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                                                                   Exhibit 10.32

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                      FORM OF LEASE AND SECURITY AGREEMENT




                                 By and Between


                              _____________________







                                       AND


                    ________________________________________
                      a Delaware limited liability company



                                     ------

                                JANUARY 30, 1998

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                                TABLE OF CONTENTS
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<CAPTION>
                                                                                    Page
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<S>                                                                                 <C>
1. DEFINITIONS........................................................................ 1


2. LEASE OF PROPERTY..................................................................11


3. TERM OF LEASE......................................................................12


4. RENT...............................................................................13


5. IMPOSITIONS........................................................................17


6. TERMINATION OR ABATEMENT OF LEASE..................................................19


7. OWNERSHIP OF PROPERTY; TENANT'S PERSONAL PROPERTY SECURITY INTEREST................19


8. CONDITION AND USE OF PROPERTY......................................................20


9. LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS......................................22


10. CONDITION OF THE PROPERTY.........................................................23


11. CAPITAL ADDITIONS.................................................................24


12. LIENS.............................................................................27


13. CONTESTS..........................................................................27


14. INSURANCE.........................................................................28


15. INSURANCE PROCEEDS................................................................31


16. CONDEMNATION......................................................................34


17. DEFAULTS AND REMEDIES.............................................................36


18. CURE BY TENANT OF LANDLORD DEFAULTS...............................................39


19. PURCHASE OF PROPERTY BY TENANT....................................................40
</TABLE>



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<TABLE>
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20. HOLDING OVER......................................................................40


21. RISK OF LOSS......................................................................41


22. LIABILITY OF PARTIES..............................................................41


23. ASSIGNMENT AND SUBLETTING.........................................................42


24. INFORMATION FROM TENANT...........................................................43


25. APPRAISALS OF THE PROPERTY AND LANDLORD OPTIONS...................................45


26. FACILITY MORTGAGES................................................................46


27. LIMITATION OF LIABILITY...........................................................47


28. ADDITIONAL TENANT COVENANTS.......................................................47


29. MISCELLANEOUS.....................................................................49
</TABLE>







EXHIBITS
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Exhibit A         Legal Description of Property
Exhibit B         Permitted Exceptions
Exhibit C         Collateral Assignment
Exhibit D         Plans and Specifications
Exhibit E         Guaranty
Exhibit F         Subordination and Standstill Agreement
Exhibit G         Security Agreement
Exhibit H         Lease Assignment
Exhibit I         Deposit Pledge Agreement







                                       ii
<PAGE>   4


                          LEASE AND SECURITY AGREEMENT

                    _________________-ASSISTED LIVING FACILITY


     THIS LEASE AND SECURITY AGREEMENT is executed as of January 30, 1998, by
and between ________________________________________________________________, as
Landlord, and ____________________________________________ Delaware limited
liability company, having its principal office at c/o Hakman & Co., 1350 Old
Bayshore Highway, Suite 300, Burlingame, California 94010, Attention F. David
Carr, as Tenant, with respect to the following Recitals:

                                 R E C I T A L S

         A. Landlord has, concurrently herewith, entered into that certain
Assignment of Property Acquisition Rights (the "Acquisition Agreement") with
Balanced Care Corporation, a Delaware corporation ("Balanced Care"), pursuant to
which Landlord has obtained Balanced Care's right to acquire from Edwin T.
Friddle and Doris A. Friddle, husband and wife ("Seller") more particularly
described on Exhibit A attached hereto.

         B. Landlord has agreed to lease to Tenant, and Tenant has agreed to
hire from Landlord, the "Land", the "Buildings" located thereon and the other
items which collectively constitute the "Property" (all as defined in Article
1), all upon the terms and subject to the conditions set forth in this
Agreement.

     NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant, intending to be fully legally and equitably bound agree as
follows:

1.       DEFINITIONS
         -----------

         For all purposes of this Lease, unless otherwise expressly provided in
this Agreement or the context in which such term is used indicates a contrary
intent, (a) the terms defined in this Article shall have the meanings ascribed
to them in this Article, (b) all accounting terms not otherwise defined in this
Article shall have the meanings ascribed to them in accordance with generally
accepted accounting principles at the time applicable to the accrual method of
accounting applied on a consistent basis from period to period, (c) all
references in this Lease to designated "Articles," "Sections" and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease, (d) the word "including" and words of similar import shall, except
as expressly provided to the contrary, be construed as words of illustration and
not as words of limitation and shall be interpreted as if the words "but not
limited to" immediately followed, and (e) the words "herein," "hereof" and
"hereunder" and other words of similar import refer to this Lease as a whole and
not to any particular Article, Section or other subdivision.


         "ADDITIONAL CHARGES" shall have the meaning ascribed to such term in
Section 4.4.

         "ADDITIONAL RENT" shall have the meaning ascribed to such term in
Section 4.3.

         "ADJUSTMENT FACTOR" shall mean two percent (2.00%) in any Lease Year in
which the nationwide Consumer Price Index for all urban consumers increases by a
percentage of less than 20% and shall mean five percent (5.00%) in all other
Lease Years.


<PAGE>   5



         "AFFILIATE" of any Person (the "Subject") shall mean (a) any Person
which, directly or indirectly, Controls or is Controlled by or is under common
Control with the Subject, (b) any Person owning, beneficially, directly or
indirectly, five percent or more of the outstanding capital stock, shares or
equity interests of the Subject or (c) any officer, director, employee, general
partner or trustee of either the Subject or any Person Controlling, Controlled
by or under common Control with the Subject (excluding trustees and persons
serving in similar capacities who are not otherwise an Affiliate of the
Subject).

         "ARCHITECT" shall mean, collectively, the architects and engineers
engaged to design and engineer the Project. Developer has engaged KWM Group,
Inc. and Charles D. Foster Architect, P.A., jointly, as the primary Architect
(the "PRIME ARCHITECT") for the Project.

         "AWARD" shall have the meaning ascribed to such term in Section
16.1((c)).

         "BALANCED CARE" shall mean Balanced Care Corporation, a Delaware
corporation.

         "BASE RATE" shall mean the rate of interest announced publicly by Wells
Fargo Bank, a national banking association, in San Francisco, California, from
time to time, as said bank's "base" or "prime" rate on corporate loans.

         "BASE RENT" shall mean an annual amount equal to the product of the (i)
Total Project Cost multiplied by (ii) the sum of the Ten Year Treasury Rate plus
three hundred thirty-five (335) basis points.

         "BUILDING" shall mean any building constructed from time to time as
part of the Improvements.

         "BUSINESS DAY" shall mean any day on which banking institutions in San
Francisco, California are open for the conduct of normal banking business.

         "CAPITAL ADDITIONS" shall mean (a) any expansion of the Facility, (b)
the construction of a new wing or new story on a Building, (c) the renovation of
any portion of the Property or the Building in order to provide services not
previously offered by Tenant in the Facility or (d) any expansion, construction,
renovation or conversion of the Property, the Building or the installation of
new Fixtures in the Property to (i) increase the service and revenue generating
capacity of a Building or (ii) change the purpose for which a Building is
utilized so as to enhance the revenue generating capacity of the Building.
Notwithstanding anything to the contrary contained in Article 11, and for the
avoidance of doubt, in the event it is necessary to abate or otherwise take
corrective action with respect to the existence of a Hazardous Substance (as
hereinafter defined) located in, on or under the Property or in the Building,
such abatement or corrective action shall not be deemed to be a Capital Addition
and shall be the sole responsibility of Tenant at its sole cost and expense.

         "CAPITAL ADDITIONS COST" shall mean the cost of any Capital Additions
made by Tenant, whether paid for by Tenant or Landlord. Such cost shall include
(a) the costs of constructing the Capital Additions, including site preparation
and improvement, materials, labor, supervision, developer and administrative
fees, the costs of design, engineering and architectural services, the costs of
fixtures, the costs of construction financing (including but not limited to
capitalized interest) and other similar costs as and to the extent each of the
foregoing are approved in advance and in writing by Landlord, (b) at Landlord's
option, the purchase price and other 




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acquisition costs, or applicable ground lease rental payable for any period such
ground lease is in effect to and including the date upon which such Capital
Addition is completed and occupied or in operation, as the case may be, of any
land which is acquired or leased for the purpose of placing thereon all or any
portion of the Capital Additions or for providing means of access thereto, or
parking facilities therefor (including the costs of surveying the same and
recording, title insurance and escrow fees and charges), (c) insurance premiums,
real estate taxes, water and sewage charges and other carrying charges for such
Capital Additions during their construction, (d) reasonable fees and expenses of
legal counsel, (e) any documentary transfer or similar taxes applicable to the
acquisition of land for the Capital Addition, (f) any applicable regulatory or
administrative fees and charges, and any costs, charges, fees or expenses paid
or incurred in connection with obtaining any applicable permits, licenses,
franchises, authorizations, certificates of need, certificates of occupancy and
similar authorizations and entitlements and (g) all other reasonable costs and
expenses of Landlord or Tenant, as applicable, and any lending institution which
has committed to finance the Capital Additions, including, but not limited to,
(i) the fees and expenses of their respective legal counsel, (ii) any printing,
duplicating and messenger expenses, (iii) any filing, registration and recording
taxes and fees, (iv) any documentary transfer or similar taxes, (v) any title
insurance charges and appraisal fees, (vi) any rating agency fees and (vii) any
commitment or similar fees charged by any lending institution financing or
offering to finance any portion of such Capital Additions.

         "CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.

         "COLLATERAL ASSIGNMENT" shall mean the collateral assignment of the
Management Agreement and Shortfall Funding Agreement made by Tenant in favor of
Landlord, which Collateral Assignment shall be substantially in the form
attached hereto as Exhibit C.

         "COMMENCEMENT DATE" shall have the meaning ascribed to such term in
Section 3.1.

         "COMMITMENT FEE" shall mean an amount equal to one percent (1.00%) of
the Total Project Costs determined without regard to clause (xi) of the
definition of that term.

         "COMPLETION DATE" shall have the meaning ascribed to such term in the
Development Agreement.

         "COMPLETION GUARANTEE" shall mean the Completion Guaranty and Agreement
of even date herewith entered into by Balanced Care in favor of Landlord
pursuant to the Development Agreement.

         "CONDEMNATION" shall have the meaning ascribed to such term in Section
16.1((a))

         "CONDEMNOR" shall have the meaning ascribed to such term in Section
16.1((d)).

         "CONTROL" (including the correlative meanings of the terms "controlled
by" and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, through the ownership of
voting securities, partnership interests or other equity interests, or through
any other means.

         "DEPOSIT PLEDGE AGREEMENT" shall mean the Deposit Pledge Agreement made
by Tenant in favor of Landlord and Balanced Care in the form attached hereto as
Exhibit I.

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<PAGE>   7

         "DEVELOPER" shall mean BCC Development and Management Co., a Delaware
corporation and a wholly-owned subsidiary of Balanced Care.

         "DEVELOPMENT AGREEMENT" shall mean the Development Agreement of even
date herewith entered into by Developer and Landlord with respect to the
construction and opening of the Facility.

         "DATE OF TAKING" shall have the meaning ascribed to such term in
Section 16.1((b)).

         "EMPLOYEE BENEFIT PLAN" shall mean any employee benefit plan within the
meaning of Section 3(3) of ERISA maintained or contributed to by the Company or
any of its ERISA Affiliates, other than a Multiemployer Plan.

         "ENCUMBRANCE" shall have the meaning ascribed to such term in Article
26.

         "ENVIRONMENTAL INDEMNITY" shall mean the Environmental Indemnification
Agreement delivered to Landlord pursuant to the Facility Agreement.

         "EQUIPMENT" shall mean all unaffixed personal property which is
included in the Approved Budget under the Development Agreement or is otherwise
paid for by Landlord whether through Construction Advances under that agreement
or otherwise.

         "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended from time to time, or any successor statute.

         "ERISA AFFILIATE" of any Person shall mean any corporation or trade or
business which is a member of the same controlled group of corporations (within
the meaning of Section 414(b) of the Code) as such Person or which is under
common control (within the meaning of Section 414(c) of the Code) with such
Person.

         "ERISA EVENT" with respect to any Person shall mean (a) the occurrence
of a reportable event, within the meaning of Section 4043 of ERISA, with respect
to any Plan of such Person or any of its ERISA Affiliates, unless the 30-day
notice requirement with respect to such event has been waived by the PBGC; (b)
the provision by the administrator of any Plan of such Person or any of its
ERISA Affiliates of a notice of intent to terminate such Plan pursuant to
Section 4041(a)(2) of ERISA (including any such notice with respect to a plan
amendment referred to in Section 4041(a)(2) of ERISA); (c) the cessation of
operations at a facility of such Person or any of its ERISA Affiliates in the
circumstances described in Section 4062(e) of ERISA with respect to a Plan; (d)
the withdrawal by such Person or any of its ERISA Affiliates from a Plan during
a plan year for which it was a substantial employer, as defined in Section
4001(a)(2) of ERISA; (e) the failure by such Person or any of its ERISA
Affiliates to make a payment to a Plan required under Section 302(f)(1) of
ERISA; (f) the adoption of an amendment to a Plan of such Person or any of its
ERISA Affiliates requiring the provision of security to such Plan pursuant to
Section 307 of ERISA; or (g) the institution by the PBGC of proceedings to
terminate a Plan of such Person or any of its ERISA Affiliates pursuant to
Section 4042 of ERISA, or the occurrence of any event or condition described in
Section 4042 of ERISA that could constitute grounds for the termination of, or
the appointment of a trustee to administer, such Plan.

         "ESTOPPEL CERTIFICATE" shall mean a certificate of Tenant signed by the
chief financial officer or another officer authorized so to sign by resolutions
adopted by the board of directors or the articles of incorporation or by-laws of
Tenant or by any other person whose power 


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and authority to act has been authorized by delegation in writing by the chief
financial officer of Tenant.

         "EVENT OF DEFAULT" shall have the meaning ascribed to such term in
Section 17.1 and elsewhere throughout this Lease.

         "EXTENDED TERM" shall have the meaning ascribed to such term in Section
3.2

         "FACILITY" shall mean, jointly and severally, the assisted living
residential facility and related support operations operated from within each
Building, or, with Landlord's express prior written consent, such other similar
facilities offering other related health care products and services which is
operated or proposed to be operated from a Building from time to time with
Landlord's consent in accordance with the provisions of this Lease.

         "FACILITY MORTGAGE" shall have the meaning ascribed to such term in
Section 14.1.

         "FACILITY MORTGAGEE" shall have the meaning ascribed to such term in
Section 14.1.

         "FAIR MARKET RENTAL" shall mean, with respect to the Property
(including any Capital Additions or portions thereof paid for by Landlord) the
rental paid on a net basis as provided in Section 4.5 hereof which a willing
tenant not compelled to rent would pay on the basis set forth in this Lease to a
willing landlord not compelled to lease for the highest and best medical use of
such property (which shall in all events include the Primary Intended Use)
pursuant to this Lease for the term in question, assuming that Tenant is not in
default under this Lease. For purposes of this Lease, Fair Market Rental shall
be determined in accordance with the appraisal procedures set forth in Article
25 or in such other manner as shall be mutually agreed upon by Landlord and
Tenant; provided that, notwithstanding any provision of this Lease to the
contrary, the Fair Market Rental applicable to the Extended Term shall be no
less than 103% nor more than 120% of the sum of Base Rent plus Additional Rent
payable for the final 12 months of the Fixed Term (with respect to the first
Extended Term) or the final 12 months of the last Extended Term to expire (with
respect to each subsequent Extended Term). Fair Market Rental shall not be
adjusted to take into account loss or wear and tear of Equipment.

         "FAIR MARKET VALUE" shall mean, with respect to the Property, including
all Capital Additions, the price that a willing buyer not compelled to buy would
pay to a willing seller not compelled to sell for such property (a) assuming
this Lease is not in effect with respect to the Property (except as otherwise
provided below) (b) assuming that such seller must pay any closing costs and
title insurance premiums with respect to such sale and (c) assuming that the
Property is fully licensed by all governmental agencies having jurisdiction
thereof, and is and will continue to be operated for the Primary Intended Use
and is otherwise a going concern. Notwithstanding the foregoing, the computation
of Fair Market Value shall assume that a lease of the Property providing for
payment of a Fair Market Rental for the remaining Term of this Lease is in
effect if Tenant is to acquire the Property pursuant to Article 15 or Article
16. For purposes of this Lease, Fair Market Value shall be determined in
accordance with the appraisal procedures set forth in Article 25 or in such
other manner as shall be mutually agreed upon by Landlord and Tenant. Fair
Market Value shall not be adjusted to take into account loss or wear and tear of
Equipment.

         "FAIR MARKET VALUE PURCHASE PRICE" shall mean a purchase price equal to
the Fair Market Value of the Property.



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         "FISCAL YEAR" shall mean the 12 month period commencing July 1 and
terminating June 30 of each year.

         "FIXED TERM" shall have the meaning ascribed to such term in Section
3.1.

         "FIXTURES" shall mean all equipment (including non-movable medical or
other equipment), machinery, fixtures and other items of property, including all
components thereof, now and hereafter located in, on or used and incorporated
into or otherwise attached to the Property, including without limitation any and
all furnaces, boilers, heaters, electrical equipment, heating, plumbing,
lighting, ventilating, refrigerating, incineration, air and water pollution
control, waste disposal, air-cooling and air-conditioning systems, equipment and
apparatus, sprinkler systems and fire, life-safety and theft protection
equipment, built-in oxygen and vacuum systems, wiring, tubing, central clock
systems, doctor register or call systems, elevators, dumb waiters, intercom
systems, nurse call systems, affixed cabinetry and counters, pneumatic tube
systems, vacuum cleaning systems, conveyor systems, paging systems, mill work,
x-ray protection, pass-through boxes, exhaust systems, laboratory plumbing and
piping, medical gas systems, counters, cabinets, emergency generators and
similar items incorporated into and made a part of or otherwise attached to the
Property, all of which to the greatest extent permitted by law are hereby deemed
by the parties hereto to constitute real estate, together with all replacements,
modifications, alterations and additions thereto.

         "GOVERNMENTAL APPROVALS" shall mean all certificates, permits and
licenses required to be obtained from any governmental authority or
instrumentality, necessary or desirable in connection with the Primary Intended
Use of the Property, including without limitation, a certificate of occupancy
for the Facility (or other similar evidence of the continuing right to occupy
and use the Facility), a license as a 60-unit assisted living facility from the
applicable State authority and each other jurisdiction or governmental agency or
instrumentality having the right and power to issue such license or similar
authority to so use the Property, if required for the Primary Intended Use a
Medicare provider number from the Health Care Financing Administration of the
United States Department of Health and Human services and all other appropriate
approvals required by any applicable Legal Requirements for the operation of the
Facility for its Primary Intended Use, including without limitation approvals by
State and federal environmental protection agencies and Federal Flood Plains
Protection Act of 1973, as amended.

         "GUARANTOR" shall mean, jointly, severally and collectively Assisted
Care Operators, L.L.C., a Delaware limited partnership ("PRIMARY PARENT") and
Oakhaven Senior Living, Inc., a California corporation ("SECONDARY PARENT").

         "HAZARDOUS SUBSTANCES" shall mean any substance (including without
limitation any asbestos, formaldehyde, radioactive substance, hydrocarbons,
industrial solvents, flammables, explosives, and any hazardous substance or
toxic material) which could presently or at any time in the future cause a
detriment to or impair the value or beneficial use of the Land (which shall
include all soils, soil vapor, surface water and ground water), Property,
Facilities or the Building or constitute or cause a health, safety or
environmental hazard on, under, or about the Land, Facilities, the Building or
the Property or to any person who may enter on, under, or about the Land,
Facilities, Building or the Property or require remediation at the behest of any
governmental agency.

         "IMPOSITIONS" shall mean all (A) taxes (including without limitation
(i) all real property taxes imposed upon the Land, Building and Fixtures (ii)
all personal property taxes imposed upon any portion of the Property, and (iii)
all ad valorem, sales, use, single business, gross


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receipts, transaction privilege, rent or similar taxes relating to or imposed
upon Landlord, Tenant, Rent or Tenant's business conducted upon any portion of
the Land, the Property or from within a Building), (B) assessments (including
without limitation all supplemental real property tax assessments or assessments
for public improvements or benefit, whether or not commenced or completed prior
to the date hereof and whether or not to be completed within the Term), (C) any
other covenants, conditions or restrictions of record with respect to the
Property, water, sewer or other rents and charges, excises, tax levies, fees
(including without limitation license, permit, franchise, inspection,
authorization and similar fees) and (D) all other governmental,
quasi-governmental or private charges, in each case whether general or special,
ordinary or extraordinary, foreseen or unforeseen, of every character or nature
whatsoever with respect to or connected with the Property, the Facility, the
Building, Landlord's investment in any of the foregoing or the business
conducted thereon or therein by Tenant (including all interest and penalties
thereon due to any failure or delay in payment thereof) which at any time prior
to, during or with respect to the Term hereof may be assessed or imposed on or
with respect to, or may be a lien upon (a) Landlord's interest in the Property,
(b) the Property or any part thereof or any Rent therefrom or any estate, right,
title or interest therein or (c) any occupancy, operation, use or possession of,
or sales from, or activity conducted on or in connection with the Property or
the leasing or use of the Property or any part thereof by Tenant. For the
purposes of this definition, the term "real property tax" shall mean all taxes
which are imposed, levied or assessed upon or with respect to the Property, the
Building, the Land, the Rent or any portion thereof (including increases in real
property taxes which are imposed as a result of a transfer, either partial or
total, of Landlord's interest in the Property or which are added to a tax or
charge hereinbefore included within the definition of real property tax by
reason of such transfer or which are imposed by reason of this transaction, any
modifications hereto, or any transfers hereof or which are caused by reason of
any new construction in or to the Property). Notwithstanding the foregoing
provisions of this definition to the contrary, "Impositions" shall not include
(1) any tax based on the net income of Landlord, unless such tax is levied,
assessed or imposed expressly in lieu of a charge, tax or assessment which
otherwise would constitute an Imposition, in which case the substitute tax,
assessment, tax levy or charge shall constitute an Imposition even if it is
measured by the net income of Landlord or (2) a real property stamp, documentary
transfer or similar tax payable with respect to the conveyance to a Person other
than Tenant, Balanced Care or the wholly-owned subsidiary or 100% shareholder of
either.

         "IMPROVEMENTS" shall have the meaning ascribed to such term in Section
2.1((b)).

         "IMPUTED INTEREST" shall have the meaning ascribed to such term in the
Development Agreement.

         "INSUFFICIENCY" shall mean, with respect to any Plan, the amount, if
any, of its unfunded benefit liabilities, as defined in Section 4001(a)(18) of
ERISA.

         "INSURANCE REQUIREMENTS" shall mean all (i) terms and conditions of any
insurance policy required by this Lease and all requirements of the issuer of
any such insurance policy and (ii) all requirements pertaining to the Property
or the Primary Intended Use of any insurance board, association, organization or
company.

         "LAND" shall mean the approximately acre parcel of real property
situated in the City of Anderson, County of Madison, State of Indiana, more
particularly described in Exhibit A attached hereto and any other land acquired
or leased and made subject to this Lease in connection with a Capital Addition.



                                       7
<PAGE>   11

         "LEASE" shall mean this document, as the same may be amended from time
to time in accordance herewith.

         "LEASEHOLD MORTGAGE" shall have the meaning ascribed to that term in
the Facility Agreement.

         "LEASE YEAR" shall mean each 12 consecutive month period commencing on
the first day of the first full calendar month to commence on or after the
Commencement Date; provided that the first Lease Year shall also include the
period between the Commencement Date and the first day of the first full
calendar month to commence on or after the Commencement Date.

         "LEGAL REQUIREMENTS" shall mean all federal, state, county, municipal
and other governmental statutes, laws, rules, orders, regulations, ordinances,
judgments, common law, decrees and injunctions affecting the Property or the
maintenance, construction, use, alteration, occupancy or operation thereof,
whether now or hereafter enacted and in force (including any of the foregoing
which may require repairs, modifications or alterations in or to the Property),
all permits, licenses, franchises, authorizations, land use entitlements, zoning
and regulations relating thereto, and all covenants, conditions, agreements,
restrictions, obligations and encumbrances contained in any instruments, either
of record or known to Tenant.

         "MANAGEMENT AGREEMENT" shall mean the Management Agreement of even date
herewith entered into by Manager and Tenant with respect to the management by
Developer of the Facility.

         "MANAGEMENT GUARANTEE" shall mean the guaranty of the Management
Agreement and Shortfall Funding Agreement entered into by Balanced Care in favor
of Landlord.

         "MANAGER" shall mean ____________________________., a Delaware
corporation and the wholly-owned subsidiary of Balanced Care.

         "MINIMUM REPURCHASE PRICE" shall mean the Total Project Costs, plus any
portion of a Capital Additions Cost which Landlord has actually paid, less the
net amount (after deduction of all reasonable legal fees and other costs and
expenses, including without limitation expert witness fees, incurred by Landlord
in connection with obtaining any such proceeds or awards) of any proceeds of
insurance paid to and retained by Landlord in accordance with Article 15 of this
Lease (other than insurance proceeds, if any, paid to compensate Landlord for
lost Rent) and of any Awards received by Landlord and not applied to restoration
of the Property in accordance with Article 16 of this Lease.

         "NET WORTH" shall mean for any period the sum of the following for
Tenant and its consolidated subsidiaries, if any, on a consolidated basis,
determined in accordance with generally accepted accounting principles: (a) the
amount of capital or stated capital (after deducting the cost of any shares held
in the applicable entity's treasury); plus (b) the amount of capital surplus and
retained earnings; or (c) in the case of a capital or retained earnings deficit,
minus the amount of such deficit.

         "NOTICE" shall mean a notice given pursuant to Section 29.8.

         "OFFICER'S CERTIFICATE" shall mean a certificate of Tenant signed by
its duly authorized manager or, if applicable, the person designated as Tenant's
chief financial officer who has been duly authorized to deliver such certificate
on behalf of Tenant.



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<PAGE>   12

         "OPTION AGREEMENT" shall mean that certain Option Agreement dated
January 30,1998 entered into by and between the owners of Tenant and Balanced
Care granting to Balanced Care the right to purchase the interests of such
owners in Tenant.

         "OPTION PURCHASE DATE" shall mean February 28, 2008; provided, however
that (i) if Tenant timely and properly exercises its option to extend the Term
by the first Extended Term as provided in Section 3.2, the Option Purchase Date
shall mean February 28, 2013, (ii) if Tenant thereafter timely and properly
exercises its option to extend the Term by the second Extended Term as provided
in Section 3.2, the Option Purchase Date shall mean February 28, 2018 and (iii)
if Tenant timely and properly exercises its option to extend the Term by the
third Extended Term as provided in Section 3.2, the Option Purchase Date shall
mean February 28, 2023.

         "OVERDUE RATE" shall mean, as of a specified date, a rate of interest
equal to the Base Rate plus five percent, but in no event greater than the
maximum rate of interest then permitted under applicable law.

         "PAYMENT DATE" shall mean any due date for the payment of any
installment of Base Rent.

         "PERSON" shall mean and include governmental agencies and authorities,
political subdivisions, individuals, corporations, general partnerships, limited
partnerships, stock companies or associations, joint ventures, associations,
trusts, banks, trust companies, land trusts, business trusts and any other
entity of any form whatsoever, natural person, corporation, business trust,
association, company, partnership or government, or any agency or political
subdivision thereof.

         "PERMITTED ENCUMBRANCES" shall mean the matters, if any, set forth in
Exhibit B attached hereto and incorporated herein by reference.

         "MULTIEMPLOYER PLAN" of any Person shall mean a multiemployer plan
defined as such in Section 3(37) of ERISA to which contributions have been made
by such Person or any ERISA Affiliate of such Person and which is covered by
Title IV of ERISA.

         "PBGC" shall mean the Pension Benefit Guaranty Corporation or any
entity succeeding to any or all of its functions under ERISA.

         "PLAN" shall mean an employee benefit or other plan established or
maintained by such Person or any ERISA Affiliate of such Person and which is
covered by ERISA, other than a Multiemployer Plan of such Person.

         "PLANS AND SPECIFICATIONS" shall mean those certain plans and
specifications for the Facility and the Improvements prepared by the Architect
and listed on Exhibit "D"

         "PRIMARY INTENDED USE" shall mean the operation of an assisted living
facility and provision of ancillary services customarily provided to residents
of such facilities, plus such additional uses as are permitted by Landlord from
time to time hereunder.

         "PROPERTY" shall have the meaning ascribed to such term in Section 2.1.

         "PROPERTY ACQUISITION AGREEMENT" shall have the meaning ascribed to
such term in the Facility Agreement.



                                       9
<PAGE>   13

         "RENT" shall mean the Base Rent, Additional Rent and Additional
Charges.

         "RENT COVERAGE RATIO" shall mean the ratio of EBITDAR (earnings before
interest, taxes, depreciation, amortization and rent) during a Fiscal Year
quarter to Rent payable during the Fiscal Year quarter.

         "SECURITY AND SUBORDINATION DOCUMENTS" shall mean, collectively, (i)
the Guaranty of Payment and Performance made with respect to each Lease by
Tenant Parent, as Guarantor, in favor of Landlord substantially in the form
attached hereto as EXHIBIT E (the "GUARANTY"), (ii) the Subordination and
Standstill Agreement entered into by and among Landlord, Tenant, and Guarantor,
substantially in the form attached hereto as EXHIBIT F (the "STANDSTILL
AGREEMENT"), (iii) the Security Agreement by Tenant in favor of Landlord
substantially in the form attached as EXHIBIT G (v) the Assignment of Leases,
Rents and Receivables made by Tenant in favor of Landlord substantially in the
form attached hereto as EXHIBIT H (the "LEASE ASSIGNMENT") and (vi) the Deposit
Pledge Agreement.

         "SELLER" shall mean Edwin T. Friddle and Doris A. Friddle, husband and
wife.

         "SHORTFALL FUNDING AGREEMENT" shall mean the Shortfall Funding
Agreement of even date herewith between Balanced Care and Tenant.

         "STATE" shall mean the __________________.

         "TAKING" shall mean a taking or voluntary conveyance during the Term
hereof of all or any part of the Property, or any interest therein, right with
respect thereto or use thereof, as a result of, incidental to, or in settlement
of any condemnation or other eminent domain proceedings affecting such Property,
regardless of whether such proceedings shall have actually been commenced.

         "TENANT'S PERSONAL PROPERTY" shall mean all machinery, equipment,
furniture, furnishings, movable walls or partitions, computers or trade fixtures
or other personal property, and consumable inventory and supplies, including, by
way of example but not by way of limitation, sterilizer units, scrub sinks, mail
boxes, desks, lamps, chairs, beds, bedstands, surgical lamps, water stills, fume
hoods, non-affixed cabinetry, tables, and similar movable equipment, owned by
Tenant or leased by Tenant as lessee and used or useful in Tenant's business in
the Building but in no event any items included within the definition of
Fixtures or Equipment.

         "TEN YEAR TREASURY RATE" shall mean, as of the date of determination,
the monthly average yield to maturity of actively traded marketable United
States Treasury securities bearing a fixed rate of interest, adjusted for a
constant maturity of ten years, as calculated by the Federal Reserve Board for
the preceding calendar month and published in the Federal Reserve Board's
Statistical Release H.15.

         "TERM" shall mean the Fixed Term and any Extended Terms, as the context
may require, unless earlier terminated pursuant to the provisions of this Lease.

         "TOTAL PROJECT COSTS" shall mean the sum of all out-of-pocket costs and
amounts disbursed, advanced or incurred by Landlord in connection with the
Transaction Documents or the construction of Improvements, whether pursuant to
the Development Agreement or otherwise, including without limitation (i) all
Advances and any other hard or soft costs of 


                                       10
<PAGE>   14

constructing the Improvements and Facility, including site preparation and
improvement, materials, labor, supervision, developer and administrative fees,
costs of design, engineering and architectural and related or similar
professional services and the costs of fixtures, (ii) purchase price and other
acquisition costs of Landlord's acquisition of its interest in the Land and the
amount of any ground rent which may be payable by Landlord (without any
obligation on the part of Landlord to pay such rent), (iii) all costs incurred
for providing means of access to and from the Land or parking facilities for or
otherwise used by the Project, (iv) costs paid by Landlord, if any, for
surveying the Land and recording fees and costs, title insurance and escrow fees
and charges, (v) insurance premiums, real estate taxes, water and sewage
charges, and other similar charges for or with respect to the Property paid by
Landlord, if any, during the period commencing on the date of this Lease and
ending on the Commencement Date, (vi)out-of-pocket expenses of Landlord and fees
and expenses of legal counsel, accounting and other professional services
provided to Landlord, (vii) any document, transfer, stamp or other taxes paid by
Landlord with respect to the Property, (viii)any applicable regulatory or
administrative fees and charges and any costs, charges, fees or expenses paid or
incurred in connection with obtaining any applicable Governmental Approvals,
franchises, authorizations, certificates of need, certificates of occupancy, and
other authorizations and entitlements with respect to the Property, (ix) Imputed
Interest and all other capitalized interest on amounts disbursed or advanced by
Landlord or charges incurred by Landlord from time to time in connection with
the Transaction Documents of the construction of the Improvements, (x) all fees
and other amounts paid to the Developer under the Development Agreement,
including without limitation both the Developer Fee and Developer Incentive Fee
contemplated thereunder, (xi) the Commitment Fee and (xii) all other customary
and reasonable costs and expenses incurred by Landlord in connection with the
Land, the Improvements, the Fixtures, the Transaction Documents or otherwise in
connection with the Property or this Lease.

         "TRANSACTION DOCUMENTS" shall have the meaning ascribed to such term in
the Facility Agreement.

         "UNAVOIDABLE DELAYS" shall mean delays due to strikes, lockouts,
inability to procure materials, power failures, acts of God, governmental
restrictions, enemy action, war, civil commotion, riot, unavoidable casualty and
other causes beyond the control of the party responsible for performing an
obligation hereunder, provided that lack of funds shall not be deemed a cause
beyond the control of either party hereto.

2.       LEASE OF PROPERTY
         -----------------

         2.1. PROPERTY. Landlord hereby leases to Tenant, and Tenant hereby
hires from Landlord, subject to the terms and conditions hereinafter set forth,
all of Landlord's right, title and interest in and to all of the following (the
"Property"):

         (a) the Land;

         (b) all buildings, structures and other improvements of every kind,
including but not limited to the Facility, all on and offsite improvements and
building improvements shown on the Plans and Specifications, all other
buildings, improvements and structures now existing or hereafter constructed
upon the Land and all alleyways, connecting tunnels, walks, sidewalks, utility
pipes, conduits, and lines (both on-site and off-site) parking areas, roadways,
driveways, and other related on-site and off-site improvements appurtenant to
such buildings and


                                       11
<PAGE>   15

structures presently or hereafter situated upon the Land and any and all Capital
Additions paid for by Landlord pursuant to Sections 11.1 and 11.2 (collectively,
the "IMPROVEMENTS");

         (c) the Equipment; and

         (d) the Fixtures.

2.2. COMPLETION AND CONDITION OF PROPERTY. As of the Commencement Date, Landlord
will have purchased the Property from Seller. Tenant acknowledges that
concurrently herewith, Landlord has entered into the Development Agreement
pursuant to which Developer has covenanted to construct and Finally Complete (as
defined in the Development Agreement) the Facility, free and clear of all liens
on or prior to the Completion Date. If for any reason Developer does not Finally
Complete the Facility on or before the Completion Date or in the event of any
defect in the construction of any Building or other Improvement, or if the
Property shall not be delivered to Tenant free from material defects in
workmanship or material, Landlord shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Tenant hereunder. Tenant hereby expressly acknowledges its
review, inspection and approval of the Land and the Plans and Specifications.

3.       TERM OF LEASE
         -------------

         3.1. TERM OF LEASE. The initial term of this Lease (the "Fixed Term")
shall commence on the earlier to occur of (a) the date on which Tenant obtains
and receives all Governmental Approvals (excluding a Medicare provider number)
or (b) the date on which Tenant or Manager begins conducting any business
activities from any portion of the Property (the "Commencement Date"), and,
unless extended or terminated earlier in accordance with the provisions of this
Lease, shall remain in effect for ten (10) years after the first day of the
first full calendar month to commence on or after the Commencement Date.
Notwithstanding the Commencement Date, if for any reason Landlord cannot deliver
possession of the Property to Tenant on the Commencement Date, Landlord shall
not be subject to any liability therefor, nor shall such failure affect the
validity of this Lease or the obligations of Tenant hereunder or extend the Term
hereof, but in such case, Tenant shall not be obligated to pay Rent until
possession of the Property is tendered to Tenant. Tenant expressly acknowledges
that (i) Landlord's obligation to acquire the Property pursuant to the Facility
Agreement, Acquisition Agreement and the Property Acquisition Agreement is
conditioned upon the fulfillment of the conditions stated therein and that
Landlord makes no warranty that such conditions can or will be fulfilled to
Landlord's satisfaction and, therefore, Landlord might not acquire (and nothing
in this Lease shall obligate Landlord to acquire) the Property and (ii) Landlord
is not obligated to complete the development and construction of the
Improvements upon the Property, such development and construction being the
obligation of Developer pursuant to the Development Agreement and (iii) Landlord
makes no warranty that the conditions to Landlord's obligations stated in the
Facility Agreement, Acquisition Agreement and Property Acquisition Agreement can
or will be fulfilled to Landlord's satisfaction or that the Developer can or
will complete the development of the Property and the construction of the
Improvements as required under the Development Agreement. Therefore, Landlord
might not acquire (and nothing in this Lease shall obligate Landlord to acquire)
the Property and the Property might not be developed (and nothing in this Lease
shall require the Landlord to develop the Property or construct the
Improvements). In the event Landlord shall not acquire the Property on or before
March 1, 1998 or the Improvements shall not have been completed within 180 days
after the Completion Date, Tenant shall have the right, by delivery to Landlord
within ten (10) days thereafter of Tenant's written notice of termination, to
terminate this Lease without liability or cost to Landlord or Tenant.

                                       12
<PAGE>   16

         3.2. OPTION TO EXTEND TERM OF LEASE. Landlord hereby grants to Tenant
three consecutive options to extend the term of this Lease for additional five
year renewal terms (each an "Extended Term"). The first Extended Term shall
commence immediately upon the expiration of the Fixed Term and each subsequent
Extended Term shall commence upon the expiration of the immediately prior
Extended Term. Each Extended Term shall be on the same terms and conditions as
those set forth for the Fixed Term except that Rent shall be paid at a rate
equal to the then current Fair Market Rental which, unless otherwise mutually
agreed to by Landlord and Tenant, shall be determined by appraisal pursuant to
the provisions of Article 25 (subject however to the restrictions stated in the
definition of "Fair Market Rental"). Each such option may only be exercised by
Tenant if, at the time such option is exercised, (i) Guarantor irrevocably
commits to cause each Tenant under a Lease executed pursuant to the Facility
Agreement to exercise the next option for an Extended Term with respect to all
property leased by Landlord or its Affiliates to either (x) any wholly-owned
subsidiary of Guarantor or (y) any Person previously owned by Guarantor, (ii)
the Lease is in full force and effect, and (iii) an Event of Default is not
continuing. Each such option shall be exercised by Tenant, if at all, by
delivery of Notice to that effect to Landlord not less than 270 days but not
more than 450 days prior to the date upon which this Lease otherwise would
terminate. If Tenant is unable to exercise any option due to the provisions of
this Section 3.2, the time during which such option may be exercised shall not
be extended or enlarged. Time is strictly of the essence with respect to the
requirement that Tenant give timely Notice of its exercise of any options
hereunder, and Tenant's failure timely to exercise any option strictly in
accordance with its terms shall constitute a material, irredeemable and
incurable failure to satisfy a condition precedent to the vesting of any rights
in Tenant pursuant to the option, and Tenant hereby expressly waives any right
to claim relief from forfeiture, or any other form of equitable relief from
consequences of an untimely exercise of any such option strictly in accordance
with its terms. The implied covenant of good faith and fair dealing under this
Lease shall not be construed to impose upon Landlord any obligation to notify
Tenant in advance of the impending deadline for the exercise of any option
hereunder, nor shall it obligate Landlord to excuse the tardy exercise of any
Option, however slight. The failure of Tenant to exercise any of the options for
the Extended Terms within the respective times specified in this Section shall
thereby terminate any option with respect to any remaining Extended Terms.

4.       RENT
         ----

         4.1. PAYMENT OF BASE RENT. During the Term, Tenant shall pay to
Landlord, in lawful money of the United States of America, in immediately
available funds, without right of offset, at the address of Landlord as set
forth in Section 29.8 or at such other place or to such other Person as Landlord
may designate from time-to-time in a Notice, the Base Rent and all other
"Additional Charges" due hereunder.

         4.2. BASE RENT. Commencing on the first Business Day of the first full
calendar month occurring after the Commencement Date and continuing thereafter
on the first day of each calendar month occurring thereafter during the Term
hereof, Tenant shall pay to Landlord the annual Base Rent payable for each year
during the Term hereof in equal monthly installments; provided that the first
payment of Base Rent shall include an additional payment for the partial
calendar month occurring between the Commencement Date and the first payment of
Base Rent required under this Section. Any payment of Base Rent for a period of
less than one calendar month shall be prorated based upon a 30 day month.

         4.3. ADDITIONAL RENT. Commencing on the first day of the second Lease
Year and continuing on the first day of each succeeding Lease Year thereafter
commencing during the 


                                       13
<PAGE>   17

Term, Tenant shall pay, in addition to the Base Rent, an annual amount (the
"ADDITIONAL RENT") equal to the sum of (i) Additional Rent, if any, payable
during the immediately preceding Lease Year and (i) the product of (x) the
Adjustment Factor for the immediately preceding Lease Year and (y) the sum of
Base Rent plus Additional Rent, if any, payable to Landlord during the
immediately preceding Lease Year. The annual Additional Rent shall be paid to
Landlord in equal monthly installments paid concurrently with each payment of
Base Rent.

         4.4. ADDITIONAL CHARGES/LATE PAYMENTS. Tenant shall pay and discharge
as and when due and payable all Impositions and other amounts, liabilities and
obligations which relate to the Property. If Tenant fails or refuses to pay any
of the items referred to in the immediately preceding sentence, Tenant shall
promptly pay and discharge every fine, penalty, interest and cost which may
arise or accrue for the non-payment or late payment of such items. The
aforementioned amounts, liabilities, obligations, Impositions, fines, penalties,
interest and costs and any and all other amounts which Tenant may owe to
Landlord pursuant to the terms of this Lease are referred to herein as
"Additional Charges." The Additional Charges shall constitute Rent hereunder.
Tenant hereby acknowledges that late payment by Tenant to Landlord of any Rent
due under this Lease will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain. Such
costs include, but are not limited to, processing and accounting charges, and
late charges which may be imposed on Landlord by the terms of any mortgage or
trust deed covering the Property. Accordingly, if any Rent shall not be paid
within five (5) days of its due date, Tenant shall pay Landlord without
requirement of notice or demand therefor, as an Additional Charge, a late charge
equal to six percent (6%) of the amount of such overdue Rent and, in such event,
the parties hereby agree that such late charge will represent a fair and
reasonable estimate of the costs Landlord will incur by reason of the late
payment by Tenant. No late charge may be imposed more than once for the same
late payment. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any other rights and remedies to which it may
be entitled hereunder.

         4.5. BOND LEASE. This Lease is what is commonly called a "bond lease",
it being understood that Landlord shall receive all Rent as provided in this
Article net of any and all Impositions, Encumbrances, charges, costs,
liabilities or expenses of any nature whatsoever in connection with the
ownership and operation of the Property.

              (A) NO SET-OFF OF RENT. Landlord shall receive all Rent due
hereunder and Rent shall be due and payable by Tenant in all events, without
notice or demand and without any setoff, counterclaim, abatement, suspension,
deduction or defense whatsoever. Tenant hereby irrevocably waives the
application of and any rights it may have pursuant to any law or other Legal
Requirement relating to valuation and appraisement. In addition to the Rent
reserved by this Article, Tenant shall pay to the parties respectively entitled
thereto all Impositions, insurance premiums, operating charges, maintenance
charges, construction costs (excluding Total Project Costs which are expressly
made the responsibility of another Person under the Transaction Documents) and
any other charges, costs, liabilities and expenses which arise with respect to
the Property or which otherwise may be contemplated under any provisions of this
Lease during the Term hereof. All of such charges, costs, liabilities and
expenses shall constitute additional rent, and upon the failure of Tenant to pay
any such costs, charges, liabilities or expenses, Landlord shall have the same
rights and remedies as otherwise provided in this Lease for the failure of
Tenant to pay Rent. It is the intention of the parties hereto that, except as
herein expressly provided this Lease shall not be terminable for any reason by
Tenant. Any present or future law to the contrary shall not alter this agreement
of the parties.



                                       14
<PAGE>   18

              (b) BANKRUPTCY. Tenant covenants and agrees that it will remain
obligated under this Lease in accordance with its terms, and that Tenant will
not take any action to terminate, rescind, or avoid this Lease, notwithstanding
the bankruptcy, insolvency, reorganization, composition, readjustment,
liquidation, dissolution, windingup or other proceeding affecting Landlord or
any assignee of Landlord in any such proceeding and notwithstanding any action
with respect to this Lease which may be taken by any trustee or receiver of
Landlord or any such assignee in any such proceeding or by any court in any such
proceeding.

                  (i) In the event that Tenant shall file a petition, or an
order for relief is entered against the Tenant, under Chapter 7, 9, 11 or 13 of
the Bankruptcy Code (11 USC ss. 101 et seq.) (the "Bankruptcy Code"), and the
trustee of Tenant shall elect to assume this Lease for the purpose of assigning
the same, such assumption and/or assignment may only be made if all of the terms
and conditions of subsections (ii) and (iii) of this Section 4.5((b)) are
satisfied. If such trustee or debtor-in-possession, as the case may require, 
shall fail to elect to assume this Lease within sixty (60) days after such
trustee of Tenant shall have been appointed, or the date of filing of the
petition, as the case may be, at Landlord's election (and in Landlord's sole
and absolute discretion) this Lease shall be deemed to have been rejected
and, in such event, Landlord shall thereupon immediately be entitled to
possession of the Property without further obligation to the Tenant or Tenant's
trustee in bankruptcy, and this Lease shall be canceled, but Landlord's right
to be compensated for damages in such bankruptcy proceeding shall survive such
cancellation. 

                  (ii) No election to assume this Lease shall be effective
unless in writing and addressed to Landlord and unless, in the Landlord's
business judgment, all of the following conditions, which Landlord and Tenant
acknowledge to be commercially reasonable, have been satisfied.


                  (A) The trustee or the debtor-in-possession has cured or has
provided Landlord "adequate assurance" (as defined hereunder) that:

                      (1) within ten (10) days from the date of such assumption,
          the trustee (or debtor-in-possession) will cure all monetary defaults
          under this Lease; and

                      (2) within thirty (30) days from the date of such 
          assumption, the trustee (or debtor-in-possession) will cure all
          nonmonetary defaults under this Lease.

                  (B) The trustee or the debtor-in-possession has compensated,
or has provided to Landlord adequate assurance that within ten (10) days from
the date of assumption Landlord will be compensated, for any pecuniary loss
incurred by Landlord arising from the default of the Tenant, the trustee, or
the debtor-in-possession, as recited in Landlord's written statement of
pecuniary loss sent to the trustee or debtor-in-possession;

                  (C) The trustee or the debtor-in-possession has provided
Landlord with adequate assurance of the future performance of each of Tenant's
obligations under the Lease; provided, however, that:

                      (1)  the  trustee  or   debtor-in-possession   shall  also
          deposit with Landlord, as security for the timely payment of Rent, an
          amount equal to three (3) months' of the then current Base Rent and
          other monetary charges accruing under this Lease; and

                                       15
<PAGE>   19

                      (2) the obligations imposed upon the trustee or 
debtor-in-possession shall continue with respect to Tenant after the completion 
of bankruptcy proceedings.

                  (D) Landlord has determined that the assumption of the Lease
will not:

                      (1) breach any  provision in any  agreement by which  
          Landlord is bound relating to the Property; or

                      (2) disrupt, in Landlord's judgment, the reputation and
          profitability of the Property.

                  (E) For purposes of this subsection (ii), "adequate assurance"
shall mean:

                      (1) Landlord shall determine that the trustee or the
          debtor-in-possession has and will continue to have sufficient
          unencumbered assets after the payment of all secured obligations and
          administrative expenses to assure Landlord that the trustee or
          debtor-in-possession will have sufficient funds to fulfill the
          obligations of Tenant under this Lease; and

                      (2) an order shall have been entered segregating 
          sufficient cash payable to Landlord and/or there shall have been
          granted a valid and perfected first lien and security interest in
          property of the Tenant, trustee or debtor-in-possession, acceptable as
          to value and kind to Landlord, to secure to Landlord the obligation of
          the Trustee or debtor-in-possession to cure the monetary and/or
          nonmonetary defaults under this Lease within the time periods set
          forth above.

                  (iii) If the trustee or debtor-in-possession has assumed the
Lease pursuant to the terms and provisions of subsections (i) and (ii) herein,
for the purpose of assigning (or election to assign) the Tenant's interest under
this Lease or the estate created thereby, to any other person, such interest or
estate may be so assigned only if Landlord shall acknowledge in writing that the
intended assignee has provided "adequate assurance" (as defined in this
subsection (iii)) of future performance of all of the terms, covenants and
conditions of this Lease to be performed by Tenant. For purposes of this
Section, adequate assurance of future performance shall mean that Landlord shall
have ascertained that each of the following conditions has been satisfied:


          (A) The assignee has submitted a current financial statement audited
by a Certified Public Accountant which shows a net worth and working capital in
amounts determined to be sufficient by Landlord to assure the future performance
by such assignee of the Tenant's obligations under this Lease;

          (B) If requested by Landlord, the assignee shall have obtained
guarantees in form and substance satisfactory to Landlord from one or more
persons who satisfy Landlord's standards of creditworthiness;

                                       16
<PAGE>   20

          (C) Landlord has obtained all consents to waivers from any third party
required under any lease, mortgage, financing arrangement or other agreement by
which Landlord is bound to enable Landlord to permit such assignment;

          (D) This assignee has deposited an adequate security deposit with
Landlord; and

          (E) The assignee has demonstrated that its intended use of the
Property is consistent with the terms of this Lease and will not diminish the
reputation of the Building, or violate any "exclusive" which has been granted to
another tenant in the Building.

                  (iv) When, pursuant to the Bankruptcy Code, the trustee or
debtor-in-possession shall be obligated to pay reasonable use and occupancy
charges for the use of the Property or any portion thereof, such charges shall
not be less than the then current Base Rent as defined in this Lease and other
monetary obligations of Tenant.

                  (v) Neither Tenant's interest in the Lease, nor any lesser
interest of Tenant herein, nor any estate of Tenant hereby created, shall pass
to any trustee, receiver, assignee for the benefit of creditors, or any other
person or entity, or otherwise by operation of law under the laws of any state
having jurisdiction of the person or property of the Tenant unless Landlord
shall consent to such transfer in writing. No acceptance by Landlord of rent or
any other payments from any such trustee, receiver, assignee, person or other
entity shall be deemed to have waived, nor shall it waive the need to obtain
Landlord's consent or Landlord's right to terminate this Lease for any transfer
of Tenant's interest under this Lease without such consent.

                  (vi) Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code shall be deemed without
further act or deed to have assumed all of the obligations arising under this
Lease on or after the date of such assignment. Any such assignee shall, upon
demand, execute and deliver to Landlord an instrument confirming such
assumption.

5.       IMPOSITIONS
         -----------

         5.1. PAYMENT OF IMPOSITIONS. Tenant shall pay, or cause to be paid, all
Impositions prior to delinquency and before any fine, penalty, interest or cost
may be added for nonpayment (subject to Tenant's rights of contest pursuant to
the provisions of Article 13. Such payments shall be made directly to the
authorities levying or to the other persons entitled to such Impositions, if
possible. Tenant shall, promptly upon request by Landlord, furnish to Landlord
original or certified copies of receipts or other reasonably satisfactory
evidence of such payments. Tenant's obligation to pay Impositions shall be
deemed absolutely fixed upon the date such Impositions become due to the
authority or person entitled thereto. If any such Imposition may, at the option
of the payor, lawfully be paid in installments (whether or not interest shall
accrue on the unpaid balance of such Imposition), Tenant may pay the same (and
shall pay any accrued interest on the unpaid balance of such Imposition) in
installments, and in such event shall pay such installments (subject to Tenant's
right of contest pursuant to the provisions of Article 13) as the same become
due and before any fine, penalty, premium, further interest or cost is added
thereto. Landlord shall, to the extent required or permitted by applicable laws
and regulations, prepare at its expense and file all returns with respect to
Landlord's net income, gross receipts, sales, use, single business, transaction
privilege, rent, ad valorem and franchise taxes, and with respect to taxes on
Landlord's capital stock. Tenant shall, at its expense, and to the extent
required or permitted by applicable laws and regulations, prepare and file all
other tax 


                                       17
<PAGE>   21

returns and reports with respect to any Imposition as may be required by
governmental agencies, authorities or other persons entitled to the receipt of
the Impositions. If any refund shall be due from any taxing authority or other
persons entitled to the receipt of the Impositions with respect to any
Imposition paid by Tenant, the same shall be paid over to and retained by Tenant
unless an Event of Default shall have occurred hereunder and be continuing, in
which case such refund shall be paid over to and retained by Landlord. Any such
funds retained by Landlord due to an Event of Default shall be applied as
provided in Article 17. Landlord and Tenant shall, each upon a request by the
other, provide such information regarding the Property as is maintained by the
party to whom the request is made as may be reasonably necessary to prepare any
required returns or reports. If any governmental agency or authority classifies
any property covered by this Lease as personal property, Tenant shall file all
personal property tax returns in such jurisdictions where it may legally so
file. Landlord, to the extent it possesses the same, and Tenant, to the extent
it possesses the same, will provide to the other party, promptly upon request,
cost and depreciation records reasonably necessary for filing returns for any
property so classified as personal property. If Landlord is legally required to
file any personal property tax returns, Landlord shall provide Tenant with
copies of any assessment notices with respect thereto in sufficient time for
Tenant to file a protest with respect thereto if it so elects pursuant to
Article 13. If no Event of Default is then continuing, Tenant may at its option
and sole cost and expense, upon notice to Landlord, protest, appeal or institute
such other proceedings as Tenant reasonably may deem appropriate to effect a
reduction of real estate or personal property assessments so long as such action
is conducted in good faith and with due diligence and without prejudice to
Landlord's rights or interest in or with respect to the Property or Landlord's
rights under this Lease. In such event, Landlord, at Tenant's sole cost and
expense, shall fully cooperate with Tenant in such protest, appeal, or other
action. Tenant hereby agrees to indemnify, defend, protect, save and hold
Landlord harmless from and against any and all losses, demands, claims,
obligations and liabilities against or incurred by Landlord in connection with
such protest, appeal or other proceeding. Billings by Landlord to Tenant for
reimbursement of personal property taxes shall be accompanied by copies of a
bill therefor and evidence of payment thereof which identify the personal
property with respect to which such payment has been made.

         5.2. NOTICE OF IMPOSITIONS. Landlord shall give prompt Notice to Tenant
of all Impositions payable by Tenant hereunder of which Landlord at any time has
knowledge. Notwithstanding the foregoing, however, Landlord's failure to give
any such Notice shall in no way diminish Tenant's obligations hereunder to pay
such Impositions, but unless Tenant or Manager otherwise had notice of such
Imposition, Landlord shall be responsible for any fine, penalty or interest
resulting from its failure to give such Notice and any default by Tenant
hereunder shall be obviated for a reasonable time after Tenant receives Notice
of any Imposition which it is obligated to pay.

         5.3. ADJUSTMENT OF IMPOSITIONS. Impositions imposed with respect to the
tax period during which the Term expires or terminates shall be adjusted and
prorated between Landlord and Tenant, whether or not such Imposition is imposed
before or after such expiration or termination, so that Tenant is only obligated
to pay that portion of such Imposition(s) pertaining to the tax period within
the Term. The obligation of Tenant to pay its prorated share of Impositions
shall survive expiration of earlier termination of this Lease.

         5.4. UTILITY CHARGES. Tenant shall pay or cause to be paid all charges
for all utilities, including but not limited to electricity, power, gas, oil and
water, used in the Property during the Term.

         5.5. INSURANCE PREMIUMS. Tenant shall pay or cause to be paid all
premiums for insurance coverage required to be maintained pursuant to Article
14.

                                       18
<PAGE>   22

6.       TERMINATION OR ABATEMENT OF LEASE
         ---------------------------------

         6.1. NO TERMINATION OR ABATEMENT. Without limiting the generality of
Section 4.5((a)) hereof, Tenant, to the full extent permitted by law, shall
remain bound by this Lease in accordance with its terms in all events unless
Landlord shall elect to terminate this Lease (other than due to an Event of
Default) in accordance with the terms hereof. Tenant shall not take any action
without the prior written consent of Landlord to modify, surrender or terminate
this Lease. The obligations of Landlord and Tenant hereunder shall be separate
and independent covenants and agreements, and Rent and all other sums shall
continue to be payable by Tenant hereunder in any event unless the obligation of
Tenant to pay the same terminates pursuant to the express provisions of this
Lease by termination of this Lease (other than by reason of an Event of
Default). Without limiting the generality of the immediately preceding sentence,
Tenant shall not seek or be entitled to any abatement, deduction, deferment or
reduction of Rent, or setoff against Rent, nor shall the respective obligations
of Landlord and Tenant be otherwise affected by reason of (a) any damage to, or
destruction of, all or any portion of the Property from whatever cause or any
Taking of all or any portion of the Property; (b) the lawful or unlawful
prohibition of, or restriction upon, Tenant's use of all or any portion of the
Property, or the interference with such use or with Tenant's quiet enjoyment of
the Property by any person or entity; (c) the eviction of Tenant from the
Property or any portion thereof whether by paramount title or otherwise; (d) any
claim which Tenant has or may have against Landlord by reason of any default or
breach of any warranty by Landlord under this Lease or any other agreement
between Landlord and Tenant or to which Landlord and Tenant are parties; (e) any
bankruptcy, insolvency, reorganization, composition, readjustment, liquidation,
dissolution, winding up or other proceeding affecting Landlord or any assignee
or transferee of Landlord; or (f) any other cause, whether similar or dissimilar
to any of the foregoing. Tenant hereby specifically waives all rights, arising
from any occurrence whatsoever, which (i) may now or hereafter be conferred upon
it by law or otherwise to modify, surrender or terminate this Lease or quit or
surrender all or any portion of the Property or (ii) entitle Tenant to any
abatement, reduction, suspension or deferment of Rent or other sums payable by
Tenant hereunder.

7.       OWNERSHIP OF PROPERTY; TENANT'S PERSONAL PROPERTY SECURITY INTEREST
         -------------------------------------------------------------------

         7.1. OWNERSHIP OF THE PROPERTY. The Property is, and throughout the
Term shall continue to be, the property of Landlord. Tenant has only the right
to the exclusive possession and use of the Property, upon the terms and subject
to the conditions set forth in this Lease.

         7.2. TENANT'S PERSONAL PROPERTY; SECURITY INTEREST. Tenant may, at its
expense, install, assemble or place on the Property any items of Tenant's
Personal Property and may, subject to the conditions set forth below, remove
Tenant's Personal Property upon the expiration or earlier termination of this
Lease (other than a termination upon an Event of Default). Notwithstanding the
foregoing, in order to secure the payment and the performance of all of Tenant's
obligations under this Lease, Tenant hereby grants to Landlord a security
interest in (and hereby pledges and collaterally assigns to Landlord) all of
Tenant's rights, title and interest in and to Tenant's Personal Property, all
whether now existing or hereafter acquired and hereby further agrees to execute
and deliver to Landlord, forthwith after demand by Landlord from time to time,
any security agreement in a reasonable form determined by Landlord and such
additional writings and instruments, including without limitation financing
statements, as may be required by Landlord for the purpose of effectuating the
intent of this sentence and perfecting the security interest granted to Landlord
hereunder, and Tenant agrees that Landlord shall have with respect to all of
Tenant's Personal Property all rights and remedies of a secured party under the
Uniform 


                                       19
<PAGE>   23

Commercial Code as adopted by and in effect in the State, including, but not
limited to, the right after the occurrence of an Event of Default to use, retain
or sell Tenant's Personal Property (and any such sale may be either a private or
public sale as determined in Landlord's reasonable discretion), and Landlord
shall not be required to remove any of such Personal Property from the Property
and in no event shall Landlord be liable to Tenant for Landlord's use or taking
possession of such Personal Property. Pending disposition of such Personal
Property by Landlord, the Landlord shall be entitled to use such Personal
Property in connection with the operation (if any) of the Facility. Tenant shall
not permit the Property or Tenant's Personal Property to become subject to any
liens or encumbrances of any kind without first obtaining the prior written
consent of Landlord, except that no such consent shall be required for any
purchase money security interest for the acquisition of equipment constituting
Tenant's Personal Property. The security interest granted Landlord hereby shall
be subordinate to any such purchase money security interest. Landlord further
agrees that Tenant may lease Tenant's Personal Property from third parties, and
Landlord shall execute and deliver such agreements as may be reasonably required
by any equipment lessor or the holder of a purchase money security interest to
confirm that Landlord's lien on the item of Tenant's Personal Property in
question is subordinate to the rights of such equipment lessor or lender on the
express condition that, in each case, Tenant shall obtain from the holder of the
purchase money debt or lessor of Personal Property, as the case may be, its
agreement to (i) notify Landlord of any default by Tenant, (ii) allow Landlord
an opportunity to cure any default, (iii) recognize Landlord as succeeding to
Tenant's rights under the agreement in question and to the undisturbed use of
the equipment, provided that Landlord fully complies with the terms of such
agreement. Tenant shall provide and maintain on the Property during the entire
Term such Tenant's Personal Property as shall be necessary to operate the
Facility in compliance with any and all applicable licensure and certification
requirements, in compliance with all Legal Requirements and Insurance
Requirements and otherwise in accordance with customary practice in the health
care industry with respect to the Primary Intended Use then conducted on the
Property by Tenant and permitted hereunder. All Tenant's Personal Property not
removed by Tenant within ten (10) days following the expiration or earlier
termination of this Lease shall be considered abandoned by Tenant and may be
appropriated, sold, destroyed or otherwise disposed of by Landlord without first
giving Notice thereof to Tenant and without any payment or obligation to account
to Tenant. Tenant shall, at its sole cost and expense, restore the Property to
the condition required by Section 10.1((d)), including repair of all damage to
the Property caused by the removal of Tenant's Personal Property, whether
effected by Tenant or Landlord.

8.       CONDITION AND USE OF PROPERTY
         -----------------------------

         8.1. CONDITION OF THE PROPERTY. By taking possession of the Property,
Tenant warrants and represents to Landlord (i) that it has examined and
otherwise has approved the condition of the Property prior to accepting such
possession, (ii) that Tenant has found the Property to be approved for occupancy
by all appropriate governmental agencies having jurisdiction over issues related
to occupancy, and (iii) that Tenant has found the Property to be satisfactory to
Tenant in every respect including for its Primary Intended Use. Notwithstanding
the foregoing, Tenant is leasing the Property "AS IS" irrespective of the
accuracy of the facts and circumstances acknowledged and warranted and
represented by Tenant as aforesaid, without any representation or warranty by
Landlord of any kind and subject to all matters of every kind and description
including without limitation (a) the existing state of title, including all
covenants, conditions, restrictions, ground leases, easements, licenses, Legal
Requirements, mortgages, deeds of trust, assignments of leases, fixture filings
and other financing instruments and any and all other matters, including matters
known to Tenant, all matters of record and other matters, and (b) matters which
would be disclosed by an inspection of the Property or by an accurate survey of
the Land,


                                       20
<PAGE>   24

(c) any matter relating to the construction, development or quality of the
Improvements, Fixtures and any and all furnishings and equipment installed or
located therein or otherwise within the Property, and (d) all other matters
which should reasonably have been known or unknown to Tenant. Tenant waives any
and all claims, demands and cause or causes of action heretofore or hereafter
arising against Landlord with respect to the condition of the Property. WITHOUT
LIMITING THE GENERALITY OF THE FOREGOING, LANDLORD MAKES NO WARRANTY OR
REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO THE PROPERTY OR ANY PART
THEREOF, EITHER AS TO ITS DESIGN, CONDITION, HABITABILITY OR FITNESS FOR ANY
PARTICULAR USE OR PURPOSE OR OTHERWISE, OR AS TO THE QUALITY OF DEFECTS IN THE
MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT. TENANT ACKNOWLEDGES AND
AGREES THAT, AS OF THE COMMENCEMENT DATE, THE PROPERTY SHALL BE CONCLUSIVELY
DEEMED TO HAVE BEEN INSPECTED BY TENANT AND SHALL BE CONCLUSIVELY DEEMED TO BE
SATISFACTORY TO IT IN ALL RESPECTS.

         8.2. USE OF THE PROPERTY.

              (a) Tenant covenants, warrants and represents to Landlord that at
the Commencement Date Tenant shall have, and shall thereafter exercise its best
efforts to maintain in effect, all permits, licenses, authorizations and
approvals needed to use and operate the Facility for Tenant's Primary Intended
Use in accordance with all Legal Requirements.

              (b) Throughout the entire Term, Tenant shall use or cause the
Property to be used solely for its Primary Intended Use. Tenant shall not use
the Property or any portion thereof for any other purpose whatsoever without the
prior written consent of Landlord. The parties agree that Landlord's consent
will not be deemed to be unreasonably withheld if, in the reasonable opinion of
Landlord, the Tenant's proposed use of the Property will significantly alter the
character or purpose or detract from the value or operating efficiency of the
Property, or significantly impair the revenue-producing capability of the
Property. No use shall be made or permitted to be made of the Property and no
acts shall be done which violate any Legal Requirements or Insurance
Requirements or which will cause the cancellation of any insurance policy
covering the Property or any part thereof, nor shall Tenant sell or permit to be
kept, used or sold in, about or under the Property any Hazardous Substance or
any other article which may be prohibited by the Legal Requirements or Insurance
Requirements (provided, however, that Hazardous Substances comprised of medical
waste or medical substances such as isotopes, alcohol, formaldehyde and other
substances commonly used in the operation of medical offices and clinics similar
to the Facility shall be permitted on the Property so long as all such wastes
and substances are used, handled, maintained and disposed of in strict
accordance with all applicable Legal Requirements and Insurance Requirements).
Tenant shall, at its sole cost, comply with all Legal Requirements and Insurance
Requirements.

              (c) Tenant shall not commit or suffer to be committed any waste
nor shall Tenant cause or permit any nuisance on the Property.

              (d) Tenant shall neither suffer nor permit all or any portion of
Tenant's Personal Property or the Property, including any Capital Addition
whether or not financed or paid for by Landlord, to be used in such a manner as
(i) may impair the owner's title or Landlord's entitlement thereto or to any
portion thereof or (ii) may make possible a claim or claims of adverse usage,
prescriptive right, adverse possession or implied dedication of all or any
portion of the Property to the public, except as is necessary in the ordinary
and prudent operation of the Property.



                                       21
<PAGE>   25

         8.3. FUNDING OF MAINTENANCE AND REPAIR.

              Commencing in the sixth Lease Year, and continuing during each 
Lease Year throughout the Term, Tenant shall expend no less than $18,000 [$300
per unit ] during each Lease Year with respect to maintenance of the Property
and capital repairs of existing elements of the Property. For the avoidance of
doubt, expenditures with respect to repair and replacement of Tenant's Personal
Property and other personal property at or about the Property shall not be
included when determining whether Tenant has complied with the requirements of
this Section 8.3. Upon the request of Landlord, Tenant shall deliver a written
report to Landlord or its designated agent stating (i) the expenditures made by
Tenant in accordance with this Section 8.3 during any prior Lease Year and (ii)
the expenditures which Tenant anticipates making during the current Lease Year
in order to comply with this Section 8.3.

9.       LEGAL REQUIREMENTS AND INSURANCE REQUIREMENTS
         ---------------------------------------------

         9.1. COMPLIANCE WITH LEGAL REQUIREMENTS, INSURANCE REQUIREMENTS AND
INSTRUMENTS. Subject to the rights of Tenant as provided in Article 13 relating
to permitted contests, Tenant, at its sole cost and expense, shall promptly (a)
comply with all applicable Legal Requirements and Insurance Requirements with
respect to the use, operation, maintenance, repair and restoration of the
Property, whether or not compliance therewith shall require structural change in
the Property or interfere with the use and enjoyment of the Property, and (b)
procure, maintain and comply with all appropriate licenses, certificates of
need, provider agreements, service agreements and other permits, licenses,
franchises and authorizations required for the Facility, any use of the Property
and Tenant's Personal Property then being made, and for the proper erection,
installation, operation and maintenance of the Property or any part thereof,
including without limitation any Capital Additions.

         9.2. COVENANTS REGARDING LEGAL REQUIREMENTS. Tenant covenants and
agrees that it shall not use the Property or Tenant's Personal Property for any
purpose which violates the Legal Requirements. Tenant shall acquire and maintain
all appropriate licenses, certificates, permits, provider agreements, service
agreements, franchises, authorizations and approvals necessary to operate the
Property and the Facility in its customary manner for the Primary Intended Use,
and any other use conducted on the Property by Tenant and permitted by Landlord
hereunder. If no Event of Default has occurred and is then continuing, Tenant
may, however, upon prior Notice to Landlord, contest the legality or
applicability of any such Legal Requirement or any licensure decision if Tenant
maintains such action in accordance with the provisions of Article 13 hereof and
otherwise conducts such action in good faith, with due diligence, without
prejudice to Landlord's rights or entitlement to the Property or Landlord's
rights hereunder and at Tenant's sole cost and expense. If by the terms of any
such Legal Requirement compliance therewith, pending the prosecution of any such
proceeding, may legally be delayed without the occurrence of any lien, charge,
fine, penalty or other liability of any kind against the Property or Landlord's
or Tenant's leasehold interest therein and without subjecting Tenant or Landlord
to any liability, civil or criminal, for failure so to comply therewith, Tenant
may delay compliance therewith until the final determination of such proceeding.
If any lien, charge or civil or criminal liability would be incurred by reason
of any such delay, Tenant, subject to the prior written consent of Landlord
(which consent shall not be unreasonably withheld), may nonetheless contest
and/or delay as aforesaid provided that such contest or delay, as the case may
be, will not affect Landlord's entitlement to the Property, subject Landlord or
Tenant to criminal liability and Tenant (a) furnishes to Landlord security
reasonably satisfactory to Landlord, in Landlord's sole and absolute discretion,
against any loss or injury by reason of such contest or delay, and (b)
prosecutes the contest at Tenant's sole cost and expense, with due diligence and
in good faith.



                                       22
<PAGE>   26

10.      CONDITION OF THE PROPERTY
         -------------------------

         10.1. MAINTENANCE AND REPAIR.

               (a) Tenant, at its sole cost and expense, shall keep the Property
and all private roadways, sidewalks and curbs appurtenant thereto in good order,
condition and repair and, except as may otherwise be expressly provided to the
contrary in Article 15, or 16, with reasonable promptness, shall, at Tenant's
sole cost and expense, make all necessary and appropriate repairs and
replacements thereto of every kind and nature, whether interior or exterior,
structural or nonstructural, ordinary or extraordinary, patent or latent,
foreseen or unforeseen, or arising by reason of a condition existing prior to,
at or after the Commencement Date and regardless of the cause necessitating
repair. Tenant shall also be obligated at its expense to make all repairs,
modifications and renovations necessary to comply with all licensing, safety and
health and building code, regulations applicable to the Property so that it can
be legally operated for its Primary Intended Use, including all modifications or
other renovations which may be required under the Americans with Disabilities
Act of 1990, as from time to time amended (42 U.S.C. ss. 12101 et seq.). All
repairs by Tenant shall be made by duly licensed contractors under a no-lien
contract (to the extent available in the State) and shall be made in a good and
workmanlike manner using materials of good quality. Tenant shall not take or
omit to take any action, the taking or omission of which might materially impair
the value or the usefulness of all or any portion of the Property for the
Primary Intended Use. Tenant shall give Landlord ten days prior written notice
of any repair, replacement, modification or renovation pursuant to this Section
which is reasonably expected to cost in excess of $50,000 and, prior to
commencing any such repair, replacement, modification or renovation, shall
provide to Landlord either (i) a lien payment and completion bond in form and
substance and issued by a surety reasonably acceptable to Landlord in an amount
equal to 150% of the reasonably anticipated cost of such repair, replacement,
modification or renovation (which payment bond together with a copy the
applicable contract shall in the form required and shall be recorded in the
office of the county recorder or county register of the county in which the
portion of the Property is located in the manner required under the laws of the
State to prevent liens from attaching to the Property) or (ii) a payment and
completion guaranty in form and substance and executed by a guarantor reasonably
acceptable to Landlord.

               (b) Landlord shall not under any circumstances be required to
build or rebuild the Building or any other improvement on the Property, or to
make any repairs, replacements, alterations, restorations or renewals of any
nature or description to the Property, whether interior or exterior, structural
or nonstructural, ordinary or extraordinary, patent or latent, foreseen or
unforeseen, or to make any expenditure whatsoever with respect thereto, in
connection with this Lease, nor shall Landlord under any circumstances be
required to maintain the Property in any other way. Tenant hereby waives, to the
fullest extent permitted by law, the right to make repairs at the expense of
Landlord pursuant to any law or equitable principle in effect at the time of the
execution of this Lease or hereafter enacted. Landlord shall have the right to
give, record and post, on the Property and otherwise, as appropriate, notices of
non-responsibility under any mechanic's lien laws now or hereafter existing, and
any other notices of a similar nature that Landlord may reasonably elect to
give, record or post from time to time during the Term.

               (c) Nothing contained in this Lease, and no action or inaction by
Landlord, shall be deemed or construed in any manner as (i) constituting the
consent or request of Landlord, expressed or implied, to any contractor,
subcontractor, laborer, materialman or vendor to or for the performance of any
labor or services or the furnishing of any materials or other property for the
construction, alteration, addition, repair or demolition of or to all or any
portion 


                                       23
<PAGE>   27

of the Property or (ii) giving Tenant any right, power or permission to contract
for or permit the performance of any labor or services or the furnishing of any
materials or other property in such a manner as would permit the making of any
claim against Landlord or any portion of the Property with respect thereto, or
to make any agreement that may create, or in any way may be the basis for the
assertion of any right, title, interest, lien, claim or other encumbrance upon
the estate of Landlord in all or any portion of the Property.

               (d) Subject to Section 15.7 hereof, Tenant shall, upon the
expiration or earlier termination of this Lease, vacate and surrender the
Property to Landlord in the condition in which the Property was originally
received from Landlord, except as repaired, rebuilt, restored, altered or added
to as permitted or required by the provisions of this Lease, and except for
ordinary wear and tear (but such exception shall be subject to the obligation of
Tenant under this Section 10.1 to maintain and repair the Property and make
those modifications and renovations to the Property which are required to keep
the Property in good order, condition and repair during the entire Term of this
Lease).

         10.2. ENCROACHMENTS. If any portion of a Building shall at any time
during the Term impair the rights of others under any easement or right-of-way
burdening the Land, provided that such restriction or easement has not been
created by Landlord subsequent to the Commencement Date and without the consent
of Tenant in violation of this Lease, then promptly upon the request of
Landlord, or at the behest of any person affected by violation or impairment and
in such case, in the event of an adverse final determination, Tenant shall, at
Tenant's sole cost and expense, but in conjunction with Landlord, obtain valid
and effective waivers or settlements of all claims, liabilities and damages
resulting from each such encroachment, violation or impairment, whether the same
shall affect Landlord or Tenant, subject to Landlord's consent to all such
settlements or waivers. In any event Tenant shall, subject to Landlord's
consent, take all such actions as may be necessary in order to be able to
continue the operation of the Property for the then existing use substantially
in the manner and to the extent the Property was operated prior to the assertion
of such violation or impairment. Notwithstanding the provisions of this Section
10.2 to the contrary, Tenant shall not be responsible for any claims to the
extent such claims are covered by Landlord's title insurance policy, and
Landlord agrees that any proceeds recovered under such title insurance policy
shall be made available to remedy the claimed violation or restriction.

11.      CAPITAL ADDITIONS
         -----------------

         11.1. CONSTRUCTION OF CAPITAL ADDITIONS.

               (a) If no Event of Default shall have occurred and be continuing,
Tenant may, subject to the terms and conditions contained in this Article,
construct or install Capital Additions on the Property with the prior written
approval of Landlord. Tenant shall not be permitted to create any Encumbrance on
the Property in connection with any such Capital Addition.

               (b) Prior to commencing construction of any Capital Addition,
Tenant shall submit a written proposal to Landlord setting forth in detail any
proposed Capital Addition which proposal shall include plans and specifications,
permits, licenses, contracts and other information concerning the proposed
Capital Addition. Without limiting the generality of the foregoing, the proposal
shall indicate the approximate projected cost of constructing the proposed
Capital Addition, the use or uses to which it will be put and a good faith
estimate of the change, if any, in the Tenant's gross revenue that Tenant
anticipates will be caused by the addition of the proposed Capital Addition to
the Property. Tenant shall not commence to build any Capital Addition unless
Tenant shall first have provided Landlord with either (i) a lien payment and
completion 


                                       24
<PAGE>   28

bond in form and substance and issued by a surety reasonably acceptable to
Landlord in an amount equal to 150% of the reasonably anticipated cost of such
repair, replacement, modification or renovation (which payment bond together
with a copy the applicable contract shall in the form and amount required and
shall be recorded in the office of the county recorder or county register of
County in which the portion of the Property is located in the manner required
under the law of the State to prevent liens from attaching to the Property) or
(ii) a payment and completion guaranty in form and substance and executed by a
guarantor reasonably acceptable to Landlord.

               (c) No Capital Addition shall be made which would tie in or
connect any improvements on the Property with any other improvements on property
adjacent to the Property (and not part of the Property covered by this Lease),
including without limitation, tieins of buildings or other structures or
utilities unless Tenant shall have obtained the prior written consent of
Landlord. Landlord may grant, withhold or delay its consent in its sole
discretion. All proposed Capital Additions shall be architecturally integrated
and consistent with the use and design of Property.


         11.2. CAPITAL ADDITIONS FINANCED OR PAID FOR BY LANDLORD.

               (a) Tenant shall request that Landlord provide or arrange
financing for any Capital Addition which is reasonably expected to cost in
excess of $50,000 by providing to Landlord such information about the Capital
Addition as Landlord may reasonably request. Landlord may, but shall be under no
obligation to, meet the request, and within 30 days of receipt of such
information, Landlord shall notify Tenant as to whether it will finance the
proposed Capital Addition and, if so, the terms and conditions upon which it
would do so, including the terms of any amendment to this Lease (including,
without limitation, an increase in Rent to compensate Landlord for the
additional funds advanced by it). In no event shall the portion of such Capital
Additions cost constituting charges for material, labor and fixtures comprise
less than eighty-five percent (85%) of the total amount of such Capital
Additions Cost.

               (b) If Landlord elects to finance the Capital Additions Cost of
the proposed Capital Addition, Tenant shall provide Landlord with the following
(unless waived by Landlord in writing):

               (i) prior to any disbursement of funds, such information,
certificates, licenses, permits, authorizations, evidence of zoning and other
documents reasonably requested by Landlord, or by any third party lender with
whom Landlord has agreed or may agree to provide financing, as necessary to
confirm that Tenant will be able to use the Capital Addition upon completion
thereof in accordance with the Primary Intended Use for such Capital Addition,
including all required federal, state or local government licenses, permits,
authorizations and approvals;

               (ii) prior to any disbursement of funds, an Officer's Certificate
and, if requested, a certificate from Tenant's architect, setting forth in
reasonable line-item detail the projected (or actual, if available) Capital
Additions Cost;

               (iii) prior to or coincident with the first disbursement of
funds, an amendment to this Lease (together with a memorandum thereof in
recordable form), duly executed and acknowledged, in form and substance
reasonably satisfactory to Landlord, providing for the change in the Rent, the
legal description of any land obtained or leased in connection with such Capital
Addition and such other provisions as may be necessary or appropriate;



                                       25
<PAGE>   29

               (iv) prior to or coincident with payment for any land obtained in
connection with such Capital Addition, a deed conveying to Landlord title to
such land, or, if applicable, a ground lease on terms acceptable to Landlord,
which title (or leasehold, if applicable) shall be free and clear of any liens,
encumbrances or other exceptions to or matters affecting title except those
approved by Landlord, and, upon completion of the Capital Addition, a final
as-built survey thereof reasonably satisfactory to Landlord;

               (v) during construction and following completion of the Capital
Addition, endorsements to any outstanding policy of title insurance covering the
Property, or commitments therefor reasonably satisfactory in form and content to
Landlord (X) updating the same without any additional exception except such as
may be reasonably permitted by Landlord and (Y) adding to its coverage any land
acquired or leased in connection with such Capital Addition and increasing the
coverage thereof by an amount equal to the Fair Market Value of the Capital
Addition (except to the extent covered by the owner's policy of title insurance
referred to in subparagraph (vi) below);

               (vi) following the advance of funds, if appropriate, (X) an
extended coverage owner's policy of title insurance insuring fee simple title
(or, if applicable, Landlord's leasehold interest) to any land conveyed (or
leased) to Landlord pursuant to subparagraph (iv), free and clear of all liens
and encumbrances except those approved by Landlord, and (Y) a lender's policy of
title insurance reasonably satisfactory in form and substance to Landlord and to
any Lender with whom Landlord has agreed or may agree to provide financing; and

               (vii) during or following the advancement of funds, prints of
architectural and engineering drawings relating to the Capital Addition and such
other certificates (including, but not limited to, endorsements increasing the
insurance coverage, if any, at the time required by Section 14.1), documents,
opinions of counsel, appraisals, surveys, certified copies of duly adopted
resolutions of the board of directors of Tenant authorizing the execution and
delivery of the lease amendment and any other instruments as may be reasonably
required by Landlord and any lender from whom Landlord has agreed or may agree
to obtain financing.

               (c) Any new mortgage or supplement to any existing mortgage
entered into by Landlord with any lending institution covering the Property or
any land referred to in subparagraph (v) above shall be subject to the rights of
Tenant under this Lease, as this Lease may be amended from time to time.

         11.3. CAPITAL ADDITIONS PAID FOR BY TENANT. If Landlord elects not to
finance the cost of a Capital Addition under the terms of Section 11.2 and
Tenant elects nevertheless to make such Capital Addition, (i) Tenant shall not
commence any construction with respect to such Capital Addition without first
obtaining the prior written consent of Landlord, (ii) Tenant shall comply with
all requirements of this Lease, including without limitation Section 10.1, and
(iii) Tenant shall pay all costs of such Capital Addition, and there shall be no
adjustment in the Rent by reason of any such Capital Addition.

         11.4. DISPOSITION OF CAPITAL ADDITIONS UPON EXPIRATION OR TERMINATION
OF LEASE. Upon the expiration or earlier termination of this Lease, all Capital
Additions shall pass to and become the property of Landlord, free and clear of
all encumbrances, without payment by Landlord.

         11.5. NON-CAPITAL ADDITIONS. Tenant shall have the right to make
additions, modifications or improvements to the Property which are not Capital
Additions from time to time as it, in its reasonable discretion, may deem to be
desirable for the Property's uses and 


                                       26
<PAGE>   30

purposes permitted hereunder, provided that such action shall not significantly
alter the character or purpose or detract in any manner from the value or
operating efficiency of the Property nor significantly impair the
revenue-producing capability of the Property or materially and adversely affect
the ability of Tenant to comply with the provisions of this Lease and that
Tenant give Landlord ten days prior written notice of such addition,
modification or improvement the cost of which exceeds $100,000, which are not
Capital Additions. The cost of such noncapital additions, modifications or
improvements to the Property shall be paid by Tenant, and all such non-capital
additions, modifications and improvements shall, without payment by Landlord at
any time, be included under the terms of this Lease, and upon expiration or
earlier termination of this Lease shall pass to and become the property of
Landlord.

         11.6. SALVAGE. All materials which are scrapped or removed in
connection with the making of either Capital Additions permitted by Section
11.1, non-capital additions permitted by Section 11.5, or repairs required by
Article 10 shall be or become the property of Landlord.

12.      LIENS
         -----
   
         Subject to the provisions of Article 13 relating to permitted contests,
Tenant shall not directly or indirectly create or allow to remain and shall
promptly discharge at its expense any lien, encumbrance, attachment, title
retention agreement or claim upon any portion of the Property or any attachment,
levy, claim or encumbrance in respect of Rent, not including, however, (a) this
Lease, (b) Permitted Encumbrances, if any, and the Leasehold Mortgage
encumbering solely Tenant's interest in the Property, (c) restrictions, liens
and other encumbrances which are consented to in writing by Landlord, (d) liens
for those taxes of Landlord which Tenant is not then currently required to pay
hereunder, (e) subleases permitted by Article 23, (f) liens for Impositions or
for sums resulting from noncompliance with Legal Requirements so long as the
same are not yet payable or are payable without the addition of any fine or
penalty and are in the process of being contested as permitted by Article 13,
(g) liens of mechanics, laborers, materialmen, suppliers or vendors for sums
either disputed or not yet due, provided that, notwithstanding the provisions of
Article 13, at Landlord's request Tenant shall remove any such lien from record
title to the Property, at Tenant's sole cost and expense, by executing
undertakings, with sufficient sureties in the manner required by the Law of the
State (including Indiana Statutes Section 328311) to remove such lien from
record title to the Property; provided further (i) the payment of such sums
shall not be postponed for more than five days after the completion of the
action giving rise to such lien and such reserve or other appropriate provisions
as shall be required by law or generally accepted accounting principles shall
have been made therefor and or (ii) any such liens are in the process of being
contested as permitted by Article 13, and (h) any liens which are the
responsibility of Landlord pursuant to the provisions of Article 26. 

13.      CONTESTS
         --------

         Tenant, on its own or on Landlord's behalf (or in Landlord's name), but
at Tenant's sole cost and expense, may contest, by appropriate legal proceedings
conducted in good faith and with due diligence, the amount, validity or
application, in whole or in part, of any Imposition, Legal Requirement,
Insurance Requirement, lien, attachment, levy, Encumbrance, charge or claim not
otherwise permitted by Article 12, provided that (a) in the case of an unpaid
Imposition, lien, attachment, levy, encumbrance, charge or claim, the
commencement and continuation of such proceedings shall suspend the collection
thereof from Landlord and from the Property, (b) neither the Property nor any
Rent therefrom nor any part thereof or interest 


                                       27
<PAGE>   31

therein would be subject to any risk of being sold, forfeited, attached,
foreclosed, or lost, (c) in the case of a Legal Requirement, Landlord would not
be in any danger of civil or criminal liability for failure to comply therewith
pending the outcome of such proceedings, (d) in the event that any such contest
shall involve a sum of money or potential loss in excess of $50,000 then, in any
such event, Tenant shall deliver to Landlord an Officer's Certificate and
opinion of counsel to the effect set forth in clauses (a), (b) and (c), to the
extent applicable, (e) in the case of a Legal Requirement or an Imposition,
lien, encumbrance or charge, Tenant shall give such reasonable security as may
be demanded by Landlord to insure ultimate payment of the same and to prevent
any sale or forfeiture of the affected portion of the Property or the Rent by
reason of such non-payment or non-compliance including without limitation a
guaranty in form and substance acceptable to Landlord and executed by a
guarantor acceptable to Landlord (g) in the case of an Insurance Requirement,
the coverage required by Article 14 shall be maintained, and (h) if such contest
be finally resolved against Landlord or Tenant, Tenant shall, as Additional
Charges due hereunder, promptly pay the amount required to be paid, together
with all interest and penalties accrued thereon, or comply with the applicable
Legal Requirement or Insurance Requirement. Notwithstanding any express or
implied provision of this Article to the contrary, the provisions of this
Article shall not be construed to permit Tenant to contest the payment of Rent
(except as to contests concerning the method of computation or the basis of levy
of an Imposition) or any other sums payable by Tenant to Landlord hereunder.
Landlord, at Tenant's expense, shall execute and deliver to Tenant such
authorizations and other documents as may reasonably be required in any such
contest and, if reasonably requested by Tenant or if Landlord so desires,
Landlord shall join as a party therein. Tenant shall indemnify, defend and save
Landlord harmless against any liability, cost or expense of any kind that may be
imposed upon Landlord in connection with any such contest and any loss resulting
therefrom. 

14.      INSURANCE 
         ---------

         14.1. GENERAL INSURANCE REQUIREMENTS. Tenant shall at all times
maintain policies of insurance insuring the Property, and all property located
in or on the Property and shall insure the Property, against the kinds of risks
and in the amounts of coverage described below. All such insurance shall be
written by companies of recognized responsibility authorized to conduct an
insurance business in the State. Except as expressly provided to the contrary in
subsection 14.1((e)) below, all such insurance (other than insurance with
respect to Tenant's Personal Property) shall name Landlord as the insured and
name Tenant as an additional insured. All insurance with respect to Tenant's
Personal Property shall name Tenant and Landlord as co-insureds. Proceeds of
insurance policies payable to compensate any loss shall be payable to Landlord
or Tenant as provided in Article 15. All such insurance shall name as an
additional insured or loss payee, as appropriate, the holder (a "Facility
Mortgagee") of any mortgage, deed of trust or other security agreement securing
any Encumbrance placed on the Property in accordance with the provisions of
Article 26 ("Facility Mortgages") by way of a standard form of mortgagee's loss
payable endorsement. Any loss adjustment or other settlement in excess of
$100,000 shall require the written consent of Landlord and each Facility
Mortgagee and any other lender of Landlord or its Affiliates ("Landlord Lender")
having any contractual insurance requirements which would impact on the
insurance requirements of this Lease to the extent so required and Landlord has
given Tenant notice thereof. Originals or certified copies of all insurance
policies obtained pursuant to this Article shall be deposited with Landlord and,
if requested, with any Facility Mortgagee(s) or Landlord Lender(s). The policies
on the Property, including the Building, Fixtures and Tenant's Personal
Property, shall insure against the following risks:

                                       28
<PAGE>   32

               (a) loss or damage by fire, vandalism and malicious mischief,
extended coverage perils ("all risk" as such term is used in the insurance
industry), and all physical loss perils insurance including but not limited to
sprinkler leakage, in an amount not less than 100% of the then full replacement
cost thereof (as defined below in Section 14.2) or such lesser amount as is
approved by Landlord in writing, which coverage shall include an "increased cost
of construction" endorsement;

               (b) loss or damage by explosion of steam boilers, pressure
vessels or similar apparatus, now or hereafter installed in the Facility in such
amounts with respect to any one accident as may be reasonably requested by
Landlord from time to time;

               (c) Tenant's business interruption under a rental value insurance
policy covering risk of loss during the lesser of the first 12 months of
reconstruction or the actual reconstruction period necessitated by the
occurrence of any of the hazards described in Sections 14.1((a)) or 14.1((b)) or
14.1((h)), if and to the extent available and economically feasible, in an
amount sufficient to prevent Landlord from becoming a coinsurer;

               (d) Landlord's loss of rental, under a rental value insurance
policy for not less than 12 months of scheduled Base Rent;

               (e) Claims for personal injury or property damage under a policy
of Comprehensive General Public Liability insurance or Commercial General
Liability insurance applying to the use and occupancy of the Property, or any
part thereof, or any areas adjacent thereto, and the business operated by
Tenant. Such insurance shall name Tenant as the named insured and name Landlord
and American Health Properties, Inc. as an additional insured and shall include
Broad Form Contractual Liability insurance coverage insuring all of Tenant's
indemnity obligations pursuant to Section 22.1 of this Lease. Such coverage
shall have a total limit of $13,000,000 with a minimum combined single limit of
liability of primary policy coverage of at least $1,000,000 with a general
aggregate limit as to such primary policy of at least $3,000,000 and shall have
a minimum umbrella or excess limit of at least $10,000,000. Any such policy
shall be written to apply to all bodily injury, property damage, personal injury
and other covered losses, however occasioned, occurring during the policy term,
and shall be endorsed to provide that such coverage shall be primary and that
any insurance maintained by Landlord shall be excess insurance only. Such
coverage shall also contain endorsements: (i) deleting any employee exclusion on
personal injury coverage; (ii) including employees as additional insureds; (iii)
deleting any liquor liability exclusion; and (iv) providing for coverage of
employers automobile nonownership liability. All such insurance shall provide
for severability of interests; shall provide that an act or omission of one of
the named insureds shall not reduce or avoid coverage to the other named
insureds; and shall afford coverage for all claims based on acts, omissions,
injury and damage, which claims occurred or arose (or the onset of which
occurred or arose) in whole or in part during the policy period. Tenant shall
also maintain employers liability insurance with a total limit of $10,500,000
with a limit as to the primary policy of no less than $500,000 per employee and
$500,000 per occurrence and as to the excess or umbrella policy of at least
$10,000,000;

               (f) claims arising out of medical malpractice in an amount not
less than $13,000,000 in total with a primary coverage policy limit of not less
than $1,000,000 for each person and $3,000,000 per occurrence and an umbrella
policy coverage of not less than $10,000,000;

               (g) flood (when the Property is located in whole or in part
within an area designated by an appropriate agency or authority of the United
States as a flood plain) and such


                                       29
<PAGE>   33

other hazards (including without limitation earthquake) in such amounts as may
be customary for comparable properties in the County in which the Property is
located and as may be available from insurance companies, insurance pools, or
other appropriate companies authorized to do business in the State at rates
which are economically practicable in relation to the risks covered; and

               (h) During any period during which any Capital Addition is under
construction, course of construction insurance and all risks insurance in such
amounts as Landlord shall reasonably require.

         14.2. REPLACEMENT COST. The term "full replacement cost" as used herein
shall mean the actual replacement cost of the Property requiring replacement
from time to time, less the standard printed exclusions provided in a normal
fire insurance policy. The amount of the insurance coverage shall be sufficient
to preclude either Landlord or Tenant from becoming a co-insurer under the
provisions of the policy. At the option of Landlord, Tenant shall procure a
"stipulated value" or "agreed amount" endorsement deleting the co-insurance
provision of any insurance policy required hereunder. If either party believes
that full replacement cost (the then replacement cost less such exclusions) has
increased or decreased at any time during the Lease Term, it may have such full
replacement cost redetermined by the insurer then providing the largest amount
of fire insurance coverage carried on the Property.

         14.3. ADDITIONAL INSURANCE. In addition to the insurance described in
Section 14.1, throughout the Term Tenant shall maintain such additional
insurance as may reasonably be required from time to time by Landlord provided
that the types and amounts of any such additional insurance required by Landlord
is then customarily maintained by the operators of similar health care
facilities in the County in which the Property is located. Tenant shall further
maintain adequate workers' compensation insurance coverage for all persons
employed by Tenant on the Property. Such workers' compensation insurance shall
be in accordance with the requirements of applicable local, state and federal
law.

         14.4. WAIVER OF SUBROGATION. All insurance policies carried by Landlord
or Tenant covering the Property, the Fixtures, the Facility or Tenant's Personal
Property shall expressly waive any right of subrogation on the part of the
insurer against the other party. Landlord and Tenant agree that the respective
policies of insurance carried by them will include such waiver clauses or
endorsements so long as the same are obtainable without extra cost. If such
clauses and endorsements are only available upon the payment of an extra charge,
the other party, at its election, may pay the same, but shall not be obligated
to do so; provided that the Tenant shall at all times be obligated to carry the
policies of insurance required under this Article regardless of whether the
waiver of subrogation required under this Section is available.

         14.5. FORM OF INSURANCE. All of the policies of insurance referred to
in this Article shall be written in a form satisfactory to Landlord, and issued
by insurance companies which are duly authorized to issue such insurance in the
State and are rated A-X or better in the most current issue of "Best's Insurance
Guide". Landlord agrees that it will not unreasonably withhold or delay its
approval as to the form of the policies or the insurance companies selected by
Tenant. Tenant shall pay all of the premiums therefor, and shall deliver an
original or certified copy of any policy, and each renewal thereof, to Landlord,
any Facility Mortgagee and any Landlord Lender at least 10 days prior to the
expiration of the existing policy to which such renewal policy relates. If
Tenant either fails to effect such insurance as herein required or to pay the
premiums therefor, or to deliver such policies or certified copies thereof to
Landlord at the times required, Landlord shall be entitled, but shall have no
obligation, to effect such insurance and pay the premiums therefor, which
premiums shall be repayable to Landlord as Rent upon demand


                                       30
<PAGE>   34

therefor in a Notice, and failure by Tenant to repay the same shall constitute
an Event of Default within the meaning of Section 17.1((b)). Each insurer
mentioned in this Article shall agree, by endorsement on the policy or policies
issued by it, or by independent instrument furnished to Landlord, that it will
give to Landlord (and to any Facility Mortgagee and Landlord Lender of which
Tenant has notice, if required) 30 days' prior written notice before such policy
or policies expire, are altered or are canceled.

         14.6. CHANGE IN LIMITS. If either party shall at any time deem the
limits of the personal injury or property damage public liability insurance or
malpractice insurance then carried by Tenant to be insufficient or excessive,
the parties shall endeavor in good faith to agree promptly upon the proper and
reasonable limits for such insurance to be carried; provided that if the parties
are unable to so agree, such dispute shall be submitted to arbitration in
accordance with the provisions of Section 29.14 hereof. Such insurance shall
thereafter be carried with the limits thus agreed upon until further change
pursuant to the provisions of this Section.

         14.7. BLANKET POLICY. Notwithstanding anything to the contrary
contained in this Article, Tenant's obligations to carry the insurance provided
for herein may be brought within the coverage of a so-called blanket policy or
policies of insurance carried and maintained by Tenant so long as (a) the
coverage afforded to Landlord is not reduced or diminished or otherwise altered
from that which would exist under a separate policy meeting all other
requirements of this Lease by reason of the use of such blanket policy of
insurance and (b) the requirements of this Article are otherwise satisfied.

         14.8. NO SEPARATE INSURANCE. Tenant shall not obtain separate insurance
concurrent in form or contributing in the event of loss with that required in
this Article 14 to be furnished by, or which may reasonably be required to be
furnished by Tenant, nor shall Tenant increase the amount of any then existing
insurance by securing an additional policy or additional policies, unless all
parties having an insurable interest in the subject matter of the insurance,
including in all cases Landlord and all Facility Mortgagees, are named therein
as additional insureds, and the loss is payable under said insurance in the same
manner as losses are payable under this Lease. Tenant shall immediately notify
Landlord of the obtaining of any such separate insurance or of the increasing of
any of the amounts of the then existing insurance.

15.      INSURANCE PROCEEDS
         ------------------

         15.1. HANDLING OF INSURANCE PROCEEDS. All proceeds from any policy of
property damage insurance required by Article 14 of this Lease shall, subject to
the rights of any Facility Mortgagee, be paid to Landlord and held in trust by
Landlord (subject to the provisions of Section 15.7) and shall, if paid to
Landlord, be made available by Landlord for reconstruction or repair, as the
case may be, of any damage to or destruction of all or any portion of the
Property to which such proceeds relate and be paid out by Landlord from time to
time in accordance with and subject to the provisions hereof for the cost of
such reconstruction or repair, subject to reasonable and customary controls to
ensure funds disbursed by Landlord are in fact used for such purpose. Any unused
portion shall be retained by Landlord free and clear upon completion of such
repair and restoration. If neither Landlord nor Tenant is required or elects to
repair and restore, and the Lease is terminated without purchase by Tenant, then
all such insurance proceeds shall be retained by Landlord as its sole property,
free and clear of any claim by Tenant. All salvage resulting from any risk
covered by insurance shall belong to Landlord, except that any salvage relating
to Tenant's Personal Property shall be the property of Tenant.

                                       31
<PAGE>   35


         15.2. RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION COVERED BY
INSURANCE.

               (a) Except as provided in Section 15.7, if during the Term the
Property is totally or substantially destroyed by a risk covered by the
insurance described in Article 14 so that the Facility thereby is rendered
unsuitable for its Primary Intended Use (taking into account all relevant
factors, including but not limited to the amount of square footage reasonably
available for use by Tenant and the type and amount of Tenant revenues lost),
Tenant shall at its option either (i) restore the Facility to substantially the
same condition as existed immediately before the damage or destruction in which
event this Lease shall continue in full force and effect or (ii) acquire the
Property from Landlord for a purchase price equal to the greater of the Minimum
Repurchase Price or the Fair Market Value Purchase Price of the Property
immediately prior to such damage or destruction. If Tenant restores the
Facility, the insurance proceeds shall be paid out by Landlord to Tenant or its
designee from time to time as necessary to pay for the reasonable costs of such
restoration. If Tenant acquires the Property, all applicable insurance proceeds
shall become the property of Tenant upon Landlord's receipt of the full purchase
price for the Property.

               (b) Except as provided in Section 15.7, if during the Term the
Property is partially destroyed from a risk covered by the insurance described
in Article 14 but the Facility is not thereby rendered unsuitable for the
Primary Intended Use (taking into account all relevant factors, including but
not limited to Legal Requirements applicable to the Primary Intended Use, the
amount of square footage reasonably available for use by Tenant and the type and
amount of Tenant revenues lost), Tenant shall restore the Facility to
substantially the same condition as existed immediately before the damage or
destruction. Such damage or destruction shall not terminate this Lease;
provided, however, that if Tenant cannot, with reasonable diligence and within a
reasonable time, obtain all Governmental Approvals, including building permits,
licenses, conditional use permits and any certificates of need, necessary to
perform all required repair and restoration work and to operate the Facility in
substantially the same manner and for the Primary Intended Use, Tenant shall
either (i) offer to purchase the Property for a purchase price equal to the
greater of the Minimum Repurchase Price or the Fair Market Value Purchase Price
immediately prior to such damage or destruction or (ii) continue with the Lease
in full force and effect in which event Landlord shall be entitled to retain the
insurance proceeds, less the amount needed to restore the Property so that the
portion of the Facility unaffected by the casualty can be used as a complete
architectural unit. If Tenant shall make such offer to purchase the Property and
Landlord does not accept the same within 120 days of Landlord's receipt of such
offer, Tenant may withdraw such offer, in which case this Lease shall remain in
full force and effect and Tenant shall proceed to restore the Facility as soon
as reasonably practicable to substantially the same condition as existed
immediately before such damage or destruction. If Tenant so restores the
Facility, insurance proceeds shall be paid out by Landlord from time to time to
pay for the reasonable costs of such restoration, and any excess proceeds
remaining after such restoration shall be retained by Landlord.

               (c) If Tenant elects to repair or restore any damage or
destruction to the Property and the cost of any such repair or restoration
exceeds the amount of proceeds received by Landlord from the insurance required
under Article 14, Tenant shall contribute any and all excess amounts necessary
to repair or restore the Facility. Tenant shall provide Landlord with a payment
or completion guaranty in form and substance and from a guarantor reasonably
acceptable to Landlord. If no acceptable guarantor is available, Tenant shall
pay Landlord the amount of such difference, which amount shall be held in trust,
together with any other insurance proceeds, for application to the cost of
repair and restoration as such repair and restoration progresses.



                                       32
<PAGE>   36

               (d) If Landlord accepts Tenant's offer to purchase the Property
this Lease shall terminate as to the entire Property upon payment of the
purchase price therefor and Landlord shall thereupon remit to Tenant all
insurance proceeds pertaining to the Property less Landlord's expenses,
including attorneys' fees, and assign Landlord's rights in any uncollected
insurance proceeds to Tenant.

         15.3. RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION NOT COVERED
BY INSURANCE. Except as provided in Section 15.7 below, if during the Term the
Facility is totally destroyed or materially damaged (i) from a risk not covered
by insurance described in Article 14 but that would have been covered if Tenant
carried the insurance customarily maintained by, and generally available to, the
operators of reputable health care facilities in the region in which the
Facility is located, (ii) from a risk for which insurance coverage is voided due
to any act or omission by Tenant, or (iii) as result of storm, flood or an
earthquake, whether or not such damage or destruction renders the Facility
unsuitable for its Primary Intended Use (taking into account all relevant
factors, including but not limited to the Legal Requirements applicable to the
Primary Intended Use, amount of square footage reasonably available for use by
Tenant and the type and amount of Tenant revenues lost), Tenant shall restore
the Facility to substantially the same condition as existed immediately before
such damage or destruction and not terminate this Lease. Otherwise, if the
Facility is totally destroyed or materially damaged by a risk not covered by
insurance such that the Facility shall be unusable for its Primary Intended Use,
Tenant shall, within 90 days of such destruction or damage, elect either (i) to
restore the Property to the same condition as existed immediately prior to such
damage or destruction so that the Facility shall be suitable for its primary
intended use, in which event, this Lease shall continue in full force and effect
or (ii) to purchase the Property from Landlord for a purchase price equal to the
greater of the Minimum Repurchase Price or the Fair Market Value Purchase Price
immediately prior to such damage or destruction. If such uninsured damage or
destruction does not render the Property unusable for its Primary Intended Use,
Tenant shall restore the Facility to substantially the same condition as existed
immediately before the damage or destruction.

         15.4. PAYMENT OF PROCEEDS ON TENANT'S PROPERTY AND CAPITAL ADDITIONS
PAID BY TENANT. Subject to Section 15.7, all insurance proceeds payable solely
by reason of any loss of or damage to any of Tenant's Personal Property or
Capital Additions fully paid for by Tenant in their entirety shall be paid to
Tenant and Tenant shall hold such insurance in trust to pay the cost of
repairing or replacing damaged Tenant's Personal Property or Capital Additions
fully paid for by Tenant in their entirety; provided, however, that if the
damaged Tenant's Personal Property or Capital Additions fully paid for by Tenant
in their entirety were no longer useful to Tenant's operations prior to their
destruction, Tenant shall not be obligated to repair or replace them.

         15.5. RESTORATION OF TENANT'S PROPERTY. Upon any restoration of the
Facility as provided in Section 15.2 or 15.3, Tenant shall either (i) at
Tenant's sole cost and expense, restore all alterations and improvements made by
Tenant, Tenant's Personal Property and all Capital Additions fully paid for by
Tenant in their entirety, or (ii) at Tenant's sole cost and expense, replace
such alterations and improvements, Tenant's Personal Property or Capital
Additions fully paid for by Tenant in their entirety with improvements or items
of the same or better quality and utility in the operation of the Property.

         15.6. NO ABATEMENT OF RENT. Unless and until Tenant shall pay the
purchase price for the Property to Landlord in accordance with this Article 15
(and the Lease thereby terminated) in the event of any damage or destruction of
the Property this Lease shall remain in full force and effect and Tenant's
obligation to make rental payments and to pay all other charges required by this
Lease shall not be abated by reason of any damage or destruction to the Property
or the subsequent loss of Landlord's entitlement to the Property.



                                       33
<PAGE>   37

         15.7. DAMAGE NEAR END OF TERM. Notwithstanding any provisions of 15.2,
15.3 or 15.4 to the contrary, if damage to or destruction of the Facility occurs
during the last 12 months of the then applicable term (whether Fixed or
Extended), if Tenant has not elected to extend such term, and if such damage or
destruction cannot be fully repaired and restored within six months immediately
following the date of loss, then Tenant shall have the right to terminate this
Lease by giving written Notice thereof to Landlord within 30 days after the date
of such damage or destruction, in which event, Landlord shall collect any
insurance proceeds to which it is entitled, and Tenant shall assign to Landlord
Tenant's rights in all insurance proceeds to which Tenant is entitled as a
consequence of such damage or destruction. Notwithstanding the foregoing, in the
event that the Facility is totally destroyed or damaged during the last 12
months of the Term (i) from a risk not covered by insurance described in Article
14 but that would have been covered if Tenant carried the insurance customarily
maintained by, and generally available to, the operators of reputable health
care facilities in the region in which the Facility is located, (ii) from a risk
for which insurance coverage is voided due to any act or omission by Tenant, or
(iii) as result of an storm, flood or earthquake, whether or not such damage or
destruction renders the Facility unsuitable for its Primary Intended Use (taking
into account all relevant factors, including but not limited to Legal
Requirements applicable to the Primary Intended Use, the amount of square
footage reasonably available for use by Tenant and the type and amount of Tenant
revenues lost), then Tenant shall pay to Landlord a sum equal to the amount
reasonably necessary to repair such damage or destruction; provided, however,
Tenant can in lieu thereof purchase the Property from Landlord in accordance
with the Call Option with the Fair Market Value Purchase Price determined as of
the day immediately prior to the date of any damage or destruction.

         15.8. TERMINATION OF OPTIONS. Any termination of this Lease pursuant to
this Article or otherwise shall cause the option granted to Tenant to extend the
Term by any Extended Term to be terminated and to be without further force or
effect.

         15.9. WAIVER. Tenant hereby waives any rights at law, in equity and any
statutory rights of termination which may arise by reason of any damage or
destruction of the Facility which Landlord is obligated to restore or may
restore under any of the provisions of this Lease.

16.      CONDEMNATION
         ------------

         16.1. DEFINITIONS.

               (A) "CONDEMNATION" means (a) the exercise of any governmental
power, whether by legal proceedings or otherwise, by a Condemnor, or (b) a
voluntary sale or transfer by Landlord with Tenant's consent (provided no Event
of Default has occurred and is continuing at such time) to any Condemnor, either
under threat of condemnation or while legal proceedings for condemnation are
pending.

               (B) "DATE OF TAKING" means the first date the Condemnor has the
right to immediate possession of the property being condemned.

               (C) "AWARD" means all compensation, sums and any other value
awarded, paid or received on a total or partial condemnation.

               (D) "CONDEMNOR" means any public or quasipublic authority, or
private corporation or individual, having the power of condemnation.



                                       34
<PAGE>   38

         16.2. PARTIES' RIGHTS AND OBLIGATIONS. If during the Term there is any
Taking of all or any part of the Property or of any interest in this Lease by
Condemnation, the rights and obligations of the parties shall be determined by
this Article.

         16.3. TOTAL OR PARTIAL TAKING. A Taking of all or part of the Property
shall not affect the validity of this Lease or Tenant's obligations to pay Rent
hereunder. Even if the whole of the Property shall be taken or condemned by any
Condemnor, Tenant's obligation to pay Rent pursuant to this Lease shall not
cease or terminate; provided, however, that if the entire Property is taken or
condemned, or if the portion of the Property taken or condemned renders the
Property unsuitable for its Primary Intended Use (taking into account all
relevant factors, including but not limited to Legal Requirements applicable to
the Primary Intended Use, the amount of square footage reasonably available for
use by Tenant, and the type and the amount of Tenant revenues lost) and Landlord
shall receive an Award which is equal to or greater than the greater of the
Minimum Repurchase Price or the Fair Market Value of the Property (or Tenant
shall pay to Landlord the difference between the actual Award received by
Landlord and such amount) Landlord shall terminate this Lease and Tenant's
obligation to pay Rent hereunder shall, upon such termination, be abated.

         16.4. ALLOCATION OF PORTION OF AWARD. Subject to the rights of any
Facility Mortgagee, the total Condemnation Award made with respect to all or any
portion of the Property shall be distributed to Landlord and Tenant ratably in
accordance with the value of their respective interests in and to such Award as
hereafter set forth in this Section 16.4. All of the Award shall be the sole and
exclusive property of Landlord and shall be payable to Landlord, subject to the
rights of any Facility Mortgagee; provided that, subject to the rights of any
Facility Mortgagee, any portion of such Condemnation Award which is expressly
allocated by the Condemnor to the taking of any Capital Additions fully paid for
by Tenant in their entirety, any loss of business by Tenant during the remaining
Term of this Lease, the taking of Tenant's Personal Property, or any removal and
relocation expenses of Tenant in any such proceedings shall be the sole property
of and payable to Tenant; provided, further, that if the Lease is terminated
pursuant to Section 16.3, Tenant shall have no right to any portion of such
Condemnation Award regardless of how such Award is allocated by the court or
other tribunal. In any Condemnation proceedings Landlord and Tenant each shall
seek their own Award in conformity herewith, at their own expense.

         16.5. PARTIAL TAKING; CONTINUED USE. If title to the fee of less than
the whole of the Property shall be taken or condemned so that the Property is
not rendered unsuitable for their Primary Intended Use, Tenant at its own cost
and expense shall with all reasonable diligence restore the untaken portion of
the Property so that the Property and the Building shall constitute a complete
architectural unit of the same general character and condition (as nearly as may
be possible under the circumstances) as existing immediately prior to such
Condemnation or Taking. In such event, Landlord and Tenant shall each contribute
to the cost of restoration that part of their Award specifically allocated to
such restoration, if any (or if no such specific allocation is made, an
allocation as is agreed upon by Landlord and Tenant or, if Landlord and Tenant
are unable to agree within 30 days of the Award, by arbitration in accordance
with Section 29.14 with such arbitration to require each party to contribute a
portion of the Award received by such party as will fairly reflect the economic
benefit to each party of the restoration of the Property), together with any and
all severance and other damages awarded for any taken portion of the Building;
provided, however, the amount of such contribution shall not exceed such cost.
If such amounts are not sufficient to cover the cost of restoration Landlord and
Tenant shall contribute any additional amounts needed for restoration in
proportion to the amounts already contributed by them, provided that in no event
shall Landlord have any obligation to contribute an amount to such restoration
in excess of its Award. Thereafter, any excess restoration cost shall be borne
solely by Tenant.



                                       35
<PAGE>   39

         16.6. TEMPORARY TAKING. If the whole or any part of the Property or of
Tenant's interest under this Lease shall be taken or condemned by any Condemnor
for its temporary use or occupancy, this Lease shall not terminate, and Tenant
shall continue to pay, in the manner and at the times herein specified, the full
amounts of Base Rent and Additional Charges. Except to the extent Tenant may be
prevented from so doing pursuant to the terms of the order of the Condemnor,
Tenant shall continue to perform and observe all of the other terms, covenants,
conditions and obligations hereof on the part of the Tenant to be performed and
observed as though such Taking or Condemnation had not occurred. Upon any such
Taking or Condemnation described in this Section, the entire amount of any such
Award made for such Taking or Condemnation allocable to the Term of this Lease,
whether paid by way of damages, Rent or otherwise, shall be paid to Tenant.
Tenant covenants that upon the termination of any such period of temporary use
or occupancy as set forth in this Section Tenant will, at its sole cost and
expense (subject to any contribution by Landlord as set forth in Section 16.5),
restore the Property as nearly as may be reasonably possible to the condition in
which the same was immediately prior to such Taking or Condemnation, unless such
period of temporary use or occupancy shall extend beyond the expiration of the
Term, in which case Tenant shall not be required to make such restoration.

17.      DEFAULTS AND REMEDIES
         ---------------------

         17.1. EVENTS OF DEFAULT. Any one or more of the following events shall
be deemed an "Event of Default" hereunder:

               (a) Tenant shall fail to pay Rent payable by Tenant under this
Lease as and when the same becomes due and payable;

               (b) Tenant shall fail to observe or perform any other material
term, covenant or condition of this Lease, or any representation or warranty
made by Tenant under this Lease shall be or become incorrect in any material
respect, and such failure is not cured by Tenant within a period of 30 days
after Notice thereof from Landlord, unless such failure cannot with due
diligence be cured within a period of 30 days, in which case such failure shall
not constitute an Event of Default if Tenant proceeds immediately and with due
diligence to cure the failure and thereafter diligently completes the curing
thereof within 90 days of Tenant's receipt of the initial Notice describing such
failure;

               (c) Tenant or Guarantor shall (i) admit in writing its inability
to pay its debts generally as they become due, (ii) file a petition in
bankruptcy or a petition to take advantage of any insolvency law, (iii) make a
general assignment for the benefit of its creditors, (iv) consent to the
appointment of a receiver of itself or of the whole or any substantial part of
its property, or (v) file a petition or answer seeking reorganization or
arrangement under the Federal bankruptcy laws or any other applicable law or
statute of the United States of America or any State thereof;

               (d) Tenant or Guarantor shall, on a petition in bankruptcy filed
against it, be adjudicated bankrupt or have an order for relief thereunder
entered against it or a court of competent jurisdiction shall enter an order or
decree appointing, without the consent of Tenant or Guarantor, a receiver of
Tenant or Guarantor or of the whole or substantially all of its property, or
approving a petition filed against Tenant or Guarantor seeking reorganization or
arrangement of such Person under the federal bankruptcy laws or any other
applicable law or statute of the United States of America or any state thereof,
and such judgment, order or decree shall not be vacated or set aside or stayed
within 90 days from the date of the entry thereof;



                                       36
<PAGE>   40

               (e) Tenant or Guarantor shall be liquidated or dissolved, or
shall begin proceedings toward such liquidation or dissolution, or shall, in any
manner, permit the sale or divestiture of substantially all of its assets or
shall become a party to a merger or consolidation of Tenant into, or a sale of
substantially all of Tenant's assets to, another corporation, provided that such
a merger, consolidation or asset sale shall not constitute an Event of Default
under this Section 17.1(e) if (i) the survivor of such merger or the purchaser
of such assets shall assume all of Tenant's obligations under this Lease by a
written instrument, in form and substance reasonably satisfactory to Landlord,
accompanied by an opinion of counsel, reasonably satisfactory to Landlord and
addressed to Landlord stating that such instrument of assumption is valid,
binding and enforceable against the parties thereto in accordance with its terms
(subject to usual bankruptcy and other creditors' rights exceptions), and (ii)
immediately after giving effect to any such merger, consolidation or sale,
Tenant or the other corporation (if not Tenant) surviving the same, shall have a
Net Worth of not less than the Net Worth of Tenant immediately prior to such
merger, consolidation or sale, all as to be set forth in an Officer's
Certificate and delivered to Landlord within a reasonable period of time after
such merger, consolidation or sale;

               (f) the estate or interest of Tenant in the Property or any part
thereof shall be levied upon or attached in any proceeding (excluding a
foreclosure under the Leasehold Mortgage in which Balanced Care or its
wholly-owned subsidiary succeeds to Tenant's interest under this Lease) and the
same shall not be vacated or discharged within the later of 60 days after
commencement thereof or 30 days after Notice thereof from Landlord (unless
Tenant shall be contesting such lien or attachment in good faith in accordance
with Article 13 hereof);

               (g) except as a result of damage, destruction or a partial,
temporary or complete Condemnation, Tenant voluntarily ceases operations on the
Property for a period in excess of 30 days;

               (h) Tenant or Guarantor shall continue in default of any
obligation for borrowed funds owed to any Person beyond the expiration of any
grace or cure period which may exist with respect to any such default; or

               (i) a breach or default on the part of Tenant, Guarantor,
Balanced Care or any one or more of the Affiliates of any one or more of the
foregoing (including without limitation Manager or Developer) shall have
occurred under any one or more of the Transaction Documents (including
Transaction Documents which may relate to facilities or properties which are not
the subject of this Lease).

Tenant shall immediately notify Landlord of the occurrence of any event set
forth in subsections 17.1 (b) through (i) and the failure to do so shall
constitute an immediate Event of Default.

         17.2. CERTAIN REMEDIES. Upon any Event of Default, Landlord shall have
all legal, equitable and contractual rights, powers and remedies provided either
in this Lease or by statute or otherwise. Without limiting the foregoing, if an
Event of Default occurs, is not cured within the period provided in Section 17.1
for any such cure, if any, and is continuing, whether or not this Lease has been
terminated pursuant to Section 17.1, Tenant shall, to the extent permitted by
law and if required by Landlord so to do, immediately surrender to Landlord the
Property and quit the same. To the extent permitted by law, Landlord may enter
upon and repossess the Property by reasonable force, summary proceedings,
ejectment or otherwise, and may remove Tenant and all other persons and any and
all personal property from the Property subject to rights of any residents or
patients and to any requirement of law.

         17.3. DAMAGES.

                                       37
<PAGE>   41

               (a) Upon the occurrence of any Event of Default, Landlord shall
have the right either (i) to terminate this Lease and Tenant's right to
possession of the Property by any lawful means, upon Notice of such termination,
in which case, this Lease shall terminate and all of Tenant's rights hereunder
cease and Tenant shall immediately surrender possession of the Property to
Landlord and, in such event, Landlord shall be entitled to recover from Tenant
all damages incurred by reason of Tenant's default, or (ii) to maintain Tenant's
right to possession of the Property in which case this Lease shall continue in
effect regardless of whether Tenant shall have abandoned or attempted to
surrender the Property and, in such event, Landlord shall have the right to
enforce all of Landlord's rights and remedies under this Lease, including the
right to recover the Rent and other sums owed as such become due hereunder
together with interest on such overdue Rent and any other overdue amount owed by
Tenant, from the date when due until paid, at the lesser of the Overdue Rate or
the maximum rate permitted by applicable law. Furthermore, Landlord shall also
have all rights at law and in equity available to Landlord as a result of
Tenant's breach of this Lease. If any litigation is commenced with respect to
any alleged default under this Lease, the prevailing party in such litigation
shall receive, in addition to its damages incurred, its reasonable attorneys'
fees, and all costs and expenses incurred in connection therewith, including
costs of litigation preparation, computerized research, staff costs, telephone
and telefax expenses, mileage, depositions, postage, photocopies, process
services, video tapes and other costs which may be incurred by or for counsel.
Neither the termination of this Lease pursuant to this Section 17.3, the
repossession of the Property, the failure of Landlord, notwithstanding
reasonable good faith efforts, to relet the Property, nor the reletting of all
or any portion of the Property, shall relieve Tenant of its liability and
obligations hereunder, all of which shall survive any such termination,
repossession or reletting. Upon any such termination, Tenant shall forthwith pay
to Landlord all Rent due and payable with respect to the Property to and
including the date of such termination. Thereafter Tenant shall promptly pay to
Landlord the full amount of Landlord's damages suffered by reason of Tenant's
breach of this Lease, which damages shall include, but may not be limited to the
sum of:

               (i) the worth at the time of the award, of the unpaid Rent earned
at the time of such termination, repossession or reletting;

               (ii) the worth at the time of the award, of the amount by which
the unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided;

               (iii) the worth at the time of the award of the amount by which
the unpaid Rent for the balance of the Term after the time of the award exceeds
the amount of such rental loss that Tenant proves could be reasonably avoided;
and

               (iv) any other amount necessary to compensate Landlord for the
costs incurred in regaining possession and reletting the Property, including but
not limited to brokerage fees and commissions, construction costs, rent
concessions, costs of decoration, repair, cleaning and/or alteration of the
Property or any portion thereof and all legal costs and expenses.

               (b) The "worth at the time of the award" of the amounts referred
to in subparagraphs (i) and (ii) above shall be computed by allowing interest at
the Overdue Rate. The "worth at the time of the award" of the amount referred to
in subparagraph (iii) shall be determined by a Court having jurisdiction thereof
using the lowest rate of capitalization (highest present worth) reasonably
applicable at the time of such determination and allowed by applicable law.


                                       38
<PAGE>   42


         17.4. APPLICATION OF FUNDS. Any payments normally made to Tenant
hereunder which are made to and received by Landlord under any of the provisions
of this Lease during the continuance of any Event of Default shall be applied to
Tenant's obligations in the order which Landlord may determine or as may be
prescribed by applicable laws.

         17.5. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT. If an Event of Default
occurs under this Lease and is not cured within the time provided under this
Lease with respect to such Event of Default, Landlord, without waiving or
releasing any obligation of Tenant, and without waiving any such Event of
Default, may (but shall be under no obligation to) at any time thereafter cure
such default for the account and at the expense of Tenant, and may, to the
extent permitted by law, enter upon the Property for such purpose and take all
such action thereon as, in Landlord's sole judgment, may be necessary or
appropriate with respect thereto. No such entry by Landlord on the Property
shall be deemed an eviction of Tenant. All sums so paid by Landlord and all
costs and expenses (including, with out limitation, reasonable attorneys' fees
and expenses, in each case to the extent permitted by law) so incurred, together
with a late charge thereon (to the extent permitted by law) at the Overdue Rate
from the date on which such sums or expenses are paid or incurred by Landlord
until paid, shall be paid by Tenant to Landlord on demand. The obligations of
Tenant and rights of Landlord contained in this Article shall survive the
expiration or earlier termination of this Lease.

         17.6. WAIVER. If this Lease is terminated pursuant to the provisions of
this Article, Tenant waives, to the extent permitted by applicable law, (a) any
right of redemption, reentry or repossession, (b) any right to trial by jury in
the event of summary proceedings to enforce the remedies set forth in this
Article, and (c) the benefit of any laws now or hereafter enforced exempting
property from liability for rent or for debt.

18.      CURE BY TENANT OF LANDLORD DEFAULTS
         -----------------------------------

         18.1. LANDLORD DEFAULT. Landlord shall be in default of its obligations
under this Lease if Landlord shall fail to observe or perform any term, covenant
or condition of this Lease on its part to be performed, and such failure shall
continue for a period of 30 days after notice thereof from Tenant unless such
failure cannot be cured with due diligence within a period of 30 days, in which
case such failure shall not be deemed to continue if Landlord, within said 30
days, promptly commences its attempt to cure the failure and diligently attempts
to complete the curing thereof. The time within Landlord shall be obligated to
cure any such failure shall also be subject to extension of time due to the
occurrence of any Unavoidable Delay. If Landlord fails to commence such cure as
provided herein, Tenant may cure such default, and so long as Tenant continues
to pay Rent, Tenant shall have the right (subject to Section 6.1), as Tenant's
sole remedy, by separate and independent action to pursue any claim it may have
against Landlord for monetary damages caused by Landlord's failure to cure such
default.

         18.2. MORTGAGEE CURE. Should Landlord fail to observe or perform any of
the covenants or conditions contained in this Lease, before taking any action,
Tenant shall give written notice to all mortgagees of Facility Mortgages or
beneficiaries under other deeds of trust or encumbrances recorded against the
Land or the Property setting forth the nature of Landlord's default. Such
lenders shall have a reasonable period of time to cure the default. All payments
made, and all acts performed by such lenders in order to cure shall be effective
to prevent a forfeiture of the rights of Landlord under this Lease and a
termination of this Lease as if the payments and acts were performed by Landlord
instead of by the lenders. If such lenders cannot reasonably take the action
required to cure Landlord's default without foreclosing Landlord's interest, the
time within which the default must be cured to avoid a termination or forfeiture
of 


                                       39
<PAGE>   43

the Lease shall be extended to include the period of time required for such
lenders to obtain possession and to effect a cure with due diligence if such
lender gives Tenant a written agreement to cure the default. In the absence of
such lenders' express written consent, such an agreement by the lenders shall
not be considered an assumption by the lenders of Landlord's other obligations
under the Lease and Landlord shall remain solely liable for the performance of
all terms, covenants and conditions of the Lease both prior and subsequent to
the lenders' exercise of any right to cure or related remedy.

19.      PURCHASE OF PROPERTY BY TENANT
         ------------------------------

         19.1. PURCHASE OF THE PROPERTY. If Tenant purchases the Property from
Landlord pursuant to the provisions of Article 15 or Article 16, Landlord shall,
except as otherwise expressly provided, upon receipt from Tenant of the
applicable purchase price, together with full payment of any unpaid Rent due and
payable with respect to any period ending on or before the date of such
purchase, deliver to Tenant a special warranty deed conveying the entire
interest of Landlord in and to the Property to Tenant free and clear of all
mortgages and encumbrances other than (a) those mortgages which Tenant has
agreed in writing to accept and to take title subject to and (b) any other
encumbrances existing on or created after the Commencement Date which are
permitted hereby to be imposed on the Property excluding only liens created by
Landlord to secure Landlord's payment of borrowed funds. The purchase price
shall be paid in cash to Landlord or as Landlord may direct, in federal or other
immediately available funds, unless otherwise mutually agreed by Landlord and
Tenant. Any such purchase shall be on an "as-is" basis with Tenant purchasing
the Property subject to all faults or defects whether known, unknown, latent,
patent or otherwise. All expenses of conveying the Property to Tenant,
including, without limitation, the cost of title insurance and attorneys' fees  
incurred by Landlord in connection with such conveyance and release, and
documentary transfer and similar taxes, shall be paid by Tenant. Recording fees
and expenses of its counsel shall also be paid by Tenant.

         19.2. FAILURE TO CLOSE PURCHASE. The closing of any such sale to Tenant
shall be contingent upon and subject to Tenant obtaining all required
governmental consents and approvals for such transfer. If such sale shall fail
to be consummated by reason of the inability of Tenant to obtain all such
approvals and consents, then this Lease shall remain in effect until the sooner
to occur of the end of the Term or the consummation of the purchase.

20.      HOLDING OVER
         ------------

         If Tenant for any reason remains in possession of any portion of the
Property after the expiration of the Term or earlier termination of the Term,
such possession shall be a month-to-month tenancy during which time Tenant shall
pay to Landlord as rental each month one and one half (11/2) times the aggregate
of (i) one-twelfth of the Base Rent then payable with respect to the last Lease
year of the Term just expired, (ii) all Additional Charges accruing during the
month with respect to which such payment relates, and (iii) all other sums, if
any, payable by Tenant pursuant to the provisions of this Lease with respect to
the Property. During such period of month-to-month tenancy, Tenant shall be
obligated to perform and observe all of the terms, covenants and conditions of
this Lease, but shall have no rights hereunder other than the right, to the
extent mandated by law applicable to month-to-month tenancies, to continue its
occupancy and use of the Property. Nothing contained herein shall constitute the
consent, express or implied, of Landlord to the holding over of Tenant after the
expiration or earlier termination of this Lease.



                                       40
<PAGE>   44

21.      RISK OF LOSS
         ------------

         During the Term of this Lease, Tenant shall bear all risk of loss or of
decrease in the enjoyment and beneficial use of the Property resulting from the
damage or destruction thereof by fire, the elements, casualties, thefts, riots,
wars or any other cause, or resulting from foreclosures, attachments, levies,
evictions or executions and, in the absence of the gross negligence, willful
misconduct or willful breach of this Lease by Landlord, Landlord shall in no
event be responsible therefor nor shall any of the events mentioned in this
Section (nor any other event or circumstance) entitle Tenant to any abatement or
setoff of Rent.

22.      LIABILITY OF PARTIES
         --------------------

         22.1. INDEMNIFICATION BY TENANT. Notwithstanding the existence of any
insurance provided for in Article 14, and notwithstanding the policy limits of
any such insurance Tenant shall indemnify, defend, protect, save and hold
Landlord harmless from and against any and all liabilities, losses, obligations,
claims, damages, penalties, causes of action, costs and expenses (including,
without limitation, reasonable attorneys' fees and expenses) imposed upon,
incurred by or asserted against Landlord arising out of, connected with or
incidental to:


               (a) any Hazardous Substance located in, on or under the Property,
the Land or the Building due to the act or omission of Tenant, or otherwise,
during or prior to the Term hereof, including any improvements, repairs,
handling, removal or other actions taken by Landlord or Tenant in order to
comply with all Legal Requirements, rules and regulations promulgated by any
applicable federal, state, or local government rule and regulation with respect
to any such Hazardous Substance or related problems of which Landlord becomes
aware;

               (b) any accident, injury to or death of persons, or loss of or
damage to property, occurring on or about the Property including without
limitation any claims of malpractice; or any such event occurring on or about
adjoining sidewalks, parking areas, service delivery facilities, alleys,
walkways or roadways;

               (c) any past, present or future use, misuse, nonuse, condition,
management, maintenance or repair, by Tenant or any subtenant or other occupant
of the Property or their respective contractors, licensees, invitees, agents,
servants or employees, of the Property or Tenant's Personal Property (or any
subtenant's personal property), wheresoever the same may occur and any
litigation, proceeding or claim by governmental entities or other third parties
to which Landlord is made a party or other participant related to the Property
or Tenant's Personal Property or to any subtenant or other occupant of the
Property or its personal property or such use, misuse, nonuse, condition,
management, maintenance or repair thereof, including but not limited to any
failure to perform obligations (other than condemnation proceedings) to which
Landlord is made a party;

               (d) any Imposition;

               (e) any failure on the part of Tenant to perform or comply with
any of the terms of this Lease; and

               (f) the nonperformance of any of the terms and provisions of any
and all existing and future subleases of the Property to be performed by Tenant
thereunder.

                                       41
<PAGE>   45

Any amounts payable by Tenant under this Section shall be paid within ten days
after Landlord's demand therefor. If such amounts are not timely paid, they
shall bear a late charge at the Overdue Rate from the date of such determination
to the date paid. Tenant, at its expense, shall contest, resist and defend any
such claim, action or proceeding asserted or instituted against Landlord, or
may, with Landlord's prior written consent, compromise or otherwise dispose of
the same as Tenant sees fit. Nothing herein shall be construed as indemnifying
Landlord against its own sole gross negligence or willful misconduct. 22.2.
INDEMNIFICATION BY LANDLORD. Landlord shall indemnify, defend, save and hold
Tenant harmless from and against any and all liabilities, obligations, claims,
damages, penalties, causes of action, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) imposed upon, incurred by
or asserted against Tenant arising out of, connected with or incidental to the
sole gross negligence or willful misconduct of Landlord; provided, however, that
Tenant's right to indemnification as provided herein, shall be subject to the
limitation set forth in Article 27.

         22.3. CONTINUING LIABILITY. Tenant's and Landlord's liability for a
breach of the provisions of this Article arising during the Term hereof shall
survive any termination of this Lease.

23.      ASSIGNMENT AND SUBLETTING
         -------------------------

         23.1. ASSIGNMENT AND SUBLETTING. Subject to the provisions of Section
23.3 below and any other express conditions or limitations set forth in this
Lease, Tenant may (a) upon ten (10) days prior Notice to Landlord, but without
the consent of Landlord, sublet less than an aggregate of 10% of the net useable
square footage of each Facility to concessionaires or other third party users or
operators of portions of the Property, provided that any such subletting shall
not individually as to any one such subletting, or in the aggregate, materially
diminish the actual or potential gross revenues generated from the Facility in
which the subletting is proposed to occur and (b) admit residents to the
Facility for occupancy of units therein. Except as otherwise permitted in the
immediately preceding sentence, no assignment or subletting of all or any
portion of the Property shall be permitted or be effective unless the consent of
Landlord is first obtained in writing, which consent Landlord may withhold in
its sole and absolute discretion; provided, however, that (subject to the
restrictions against Landlord consenting to any assignment of the Lease as set
forth in the Working Capital Assurances Agreement and in any other Transaction
Document) Landlord shall not unreasonably withhold its consent to any subletting
or assignment if the assignee or sublessee is credit-worthy and reputable in the
opinion of Landlord and (u) such subtenant or assignee shall pay to Landlord in
cash an amount equal to two month's rent to be held by Landlord as a security
deposit for the faithful performance by such subtenant or assignee of the
provisions of this Lease, (v) the Net Worth of Tenant at the time of such
sublease or assignment shall be equal to or greater than the Net Worth of Tenant
as of the date this Lease is signed, (w) in the case of a subletting, the
sublease shall comply with the provisions of Section 23.2 and is otherwise in
form and substance acceptable to Landlord, (x) in the case of an assignment, the
assignee assumes in writing and agrees to keep and perform all of the terms of
this Lease on the part of Tenant to be kept and performed and becomes jointly
and severally liable with Tenant for the performance thereof, (y) an original
counterpart of each such sublease and assignment and assumption, duly executed
by Tenant and such sublessee or assignee, as the case may be, in form and
substance satisfactory to Landlord, is delivered promptly to Landlord, and (z)
in case of either an assignment or subletting, Tenant remains primarily liable,
as principal rather than as surety, for the prompt payment of Rent and for the


                                       42
<PAGE>   46

performance and observance of all covenants and agreements to be performed by
Tenant hereunder. Tenant shall not, without Landlord's approval which Landlord
may withhold in its sole and absolute discretion, permit any change in ownership
or beneficial interest amounting to 50% (in the aggregate of all such transfers
occurring on or after the Commencement Date) of Tenant's voting interests or
assets to occur and any change in the ownership of 50% or more of the
membership, voting interests or assets of Tenant, from and after the
Commencement Date shall constitute an assignment of this Lease which shall
require Landlord's prior written consent as hereinabove provided.
Notwithstanding the foregoing to the contrary (i) the purchase by Balanced Care
(or, if Balanced Care delivers to Landlord a guaranty in form and substance
acceptable to Landlord, its wholly-owned subsidiary) of the outstanding
interests in Tenant under the terms of the Option Agreement, (ii) the grant by
Tenant of a leasehold mortgage to Balanced Care as contemplated in the
Shortfall Funding Agreement, or (iii) the assignment of this Lease to Balanced  
Care (or, if Balanced Care delivers to Landlord a guaranty in form and
substance acceptable to Landlord, its wholly-owned subsidiary) pursuant to the
exercise by Balanced Care of the Asset Purchase Option set forth in the
Shortfall Funding Agreement shall not constitute an assignment for purposes of
this Section 23.1 so long as (x) assignee assumes in writing and agrees to keep
and perform all of the terms of this Lease on the part of Tenant to be kept and
performed and becomes jointly and severally liable with Tenant for the
performance thereof, (y) an original counterpart of each such assignment and
assumption, duly executed by Tenant and the assignee, in form and substance
satisfactory to Landlord, is delivered promptly to Landlord, and (z) in case of
either an assignment or subletting, Tenant remains primarily liable, as
principal rather than as surety, for the prompt payment of Rent and for the
performance and observance of all covenants and agreements to be performed by
Tenant hereunder.

         23.2. ATTORNMENT. Tenant shall insert in each sublease permitted under
Section 23.1 provisions satisfactory to Landlord which provide for the benefit
of Landlord that (a) such sublease is subject and subordinate to all of the
terms and provisions of this Lease (b) in the event this Lease terminates before
the expiration of such sublease, the sublessee thereunder will, at Landlord's
option, attorn to Landlord and waive any right the sublessee may have to
terminate the sublease or surrender possession under such sublease, and (c) in
the event the sublessee receives a written Notice from Landlord or Landlord's
assignees, if any, stating that Tenant is in default under this Lease, the
sublessee shall thereafter be obligated to pay all rentals accruing under said
sublease directly to the party giving such Notice, or as such party may
otherwise direct. All rentals received from the sublessee by Landlord or
Landlord's assignees, if any, as the case may be, shall be credited against the
amounts owed to Landlord under this Lease.

         23.3. SUBLEASE LIMITATION. Anything contained in this Lease to the
contrary notwithstanding, Tenant shall not sublet the Property on any basis such
that the rental to be paid by the sublessee thereunder would be based, in whole
or in part, on either (a) the income or profits derived by the business
activities of the sublessee, or (b) any other formula such that any portion of
the sublease rental would fail to qualify as "rents from real property" within
the meaning of Section 856(d) of the Code, or any similar or successor provision
thereto.

24.      INFORMATION FROM TENANT
         -----------------------

         24.1. ESTOPPEL CERTIFICATES. At any time and from time to time, upon
not less than 20 days Notice by Landlord, Tenant shall furnish to Landlord an
Estoppel Certificate certifying that this Lease is unmodified and in full force
and effect (or that this Lease is in full force and effect as modified and
setting forth the modifications), the date to which the Rent has been paid,
whether there exists any Event of Default or any situation which, with the
giving of notice, passage of time, or both, would constitute an Event of Default
hereunder, whether Tenant 


                                       43
<PAGE>   47

contends that Landlord is in default hereunder, and if Tenant so contends, the
basis for such contention, the date upon which the Term terminates, and such
other information as Landlord reasonably may request. The failure by Tenant to
deliver such Estoppel Certificate to Landlord within twenty days of Landlord's
request therefor shall constitute an immediate Event of Default hereunder and
shall be conclusively deemed to be Tenant's certification (i) that this Lease is
in full force and effect, without modification except as represented by
Landlord; (ii) that there are no uncured defaults in Landlords performance
hereunder, and (iii) that not more than one month's rent has been paid in
advance. Any such certificate furnished pursuant to this Section 24.1 may be
relied upon by Landlord, any prospective purchaser of the Property, and any
Facility Mortgagee or Landlord Lender.

         24.2. LANDLORD ESTOPPEL CERTIFICATES. At any time and from time to
time, upon not less than 20 days Notice by Tenant, Landlord shall furnish to
Tenant an Estoppel Certificate certifying that this Lease is unmodified and in
full force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications), the date to which the Rent has
been paid, whether to the knowledge of Landlord, there exists any Event of
Default or any situation which, with the giving of notice, passage of time, or
both, would constitute an Event of Default hereunder, whether Landlord contends
that Tenant is in default hereunder, and if Landlord so contends, the basis for
such contention. Any such certificate furnished pursuant to this Section 24.2
may be relied upon by Tenant or lender to Tenant.

         24.3. FINANCIAL INFORMATION. Tenant shall furnish and cause Guarantor
to furnish within the time periods specified below, the following statements to
Landlord:

               (a) within 90 days after the end of each Fiscal Year, an
Officer's Certificate stating that, after making due inquiry, Tenant is not in
default in the performance or observance of any of the terms or conditions of
this Lease, or if Tenant shall be in default to its knowledge, specifying all
such defaults, the nature thereof and the steps being taken to remedy them; and

               (b) with reasonable promptness, such other information respecting
the financial condition and affairs of Tenant, Manager or Balanced Care as
Landlord may reasonably request from time to time; and

               (c) the most recent quarterly Financial Statements of Tenant with
an Officer's Certificate of Tenant stating that such Financial Statements are
true, accurate and complete and fairly reflect the financial condition of Tenant
as of the end of the Fiscal Year quarter just ended, within 45 days after the
last day of each Fiscal Year quarter.

         24.4. LICENSING INFORMATION. Tenant shall promptly furnish to Landlord
complete copies of all surveys, examinations, inspections, compliance
certificates and similar reports of any kind issued to Tenant by any
governmental agencies or authorities having jurisdiction over the licensing of
the operation of the Property or Facility, if any, which are material to the
Property or the Facility, their ownership or operation.

                                       44
<PAGE>   48

25.      APPRAISALS OF THE PROPERTY AND LANDLORD OPTIONS
         -----------------------------------------------

         25.1. APPRAISERS. If at any time it becomes necessary to determine the
Fair Market Rental or Fair Market Value of the Property for any purpose under
this Lease, and the parties are unable to agree thereupon within thirty days of
the date on which Tenant or Landlord (as the case may be) first receives Notice
that such determination is necessary, the determination of the Fair Market
Rental or Fair Market Value of the Property shall be submitted for decision to a
panel of three arbitrators in accordance with this Section 25.1. Within ten
business days after the expiration of the foregoing thirty day period, Landlord
and Tenant shall each appoint one arbitrator, each of which shall be a member of
the American Institute of Real Estate Appraisers (or any successor organization
thereto). Concurrently with the appointment of the arbitrators, Tenant and
Landlord shall submit their proposed dollar amounts, as determined by each such
party, of the Fair Market Rental or Fair Market Value of the Property. The two
arbitrators appointed in accordance with this Section 25.1 shall, within fifteen
days of the date of the appointment of the last appointed arbitrator, agree upon
and appoint a third arbitrator who shall be qualified under the same criteria
set forth above for the qualification of the initial two arbitrators. Failing
such appointment, either Landlord or Tenant shall have the right to petition for
the appointment of the third arbitrator by the presiding Judge of the Superior
Court of the County in which the Property is located. The three arbitrators
shall, within thirty days of the appointment of the third arbitrator, reach a
decision as to whether Landlord's or Tenant's proposed dollar amount for the
Fair Market Rental or Fair Market Value of the Property is closer to the actual
dollar amount for such figure and the arbitrators' determination shall be
limited solely to the issue of whether Landlord's or Tenant's proposed Fair
Market Rental or Fair Market Value of the Property is closer to the actual
dollar amount for such figure. The parties shall adopt the figure determined by
the majority of the arbitrators to be closer to the actual figure as the Fair
Market Rental or Fair Market Value of the Property and the decision of the
majority of the three arbitrators in this regard shall be final and binding upon
Landlord and Tenant. The cost of Landlord's appointed arbitrator shall be paid
for by Landlord, the cost of Tenant's arbitrator shall be paid for by Tenant and
the cost of the third arbitrator shall be paid by Landlord and Tenant equally.

         25.2. TIMING OF APPRAISAL. The arbitration procedure outlined in
Section 25.2 above shall be completed within thirty days of the appointment of
the third arbitrator and shall be binding upon Tenant and Landlord.

         25.3. LANDLORD'S OPTION TO PURCHASE TENANT'S PERSONAL PROPERTY.
Effective upon not less than 90 days' prior Notice given at any time within 180
days prior to the expiration of the Term of this Lease, or upon such shorter
Notice as shall be reasonable if this Lease is terminated prior to its
expiration date, Landlord shall have the option to purchase all (but not less
than all) of Tenant's Personal Property, if any, at the expiration or
termination of this Lease, for an amount equal to the then net market value
thereof (as determined by an appraisal conducted pursuant to the procedure
detailed in Section 25.1) subject to, and with appropriate price adjustments
for, all equipment leases, conditional sale contracts, UCC financing statements
and other encumbrances to which Tenant's Personal Property is then subject.

         25.4. TENANT'S OPTION TO PURCHASE ALL PROPERTIES. Provided no Event of
Default has occurred and is continuing, Landlord hereby grants to Tenant the
option (the "Call Option"), exercisable on not less than six months' nor more
than 18 months' Notice, to purchase on the Option Purchase Date all property
leased by Landlord or its Affiliates in accordance with the Facility Agreement
to either (x) any wholly-owned subsidiary of Guarantor or (y) any Person
previously wholly-owned by Guarantor for a purchase price (determined on a
property-by-


                                       45
<PAGE>   49

property basis) equal to the greater of the Fair Market Value Purchase Price of
each such property as of the Option Purchase Date or the Minimum Repurchase
Price. Tenant's timely and proper exercise of the Call Option shall constitute
Tenant's irrevocable agreement and commitment to purchase the Property from
Landlord for the price and on the terms and conditions stated in this Section.
If Tenant shall timely and properly exercise the Call Option, the sale of the
properties shall be consummated through an escrow (the "Escrow") to be opened
with a title or escrow company mutually acceptable to Landlord and Tenant (the
"Escrow Holder"). The purchase price for the properties (net solely of the
principal balance of any Facility Mortgages placed on a Property by Landlord and
expressly assumed by Tenant) shall be deposited into Escrow in immediately
available federal funds at least two business days prior to the close of Escrow
and shall be paid to Landlord at the close of Escrow in immediately available
federal funds. The close of Escrow shall occur as of the Purchase Option Date.
Tenant acknowledges and agrees that it shall purchase all such property from
Landlord "AS IS" and subject to all faults, all defects in title and all other
matters whatsoever, including without limitation all matters of record. Landlord
shall be conclusively deemed not to have made any warranty or representation
regarding the title, condition or other status of the properties but Landlord
covenants to remove Facility Mortgages against the properties to be conveyed
under the Call Option solely to the extent that such Facility Mortgage both (a)
was in excess of the amount permitted under Article 26 at the time it was placed
against title to such property and (b) has a principal balance in excess of the
purchase price to be paid for all properties subject to the Call Option pursuant
to this Section 25.4. Landlord shall pay at closing any lien encumbering the
Land or the Building which secures either (x) any income tax liability of
Landlord or (y) a liability of Landlord unrelated to any of the Property, the
Rent, the Facility or the use, occupancy or operation of the Property. All
closing costs associated with the sale of the properties to Tenant pursuant to
this Section shall be paid by Tenant.

         25.5. NATURE OF OPTIONS. All options granted to Tenant under this
Lease, including any option to extend the Term of this Lease are strictly
personal to Tenant and may not be assigned by Tenant. Without limitation on the
foregoing, the assignment by Tenant of its rights under this Lease, whether with
or without the consent of Landlord shall, at Landlord's option, render all
options of Tenant to extend the Term and any option to purchase the Property
(other than pursuant to Article 15 and Article 16) null and void.

26.      FACILITY MORTGAGES
         ------------------

         Without the consent of Tenant, Landlord may, subject to the terms and
conditions set forth below in this Section, from time to time, directly or
indirectly, create or otherwise cause to exist any lien, encumbrance or title
retention agreement ("Encumbrance") upon the Property, or any portion thereof or
interest therein, whether to secure any borrowing or other means of financing or
refinancing provided that the principal amount of such borrowing, financing or
refinancing does not exceed 80% of the then Fair Market Value of the Property.
Any such Encumbrance shall contain the right to prepay (whether or not subject
to a prepayment penalty). Tenant agrees that it will subordinate this Lease to
any mortgage or deed of trust that may hereafter from time to time be recorded
on the Property, and to any and all advances made or to be made thereunder, and
to renewals, replacements and extensions thereof. Tenant's failure to deliver
any reasonable written subordination document requested by Landlord in
accordance with the preceding sentence within five Business Days of Landlord's
demand therefor shall constitute an Event of Default hereunder. Any such
subordination, however, shall be subject to the condition precedent that the
mortgagee under such mortgage or the beneficiary under such deed of trust enter
into a written nondisturbance and attornment agreement with Tenant, in form and


                                       46
<PAGE>   50

content satisfactory to Tenant, whereunder it is agreed that in the event of a
sale or foreclosure under such mortgage or deed of trust, the purchaser of the
Property (including the mortgagee or beneficiary under such mortgage or deed of
trust), shall acquire or hold the Property subject to this Lease so long as
Tenant is not in default hereunder. Tenant hereby agrees to recognize such
purchaser as the landlord under this Lease and agrees to attorn to such
purchaser and, if instructed to do so by such purchaser, to make rental payments
directly to it. Such subordination agreement may also include an acknowledgment
by Tenant that any purported cancellation of this Lease, reduction in its
effective rate of rent, shortening of its term or extension of its term at a
reduced effective rate of rent, shall not be binding upon any encumbrancer or
any other person, firm or corporation, acquiring the Property, at any sale or
other proceedings, or pursuant to the exercise of any rights, powers or remedies
under any Encumbrance, without said encumbrancer's prior written consent. 

27.      LIMITATION OF LIABILITY
         -----------------------

         Tenant specifically agrees that no officer, shareholder, employee or
agent of Landlord or American Health Properties, Inc., a Delaware corporation or
of any of its Affiliates, shall be held to any personal liability, jointly or
severally, for any obligation of, or claims against Landlord, Tenant agreeing to
look solely to Landlord's equity interest in the Property for recovery of any
judgment from Landlord, American Health Properties, Inc., a Delaware corporation
or the Affiliates of either. The provisions contained in the foregoing sentence
are not intended to, and shall not, limit any right that Tenant might otherwise
have to obtain injunctive relief against Landlord or Landlord's successors in
interest, or any action not involving the personal liability of Landlord
(original or successor), American Health Properties, Inc., a Delaware
corporation or the Affiliates of either. In no event shall Landlord (original or
successor) or any Affiliate of Landlord or American Health Properties, Inc., a
Delaware corporation be required to respond in monetary damages from any assets
other than Landlord's equity interest in the Property. Furthermore, except as
otherwise expressly provided herein, in no event shall Landlord or any Affiliate
of Landlord (original or successor) ever be liable to Tenant for any indirect or
consequential damages suffered by Tenant from whatever cause.

28.      ADDITIONAL TENANT COVENANTS
         ---------------------------

         28.1. MINIMUM RENT COVERAGE RATIO. From and after the first day of the
second Fiscal Year quarter to commence during the second Lease Year, Tenant
shall maintain at all times during the Term of this Lease an average Rent
Coverage Ratio during the each of the four preceding Fiscal Year quarters (but
only counting those quarters commencing after the first day of the second Lease
Year) of no less than 1.40:1.00. In addition, from and after the first day of
the first Fiscal Year quarter to commence during the third Lease Year, Tenant
shall at all times during the Term maintain a Rent Coverage Ratio with respect
to each Fiscal Year quarter of no less than 1.10:1.00.

         28.2. MANAGEMENT OF PROPERTY.

               Tenant shall do or cause to be done all things necessary and
customary in the operation of similar health care facilities in the region where
the Property is located to ensure the Facility is producing the maximum possible
gross revenues under the circumstances then existing. Without limitation on the
foregoing, but subject to the limitation stated in Section 28.2((b))((ii)),
Tenant shall continuously engage a manager for the Facility who shall be
acceptable to Landlord in its sole and absolute discretion which manager shall,
at a minimum, be experienced in the operation of health care facilities similar
to the Facility and shall perform for


                                       47
<PAGE>   51

the mutual benefit of Landlord and Tenant all obligations of the manager under
the Management Agreement. The Manager identified in this Lease is acceptable to
Landlord.

               (b) Tenant shall not during the Term or while any obligations of
Tenant to Landlord remain outstanding:

                   (i) Pay any compensation or fee or make any distribution to
Manager or any other Person in connection with management or operation of the
Facility without the prior written consent of Landlord other than compensation
paid in accordance with the Management Agreement as limited by the applicable
terms of the Security and Subordination Documents; or

                   (ii) Materially alter, modify or amend, or terminate, the
Management Agreement, or enter into any other agreement or arrangement for the
management or operation of the Facility or enter into any agreement (other than
the Option Agreement) that transfers or could result in a transfer of the
ownership of Tenant or (except as provided in the Shortfall Funding Agreement)
substantially all or any material portion of its assets to any other Person
without the prior written consent of Landlord which may be withheld in
Landlord's sole and absolute discretion.

         28.3. REPRESENTATIONS AND WARRANTIES OF TENANT. Each of the
representations and warranties of Tenant set forth in Article 3 of the Shortfall
Funding Agreement are incorporated herein by this reference and made a part
hereof and are reaffirmed to Landlord, for Landlord's benefit and reliance, to
be true, accurate and complete in all respects.

         28.4. PERFORMANCE OF COVENANTS. Tenant shall have complied with and
fully performed each of the covenants set forth in Article 4 of the Shortfall
Funding Agreement.

         28.5. ERISA COMPLIANCE.
        
               (a) Neither Tenant nor any Affiliate maintains or contributes to
any Employee Benefit Plan or Multiemployer Plan other than those identified on
Schedule 28.3.3.

               (b) Tenant and each Affiliate are in compliance in all material
respects with all applicable provisions of ERISA and the Code with respect to
all Employee Benefit Plans. Each Employee Benefit Plan that is intended to be
qualified under Section 401(a) of the Code has been determined by the Internal
Revenue Service to be so qualified, and each trust related to such Plan has been
determined to be exempt from federal income tax under Section 501(a) of the
Code. The actuarial present value of all accumulated benefit obligations under
each Plan, as disclosed in the most recent actuarial report with respect to such
Plan, do not exceed the fair market value of the assets of such Plan. No
material liability has been incurred by Tenant or any Affiliate or any of their
ERISA Affiliates which remains unsatisfied for any taxes, penalties or other
amount (other than contributions in the ordinary course) with respect to any
Employee Benefit Plan or any Multiemployer Plan, and to the best knowledge of
Tenant no such material liability is expected to be incurred.

               (c) Neither Tenant nor any Affiliate has: (i) engaged in a
nonexempt prohibited transaction described in Section 406 of ERISA or Section
4975 of the Code; (ii) incurred any liability to the PBGC which remains
outstanding other than the payment of premiums and there are no premium payments
which are due and unpaid; (iii) failed to make a required contribution or
payment to a Multiemployer Plan; or (iv) failed to make a required installment
or other required payment under Section 412 of the Code.

                                       48
<PAGE>   52

               (d) No ERISA Event has occurred or is reasonably expected to
occur with respect to any Plan or Multiemployer Plan maintained or contributed
to by Tenant or any Affiliate.

               (e) No material proceeding, claim (other than routine claims for
benefits), lawsuit and/or investigation is existing or, to Tenant's knowledge,
threatened concerning or involving any Employee Benefit Plan or Multiemployer
Plan maintained or contributed to by Tenant or any Affiliate.

         28.6. SECURITY; COLLATERAL ASSIGNMENT. Concurrently with the execution
and delivery hereof, (i) Tenant shall execute and cause Guarantor and Manager to
execute the Security and Subordination Documents and (ii) Tenant shall execute
and deliver to Landlord the Collateral Assignment, pursuant to which Tenant
shall assign to Landlord all of Tenant's rights under the Shortfall Funding
Agreement and the Management Agreement as security for the full, timely and
faithful performance of each of the obligations of Tenant under this Lease.


29.      MISCELLANEOUS
         -------------

         29.1. LANDLORD'S RIGHT TO INSPECT. Landlord and its authorized
representatives may, at any time and from time to time, upon reasonable notice
to Tenant, inspect the Property during usual business hours subject to any
security, health, safety or patient business confidentiality requirements of
Tenant or any governmental agency, or created by any Insurance Requirement or
Legal Requirement relating to the Property.

         29.2. NO WAIVER. No failure by Landlord or Tenant to insist upon the
strict performance of any term hereof or to exercise any right, power or remedy
provided hereunder, and no acceptance of full or partial payment of Rent during
the continuance of any such breach, shall constitute a waiver of any such breach
or of any such term. To the extent permitted by applicable law, no waiver of any
breach shall affect or alter this Lease, which shall continue in full force and
effect with respect to any other then existing or subsequent breach.

         29.3. REMEDIES CUMULATIVE. To the extent permitted by law, each legal,
equitable or contractual right, power and remedy of Landlord or Tenant now or
hereafter provided either in this Lease or by statute or otherwise shall be
cumulative and concurrent and shall be in addition to every other right, power
and remedy. The exercise or beginning of the exercise by Landlord or Tenant of
any one or more of such rights, powers and remedies shall not preclude the
simultaneous or subsequent exercise by Landlord or Tenant of any or all of such
other rights, powers and remedies.

         29.4. ACCEPTANCE OF SURRENDER. No surrender to Landlord of this Lease
or of all or any portion of or interest in the Property shall be valid or
effective unless agreed to and accepted in writing by Landlord, and no act by
Landlord or any representative or agent of Landlord, other than such a written
acceptance by Landlord, shall constitute an acceptance of any such surrender by
Tenant.

         29.5. NO MERGER OF TITLE. There shall be no merger of this Lease or of
the leasehold estate created hereby if the same person, firm, corporation or
other entity acquires, owns or holds, directly or indirectly, this Lease or the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate, and the fee estate in the Property.



                                       49
<PAGE>   53

         29.6. CONVEYANCE BY LANDLORD. If Landlord or any successor owner of the
Property conveys the Property in accordance with the terms hereof (other than as
security for a debt), and the grantee or transferee of the Property expressly
assumes all obligations of Landlord hereunder arising or accruing from and after
the date of such conveyance or transfer, Landlord or such successor owner, as
the case may be, thereupon shall be released from all liabilities and
obligations of Landlord under this Lease.

         29.7. QUIET ENJOYMENT. So long as Tenant pays all Rent as the same
becomes due and fully complies with all of the terms of this Lease and fully
performs its obligations hereunder, Tenant shall peaceably and quietly have,
hold and enjoy the Property for the Term hereof, free of any claim or other
action by Landlord or anyone claiming by, through or under Landlord, but subject
to all liens and encumbrances of record as of the date hereof or hereafter
consented to by Tenant. Except as otherwise provided in this Lease, no failure
by Landlord to comply with the foregoing covenant shall give Tenant any right to
cancel or terminate this Lease or abate, reduce or make a deduction from or
offset against the Rent or any other sum payable under this Lease, or to fail or
refuse to perform any other obligation of Tenant hereunder. Notwithstanding the
foregoing, Tenant shall have the right, subject to the limitation set forth in
this Lease, by separate and independent action, to pursue any claim it may have
against Landlord as a result of a breach by Landlord of the covenant of quiet
enjoyment contained in this Section.

         29.8. NOTICES. All notices, demands, requests, consents, approvals and
other communications ("Notice" or "Notices") hereunder shall be in writing and
delivered by personal delivery, courier or messenger service, express or
overnight mail, or by registered or certified mail, return receipt requested and
postage prepaid, addressed to the respective parties as follows:


If to Tenant:           c/o Hakman & Co.
                        1350 Old Bayshore Highway, Suite 300
                        Burlingame, California 94010
                        Attention F. David Carr

If to Landlord:         _________________________
                        c/o American Health Properties, Inc.
                        6400 S. Fiddler's Green Circle; Suite 1800
                        Englewood, Colorado 80111
                        Attention:  President & General Counsel

or to such other address as either party may hereafter designate. Personally
delivered Notice and Notices sent by courier or messenger service or by express
or overnight mail shall be effective upon receipt, and Notice given by mail
shall be complete at the time of deposit in the U.S. mail system, but any
prescribed period of Notice and any right or duty to do any act or make any
response within any prescribed period or on a date certain after the service of
such Notice given by mail shall be extended five (5) days. 

         29.9. SURVIVAL OF TERMS; APPLICABLE LAW. Anything contained in this
Lease to the contrary notwithstanding, all claims against, and liabilities of,
Tenant or Landlord arising prior to any date of termination of this Lease shall
survive such termination for two years, except for third party claims based on
alleged tortious actions and omissions of Tenant during the term of this Lease,
which third party claims shall survive the term of this Lease for the period of
limitations applicable to such claims under applicable law. If any term or
provision of this Lease or any application thereof shall be invalid or
unenforceable for any reason whatsoever, the remainder of this Lease and any
other application of such term or provisions shall not be affected thereby. If
any late charge or any interest rate provided for in any provision of this Lease
based 


                                       50
<PAGE>   54

upon a rate in excess of the maximum rate permitted by applicable law, such
charges shall be fixed at the maximum permissible rate. Neither this Lease nor
any provision hereof may be changed, waived, discharged, modified or terminated
except by an instrument in writing and in recordable form, signed by Landlord
and Tenant. Subject to any limitations on assignment contained in this Lease,
all the terms and provisions of this Lease shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns.
The headings in this Lease are for convenience of reference only and shall not
limit or otherwise affect the meaning hereof. This Lease shall be governed by
and construed in accordance with the laws of the State, but not including its
conflicts of laws rules.

         29.10. EXCULPATION. This Lease is made on behalf of Landlord by an
officer of Landlord, not individually, but solely in his capacity in such office
as authorized by the directors of Landlord pursuant to its by-laws. The
obligations of this Lease are not binding upon, nor shall resort be had to, the
private property of any of the directors, shareholders, officers, employees or
agents of Landlord, American Health Properties, Inc. or the Affiliates of
either, but shall bind only Landlord's equity interest in the Property as
provided in Article 27. Notwithstanding any provision of this Lease or
applicable law to the contrary, in no event shall Landlord ever be liable to
Tenant for any indirect or consequential damages suffered by Tenant from
whatever cause.

         29.11. TRANSFERS FOLLOWING TERMINATION. Upon the expiration or earlier
termination of the Term, Tenant shall use its best efforts to transfer to
Landlord or Landlord's nominee, or to cooperate with Landlord or Landlord's
nominee in connection with the processing by Landlord or Landlord's nominee of
any applications for, all licenses, operating permits and other governmental
authorizations and all contracts (including all Government Approvals and
contracts with governmental or quasi-governmental entities) which may be
necessary for the operation of the Facility.

         29.12. TENANT'S WAIVERS. Tenant waives all presentments, demands for
performance, notices of nonperformance, protests, notices of protest, notices of
dishonor, and notices of acceptance and waives all notices of the existence,
creation, or incurring of new or additional obligations, except as expressly
granted herein. 29.13. MEMORANDUM OF LEASE. Landlord and Tenant shall, promptly
upon the request of either party, enter into a short form memorandum of this
Lease and all options contained herein, in form suitable for recording under the
laws of the State in which the Property is located. Tenant shall pay all costs
and expenses of recording such memorandum of this Lease.

         29.14. ARBITRATION. Any controversy arising out of, connected with or
incidental to this Agreement (other than with respect to the nonpayment of any
Rent) shall be decided by arbitration under the Expedited Procedures of the
American Arbitration Association, at Denver, Colorado, provided that claim is
made within the applicable period of limitation. Depositions to obtain discovery
may be taken upon good cause, upon leave to do so granted by the arbitrator. The
provisions of this Section 29.14 shall not limit Landlord's rights to obtain
damages and possession of the Property by summary eviction or similar
proceedings in the event of Tenant's default hereunder.

         29.15. ATTORNEYS' FEES. If either party commences an action against the
other to interpret or enforce any of the terms of this Lease or because of the
breach by the other party of any of the terms hereof, the losing or defaulting
party shall pay to the prevailing party reasonable attorneys' fees, costs and
expenses incurred in connection with the prosecution or defense of such action,
whether or not the action is prosecuted to a final judgment.



                                       51
<PAGE>   55

         29.16. TIME IS OF THE ESSENCE. Time is hereby expressly made of the
essence with respect to each and every term and provision of this Lease,
including, but in no way limiting the generality of the foregoing, with respect
to each and every time constraint and deadline imposed by the terms of this
Agreement together with the obligation of the Tenant to exercise any option
within the time period set forth herein. The parties intend that they be
strictly bound by the provisions concerning the timing of performance of their
respective obligations contained in this Lease. Further, if any attempt is made
by either party to perform an obligation required by it to be performed or
comply with a provision of this Lease required by it to be complied with, in any
manner, other than in strict compliance with the time constraints applicable
thereto, even if such purported attempt is but one day late, then such purported
attempt at performance or compliance shall be deemed (i) a violation of this
"Time is of the Essence" clause, (ii) in contravention of the intent of the
parties thereto and (iii) null and void and of no force and effect.

         29.17. ENTIRE AGREEMENT; INCORPORATION OF EXHIBITS; MODIFICATIONS. This
Lease and the exhibits attached to this Lease or referred to herein, each of
which is hereby incorporated by reference as if set forth at length herein,
constitutes the entire agreement between the parties with respect to the letting
to Tenant of the Property. This Lease supersedes all prior written and oral
communications between the parties with respect to the subject matter hereof and
there are no covenants, promises, warranties or representations regarding the
subject matter stated above which are not stated in this Lease. No provision of
this Lease may be amended, supplemented or otherwise modified except by an
agreement in writing signed by the parties hereto or their respective successors
in interest.


         IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date first above written.

<TABLE>
<S>                               <C>
                                  ______________________


                                  By:
                                     ------------------------------------------


                                  _________________________________________
                                  a Delaware limited liability company,

                                  By:    Assisted Care Operators, LLC
                                         a Delaware limited liability company
                                         its Manager and authorized representative



                                         By:
                                            ------------------------------------------
                                              Name:
                                              Title:
                                              Its Authorized Representative
</TABLE>



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