deemed conditioned uponLessee’s:  (i) acquiring all applicablegovernmental permits, (ii) furnishing Lessor with copies of both the permitsand the plans and specifications prior to commencement of the work, and (iii)compliance with all conditions of said permits and other ApplicableRequirements in a prompt and expeditious manner.  Any Alterations or Utility Installations shall be performed in aworkmanlike manner with good and sufficient materials.  Lessee shall promptly upon completionfurnish Lessor with as-built plans and specifications. For work which costs anamount in excess of one month’s Base Rent, Lessor may condition its consentupon Lessee providing a lien and completion bond in an amount equal to 150% ofthe estimated cost of such Alteration or Utility Installation and/or uponLessee’s posting an additional Security Deposit with Lessor.

 

(c)                                  **Indemnification**.  Lessee shall pay, when due, all claims forlabor or materials furnished or alleged to have been furnished to or for Lesseeat or for use on the Premises, which claims are or may be secured by anymechanic’s or materialman’s lien against the Premises or any interesttherein.  Lessee shall give Lessor notless than 10 days notice prior to the commencement of any work in, on or aboutthe Premises, and Lessor shall have the right to post notices ofnon-responsibility.  If Lessee shallcontest the validity of any such lien, claim or demand, then Lessee shall, atits sole expense defend and protect itself, Lessor and the Premises against thesame and shall pay and satisfy any such adverse judgment that may be renderedthereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amountequal to 150% of the amount of such contested lien, claim or demand,indemnifying Lessor against liability for the same.  If Lessor elects to participate in any such action, Lessee shallpay Lessor’s attorneys’ fees and costs.

 

7.4                                 **Ownership;Removal; Surrender; and Restoration**.

 

(a)                                  **Ownership**.  Subject to Lessor’s right to require removalor elect ownership as hereinafter provided, all Alterations and UtilityInstallations made by Lessee shall be the property of Lessee, but considered apart of the Premises.  Lessor may, atany time, elect in writing to be the owner of all or any specified part of theLessee Owned Alterations and Utility Installations.  Unless otherwise instructed per paragraph 7.4(b) hereof, allLessee Owned Alterations and Utility Installations shall, at the expiration ortermination of this Lease, become the property of Lessor and be surrendered byLessee with the Premises.

 

(b)                                 **Removal**.  By delivery to Lessee of written notice fromLessor not earlier than 90 and not later than 30 days prior to the end of theterm of this Lease, Lessor may require that any or all Lessee Owned Alterationsor Utility Installations be removed by the expiration or termination of thisLease.  Lessor may require the removalat any time of all or any part of any Lessee Owned Alterations or UtilityInstallations made without the required consent.

 

(c)                                  **Surrender;Restoration**.  Lessee shall surrender thePremises by the Expiration Date or any earlier termination date, with all ofthe improvements, parts and surfaces thereof broom clean and free of debris,and in good operating order, condition and state of repair, ordinary wear andtear excepted.  “Ordinary wear and tear”shall not include any damage or deterioration that would have been prevented bygood maintenance practice.

 
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Notwithstanding the foregoing, if this Leaseis for 12 months or less, then Lessee shall surrender the Premises in the samecondition as delivered to Lessee on the Start Date with NO allowance forordinary wear and tear.  Lessee shallrepair any damage occasioned by the installation, maintenance or removal ofTrade Fixtures, Lessee owned Alterations and/or Utility Installations,furnishings, and equipment as well as the removal of any storage tank installedby or for Lessee.  Lessee shall alsocompletely remove from the Premises any and all Hazardous Substances broughtonto the Premises by or for Lessee, or any third party (except HazardousSubstances which were deposited via underground migration from areas outside ofthe Project) even if such removal would require Lessee to perform or pay forwork that exceeds statutory requirements. Trade Fixtures shall remain the property of Lessee and shall be removedby Lessee. The failure by Lessee to timely vacate the Premises pursuant to thisParagraph 7.4(c) without the express written consent of Lessor shall constitutea holdover under the provisions of Paragraph 26 below.

 

8.                                       **Insurance;Indemnity**.

 

8.1                                 **Paymentof Premiums**.  The cost of the premiums forthe insurance policies required to be carried by Lessor, pursuant to Paragraphs8.2(b), 8.3(a) and 8.3(b), shall be a Common Area Operating Expense.  Premiums for policy periods commencing priorto, or extending beyond, the term of this Lease shall be prorated to coincidewith the corresponding Start Date or Expiration Date.

 

8.2                              **LiabilityInsurance**.

 

(a)                                  **Carriedby Lessee**.  Lessee shall obtain and keepin force a Commercial General Liability policy of insurance protecting Lesseeand Lessor as an additional insured against claims for bodily injury, personalinjury and property damage based upon or arising out of the ownership, use,occupancy or maintenance of the Premises and all areas appurtenantthereto.  Such insurance shall be on anoccurrence basis providing single limit coverage in an amount not less than$1,000,000 per occurrence with an annual aggregate of not less than $2,000,000,an “Additional Insured-Managers or Lessors of Premises Endorsement” and containthe “Amendment of the Pollution Exclusion Endorsement” for damage caused byheat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as betweeninsured persons or organizations, but shall include coverage for liabilityassumed under this Lease as an **“insuredcontract”** for the performance of Lessee’s indemnity obligationsunder this Lease.  The limits of saidinsurance shall not, however, limit the liability of Lessee nor relieve Lesseeof any obligation hereunder.  Allinsurance carried by Lessee shall be primary to and not contributory with anysimilar insurance carried by Lessor, whose insurance shall be considered excessinsurance only.

 

(b)                                 **Carriedby Lessor**.  Lessor shall maintainliability insurance as described in Paragraph 8.2(a), in addition to, and notin lieu of, the insurance required to be maintained by Lessee.  Lessee shall not be named as an additionalinsured therein.

 

8.3                                 **PropertyInsurance - Building, Improvements and Rental Value**.

 

(a)                                  **Buildingand Improvements**.  Lessor shall obtain and keepin force a policy or policies of insurance in the name of Lessor, with losspayable to Lessor, any ground-lessor, and to any Lender insuring loss or damageto the Premises.  The amount of suchinsurance shall be equal to the full replacement cost of the Premises, as thesame shall exist from time to time, or the amount required by any Lender, butin no event more than the commercially reasonable and available insurable valuethereof.  Lessee Owned Alterations andUtility Installations, Trade Fixtures, and Lessee’s personal property shall beinsured by Lessee under Paragraph 8.4. If the coverage is available and commercially appropriate, such policyor policies shall insure against all risks of direct physical loss or damage(except the perils of flood and/or earthquake unless required by a Lender),including coverage for debris removal and the enforcement of any ApplicableRequirements requiring the upgrading, demolition, reconstruction or replacementof any portion of the Premises as the result of a covered loss.  Said policy or policies shall also containan agreed valuation provision in lieu of any coinsurance clause, waiver ofsubrogation, and inflation guard protection causing an increase in the annualproperty insurance coverage amount by a factor of not less than the adjustedU.S. Department of Labor Consumer Price Index for All Urban Consumers for thecity nearest to where the Premises are located.  If such insurance coverage has a deductible clause, thedeductible amount shall not exceed $1,000 per occurrence.

 

(b)                                 **RentalValue**.  Lessor shall also obtain andkeep in force a policy or policies in the name of Lessor with loss payable toLessor and any Lender, insuring the loss of the full Rent for one year with anextended period of indemnity for an additional 180 days (“Rental Valueinsurance”). Said insurance shall contain an agreed valuation provision inlieu of any coinsurance clause, and the amount of coverage shall be adjustedannually to reflect the projected Rent otherwise payable by Lessee, for thenext 12 month period.

 

(c)                                  **AdjacentPremises**.  Lessee shall pay for anyincrease in the premiums for the property insurance of the Building and for theCommon Areas or other buildings in the Project if said increase is caused byLessee’s acts, omissions, use or occupancy of the Premises.

 

(d)                                 **Lessee’sImprovements**.  Since Lessor is the InsuringParty, Lessor shall not be required to insure Lessee Owned Alterations andUtility Installations unless the item in question has become the property ofLessor under the terms of this Lease.

 

8.4                                 **Lessee’sProperty; Business Interruption Insurance**.

 

(a)                                  **PropertyDamage**.  Lessee shall obtain andmaintain insurance coverage on all of Lessee’s personal property, TradeFixtures, and Lessee Owned Alterations and Utility Installations.  Such insurance shall be full replacementcost coverage with a deductible of not to exceed $2,500 per occurrence.  The proceedsfrom any such insurance shall be used by Lessee for the replacement of personalproperty, Trade Fixtures and Lessee Owned Alterations and UtilityInstallations.  Lessee shall provideLessor with written evidence that such insurance is in force.

 

(b)                                 **BusinessInterruption**.  Lessee shall obtain andmaintain loss of income and extra expense insurance in amounts as willreimburse Lessee for direct or indirect loss of earnings attributable to allperils commonly insured against by prudent lessees in the business of Lessee orattributable to prevention of access to the Premises as a result of suchperils.

 

(c)                                  **NoRepresentation of Adequate Coverage**. Lessor makes no representation that the limits or forms of coverage ofinsurance specified herein are adequate to cover Lessee’s property, businessoperations or obligations under this Lease.

 

                                                8.5                                 **Insurance Policies**.  Insurance required herein shall be bycompanies duly licensed or admitted to transact business in the state where thePremises are located, and maintaining during the policy term a “GeneralPolicyholders Rating” of at least B+, V, as set forth in the most current issueof “Best’s Insurance Guide”, or such other rating as may be required by aLender.  Lessee shall not do or permitto be done anything which invalidates the required insurance policies.  Lessee shall, prior to the Start Date, deliverto Lessor certified copies of policies of such insurance or certificatesevidencing the existence and amounts of the required insurance.  No such policy shall be cancelable orsubject to modification except after 30 days prior written notice toLessor.  Lessee shall, at least 30 daysprior to the expiration of such policies, furnish Lessor with evidence ofrenewals or “insurance binders” evidencing renewal thereof, or Lessor may ordersuch insurance and charge the cost thereof to Lessee, which amount shall bepayable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length ofthe remaining term of this Lease, whichever is less.  If either Party shall fail to procure and maintain the insurancerequired to be carried by it, the other Party may, but shall not be requiredto, procure and maintain the same.

 

8.6                                 **Waiverof Subrogation**.  Without affecting any otherrights or remedies, Lessee and Lessor each hereby release and relieve theother, and waive their entire right to recover damages against the other, forloss of or damage to its property arising out of or incident to the perilsrequired to be insured against herein. The effect of such releases and waivers is not limited by the amount ofinsurance carried or required, or by any deductibles applicable hereto.  The Parties agree to have their respectiveproperty damage insurance carriers waive any right to subrogation that suchcompanies may have against Lessor or Lessee, as the case may be, so long as theinsurance is not invalidated thereby.

 

8.7                              **Indemnity**.  Except for Lessor’s gross negligence orwillful misconduct or breach of warranties, Lessee shallindemnify, protect, defend and hold harmless the Premises, Lessor and itsagents, Lessor’s master or ground lessor, partners and Lenders, from andagainst any and all claims, loss of rents and/or damages, liens, judgments,penalties, attorneys’ and consultants’ fees, expenses and/or liabilitiesarising out of, involving, or in connection with, the use and/or occupancy ofthe Premises by Lessee.  If any actionor proceeding is brought against Lessor by reason of any of the foregoingmatters, Lessee shall upon notice defend the same at Lessee’s expense bycounsel reasonably satisfactory to Lessor and Lessor shall cooperate withLessee in such defense.  Lessor need nothave first paid any such claim in order to be defended or indemnified.

 

8.8                                 **Exemptionof Lessor from Liability**.  Lessorshall not be liable for injury or damage to the person or goods, wares,merchandise or other property of Lessee, Lessee’s employees, contractors,invitees, customers, or any other person in or about the Premises, whether suchdamage or injury is caused by or results from fire, steam, electricity, gas,water or rain, or from the breakage, leakage, obstruction or other defects ofpipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures,or from any other cause, whether the said injury or damage results fromconditions arising upon the Premises or upon other portions of the Building, orfrom other sources or places.  Lessorshall not be liable for any damages arising from any act or neglect of anyother tenant of Lessor nor from the failure of Lessor to enforce the provisionsof any other lease in the Project. Notwithstanding Lessor’s negligence orbreach of this Lease, Lessor shall under no circumstances be liable for injuryto Lessee’s business or for any loss of income or profit therefrom.

 

9.                                       **Damageor Destruction**.

 

9.1                              **Definitions**.

 

(a)                                  **“PremisesPartial Damage”** shall mean damage or destruction to the improvements on the Premises,other than Lessee Owned Alterations and Utility Installations, which canreasonably be repaired in 3 months or less from the date of the damage ordestruction, and the cost thereof does not exceed a sum equal to 6 month’s BaseRent.  Lessor shall notify Lessee inwriting within 30 days from the date of the damage or destruction as to whetheror not the damage is Partial or Total.

 

(b)                                 **“PremisesTotal Destruction”** shall mean damage or destruction to the improvements on the Premises,other than Lessee Owned Alterations and Utility Installations and TradeFixtures, which cannot reasonably be repaired in 3 months or less from the dateof the damage or destruction and/or the cost thereof exceeds a sum equal to 6month’s Base Rent.  Lessor shall notifyLessee in writing within 30 days from the date of the damage or destruction asto whether or not the damage is Partial or Total.

 

(c)                                  **“InsuredLoss”** shall mean damage or destruction to improvements on the Premises, otherthan Lessee Owned Alterations and Utility Installations and Trade Fixtures,which was caused by an event required to be covered by the insurance describedin Paragraph 8.3(a), irrespective of any deductible amounts or coverage limitsinvolved.

 

(d)                                 **“ReplacementCost”** shall mean the cost to repair or rebuild the improvements owned byLessor at the time of the occurrence to their condition existing immediatelyprior thereto, including demolition, debris removal and upgrading required bythe operation of Applicable Requirements,

 
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and without deduction for depreciation.

 

(e)                                  **“HazardousSubstance Condition”** shall mean the occurrence or discovery of acondition involving the presence of, or a contamination by, a HazardousSubstance as defined in Paragraph 6.2(a), in, on, or under the Premises.

 

9.2                                 **PartialDamage - Insured Loss**.  If aPremises Partial Damage that is an Insured Loss occurs, then Lessor shall, atLessor’s expense, repair such damage (but not Lessee’s Trade Fixtures or LesseeOwned Alterations and Utility Installations) as soon as reasonably possible andthis Lease shall continue in full force and effect; provided, however, thatLessee shall, at Lessor’s election, make the repair of any damage ordestruction the total cost to repair of which is $5,000 or less, and, in suchevent, Lessor shall make any applicable insurance proceeds available to Lesseeon a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not inforce or the insurance proceeds are not sufficient to effect such repair, theInsuring Party shall promptly contribute the shortage in proceeds as and whenrequired to complete said repairs.  Inthe event, however, such shortage was due to the fact that, by reason of theunique nature of the improvements, full replacement cost insurance coverage wasnot commercially reasonable and available, Lessor shall have no obligation topay for the shortage in insurance proceeds or to fully restore the uniqueaspects of the Premises unless Lessee provides Lessor with the funds to coversame, or adequate assurance thereof, within 10 days following receipt ofwritten notice of such shortage and request therefor.  If Lessor receives said funds or adequate assurance thereofwithin said 10 day period, the party responsible for making the repairs shallcomplete them as soon as reasonably possible and this Lease shall remain infull force and effect.  If such funds orassurance are not received, Lessor may nevertheless elect by written notice toLessee within 10 days thereafter to: (i) make such restoration and repair as is commercially reasonable withLessor paying any shortage in proceeds, in which case this Lease shall remainin full force and effect, or (ii) have this Lease terminate 30 daysthereafter.  Lessee shall not beentitled to reimbursement of any funds contributed by Lessee to repair any suchdamage or destruction.  Premises PartialDamage due to flood or earthquake shall be subject to Paragraph 9.3,notwithstanding that there may be some insurance coverage, but the net proceedsof any such insurance shall be made available for the repairs if made by eitherParty.

 

9.3                                 **PartialDamage - Uninsured Loss**.  If aPremises Partial Damage that is not an Insured Loss occurs, unless caused by anegligent or willful act of Lessee (in which event Lessee shall make therepairs at Lessee’s expense), Lessor may either:  (i) repair such damage as soon as reasonably possible at Lessor’sexpense, in which event this Lease shall continue in full force and effect, or(ii) terminate this Lease by giving written notice to Lessee within 30 daysafter receipt by Lessor of knowledge of the occurrence of such damage.  Such termination shall be effective 60 daysfollowing the date of such notice.  Inthe event Lessor elects to terminate this Lease, Lessee shall have the rightwithin 10 days after receipt of the termination notice to give written noticeto Lessor of Lessee’s commitment to pay for the repair of such damage withoutreimbursement from Lessor.  Lessee shallprovide Lessor with said funds or satisfactory assurance thereof within 30 daysafter making such commitment.  In suchevent this Lease shall continue in full force and effect, and Lessor shallproceed to make such repairs as soon as reasonably possible after the requiredfunds are available.  If Lessee does notmake the required commitment, this Lease shall terminate as of the datespecified in the termination notice.

 

9.4                                 **TotalDestruction**.  Notwithstanding any otherprovision hereof, if a Premises Total Destruction occurs, this Lease shallterminate 60 days following such Destruction. If the damage or destruction was caused by the gross negligence orwillful misconduct of Lessee, Lessor shall have the right to recover Lessor’sdamages from Lessee, except as provided in Paragraph 8.6.

 

9.5                                 **DamageNear End of Term**.  If at any time during the last6 months of this Lease there is damage for which the cost to repair exceeds onemonth’s Base Rent, whether or not an Insured Loss, Lessor may terminate thisLease effective 60 days following the date of occurrence of such damage bygiving a written termination notice to Lessee within 30 days after the date ofoccurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisableoption to extend this Lease or to purchase the Premises, then Lessee maypreserve this Lease by, (a) exercising such option and (b) providing Lessorwith any shortage in insurance proceeds (or adequate assurance thereof) neededto make the repairs on or before the earlier of (i) the date which is 10 daysafter Lessee’s receipt of Lessor’s written notice purporting to terminate thisLease, or (ii) the day prior to the date upon which such option expires.  If Lessee duly exercises such option duringsuch period and provides Lessor with funds (or adequate assurance thereof) tocover any shortage in insurance proceeds, Lessor shall, at Lessor’scommercially reasonable expense, repair such damage as soon as reasonablypossible and this Lease shall continue in full force and effect.  If Lessee fails to exercise such option andprovide such funds or assurance during such period, then this Lease shallterminate on the date specified in the termination notice and Lessee’s optionshall be extinguished.

 

9.6                                 **Abatementof Rent; Lessee’s Remedies**.

 

(a)                                  **Abatement**.  In the event of Premises Partial Damage orPremises Total Destruction or a Hazardous Substance Condition for which Lesseeis not responsible under this Lease, the Rent payable by Lessee for the periodrequired for the repair, remediation or restoration of such damage shall beabated in proportion to the degree to which Lessee’s use of the Premises isimpaired, but not to exceed the proceeds received from the Rental Valueinsurance.  All other obligations ofLessee hereunder shall be performed by Lessee, and Lessor shall have noliability for any such damage, destruction, remediation, repair or restorationexcept as provided herein.

 

(b)                                 **Remedies**.  If Lessor shall be obligated to repair orrestore the Premises and does not commence, in a substantial and meaningfulway, such repair or restoration within 90 days after such obligation shallaccrue, Lessee may, at any time prior to the commencement of such repair orrestoration, give written notice to Lessor and to any Lenders of which Lesseehas actual notice, of Lessee’s election to terminate this Lease on a date notless than 60 days following the giving of such notice.  If Lessee gives such notice and such repairor restoration is not commenced within 30 days thereafter, this Lease shallterminate as of the date specified in said notice.  If the repair or restoration is commenced within such 30 days,this Lease shall continue in full force and effect.  “Commence” shall mean either the unconditional authorization ofthe preparation of the required plans, or the beginning of the actual work onthe Premises, whichever first occurs.

 

9.7                                 **Termination;Advance Payments**.  Upon termination of this Leasepursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall bemade concerning advance Base Rent and any other advance payments made by Lesseeto Lessor.  Lessor shall, in addition,return to Lessee so much of Lessee’s Security Deposit as has not been, or isnot then required to be, used by Lessor.

 

9.8                                 **WaiveStatutes**.  Lessor and Lessee agree thatthe terms of this Lease shall govern the effect of any damage to or destructionof the Premises with respect to the termination of this Lease and hereby waivethe provisions of any present or future statute to the extent inconsistentherewith. 

 

10.                                 **RealProperty Taxes**.

 

                10.1                           **Definition**.  As used herein, the term “Real Property Taxes” shall include anyform of assessment; real estate, general, special, ordinary or extraordinary,or rental levy or tax (other than inheritance, personal income or estatetaxes); improvement bond; and/or license fee imposed upon or levied against anylegal or equitable interest of Lessor in the Project, Lessor’s right to otherincome therefrom, and/or Lessor’s business of leasing, by any authority havingthe direct or indirect power to tax and where the funds are generated withreference to the Project address and where the proceeds so generated are to beapplied by the city, county or other local taxing authority of a jurisdictionwithin which the Project is located. The term “Real Property Taxes” shall also include any tax, fee, levy,assessment or charge,or any increase therein, imposed by reason of events occurring during the termof this Lease, including but not limited to, a change in the ownership of theProject or any portion thereof or a change in the improvements thereon.  In calculating Real Property Taxes for anycalendar year, the Real Property Taxes for any real estate tax year shall beincluded in the calculation of Real Property Taxes for such calendar year basedupon the number of days which such calendar year and tax year have in common.

 

10.2                           **Paymentof Taxes**.  Lessor shall pay the RealProperty Taxes applicable to the Project, and except as otherwise provided inParagraph 10.3, any such amounts shall be included in the calculation of CommonArea Operating Expenses in accordance with the provisions of Paragraph 4.2. 

 

10.3                           **AdditionalImprovements**.  Common Area Operating Expensesshall not include Real Property Taxes specified in the tax assessor’s recordsand work sheets as being caused by additional improvements placed upon theProject by other lessees or by Lessor for the exclusive enjoyment of such otherlessees.  Notwithstanding Paragraph 10.2hereof, Lessee shall, however, pay to Lessor at the time Common Area OperatingExpenses are payable under Paragraph 4.2, the entirety of any increase in RealProperty Taxes if assessed solely by reason of Alterations, Trade Fixtures orUtility Installations placed upon the Premises by Lessee or at Lessee’srequest.

 

10.4                           **JointAssessment**.  If the Building is notseparately assessed, Real Property Taxes allocated to the Building shall be anequitable proportion of the Real Property Taxes for all of the land andimprovements included within the tax parcel assessed, such proportion to bedetermined by Lessor from the respective valuations assigned in the assessor’swork sheets or such other information as may be reasonably available.  Lessor’s reasonable determination thereof,in good faith, shall be conclusive.

 

10.5                           **PersonalProperty Taxes**.  Lessee shall pay prior todelinquency all taxes assessed against and levied upon Lessee Owned Alterationsand Utility Installations, Trade Fixtures, furnishings, equipment and allpersonal property of Lessee contained in the Premises.  When possible, Lessee shall cause its LesseeOwned Alterations and Utility Installations, Trade Fixtures, furnishings,equipment and all other personal property to be assessed and billed separatelyfrom the real property of Lessor.  Ifany of Lessee’s said property shall be assessed with Lessor’s real property,Lessee shall pay Lessor the taxes attributable to Lessee’s property within 10days after receipt of a written statement setting forth the taxes applicable toLessee’s property.

 

11.                                 **Utilities**.  Lessee shall pay for all water, gas, heat,light, power, telephone, trash disposal and other utilities and servicessupplied to the Premises, together with any taxes thereon.  Notwithstanding the provisions of Paragraph4.2, if at any time in Lessor’s sole judgment, Lessor determines that Lessee isusing a disproportionate amount of water, electricity or other commonly meteredutilities, or that Lessee is generating such a large volume of trash as torequire an increase in the size of the dumpster and/or an increase in thenumber of times per month that the dumpster is emptied, then Lessor mayincrease Lessee’s Base Rent by an amount equal to such increased costs.

 

12.                                 **Assignmentand Subletting**.

 

12.1                           **Lessor’sConsent Required**.

 

(a)                                  Lessee shall notvoluntarily or by operation of law assign, transfer, mortgage or encumber(collectively but excluding any Permitted Transfer, **“assign or assignment”**) or sublet all orany part of Lessee’s interest in this Lease or in the Premises without Lessor’sprior written consent.  Lesseemay assign this Lease or sublet the Premises, or any portion thereof withoutLessor’s consent, to any entity which controls, is controlled by, or is undercommon control with Lessee; to any entity which results from a merger of,reorganization of, or

 
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consolidation with Lessee; to any entity engaged in a joint venturewith Lessee; or to any entity which acquires substantially all of the stock orassets of Lessee, as a going concern, with respect to the business that isbeing conducted in the Premises (hereinafter each a “Permitted Transfer”).  In addition, a sale or transfer of the capitalstock of Lessee shall be deemed a Permitted Transfer if (1) such sale ortransfer occurs in connection with any *bonafide*financing or capitalization for the benefit of Lessee, or (2)Lessee is, or becomes as a consequence of such sale or transfer of stock, apublicly traded corporation.  Within ten(10) business days following a Permitted Transfer, Lessee will give notice ofthe Permitted Transfer to the Lessor.

 

(d)                                 An assignment orsubletting without consent shall, at Lessor’s option, be a Default curableafter notice per Paragraph 13.1(c), or a noncurable Breach without thenecessity of any notice and grace period. If Lessor elects to treat such unapproved assignment or subletting as anoncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon 30days written notice, increase the monthly Base Rent to 110% of the Base Rentthen in effect.  Further, in the eventof such Breach and rental adjustment, (i) the purchase price of any option topurchase the Premises held by Lessee shall be subject to similar adjustment to110% of the price previously in effect, and (ii) all fixed and non-fixed rentaladjustments scheduled during the remainder of the Lease term shall be increasedto 110% of the scheduled adjusted rent.

 

(e)                                  Lessee’s remedy forany breach of Paragraph 12.1 by Lessor shall be limited to compensatory damagesand/or injunctive relief.

 

12.2                           **Termsand Conditions Applicable to Assignment and Subletting**.

 

(a)                                  Regardless ofLessor’s consent, no assignment or subletting shall:  (i) be effective without the express written assumption by suchassignee or sublessee of the obligations of Lessee under this Lease, (ii)release Lessee of any obligations hereunder, or (iii) alter the primaryliability of Lessee for the payment of Rent or for the performance of any otherobligations to be performed by Lessee.

 

(b)                                 Lessor may acceptRent or performance of Lessee’s obligations from any person other than Lesseepending approval or disapproval of an assignment.  Neither a delay in the approval or disapproval of such assignmentnor the acceptance of Rent or performance shall constitute a waiver or estoppelof Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

 

(c)                                  Lessor’s consent toany assignment or subletting shall not constitute a consent to any subsequentassignment or subletting.

 

(d)                                 In the event of anyDefault or Breach by Lessee, Lessor may proceed directly against Lessee, anyGuarantors or anyone else responsible for the performance of Lessee’sobligations under this Lease, including any assignee or sublessee, withoutfirst exhausting Lessor’s remedies against any other person or entityresponsible therefore to Lessor, or any security held by Lessor.

 

(e)                                  Each request forconsent to an assignment or subletting shall be in writing, accompanied byinformation relevant to Lessor’s determination as to the financial andoperational responsibility and appropriateness of the proposed assignee orsublessee, including but not limited to the intended use and/or requiredmodification of the Premises, if any, together with a fee of $1,000 asconsideration for Lessor’s considering and processing said request.  Lessee agrees to provide Lessor with suchother or additional information and/or documentation as may be reasonablyrequested.

 

(f)                                    Any assignee of, orsublessee under, this Lease shall, by reason of accepting such assignment orentering into such sublease, be deemed to have assumed and agreed to conformand comply with each and every term, covenant, condition and obligation hereinto be observed or performed by Lessee during the term of said assignment orsublease, other than such obligations as are contrary to or inconsistent withprovisions of an assignment or sublease to which Lessor has specificallyconsented to in writing.

 

(g)                                 Lessor’s consent toany assignment or subletting shall not transfer to the assignee or sublesseeany Option granted to the original Lessee by this Lease unless such transfer isspecifically consented to by Lessor in writing. (See Paragraph 39.2)

 

12.3                        **AdditionalTerms and Conditions Applicable to Subletting**.  Thefollowing terms and conditions shall apply to any subletting by Lessee of allor any part of the Premises and shall be deemed included in all subleases underthis Lease whether or not expressly incorporated therein:

 

(a)                                  Lessee hereby assignsand transfers to Lessor all of Lessee’s interest in all Rent payable on anysublease, and Lessor may collect such Rent and apply same toward Lessee’sobligations under this Lease; provided, however, that until a Breach shalloccur in the performance of Lessee’s obligations, Lessee may collect saidRent.  Lessor shall not, by reason ofthe foregoing or any assignment of such sublease, nor by reason of thecollection of Rent, be deemed liable to the sublessee for any failure of Lesseeto perform and comply with any of Lessee’s obligations to such sublessee.Lessee hereby irrevocably authorizes and directs any such sublessee, uponreceipt of a written notice from Lessor stating that a Breach exists in theperformance of Lessee’s obligations under this Lease, to pay to Lessor all Rentdue and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay allRents to Lessor without any obligation or right to inquire as to whether suchBreach exists, notwithstanding any claim from Lessee to the contrary.

 

(b)                                 In the event of aBreach by Lessee, Lessor may, at its option, require sublessee to attorn toLessor, in which event Lessor shall undertake the obligations of the sublessorunder such sublease from the time of the exercise of said option to theexpiration of such sublease; provided, however, Lessor shall not be liable forany prepaid rents or security deposit paid by such sublessee to such sublessoror for any prior Defaults or Breaches of such sublessor.

 

(c)                                  Any matterrequiring the consent of the sublessor under a sublease shall also require theconsent of Lessor.

 

(d)                                 No sublessee shallfurther assign or sublet all or any part of the Premises without Lessor’s priorwritten consent.

 

(e)                                  Lessor shalldeliver a copy of any notice of Default or Breach by Lessee to the sublessee,who shall have the right to cure the Default of Lessee within the grace period,if any, specified in such notice.  Thesublessee shall have a right of reimbursement and offset from and againstLessee for any such Defaults cured by the sublessee.

 

13.                                 **Default;Breach; Remedies**.

 

                                                13.1                           **Default; Breach**.  A “**Default**” isdefined as a failure by the Lessee to comply with or perform any of the terms,covenants, conditions or Rules and Regulations under this Lease.  A “**Breach**” isdefined as the occurrence of one or more of the following Defaults, and thefailure of Lessee to cure such Default within any applicable grace period:

 

(a)                                  The abandonment ofthe Premises; or the vacating of the Premises without providing a commerciallyreasonable level of security, or where the coverage of the property insurancedescribed in Paragraph 8.3 is jeopardized as a result thereof, or withoutproviding reasonable assurances to minimize potential vandalism.

 

(b)                                 The failure ofLessee to make any payment of Rent or any Security Deposit required to be madeby Lessee hereunder, whether to Lessor or to a third party, when due, toprovide reasonable evidence of insurance or surety bond, or to fulfill anyobligation under this Lease which endangers or threatens life or property,where such failure continues for a period of 3 business days following writtennotice to Lessee.

 

(c)                                  The failure byLessee to provide (i) reasonable written evidence of compliance with ApplicableRequirements, (ii) the service contracts, (iii) the rescission of anunauthorized assignment or subletting, (iv) an Estoppel Certificate, (v) arequested subordination, (vi) evidence concerning any guaranty and/orGuarantor, (vii) any document requested under Paragraph 41 (easements), or(viii) any other documentation or information which Lessor may reasonablyrequire of Lessee under the terms of this Lease, where any such failurecontinues for a period of 10 days following written notice to Lessee.

 

(d)                                 A Default by Lesseeas to the terms, covenants, conditions or provisions of this Lease, or of therules adopted under Paragraph 2.9 hereof, other than those described insubparagraphs 13.1(a), (b) or (c), above, where such Default continues for aperiod of 30 days after written notice; provided, however, that if the natureof Lessee’s Default is such that more than 30 days are reasonably required forits cure, then it shall not be deemed to be a Breach if Lessee commences suchcure within said 30 day period and thereafter diligently prosecutes such cureto completion.

 

(e)                                  The occurrence ofany of the following events:  (i) themaking of any general arrangement or assignment for the benefit of creditors;(ii) becoming a **“debtor”** asdefined in 11 U.S.C. § 101 or anysuccessor statute thereto (unless, in the case of a petition filed againstLessee, the same is dismissed within 60 days); (iii) the appointment of atrustee or receiver to take possession of substantially all of Lessee’s assetslocated at the Premises or of Lessee’s interest in this Lease, where possessionis not restored to Lessee within 30 days; or (iv) the attachment, execution orother judicial seizure of substantially all of Lessee’s assets located at thePremises or of Lessee’s interest in this Lease, where such seizure is notdischarged within 30 days; provided, however, in the event that any provisionof this subparagraph (e) is contrary to any applicable law, such provisionshall be of no force or effect, and not affect the validity of the remainingprovisions.

 

(f)                                    The discovery thatany financial statement of Lessee or of any Guarantor given to Lessor wasmaterially false.

 

(g)                              If the performanceof Lessee’s obligations under this Lease is guaranteed:  (i) the death of a Guarantor, (ii) the terminationof a Guarantor’s liability with respect to this Lease other than in accordancewith the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or thesubject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor theguaranty, or (v) a Guarantor’s breach of its guaranty obligation on ananticipatory basis, and Lessee’s failure, within 60 days following writtennotice of any such event, to provide written alternative assurance or security,which, when coupled with the then existing resources of Lessee, equals orexceeds the combined financial resources of Lessee and the Guarantors thatexisted at the time of execution of this Lease.

 

13.2                        **Remedies**.  If Lessee fails to perform any of itsaffirmative duties or obligations, within 10 days after written notice (or incase of an

 
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emergency, without notice), Lessor may, atits option, perform such duty or obligation on Lessee’s behalf, including butnot limited to the obtaining of reasonably required bonds, insurance policies,or governmental licenses, permits or approvals.  The costs and expenses of any such performance by Lessor shall bedue and payable by Lessee upon receipt of invoice therefor.  If any check given to Lessor by Lessee shallnot be honored by the bank upon which it is drawn, Lessor, at its option, mayrequire all future payments to be made by Lessee to be by cashier’s check.  In the event of a Breach, Lessor may, withor without further notice or demand, and without limiting Lessor in theexercise of any right or remedy which Lessor may have by reason of such Breach:

 

(a)                                  Terminate Lessee’sright to possession of the Premises by any lawful means, in which case thisLease shall terminate and Lessee shall immediately surrender possession toLessor.  In such event Lessor shall beentitled to recover from Lessee:  (i)the unpaid Rent which had been earned at the time of termination; (ii) theworth at the time of award of the amount by which the unpaid rent which wouldhave been earned after termination until the time of award exceeds the amountof such rental loss that the Lessee proves could have been reasonably avoided;(iii) the worth at the time of award of the amount by which the unpaid rent forthe balance of the term after the time of award exceeds the amount of suchrental loss that the Lessee proves could be reasonably avoided; and (iv) anyother amount necessary to compensate Lessor for all the detriment proximatelycaused by the Lessee’s failure to perform its obligations under this Lease orwhich in the ordinary course of things would be likely to result therefrom,including but not limited to the cost of recovering possession of the Premises,expenses of reletting, including necessary renovation and alteration of thePremises, reasonable attorneys’ fees, and that portion of any leasingcommission paid by Lessor in connection with this Lease applicable to theunexpired term of this Lease.  The worthat the time of award of the amount referred to in provision (iii) of theimmediately preceding sentence shall be computed by discounting such amount atthe discount rate of the Federal Reserve Bank of the District within which thePremises are located at the time of award plus one percent.  Efforts by Lessor to mitigate damages causedby Lessee’s Breach of this Lease shall not waive Lessor’s right to recoverdamages under Paragraph 12.  Iftermination of this Lease is obtained through the provisional remedy ofunlawful detainer, Lessor shall have the right to recover in such proceedingany unpaid Rent and damages as are recoverable therein, or Lessor may reservethe right to recover all or any part thereof in a separate suit.  If a notice and grace period required underParagraph 13.1 was not previously given, a notice to pay rent or quit, or toperform or quit given to Lessee under the unlawful detainer statute shall alsoconstitute the notice required by Paragraph 13.1.  In such case, the applicable grace period required by Paragraph13.1 and the unlawful detainer statute shall run concurrently, and the failureof Lessee to cure the Default within the greater of the two such grace periodsshall constitute both an unlawful detainer and a Breach of this Lease entitlingLessor to the remedies provided for in this Lease and/or by said statute.

 

(b)                                 Continue the Leaseand Lessee’s right to possession and recover the Rent as it becomes due, inwhich event Lessee may sublet or assign, subject only to reasonablelimitations.  Acts of maintenance,efforts to relet, and/or the appointment of a receiver to protect the Lessor’sinterests, shall not constitute a termination of the Lessee’s right topossession.

 

(c)                                  Pursue any otherremedy now or hereafter available under the laws or judicial decisions of thestate wherein the Premises are located. The expiration or termination of this Lease and/or the termination ofLessee’s right to possession shall not relieve Lessee from liability under anyindemnity provisions of this Lease as to matters occurring or accruing duringthe term hereof or by reason of Lessee’s occupancy of the Premises.

 

13.3                           **InducementRecapture**.  Any agreement for free orabated rent or other charges, or for the giving or paying by Lessor to or forLessee of any cash or other bonus, inducement or consideration for Lessee’sentering into this Lease, all of which concessions are hereinafter referred toas **“Inducement Provisions”**, shallbe deemed conditioned upon Lessee’s full and faithful performance of all of theterms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shallautomatically be deemed deleted from this Lease and of no further force oreffect, and any rent, other charge, bonus, inducement or considerationtheretofore abated, given or paid by Lessor under such an Inducement Provisionshall be immediately due and payable by Lessee to Lessor, notwithstanding anysubsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach whichinitiated the operation of this paragraph shall not be deemed a waiver byLessor of the provisions of this paragraph unless specifically so stated inwriting by Lessor at the time of such acceptance.

 

13.4                           **LateCharges**.  Lessee hereby acknowledgesthat late payment by Lessee of Rent will cause Lessor to incur costs notcontemplated by this Lease, the exact amount of which will be extremelydifficult to ascertain.  Such costsinclude, but are not limited to, processing and accounting charges, and latecharges which may be imposed upon Lessor by any Lender.  Accordingly, if any Rent shall not bereceived by Lessor within 5 days after such amount shall be due, then, withoutany requirement for notice to Lessee, Lessee shall pay to Lessor a one-timelate charge equal to 10% of each such overdue amount or $100, whichever isgreater.  The parties hereby agree thatsuch late charge represents a fair and reasonable estimate of the costs Lessorwill incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute awaiver of Lessee’s Default or Breach with respect to such overdue amount, norprevent the exercise of any of the other rights and remedies grantedhereunder.  In the event that a late chargeis payable hereunder, whether or not collected, for 3 consecutive installmentsof Base Rent, then notwithstanding any provision of this Lease to the contrary,Base Rent shall, at Lessor’s option, become due and payable quarterly inadvance.

 

13.5                           **Interest**.  Any monetary payment due Lessor hereunder,other than late charges, not received by Lessor, when due as to scheduledpayments (such as Base Rent) or within 30 days following the date on which itwas due for non-scheduled payment, shall bear interest from the date when due,as to scheduled payments, or the 31st day after it was due as to non-scheduledpayments. The interest (**“Interest”**)charged shall be equal to the prime rate reported in the Wall Street Journal aspublished closest prior to the date when due plus 4%, but shall not exceed themaximum rate allowed by law. Interest is payable in addition to the potentiallate charge provided for in Paragraph 13.4.

 

13.6                           **Breachby Lessor**.

 

(a)                                  **Noticeof Breach**.  Lessor shall not be deemed inbreach of this Lease unless Lessor fails within a reasonable time to perform anobligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event beless than 30 days after receipt by Lessor, and any Lender whose name andaddress shall have been furnished Lessee in writing for such purpose, ofwritten notice specifying wherein such obligation of Lessor has not beenperformed; provided, however, that if the nature of Lessor’s obligation is suchthat more than 30 days are reasonably required for its performance, then Lessorshall not be in breach if performance is commenced within such 30 day periodand thereafter diligently pursued to completion.

 

(b)                                 **Performanceby Lessee on Behalf of Lessor**.  In theevent that neither Lessor nor Lender cures said breach within 30 days afterreceipt of said notice, or if having commenced said cure they do not diligentlypursue it to completion, then Lessee may elect to cure said breach at Lessee’sexpense and offset from Rent an amount equal to the greater of one month’s BaseRent or the Security Deposit, and to pay an excess of such expense underprotest, reserving Lessee’s right to reimbursement from Lessor.  Lessee shall document the cost of said cureand supply said documentation to Lessor.

 

14.                                 **Condemnation**.  If the Premises or any portion thereof are taken under the powerof eminent domain or sold under the threat of the exercise of said power(collectively **“Condemnation”**),this Lease shall terminate as to the part taken as of the date the condemningauthority takes title or possession, whichever first occurs.  If more than 10% of the floor area of theUnit, or more than 25% of Lessee’s Reserved Parking Spaces, is taken byCondemnation, Lessee may, at Lessee’s option, to be exercised in writing within10 days after Lessor shall have given Lessee written notice of such taking (orin the absence of such notice, within 10 days after the condemning authorityshall have taken possession) terminate this Lease as of the date the condemningauthority takes such possession.  IfLessee does not terminate this Lease in accordance with the foregoing, thisLease shall remain in full force and effect as to the portion of the Premisesremaining, except that the Base Rent shall be reduced in proportion to thereduction in utility of the Premises caused by such Condemnation.  Condemnation awards and/or payments shall bethe property of Lessor, whether such award shall be made as compensation fordiminution in value of the leasehold, the value of the part taken, or forseverance damages; provided, however, that Lessee shall be entitled to anycompensation for Lessee’s relocation expenses, loss of business goodwill and/orTrade Fixtures, without regard to whether or not this Lease is terminatedpursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises byLessee, for purposes of Condemnation only, shall be considered the property ofthe Lessee and Lessee shall be entitled to any and all compensation which ispayable therefor.  In the event that thisLease is not terminated by reason of the Condemnation, Lessor shall repair anydamage to the Premises caused by such Condemnation.

 

15.                                 **BrokerageFees**.

 

15.1                        **AdditionalCommission**.  In addition to the paymentsowed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokersotherwise agree in writing, Lessor agrees that:  (a) if Lessee exercises any Option, (b) if Lessee acquires fromLessor any rights to the Premises or other premises owned by Lessor and locatedwithin the Project, (c) if Lessee remains in possession of the Premises, withthe consent of Lessor, after the expiration of this Lease, or (d) if Base Rentis increased, whether by agreement or operation of an escalation clause herein,then, Lessor shall pay Brokers a fee in accordance with the schedule of theBrokers in effect at the time of the execution of this Lease.

 

15.2                        **Assumptionof Obligations**.  Any buyer or transferee ofLessor’s interest in this Lease shall be deemed to have assumed Lessor’sobligation hereunder.  Brokers shall bethird party beneficiaries of the provisions of Paragraphs 1.10, 15, 22 and31.  If Lessor fails to pay to Brokersany amounts due as and for brokerage fees pertaining to this Lease when due,then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee’s Broker whendue, Lessee’s Broker may send written notice to Lessor and Lessee of suchfailure and if Lessor fails to pay such amounts within 10 days after saidnotice, Lessee shall pay said monies to its Broker and offset such amountsagainst Rent.  In addition, Lessee’sBroker shall be deemed to be a third party beneficiary of any commissionagreement entered into by and/or between Lessor and Lessor’s Broker for thelimited purpose of collecting any brokerage fee owed.

 

15.3                           **Representationsand Indemnities of Broker Relationships**. Lessee and Lessor each represent and warrant to the other that it hashad no dealings with any person, firm, broker or finder (other than theBrokers, if any) in connection with this Lease, and that no one other than saidnamed Brokers is entitled to any commission or finder’s fee in connectionherewith.  Lessee and Lessor do eachhereby agree to indemnify, protect, defend and hold the other harmless from andagainst liability for compensation or charges which may be claimed by any suchunnamed broker, finder or other similar party by reason of any dealings oractions of the indemnifying Party, including any costs, expenses, attorneys’fees reasonably incurred with respect thereto.

 

16.                                 **EstoppelCertificates**.

 

(a)                                  Each Party (as **“Responding Party”**) shall within 10 daysafter written notice from the other Party (the **“Requesting Party”**) execute, acknowledge and deliver to theRequesting Party a statement in writing in form similar to the then mostcurrent **“Estoppel Certificate”**form

 
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published by the American Industrial RealEstate Association, plus such additional information, confirmation and/orstatements as may be reasonably requested by the Requesting Party.

 

(b)                              If the RespondingParty shall fail to execute or deliver the Estoppel Certificate within such 10day period, the Requesting Party may execute an Estoppel Certificate statingthat: (i) the Lease is in full force and effect without modification except asmay be represented by the Requesting Party, (ii) there are no uncured defaultsin the Requesting Party’s performance, and (iii) if Lessor is the RequestingParty, not more than one month’s rent has been paid in advance. Prospectivepurchasers and encumbrances may rely upon the Requesting Party’s EstoppelCertificate, and the Responding Party shall be estopped from denying the truthof the facts contained in said Certificate.

 

(c)                               If Lessor desires tofinance, refinance, or sell the Premises, or any part thereof, Lessee and allGuarantors shall deliver to any potential lender or purchaser designated byLessor such financial statements as may be reasonably required by such lenderor purchaser, including but not limited to Lessee’s financial statements forthe past 3 years.  All such financialstatements shall be received by Lessor and such lender or purchaser inconfidence and shall be used only for the purposes herein set forth.

 

17.                                 **Definition of Lessor**.  The term **“Lessor”**as used herein shall mean the owner or owners at the time in question of thefee title to the Premises, or, if this is a sublease, of the Lessee’s interestin the prior lease.  In the event of atransfer of Lessor’s title or interest in the Premises or this Lease, Lessorshall deliver to the transferee or assignee (in cash or by credit) any unusedSecurity Deposit held by Lessor.  Exceptas provided in Paragraph 15, upon such transfer or assignment and delivery ofthe Security Deposit, as aforesaid, the prior Lessor shall be relieved of allliability with respect to the obligations and/or covenants under this Leasethereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Leaseto be performed by the Lessor shall be binding only upon the Lessor ashereinabove defined.  Notwithstandingthe above, and subject to the provisions of Paragraph 20 below, the originalLessor under this Lease, and all subsequent holders of the Lessor’s interest inthis Lease shall remain liable and responsible with regard to the potentialduties and liabilities of Lessor pertaining to Hazardous Substances as outlinedin Paragraph 6.2 above.

 

18.                                 **Severability**.  The invalidity of any provision of thisLease, as determined by a court of competent jurisdiction, shall in no wayaffect the validity of any other provision hereof.

 

19.                                 **Days**.  Unless otherwise specifically indicated tothe contrary, the word **“days”** asused in this Lease shall mean and refer to calendar days. 

 

20.                                 Limitation onLiability.  Subject to the provisions ofParagraph 17 above, the obligations of Lessor under this Lease shall notconstitute personal obligations of Lessor, the individual partners of Lessor orits or their individual partners, directors, officers or shareholders, andLessee shall look to the Premises, and to no other assets of Lessor, for thesatisfaction of any liability of Lessor with respect to this Lease, and shallnot seek recourse against the individual partners of Lessor, or its or theirindividual partners, directors, officers or shareholders, or any of theirpersonal assets for such satisfaction.

 

21.                                 **Timeof Essence**.  Time is of the essence withrespect to the performance of all obligations to be performed or observed by theParties under this Lease.

 

22.                                 **NoPrior or Other Agreements; Broker Disclaimer**. This Lease contains all agreements between the Parties with respect toany matter mentioned herein, and no other prior or contemporaneous agreement orunderstanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that ithas made, and is relying solely upon, its own investigation as to the nature,quality, character and financial responsibility of the other Party to thisLease and as to the use, nature, quality and character of the Premises.  Brokers have no responsibility with respectthereto or with respect to any default or breach hereof by either Party.  The liability (including court costs andattorneys’ fees), of any Broker with respect to negotiation, execution,delivery or performance by either Lessor or Lessee under this Lease or anyamendment or modification hereto shall be limited to an amount up to the feereceived by such Broker pursuant to this Lease; provided, however, that theforegoing limitation on each Broker’s liability shall not be applicable to anygross negligence or willful misconduct of such Broker.

 

23.                                 **Notices**.

 

23.1 **Notice Requirements**.  All notices required or permitted by thisLease or applicable law shall be in writing and may be delivered in person (byhand or by courier) or may be sent by regular, certified or registered mail orU.S. Postal Service Express Mail, with postage prepaid, or by facsimiletransmission, and shall be deemed sufficiently given if served in a mannerspecified in this Paragraph 23.  Theaddresses noted adjacent to a Party’s signature on this Lease shall be thatParty’s address for delivery or mailing of notices.  Either Party may by written notice to the other specify adifferent address for notice, except that upon Lessee’s taking possession ofthe Premises, the Premises shall constitute Lessee’s address for notice.  A copy of all notices to Lessor shall beconcurrently transmitted to such party or parties at such addresses as Lessormay from time to time hereafter designate in writing.  

 

23.2 **Date of Notice**.  Any notice sent by registered or certified mail, return receiptrequested, shall be deemed given on the date of delivery shown on the receiptcard, or if no delivery date is shown, the postmark thereon.  If sent by regular mail the notice shall bedeemed given 48 hours after the same is addressed as required herein and mailedwith postage prepaid.  Notices deliveredby United States Express Mail or overnight courier that guarantee next daydelivery shall be deemed given 24 hours after delivery of the same to thePostal Service or courier.  Noticestransmitted by facsimile transmission or similar means shall be deemeddelivered upon telephone confirmation of receipt (confirmation report from faxmachine is sufficient), provided a copy is also delivered via delivery ormail.  If notice is received on aSaturday, Sunday or legal holiday, it shall be deemed received on the nextbusiness day.

 

24.                                 **Waivers**.  No waiver by Lessor of the Default or Breachof any term, covenant or condition hereof by Lessee, shall be deemed a waiverof any other term, covenant or condition hereof, or of any subsequent Defaultor Breach by Lessee of the same or of any other term, covenant or conditionhereof. Lessor’s consent to, or approval of, any act shall not be deemed torender unnecessary the obtaining of Lessor’s consent to, or approval of, anysubsequent or similar act by Lessee, or be construed as the basis of anestoppel to enforce the provision or provisions of this Lease requiring suchconsent.  The acceptance of Rent byLessor shall not be a waiver of any Default or Breach by Lessee.  Any payment by Lessee may be accepted by Lessoron account of moneys or damages due Lessor, notwithstanding any qualifyingstatements or conditions made by Lessee in connection therewith, which suchstatements and/or conditions shall be of no force or effect whatsoever unlessspecifically agreed to in writing by Lessor at or before the time of deposit ofsuch payment. 

 

25.                                 **DisclosuresRegarding The Nature of a Real Estate Agency Relationship**.

 

                (a)                                  When entering into adiscussion with a real estate agent regarding a real estate transaction, aLessor or Lessee should from the outset understand what type of agencyrelationship or representation it has with the agent or agents in thetransaction.  Lessor and Lesseeacknowledge being advised by the Brokers in this transaction, as follows:

 

(i)                                     Lessor’s Agent.  A Lessor’s agent under a listing agreementwith the Lessor acts as the agent for the Lessor only.  A Lessor’s agent or subagent has thefollowing affirmative obligations:  Tothe Lessor:  A fiduciary duty ofutmost care, integrity, honesty, and loyalty in dealings with the Lessor.  To the Lessee and the Lessor:  (a) Diligent exercise of reasonable skillsand care in performance of the agent’s duties. (b) A duty of honest and fair dealing and good faith.  (c) A duty to disclose all facts known to theagent materially affecting the value or desirability of the property that arenot known to, or within the diligent attention and observation of, theParties.  An agent is not obligated toreveal to either Party any confidential information obtained from the otherParty which does not involve the affirmative duties set forth above.

 

(ii)                                  Lessee’s Agent.  An agent can agree to act as agent for theLessee only.  In these situations, theagent is not the Lessor’s agent, even if by agreement the agent may receivecompensation for services rendered, either in full or in part from the Lessor.  An agent acting only for a Lessee has thefollowing affirmative obligations.  Tothe Lessee:  A fiduciary duty ofutmost care, integrity, honesty, and loyalty in dealings with the Lessee. Tothe Lessee and the Lessor:  (a)Diligent exercise of reasonable skills and care in performance of the agent’sduties.  (b) A duty of honest and fairdealing and good faith.  (c) A duty todisclose all facts known to the agent materially affecting the value ordesirability of the property that are not known to, or within the diligentattention and observation of, the Parties. An agent is not obligated to reveal to either Party any confidentialinformation obtained from the other Party which does not involve theaffirmative duties set forth above.

 

(iii)                               Agent RepresentingBoth Lessor and Lessee.  A realestate agent, either acting directly or through one or more associate licenses,can legally be the agent of both the Lessor and the Lessee in a transaction,but only with the knowledge and consent of both the Lessor and the Lessee. In adual agency situation, the agent has the following affirmative obligations toboth the Lessor and the Lessee: (a) A fiduciary duty of utmost care, integrity,honesty and loyalty in the dealings with either Lessor or the Lessee.  (b) Other duties to the Lessor and theLessee as stated above in subparagraphs (i) or (ii). In representing bothLessor and Lessee, the agent may not without the express permission of therespective Party, disclose to the other Party that the Lessor will accept rentin an amount less than that indicated in the listing or that the Lessee iswilling to pay a higher rent than that offered. The above duties of the agentin a real estate transaction do not relieve a Lessor or Lessee from theresponsibility to protect their own interests. Lessor and Lessee shouldcarefully read all agreements to assure that they adequately express theirunderstanding of the transaction.  Areal estate agent is a person qualified to advise about real estate.  If legal or tax advice is desired, consult acompetent professional.

 

(b)                                 Brokers have noresponsibility with respect to any default or breach hereof by eitherParty.  The liability (including courtcosts and attorneys’ fees), of any Broker with respect to any breach of duty,error or omission relating to this Lease shall not exceed the fee received bysuch Broker pursuant to this Lease; provided, however, that the foregoinglimitation on each Broker’s liability shall not be applicable to any grossnegligence or willful misconduct of such Broker.

 

(c)                                  Buyer and Selleragree to identify to Brokers as “Confidential” any communication or informationgiven Brokers that is considered by such Party to be confidential.

 

26.                                 **NoRight To Holdover**.  Lessee has no right to retainpossession of the Premises or any part thereof beyond the expiration ortermination of this Lease.  In the eventthat Lessee holds over, then the Base Rent shall be increased to 150%****100% ofthe Base Rent applicable immediately preceding the expiration ortermination.  Nothing contained hereinshall be construed as consent by Lessor to any holding over by Lessee.

 

27.                                 **CumulativeRemedies**.  No remedy or electionhereunder shall be deemed exclusive but shall, wherever possible, be cumulativewith all other remedies at law or in equity.

 

28.                                 **Covenantsand Conditions; Construction of Agreement**.  Allprovisions of this Lease to be observed or performed by Lessee are bothcovenants and conditions.  In construingthis Lease, all headings and titles are for the convenience of the Parties onlyand shall not be considered a part of this Lease.  Whenever required by the context, the singular shall include theplural and vice versa.  This Lease shallnot be construed as if prepared by one of the Parties, but rather according toits fair meaning as a whole, as if both Parties had prepared it.

 
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29.                                 **BindingEffect; Choice of Law**.  ThisLease shall be binding upon the parties, their personal representatives,successors and assigns and be governed by the laws of the State in which thePremises are located.  Any litigationbetween the Parties hereto concerning this Lease shall be initiated in thecounty in which the Premises are located.

 

30.                                 **Subordination;Attornment; Non-Disturbance**.

 

30.1                           **Subordination**.  This Lease and any Option granted herebyshall be subject and subordinate to any ground lease, mortgage, deed of trust,or other hypothecation or security device (collectively, **“Security Device”**), now or hereafter placedupon the Premises, to any and all advances made on the security thereof, and toall renewals, modifications, and extensions thereof.  Lessee agrees that the holders of any such Security Devices (in thisLease together referred to as **“Lender”**)shall have no liability or obligation to perform any of the obligations ofLessor under this Lease.  Any Lender mayelect to have this Lease and/or any Option granted hereby superior to the lienof its Security Device by giving written notice thereof to Lessee, whereuponthis Lease and such Options shall be deemed prior to such Security Device,notwithstanding the relative dates of the documentation or recordation thereof.

 

30.2                           **Attornment**.  In the event that Lessor transfers title tothe Premises, or the Premises are acquired by another upon the foreclosure ortermination of a Security Device to which this Lease is subordinated (i) Lesseeshall, subject to the non-disturbance provisions of Paragraph 30.3, attorn tosuch new owner, and upon request, enter into a new lease, containing all of theterms and provisions of this Lease, with such new owner for the remainder ofthe term hereof, or, at the election of such new owner, this Lease shallautomatically become a new Lease between Lessee and such new owner, upon all ofthe terms and conditions hereof, for the remainder of the term hereof, and (ii)Lessor shall thereafter be relieved of any further obligations hereunder andsuch new owner shall assume all of Lessor’s obligations hereunder, except thatsuch new owner shall not:  (a) be liablefor any act or omission of any prior lessor or with respect to events occurringprior to acquisition of ownership; (b) be subject to any offsets or defenseswhich Lessee might have against any prior lessor,  (c) be bound by prepayment of more than one month’s rent, or (d)be liable for the return of any security deposit paid to any prior lessor.

 

30.3                           **Non-Disturbance**.  With respect to Security Devices enteredinto by Lessor after the execution of this Lease, Lessee’s subordination ofthis Lease shall be subject to receiving a commercially reasonablenon-disturbance agreement (a **“Non-DisturbanceAgreement”**) from the Lender which Non-Disturbance Agreement providesthat Lessee’s possession of the Premises, and this Lease, including any optionsto extend the term hereof, will not be disturbed so long as Lessee is not inBreach hereof and attorns to the record owner of the Premises.  Further, within 60 days after the executionof this Lease, Lessor shall use its commercially reasonable efforts to obtain aNon-Disturbance Agreement from the holder of any pre-existing Security Devicewhich is secured by the Premises.  Inthe event that Lessor is unable to provide the Non-Disturbance Agreement withinsaid 60 days, then Lessee may, at Lessee’s option, directly contact Lender andattempt to negotiate for the execution and delivery of a Non-DisturbanceAgreement.  

 

30.4                           **Self-Executing**.  The agreements contained in this Paragraph30 shall be effective without the execution of any further documents; provided,however, that, upon written request from Lessor or a Lender in connection witha sale, financing or refinancing of the Premises, Lessee and Lessor shallexecute such further writings as may be reasonably required to separately documentany subordination, attornment and/or Non-Disturbance Agreement provided forherein.

 

31.                                 **Attorneys’Fees**.  If any Party or Broker brings an action orproceeding involving the Premises whether founded in tort, contract or equity,or to declare rights hereunder, the Prevailing Party (as hereafter defined) inany such proceeding, action, or appeal thereon, shall be entitled to reasonableattorneys’ fees.  Such fees may beawarded in the same suit or recovered in a separate suit, whether or not suchaction or proceeding is pursued to decision or judgment.  The term, **“PrevailingParty”** shall include, without limitation, a Party or Broker whosubstantially obtains or defeats the relief sought, as the case may be, whetherby compromise, settlement, judgment, or the abandonment by the other Party orBroker of its claim or defense.  Theattorneys’ fees award shall not be computed in accordance with any court feeschedule, but shall be such as to fully reimburse all attorneys’ feesreasonably incurred.  In addition,Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in thepreparation and service of notices of Default and consultations in connectiontherewith, whether or not a legal action is subsequently commenced inconnection with such Default or resulting Breach ($200 is a reasonable minimumper occurrence for such services and consultation).

 

32.                                 **Lessor’sAccess; Showing Premises; Repairs**. Lessor and Lessor’s agents shall have the right to enter the Premises atany time, in the case of an emergency, and otherwise at reasonable times forthe purpose of showing the same to prospective purchasers, lenders, or tenants,and making such alterations, repairs, improvements or additions to the Premisesas Lessor may deem necessary.  All suchactivities shall be without abatement of rent or liability to Lessee.  Lessor may at any time place on the Premisesany ordinary **“For Sale”** signs andLessor may during the last 6 months of the term hereof place on the Premisesany ordinary **“For Lease”**signs.  Lessee may at any time place onthe Premises any ordinary **“For Sublease”**sign.

 

33.                                 **Auctions**.  Lessee shall not conduct, nor permit to beconducted, any auction upon the Premises without Lessor’s prior writtenconsent.  Lessor shall not be obligatedto exercise any standard of reasonableness in determining whether to permit anauction.

 

34.                                 **Signs**.  Except for ordinary “For Sublease” signswhich may be placed only on the Premises and for signage noted on#56 in Addendum 1, Lessee shall not place any sign upon the Project without Lessor’sprior written consent. All signs must comply with all Applicable Requirements.

 

35.                                 **Termination;Merger**.  Unless specifically statedotherwise in writing by Lessor, the voluntary or other surrender of this Leaseby Lessee, the mutual termination or cancellation hereof, or a terminationhereof by Lessor for Breach by Lessee, shall automatically terminate anysublease or lesser estate in the Premises; provided, however, that Lessor mayelect to continue any one or all existing subtenancies.  Lessor’s failure within 10 days followingany such event to elect to the contrary by written notice to the holder of anysuch lesser interest, shall constitute Lessor’s election to have such eventconstitute the termination of such interest.

 

36.                                 **Consents**.  Except as otherwise provided herein,wherever in this Lease the consent of a Party is required to an act by or forthe other Party, such consent shall not be unreasonably withheld or delayed.  Lessor’s actual reasonable costs andexpenses (including but not limited to architects’, attorneys’, engineers’ andother consultants’ fees) incurred in the consideration of, or response to, arequest by Lessee for any Lessor consent, including but not limited to consentsto an assignment, a subletting or the presence or use of a Hazardous Substance,shall be paid by Lessee upon receipt of an invoice and supporting documentationtherefor.  Lessor’s consent to any act,assignment or subletting shall not constitute an acknowledgment that no Defaultor Breach by Lessee of this Lease exists, nor shall such consent be deemed awaiver of any then existing Default or Breach, except as may be otherwisespecifically stated in writing by Lessor at the time of such consent.  The failure to specify herein any particularcondition to Lessor’s consent shall not preclude the imposition by Lessor atthe time of consent of such further or other conditions as are then reasonablewith reference to the particular matter for which consent is being given.  In the event that either Party disagreeswith any determination made by the other hereunder and reasonably requests thereasons for such determination, the determining party shall furnish its reasonsin writing and in reasonable detail within 10 business days following such request.

 

38.                                 **QuietPossession**.  Subject to payment by Lesseeof the Rent and performance of all of the covenants, conditions and provisionson Lessee’s part to be observed and performed under this Lease, Lessee shallhave quiet possession and quiet enjoyment of the Premises during the termhereof.

 

39.                                 **Options**.  If Lessee is granted an option, as definedbelow, then the following provisions shall apply.

 

39.1                           **Definition**.  **“Option”**shall mean:  (a) the right to extend theterm of or renew this Lease or to extend or renew any lease that Lessee has onother property of Lessor; (b) the right of first refusal or first offer tolease either the Premises or other property of Lessor; (c) the right topurchase or the right of first refusal to purchase the Premises or otherproperty of Lessor.

 

39.2                           **OptionsPersonal To Original Lessee**.  AnyOption granted to Lessee in this Lease is personal to the original Lessee, andcannot be assigned or exercised by anyone other than said original Lessee andonly while the original Lessee is in full possession of the Premises and, ifrequested by Lessor, with Lessee certifying that Lessee has no intention ofthereafter assigning or subletting.

 

39.3                           **MultipleOptions**.  In the event that Lessee hasany multiple Options to extend or renew this Lease, a later Option cannot beexercised unless the prior Options have been validly exercised.

 

39.4                           **Effectof Default on Options**.

 

(a)                                  Lessee shall haveno right to exercise an Option:  (i)during the period commencing with the giving of any notice of Default andcontinuing until said Default is cured, (ii) during the period of time any Rentis unpaid (without regard to whether notice thereof is given Lessee), (iii)during the time Lessee is in Breach of this Lease, or (iv) in the event thatLessee has been given 3 or more notices of separate Default, whether or not theDefaults are cured, during the 12 month period immediately preceding theexercise of the Option.

 

(b)                                 The period of timewithin which an Option may be exercised shall not be extended or enlarged byreason of Lessee’s inability to exercise an Option because of the provisions ofParagraph 39.4(a).

 

(c)                                  An Option shallterminate and be of no further force or effect, notwithstanding Lessee’s dueand timely exercise of the Option, if, after such exercise and prior to thecommencement of the extended term, (i) Lessee fails to pay Rent for a period of30 days after such Rent becomes due (without any necessity of Lessor to givenotice thereof), (ii) Lessor gives to Lessee 3 or more notices of separateDefault during any 12 month period, whether or not the Defaults are cured, or(iii) if Lessee commits a Breach of this Lease.

 

40.                                 **SecurityMeasures**.  Lessee hereby acknowledgesthat the Rent payable to Lessor hereunder does not include the cost of guardservice or other security measures, and that Lessor shall have no obligationwhatsoever to provide same.  Lesseeassumes all responsibility for the protection of the Premises, Lessee, itsagents and invitees and their property from the acts of third parties.

 

41.                                 **Reservations**.  Lessor reserves the right: (i) to grant,without the consent or joinder of Lessee, such easements, rights anddedications that Lessor deems necessary, (ii) to cause the recordation ofparcel maps and restrictions, and (iii) to create and/or install new utilityraceways, so long as such easements, rights, dedications, maps, restrictions,and utility raceways do not unreasonably interfere with the use of the Premisesby Lessee.  Lessee agrees

 
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to sign any documents reasonably requested byLessor to effectuate such rights.

 

42.                                 **PerformanceUnder Protest**.  If at any time a dispute shallarise as to any amount or sum of money to be paid by one Party to the otherunder the provisions hereof, the Party against whom the obligation to pay themoney is asserted shall have the right to make payment “under protest” and suchpayment shall not be regarded as a voluntary payment and there shall survivethe right on the part of said Party to institute suit for recovery of suchsum.  If it shall be adjudged that therewas no legal obligation on the part of said Party to pay such sum or any partthereof, said Party shall be entitled to recover such sum or so much thereof asit was not legally required to pay.

 

43.                                 **Authority**.  If either Party hereto is a corporation,trust, limited liability company, partnership, or similar entity, each individual executing this Lease onbehalf of such entity represents and warrants that he or she is duly authorizedto execute and deliver this Lease on its behalf. Each party shall, within 30days after request, deliver to the other party satisfactory evidence of suchauthority.

 

44.                                 **Conflict**.  Any conflict between the printed provisionsof this Lease and the typewritten or handwritten provisions shall be controlledby the typewritten or handwritten provisions.

 

45.                                 **Offer**.  Preparation of this Lease by either party ortheir agent and submission of same to the other Party shall not be deemed anoffer to lease to the other Party.  ThisLease is not intended to be binding until executed and delivered by all Partieshereto.

 

46.                                 **Amendments**.  This Lease may be modified only in writing,signed by the Parties in interest at the time of the modification.  As long as they do not materially changeLessee’s obligations hereunder, Lessee agrees to make such reasonablenon-monetary modifications to this Lease as may be reasonably required by aLender in connection with the obtaining of normal financing or refinancing ofthe Premises.

 

47.                                 **MultipleParties**.  If more than one person orentity is named herein as either Lessor or Lessee, such multiple Parties shallhave joint and several responsibility to comply with the terms of this Lease. 

 

48.                                 **Waiverof Jury Trial**.  The Parties hereby waive theirrespective rights to trial by jury in any action or proceeding involving theProperty or arising out of this Agreement.

 

49.                                 **Mediationand Arbitration of Disputes**.  AnAddendum requiring the Mediation and/or the Arbitration of all disputes betweenthe Parties and/or Brokers arising out of this Lease o is ý is not attached tothis Lease.

 

**LESSOR AND LESSEE HAVECAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINEDHEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARYCONSENT THERETO.  THE PARTIES HEREBYAGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARECOMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR ANDLESSEE WITH RESPECT TO THE PREMISES.**

 

**ATTENTION:  NO REPRESENTATION OR RECOMMENDATION IS MADEBY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THELEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THETRANSACTION TO WHICH IT RELATES.  THEPARTIES ARE URGED TO:**

 

**1.**                                      **SEEKADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE.**

 

**2.**                                      **RETAINAPPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THEPREMISES.  SAID INVESTIGATION SHOULDINCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES,THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOFAND OPERATING SYSTEMS, COMPLIANCE WITH THE AMERICANS WITH DISABILITIES ACT ANDTHE SUITABILITY OF THE PREMISES FOR LESSEE’S INTENDED USE.**

** **

**WARNING:  IF THE PREMISES ARE LOCATED IN A STATE OTHERTHAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TOCOMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES ARE LOCATED.**

 

The parties hereto have executed this Leaseat the place and on the dates specified above their respective signatures.

 
| Executed at:                      | San Diego, CA        |                                               | Executed at:   |                                               |
|-----------------------------------|----------------------|----------------------------------------------------|----------------|----------------------------------------------------|
| on:                               | October 8, 2003 |                                               | on:            | October 9, 2003                               |
|                              |                 |                                               |
| By LESSOR:                        |                 |                                               | By LESSEE:     |
| Thornmint I, a California Limited |                 | Image Ware Systems, Inc. a California  Corporation |
| Partnership                       |                 |                                               |
|                              |                 |                                               |
| By:                               | /s/ David Price      |                                               | By:            | /s/ John Gott                                      |
| Name Printed:                     | David Price          |                                               | Name Printed:  | John Gott                                          |
| Title:                            | General Partner      |                                               | Title:         | Corporate Secretary, Treasurer                     |
|                              |                 |                                               |
| By:                               |                 |                                               | By:            |                                               |
| Name Printed:                     |                 |                                               | Name Printed:  |                                               |
| Title:                            |                 |                                               | Title:         |                                               |
| Address:                          |                 |                                               | Address:       |                                               |
|                              |                 |                                               |
|                              |                 |                                               |
|                              |                 |                                               |
| Telephone:                        | (760) 930-4048       |                                               | Telephone:     | (        ) |
| Facsimile:                        | (760) 930-9222       |                                               | Facsimile:     | (        ) |
| Federal ID No.                    |                 |                                               | Federal ID No. |                                               |
|                                   |                      |                                                    |                |                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**These forms are oftenmodified to meet changing requirements of law and needs of the industry. Alwayswrite or call to make sure you are utilizing the most current form: AmericanIndustrial Real Estate Association, 700 South Flower Street, Suite 600, LosAngeles, CA 90017.**

**(213) 687-8777.**

 

**©Copyright 1999 By American Industrial Real EstateAssociation.All rights reserved.No part of these works may be reproduced in any form without permission inwriting.**

 
|     |   |   |   |     |
|----------|--------|--------|--------|----------|
|     |   |   |   |     |
| Initials |   |   |   | Initials |

 

12

----

 

**ADDENDUM NO. 1**

 

**THISADDENDUM NO. 1 TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL MULT-TENANTLEASE-NET SEPTEMBER 26, 2003 BY AND BETWEEN THORNMINT I,  A CALIFORNIA LIMITED PARTNERSHIP,HEREINAFTER REFERRED TO AS (“LESSOR”), AND IMAGEWARE SOFTWARE, INC.,HEREINAFTER REFERRED TO AS (“LESSEE”) FOR THE PROPERTY COMMONLY KNOWN AS 10883THORNMINT ROAD, CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA.**

 

September 26, 2003

 
| **50.** |   | **LEASE COMMENCEMENT:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | The Lease shall commence October 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **51.** |   | **BASE RENTAL RATE SCHEDULE:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | October 1, 2003 – November 30, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | $0.00 per month |   |
|    |   | December 1, 2003 – September 30, 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | $16,340.40 per month |   |
|    |   | October 1, 2004 – September 30, 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $16,821.00 per month |   |
|    |   | October 1, 2005 – September 30, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $17,301.60 per month |   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | The above Rental Rate Schedule is net of Lessee’s separately  sub-metered electricity and janitorial services to the Premises and all  Project Operating Expenses per paragraph 4.2 of the Lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **52.** |   | **UTILITIES:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | Lessee shall pay its pro rata share of electricity provided to the  Premises as billed by Lessor.   Lessee’s pro rata share shall be determined by the Lessor periodically  reading the electric sub-meter to be installed by Lessor.  Lessor shall calculate Lessee’s pro rata  share by charging Lessee their mathematical proportion of the kilowatt-hours  used (as read on the new sub-meter) in relation to the total number of  kilowatt-hours on the main meter.   Lessor shall charge Lessee based on actual costs billed by the service  provider.  Lessor shall not profit or  charge a fee for this service.  Lessee  shall have reasonable inspection of bills and sub-meters.  Bills shall be submitted accordingly by  Lessor to Lessee upon request from Lessee. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **53.** |   | **OPERATING EXPENSES:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | Not withstanding anything contained in the Lease, Lessee shall pay  its proportionate share of Operating Expenses associated with the Premises  and the Project per paragraph 4.2 of the Lease.  The expenses shall not exceed Nineteen Cents ($0.19) per square  foot, per month, during the initial year of the Lease Term.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **54.** |   | **OPERATING HOURS:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | Lessee may utilize the HVAC system during typical business hours, not  to exceed sixty (60) hours per week.   Lessee shall pay their own separately sub-metered electricity for such  usage.  The foregoing will not  restrict Lessee’s opportunity to access the Premises twenty-four hours a day,  seven (7) days a week.  Lessee  reserves the right, in the future, if necessary, to install a supplemental  air conditioning unit for after hours usage, with Lessor’s reasonable  approval, at Lessee’s cost.  Said air  conditioning unit shall be at a location mutually acceptable between Lessor  and Lessee.                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| **55.** |   | **TENANT IMPROVEMENTS:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | Lessor, at Lessor’s expense, shall complete the following Tenant  Improvements utilizing building standard materials:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   | ***First Floor***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 1)              Professionally  clean the carpet and fabric covered walls; patch and/or add molding to frayed  edges of fabric (e.g. in the alcove edges). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 2)              Replace and/or  service any defective faucets or valves within the restrooms; replace missing  floor tiles in the shower room. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 3)              Paint all  currently painted interior walls. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 4)              Replace vinyl  flooring in kitchen. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | 5)              Replace two (2)  microwaves and dishwasher in kitchen.  Replace or repair range “pans” under burners and test and  replace, if necessary, burner electro-stats.   Repair (or replace if repairs does not correct existing deficiencies)  Sub-zero refrigerator with similar grade and size refrigerator. |
|         |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |

 

**© 2003 CB Richard Ellis, Inc.**The information above has been obtained from sources believed reliable.  While we do not doubt its accuracy, we havenot verified it and make no guarantee, warranty or representation about it.  It is your responsibility to independentlyconfirm its accuracy and completeness. Any projections, opinions, assumptions or estimates used are for exampleonly and do not represent the current or future performance of the property.  The value of this transaction to you dependson tax and other factors which should be evaluated by your tax, financial andlegal advisors.  You and your advisorsshould conduct a careful, independent investigation of the property todetermine to your satisfaction the suitability of the property for your needs.

 

1

----

 
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 6)              Repair and/or  re-zone air conditioner thermostats to all areas of Premises and provide air  conditioning/heating, which is controlled by thermostats logically located  within the Premises.  Repair all  registers as needed so that all are functioning within the Premises. |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 7)              Power wash the  patio area.                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 8)              Trim and/or  replace entryway tree.                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   | ***Second Floor***                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 1)              Replace carpet  with equivalent or better grade carpet and paint walls.                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 2)              Replace and/or  service any defective faucets or valves within the restrooms.                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 3)              Patch and seal off  electrical floor plugs as directed by Lessee.                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 4)              Inspect and  repair, as needed, all air conditioning/heating registers.                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  |
| **56.** |   | **SIGNAGE:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | Lessee shall continue to have the existing signage adjacent to  Lessee’s main suite entrance and monument signage.  The cost associated with the purchase, installation,  maintenance and eventual removal of such signage shall be borne by Lessee.  Any changes to the existing signage shall  conform to all zoning and CC&R’s and Lessor shall have reasonable review  and approval rights of any modifications to the existing Lessee signage. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **57.** |   | **PARKING:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | Lessee will have common usage of the forty-eight (48) parking spaces  in front of the Building with any other lessee in the Project.  Such parking spaces shall be free for the  Term of the Lease and Lessee, with Lessor’s approval, may designate four (4)  spaces for common visitor parking with a mutually acceptable location between  Lessor and Lessee.                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **58.** |   | **BROKERAGE COMMISSION:**                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | In addition to what is outlined in Section 1.10(b) of the Lease,  Lessor shall agree to pay Irving Hughes, Inc. three percent (3%) of the  aggregate rental for years one (1) through three (3).  Such commission shall be paid by Lessor  fifty percent (50%) upon mutual Lease Execution and fifty percent (50%) upon  Commencement of Lease.                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **59.** |   | **LESSOR’S CONSENT REQUIRED –  ARTICLE 12.1(A) OF LEASE**                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | Such consent shall not be unreasonably withheld or delayed by Lessor.                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **60.** |   | **LOCKS:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | Lessor shall permit Lessee the right to change locks within, and to  their Premises, provided the costs are at Lessee’s sole cost and a complete  set of new keys are provided to the Lessor for the exterior door, for the  non-business hours security and fire protection services.                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **61.** |   | **LESSEE’S SHARE OF COMMON AREA OPERATING EXPENSES:**                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   | In reference to paragraph 4.2 (a), the following percentage of Common  Area Expense catagories shall apply:                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (I)                                                                                                                                                                                                                                                                                                                                                                   | 4S Ranch  Park Fees 35.61%. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (II)                                                                                                                                                                                                                                                                                                                                                                  | Utilities: |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  | Water 35.61% |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                  | Gas percent  over base 82.1% |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (V)                                                                                                                                                                                                                                                                                                                                                                   | Real  Property Taxes 46.0%. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | (VI)                                                                                                                                                                                                                                                                                                                                                                  | Insurance  pursuant 35.61% to lease paragraph 8. |

 

2

----

 

**BROKERDISCLOSURE:** The parties hereby expressly acknowledge that Broker has made noindependent determination or investigation regarding the following:  present or future use or zoning of the Property;environmental matters affecting the Property; the condition of the Propertyincluding, but not limited to, structural, mechanical and soils conditions aswell as issues surrounding hazardous wastes or substances; violations of theOccupational Safety and Health Act or any other federal, state, county ormunicipal laws, ordinances or statutes; measurements of land and/orbuildings.  Lessee agrees to make itsown investigation and determination regarding such items.

 

Owners or tenants of real property may be subject to the Americans withDisabilities Act (ADA), a federal law codified at 42 USC Section 12101 etseq.  Among other requirements of theADA that could apply to the Property, Title III of the ACT requires owners andtenants of “public accommodations” to remove barriers to access by disabledpersons and provide auxiliary aids and services for hearing, vision, or speechimpaired persons.  The regulations underTitle III of the ADA are codified at 28 CFR Part 36.  Broker recommends that both Lessor and Lessee review the ADA andthe regulations to determine if this law would apply to them and the nature ofthe requirements.  These are legalissues.  The parties are responsible forconducting their own independent investigation of these issues.

 

**Compliance with Laws:**  The parties hereto agree to comply with allapplicable federal, state and local laws, regulations, codes, ordinances andadministrative orders having jurisdiction over the parties, the Property, orthe subject matter of this document including, but not limited to, the 1964Civil Rights Act and all amendments thereto, the Foreign Investment in RealProperty Tax Act, the Comprehensive Environmental Response Compensation andLiability Act and The Americans With Disabilities Act.

 
| **LESSOR:**                                         | **LESSEE:**                     |
|-----------------------------------------------------|---------------------------------|
|                                                |                            |
| ***THORNMINT 1  a California Limited Partnership*** | ***IMAGEWARE  SOFTWARE, INC.*** |
|                                                |                            |
|                                                |                            |
| **By:**                                             | **/s/ Dave Price**              |   | **By:** | **/s/ John Gott** |   |
|                                                |                            |
| **Date:**                                           | **October 7, 2003**        |   | **Date:** | **September 30, 2003** |   |
|                                                     |                                 |  |  |  |  |  |  |

 

3

----

 

**EXHIBIT “A”**

 

[GRAPHIC]

 

[BUILDING DIAGRAM]

 

4

----

 

LUNDVANDRUFF

[LOGO]

**EXHIBIT “B”**(First Floor)

 

THORNMINT PLAZA

10885 THORNMINT RD

1ST FLOOR

SAN DIEGO, CA 92150

PROJECT: [ILLEGIBLE]

DATE: 06/04/98

 

[GRAPHIC]

 

AS–BUILT 1ST FLOOR PLAN–(AVAILABLE)

 

5

----

 

LUNDVANDRUFF

[LOGO]

 

**EXHIBIT “B”**(Second Floor)

 

THORNMINT PLAZA

10885 THORNMINT RD

2ND FLOOR

SAN DIEGO, CA 92150

PROJECT: [ILLEGIBLE]

DATE: 06/04/98

 

[GRAPHIC]

 

2ND FLOOR PLAN–(AVAILABLE)

 

6

----

 

**EXHIBIT “C”**

 

[LUNDVANDRUFF

LOGO]

 
|                  |   |         | **FAX COVER LETTER** |
|-----------------------|--------|--------------|----------------------|
|                  |   |         |                 |
|                  |   |         |                 |
|                  |   | **DATE:**    |                 |   | **6/9/98** |
|                  |   |         |                 |   |   |
|                  |   | **TO:**      |                 |   | **Jeb Blakke** |
|                  |   |         |                 |   |   |
|                  |   | **COMPANY:** |                 |   | **CB COMMERCIAL** |
|                  |   |         |                 |   |   |
|                  |   | **RE:**      |                 |   | **Thornmint** |
|                  |   |         |                 |   |   |
|                  |   | **FAX # :**  |                 |   | **[ILLEGIBLE]** |
|                  |   |         |                 |   |   |
|                  |   | **FROM:**    |                 |   | **Michele Arnold-Kuzh** |
|                  |   |         |                 |   |   |
|                  |   | **MESSAGE:** |                 | **Jeb,** |   |
|                  |   |         |                 |   |
|                  |   |         |                 | **The square footage calculations we  determined from our field measurements are as follows:** |
|                  |   |         |                 |   |
|                  |   |         |                 | **Vacant space:** | **1st flr.** | **6,076.08 u.s.f.** |   |
|                  |   |         |                 |   | **2nd flr** | **9545.54 u.s.f.** |   |
|                  |   |         |                 |   | **Total** | **15,621.62 u.s.f.** |   |
|                  |   |         |                 |   |   |   |
|                  |   |         |                 | **1st flr occupied space:** | **3,403.85 u.s.f.** |   |
|                  |   |         |                 |   |   |   |
|                  |   |         |                 | **Core factor:** | **This only includes 1st floor lobby, stairs  have been included in 2nd floor tenant space. 1.0255** |
|                  |   |         |                 |   |   |   |
|                  |   |         |                 | **Total rentable vacant space is 16,020  r.s.f.** |
|                  |   |         |                 |   |   |
|                  |   |         |                 | **Total rentable occupied is 3,496 r.s.f.** |
|                  |   |         |                 |   |
|                  |   |         |                 |   |
|                  |   |         |                 | **c.c.****                              David  Price - Thornmint I Partnership** |
|                  |   |         |                 |   |
|                  |   |         |                 |   |
| **3970 SORRENTO**     |   |         |                 |   |
| **VALLEY BLVD.**      |   |         |                 | **TOTAL PAGES, INCLUDING COVER LETTER:****                         1** |
| **SUITE N**           |   |         |                 |   |
| **SAN DIEGO**         |   |         |                 |   |
| **CALIFORNIA 92121**  |   |         |                 |   |
| **TEL: 619-457-????** |   |         |                 |   |
| **FAX: 619-457-6???** |   |         |                 |   |
|                       |        |              |                      |  |  |  |  |  |

 

7

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EXHIBIT “D”

RULES AND REGULATIONS

 

1.                                       Nosign, placard, pictures, advertisement, name or notice shall be inscribed,displayed or printed or affixed on or to any part of the outside or inside ofthe Building without the written consent of Lessor first had and obtained andLessor shall have the right to remove any such sign, placard, picture,advertisement, name or notice without notice to and at the expense of Lessee.

 

All approvedsigns or lettering on doors shall be printed, painted, affixed or inscribed atthe expense of Lessee by a person approved by Lessor outside the Premises;provided, however, that Lessor may furnish and install a Building standardwindow covering at all exterior windows. Lessee shall not, without prior written consent of Lessor, cause orotherwise sunscreen any window.

 

2.                                       Thesidewalks, halls, passages, exists, entrances, elevators and stairways shallnot be obstructed by any of the Lessees or used by them for any purpose otherthan for ingress and egress from their respective Premises.

 

3.                                       Lesseeshall not alter any lock or install any new or additional locks or any bolts onany doors or windows of the Premises. Lessee shall be permitted to change the locks on the Premises providedthey provide a copy of the new keys to Lessor. Such changes are at Lessee’s expense.

 

4.                                       Thetoilet rooms, urinals, wash bowls and other apparatus shall not be used for anypurpose other than that for which they were constructed and no foreignsubstance of any kind whatsoever shall be thrown therein and the expense of anybreakage, stoppage or damage resulting from the violation of the rule shall beborne by the Lessee who, or whose employees or invitees shall have caused it.

 

5.                                       Lesseeshall not overload the floor of the Premises or in any way deface the Premisesor any part thereof.

 

6.                                       Nofurniture, freight or equipment of any kind shall be brought into the Buildingwithout the prior notice to Lessor and all moving of the same into or out ofthe Building shall be done at such time and in such manner as Lessor shalldesignate.  Lessor shall have the rightto prescribe the weight, size and position of all safes and other heavyequipment brought into the Building and also the times and manner of moving thesame in and out of the Building.  Safesor other heavy objects shall, if considered necessary by Lessor, stand onsupports of such thickness as is necessary to properly distribute the weight.  Lessor will not be responsible for loss ofor damage to any such safe or property from any cause and all damage done tothe Building by moving or maintaining any such safe or other property shall berepaired at the expense of Lessee.

 

7.                                       Lesseeshall not use, keep or permit to be used or kept any foul or noxious gas orsubstances in the Premises, or permit or suffer the Premises to be occupied orused in a manner offensive or objectionable to the Lessor or other occupants ofthe Building by reason of noise, odors and/or vibrations, or interfere in anyway with other Lessees or those having business therein, nor shall any animalsor birds be brought in or kept in or about the Premises or the Building.

 

8.                                       Nocommercial cooking shall be done or permitted by any Lessee on the Premises,nor shall the Premises be used for washing clothes, for lodging or for anyimproper, objectionable or immoral purposes. Lessee shall be permitted use of a microwave, refrigerator, and coffeemachine on the Premises.

 

9.                                       Lesseeshall not use or keep in the Premises or the Building any kerosene, gasoline orinflammable or combustible fluid or material, or use any method of heating orair conditioning other than that supplied by Lessor.

 

10.                                 Lessorwill direct electricians as to where and how telephone and telegraph wires areto be introduced.  No boring or cuttingfor wires will be allowed without the consent of the Lessor.  The location of telephones, call boxes andother office equipment affixed to the Premises shall be subject to the approvalof Lessor, Lessor’s approval shall not be unreasonably withheld or delayed.

 

11.                                 OnSaturdays, Sundays and legal holidays, and on other days between the hours of6:00 p.m. and 8:00 a.m. the following day, access to the Building or to thehalls, corridors, elevators or stairways in the Building, or to the Premisesmay be refused unless the person seeking access is known to the person oremployee of the Building in charge and has a pass or is properlyidentified.  The Lessor shall in no casebe liable for damages for any error with regard to the admission to or exclusionfrom the Building of any person.  Incase of invasion, mob, riot, public excitement, or other commotion, the Lessorreserves the right to prevent access to the Building during the continuance ofthe same by closing of the doors or otherwise, for the safety of the Lesseesand protection of property in the Building and the Building.

 

12.                                 Lessorreserves the right to exclude or expel from the Building any person who, in thejudgment of Lessor, is intoxicated or under the influence of liquor or drugs,or who shall in any manner do any act in violation of any of the rules andregulations of the Building.

 

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14.                                 Lessorshall have the right, exercisable without notice and without liability toLessee, to change the name and street address of the Building of which thePremises are a part.  This right shallnot be exercised by Lessor unless required by County or other municipality oragencies that have jurisdiction.

 

15.                                 Lesseeshall not disturb, solicit, or canvass any occupant of the Building and shallcooperate to prevent same.

 

16.                                 Withoutthe written consent of Lessor, Lessee shall not use the name of the Building inconnection with or in promoting or advertising the business of Lessee except asLessee’s address.

 

17.                                 Lessorshall have the right to control and operate the public portions of theBuilding, and the public facilities, and heating and air conditioning, as wellas facilities furnished for the common use of the Lessees, in such manner as itdeems best for the benefit of the Lessees generally.

 

18.                                 Allentrance doors in the Premises shall be left locked when the Premises are notin use, and all doors opening to public corridors shall be kept closed exceptfor normal ingress and egress from the Premises.

 

 
|                   |                   | /s/             JG |   |
|------------------------|------------------------|--------------------------------------------------------------------------------|--------|
| Lessor’s Initials | Lessee’s Initials |

 

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