Document:

<PAGE>

                                                                   Exhibit 10.24
________________________________________________________________________________

                               CREDIT AGREEMENT

                          Dated as of March 30, 2001

                                 by and among

                          TOTAL GAS & ELECTRIC, INC.

                                      and

                           THE CHASE MANHATTAN BANK
                                   as Agent

                                      and

                           THE LENDERS PARTY HERETO

_______________________________________________________________________________
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                              PAGE
<S>                                                                                                           <C>

ARTICLE I                                                                                                       1
     DEFINITIONS AND ACCOUNTING TERMS                                                                           1
          SECTION 1.1  Defined Terms                                                                            1
                       -------------
          SECTION 1.2  Use of Defined Terms                                                                     21
                       --------------------
          SECTION 1.3  Other Interpretive Provisions                                                            21
                       -----------------------------
          SECTION 1.4  Accounting and Financial Determinations                                                  22
                       ---------------------------------------

ARTICLE II                                                                                                      23
     COMMITMENTS, BORROWING PROCEDURES AND NOTES                                                                23
          SECTION 2.1  Commitments                                                                              23
                       -----------
               SECTION 2.1.1  Facility A Commitment                                                             23
                              ---------------------
               SECTION 2.1.2  Facility B Commitment                                                             24
                              ---------------------
               SECTION 2.1.3  Restrictions on Loans                                                             24
                              ---------------------
          SECTION 2.2  Reduction and Termination of Commitments                                                 24
                       ----------------------------------------
               SECTION 2.2.1  Optional Subject to Section 5.4                                                   24
                              -------------------------------
               SECTION 2.2.2  Mandatory                                                                         24
                              ---------
               SECTION 2.2.3  Termination                                                                       24
                              -----------
          SECTION 2.3  Borrowing Procedure                                                                      25
                       -------------------
          SECTION 2.4  Continuation and Conversion Elections                                                    25
                       -------------------------------------
          SECTION 2.5  Funding                                                                                  25
                       -------
          SECTION 2.6  Loan Accounts/Notes                                                                      26
                       -------------------

ARTICLE III                                                                                                     27
     REPAYMENTS, PREPAYMENTS, INTEREST AND FEES                                                                 27
          SECTION 3.1  Repayment and Prepayments                                                                27
                       -------------------------
               SECTION 3.1.1  Repayment                                                                         27
                              ---------
               SECTION 3.1.2  Voluntary Prepayments                                                             27
                              ---------------------
               SECTION 3.1.3  Mandatory Prepayments                                                             27
                              ---------------------
          SECTION 3.2  Interest Provisions                                                                      29
                       -------------------
               SECTION 3.2.1  Rates                                                                             29
                              -----
               SECTION 3.2.2  Post-Default Rate                                                                 29
                              -----------------
               SECTION 3.2.3  Payment Dates                                                                     29
                              -------------
          SECTION 3.3 Fees                                                                                      30
                      ----
               SECTION 3.3.1  Commitment Fee                                                                    30
                              --------------
               SECTION 3.3.2  Arrangement and Agency Fees                                                       30
                              ---------------------------

ARTICLE IV                                                                                                      30
     INTENTIONALLY OMITTED NUMBERING RESERVED                                                                   30

ARTICLE V                                                                                                       30
     CERTAIN LIBOR AND OTHER PROVISIONS                                                                         30
          SECTION 5.1 LIBOR Lending Unlawfu1                                                                    30
                      ----------------------
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                                                              <C>
          SECTION 5.2  Deposits Unavailable                                                                      30
                       --------------------
          SECTION 5.3  Increased LIBOR Loan Costs, etc.                                                          31
                       --------------------------------
          SECTION 5.4  Funding Losses                                                                            32
                       --------------
          SECTION 5.5  Increased Capital Costs                                                                   32
                       -----------------------
          SECTION 5.6  Taxes                                                                                     33
                       -----
          SECTION 5.7  Payments, Computations, etc                                                               34
                       ---------------------------
          SECTION 5.8  Sharing of Payments                                                                       34
                       -------------------
          SECTION 5.9  Setoff                                                                                    35
                       ------
          SECTION 5.10 Recourse                                                                                  35
                       --------
          SECTION 5.11 Replacement of Lenders                                                                    35
                       ----------------------

ARTICLE VI                                                                                                       36
     CONDITIONS TO EFFECTIVENESS AND TO BORROWING                                                                36
          SECTION 6.1  Conditions to Effectiveness                                                               36
                       ---------------------------
               SECTION 6.1.1  Credit Agreement and Loan Documents                                                36
                              -----------------------------------
               SECTION 6.1.2  Resolutions; Incumbency                                                            36
                              -----------------------
               SECTION 6.1.3  Organization Documents; Good Standing                                              36
                              -------------------------------------
               SECTION 6.1.4  Closing Certificate                                                                37
                              -------------------
               SECTION 6.1.5  Security Agreements; Prior Liens Removed; Prior Indebtedness Paid                  37
                              -----------------------------------------------------------------
               SECTION 6.1.6  Permits                                                                            38
                              -------
               SECTION 6.1.7  RESERVED                                                                           38
                              --------
               SECTION 6.1.8  Opinion of Counsel                                                                 38
                              ------------------
               SECTION 6.1.9  Closing Fees, Expenses, etc.                                                       38
                              ----------------------------
               SECTION 6.1.10 Insurance                                                                          39
                              ---------
               SECTION 6.1.11 Solvency Certificate                                                               39
                              --------------------
               SECTION 6.1.12 Borrowing Base Certificate                                                         39
                              --------------------------
               SECTION 6.1.13 RESERVED                                                                           39
                              --------
               SECTION 6.1.14 Material Contracts                                                                 39
                              ------------------
               SECTION 6.1.15 Consent of Petro Lenders                                                           39
                              ------------------------
               SECTION 6.1.16 Other Documents                                                                    39
                              ---------------
          SECTION 6.2  All Borrowings                                                                            39
                       --------------
               SECTION 6.2.1  Compliance with Warranties, No Default, etc.                                       39
                              --------------------------------------------
               SECTION 6.2.2  Borrowing Request                                                                  40
                              -----------------
               SECTION 6.2.3  Lien Searches                                                                      40
                              -------------
               SECTION 6.2.4  Satisfactory Legal Form                                                            40
                              -----------------------

ARTICLE VII                                                                                                      40
     REPRESENTATIONS AND WARRANTIES                                                                              40
          SECTION 7.1  Organization etc                                                                          40
                       ----------------
          SECTION 7.2  Material Subsidiaries                                                                     41
                       ---------------------
          SECTION 7.3  Qualification                                                                             41
                       -------------
          SECTION 7.4  Enforceability                                                                            41
                       --------------
          SECTION 7.5  Due Authorization; Non-contravention; etc                                                 42
                       -----------------------------------------
          SECTION 7.6  Government Approvals; Regulations, etc                                                    42
                       --------------------------------------
          SECTION 7.7  Business; Financial Statements                                                            42
                       ------------------------------
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                                                              <C>
          SECTION 7.8  No Material Adverse Change                                                                43
                       --------------------------
          SECTION 7.9  Litigation; Labor Controversies, etc                                                      43
                       ------------------------------------
          SECTION 7.10 Ownership of Properties; Project Contracts; Liens                                         44
                       -------------------------------------------------
          SECTION 7.11 Taxes                                                                                     44
                       -----
          SECTION 7.12 ERISA Compliance                                                                          44
                       ----------------
          SECTION 7.13 Environmental Warranties                                                                  45
                       ------------------------
          SECTION 7.14 Regulations U and X and Use of Proceeds                                                   47
                       ---------------------------------------
          SECTION 7.15 Accuracy of Information                                                                   47
                       -----------------------
          SECTION 7.16 Solvency                                                                                  47
                       --------
          SECTION 7.17 Compliance with Agreements and Laws                                                       48
                       -----------------------------------

ARTICLE VIII                                                                                                     48
     COVENANTS                                                                                                   48
          SECTION 8.1  Affirmative Covenants                                                                     48
                       ---------------------
               SECTION 8.1.1  Financial Information, Reports, Notices, etc                                       48
                              --------------------------------------------
               SECTION 8.1.2  Maintenance of Properties                                                          52
                              -------------------------
               SECTION 8.1.3  Insurance                                                                          52
                              ---------
               SECTION 8.1.4  Payment of Obligations                                                             53
                              ----------------------
               SECTION 8.1.5  Compliance with Laws                                                               53
                              --------------------
               SECTION 8.1.6  Books and Records                                                                  53
                              -----------------
               SECTION 8.1.7  Inspection                                                                         53
                              ----------
               SECTION 8.1.8  Environmental Covenant                                                             54
                              ----------------------
               SECTION 8.1.9  Compliance with ERISA                                                              54
                              ---------------------
               SECTION 8.1.10 Collateral                                                                         54
                              ----------
               SECTION 8.1.11 Update of Project Contracts                                                        55
                              ---------------------------
               SECTION 8.1.12 Agreements Regarding Receipts Account                                              55
                              -------------------------------------
               SECTION 8.1.13 Preservation of Corporate Existence                                                55
                              -----------------------------------
               SECTION 8.1.14 Use of Proceeds                                                                    56
                              ---------------
               SECTION 8.1.15 Update of Customer Lists                                                           56
                              ------------------------
               SECTION 8.1.16 Further Assurances                                                                 56
                              ------------------
          SECTION 8.2  Negative Covenants                                                                        57
                       ------------------
               SECTION 8.2.1  Business Activities                                                                57
                              -------------------
               SECTION 8.2.2  Indebtedness                                                                       57
                              ------------
               SECTION 8.2.3  Liens                                                                              57
                              -----
               SECTION 8.2.4  Financial Covenants                                                                58
                              -------------------
               SECTION 8.2.5  Investments                                                                        59
                              -----------
               SECTION 8.2.6  Restricted Payments, etc                                                           59
                              ------------------------
               SECTION 8.2.7  Consolidation, Merger, etc                                                         60
                              --------------------------
               SECTION 8.2.8  Asset Dispositions, etc                                                            60
                              -----------------------
               SECTION 8.2.9  RESERVED                                                                           61
                              --------
               SECTION 8.2.10 Transactions with Affiliates                                                       61
                              ----------------------------
               SECTION 8.2.11 Negative Pledges, Restrictive Agreements, etc                                      61
                              ---------------------------------------------
               SECTION 8.2.12 RESERVED                                                                           61
                              --------
               SECTION 8.2.13 Operating Leases                                                                   61
                              ----------------
               SECTION 8.2.14 Prepayments                                                                        62
                              -----------
               SECTION 8.2.15 Organization  Documents                                                            62
                              -----------------------
</TABLE>

                                      iii
<PAGE>

<TABLE>
<S>                                                                                                              <C>
               SECTION 8.2.16 Capital Expenditures                                                               62
                              --------------------
               SECTION 8.2.17 Contingent Liabilities                                                             62
                              ----------------------
               SECTION 8.2.18 ERISA                                                                              62
                              -----
               SECTION 8.2.19 Accounting Changes                                                                 62
                              ------------------
               SECTION 8.2.20 Bank Accounts                                                                      62
                              -------------

ARTICLE IX                                                                                                       63
     EVENTS OF DEFAULT                                                                                           63
          SECTION 9.1   Listing of Events of Default                                                             63
                        ----------------------------
               SECTION 9.1.1  Non-Payment of Obligations                                                         63
                              --------------------------
               SECTION 9.1.2  Breach of Warranty                                                                 63
                              ------------------
               SECTION 9.1.3  Non-Performance of Other Covenants and Obligations                                 63
                              --------------------------------------------------
               SECTION 9.1.4  Default on Other Indebtedness                                                      63
                              -----------------------------
               SECTION 9.1.5  Judgments                                                                          64
                              ---------
               SECTION 9.1.6  ERISA                                                                              64
                              -----
               SECTION 9.1.7  Change in Control                                                                  64
                              -----------------
               SECTION 9.1.8  Bankruptcy, Insolvency, etc                                                        64
                              ---------------------------
               SECTION 9.1.9  Impairment of Security, etc                                                        65
                              ---------------------------
               SECTION 9.1.10 Split-Up                                                                           65
                              --------
               SECTION 9.1.11 Guarantor Defaults                                                                 66
                              ------------------
          SECTION 9.2   Action if Bankruptcy                                                                     66
                        --------------------
          SECTION 9.3   Action if Other Event of Default                                                         66
                        --------------------------------

ARTICLE X                                                                                                        67
     THE AGENT                                                                                                   67
          SECTION 10.1  Appointment and Authorization                                                            67
                        -----------------------------
          SECTION 10.2  Delegation of Duties                                                                     67
                        --------------------
          SECTION 10.3  Liability of Agent                                                                       67
                        ------------------
          SECTION 10.4  Reliance by Agent                                                                        67
                        -----------------
          SECTION 10.5  Notice of Default                                                                        68
                        -----------------
          SECTION 10.6  Credit Decision                                                                          68
                        ---------------
          SECTION 10.7  Indemnification of Agent                                                                 69
                        ------------------------
          SECTION 10.8  Agent in Individual Capacity                                                             69
                        ----------------------------
          SECTION 10.9  Successor Agent                                                                          70
                        ---------------
          SECTION 10.10 Withholding Tax                                                                          70
                        ---------------
          SECTION 10.11 Collateral Matters                                                                       71
                        ------------------

ARTICLE XI                                                                                                       72
     MISCELLANEOUS PROVISIONS                                                                                    72
          SECTION 11.1  Waivers, Amendments, etc                                                                 72
                        ------------------------
          SECTION 11.2  Notices                                                                                  73
                        -------
          SECTION 11.3  Payment of Costs and Expenses                                                            73
                        -----------------------------
          SECTION 11.4  Indemnification                                                                          74
                        ---------------
          SECTION 11.5  Survival                                                                                 75
                        --------
          SECTION 11.6  Severability                                                                             75
                        ------------
</TABLE>

                                      iv
<PAGE>

<TABLE>
<S>                                                                                                              <C>
          SECTION 11.7  Headings                                                                                 75
                        --------
          SECTION 11.8  Execution in Counterparts, Effectiveness, etc                                            75
                        ---------------------------------------------
          SECTION 11.9  Governing Law; Entire Agreement                                                          75
                        -------------------------------
          SECTION 11.10 Successors and Assigns                                                                   76
                        ----------------------
          SECTION 11.11 Sale and Transfer of Loans and Notes; Participations in its Loans and Notes              76
                        ---------------------------------------------------------------------------
               SECTION 11.11.1 Assignments                                                                       76
                               -----------
               SECTION 11.11.2 Participations                                                                    77
                               --------------
          SECTION 11.12 Other Transactions                                                                       78
                        ------------------
          SECTION 11.13 Forum Selection and Consent to Jurisdiction                                              78
                        -------------------------------------------
          SECTION 11.14 Waiver of Jury Trial                                                                     79
                        --------------------
</TABLE>

SCHEDULE 1.1        - Disclosure Schedule
SCHEDULE 2.1.1      - Facility Percentages and Commitments
SCHEDULE 6.2.3      - Lien Search Locations
SCHEDULE 7.2        - Subsidiaries of the Borrower
SCHEDULE 8.2.20     - Bank Accounts

EXHIBIT A-1         - Form of Facility A Note
EXHIBIT A-2         - Form of Facility B Note
EXHIBIT B           - Form of Borrowing Base Certificate
EXHIBIT C           - Form of Borrowing Request
EXHIBIT D           - Form of Continuation/Conversion Notice
EXHIBIT E           - Form of Assignment & Acceptance Agreement
EXHIBIT F           - Form of Compliance Certificate
EXHIBIT G           - Form of Opinion of Counsel
EXHIBIT H-1         - Form of Guarantee Agreement of Star Gas Partners
EXHIBIT H-2         - Form of Guarantee Agreement of the Material Subsidiaries
EXHIBIT I           - Form of Solvency Certificate
EXHIBIT J-1         - Form of Company Security Agreement
EXHIBIT J-2         - Form of Material Subsidiaries Security Agreement
EXHIBIT K           - Form of Accounts Security Deposit Agreement
EXHIBIT L           - Form of Securities Account Control Agreement
EXHIBIT M           - Form of Company Share Pledge Agreement
EXHIBIT N           - Form of Irrevocable Letter of Instruction
EXHIBIT O           - List of Project Contracts and Related Project Parties
EXHIBIT P           - Form of Subordination Agreement

                                       v
<PAGE>

     CREDIT AGREEMENT (as the same may be amended, supplemented or otherwise
modified from time to time, this "Agreement"), dated as of March 30, 2001,
                                  ---------
between TOTAL GAS & ELECTRIC, INC., a Florida corporation (the "Borrower"), the
                                                                --------
LENDERS which from time to time are parties to this Agreement (individually, a
"Lender" and collectively, the "Lenders")  and THE CHASE MANHATTAN BANK
 ------                         -------
("Chase") as agent for the Lenders (the "Agent").
  -----                                  -----

                                   RECITALS
                                   --------

     A.   The Borrower is a provider of certain energy and energy related
products and services for customers related to the deregulated natural gas and
electric industry (the "Business").
                        --------

     B.   The Borrower has requested the following credit facilities from the
Lenders: (i) a $15,350,000 revolving credit facility for working capital
purposes and (ii) a $3,000,000 revolving credit facility which converts to a
term loan facility for financing acquisitions for customer accounts and Capital
Expenditures (as defined herein).

     C.   The Lenders are willing, on the terms and subject to the conditions
set forth in this Agreement, to agree to the Borrower's requests.

     Accordingly, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:

     ARTICLE I
                       DEFINITIONS AND ACCOUNTING TERMS

     SECTION 1.1  Defined Terms.  The following terms (whether or not
                  -------------
underscored) when used in this Agreement, including its preamble and recitals,
shall, except where the context otherwise requires, have the following meanings:

     "Affiliate" of any Person means as applied to any Person, any other Person
      ---------
directly or indirectly controlling or controlled by or under common control with
such Person, provided that, for purposes, of this definition, "control" 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 and policies of
such Person, whether as a general partner or through the ownership of voting
securities or by contract or otherwise; and provided further that no member of
                                            -------- -------
the Sevin Group shall be an Affiliate for purposes of this Agreement.

     "Agent" is defined in the preamble and includes each other Person as shall
      -----                    --------
have subsequently been appointed as a successor agent pursuant to Section 10.9.
                                                                  ------------

     "Agent-Related Person" means Chase in its capacity as agent and any
      --------------------
successor agent arising under Section 10.9, and their respective Affiliates, and
                              ------------
the officers, directors, employees, agents and attorneys-in-fact of such Persons
and Affiliates.

                                      vi
<PAGE>

     "Agreement" is defined in the preamble.
      ---------                    --------

     "Applicable Prime Rate Margin" means, with respect to any Prime Rate Loan,
      ----------------------------
1.00 percent per annum.

     "Applicable Lending Office" means, with respect to each Lender, with
      -------------------------
respect to each  type of Loan, the lending office as designated for such type of
Loan below its name on the signature pages hereof or such other office of such
Lender or of an affiliate of such Lender as such Lender may from time to time
specify to the Agent and the Borrower as the office at which its Loans of such
type are to be made and maintained.

     "Applicable LIBOR Margin" means, with respect any LIBOR Loan, 3.00 percent
      -----------------------
per annum.

     "Asset Disposition" is defined in Section 8.2.8.
      -----------------                -------------

     "Assignee Lender" is defined in Section 11.11.1.
      ---------------                ---------------

     "Assignment and Acceptance Agreement" means an Assignment and Acceptance
      -----------------------------------
Agreement substantially in the form of Exhibit E hereto.
                                       ---------

     "Bankruptcy Code" means Title 11 of the United States Code, as amended from
      ---------------
time to time, or any successor statute.

     "Bankruptcy Law" is defined in Section 9.1.8.
      --------------                -------------

     "Borrower" is defined in the preamble.
      --------                    --------

     "Borrowing" means the Loans of the same type and, in the case of LIBOR
      ---------
Loans, having the same Interest Period made by all Lenders on the same Business
Day and pursuant to the same Borrowing Request in accordance with Section 2.3.
                                                                  -----------

     "Borrowing Base Certificate" means a certificate executed by a Responsible
      --------------------------
Officer of the Borrower substantially in the form of Exhibit B hereto.
                                                     ---------

     "Borrowing Request" means a Loan request and certificate duly executed by a
     ------------------
Responsible Officer of the Borrower, substantially in the form of Exhibit C
                                                                  ---------
hereto.

     "Business" is defined in the preamble.
      --------                    --------

     "Business Day" means:
      ------------

          (a)  any day which is neither a Saturday or Sunday nor a legal holiday
     on which banks are authorized or required to be closed in New York, New
     York; and

                                       2
<PAGE>

          (b)  relative to the making, continuing, prepaying or repaying of any
     LIBOR Loans, any day on which dealings in Dollars are carried on in the
     London interbank market.

     "Capital Expenditures" means, for any period, the aggregate amount of all
      --------------------
payments made during such period by any Person directly or indirectly for the
purpose of acquiring, constructing or maintaining fixed assets, real property or
equipment that, in accordance with GAAP, would be added as a debit to the fixed
asset account of such Person, including, without limitation, all amounts paid or
payable during such period with respect to Capitalized Lease Liabilities and
interest that are required to be capitalized in accordance with GAAP.

     "Capital Stock" means, with respect to any Person, any capital stock
      -------------
(including preferred stock), shares, units, interests, participations or other
ownership interests (however designated, including without limitation such items
as they may apply to a partnership, limited liability company or similar Person)
of such Person and any rights, warrants or options to purchase any thereof.

     "Capitalized Lease Liabilities" means all monetary obligations of the
      -----------------------------
Borrower or any Material Subsidiary under any leasing or similar arrangement
which, in accordance with GAAP, would be classified as capitalized leases, and,
for purposes of this Agreement and each other Loan Document, the amount of such
obligations shall be the capitalized amount thereof, determined in accordance
with GAAP, and the stated maturity thereof shall be the date of the last payment
of rent or any other amount due under such lease prior to the first date upon
which such lease may be terminated by the lessee without payment of a penalty.

     "Casualty Event" means, with respect to any Property of the Borrower or any
      --------------
of the Material Subsidiaries, any loss of or damage to, or any condemnation or
other taking of, such Property for which such Person receives insurance
proceeds, or proceeds of a condemnation award or other compensation.

     "Casualty Proceeds" is defined in Section 3.1.3(g).
      -----------------                ----------------

     "CERCLA" means the Comprehensive Environmental Response, Compensation and
      ------
Liability Act of 1980, 42 U.S.C. (S) 9601 et seq., as amended.

     "CERCLIS" means the Comprehensive Environmental Response Compensation
      -------
Liability Information System List.

     "Change in Control" means:
      -----------------

          (a)  the Sevin Group shall fail to own directly at least a 51%
     ownership interest in the Managing General Partner with voting power to
     elect the board of directors or other governing body; or

                                       3
<PAGE>

          (b)  the Managing General Partner shall fail to own directly 100% of
     the general partnership interests in Star Propane, or if Star Propane shall
     have been converted to corporate form, at least 51 % of the voting shares
     of Star Propane; or

          (c)  the Managing General Partner shall fail to own directly 100% of
     the general partnership interests in Star Gas Partners, or if Star Gas
     Partners shall have been converted to corporate form, at least 51 % of the
     voting shares of Star Gas Partners; or

          (d)  (i)  Star Gas Partners shall fail to own directly or indirectly
     at least 72.7% of the voting shares of the Borrower, or (ii) Star Gas
     Partners shall fail to own directly or indirectly at least an 72.7%
     ownership interest in the Borrower provided that the 72.7%  may be reduced
                                        --------
     by 11 % due to the exercise of certain stock options outstanding as of the
     Effective Date; or

          (e)  Star Gas Partners shall fail to own directly at least 99% in Star
     Propane; or

          (f)  Star Gas Partners shall fail to own, directly or indirectly, 51 %
     of each of Petro Holdings Inc.  and its Subsidiaries existing as of the
     Effective Date; or

          (g)  (i)  the Borrower shall fail to own directly 100% of the voting
     shares of each Material Subsidiary, or (ii) the Borrower shall fail to own
     directly at least a 100% ownership interest in each Material Subsidiary.

     "Chase" means The Chase Manhattan Bank.
      -----

     "Code" means the Internal Revenue Code of 1986, as amended, reformed or
      ----
otherwise modified from time to time.

     "Collateral" is defined in the respective Security Documents.
      ----------

     "Commitment" means, as the context may require, a Lender's Facility A
      ----------
Commitment, Facility B Commitment, or both thereof.

     "Commitment Termination Date" means, as the context may require, the
      ---------------------------
Facility A Commitment Termination Date or the Facility B Commitment Termination
Date.

     "Commitment Termination Event" means:
      ----------------------------

          (a)  the occurrence of any Default described in Section 9.1.8; or
                                                          -------------

          (b)  the occurrence and continuance of any other Event of Default and
     either:

               (i)  the declaration of the Loans to be due and payable pursuant
          to Section 9.3; or
             -----------

                                       4
<PAGE>

               (ii)  in the absence of such declaration in clause (i) above, the
                                                           ----------
          giving of notice by the Agent, acting at the direction of the Required
          Lenders, to the Borrower that the Commitments have been terminated.

     "Compliance Certificate" means a certificate signed by a Responsible
      ----------------------
Officer of the Borrower substantially in the form of Exhibit F, demonstrating
                                                     ---------
compliance with the covenants contained in Sections 8.2.2(a), 8.2.4, 8.2.5,
                                           -----------------  -----  -----
8.2.6, 8.2.8, 8.2.13 and 8.2.16 and certifying that no Default or Event of
-----  -----  -------    ------
Default exists, or, if any Default or Event of Default exists, stating the
nature and status thereof.

     "Consolidated" or "consolidated" means, when used with reference to any
      ------------      ------------
accounting term, the amount described by such accounting term, determined on a
consolidated basis in accordance with GAAP, after elimination of intercompany
items.

     "Consolidated EBITDA" shall mean for any period of four consecutive
      -------------------
quarters, Consolidated Net Income (or consolidated net loss) of the Borrower and
the Material Subsidiaries for such period, plus the sum, without duplication, of
(a) gross interest expense, (b) depreciation and amortization expenses and
charges, (c) all income taxes to any government or governmental instrumentality
expensed on the Borrower and Material Subsidiaries' books (whether paid or
accrued), (d) the cost to acquire additional customers to the extent such costs
were deducted in computing Consolidated Net Income, and (e) all other non-cash
expenses to the extent deducted in computing Consolidated Net Income as
indicated on the income and expense statements of the Borrower and the Material
Subsidiaries, minus all extraordinary or unusual gains, in each case determined
on a consolidated basis for the Borrower and the Material Subsidiaries in
accordance with GAAP, applied on a consistent basis.  All of the foregoing
categories shall be calculated (without duplication) over the four fiscal
quarters next preceding the date of calculation thereof.

     "Consolidated Net Income" means, for any period, the net income (or
      -----------------------
deficit) of the Borrower and the Material Subsidiaries for such period (taken as
a cumulative whole) including, without limitation, provisions for all taxes and
reserves (including reserves for deferred income taxes) and all other proper
deductions, all determined in accordance with GAAP on a consolidated basis,
after eliminating all intercompany transactions, provided that there shall be
excluded (a) the income (or deficit) of any Person accrued prior to the date it
becomes a Material Subsidiary or is merged into or consolidated with the
Borrower or a Material Subsidiary, (b) the income (or deficit) of any Person
(other than a Material Subsidiary) in which the Borrower or any Material
Subsidiary has an ownership interest, except to the extent that any such income
has been actually received by the Borrower or such Material Subsidiary in the
form of dividends, or similar distributions, (c) the undistributed earnings of
the Borrower and any Material Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by the Borrower and such Material
Subsidiary is not at the time permitted by the terms of its charter of any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to the Borrower and such Material Subsidiary, (d) any
restoration to income of any contingency reserve, except to the extent that
provision for such reserve was made out of income accrued during such period,
(e) any aggregate net after tax gain or net after tax loss during such period
arising from the sale, exchange or other disposition of capital assets (such
term to include

                                       5
<PAGE>

all fixed assets, whether tangible or intangible, all Inventory sold in
conjunction with the disposition of fixed assets, and all securities), (f) any
write-up of any asset, (g) any net gain from the collection of the proceeds of
life insurance polices, (h) any gain arising from the acquisition of any
securities, or the extinguishment, under GAAP, of any Indebtedness, of the
Borrower or any Material Subsidiary, (i) any after tax gain or loss during such
period from any change in accounting, from any discontinued operations or the
disposition thereof, from any extraordinary events or from any prior period
adjustments, (j) any deferred credit representing the excess of equity in any
Material Subsidiary at the date of acquisition over the cost of the investment
in such Material Subsidiary, and (k) in the case of a successor to the Borrower
by consolidation or merger or as a transferee of its assets, any earnings of the
successor corporation prior to such consolidation, merger or transfer of assets.

     "Consolidated Total Assets" means, as of any date of determination, the
      -------------------------
total assets of the Borrower and the Material Subsidiaries on a consolidated
basis, as determined in accordance with GAAP.

     "Contingent Liability" means any agreement, undertaking or arrangement by
      --------------------
which any Person guarantees, endorses or otherwise becomes or is contingently
liable upon (by direct or indirect agreement, contingent or otherwise, to
provide funds for payment, to supply funds to, or otherwise to invest in, a
debtor, or otherwise to assure a creditor against loss) the indebtedness,
obligation or any other liability of any other Person (other than by
endorsements of instruments in the course of collection), or guarantees the
payment of dividends or other distributions upon the shares of any other Person.
The amount of any Person's obligation under any Contingent Liability shall
(subject to any limitation set forth therein) be deemed to be the outstanding
principal amount of the debt, obligation or other liability guaranteed thereby.

     "Continuation/Conversion Notice" means a notice of continuation or
      ------------------------------
conversion of LIBOR Loans or Prime Rate Loans, as applicable, and certificate
duly executed by an Responsible Officer of the Borrower, substantially in the
form of Exhibit D hereto.
        ---------

     "Customer List" means, at any time, the names and addresses of all
      -------------
customers of the Borrower and the Material Subsidiaries at such time, together
with all trade names and trademarks and all supporting documents, including but
not limited to computer discs, programs, tapes, trial balances and carrying
media.

     "Default" means any event or occurrence which, with the giving of notice or
      -------
the lapse of time or both, would constitute an Event of Default.

     "Depositary" means Bank of America N.A.
      ----------

     "Disclosure Schedule" means the Disclosure Schedule attached hereto as
      -------------------
Schedule 1.1, as it may be amended, supplemented or otherwise modified from time
------------
to time by the Borrower with the written consent of the Agent and the Required
Lenders.

     "Disqualified Stock" means, with respect to any Person, any Capital Stock
      ------------------
of such Person which by its terms (or by the terms of any security into which it
is convertible or for which it is

                                       6
<PAGE>

exchangeable or exercisable), upon the happening of any event or otherwise (i)
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, (ii) is convertible into or exchangeable or exercisable for
Indebtedness or Disqualified Stock, or (iii) is redeemable at the option of the
holder thereof, in whole or in part, in each case on or prior to the first
anniversary of the stated maturity of such Capital Stock.

     "Dollar" and the sign "$" mean lawful money of the United States.
      ------               ---

     "Effective Amount" means, with respect to any Loans on any date, the
      ----------------
aggregate outstanding principal amount thereof after giving effect to any
Borrowings and prepayments or repayments of Loans occurring on such date.  For
purposes of Section 3.1 the Effective Amount shall be determined without giving
            -----------
effect to any mandatory prepayments to be made under such Section 3.1.
                                                          -----------

     "Effective Date" means the date on which all conditions precedent set forth
      --------------
in Section 6.1, Section 6.2 and Section 11.8 are satisfied or waived by all
   -----------  -----------     ------------
Lenders, which date shall occur on or before March 30, 2001 or such later date
upon which the Borrower and the Lenders shall mutually agree.

     "Eligible Accounts" means, as to any Person at a particular date, the total
      -----------------
outstanding balance of Accounts (as defined in the Uniform Commercial Code in
effect in the State of New York) of such Person recorded on the books of such
Person in accordance with GAAP after giving effect to all normal reserves
(including, without limitation, bad debt reserves) in connection therewith (a)
which are bona fide, valid and legally enforceable obligations of the account
debtor in respect thereof and arise from the actual sale and delivery of goods
or rendition and acceptance of services in the ordinary course of business to
such account debtor (but, for clarification, do not include amounts in respect
of which no invoice has been rendered to such account debtor), (b) which are not
owed by an obligor which is an affiliate or Subsidiary of such Person, (c) which
are not owed by an obligor which has taken any of the actions or suffered any of
the events of the kind described in Section 9.1.8, (d) which are owed solely by
                                    -------------
such Person free and clear of all liens or other rights or claims of any other
Person (except in favor of the Agent for the ratable benefit of the Lenders),
(e) with respect to which no more than sixty (60) days have elapsed since the
date payment is due, and (f) in which the Agent has a perfected, first priority
security interest.

     "Eligible Inventory" means natural gas inventory of the Borrower or any
      ------------------
Material Subsidiary to the extent that such inventory:

     (a)  is valued on any date of determination based on the then current
midpoint market price set forth in the "Gas Daily - Daily Price Survey", for the
closest delivery point of natural gas of similar physical and chemical
characteristics: (i) which is owned by the Borrower and in storage pursuant to a
gas storage contract and as to which there is a firm transportation contract
giving the Borrower the irrevocable unconditional right to cause such natural
gas to be transported to the Borrower's customers pursuant to utility
nominations and delivery schedules set forth in such contracts or (ii) as to
which irrevocable unconditional rights to receive natural gas have been prepaid
in full by the Borrower to a Person which has unconditional rights and is

                                       7
<PAGE>

unconditionally obligated to the Borrower, at any time the Borrower shall elect
pursuant to utility nomination and delivery schedules (set forth in a contract
approved by the Agent) to deliver such natural gas to customers of the Borrower;

     (b)  is owned by the Borrower or such Material Subsidiary, is subject to
the security interest in favor of the Agent for the benefit of the Lenders
pursuant to the Security Agreements, which security interest is (to the extent
required by the Agent) perfected as to such inventory, and is subject to no
other than Lien whatsoever;

     (c)  is of customary quality and meets all standards applicable to natural
gas, its use or sale imposed by any Governmental Authority having regulatory
authority over such matters;

     (d)  is of a quality and type sold in the ordinary course of the business
of the Borrower or such Material Subsidiary;

     (e)  is located within the United States (i) in a Federal Energy Regulatory
Commission ("FERC") regulated pipeline system in or (ii) in commercial storage
facilities;

     (f)  is stored in storage facilities of the Borrower or a Material
Subsidiary, a utility controlled storage facility or in a pipeline system
regulated by the FERC and if located in another facility leased by the Borrower
or such Material Subsidiary, the lessor has delivered to the Agent a waiver,
consent and agreement in form and substance satisfactory to the Agent;

     (g)  has not been delivered to a customer of the Borrower or any Material
Subsidiary (regardless of whether such delivery is on a consignment basis); and

     (h)  is not determined by the Agent, on behalf of the Lenders, to be
ineligible for any other reason, based upon credit, collateral or other
considerations customarily taken into account by the Agent in making such
determinations.

     "Environmental Claim" means any written or oral notice, claim demand or
      -------------------
other communication (collectively, a "claim") for investigatory costs, cleanup
costs, Government Authority response costs, damages to natural resources or
other property, personal injuries, fines or penalties arising out of, based on
or resulting from (a) the presence, or release into the environment, of any
Hazardous Material at any location, or (b) circumstances forming the basis of
any violation, or alleged violation, of any Environmental Law.  The term
"Environmental Claim" shall include, without limitation, any claim by any
Government Authority for enforcement, cleanup, removal, response, remedial or
other actions or damages pursuant to any applicable Environmental Law, and any
claim by any third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from the presence of
Hazardous Materials or arising from alleged injury or threat of injury to
health, public safety or the environment.

     "Environmental Law" means any law, regulation, statute, ordinance, code,
      -----------------
rule, regulation, order or guideline (including consent decrees or
administrative orders) relating to human health, public safety or the
environment or to emissions, discharges, releases or

                                       8
<PAGE>

threatened releases of Hazardous Materials into the environment (including,
without limitation, ambient air, soil, surface water, ground water, wetlands,
land or subsurface strata), or otherwise relating to the presence, existence,
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials.

     "ERISA" means the Employee Retirement Income Security Act of 1974, as
      -----
amended and regulations promulgated thereunder.

     "ERISA Affiliate" means any trade or business (whether or not incorporated)
      ---------------
under common control with the Borrower within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).

     "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan;
      -----------
(b) a withdrawal by the Borrower or any ERISA Affiliate from a Pension Plan
subject to Section 4063 of ERISA during a plan year in which it was a
substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation
of operations which is treated as such a withdrawal under Section 4062(e) of
ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA
Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is
in reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension
Plan or Multiemployer Plan; (e) an event or condition which could constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan; or (f) the imposition of any
liability under Title IV of ERISA, other than PBGC premiums due but not
delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA
Affiliate.

     "Event of Default" is defined in Section 9.1.
      ----------------                -----------

     "Excess Sale Proceeds" is defined in Section 8.2.8(b).
      --------------------                ----------------

     "Facility A Borrowing Base" means, on any date of determination thereof, an
      -------------------------
amount equal to the sum of (a) 85% of the aggregate amount of Eligible Accounts
of the Borrower and its Material Subsidiaries, plus (b) the lesser of (x) seven
                                               ----
million dollars and (y) 85% of Eligible Inventory.  The Facility A Borrowing
Base (including, without limitation, the aforesaid amounts) on any date shall be
determined by the Agent in accordance with the provisions of Section 2.1.1(c).
                                                             ----------------

     "Facility A Commitment" is defined in Section 2.1.1.
      ---------------------                -------------

     "Facility A Commitment Termination Date" means the earliest of:
      --------------------------------------

          (a)  the date 364 days after, but including, the Effective Date;

          (b)  the date on which the Facility A Commitments are terminated in
     full or reduced to zero pursuant to Section 2.2; and
                                         -----------

                                       9
<PAGE>

          (c)  the date on which any Commitment Termination Event occurs.

     "Facility A Loan" is defined in Section 2.1.1(a).
      ---------------                ----------------

     "Facility A Note" is defined in Section 2.6(b).
      ---------------                --------------

     "Facility A Percentage" means, relative to any Lender, the Facility A
      ---------------------
Percentage set forth on Schedule 2.1.1, as such percentage may be adjusted from
                        --------------
time to time pursuant to Assignment and Acceptance Agreement(s) executed by such
Lender and its Assignee Lender(s) and delivered pursuant to Section 11.11.1.
                                                            ---------------

     "Facility B Commitment" means, as to any Lender, the Facility B Commitment
      ---------------------
set forth opposite such Lender's name on Schedule 2.1.1 under the caption
                                         --------------
"Facility B Commitment" as such amount must be reduced from time to time as
provided herein.

     "Facility B Commitment Termination Date" means the earliest of
      --------------------------------------

          (a)  the date 364 days after, but including, the Effective Date;

          (b)  the date on which the Facility B Commitment is terminated in full
     or reduced to zero pursuant to Section 2.2; and
                                    -----------

          (c)  the date on which any Commitment Termination Event occurs.

     "Facility B Loan" is defined in Section 2.1.2.
      ---------------                -------------

     "Facility B Note" is defined in Section 2.6(c).
      ---------------                --------------

     "Facility B Percentage" means, relative to any Lender, the Facility B
      ---------------------
Percentage set forth on Schedule 2.1.1, as such percentage may be adjusted from
                        --------------
time to time pursuant to Assignment and Acceptance Agreement(s) executed by such
Lender and its Assignee Lender(s) and delivered pursuant to Section 11.11.1.
                                                            ---------------
The Facility B Percentage of each Lender shall equal the Facility A Percentage
of such Lender if any Facility A Loan shall be outstanding at the time of
determination.

     "Facility B Loan Conversion Date" means the earliest of
      -------------------------------

          (a)  the date 364 days after, but including, the Effective Date ;

          (b)  the date on which the Facility B Commitments are terminated in
     full or reduced to zero pursuant to Section 2.2; and
                                         -----------

          (c)  the date on which any Commitment Termination Event occurs.

                                      10
<PAGE>

     "Fiscal Quarter" means, with respect to any Person, the three (3) month
      --------------
period ending on March 31, June 30, September 30 and December 31.

     "Fiscal Year" means with respect to Star Gas Partners, the Borrower and the
      -----------
Material Subsidiaries, any period of twelve consecutive calendar months ending
on September 30 occurring during the referred to calendar year (e.g., the "2001
Fiscal Year" refers to a Fiscal Year ending on the September 30, 2001);
provided, however, that for years ended on or prior to December 31, 1999, Fiscal
--------  -------
Year for the Borrower and the Material Subsidiaries means calendar year."

     "F.R.S.  Board" means the Board of Governors of the Federal Reserve System
      -------------
or any successor thereto.

     "GAAP" is defined in Section 1.4.
      ----                -----------

     "Government Authority" means any agency, authority, board, bureau,
      --------------------
commission, department, office or instrumentality of any nature whatsoever of
any governmental or quasigovernmental unit, whether federal, state, county,
district, city or other political subdivision, foreign or otherwise and whether
now or hereafter in existence, or any officer or official of any thereof.

     "Guarantee Agreements" means (i) the Guarantee Agreement, dated as of the
      --------------------
date hereof among Star Gas Partners and the Agent substantially in the form of
Exhibit H-1 hereto, and (ii) the Guarantee Agreement, dated as of the date
-----------
hereof, among the Material Subsidiaries and the Agent substantially in the form
of Exhibit H-2 hereto.
   -----------

     "Hazardous Material" means:
      ------------------

          (a)  any "hazardous substance", as defined by CERCLA;

          (b)  any "hazardous waste", as defined by the Resource Conservation
     and Recovery Act, as amended;

          (c)  any "pollutant" pursuant to the Clean Water Act, as amended;

          (d)  any petroleum product or related compound;

          (e)  any polychlorinated biphenyls or friable asbestos;

          (f)  any radioactive material or substance; or

          (g)  any pollutant or contaminant or hazardous, dangerous or toxic
     chemical, material, substance or waste within the meaning of any other
     Environmental Law, all as amended or hereafter amended.

     "Indebtedness" of any Person means, without duplication:
      ------------

                                      11
<PAGE>

          (a)  any indebtedness for borrowed money which such Person has
     directly or indirectly created, incurred or assumed;

          (b)  any indebtedness, whether or not for borrowed money, with respect
     to which such Person has become directly or indirectly liable and which
     represents the deferred purchase price (or a portion thereof) or has been
     incurred to finance the purchase price (or a portion thereof) of any
     property or service or business acquired by such Person, whether, by
     purchase, consolidation, merger or otherwise;

          (c)  all obligations of such Person evidenced by notes, bonds,
     debentures or similar instruments, including obligations so evidenced
     incurred in connection with the acquisition of property, assets or
     businesses;

          (d)  all indebtedness of such Person created or arising under any
     conditional sale or other title retention agreement, or incurred as
     financing, in either case with respect to property acquired by the Person
     (even though the rights and remedies of the seller or lender under such
     agreement in the event of default are limited to repossession or sale of
     such property);

          (e)  all Capitalized Lease Liabilities;

          (f)  any indebtedness, whether or not for borrowed money, secured by
     (or for which the holder of such Indebtedness has an existing right,
     contingent or otherwise, to be secured by) any Lien in respect of property
     owned by such Person, whether or not such Person has assumed or become
     liable for the payment of such indebtedness, provided that the amount of
     such Indebtedness if not so assumed shall in no event be deemed to be
     greater than the fair market value from time to time (as determined in good
     faith, by such Person) of the property subject to such Lien;

          (g)  all liabilities of such Person in respect of letters of credit or
     instruments serving a similar function issued or accepted for its account
     by banks and other financial institutions (whether or not representing
     obligations for borrowed money);

          (h)  any indebtedness of the character referred to in clauses (a)
                                                                -----------
     through (g) of this definition deemed to be extinguished under GAAP but for
             ---
     which such Person remains legally liable but only to the extent of such
     legal liability; and

          (i)  any indebtedness of any other Person of the character referred to
     in clauses (a) through (h) of this definition with respect to which the
        ------------        ---
     Person whose Indebtedness is being determined has become liable by way of a
     Contingent Liability.

     "Indemnified Liabilities" is defined in Section 11.4.
      -----------------------                ------------

     "Indemnified Parties" is defined in Section 11.4.
      -------------------                ------------
                                      12
<PAGE>

     "Interest Period" means, relative to any LIBOR Loan, the period beginning
      ---------------
on (and including) the date on which such LIBOR Loan is made or continued as, or
converted into, a LIBOR Loan pursuant to Section 2.3 or 2.4 and ending on (but
                                         -----------    ---
excluding) the day which numerically corresponds to such date one, two, three or
six months thereafter (or, if such month has no numerically corresponding day,
on the last Business Day of such month) or any shorter period if acceptable to
all the Lenders, in each case as the Borrower may select in its relevant notice
pursuant to Section 2.3 or 2.4; provided, however, that:
            ------------   ---

          (a)  the Borrower shall not be permitted to select Interest Periods to
     be in effect at any one time which have expiration dates occurring on more
     than two (2) different dates;

          (b)  Interest Periods commencing on the same date for Loans comprising
     part of the same Borrowing shall be of the same duration;

          (c)  if such Interest Period would otherwise end on a day which is not
     a Business Day, such Interest Period shall end on the next following
     Business Day (unless, if such Interest Period applied to LIBOR Loans, such
     next following Business Day is the first Business Day of a calendar month,
     in which case such Interest Period shall end on the Business Day next
     preceding such numerically corresponding day); and

          (d)  no Interest Period may end later than the date set forth in

     clause (a) of the definition "Facility A Commitment Termination Date", in
     ----------
     the case of Interest Periods for Facility A Loans, or in the case of
     Interest Periods for Facility B Loans any date on which a principal payment
     is due if it would be necessary to repay Facility B Loans before the end of
     the Interest Period applicable thereto.

     "Investment" means, relative to any Person, any direct or indirect purchase
      ----------
or other acquisition by such Person of stock or other securities of any other
Person, or any direct or indirect loan, advance or capital contribution by such
Person to any other Person, and any other item, which in any such case; would be
classified as an "investment" on a balance sheet of such Person prepared in
accordance with GAAP, including, without limitation, any direct or indirect
contribution by such Person of property or assets to a joint venture,
partnership or other business entity in which such Person retains an interest,
but excluding any Permitted Hedging Agreement investments in any company by
which such company becomes a Material Subsidiary.  For the purposes of Section
                                                                       -------
8.2.5, the amount involved in Investments made during any period shall be the
-----
aggregate cost during such period to the Borrower and the Material Subsidiaries
of all such Investments, determined in accordance with GAAP, but without regard
to unrealized increases or decreases in value, or write-ups, write-downs or
write-offs, of such investments and without regard to the existence of any
undistributed earnings or accrued interest with respect thereto accrued after
the respective dates on which such Investments were made, less any net return of
capital realized during such period upon the sale, repayment or other
liquidation of such Investment (determined in accordance with GAAP, but without
regard to any amounts received as earnings (in the form of dividends not
constituting a return of capital, interest or otherwise) on such Investment or
as loans from any Person in whom such Investment has been made).

                                      13
<PAGE>

     "Lender" has the meaning set forth in the preamble hereto.
      ------

     "LIBOR" means, for each Interest Period for each LIBOR Loan, the interest
      -----
per annum obtained by the Agent as offered quotations (rounded upwards, if
necessary, to the nearest 1/100 of 1%) that appear on the Telerate Screen which
displays an average British Bankers Association Interest Settlement Rate (such
page number 3740 or 3750, as applicable) for deposits (on the date two (2)
Business Days prior to the first day of such Interest Period) with a term
equivalent to such period in Dollars, determined as of approximately 11:00 a.m.,
London time; provided that if such rate does not appear on such page or service
or such service shall cease to be available, the rate per annum (rounded
upwards, if necessary, to the nearest 1/100 of 1%) which the Agent has
determined to be the offered rate on such other page or other service which
displays an average British Bankers Association Interest Settlement Rate for
deposits on the date two (2) Business Days prior to the first day of such
Interest Period) with a term equivalent to such period in Dollars, determined as
of approximately 11:00 a.m., London time.

     "LIBOR Loan" means any Loan bearing interest, at all times during an
      ----------
Interest Period applicable to such Loan, at a fixed rate of interest determined
by reference to the LIBOR (Reserve Adjusted).

     "LIBOR (Reserve Adjusted)" means, relative to any Loan to be made,
      ------------------------
continued or maintained as, or converted into, a LIBOR Loan for any Interest
Period, a rate per annum (rounded upward, if necessary, to the nearest 1 / 100
of 1 %) determined pursuant to the following formula:

          LIBOR                    LIBOR
                                   -----
                           =
     (Reserve Adjusted)          1.00 - LIBOR Reserve Percentage

The LIBOR (Reserve Adjusted) for any Interest Period for LIBOR Loans will be
determined by the Agent on the basis of the LIBOR Reserve Percentage in effect
on, and the applicable rates furnished to and received by the Agent from the
Reference Lender, two (2) Business Days before the first day of such Interest
Period.

     "LIBOR Reserve Percentage" means, relative to any Interest Period for LIBOR
      ------------------------
Loans, the reserve percentage (expressed as a decimal) equal to the maximum
aggregate reserve requirements (including all basic, emergency, supplemental,
marginal and other reserves and taking into account any transitional adjustments
or other scheduled changes in reserve requirements) specified under regulations
issued from time to time by the F.R.S.  Board and then applicable to assets or
liabilities consisting of and including "Eurocurrency Liabilities", as currently
defined in Regulation D of the F.R.S.  Board, having a term approximately equal
or comparable to such Interest Period.

     "Lien" means, as to any Person, any mortgage, lien (statutory or
      ----
otherwise), pledge, reservation, right of entry, encroachment, easement, right
of way, restrictive covenant, license, charge, security interest or other
encumbrance in or on, or any interest or title of any vendor, lessor, lender or
other secured party to or of such Person under any conditional sale or other
title

                                      14
<PAGE>

retention agreement or capital lease with respect to, any property or asset
owned or held by such Person, or the signing or filing of a financing statement
with respect to any of the foregoing which names such Person as debtor, the
signing of any security agreement with respect to any of the foregoing
authorizing any other party as the secured party thereunder to file any
financing statement or any other agreement to give or grant any of the
foregoing. For the purposes of this Agreement, a Person shall be deemed to be
the owner of any asset which it has placed in trust for the benefit of the
holders of Indebtedness of such Person and such trust shall be deemed to be a
Lien if such Person remains legally liable therefor, notwithstanding that such
Indebtedness is or may be deemed to be extinguished under GAAP.

     "Loan" means, as the context may require, a Facility A Loan or a Facility B
      ----
Loan.

     "Loan Documents" means this Agreement, the Notes, the Guarantee Agreements,
      --------------
the Security Documents, any pledge agreement, security agreement, guaranty, or
mortgage or subordination agreement delivered to the Agent pursuant to this
Agreement, as the same may be amended, supplemented, restated or otherwise
modified from time to time.

     "Managing General Partner" means Star Gas LLC, a Delaware limited liability
      ------------------------
company.

     "Material Adverse Effect" means, without limitation, a material adverse
      -----------------------
effect on (i) the condition (financial or otherwise), business, prospects,
operations, assets or properties of Star Gas Partners and its Subsidiaries taken
as a whole, (ii) the condition (financial or otherwise), business, prospects,
operations, assets or properties of the Borrower and the Material Subsidiaries
(taken as a whole), (iii) any Obligor's ability to perform its obligations under
any Loan Document to which it is a party, (iv) the security interests (or the
value or priority thereof) granted under the Security Documents, or (v) the
validity of the Loan Documents.

     "Material Subsidiary" means unless waived by the Agent all existing,
      -------------------
future, direct or indirect Subsidiaries of the Borrower.

     "Multiemployer Plan" means a "multiemployer plan", within the meaning of
      ------------------
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes,
is making, or is obligated to make contributions or, during the preceding three
(3) calendar years, has made, or been obligated to make, contributions.

     "Note" means, as the context may require, either a Facility A Note or a
      ----
Facility B Note, or both.

     "Obligations" means the obligations of the Borrower to the Agent and the
      -----------
Lenders under this Agreement, the Notes and each other Loan Document.

     "Obligor" means Star Gas Partners, the Borrower, the Material Subsidiaries
      -------
and any other Person (other than the Agent or any Lender) obligated under any
Loan Document.

     "Other Facilities" is defined in Section 11.12.
      ----------------                -------------

                                      15
<PAGE>

     "Organization Document" means, relative to any Obligor, its partnership
      ---------------------
agreement, certificate of incorporation, certificate of formation, its by-laws
or operating agreement and all shareholder agreements, voting trusts and similar
arrangements applicable to any of its authorized shares of Capital Stock or
other equity interests.

     "Participant" is defined in Section 11.11.2.
      -----------                ---------------

     "PBGC" means the Pension Benefit Guaranty Corporation or any Government
      ----
Authority succeeding to any of its principal functions under ERISA.

     "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA)
      ------------
subject to Title IV of ERISA (other than a Multiemployer Plan) which the
Borrower and/or any ERISA Affiliate sponsors, maintains, or to which it makes,
is making, or is obligated to make contributions, or in the case of multiple
employer plan (as described in Section 4064(a) of ERISA) has made contributions
at any time during the immediately preceding five (5) plan years.

     "Percentage" means the Facility A Percentage or the Facility B Percentage,
      ----------
or both, as applicable.

     "Permitted Hedging Agreement" means natural gas or electricity hedging
      ---------------------------
agreements for the purpose of hedging (i) price fluctuations of inventory of the
Borrower and its Material Subsidiaries, and (ii) the Borrower's obligation to
deliver natural gas or electricity at capped or fixed prices (and not for
investment or speculative purposes).

     "Person" means any natural person, corporation, partnership, firm,
      ------
association, trust, government, governmental agency or any other entity, whether
acting in an individual, fiduciary or other capacity.

     "Petro Credit Facility" means that certain Amended and Restated Credit
      ---------------------
Agreement, dated as of December 8, 2000, by and among Petroleum Heat and Power
Co., Inc., Bank of America N.A. and certain other financial institutions, as
amended, modified or restated from time to time.

     "Plan" means an employee benefit plan (as defined in Section 3(3) of
      ----
ERISA), subject to Part 4 of Title I (B) of ERISA which the Borrower sponsors or
maintains or to which the Borrower makes, is making, or is obligated to make
contributions and includes any Pension Plan.

     "Post-Default Rate" means (a) in respect of any Loans a rate per annum
      -----------------
equal to: (i) if such Loans are Prime Rate Loans, 2% above the Alternate Prime
Rate as in effect from time to time plus the Applicable Prime Rate Margin (but
in no event less than the interest rate in effect on the due date), or (ii) if
such Loans are LIBOR Loans, 2% above the rate of interest in effect thereon at
the time of the Event of Default that resulted in the Post-Default Rate being
instituted until the end of the then current Interest Period therefor and,
thereafter, 2% above the Alternate Prime Rate as in effect from time to time
plus the Applicable Prime Rate Margin (but in no event less than the interest
rate in effect on the due date); and (b) in respect of other amounts payable

                                      16
<PAGE>

by the Borrower hereunder (other than interest) not paid when due (whether at
stated maturity, by acceleration or otherwise), a rate per annum during the
period commencing on the due date until such other amounts are paid in full
equal to 2% above the Prime Rate as in effect from time to time plus the
Applicable Prime Rate Margin (but in no event less than the interest rate in
effect on the due date).

     "Prior Lien" means all Liens of whatever nature against the Borrower or any
      ----------
of its Material Subsidiaries or any of their respective assets or properties
existing on the date hereof before giving effect to the transactions
contemplated by this Agreement.

     "Prime Rate" means the rate per annum announced by the Reference Lender
      ----------
from time to time as its Prime Rate in effect at its principal office.  The
Prime Rate is not necessarily intended to be the lowest rate of interest
determined by the Reference Lender in connection with extensions of credit.
Changes in the rate of interest on that portion of any Loans maintained as Prime
Rate Loans will take effect simultaneously with each change in the Prime Rate.
The Agent will give notice promptly to the Borrower and the Lenders of changes
in the Prime Rate.

     "Prime Rate Loans" means loans at such times as they are being made and/or
      ----------------
maintained at a rate of interest based on the Prime Rate.

     "Project Contract" means each agreement of the Borrower and the Material
      ----------------
Subsidiaries listed on Exhibit O (as the same may be amended or supplemented
                       ---------
from time to time) hereto, together with each other agreement entered into by
the Borrower or the Material Subsidiaries pursuant to which the Borrower or the
Material Subsidiaries agrees to provide services and products anticipated by the
Borrower in its reasonable judgement to provide revenues to the Borrower or the
Material Subsidiaries in excess of $200,000 over any 12-month period.

     "Project Party" means each Person listed on Exhibit O hereto, who is a
      -------------                              ---------
party to the Project Contract listed thereon, and each other Person who is, in
the future, party to a Project Contract.

     "Property" means any right or interest in or to property whatsoever,
      --------
whether real, personal or mixed and whether tangible or intangible.

     "Qualified Capital Stock" means Capital Stock not constituting Disqualified
      -----------------------
Stock.

     "Quarterly Payment Date" means the last day of each March, June, September,
      ----------------------
and December or, if any such day is not a Business Day, the next succeeding
Business Day.

     "Receipts Account" shall mean account no. 375-1508531of the Borrower
      ----------------
maintained with the Depositary.

     "Reference Lender" means, so long as Chase is the Agent, Chase, and
      ----------------
otherwise "Reference Lender" means the Lender serving for the time being as a
successor Agent to Chase pursuant to Section 10.9.
                                     ------------

                                      17
<PAGE>

     "Regulatory Change" means, relative to the Agent or any Lender, any change
      -----------------
after the date hereof in any (or the adoption after the date hereof of any new):

          (a)  United States Federal or state law or foreign law applicable to
     the Agent or such Lender; or

          (b)  regulation, interpretation, directive, or request (whether or not
     having the force of law) applicable to such Agent or such Lender or any
     court or government authority charged with the interpretation or
     administration of any law referred to in the immediately preceding clause
                                                                        ------
     (a) or of any fiscal, monetary, or other authority having jurisdiction over
     ---
     the Agent or such Lender.

     "Release" means a "release", as such term is defined in CERCLA.
      -------

     "Reportable Event" means, any of the events set forth in Section 4043(c) of
      ----------------
ERISA or the regulations thereunder, other than any such event for which the 30-
day notice requirement under ERISA has been waived in regulations issued by the
PBGC.

     "Required Lenders" means, Lenders holding 100 % of the Commitments (or, if
      ----------------
the Commitments have been terminated, Lenders holding 100% of the outstanding
Obligations).

     "Resource Conservation and Recovery Act" means the Resource Conservation
      --------------------------------------
and Recovery Act, 42 U.S.C.  Section 6901, et seq., as amended.

     "Responsible Officer" means with respect to any Person, the President, any
      -------------------
Vice President, the Chief Financial Officer, the Treasurer and the Secretary of
such Person and any other officer of such Person who is responsible for
compliance with or performance of any obligation under or matter referred to in
this Agreement with respect to the Borrower, and, in any case, any employee of
the Borrower performing any of the above functions.

     "Restricted Payment" means any payment or other distribution made after the
      ------------------
Effective Date in respect of stock in the Borrower, and the Material
Subsidiaries, except a distribution payable solely in additional stock of such
Person, and any payment, by the Borrower or a Material Subsidiary on account of
the redemption, retirement, purchase or other acquisition of stock or a
distribution by a Material Subsidiary to the Borrower.

     "Securities Act" means the Securities Act of 1933, as amended from time to
      --------------
time.

     "Security" is defined in Section 2(1) of the Securities Act.
      --------

     "Security Agreement" means (i) the Company Security Agreement dated as of
      ------------------
the date hereof, between the Borrower and the Agent, substantially in the form
of Exhibit J-1 hereto; and (ii) the Material Subsidiary Guarantor Security
   -----------
Agreement dated as of the date hereof, among the Material Subsidiaries and the
Agent, substantially in the form of Exhibit J-2 hereto.
                                    -----------

                                      18
<PAGE>

     "Security Agreements" means (i) the Security Agreement, and (ii) the
      -------------------
Accounts Security Deposit Agreement, dated as of the date hereof, between the
Borrower and the Agent, substantially in the form of Exhibit K hereto, and (iii)
                                                     ---------
the Securities Account Control Agreement, dated the date hereof, between the
Borrower, as securities intermediary and the Agent, substantially in the form of
Exhibit L hereto, and (iv) the Company Share Pledge Agreement, dated the date
---------
hereof, among all of the shareholders of the Borrower and the Agent,
substantially in the form of Exhibit M hereto.
                             ---------

     "Security Documents" means any of the documents securing the Notes,
      ------------------
including without limitation, the Security Agreements.

     "Senior Debt" means the Obligations.
      -----------

     "Senior Interest Expense" shall mean the gross interest expense incurred by
      -----------------------
the Borrower in connection with the Obligations, calculated in accordance with
GAAP applied on a consistent basis and calculated over the four fiscal quarters
next preceding the date of calculation thereof.

     "Sevin Group" means Irik P.  Sevin, Audrey L.  Sevin and the estate of Irik
      -----------
P.  Sevin and Audrey L.  Sevin, so long as the survivor has the power to vote
membership interest in the Managing General Partner, and any testamentary trust,
all beneficiaries of which are members of the immediate family of Irik P.  Sevin
or Audrey L.  Sevin, and all trustees which are members of the immediate family
of Irik P.  Sevin or Audrey L.  Sevin and, under the terms of the trust, have
the power to vote membership interests in the Managing General Partner.

     "Star Gas Partners" means Star Gas Partners, L.P., a Delaware limited
      -----------------
partnership.

     "Star Propane" means Star Gas Propane, L.P., a Delaware limited
      ------------
partnership.

     "Stated Maturity Date" means, with respect to the Facility A Loans the date
      --------------------
that is 364 days after, but including, the Effective Date, and, with respect to
the Facility B Loans the date that is eighteen (18) months after, but including,
the Effective Date.

     "Subordinated Indebtedness" shall mean Indebtedness of the Borrower to an
      -------------------------
Affiliate of the Borrower subordinated to the Senior Debt upon terms and
conditions substantially as are set forth in the Subordination Agreement.

     "Subordination Agreement" shall mean a Subordination Agreement in the form
      -----------------------
of Exhibit P hereto.

     "Subsidiary" means, with respect to any Person, any corporation, limited
      ----------
liability company, business trust, association, partnership, joint venture or
other business entity at least a majority (by number of votes) of the stock of
any class or classes (or equivalent interest) of which is at the time owned by
such Person or by one or more Subsidiaries of such Person or by such Person and
one or more Subsidiaries of such Person, if the holders of the stock of such
class or classes (or equivalent interests) (a) are ordinarily, in the absence of
contingencies, entitled to vote for the election of a majority of the directors
(or Persons performing similar functions) of

                                      19
<PAGE>

such business entity, even though the right so to vote has been suspended by the
happening of such a contingency, or (b) are at the time entitled, as such
holders, to vote for the election of the majority of the directors (or Persons
performing similar functions) of such business entity, whether or not the right
so to vote exists by reason of the happening of a contingency. Unless the
context otherwise requires, any reference to a Subsidiary shall mean a
Subsidiary of the Borrower. Star Propane shall be deemed to be a Subsidiary of
Star Gas Partners so long as Star Gas Partners owns a majority of the limited
partnership interests in Star Propane and the Managing General Partner is the
sole general partner of Star Propane.

     "Synthetic Lease" means each arrangement, however described, under which
      ---------------
the obligor: (a) accounts for its interest in the property covered thereby under
GAAP as if the obligor were the lessee of a lease which is not a capital lease;
and (b) accounts for its interest in the property covered thereby for Federal
income tax purposes as if the obligor were the owner.

     "Synthetic Lease Interest Component" means, with respect to any Person for
      ------------------------------------
any period, the portion of rent paid or payable (without duplication) for such
period under Synthetic Leases of such Person that would be treated as interest
in accordance with Financial Accounting Standards Board Statement No.  13 if
such Synthetic Leases were treated as capital leases under GAAP.

     "Synthetic Lease Obligation" means, as to any Person with respect to any
      --------------------------
Synthetic Lease at any time of determination, the amount of the liability of
such Person in respect of such Synthetic Lease that would (if such lease was
required to be classified and accounted for as a capital lease on a balance
sheet of such Person in accordance with GAAP) be required to be capitalized on
the balance sheet of such Person at such time.

     "Taxes" is defined in Section 5.6.
      -----                -----------

     "type" means, relative to any Loan, the portion thereof, if any, being
      ----
maintained as a Prime  Rate Loan or a LIBOR Loan.

     "Unfunded Pension Liability" means the excess of a Pension Plan's benefit
      --------------------------
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Plan's assets, determined in accordance with the assumptions used for funding
the Pension Plan pursuant to Section 412 of the Code for the applicable plan
year.

     "United States" or "U.S." means the United States of America, its fifty
      -------------      ---
States and the District of Columbia.

     "Wholly-Owned Subsidiary" means any corporation in which (other than
      -----------------------
directors' qualifying shares required by law) 100% of the Capital Stock of each
class having ordinary voting power, and 100% of the Capital Stock of every other
class, in each case, at the time as of which any determination is being made, is
owned, beneficially and of record, by the Borrower, or by one or more of the
other Wholly-Owned Subsidiaries of the Borrower, or any of them.

                                      20
<PAGE>

     SECTION 1.2  Use of Defined Terms. Unless otherwise defined or the context
                  --------------------
otherwise requires, terms for which meanings are provided in this Agreement
shall have such meanings when used in the Disclosure Schedule and in each Note,
Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and
other communication delivered from time to time in connection with this
Agreement or any other Loan Document.

     SECTION 1.3  Other Interpretive Provisions.
                  -----------------------------

          (a)  The meanings of defined terms are equally applicable to the
     singular and plural forms of the defined terms.

          (b)  The words "hereof", "herein", "hereunder" and similar words refer
     to this Agreement as a whole and not to any particular provision of this
     Agreement; and subsection, Section, Schedule and Exhibit references are to
     this Agreement unless otherwise specified.

          (c)  (i)    The term "documents" includes any and all instruments,
     documents, agreements, certificates, indentures, notices and other
     writings, however evidenced.

               (ii)   The term "including" is not limiting and means "including
          without limitation."

               (iii)  In the computation of periods of time from a specified
          date to a later specified date, the word "from" means "from and
          including"; the words "to" and "until" each mean "to but excluding",
          and the word "through" means "to and including."

          (d)  Unless otherwise expressly provided herein, (i) references to
     agreements (including this Agreement) and other contractual instruments
     shall be deemed to include all subsequent amendments and other
     modifications thereto, but only to the extent such amendments and other
     modifications are not prohibited by the terms of any Loan Document, and
     (ii) references to any statute or regulation are to be construed as
     including all statutory and regulatory provisions consolidating, amending,
     replacing, supplementing or interpreting the statute or regulation.

          (e)  The captions and headings of this Agreement are for convenience
     of reference only and shall not affect the interpretation of this
     Agreement.

          (f)  This Agreement and other Loan Documents may use several different
     limitations, tests or measurements to regulate the same or similar matters.
     All such limitations, tests and measurements are cumulative and shall each
     be performed in accordance with their terms.

                                      21
<PAGE>

          (g)  Unless otherwise expressly provided herein, financial
     calculations applicable to the Borrower shall be made on a consolidated
     basis among the Borrower and the Material Subsidiaries.

     SECTION 1.4  Accounting and Financial Determinations.  Unless otherwise
                  ---------------------------------------
specified, all accounting terms used herein or in any other Loan Document shall
be interpreted, all accounting determinations and computations hereunder or
thereunder (including under Section 8.2.4) shall be made, and all financial
                            -------------
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with, those generally accepted accounting principles in effect in the
United States of America from time to time ("GAAP").  Notwithstanding the
                                             ----
foregoing, if the Borrower, the Required Lenders or the Agent determines that a
change in GAAP from that in effect on the date hereof, has altered the treatment
of certain financial data to its detriment under this Agreement, such party may
seek of the others a renegotiation of any financial covenant affected thereby.
If the Borrower, the Required Lenders and Agent cannot agree on renegotiated
covenants, then, for the purposes of this Agreement, GAAP will refer to
generally accepted accounting principles on the date just prior to the date on
which the change that gave rise to the renegotiation occurred.

                                  ARTICLE II
                  COMMITMENTS, BORROWING PROCEDURES AND NOTES

     SECTION 2.1  Commitments. On the terms and subject to the conditions of
                  -----------
this Agreement (including Article VI), each Lender severally agrees to make
                          ----------
Loans pursuant to the Commitments described in this Section 2.1.
                                                    -----------

          SECTION 2.1.1  Facility A Commitment.
                         ---------------------

          (a)  On the terms and subject to the conditions of this Agreement
     (including, without limitation, Section 2.1.3), from time to time on any
                                     -------------
     Business Day occurring prior to the Facility A Commitment Termination Date,
     each Lender will make loans (relative to such Lender, its "Facility A
                                                                ----------
     Loans") to the Borrower in an aggregate principal amount not to exceed at
     -----
     anytime outstanding the lesser of (a) the amount set forth opposite such
     Lender's name on Schedule 2.1.1 under the caption "Facility A Commitment"
                      --------------
     (such amount as the same may be reduced hereunder or as reduced or
     increased as a result of one or more assignments, under Section 11.11.1,
                                                             ---------------
     such Lender's "Facility A Commitment"), and (b) such Lender's pro rata
                    ---------------------
     portion of the Facility A Borrowing Base.   On the terms and subject to the
     conditions hereof, the Borrower may from time to time borrow, prepay and
     reborrow Facility A Loans.

          (b)  The Borrower shall deliver a Borrowing Base Certificate to the
     Agent prior to the Effective Date to permit the Agent to determine the
     Facility A Borrowing Base to be in effect on the Effective Date and,
     thereafter, shall deliver Borrowing Base Certificates and such other
     materials to the Agent in accordance with the provisions of Section
                                                                 -------
     8.1.1(j).  Each  such Borrowing Base Certificate shall certify the Facility
     --------
     A Borrowing Base in effect on the last day of the applicable reporting
     period.  Promptly

                                      22
<PAGE>

     following its receipt of each Borrowing Base Certificate, the Agent shall
     confirm the then current Facility A Borrowing Base using the information
     previously provided to the Agent by the Borrower and shall notify the
     Borrower and each Lender of the Facility A Borrowing Base so determined.
     Each determination of the Facility A Borrowing Base by the Agent shall
     remain in effect until notice of a redetermined Facility A Borrowing Base
     shall have been given by the Agent in accordance with the provisions of
     this Section 2.1.1(b); provided, however, if the Borrower fails to deliver
          ----------------
     a Borrowing Base Certificate, the Borrower will be unable to borrow
     Facility A Loans until such time that a Borrowing Base Certificate is
     delivered.

          SECTION 2.1.2  Facility B Commitment.  On the terms and subject to the
                         ---------------------
     conditions of this Agreement (including without limitation Section 2.1.3),
                                                                -------------
     from time to time on any Business Day occurring prior to the Facility B
     Loan Conversion Date, each Lender will make loans (relative to such
     Lender, its "Facility B Loans") to the Borrower in an aggregate principal
                  ----------------
     amount not to exceed at any time outstanding the amount set forth opposite
     such Lender's name on Schedule 2.1.1 under the caption "Facility B
                           --------------
     Commitment" (such amount as the same may be reduced hereunder or as reduced
     or increased as a result of one or more assignments under Section 11.11.1,
                                                               ---------------
     such Lender's "Facility B Commitment").  On the terms and subject to the
                    ---------------------
     conditions hereof, the Borrower may from time to time borrow, prepay and
     reborrow Facility B Loans prior to the Facility B Loan Conversion Date.

          SECTION 2.1.3  Restrictions on Loans.   None of the Lenders shall be
                         ---------------------
     permitted or required to:

          (a)  make any Facility A Loan if, after giving effect thereto, the
     Effective Amount of all Facility A Loans, would exceed the lesser of (x)
     the combined Facility A Commitments and (y) the Facility A Borrowing Base;
     or

          (b)  make any Facility A Loan or Facility B Loan, if after giving
     effect thereto, Section 8.1.14(b) would be breached.
                     -----------------

     SECTION 2.2  Reduction and Termination of Commitments.  The Commitments
                  ----------------------------------------
are subject to reduction and termination from time to time pursuant to this
Section 2.2.
-----------

          SECTION 2.2.1  Optional Subject to Section 5.4.  The Borrower may,
                         -------------------------------
     from time to time on any Business Day occurring after the Effective Date,
     voluntarily reduce the unused amount of any Commitment; provided, however,
     that all such reductions shall require at least three (3) Business Days'
     prior notice to the Agent and be permanent, and any partial reduction of
     any Commitment shall be in an integral multiple of $1,000,000.

          SECTION 2.2.2  Mandatory.  The applicable Commitment shall be
                         ---------
     reduced by an amount equal to any amount required as a mandatory prepayment
     of the Facility A Loans or Facility B Loans as applicable pursuant to
     Section 3.1.1, 3.1.3(a), 3.1.3(d) or 3.1.3(g) (whether or not any Loans
     -------------  --------  --------    --------
     shall then be outstanding under the applicable Commitment).

                                      23
<PAGE>

          SECTION 2.2.3  Termination.
                         -----------

          (a)  Upon the occurrence of any event described in the definition of
     Facility A Commitment Termination Date, the Facility A Commitment shall be
     reduced to zero and shall terminate automatically and without further
     action.

          (b)  Upon the occurrence of any event described in the definition of
     Facility B Commitment Termination Date, the Facility B Commitment shall be
     reduced to zero and shall terminate automatically and without further
     action.

     SECTION 2.3  Borrowing Procedure. By delivering a Borrowing Request to the
Agent on or before 11:00 a.m., New York City time, on a Business Day, the
Borrower may from time to time irrevocably request, on not less than three (3)
nor more than five (5) Business Days' notice in the case of LIBOR Loans, and on
the same day or no more than five (5) Business Days' notice in the case of Prime
Rate Loans, that a Borrowing be made in a minimum amount of $100,000 in the case
of LIBOR Loans, and in a minimum amount of $50,000 in the case of Prime Rate
Loans, and in both instances in any integral multiple of $50,000 in excess
thereof, or in the unused amount of the applicable Commitment. On the terms and
subject to the conditions of this Agreement, each Borrowing shall be comprised
of the type of Loans, and shall be made on the Business Day, specified in such
Borrowing Request. Each Borrowing Request must be signed by a Responsible
Officer of the Borrower. Upon receipt of any Borrowing Request, the Agent shall
promptly notify the Lenders of such Borrowing Request. On or before 1:00 p.m.,
New York City time, on such Business Day each Lender shall deposit with the
Agent same day funds in an amount equal to such Lender's Percentage of the
requested Borrowing. Such deposit will be made to an account which the Agent
shall specify from time to time by notice to the Lenders. To the extent funds
are received from the Lenders, the Agent shall make such funds available to the
Borrower by wire transfer to the accounts specified in the applicable Borrowing
Request. No Lender's obligation to make any Loan shall be affected by any other
Lender's failure to make any Loan.

     SECTION 2.4  Continuation and Conversion Elections.   By delivering a
                  -------------------------------------
Continuation/Conversion Notice to the Agent on or before 11:00 a.m., New York
City time, on a Business Day, the Borrower may from time to time irrevocably
elect, on not less than three (3) nor more than five (5) Business Days' notice
that all, or any portion in a minimum amount of $100,000, in the case of LIBOR
Loans, and in a minimum amount of $50,000 in the case of Prime Rate Loans, and
in both instances any integral multiple of $50,000 in excess thereof, of any
Loans be, in the case of Prime Rate Loans, converted into LIBOR Loans or, in the
case of LIBOR Loans, be converted into a Prime Rate Loan or a LIBOR Loan or
continued as a LIBOR Loan (in the absence of delivery of a
Continuation/Conversion Notice with respect to any LIBOR Loan at least three (3)
Business Days before the last day of the then current Interest Period with
respect thereto, such LIBOR Loan shall, on such last day, automatically convert
to a Prime Rate Loan); provided, however, that (i) each such conversion or
continuation shall be pro rated among the applicable outstanding Loans of all
Lenders, and (ii) no portion of the outstanding principal amount of any Loans
may be continued as, or be converted into, LIBOR Loans when any Default or Event
of Default has occurred and is continuing.

                                      24
<PAGE>

     SECTION 2.5  Funding.   Each Lender may, if it so elects, fulfill its
                  -------
obligation to make, continue or convert LIBOR Loans hereunder by causing one of
its foreign branches or Affiliates (or an international banking facility created
by such Lender) to make or maintain such LIBOR Loan; provided, however, that
such LIBOR Loan shall nonetheless be deemed to have been made and to be held by
such Lender, and the obligation of the Borrower to repay such LIBOR Loan shall
nevertheless be to such Lender for the account of such foreign branch, Affiliate
or international banking facility.  In addition, the Borrower hereby consents
and agrees that, for purposes of any determination to be made for purposes of
Sections 5.1, 5.2, 5.3 or 5.4, it shall be conclusively assumed that each Lender
------------  ---  ---    ---
elected to fund all LIBOR Loans by purchasing, as the case may be, Dollar
certificates of deposit in the U.S.  or Dollar deposits in its Applicable
Lending Office.

     SECTION 2.6  Loan Accounts/Notes.
                  -------------------

          (a)  The Loans made by each Lender shall be evidenced by one or more
     loan accounts or records maintained by such Lender in the ordinary course
     of business.  The loan accounts or records maintained by the Agent and each
     Lender shall be conclusive absent manifest error of the amount of the Loans
     made by the Lenders to the Borrower and the interest and payments thereon.
     Any failure so to record or any error in doing so shall not, however, limit
     or otherwise affect the obligation of the Borrower hereunder to pay any
     amount owing with respect to the Loans.  In case of a discrepancy between
     the entries in the Agent's books and any Lender's books, the Agent's books
     shall be conclusive absent manifest error.

          (b)  Upon the request of any Lender made through the Agent, the
     Facility A Loans made by such Lender shall be evidenced by a single
     promissory note of the Borrower in substantially the form of Exhibit A-1
                                                                  -----------
     hereto (each, a "Facility A Note" and collectively, the "Facility A
                      ---------------                         ----------
     Notes"), instead of loan accounts.  Each Facility A Note shall be dated the
     -----
     Effective Date, shall be payable to the order of such Lender in a principal
     amount equal to such Lender's Facility A Commitment as originally in
     effect, and shall otherwise be duly completed.  The Notes shall be payable
     as provided in Article III.
                    -----------

          (c)  Upon the request of any Lender made through the Agent, the
     Facility B Loans made by such Lender shall be evidenced by a single
     promissory note of the Borrower in substantially the form of Exhibit A-2
                                                                  -----------
     hereto (each, a "Facility B Note" and collectively, the "Facility B
                      ---------------                         ----------
     Notes"), instead of loan accounts.  Each Facility B Note shall be dated the
     -----
     Effective Date, shall be payable to the order of such Lender in a principal
     amount equal to such Lender's Facility B Commitment as originally in
     effect, and shall otherwise be duly completed.  The Notes shall be payable
     as provided in Article III.
                    -----------

          (d)  Each Lender shall enter on a schedule attached to its Notes a
     notation with respect to each Loan made hereunder of: (i) the date and
     principal amount thereof, (ii) each payment and prepayment of principal
     thereof, (iii) whether the interest rate is initially to be determined in
     accordance with Section 3.2.1(a) or Section 3.2.1(b), and (iv) the Interest
                     ----------------    ----------------
     Period, if applicable.  Such notations shall be conclusive and binding on

                                      25
<PAGE>

     the Borrower absent manifest error; provided, however, that the failure of
     any Lender to make a notation on the schedule to its Note as aforesaid
     shall not limit or otherwise affect the obligation of the Borrower to repay
     the Loans in accordance with their respective terms as set forth herein.

                                  ARTICLE III
                  REPAYMENTS, PREPAYMENTS, INTEREST AND FEES

     SECTION 3.1  Repayment and Prepayments.
                  -------------------------

          SECTION 3.1.1  Repayment
                         ---------

          (a)  Facility A Loans.  The Borrower shall pay to the Agent, for the
               ----------------
     account of each Lender, on the Facility A Commitment Termination Date the
     aggregate principal amount of Facility A Loans outstanding on such date,
     together with all accrued and unpaid interest thereon.

          (b)  Facility B Loans.  The Borrower shall pay to the Agent, for the
               ----------------
     account of each Lender, the principal of the Facility B Loans made by such
     Lender outstanding at the close of business on the Facility B Loan
     Conversion Date (together with all accrued and unpaid interest thereon) in
     a single payment on the date eighteen (18) months after the Effective Date.

          SECTION 3.1.2  Voluntary Prepayments. The Borrower may, from time to
                         ---------------------
     time on any Business Day, make a voluntary prepayment, in whole or in part,
     of the outstanding principal amount of any Loans; provided, however, that:

          (a)  any such prepayment shall be made pro rata among Loans of the
     same type and, if applicable, having the same Interest Period, of all
     Lenders;

          (b)  all such voluntary prepayments of LIBOR Loans shall require at
     least three (3) but no more than five (5) Business Days' prior written
     notice to the Agent and all such voluntary prepayments of Prime Rate Loans
     shall require prior written notice to the Agent at least by 1:00 p.m., New
     York City time, at least one (1) Business Day prior to such repayment but
     no more than five (5) Business Days prior to such repayment; and

          (c)  all such voluntary prepayments of LIBOR Loans or Prime Rate Loans
     shall be made in a minimum amount of $100,000 and any integral multiple of
     $50,000 in excess thereof, or in the whole outstanding principal amount of
     such Loans;

Each prepayment of any Loans made pursuant to this Section shall be without
premium or penalty, except as required by Section 5.4.
                                          ------------

          SECTION 3.1.3  Mandatory Prepayments.
                         ---------------------

                                      26
<PAGE>

          (a)  The Borrower shall, on each date when any reduction in the
     applicable Commitment shall become effective, including pursuant to Section
                                                                         -------
     2.2, make a mandatory prepayment of all applicable Loans equal to the
     ---
     excess, if any, of the aggregate principal amount of all applicable Loans
     over the applicable Commitment.

          (b)  If at any time the Effective Amount of the Facility A Loans
     exceeds the lesser of (x) the combined Facility A Commitments then in
     effect and (y) the Facility A Borrowing Base, the Borrower shall
     immediately prepay such Facility A Loan in an aggregate principal amount
     equal to such excess.  Amounts prepaid pursuant to this Section may be
     reborrowed; provided that the aggregate Facility A Commitment is not
     exceeded thereby.

          (c)  If at any time the Effective Amount of the Facility B Loans
     exceeds the combined Facility B Loan Commitments then in effect, the
     Borrower shall immediately prepay such Facility B Loan in an aggregate
     principal amount equal to such excess, together with commitment fees
     accrued to the date of such payment.

          (d)  In the event any Asset Disposition results in Excess Sale
     Proceeds which are (i) not reinvested within ninety (90) days of such
     disposition in replacement assets or not deposited with the Agent within
     ninety (90) days of such disposition to be reinvested in such replacement
     assets, or (ii) deposited with the Agent within ninety (90) days of such
     disposition but which are not reinvested within one-hundred eighty (180)
     days of such disposition all as provided Section 8.2.8(b), such Excess Sale
                                              ----------------
     Proceeds shall be applied first to the prepayment of the Facility B Loans
     in inverse order of maturity and, second to prepayment of the Facility A
     Loans.  In the instance that Facility A Loans are so prepaid, the Facility
     A Commitment shall be reduced permanently by the amount of such prepayment.

          (e)  The Borrower shall, immediately upon any acceleration of the
     Stated Maturity Date of any Loans pursuant to Section 9.2 or Section 9.3,
                                                   ------------   -----------
     repay all such Loans.

          (f)  The Borrower shall prepay amounts in accordance with Section
                                                                    -------
     8.1.11.
     ------

          (g)  In the event any Casualty Event affecting any property of the
     Borrower or any of the Material Subsidiaries which results in insurance,
     condemnation award or other compensation in excess of $250,000 ("Casualty
                                                                      --------
     Proceeds") which Casualty Proceeds are (i) not reinvested within ninety
     --------
     (90) days of receipt of such Casualty Proceeds in replacement assets shall
     be applied to the prepayment of the Senior Debt in accordance with the
     procedures set forth in the foregoing clause (d) for Excess Proceeds.

Except as otherwise provided above, mandatory prepayments shall be applied first
to the Facility B Loans, then the Facility A Loans.  Subsequent to the Facility
B Loan Conversion Date, each voluntary prepayment of Facility B Loans made
pursuant to Section 3.1.2 and each mandatory prepayment of Facility B Loans made
            -------------
pursuant to Section 3.1.3 shall be applied, to the extent of such prepayment, to
            -------------
the repayments of the Facility B Loans installments in inverse order of
maturity.  Each prepayment of any Loans made pursuant to this Section shall be
without

                                      27
<PAGE>

premium or penalty, except as may be required by Section 5.4. No voluntary
                                                 -----------
prepayment of principal of any Facility A Loan or Facility B Loan prior to the
applicable Commitment Termination Date, shall cause a reduction in the Facility
A Commitment or Facility B Commitment, as applicable.

     SECTION 3.2  Interest Provisions.  Interest on the outstanding principal
                  -------------------
amount of Loans shall accrue and be payable in accordance with this Section 3.2.
                                                                    -----------

          SECTION 3.2.1  Rates.  Pursuant to an appropriately delivered
                         -----
     Borrowing Request or Continuation/Conversion Notice, the Borrower may elect
     that Loans comprising a Borrowing accrue interest at a rate per annum:

          (a)  on that portion maintained from time to time as a Prime Rate
     Loan, equal to the sum of the Prime Rate from time to time in effect plus
     the Applicable Prime Rate Margin; and

          (b)  on that portion maintained as a LIBOR Loan, during each Interest
     Period applicable thereto, equal to the sum of the LIBOR (Reserve Adjusted)
     for such Interest Period plus the Applicable LIBOR Margin.

          All LIBOR Loans shall bear interest from and including the first day
     of the applicable Interest Period to (but not including) the last day of
     such Interest Period at the rate determined as applicable to such LIBOR
     Loan.

          SECTION 3.2.2  Post-Default Rate.   Notwithstanding Section 3.2.1,
                         -----------------                    -------------
     whenever an Event of Default has occurred and is continuing, the Borrower
     shall pay interest on any Loan, and on any other amount payable by the
     Borrower hereunder (to the extent permitted by law) for the period
     commencing on the occurrence of such Event of Default until such Event of
     Default has been cured or waived as acknowledged in writing by the Agent at
     the applicable Post-Default Rate.

          SECTION 3.2.3  Payment Dates.   Interest accrued on each Loan shall
                         -------------
     be payable, without duplication:

          (a)  on the Stated Maturity Date applicable to such Loan;

          (b)  with respect to any prepayment of a Loan in connection with a
     reduction in the applicable Commitment, on the date of any such prepayment;

          (c)  with respect to Base Rate Loans, on each Quarterly Payment Date
     occurring after the date of the initial Borrowing hereunder;

          (d)  with respect to LIBOR Loans, on the last day of each applicable
     Interest Period (and, if such Interest Period shall exceed three months, on
     the three month anniversary of the first day of such Interest Period); and

                                      28
<PAGE>

          (e)  on that portion of any Loans the Stated Maturity Date of which is
     accelerated pursuant to Section 9.2 or Section 9.3, immediately upon such
                             -----------    -----------
     acceleration.

     Interest accruing on the Loans or other monetary Obligations arising under
     this Agreement or any other Loan Document during the continuance of any
     Event of Default shall be payable upon demand.

     SECTION 3.3 Fees.  The Borrower agrees to pay the fees set forth in this
                 ----
Section 3.3.  All such fees shall be non-refundable.
-----------

          SECTION 3.3.1 Commitment Fee.  The Borrower shall pay to the Agent
                        --------------
     for the account of each Lender a commitment fee in an amount equal to 0.75%
     times the daily actual unused amount of (a) such Lender's Facility A
     -----
     Commitment and (b) such Lender's Facility B Commitment from the date hereof
     until the Facility B Loan Conversion Date.  Accrued commitment fees shall
     be payable in arrears on each Quarterly Payment Date and on the date on
     which the Commitments terminate as provided herein, commencing on the first
     of such dates to occur after the date hereof.

          SECTION 3.3.2 Arrangement and Agency Fees.  The Borrower agrees to
                        ---------------------------
     pay to Chase those fees specified in the letter agreement dated March 30,
     2001, between the Borrower and Chase at the times specified in such letter
     agreement.

                                  ARTICLE IV
                   INTENTIONALLY OMITTED NUMBERING RESERVED

                                   ARTICLE V
                      CERTAIN LIBOR AND OTHER PROVISIONS

     SECTION 5.1 LIBOR Lending Unlawfu1.  If any Lender shall determine (which
                 ----------------------
determination shall, upon notice thereof to the Borrower, the Agent and the
Lenders, be conclusive and binding on the Borrower) that after the Effective
Date the introduction of, or any change in, or in the interpretation of, any law
makes it unlawful, or any central bank or other government authority asserts
that it is unlawful, for such Lender to make, continue or maintain any Loan as,
or to convert any Loan into, a LIBOR Loan of a certain type, the obligations of
such Lender to make, continue, maintain or convert any such Loans shall, upon
such determination, forthwith be suspended until such Lender shall notify the
Agent that the circumstances causing such suspension no longer exist, and all
LIBOR Loans of such type shall automatically convert into Prime Rate Loans at
the end of the then current Interest Periods with respect thereto or sooner, if
required by such law or assertion.

     SECTION 5.2 Deposits Unavailable.  If the Agent shall have determined that:
                 --------------------

                                      29
<PAGE>

          (a)  Dollar deposits in the relevant amount and for the relevant
     Interest Period are not available to the Reference Lender in the London
     interbank market; or

          (b)  by reason of circumstances affecting the London interbank market,
     adequate means do not exist for ascertaining the interest rate applicable
     hereunder to LIBOR Loans of such type;

then, upon notice from the Agent to the Borrower and the Lenders, the
obligations of all Lenders under Section 2.3 and Section 2.4 to make or continue
                                 -----------     -----------
any Loans as, or to convert any Loans into, LIBOR Loans of such type shall
forthwith be suspended until the Agent shall notify the Borrower and the Lenders
that the circumstances causing such suspension no longer exist.

     SECTION 5.3 Increased LIBOR Loan Costs, etc.   The Borrower agrees to
                 -------------------------------
reimburse each Lender for any increase in the cost to such Lender of, or any
reduction in the amount of any sum receivable by such Lender in respect of,
making, continuing or maintaining (or of its obligation to make, continue or
maintain) any Loans as, or of converting (or of its obligation to convert) any
Loans into, LIBOR Loans, in any case from time to time by reason of:

          (a)  to the extent not included in the calculation of the LIBOR
     (Reserve Adjusted), any reserve, special deposit, or similar requirement
     against assets of, deposits with or for the account of, or credit extended
     by such Lender, under or pursuant to any change in any law, treaty, rule,
     regulation (including any F.R.S.  Board regulation), or requirement from
     that in effect on the Effective Date, or as the result of any Regulatory
     Change; or

          (b)  any Regulatory Change which shall subject such Lender to any tax
     (other than taxes on net income including franchise taxes based on income,
     and franchises), levy, impost, charge, fee, duty, deduction, or withholding
     or any kind whatsoever or change the taxation of any Loan made or
     maintained as a LIBOR Loan and the interest thereon (other than any change
     which affects, and to the extent that it affects, the taxation of net
     income including franchise taxes based on income and franchises).

Such Lender shall promptly and in no event later than ninety (90) days after its
knowledge of the occurrence of any such event notify the Agent and the Borrower
in writing of the occurrence of any such event, such notice to state, in
reasonable detail, the reasons therefor and the additional amount required fully
to compensate such Lender for such increased cost or reduced amount; provided,
however, no Lender may make any demand for any such amounts accrued under this
Section 5.3 for any period commencing more than ninety (90) days prior to the
-----------
receipt by the Borrower of such notice or, should such cost have accrued
retroactively, within ninety (90) days of the determination by such Lender of
such cost.  Such additional amounts shall be payable by the Borrower directly to
such Lender within five (5) days of its receipt of such notice, and such notice
shall, in the absence of manifest error, be conclusive and binding on the
Borrower.

     SECTION 5.4 Funding Losses. In the event any Lender shall incur any loss or
                 --------------
expense (including any loss or expense incurred by reason of the liquidation or
reemployment of deposits or other funds acquired by such Lender to make,
continue or maintain any portion of the

                                      30
<PAGE>

principal amount of any Loan as, or to convert any portion of the principal
amount of any Loan into, a LIBOR Loan) as a result of:

          (a)  any conversion or repayment or prepayment of the principal amount
     of any LIBOR Loans on a date other than the scheduled last day of the
     Interest Period applicable thereto, whether pursuant to Section 3.1 or
                                                             -----------
     otherwise;

          (b)  any Loans not being made as LIBOR Loans in accordance with the
     Borrowing Request therefor; or

          (c)  any Loans not being continued as, or converted into, LIBOR Loans
     in accordance with the Continuation/Conversion Notice therefor;

then, upon the written notice of such Lender to the Borrower (with a copy to the
Agent), the Borrower shall, within five (5) days of its receipt thereof, pay
directly to such Lender such amount as will (in the reasonable determination of
such Lender) reimburse such Lender for such loss or expense.  Such written
notice (which shall include calculations in reasonable detail) shall, in the
absence of manifest error, be conclusive and binding on the Borrower.

     SECTION 5.5  Increased Capital Costs.  If after the Effective Date any
                  -----------------------
change in, or the introduction, adoption, effectiveness, interpretation,
reinterpretation or phase-in of, any law or regulation, directive, guideline,
decision or request (whether or not having the force of law) of any court,
central bank, regulator or other government authority affects or would affect
the amount of capital required or expected to be maintained by any Lender or any
Person controlling such Lender, and such Lender determines (in its sole and
absolute discretion) that the rate of return on its or such controlling Person's
capital as a consequence of its Commitments or the Loans made by such Lender is
reduced to a level below that which such Lender or such controlling Person could
have achieved but for the occurrence of any such circumstance, then, in any such
case upon notice from time to time by such Lender to the Borrower (with copies
to the Agent), the Borrower shall within five (5) days of its receipt thereof
pay directly to such Lender additional amounts sufficient to compensate such
Lender or such controlling Person for such reduction in rate of return.  Such
Lender shall promptly and in no event later than ninety (90) days after its
knowledge of any such event notify the Agent and the Borrower of the occurrence
of any such event; provided, however, no Lender may make any demand for any such
amounts accrued under this Section 5.5 for any period commencing more than
                           -----------
ninety (90) days prior to the receipt by the Borrower of any such notice or,
should such cost have accrued retroactively, within ninety (90) days of the
determination by such Lender of such cost.  A statement of such Lender as to any
such additional amount or amounts (including calculations thereof in reasonable
detail) shall, in the absence of manifest error, be conclusive and binding on
the Borrower.  In determining such amount, such Lender may use any reasonable
method of averaging and attribution that it (in its sole and absolute
discretion) shall deem applicable.

     SECTION 5.6 Taxes.  Without duplication of any payments made under any
                 -----
other provisions of this Article V, all payments by the Borrower of principal
                         ---------
of, and interest on, the Loans and all other amounts payable hereunder shall be
made free and clear of and without deduction for any present or future income,
excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or
other charges of any nature whatsoever imposed by any taxing authority,

                                      31
<PAGE>

but excluding franchise taxes and taxes imposed on or measured by any Lender's
net income (including franchise taxes based upon income) or receipts (such non-
excluded items being called "Taxes"). In the event that any withholding or
                             -----
deduction from any payment to be made by the Borrower hereunder is required in
respect of any Taxes pursuant to any applicable law, rule or regulation, then
the Borrower will:

          (a)  pay directly to the relevant authority the full amount required
     to be so withheld or deducted;

          (b)  promptly forward to the Agent an official receipt or other
     documentation satisfactory to the Agent evidencing such payment to such
     authority; and

          (c)  pay to the Agent for the account of the Agent and the Lenders
     such additional amount or amounts as is necessary to ensure that the net
     amount actually received by the Agent and each Lender will equal the full
     amount such Lender or the Agent would have received had no such withholding
     or deduction been required; provided that the Agent or each Lender shall
     promptly and in no event later than ninety (90) days after its knowledge
     that any amount is payable under this clause (c) notify the Agent and the
                                           ----------
     Borrower of the same;

provided, however, no Lender or the Agent may make any demand for any such
amounts accrued under this Section 5.6 for any period commencing more than
                           -----------
ninety (90) days prior to the receipt by the Borrower of any such notice or,
should such cost have accrued retroactively, within ninety (90) days of the
determination by such Lender or the Agent of such cost.

     Moreover, if any Taxes are directly asserted against the Agent or any
Lender with respect to any payment received by the Agent or such Lender
hereunder, the Agent or such Lender may pay such Taxes and the Borrower will pay
on demand such additional amounts (including any penalties, interest or
expenses) as is necessary in order that the net amount received by such person
after the payment of such Taxes (including any Taxes on such additional amount)
shall equal the amount such person would have received had not such Taxes been
asserted.

     If the Borrower fails to pay any Taxes when due to the appropriate taxing
authority or fails to remit to the Agent, for the account of the respective
Lenders and the Agent, the required receipts or other required documentary
evidence, the Borrower shall indemnify the Lenders and the Agent for any
incremental Taxes, interest or penalties that may become payable by any Lender
as a result of any such failure.

For purposes of this Section 5.6, a distribution hereunder by the Agent or any
                     -----------
Lender to or for the account of any Lender or the Agent shall be deemed a
payment by the Borrower.

     Each Lender that is organized under the laws of a jurisdiction other than
the United States shall, prior to the due date of any payments under the Notes,
(i) execute and deliver to the Borrower and the Agent, on or about the first
scheduled payment date in each Fiscal Year, one or more (as the Borrower or the
Agent may reasonably request) United States Internal Revenue Service Forms 4224
or Forms 1001 or such other forms or documents (or successor forms or

                                      32
<PAGE>

documents), appropriately completed, as may be applicable to establish the
extent, if any, to which a payment to such Lender is exempt from withholding or
deduction of Taxes, and (ii) comply with the requirements of Section 10.10.
                                                             -------------

     SECTION 5.7 Payments, Computations, etc.  Unless otherwise expressly
                 ---------------------------
provided, all payments by the Borrower pursuant to this Agreement, the Notes or
any other Loan Document shall be made in Dollars, in immediately available funds
by the Borrower to the Agent for the pro rata account of the Lenders entitled to
receive such payment.  All such payments required to be made to the Agent shall
be made, without setoff, counterclaim, recoupment or other deduction, not later
than 11:00 a.m., New York City time, on the date due, in immediately available
funds, to such account as the Agent shall specify from time to time by notice to
the Borrower.  Funds received after that time shall be deemed to have been
received by the Agent on the next succeeding Business Day.  The Agent shall
promptly remit in same day funds to each Lender its share, if any, of such
payments received by the Agent for the account of such Lender.  All interest
(other than interest computed at the Prime Rate) and fees shall be computed on
the basis of the actual number of days (including the first day but excluding
the last day) occurring during the period for which such interest or fee is
payable over a year comprised of three-hundred sixty (360) days.  Interest
computed at the Prime  Rate shall be computed on the basis of its actual number
of days (including the first day but excluding the last day) occurring during
the period for which such interest is payable over a year comprised of 365 or
366 days, as the case may be.  Whenever any payment day is not a Business Day,
such payment shall (except as otherwise required by clause (c) of the definition
                                                    ----------
of the term "Interest Period" with respect to LIBOR Loans) be made on the next
             ---------------
succeeding Business Day and such extension of time shall be included in
computing interest and fees, if any, in connection with such payment.

     SECTION 5.8 Sharing of Payments.  If any Lender shall obtain any payment
                 -------------------
or other recovery (whether voluntary, involuntary, by application of setoff or
otherwise) on account of any Loan (other than pursuant to the terms of Section
                                                                       -------
5.3, 5.4 or 5.5 in excess of its pro rata share of payments then or therewith
---  ---    ---                  --- ----
obtained by all Lenders, such Lender shall purchase from the other Lenders such
participations in Loans made by them as shall be necessary to cause such
purchasing Lender to share the excess payment or other recovery ratably with
each of them; provided, however, that if all or any portion of the excess
payment or other recovery is thereafter recovered from such purchasing Lender,
the purchase shall be rescinded and each Lender which has sold a participation
to the purchasing Lender shall repay to the purchasing Lender the purchase price
to the ratable extent of such recovery together with an amount equal to such
selling Lender's ratable share (according to the proportion of (a) the amount of
such selling Lender's required repayment to the purchasing Lender to (b) the
                                                                  --
total amount so recovered from the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the total amount
so recovered.  The Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section may, to the fullest extent
permitted by law, exercise all its rights of payment (including pursuant to
Section 5.9) with respect to such participation as fully as if such Lender were
-----------
the direct creditor of the Borrower in the amount of such participation.  If
under any applicable bankruptcy, insolvency or other similar law, any Lender
receives a secured claim in lieu of a setoff to which this Section applies, such
Lender shall, to the extent practicable, exercise its rights in respect of such
secured claim in a manner

                                      33
<PAGE>

consistent with the rights of the Lenders entitled under this Section to share
in the benefits of any recovery on such secured claim.

     SECTION 5.9 Setoff.  Each Lender shall, upon the occurrence of any Default
                 ------
or any other Event of Default, have the right to appropriate and apply to the
payment of the Obligations (whether or not then due), and (as security for such
Obligations) the Borrower hereby grants to each Lender a continuing security
interest in, any and all balances, credits, deposits, accounts or moneys of the
Borrower then or thereafter maintained with such Lender; provided, however, that
any such appropriation and application shall be subject to the provisions of
Section 5.8.  Each Lender agrees promptly to notify the Borrower and the Agent
-----------
after any such setoff and application made by such Lender; provided, however,
that the failure to give such notice shall not affect the validity of such
setoff and application.  The rights of each Lender under this Section are in
addition to other rights and remedies (including other rights of setoff under
applicable law or otherwise) which such Lender may have.

     SECTION 5.10 Recourse.  The Obligations of the Borrower to the Agent, and
                  --------
the Lenders are secured and rank pari passu with all other Senior Debt.  All of
the Collateral of the Borrower and the Material Subsidiaries will be pledged to
secure the Obligations and all other Senior Debt.  In the event that the
Borrower obtains or creates any Material Subsidiaries (a) each such Material
Subsidiary must issue a guarantee of the Obligations in the form of Exhibit H-2
                                                                    -----------
and each such guarantee will be in favor of the Agent for the benefit of the
Lenders and secured by a pledge of all of the accounts receivable, inventory,
cash, Customer Lists and stock of such Material Subsidiary, and (b) the Borrower
shall cause the Security Agreements to be amended to add such Material
Subsidiary as an Obligor thereunder and shall deliver, or cause such Material
Subsidiary to deliver, such other agreements, documents, instruments and
opinions in connection therewith as the Agent may request.

     SECTION 5.11 Replacement of Lenders.  In the event any Lender shall
                  ----------------------
provide notice to the Agent pursuant to Section 5.3, 5.5 or 5.6 hereunder, the
                                        -----------  ---    ---
Borrower shall be permitted to replace such Lender, provided, however, that such
Lender's replacement shall agree to all the obligations and conditions relating
to an Assignee Lender contained in Section 11.11.1 hereto.  Any such replacement
                                   ---------------
shall be subject to the Agent's consent which consent shall not be unreasonably
withheld.

                                  ARTICLE VI
                 CONDITIONS TO EFFECTIVENESS AND TO BORROWING

     SECTION 6.1 Conditions to Effectiveness.  The effectiveness of this
                 ---------------------------
Agreement shall be subject to the prior or concurrent satisfaction of each of
the conditions precedent set forth in this Section 6.1.
                                           -----------

          SECTION 6.1.1 Credit Agreement and Loan Documents.  This Agreement
                        -----------------------------------
     and the other Loan Documents shall have been duly executed and delivered by
     each party thereto.

                                      34
<PAGE>

          SECTION 6.1.2 Resolutions; Incumbency.  The Agent shall have received
                        -----------------------
     each of the following documents:

          (a)  Copies of the resolutions of the board of directors of each of
     the Managing General Partner, the Borrower and the Material Subsidiaries
     and partnership authorizations of Star Gas Partners authorizing the
     transactions contemplated hereby, certified as of the Effective Date by the
     Secretary or an Assistant Secretary of each of the Managing General
     Partner, the Borrower and the Material Subsidiaries; and

          (b)  A certificate of the Secretary or Assistant Secretary of each of
     the Borrower and the Material Subsidiaries certifying the names and true
     signatures of the officers of each of the Borrower and the Material
     Subsidiaries authorized to execute, deliver and perform, as applicable, on
     behalf of each of the Borrower and the Material Subsidiaries, this
     Agreement and all other Loan Documents to be delivered by each of the
     Borrower and the Material Subsidiaries hereunder (upon which certificate
     the Agent and each Lender may conclusively rely until they shall have
     received a further certificate of a Responsible Officer canceling or
     amending such prior certificate).

          (c)  A certificate of the Secretary or Assistant Secretary of the
     Managing General Partner certifying the names and the signatures of the
     officers of the Managing General Partner authorized to execute, deliver and
     perform, as applicable, on behalf of the Managing General Partner and Star
     Gas Partners, the Loan Documents to be delivered by Star Gas Partners and
     the Managing General Partner (upon which certificate the Agent and each
     Lender may conclusively rely until they shall have received a further
     certificate of a Responsible Officer canceling or amending such prior
     certificate).

          SECTION 6.1.3 Organization Documents; Good Standing.  The Agent shall
                        -------------------------------------
     have received each of the following documents:

          (a)  the articles or certificate of incorporation and the bylaws or
     other organizational documents of each of the Managing General Partner, the
     Borrower and the Material Subsidiaries, and the certificate of limited
     partnership and the partnership agreement of Star Gas Partners, in each
     case as in effect on the Effective Date, certified by the Secretary or
     Assistant Secretary of the relevant entity as of the Effective Date; and

          (b)  a good standing and tax good standing certificate for each of
     Star Gas Partners, the Borrower and the Material Subsidiaries from the
     Secretary of State (or similar, applicable Government Authority) of its
     state of incorporation or organization, as applicable, and each other state
     designated by the Agent where such entity conducts significant business, in
     each case as of a recent date.

          SECTION 6.1.4 Closing Certificate.  A certificate signed by a
                        -------------------
     Responsible Officer of each of Star Gas Partners and the Borrower, dated as
     of the Effective Date, certifying:

                                      35
<PAGE>

          (a)  the representations and warranties contained in Article VII are
                                                               -----------
     true and correct on and as of such date, as though made on and as of such
     date;

          (b)  since December 31, 2000, there has been no material adverse
     change in the condition (financial or otherwise), operations, business
     assets, liabilities (actual or contingent) or prospects taken as a whole of
     the Borrower and its Material Subsidiaries from that set forth in the
     financial statements as of December 31, 2000 for the period ending on that
     date (which financial statements shall be attached);

          (c)  since December 31, 2000, there has been no material adverse
     change in the condition (financial or otherwise), operations, business
     assets, liabilities (actual or contingent) or prospects taken as a whole of
     Star Gas Partners and its subsidiaries taken as a whole from that set forth
     in the financial statements as of December 31, 2000 (which financial
     statements shall be attached);

          (d)  There shall not have occurred since December 31, 2000 a material
     adverse change in the condition (financial or otherwise), operations,
     business, assets, liabilities (actual or contingent) or prospects of
     regarding Star Gas Partners, the Borrower and the Material Subsidiaries
     taken as a whole; and

          (e)  the financial statements delivered to the Lenders and Agent on
     and prior the date of this Agreement are true and correct.

          SECTION 6.1.5 Security Agreements; Prior Liens Removed; Prior
                        -----------------------------------------------
     Indebtedness Paid.  The Agent shall have received duly executed
     -----------------
     counterparts of the Security Agreements, dated as of the date hereof, duly
     executed by the Borrower, Star Gas Partners, and the Material Subsidiaries,
     as the case may be, together with:

          (a)  copies of properly executed Uniform Commercial Code financing
     statements (Form UCC-1), naming (i) the Borrower as the debtor and the
     Agent as the secured party, and (ii) each of the Material Subsidiaries as
     the debtor and the Agent as the secured party;

          (b)  executed copies of proper Uniform Commercial Code Form UCC-3
     termination statements, if any, necessary to release all Liens and other
     rights of any Person in the Collateral;

          (c)  copies of Uniform Commercial Code Requests for Information or
     Copies (Form UCC-11), or a similar search report, dated a date reasonably
     near to the date of the initial Borrowing, listing all effective financing
     statements which name any of the Borrower, and the Material Subsidiaries
     (under its present name and any previous names) as the debtor and which are
     filed in the jurisdictions in which filings were made pursuant to clause
                                                                       ------
     (a) above, together with copies of such financing statements (none of which
     ---
     shall cover any collateral described in the Security Agreements);

                                      36
<PAGE>

          (d)  letters of instruction to each of the depository banks in respect
     of banking accounts of the Borrower and each Material Subsidiary at such
     depository banks in form and substance satisfactory to the Agent; and

          (e)  each Prior Lien shall have been removed on or before the
     Effective Date and all Indebtedness of the Borrower (except for
     Indebtedness hereunder and the Subordinated Indebtedness) shall have been
     paid and discharged in full, and no Person shall have any interest
     whatsoever in, or be a creditor of, the Borrower except the existing
     Shareholders of the Borrower as holders of common and preferred equity in
     the Borrower, and the Agent shall have received evidence satisfactory to it
     to such effect.

          SECTION 6.1.6 Permits.  The Agent shall have received a duly executed
                        -------
     certificate of a Responsible Officer of the Borrower certifying that there
     are no permits, licenses or regulatory approvals required for the
     execution, delivery and performance of the Loan Documents.

          SECTION 6.1.7 RESERVED
                        --------

          SECTION 6.1.8 Opinion of Counsel.  The Agent shall have received
                        ------------------
     opinions, dated the Effective Date and addressed to the Agent and all
     Lenders, from Phillips Nizer Benjamin Krim & Ballon, special counsel to the
     Managing General Partner, Star Gas Partners, the Borrower and the Material
     Subsidiaries substantially in the form of Exhibit G hereto and opinions of
                                               ---------
     counsel to the Borrower and its Material Subsidiaries covering such matters
     of law of the State of Florida, New York, New Jersey, Maryland,
     Pennsylvania and the District of Columbia as shall be reasonably requested
     by the Agent or any Lender.

          SECTION 6.1.9 Closing Fees, Expenses, etc.   The Agent shall have
                        ---------------------------
     received evidence satisfactory to it of payment for its own account, or for
     the account of each Lender, as the case may be, all fees, costs and
     expenses due and payable pursuant to Section 3.3 and, if then invoiced,
                                          -----------
     Section 11.3.
     ------------

          SECTION 6.1.10 Insurance.  Insurance complying with the Loan Documents
                         ---------
     shall be in full force and effect and the Agent shall have received a
     certificate to that effect from independent insurance brokers or
     consultants as shall be satisfactory to the Agent and the Required Lenders.

          SECTION 6.1.11 Solvency Certificate.  The Authorized Officer of each
                         --------------------
     of the Borrower and the Guarantors shall have delivered to the Agent a
     solvency certificate dated the Effective Date, substantially in the form of
     Exhibit I hereto.
     ---------

          SECTION 6.1.12 Borrowing Base Certificate.   The Agent shall have
                         --------------------------
     received a Borrowing Base Certificate.

          SECTION 6.1.13 RESERVED
                         --------

                                      37
<PAGE>

          SECTION 6.1.14 Material Contracts.  The Agent and the Lenders shall
                         ------------------
     have received true and complete copies of all Project Contracts and each
     other material agreement, entered into as of April 6, 2000, between the
     Borrower, each Material Subsidiary and their respective suppliers and the
     purchasers from them of services.  Each such Project Contract shall be in
     full force and effect without default thereunder and the Agent shall have
     received a certificate of a Responsible Officer of the Borrower to such
     effect.

          SECTION 6.1.15 Consent of Petro Lenders.  The Agent shall have
                         ------------------------
     received evidence satisfactory to it of the consent of the lenders under
     the Petro Credit Facility to the issuance by Star Gas Partners of its
     Guarantee Agreement.

          SECTION 6.1.16 Other Documents.  The Agent and each Lender shall have
                         ---------------
     received such other approvals, opinions, documents or materials as the
     Agent or such Lender may reasonably request.

     SECTION 6.2 All Borrowings.  The obligation of each Lender to fund any
                 --------------
Loan on the occasion of any Borrowing (including the initial Borrowing) shall be
subject to the satisfaction of each of the conditions precedent set forth in
this Section 6.2.

          SECTION 6.2.1 Compliance with Warranties, No Default, etc.   Both
                        --------------------------------------------
     before and after giving effect to any Borrowing (but, if any Default of the
     nature referred to in Section 9.1.4 shall have occurred with respect to any
                           -------------
     other Indebtedness, without giving effect to the application, directly or
     indirectly, of the proceeds thereof) the following statements shall be true
     and correct:

          (a)  the representations and warranties set forth in Article VII and
                                                               -----------
     in the Security Agreements shall be true and correct with the same effect
     as if then made (unless stated to relate solely to an earlier date, in
     which case such representations and warranties shall be true and correct as
     of such earlier date);

          (b)  no Default or Event of Default shall have then occurred and be
               continuing;

          (c)  the Borrower shall not have made any distribution or payment to
     shareholders of the Borrower or any payment in respect of Indebtedness of
     the Borrower in violation of the provisions of Section 8.2.6 hereof; and
                                                    -------------

          (d)  no event or circumstance shall have occurred which could have a
     Material Adverse Effect.

          SECTION 6.2.2 Borrowing Request.  The Agent shall have received a
                        -----------------
     Borrowing Request, for such Borrowing.  Each delivery of a Borrowing
     Request and the acceptance by the Borrower of the proceeds of such
     Borrowing shall constitute a representation and warranty by Star Gas
     Partners, the Borrower and the Material Subsidiaries that on the date of
     such Borrowing (both immediately before and after giving effect to such
     Borrowing and the application of the proceeds thereof) each of the
     statements made in Section 6.2.1 is true and correct.
                        -------------

                                      38
<PAGE>

          SECTION 6.2.3 Lien Searches.  With respect to the initial Borrowing
                        -------------
     only, satisfactory results of lien searches against the Borrower in the
     locations set forth on Schedule 6.2.3.
                            --------------

          SECTION 6.2.4 Satisfactory Legal Form.  All documents executed or
                        -----------------------
     submitted pursuant hereto by or on behalf of the Borrower, any other
     Obligor or any Subsidiary shall be satisfactory in form and substance to
     the Agent and its counsel; the Agent and its counsel shall have received
     all information, approvals, opinions, documents or instruments as the Agent
     or its counsel may reasonably request.

                                  ARTICLE VII
                        REPRESENTATIONS AND WARRANTIES

     In order to induce the Lenders and the Agent to enter into this Agreement
and to make Loans hereunder, the Borrower represents and warrants unto the Agent
and each Lender as set forth in this Article VII.
                                     -----------

     SECTION 7.1 Organization etc.
                 ----------------

          (a)  Each of the Managing General Partner, the Borrower and its
     Material Subsidiaries is a corporation (or a limited liability company in
     the case of the Managing General Partner) duly organized, validly existing
     and in good standing under the laws of its state of organization and has
     all requisite power and authority to own and operate its properties, to
     conduct its business as conducted on the Effective Date, to enter into this
     Agreement, the Notes and the other Loan Documents to which it is a party,
     and to carry out the terms of this Agreement, the Notes and such other Loan
     Documents.

          (b)  Star Gas Partners is a limited partnership duly organized,
     validly existing and in good standing under the laws of its state of its
     organization and has all requisite partnership power and authority to own
     and operate its properties, to conduct its business as conducted on the
     Effective Date, and to execute, deliver and carry out the terms of the Loan
     Documents to which it is a party.

          (c)  Item 7.1 of the Disclosure Schedule accurately and completely
               --------
     lists, as to each of Star Gas Partners, the Borrower and each Material
     Subsidiary: (i) the state of incorporation or organization of each such
     entity, and the type of legal entity that each of them is, (ii) as to each
     of them that is a corporation, the classes and number of authorized and
     outstanding shares of Capital Stock of each such corporation, and the
     owners of such outstanding shares of Capital Stock, (iii) as to each of
     them that is a legal entity other than a corporation (but not a natural
     person), the type and amount of equity interests authorized and outstanding
     of each such entity, and the owners of such equity interests, and (iv) the
     business in which each of such entities is engaged.  All of the foregoing
     shares or other equity interests that are issued and outstanding have been
     duly and validly issued and are fully paid and non-assessable, and are
     owned by the Persons referred to in

                                      39
<PAGE>

     Item 7.1 of the Disclosure Schedule, free and clear of any Lien except as
     --------
     otherwise provided for herein. Except as set forth on Item 7.1 of the
                                                           --------
     Disclosure Schedule, there are no outstanding warrants, options, contracts
     or commitments of any kind entitling any Person to purchase or otherwise
     acquire any shares of Capital Stock or other equity interests of the
     Borrower or any Material Subsidiary nor are there outstanding any
     securities that are convertible into or exchangeable for any shares of
     Capital Stock or other equity interests of the Borrower or any Material
     Subsidiary.

     SECTION 7.2 Material Subsidiaries.  The Material Subsidiaries of the
                 ---------------------
Borrower are listed on Schedule 7.2 hereto, and none of the Borrower or any of
                       ------------
its Material Subsidiaries existing on the date of this Agreement has made any
Investments in any other Person (other than Investments of the types permitted
in Section 8.2.5).
   -------------

     SECTION 7.3 Qualification.  Each of Star Gas Partners, the Borrower and
                 -------------
its Material Subsidiaries is duly qualified or registered and is in good
standing as a foreign corporation or partnership for the transaction of
business, in the jurisdictions set forth in Item 7.3 of the Disclosure Schedule
                                            --------
which are the only jurisdictions, on the date hereof, in which the nature of
their respective activities or the character of the properties they own, lease
or use makes such qualification or registration necessary and, in the case of
Star Gas Partners only, in which the failure so to qualify or to be so
registered could be reasonably expected to have a Material Adverse Effect.

     SECTION 7.4 Enforceability.  Each of Star Gas Partners, the Borrower and
                 --------------
the Material Subsidiaries has taken all necessary partnership or corporate
action to authorize the execution, delivery and performance by it of this
Agreement, the Notes and each other Loan Document to which is a party.  Each of
Star Gas Partners, the Borrower and the Material Subsidiaries has duly executed
and delivered each of this Agreement, the Notes and the other Loan Documents to
which it is a party, and each of them constitutes its legal, valid and binding
obligation enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium and similar laws of general application relating to
or affecting the rights and remedies of creditors and by general equitable
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law; provided, however, that such laws shall not
materially interfere with the practical realization of the Security Documents or
the Liens created thereby, except for (i) possible delay, (ii) situations that
may arise under Chapter 11 of the Bankruptcy Code, and (iii) equitable orders of
a bankruptcy court.

     SECTION 7.5 Due Authorization; Non-contravention; etc.  The execution,
                 -----------------------------------------
delivery and performance by each of Star Gas Partners, the Borrower and the
Material Subsidiaries of this Agreement, the Notes and each other Loan Document
required to be executed by it hereunder are within Star Gas Partner's, the
Borrower's and such Material Subsidiary's powers, have been duly authorized by
all necessary action, and do not:

          (a)  contravene Star Gas Partners', the Borrower's or any Material
     Subsidiary's Organization Documents;

                                      40
<PAGE>

          (b)  contravene any contractual restriction, law or governmental
     regulation or court decree or order binding on or affecting Star Gas
     Partners, the Borrower or any Material Subsidiary; or

          (c)  result in, or require the creation or imposition of, any Lien on
     any of Star Gas Partners', the Borrower's or such Material Subsidiary's
     properties, except as contemplated hereby.

     SECTION 7.6 Government Approvals; Regulations, etc.  No authorization or
                 --------------------------------------
approval or other action, by, and no notice to or filing with, any government
authority or regulatory body or other Person (that has not been obtained) is
required for the due execution, delivery or performance by Star Gas Partners,
the Borrower or any Material Subsidiary of this Agreement, the Notes or any
other Loan Document to which it is a party.  All such required authorizations
and approvals have been obtained and such required notices and filings have been
made.

     SECTION 7.7 Business; Financial Statements.
                 ------------------------------

          (a)  The audited consolidated financial statements of the Borrower and
     its Subsidiaries dated for their fiscal year ending in 2000, together with
     the related statements of income or operations, shareholders' equity and
     cash flows for the fiscal periods ended on those respective dates:

               (i)    were prepared in accordance with GAAP consistently applied
          throughout the period covered thereby, except as otherwise expressly
          noted therein;

               (ii)   fairly present in accordance with GAAP the financial
          condition of the Borrower and its Subsidiaries as of the date thereof
          and results of operations for the period covered thereby; and

               (iii)  show all material indebtedness and other liabilities,
          direct or contingent of the Borrower and its Subsidiaries required to
          be disclosed in accordance with GAAP as of the date thereof including
          liabilities for taxes, material commitment and Contingent Liabilities.

          (b)  The audited consolidated financial statements of Star Gas
     Partners and its Subsidiaries for its fiscal years ending during 1998, 1999
     and 2000, in each case together with the related consolidated statements of
     income or operations, partners' (or shareholders) capital and cash flow for
     the fiscal periods ended on those respective dates:

               (i)  were prepared in accordance with GAAP consistently applied
          throughout the period covered thereby, except as otherwise expressly
          noted therein;

                                      41
<PAGE>

               (ii)  fairly present in accordance with GAAP the financial
          condition of Star Gas Partners and its Subsidiaries as of the date
          thereof and results of operations for the period covered thereby; and

               (iii) show all material indebtedness and other liabilities,
          direct or contingent, of such Person and its consolidated Subsidiaries
          required to be disclosed, including liabilities for taxes, material
          commitments and Contingent Liabilities in accordance with GAAP as of
          the date thereof.

     SECTION 7.8 No Material Adverse Change. Since the date of the most recent
                 --------------------------
financial statements described in Section 7.7 or, for any determination after
                                  -----------
the delivery of the first financial statements pursuant to Section 8.1.1(b),
                                                           ---------------
since the date of such financial statements (if such financial statements shall
be satisfactory to the Required Lenders), there has been no material adverse
change in the condition (financial or otherwise), business, prospects,
operations, assets or properties of (a) the Borrower and the Material
Subsidiaries (taken as a whole), or (b) Star Gas Partners and its Subsidiaries
(taken as a whole).

     SECTION 7.9 Litigation; Labor Controversies, etc. There is no pending or,
                 ------------------------------------
to the knowledge of Star Gas Partners, the Borrower, or any of its Material
Subsidiaries, threatened litigation, action, proceeding, or labor controversy
affecting Star Gas Partners, the Borrower or any of their Subsidiaries, or any
of their respective properties, businesses, assets or revenues, (a) which has,
or could have, a Material Adverse Effect, (b) which could affect the legality,
validity or enforceability of this Agreement, the Notes or any other Loan
Document, or (c) which could affect the transaction contemplated hereby or the
ability of Star Gas Partners, the Borrower or any of its Material Subsidiary to
perform their respective obligations under the Loan Documents.

     SECTION 7.10 Ownership of Properties; Project Contracts; Liens.
                  -------------------------------------------------

          (a)   Star Gas Partners, the Borrower and each of the Material
     Subsidiaries have (i) title to all of their respective assets constituting
     real property owned in fee simple, (ii) good and valid leasehold interests
     in their respective assets constituting leased real property, pursuant to
     which they enjoy undisturbed possession thereof, except for defects in, or
     lack of recorded title and exceptions to, leasehold interests which could
     not, in the aggregate, be reasonably expected to have a Material Adverse
     Effect, and (iii) sufficient title to the portion of their respective
     assets constituting personal property (including patents, trademarks, trade
     names, service marks, copyrights and other intellectual property rights)
     reasonably necessary for the use and operation of such personal property as
     it has been used in the past and as it is proposed to be used, in each case
     subject to no Liens except as permitted pursuant to Section 8.2.3.

          (b)   Each Prior Lien has been removed.

          (c)   Each Project Contract is in full force and effect without
     default thereunder .

                                      42
<PAGE>

          (d)  The Liens that, simultaneously with the execution and delivery of
     this Agreement and the consummation of the initial Loans, have been created
     and granted by the Security Documents and upon filing will constitute valid
     perfected first Liens on the properties and assets covered by the Security
     Documents; provided, however, that Liens on the Project Contracts shall be
     created and granted only to the maximum extent permitted by such documents.

     SECTION 7.11 Taxes. Star Gas Partners, the Borrower and each Material
                  -----
Subsidiary, and any predecessor entity thereto, have filed all tax returns and
reports required by law to have been filed by them and have paid all taxes and
governmental charges thereby shown to be owing, except (a) any such taxes or
charges which are being diligently contested in good faith by appropriate
proceedings and for which adequate reserves in accordance with GAAP shall have
been set aside on its books, and (b) in the case only of Star Gas Partners,
where the failure to do so could not have a Material Adverse Effect.

     SECTION 7.12 ERISA Compliance.
                  ----------------

          (a)   Each Plan is in compliance in all material respects with the
     applicable provisions of ERISA, the Code and other federal or state law.
     Each Plan which is intended to qualify under Section 401(a) of the Code has
     received a favorable determination letter from the Internal Revenue Service
     and, to the best knowledge of the Borrower, nothing has occurred which
     would cause the loss of such qualification. The Borrower and each ERISA
     Affiliate has made all required contributions to any Plan subject to
     Section 412 of the Code, and no application for a funding waiver or an
     extension of any amortization period pursuant to Section 412 of the Code
     has been made with respect to any Plan.

          (b)   There are no pending or, to the best knowledge of Borrower,
     threatened claims, actions or lawsuits, or action by any Government
     Authority, with respect to any Plan which has resulted in or could
     reasonably be expected to have a Material Adverse Effect on the condition
     (financial or otherwise), business, operations, assets or properties of
     Star Gas Partners, the Borrower and the Subsidiaries (taken as a whole).
     There has been no prohibited transaction or violation of the fiduciary
     responsibility rules, or failure to be able to accurately value Plan assets
     with respect to any Plan which has resulted in or could reasonably be
     expected to have a Material Adverse Effect.

          (c)   (i) No ERISA Event has occurred or could reasonably be expected
     to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii)
     neither the Borrower nor any ERISA Affiliate has incurred, or could
     reasonably be expected to incur, any liability under Title IV of ERISA with
     respect to any Pension Plan (other than premiums due and not delinquent
     under Section 4007 of ERISA); (iv) neither the Borrower nor any ERISA
     Affiliate has incurred, or reasonably could be expected to incur, any
     liability (and no event has occurred which, with the giving of notice under
     Section 4219 of ERISA, could result in such liability under Section 4201 or
     4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the
     Borrower nor any ERISA Affiliate has engaged

                                      43
<PAGE>

     in a transaction that could reasonably be expected to be subject to Section
     4069 or 4212(c) of ERISA.

          (d)   From this date hereafter, each year the Borrower shall have no
     underfunded Pension Plans.

     SECTION 7.13 Environmental Warranties.
                  ------------------------

          (a)   All facilities and property owned, leased, used, occupied or
     controlled (in whole or in part) by Star Gas Partners, the Borrower or any
     Material Subsidiary have been, and continue to be, owned, leased, used,
     occupied or controlled by Star Gas Partners, the Borrower or such Material
     Subsidiary in compliance with all Environmental Laws except where the
     failure of any of the foregoing to be done could not reasonably be expected
     to have a Material Adverse Effect.

          (b)   There have been no past, and there are no pending or threatened

                (i)  Environmental Claims received by Star Gas Partners, the
          Borrower or any Material Subsidiary with respect to any alleged
          violation of any Environmental Law, or

                (ii) complaints, notices or inquiries to Star Gas Partners, the
          Borrower or any Material Subsidiary regarding potential liability
          under any Environmental Law;

     which in either the case of clauses (i) or (ii) above, could be reasonably
                                 -----------    ----
     expected to have a Material Adverse Effect on Star Gas Partners, the
     Borrower and the Subsidiaries (taken as a whole).

          (c)   To the knowledge of each of Star Gas Partners, the Borrower and
     the Material Subsidiaries there have been no Releases of Hazardous
     Materials at, on or under any property now or previously owned or leased by
     Star Gas Partners, the Borrower or any Material Subsidiary that, singly or
     in the aggregate, have, or could reasonably be expected to have, a Material
     Adverse Effect.

          (d)   Star Gas Partners, the Borrower and each Material Subsidiary
     have been issued and are in material compliance with all permits,
     certificates, approvals, licenses and other authorizations relating to
     environmental matters and necessary or desirable for their businesses, the
     absence of or non compliance with which could reasonably be expected to
     have a Material Adverse Effect, and no order has been issued, no
     Environmental Claim has been made, no penalty has been assessed and, to the
     knowledge of the Borrower or any Material Subsidiary, no investigation or
     review has occurred or is pending or threatened by any Person with respect
     to any alleged failure by Star Gas Partners, the Borrower or any Material
     Subsidiary to have any permit, certificate, approval, license or other
     governmental authorization required under applicable Environmental Laws in
     connection with the conduct of the business or operations of any

                                      44
<PAGE>

     of them, except where the failure of any of the foregoing to be done could
     not reasonably be expected individually or in the aggregate to have a
     Material Adverse Effect.

          (e)   No property now or previously owned or leased by the Borrower or
     any Material Subsidiary is listed or to the knowledge of Borrower is
     proposed for listing (with respect to owned property only) on the National
     Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state
     list of sites requiring investigation or clean-up where the circumstances
     giving rise to such listing or proposed listing or the effect of such
     listing or proposed listing has, or could reasonably be expected to have, a
     Material Adverse Effect.

          (f)   To the knowledge of each of Star Gas Partners, the Borrower and
     the Material Subsidiaries there are no underground storage tanks, active or
     abandoned, including petroleum storage tanks, on or under any property now
     leased, used, occupied or controlled (in whole or in part) by Star Gas
     Partners, the Borrower or any Material Subsidiary.

          (g)   To the knowledge of each of Star Gas Partners, the Borrower and
     each Material Subsidiary, none of Star Gas Partners, the Borrower or any
     Material Subsidiary has directly transported or directly arranged for the
     transportation of any Hazardous Material to any location, including
     locations which are listed or proposed for listing on the National
     Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state
     list or which is the subject of federal, state or local enforcement actions
     or other investigations.

          (h)   To the knowledge of each of Star Gas Partners, the Borrower and
     each Material Subsidiary there are no polychlorinated biphenyls or friable
     asbestos present at any property now or previously owned, leased, used,
     occupied or controlled (in whole or in part) by Star Gas Partners, the
     Borrower or any Material Subsidiary that, singly or in the aggregate, have,
     or could reasonably be expected to have, a Material Adverse Effect.

     SECTION 7.14 Regulations U and X and Use of Proceeds.
                  ---------------------------------------

          (a)   The Borrower is not engaged in the business of extending credit
     for the purpose of buying or carrying margin stock, and no proceeds of any
     Loans will be used for a purpose which violates, or would be inconsistent
     with, F.R.S. Board Regulation U or X. Terms for which meanings are provided
     in F.R.S. Board Regulation U or X or any regulations substituted therefor,
     as from time to time in effect, are used in this Section with such
     meanings.

          (b)   The Borrower shall (i) use the proceeds of the Facility A Loans,
     solely for working capital purposes, and (ii) use the proceeds of the
     Facility B Loans, solely for purposes of financing that portion of the
     purchase price for acquisitions of customer accounts from direct marketers
     which does not exceed $40 per customer and to finance capital expenditures
     relating to the Borrower's Business or future acquired businesses of the
     Borrower.

                                      45
<PAGE>

     SECTION 7.15 Accuracy of Information. All factual information heretofore
                  -----------------------
or contemporaneously furnished by or on behalf of Star Gas Partners, the
Borrower in writing to the Agent or any Lender for purposes of or in connection
with this Agreement or any transaction contemplated hereby which were furnished
to the Agent and all other such factual information hereafter furnished by or on
behalf of Star Gas Partners, the Borrower or any of its Material Subsidiaries in
writing to the Agent or any Lender does not contain any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained therein not misleading. There is no fact known to either of
Star Gas Partners or the Borrower which has or in the future would (so far as
either of Star Gas Partners or the Borrower can now foresee) have a Material
Adverse Effect which has not been set forth or referred to in this Agreement or
the other factual information furnished by Star Gas Partners or the Borrower in
writing.

     SECTION 7.16 Solvency. The Borrower, both before and after giving effect
                  --------
to any Borrowing hereunder (including the initial Borrowings), (i) is not
"insolvent" (as such term is defined in (S) 101(31)(A) of the Bankruptcy Code),
(ii) is able to pay its debts and other liabilities, contingent obligations and
commitments as they mature, and (iii) does not have unreasonably small capital
for the business in which it is engaged or for any business or transaction in
which it is about to engage.

     SECTION 7.17 Compliance with Agreements and Laws. None of Star Gas
                  -----------------------------------
Partners, the Borrower or any of their Subsidiaries is in default under any
agreement by which it is bound or in violation of any statute, law or
governmental rule or regulation or court or arbitrator's judgment, decree or
order, in any such case, which either individually or in the aggregate, could
have a Material Adverse Effect.

     SECTION 7.18 Investment Company Act; Other Regulations. None of Star Gas
                  -----------------------------------------
Partners, the Borrower or any Material Subsidiary is an "investment company" or
a company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended. None of Star Gas Partners, the
Borrower or any Material Subsidiary is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Interstate
Commerce Act, any state public utilities code, or any other federal or state
statute or regulation limiting its ability to incur Indebtedness.

                                 ARTICLE VIII
                                   COVENANTS

     SECTION 8.1 Affirmative Covenants. The Borrower agrees with the Agent and
                 ---------------------
each Lender that, until all Commitments have terminated and all Obligations have
been paid and performed in full, the Borrower will perform the obligations set
forth in this Section 8.1.
              -----------

          SECTION 8.1.1 Financial Information, Reports, Notices, etc. The
                        --------------------------------------------
     Borrower will furnish, or will cause to be furnished, to each Lender and
     the Agent copies of the following financial statements, reports, notices
     and information:

                                      46
<PAGE>

          (a)  (i)  as soon as practicable, but in any event within forty-five
     (45) days after the end of each of the first three quarterly fiscal periods
     in each Fiscal Year of the Borrower, consolidated balance sheets of the
     Borrower and the Material Subsidiaries as at the end of such period and the
     related consolidated (and, as to statements of income and cash flows, if
     applicable and to the extent that such are being prepared, consolidating)
     statements of income, surplus or partners' capital, cash flows and
     stockholders' equity of the Borrower and the Material Subsidiaries for such
     period, all in reasonable detail and certified by an authorized financial
     officer of the Borrower as presenting fairly, in all material respects, the
     information contained therein (subject to changes resulting from normal
     year-end adjustments), in accordance with GAAP applied on a basis
     consistent with prior fiscal periods;

               (ii) as soon as practicable, but in any event within forty-five
          (45) days after the end of each of the first three quarterly fiscal
          periods in each Fiscal Year of Star Gas Partners, the report on Form
          10-Q submitted by Star Gas Partners to the Securities Exchange
          Commission in respect of such quarterly period;

          (b)  (i)  as soon as practicable but in any event within one hundred
     five (105) days after the end of each Fiscal Year of the Borrower,
     consolidated balance sheets of the Borrower and the Material Subsidiaries
     as at the end of such year and the related consolidated (and, as to
     statements of income and cash flows, if applicable and to the extent that
     such are being prepared, consolidating) statements of income, cash flows
     and stockholders' equity of the Borrower and the Material Subsidiaries for
     such Fiscal Year, setting forth in each case in comparative form the
     consolidated and, where applicable and to the extent that such are being
     prepared, consolidating figures for the previous Fiscal Year, all in
     reasonable detail, and accompanied by a report thereon of KPMG LLP or other
     independent public accountants of recognized national standing selected by
     the Borrower, which report shall (1) contain no limitation on the scope of
     the audit and no material qualification or exception and (2) state that
     such consolidated financial statements present fairly in all material
     respects the financial position of the Borrower and the Material
     Subsidiaries as at the dates indicated and the results of their operations
     and cash flows for the periods indicated in conformity with GAAP applied on
     a basis consistent with prior years and that the audit by such accountants
     in connection with such consolidated financial statements has been made in
     accordance with GAAP;

               (ii) as soon as practicable but in any event within ninety (90)
          days after the end of each Fiscal Year of Star Gas Partners,
          consolidated (and to the extent that such are being prepared,
          consolidating) balance sheets of Star Gas Partners and its
          Subsidiaries as at the end of such year and the related consolidated
          (and, as to statements of income and cash flows, if applicable and to
          the extent that such are being prepared, consolidating) statements of
          income, partners' capital and cash flows of Star Gas Partners and its
          Subsidiaries for such Fiscal Year of Star Gas Partners, setting forth
          in each case in comparative form the consolidated and, where
          applicable and to the extent that such are being prepared,
          consolidating figures for the previous Fiscal Year of Star Gas
          Partners, all in reasonable detail,

                                      47
<PAGE>

          and accompanied by a report thereon of KPMG LLP or other independent
          public accountants of recognized national standing selected by Star
          Gas Partners, which report shall (1) contain no limitation on the
          scope of the audit and no material qualification or exception and (2)
          state that such consolidated financial statements present fairly in
          all material respects the financial position of Star Gas Partners and
          its Subsidiaries as at the dates indicated and the results of their
          operations and cash flows for the periods indicated in conformity with
          GAAP applied on a basis consistent with prior years and that the audit
          by such accountants in connection with such consolidated financial
          statements has been made in accordance with GAAP;

               (iii)  as soon as practicable, but in any event not later than
          June 30, 2001 for Fiscal Year 2001, and thereafter, not later than the
          beginning of each Fiscal Year of the Borrower, a copy of the annual
          budget of the Borrower and each Material Subsidiary for such beginning
          fiscal year of such Person, in each case in detail satisfactory to the
          Agent and containing information sufficient to verify monthly
          operation and maintenance expenses;

          (c)  as soon as available and in any event within forty-five (45) days
     after the end of each of the first three (3) Fiscal Quarters of the
     Borrower and within ninety (90) days after the end of each Fiscal Year of
     the Borrower, a Compliance Certificate with respect to the period covered
     by the financial statements referred to in Section 8.1.1(a) and 8.1.1(b)
                                                ----------------     --------
     above together with an enumeration of the aggregate number of customers of
     the Borrower and its Subsidiaries existing as at the end of such Fiscal
     Quarters, and the number of customers acquired through use of the proceeds
     of Facility B Loans during such Fiscal Quarter, in each case with
     supporting calculations and such other supporting detail as the Agent and
     the Required Lenders may require;

          (d)   promptly upon receipt thereof, copies of all reports, management
     letters and other detailed information (if any) prepared with respect to
     Star Gas Partners, the Borrower or any Material Subsidiary by any
     independent public accountant in connection with each annual or interim
     audit of such Person;

          (e)   as soon as possible and in any event within three (3) Business
     Days after knowledge by a Responsible Officer of the occurrence of each
     Default or Event of Default, a statement of the chief financial officer of
     the Borrower setting forth details of such Default or Event of Default and
     the action which the Borrower has taken and propose to take with respect
     thereto;

          (f)   as soon as possible and in any event within three (3) Business
     Days after knowledge by a Responsible Officer of (x) the occurrence of any
     material adverse development with respect to any litigation, action,
     proceeding, or labor controversy described in Section 7.9 or (y) the
                                                   -----------
     commencement of any labor controversy, litigation, action, proceeding of
     the type described in Section 7.9, notice thereof and copies of all
                           -----------
     documentation relating thereto;

                                      48
<PAGE>

          (g)   within five (5) Business Days after the sending or filing
     thereof, all reports, registration statements and prospectuses which Star
     Gas Partners, the Borrower or any of its Subsidiaries files with the
     Securities and Exchange Commission or any national securities exchange;

          (h)   as soon as possible and in any event within ten (10) days after
     knowledge by a Responsible Officer of the occurrence of any of the
     following events affecting the Borrower or any ERISA Affiliate, deliver to
     the Agent and each Lender a copy of any notice with respect to such event
     that is filed with the Government Authority and any notice delivered by a
     Government Authority to the Borrower or any ERISA Affiliate with respect to
     such event:

                (i)   an ERISA Event;

                (ii)  any Unfunded Pension Liability of any Pension Plan;

                (iii) the adoption of, or the commencement of contributions to,
          any Plan subject to Section 412 of the Code by the Borrower or any
          ERISA Affiliate;

                (iv)  the adoption of any amendment to a Plan subject to Section
          412 of the Code, if such amendment could result in a material increase
          in contributions or Unfunded Pension Liability; or

                (v)   any Pension Plan's having incurred an "accumulated funding
          deficiency" (as defined in Section 412 of the Code), or receiving
          notice from the PBGC, Internal Revenue Service or any governmental
          agency that it is the subject of an audit, review or any other
          governmental action;

in addition, the Borrower shall instruct the actuaries for all Pension Plans to
deliver to the Agent a copy of each Pension Plan's Actuarial Valuation and each
Pension Plan's Schedule B to Form 5500 at the earliest time that such is
delivered to the Borrower or any ERISA Affiliate;

          (i)   within sixty (60) Business Days after each Fiscal Quarter end, a
     certificate setting forth the net proceeds from Asset Dispositions, the
     application of such proceeds as permitted under Section 8.2.8, and the
                                                     -------------
     mandatory prepayments made as required by Section 3.1.3;
                                               -------------

          (j)   on the twenty fifth (25/th/) day of each month (or if such day
     shall not be a Business Day, the next preceding Business Day) and promptly
     after any day on which the Agent requests, a Borrowing Base Certificate
     showing the Facility A Borrowing Base as of the last day of the most
     recently ended calendar month or such other date as reasonably requested by
     the Agent, as the case may be, in each case certified as complete and
     correct by the chief financial officer of the Borrower together with
     supporting documents reasonably acceptable to the Agent; provided however,
     that for the first three (3) months after the Effective Date, such
     Borrowing Base Certificates shall be due thirty (30) days after the last
     day of the most recently ended calendar month;

                                      49
<PAGE>

          (k)   within ten (10) days of knowledge by a Responsible Officer
     thereof, notice of any litigation, proceeding, investigation or dispute
     which may exist at any time between Star Gas Partners, the Borrower or any
     Material Subsidiary and any governmental regulatory body which might
     interfere with the normal business operations of Star Gas Partners, the
     Borrower or any Material Subsidiary, such other information respecting the
     condition or operations, financial or otherwise, of Star Gas Partners, the
     Borrower or any Subsidiary as any Lender through the Agent may from time to
     time reasonably request;

          (l)   within ten (10) days of knowledge by a Responsible Officer
     thereof and to the extent not otherwise covered in clauses (a) - (k) above,
                                                        -----------------
     notice of any event or circumstance that could have a Material Adverse
     Effect, including without limitation an event or circumstance which leads
     the Borrower to believe it will not meet the financial covenants set forth
     in Section 8.2.4 on a pro forma basis;
        --------------

          (m)   within ten (10) days of the occurrence thereof, a notice of the
     occurrence of any default by Star Gas Partners or any of its Subsidiaries
     under any agreement the breach of which could have a Material Adverse
     Effect to which such Person is a party, setting forth in reasonable detail
     the circumstances of such default; and

          (n)   not later than ten (10) Business Days after the occurrence
     thereof, notice of any change, amendment, waiver or entering into of any
     Project Contract.

          SECTION 8.1.2 Maintenance of Properties. The Borrower will, and will
                        -------------------------
     cause each of its Material Subsidiaries to, maintain, preserve, protect and
     keep its properties in good repair, working order and condition, and make
     necessary and proper repairs, renewals and replacements so that its
     business carried on in connection therewith may be properly conducted at
     all times unless the Borrower determines in good faith that the continued
     maintenance of any of its or its Subsidiaries' properties is no longer
     economically desirable.

          SECTION 8.1.3 Insurance. In addition to insurance requirements set
                        ---------
     forth in the Security Documents, the Borrower shall maintain, and shall
     cause each of the Material Subsidiaries to maintain, with financially sound
     and reputable independent insurers, insurance with respect to its
     properties and business against loss or damage of the kinds customarily
     insured against by Persons engaged in the same or similar business, of such
     types and in such amounts as are customarily carried under similar
     circumstances by such other Persons; including workers' compensation
     insurance, public liability and property and casualty insurance which
     amount shall not be reduced by the Borrower or any Material Subsidiary in
     the absence of thirty (30) days' prior notice to the Agent. All such
     insurance shall name the Agent as loss payee/mortgagee and as additional
     insured, for the benefit of the Lenders, as their interests may appear. All
     casualty insurance maintained by the Borrower and the Material Subsidiaries
     shall name the Agent as loss payee and all liability insurance shall name
     the Agent as additional insured for the benefit of the Borrower, as their
     interests may appear. Upon request of the Agent or any Lender, the Borrower
     shall furnish the Agent, with sufficient copies for each Lender, at

                                      50
<PAGE>

     reasonable intervals (but not more than once per calendar year) a
     certificate of a Responsible Officer of the Borrower (and, if requested by
     the Agent, any insurance broker of the Borrower) setting forth the nature
     and extent of all insurance maintained by the Borrower and the Material
     Subsidiaries in accordance with this Section or any Security Documents (and
     which, in the case of a certificate of a broker, were placed through such
     broker).

          SECTION 8.1.4 Payment of Obligations. The Borrower shall, and shall
                        ----------------------
     cause each of its Material Subsidiaries to, pay and discharge as the same
     shall become due and payable (except to the extent the failure to so pay
     and discharge could not reasonably be expected to have a Material Adverse
     Effect), all their respective obligations and liabilities, including:

          (a)   all tax liabilities, assessments and governmental charges or
     levies upon it or its properties or assets, unless the same are being
     contested in good faith by appropriate proceedings and adequate reserves in
     accordance with GAAP are being maintained by the Borrower or such Material
     Subsidiary;

          (b)   all lawful claims which, if unpaid, would by law become a Lien
     upon its property; and

          (c)   all Indebtedness, as and when due and payable, but subject to
     any subordination provisions contained in any instrument or agreement
     evidencing such Indebtedness.

          SECTION 8.1.5 Compliance with Laws. The Borrower shall, and shall
                        --------------------
     cause each of its Material Subsidiaries to comply, in all material respects
     with all Requirements of Law of any Government Authority having
     jurisdiction over it or its business (including the Federal Fair Labor
     Standards Act), except such as may be contested in good faith or as to
     which a bona fide dispute may exist.

          SECTION 8.1.6 Books and Records. Star Gas Partners and the Borrower
                        -----------------
     will, and will cause each of the Material Subsidiaries to, keep books and
     records which accurately reflect all of its business affairs and
     transactions.

          SECTION 8.1.7 Inspection. The Borrower shall permit the
                        ----------
     representatives of each Lender and the Agent, at the expense of the
     Borrower at any time when a Default or Event of Default has occurred and is
     in existence, and otherwise representatives of any Lender or the Agent with
     prior written notice at the expense of such Lender or the Agent, to visit
     and inspect during normal business hours any of the properties of the
     Borrower or any Material Subsidiary, to examine all their respective books
     of account, records, reports and other papers, to make copies and extracts
     therefrom, and to discuss their respective affairs, finances and accounts
     with their respective officers, employees and independent public
     accountants all at such reasonable times and intervals and as often as may
     be reasonably requested. The Borrower hereby authorizes the Borrower's and
     the Material Subsidiaries' independent accountants, and shall upon such
     request deliver a letter to the

                                      51
<PAGE>

     Borrower's and the Material Subsidiaries' independent public accountants
     authorizing them, to reply to and comply with the provisions of this
     Section 8.1.7.
     -------------

          SECTION 8.1.8  Environmental Covenant. The Borrower will, and will
                         ----------------------
     cause each of the Material Subsidiaries to:

          (a) use and operate all of its facilities and properties in compliance
     with all Environmental Laws, keep all necessary permits, approvals,
     certificates, licenses and other authorizations relating to environmental
     matters in effect and remain in compliance therewith, and handle all
     Hazardous Materials in compliance with all applicable Environmental Laws
     except where non-compliance could not singly or in the aggregate be
     reasonably expected to have a Material Adverse Effect;

          (b) immediately notify the Agent and provide copies upon receipt of
     all written claims, complaints, notices or inquiries relating to the
     condition of its facilities and properties or compliance with Environmental
     Laws other than those claims, complaints, notices or inquiries which singly
     or in the aggregate could not have a Material Adverse Effect, and shall
     promptly cure and have dismissed with prejudice to the satisfaction of the
     Agent any such actions and proceedings relating to compliance with
     Environmental Laws except to the extent being diligently contested in good
     faith by appropriate proceedings and for which adequate reserves in
     accordance with GAAP shall have been set aside on its books; and

          (c) provide such information and certifications which the Agent may
     reasonably request from time to time to evidence compliance with this
     Section 8.1.8.
     -------------

          SECTION 8.1.9  Compliance with ERISA. The Borrower shall, and shall
                         ---------------------
     cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance
     in all material respects with the applicable provisions of ERISA, the Code
     and other federal or state law; (b) cause each Plan which is qualified
     under Section 401(a) of the Code to maintain such qualification; and (c)
     make all required contributions to any Plan subject to Section 412 of the
     Code.

          SECTION 8.1.10 Collateral.
                         ----------

          (a)  All of the Collateral will be pledged to secure the Senior Debt.

          (b)  In the event that the Borrower obtains or creates any Material
     Subsidiary (after the date hereof), the Borrower shall (i) cause each such
     Material Subsidiary to issue a guarantee of the Obligations and each such
     guarantee will be in favor of the Agent and secured by a pledge of all of
     the accounts receivable, inventory, cash, Customer Lists and stock of such
     Material Subsidiary, and (ii) cause the Security Agreements to be amended
     to add such Material Subsidiary as an Obligor thereunder and shall deliver,
     or cause such Material Subsidiary to deliver, such other agreements,
     documents, instruments and opinions in connection therewith as the Agent
     may request.

                                      52
<PAGE>

          (c)  The Borrower shall, and shall cause each Material Subsidiary to,
     use commercially reasonable efforts to cause each Project Contract entered
     into after the date hereof to become subject to the grant of liens set out
     in of the Security Agreements.

          (d)  All of the funds received by the Borrower and the Material
     Subsidiaries under the Contracts (as defined in the Security Agreements)
     shall be deposited into the Receipts Account for application in accordance
     with the Security Agreements.

          SECTION 8.1.11 Update of Project Contracts. The Borrower shall
                         ---------------------------
     deliver to the Agent and the Lenders, not later than June 30, 2001, an
     updated Exhibit O indicating all Project Contracts in effect as of the date
             ---------
     of delivery of such updated Exhibit O. Each Project Contract shall be in
                                 ---------
     full force and effect without default thereunder and the Borrower shall
     deliver to the Agent a certificate of a Responsible Officer of the Borrower
     to such effect.

          SECTION 8.1.12 Agreements Regarding Receipts Account .  The Borrower
                         -------------------------------------
     shall, not later than June 30, 2001 execute and deliver (i) an amendment to
     this Agreement, (ii) an amendment and restatement of the Accounts Security
     Deposit Agreement and (iii) an amendment and restatement of the Securities
     Account Control Agreement, in each case in form and substance satisfactory
     to the Agent, pursuant to which the Receipts Account shall be established
     with Chase, and Chase shall become (a) the Depositary under the Accounts
     Security Deposit Agreement and (b) the Securities Intermediary under the
     Securities Account Control Agreement, together with such other documents,
     certificates or other instruments the Agent determines are necessary to
     effectuate the foregoing.

          SECTION 8.1.13 Preservation of Corporate Existence. The Borrower
                         -----------------------------------
     shall, and shall cause each of its Material Subsidiaries to:

          (a)  preserve and maintain in full force and effect its corporate or
     partnership existence (as applicable) and good standing under the laws of
     its state or jurisdiction of organization or incorporation, except to the
     extent permitted by Section 8.2.7;
                         -------------

          (b)  preserve and maintain in full force and effect all governmental
     rights, privileges, qualifications, permits, licenses and franchises
     necessary or desirable in the normal conduct of its business except in
     connection with transactions permitted by Section 8.2.7 and sale of assets
                                               -------------
     permitted by Section 8.2.8 or where the lapse could not reasonably be
                  -------------
     expected to have a Material Adverse Effect;

          (c)  use reasonable efforts, in the ordinary course of business, to
     preserve its business organization and goodwill; and

          (d)  preserve or renew all of its registered patents, trademarks,
     trade names and service marks, the non-preservation of which could have a
     Material Adverse Effect.

          SECTION 8.1.14 Use of Proceeds.
                         ---------------

                                      53
<PAGE>

          (a) The Borrower shall not, and shall not suffer or permit any
     Subsidiary to, use any portion of the Loan proceeds, directly or indirectly
     for the purpose of buying or carrying margin stock or any purpose which
     violates, or would be inconsistent with F.R.S. Board Regulation U or X.
     Terms for which meanings are provided in F.R.S. Board Regulation U or X or
     any regulations substituted therefor, as from time to time in effect, are
     used in this Section with such meanings;

          (b) The proceeds of the Loans shall be used for the purposes set forth
     in Section 7.14.
        ------------

          SECTION 8.1.15 Update of Customer Lists.  The Borrower shall, and
                         ------------------------
     shall cause its Material Subsidiaries to, provide to the Agent and the
     Lenders on such dates as the Agent reasonably may request one or more
     computer information (or such other medium as may be acceptable to the
     Agent) containing each Customer List owned by the Borrower or any of the
     Material Subsidiaries and within fifteen (15) days of such request the
     Borrower and the Agent agree that each Lender shall be permitted to review
     such information (or other medium) during the reasonable business hours of
     the Agent; provided that the Agent and the Lenders shall not disclose such
     information unless an Event of Default has occurred and is continuing;
     provided, however, that prior to an Event of Default, the Agent and the
     Lenders may disclose such information only to (a) their respective
     attorneys, auditors, employees, consultants or other agents, and (b) to any
     Government Authority to the extent required by such Government Authority.

          SECTION 8.1.16 Further Assurances.
                         ------------------

          (a)  The Borrower shall ensure that all written information, exhibits
     and reports furnished to the Agent or the Lenders by the Borrower do not
     and will not contain any untrue statement of a material fact and do not and
     will not omit to state any material fact or any fact necessary to make the
     statements contained therein not misleading in light of the circumstances
     in which made, and will promptly disclose to the Agent and the Lenders and
     correct any defect or error that may be discovered therein or in any Loan
     Document or in the execution, acknowledgment or recordation thereof.

          (b)  Promptly upon request by the Agent or the Required Lenders, the
     Borrower shall (and shall cause any of its Subsidiaries to) do, execute,
     acknowledge, deliver, record, re-record, file, re-file, register and re-
     register, any and all such further acts, deeds, conveyances, security
     agreements, mortgages, assignments, estoppel certificates, financing
     statements and continuations thereof, termination statements, notices of
     assignment, transfers, certificates, assurances and other instruments the
     Agent or such Lenders, as the case may be, may reasonably require from time
     to time in order (i) to carry out more effectively the purposes of this
     Agreement or any other Loan Document, (ii) to subject to the Liens created
     by any of the Security Documents any of the properties, rights or interests
     covered by any of the Security Documents, (iii) to perfect and maintain the
     validity, effectiveness and priority of any of the Security Documents and
     the Liens intended to be created thereby, and (iv) to better assure,

                                      54
<PAGE>

     convey, grant, assign, transfer, preserve, protect and confirm to the Agent
     and Lenders the rights granted or now or hereafter intended to be granted
     to the Agent and the Lenders under any Loan Document or under any other
     document executed in connection therewith.

     SECTION 8.2 Negative Covenants.  The Borrower agrees with the Agent and
                 ------------------
each Lender that, until all Commitments have terminated and all Obligations have
been paid and performed in full, the Borrower will perform the obligations set
forth in this Section 8.2.
              -----------

          SECTION 8.2.1 Business Activities.  The Borrower will not, nor will
                        -------------------
     it permit any of the Material Subsidiaries to, engage in any line of
     business, if, as a result, the general nature of the business in which the
     Borrower and the Material Subsidiaries taken as a whole are engaged in
     would be substantially different from the nature of the business in which
     the Borrower and the Material Subsidiaries are engaged in as of the
     Effective Date.

          SECTION 8.2.2 Indebtedness.
                        ------------

          (a) The Borrower will not, nor will it permit any of the Material
     Subsidiaries to, create, incur, assume or suffer to exist or otherwise
     become or be liable in respect of any Indebtedness, other than, (i)
     Indebtedness evidenced by the Obligations; (ii) and Subordinated
     Indebtedness to persons having an equity ownership interest in the Borrower
     and which is subordinated on terms and conditions satisfactory to the
     Agent; and (iii) Indebtedness incurred in connection with Section 8.2.3(e).

          (b) Star Gas Partners will not create, incur, assume or suffer to
     exist or otherwise become liable in respect of any Indebtedness except
     Indebtedness evidenced by the Obligations and its Guaranty dated the date
     hereof, and other Indebtedness permitted by Section 8.2.2(b) of the Petro
     Credit Facility.

          SECTION 8.2.3 Liens.  The Borrower shall not, nor shall it permit any
                        -----
     of the Material Subsidiaries to, create, incur, assume or suffer to exist
     any Lien upon any of its property, revenues or assets, whether now owned or
     hereafter acquired, except the Liens referred to below:

          (a) Liens in the Collateral created in favor of the Agent for the
     benefit of the Agent and the Lenders;

          (b) Liens for taxes, assessments or other governmental charges or
     levies not at the time delinquent or thereafter payable without penalty or
     being diligently contested in good faith by appropriate proceedings and for
     which adequate reserves in accordance with GAAP shall have been set aside
     on its books;

          (c) Liens of carriers, warehousemen, mechanics, materialmen and
     landlords incurred in the ordinary course of business for sums not overdue
     and being diligently

                                      55
<PAGE>

     contested in good-faith by appropriate proceedings and for which adequate
     reserves in accordance with GAAP shall have been set aside on its books;

          (d)  Liens incurred in the ordinary course of business in connection
     with workmen's compensation, unemployment insurance or other forms of
     governmental insurance or benefits, or to secure performance of tenders,
     statutory obligations, leases and contracts (other than for borrowed money)
     entered into in the ordinary course of business or to secure obligations on
     surety or appeal bonds;

          (e)  the purchase money security interests on any property acquired or
     held by the Borrower or Material Subsidiaries in the ordinary course of
     business, securing Indebtedness incurred or assumed for the purpose of
     financing all or any part of the cost of acquiring such property; provided
     that (i) any such Lien attaches to such property concurrently with or
     within twenty (20) days after the acquisition thereof, (ii) such Lien
     attaches solely to the property so acquired in such transaction, (iii) the
     principal amount of the debt secured thereby does not exceed 100% of the
     cost of such property and (iv) the principal amount of the Indebtedness
     secured by any and all such purchase money security interests shall not at
     any time exceed $100,000;

          (f)  leases or subleases granted to others, zoning restrictions,
     easements, licenses, reservations, rights-of-way, restrictions on the use
     of property or irregularities of title and other similar changes,
     encumbrances and Liens which do not materially impair the use thereof by
     the Borrower or any of the Material Subsidiaries; and

          (g)  Liens (other than any Lien imposed by ERISA and other than on the
     Collateral) consisting of pledges or deposits required in the ordinary
     course of business in connection with workers' compensation, unemployment
     insurance and other social security legislation;

provided, however, that the Borrower shall not purchase any real estate without
the prior written consent of the Lenders.

          SECTION 8.2.4 Financial Covenants.  The Borrower shall at all times:
                        -------------------

          (a) maintain Consolidated EBITDA of not less than $2,000,000;

          (b) not permit the ratio of Consolidated EBITDA to Senior Interest
Expense to be  less than 1.25:1.00.

          SECTION 8.2.5 Investments.  Subject to Section 8.2.6, none of the
                        -----------               -------------
     Borrower or any of the Material Subsidiaries shall make or suffer to exist,
     any Investment in any Person, including without limitation, any shareholder
     of the Borrower or any Subsidiary except in accordance with Section 4 of
     the Accounts Security Deposit Agreement referred to in the definition of
     Security Agreements, and which are one of the following:

          (a)  Investments in:
                                      56
<PAGE>

               (i)    obligations issued or guaranteed by the United States of
          America or any agency thereof maturing or being due or payable in full
          not more than 1 year after the Borrower's acquisition thereof;

               (ii)   certificates of deposit, bankers acceptances and other
          "money market instruments" issued by any Lender or a bank having
          capital and surplus in an aggregate amount of not less than
          $500,000,000 and a rating of at least A- by Standard & Poor's
          Corporation or A3 by Moodys Investors Service or equivalent rating by
          another nationally recognized credit rating agency maturing or being
          due or payable in full not more than 1 year after the Borrower's
          acquisition thereof;

               (iii)  open market commercial paper having a rating of at least
          A-1 by Standard & Poor's Corporation or Prime-1 by Moody's Investors
          Service maturing or being due or payable in full not more than 270
          days after the Borrower's acquisition thereof;

               (iv)   collateralized repurchase agreements entered into with any
          bank or trust company organized under the laws of the United States of
          America or any State thereof and having capital and surplus in an
          aggregate amount of not less than $100,000,000 relating to United
          States of America government obligations maturing or being due or
          payable in full not more than 90 days after the Borrower's acquisition
          thereof; and

               (v)    tax exempt short term securities having a rating of at
          least A-1 by Standard & Poor's Corporation or Prime-1 by Moody's
          Investors Service and tax exempt long-term securities having a rating
          of at least A by Standard & Poor's Corporation or A2 by Moodys
          Investors Service in each case maturing or being due or payable in
          full not more than 180 days after the Borrower's acquisition thereof;
          and

          (b) Investments by the Borrower in any Material Subsidiary and by any
     Material Subsidiary in the Borrower or another Material Subsidiary as in
     effect on the date hereof.

          SECTION 8.2.6 Restricted Payments, etc .
                        ------------------------

          (a)  Except as permitted by subparagraph (b) below, the Borrower will
     not, and will not permit any of the Material Subsidiaries to make or
     authorize any Restricted Payment or any payment in respect of Subordinated
     Indebtedness.

          (b)  The Borrower and any of the Material Subsidiaries may make or
     authorize a Restricted Payment if such Restricted Payment is payable within
     sixty (60) days of its declaration and no Default or Event of Default
     exists on the day of such distribution or would exist after making such
     declaration or distribution.

                                      57
<PAGE>

          SECTION 8.2.7 Consolidation, Merger, etc.  The Borrower shall not,
                        --------------------------
     and shall not suffer or permit any Material Subsidiary to, merge,
     consolidate with or into, or convey, transfer, lease or otherwise dispose
     of (whether in one transaction or in a series of transactions) all or
     substantially all of its assets (whether now owned or hereafter acquired)
     to or in favor of any Person, except:

          (a)  any Material Subsidiary may merge with the Borrower, provided
     that the Borrower shall be the continuing or surviving corporation, or with
     any one or more Subsidiaries, provided that if any transaction shall be
     between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned
     Subsidiary shall be the continuing or surviving corporation; and

          (b)  any Material Subsidiary may sell or otherwise transfer all or
     substantially all of its assets (upon voluntary liquidation or otherwise),
     to the Borrower or another Wholly-Owned Material Subsidiary.

          SECTION 8.2.8 Asset Dispositions, etc.  Except in connection with a
                        -----------------------
     transaction permitted under Section 8.2.7, none of the Borrower or any of
                                 -------------
     the Material Subsidiaries may sell or dispose of any portion of its
     property (excepting abandonment, sale of inventory or other dispositions in
     the ordinary course of business), or sell equity interests in any Material
     Subsidiary to any third party (all of the foregoing, are herein called
     "Asset Dispositions"), unless:
      -------------------

          (a)  immediately before and after giving effect to such transaction,
     no Default or Event of Default shall exist or be continuing;

          (b)  one of the following two conditions shall be satisfied:

               (i)  the aggregate net after tax proceeds from such Asset
          Disposition do not exceed 5% of the Consolidated Total Assets of the
          Borrower during such Fiscal Year; or

               (ii) in the event that such net after tax proceeds from such
          Asset Disposition exceed 5% of such Consolidated Total Assets ("Excess
                                                                          ------
          Sale Proceeds"), the Borrower shall within ninety (90) days of the
          -------------
          date of the disposal of the assets giving rise to such proceeds, cause
          an amount equal to such Excess Sale Proceeds to be applied (x) to the
          acquisition of assets in replacement of the assets so disposed of or
          of assets which may be productively used in the United States in the
          conduct of the Borrower's or any Material Subsidiary's business (and
          such newly acquired assets shall become part of the Collateral and
          shall be subjected to the Lien of the Security Documents), or may be
          deemed by the Borrower to have been applied to fund the purchase of
          such replacement assets purchased not earlier than 30 days prior to
          such Asset Disposition or (y) to the extent not applied pursuant to
          the immediately preceding clause (x) , for deposit with the Agent no
                                    ----------
          later than ninety (90) days of after such disposition to be reinvested
          in assets described in clause (x) and to the extent such Excess Sale
                                 ----------

                                      58
<PAGE>

          Proceeds are not reinvested as described above within one-hundred
          eighty (180) days of such disposition to the prepayment of the
          Obligations pursuant to Section 3.1; and
                                  -----------

          (c) 100% of the consideration received is in cash or marketable
     securities or notes secured by a letter of credit issued by a financial
     institution acceptable to the Lenders.

          SECTION 8.2.9 RESERVED.
                        --------

          SECTION 8.2.10 Transactions with Affiliates.  The Borrower will not,
                         ----------------------------
     and will not permit any Material Subsidiary to, directly or indirectly,
     engage in any transaction with any Affiliate, including, without
     limitation, the purchase, sale or exchange of assets or the rendering of
     any service, to the Borrower's or such Material Subsidiary's business
     except upon fair and reasonable terms that are no less favorable to the
     Borrower or such Material Subsidiary, as the case may be, than those which
     might be obtained in an arm's-length transaction at the time such
     transaction is agreed upon from Persons which are not such an Affiliate.

          SECTION 8.2.11 Negative Pledges, Restrictive Agreements, etc.  The
                         ---------------------------------------------
     Borrower will not, and will not permit any of the Material Subsidiaries to,
     enter into any agreement (excluding this Agreement, any other Loan Document
     and any agreement governing any Indebtedness permitted herein) prohibiting
     the creation or assumption of any Lien upon its properties, revenues or
     assets, whether now owned or hereafter acquired, or the ability of the
     Borrower or any other Obligor to amend or otherwise modify this Agreement
     or any other Loan Document.

          SECTION 8.2.12 RESERVED
                         --------

          SECTION 8.2.13 Operating Leases.  The aggregate obligations of the
                         ----------------
     Borrower and the Material Subsidiaries for the payment of rent for any
     property under lease or agreement to lease for any Fiscal Year shall not
     exceed $100,000.

          SECTION 8.2.14 Prepayments.  None of the Borrower or any Material
                         -----------
     Subsidiary shall make any voluntary or optional prepayment of any
     Indebtedness for borrowed money incurred or permitted to exist under the
     terms of this Agreement other than (i) the Indebtedness hereunder, and (ii)
     Subordinated Indebtedness repaid out of funds otherwise available for
     distribution to the shareholders of the Borrower in full compliance with
     the provisions of this Agreement.

          SECTION 8.2.15 Organization  Documents.  Star Gas Partners and the
                         -----------------------
     Borrower will not, and will not permit any Material Subsidiary, to alter
     any Organization Document of such entity in any manner which could have a
     Material Adverse Effect.

          SECTION 8.2.16 Capital Expenditures.  The Borrower will not, nor will
                         --------------------
     it permit any of the Material Subsidiaries to, make at any time Capital
     Expenditures in

                                      59
<PAGE>

     respect of any line of business other than the Business which, in the
     aggregate over the term of this Agreement, exceed 10% of the consolidated
     tangible assets of the Borrower and the Material Subsidiaries as determined
     in accordance with GAAP at such time.

          SECTION 8.2.17 Contingent Liabilities.  The Borrower shall not, and
                         ----------------------
     shall not suffer or permit any Material Subsidiary to, create, incur,
     assume or suffer to exist any Contingent Liabilities except endorsements
     for collection or deposit in the ordinary course of business or guarantees
     of Indebtedness incurred by the Borrower or a Material Subsidiary in
     accordance with the provisions of this Agreement.

          SECTION 8.2.18 ERISA. The Borrower shall not, and shall not suffer or
                         -----
     permit any of its ERISA Affiliates to: (a) engage in a prohibited
     transaction or violation of the fiduciary responsibility rules with respect
     to any Plan which has resulted, or otherwise act or fail to make a
     contribution if such action or failure to act could result in liability of
     the Borrower and/or ERISA Affiliate with respect to any Pension Plan; (b)
     engage in a transaction that could be subject to Section 4069 or 4212(c) of
     ERISA; or (c) permit to exist any "accumulated funding deficiency" (as
     defined in Section 412 of the Code) with respect to any Pension Plan.

          SECTION 8.2.19 Accounting Changes.  The Borrower shall not, and shall
                         ------------------
     not suffer or permit any Material Subsidiary to, make any significant
     change in accounting treatment or reporting practices, except as required
     by GAAP, or change the Fiscal Year of the Borrower or of any Material
     Subsidiary.

          SECTION 8.2.20 Bank Accounts.  None of the Borrower or any of the
                         -------------
     Material Subsidiaries shall have any bank accounts other than those bank
     accounts subject to the Security Agreements; provided that the Borrower and
     its Material Subsidiaries may continue to have the bank accounts in
     existence on the date hereof for sixty (60) days from the date hereof and
     may draw funds from such bank accounts for a period of twenty (20) days
     from the date hereof; provided, however, no receivables or other funds of
     the Borrower shall be deposited into any other account after the date
     hereof.

                                   ARTICLE IX
                               EVENTS OF DEFAULT

     SECTION 9.1 Listing of Events of Default.  Each of the following events or
                 ----------------------------
occurrences described in this Section 9.1 shall constitute an "Event of
                              -----------                      --------
Default".
-------

          SECTION 9.1.1 Non-Payment of Obligations.  The Borrower shall default
                        --------------------------
     in the payment or prepayment when due of any principal or interest of any
     Loan, or the payment of any fee or other Obligation.

          SECTION 9.1.2 Breach of Warranty.  Any material representation or
                        ------------------
     warranty of the Borrower or any other Obligor made or deemed to be made
     hereunder or in any other Loan Document executed by it or any other writing
     or certificate furnished by or on

                                      60
<PAGE>

behalf of the Borrower or any other Obligor to the Agent or any Lender for the
purposes of or in connection with this Agreement or any such other Loan Document
(including any certificates delivered pursuant to Article VI) is or shall be
                                                  ----------
incorrect when made in any material respect.

     SECTION 9.1.3 Non-Performance of Other Covenants and Obligations.
                   --------------------------------------------------

     (a)  Any Obligor shall default in the due performance and observance of any
term, covenant or agreement contained in any of Sections 8.1.5, 8.1.10 or
                                                --------------  ------
8.1.14 or in Section 8.2; or
-------      -----------

     (b)  any Obligor shall default in the due performance and observance of any
 other Obligation or agreement contained herein or in any other Loan Document,
 and such default shall continue unremedied for a period of fifteen (15) days
 after actual knowledge thereof by a Responsible Officer.

     SECTION 9.1.4 Default on Other Indebtedness.  Star Gas Partners, any of its
                   -----------------------------
Subsidiaries, the Borrower or any Material Subsidiary shall default (after
notice and the expiration of any applicable grace period) in the payment of any
amount of principal, premium or interest on any Indebtedness (other than the
Notes) (including, without limitation, Indebtedness under the Petro Credit
Facility), or any event shall occur or condition shall exist in respect of any
Indebtedness of Star Gas Partners, the Borrower or any of their Subsidiaries
(other than the Notes) and the effect of such event or condition is to cause (or
to permit the holders of such Indebtedness to cause) such Indebtedness to become
due before its stated maturity, in each case, if the outstanding principal
balance of such Indebtedness is in excess of $2,000,000 in the aggregate.

     SECTION 9.1.5 Judgments.  Any judgment or order for the payment of money in
                   ---------
excess of $1,000,000, net of insurance coverage, shall be rendered against Star
Gas Partners the Borrower or any of their Subsidiaries and:

     (a)  such judgment or order is non appealable, has not been stayed pending
appeal, or all rights to appeal such judgment have expired or been exhausted;
and

     (b)  such judgment or order shall remain undischarged for a period of sixty
(60) consecutive days after the date due.

     SECTION 9.1.6 ERISA.  (a) An ERISA Event shall occur with respect to a
                   -----
Pension Plan or Multiemployer Plan which has resulted or could result in
liability of the Borrower under Title IV of ERISA to the Pension Plan,
Multiemployer Plan or the PBGC in an aggregate amount in excess of $500,000; or
(b) there shall exist an Unfunded Pension Liability among all Pension Plans of
Star Gas Partners and its Affiliates at any time in excess of $7,000,000; or (c)
with respect to any Pension Plan, the Borrower or any ERISA Affiliate shall fail
to pay when due, after the expiration of any applicable grace period, any
contribution required or needed in order to avoid (i) an "accumulated funding
deficiency" (as defined in Section 412 of the Code), or (ii) adverse PBGC
action;

                                      61
<PAGE>

or (d) $500,000 is not contributed each year among the underfunded Pension Plans
related to Star Gas Partners and its Affiliates. For purposes of clause (d), the
                                                                 -----------
$500,000 amount shall be in addition to contributions necessary
to satisfy Section 412 of the Code for such year.

     SECTION 9.1.7 Change in Control.  Any Change in Control shall occur except
                   -----------------
as is permitted by Section 8.2.7.
                   -------------

     SECTION 9.1.8 Bankruptcy, Insolvency, etc.  Any of the following events
                   ---------------------------
shall occur:

     (a)  filing by or on the behalf of the Managing General Partner, Star Gas
Partners, the Borrower, or any of their Subsidiaries of a voluntary petition or
an answer seeking reorganization, arrangement, readjustment of its debts or for
any other relief under any bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar act or
law, state or federal, now or hereafter existing ("Bankruptcy Law"), or any
                                                   --------------
action by the Managing General Partner, Star Gas Partners, the Borrower or any
of their Subsidiaries for, or consent or acquiescence to, the appointment of a
receiver, trustee or other custodian of the Managing General Partner, Star Gas
Partners, the Borrower or any of their Subsidiaries, or of all or a substantial
part of its property; or the making by the Managing General Partner, Star Gas
Partners, the Borrower or any of their Subsidiaries of any assignment for the
benefit of creditors; or the admission by the Managing General Partner, Star Gas
Partners, the Borrower or any of their Subsidiaries in writing of its inability
to pay its debts as they become due; or

     (b)  filing of any involuntary petition against the Managing General
Partner, Star Gas Partners, the Borrower or any of their Subsidiaries in
bankruptcy or seeking reorganization, arrangement, readjustment or its debts or
for any other relief under any Bankruptcy Law and an order for relief by a court
having jurisdiction in the premises shall have been issued or entered therein;
or any other similar relief shall be granted under any applicable Federal or
state law; or a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver, liquidator, sequestrator, trustee or other
officer having similar powers over the Managing General Partner, Star Gas
Partners, the Borrower or any of their Subsidiaries or over all or a part of its
property shall have been entered; or the involuntary appointment of an interim
receiver, trustee or other custodian of the Managing General Partner, Star Gas
Partners, the Borrower or any of their Subsidiaries or of all or a substantial
part of its property; or the issuance of a warrant of attachment, execution or
similar process against any substantial part of the property of the Managing
General Partner, Star Gas Partners, the Borrower or any of their Subsidiaries
and continuance of any such event for sixty (60) consecutive days unless
dismissed, bonded to the satisfaction of the court having jurisdiction in the
premises or discharged; or

     (c)  taking any action authorizing, or in furtherance of, any of the
foregoing by Star Gas Partners, the Borrower or any Material Subsidiary.

                                      62
<PAGE>

     SECTION 9.1.9 Impairment of Security, etc.  Any of the Security Documents
                   ---------------------------
or documents guaranteeing the Notes shall cease in any material respect to be in
full force and effect or shall be declared to be null and void in whole or in a
material part by the final judgment (which is non-appealable or has not been
stayed pending appeal or as to which all rights to appeal have expired or have
been exhausted) of a court or other governmental or regulatory authority having
jurisdiction or the validity or enforceability thereof shall be contested by or
on behalf of the Borrower or any Material Subsidiary or the Borrower or any
Material Subsidiary shall renounce any of the same or deny that it has any or
further liability thereunder or any security interest purported to be created by
any Security Document shall cease to be, or shall be asserted by the Borrower or
any Material Subsidiary not to be, a valid, perfected, first priority (except as
expressly otherwise provided in this Agreement or such Security Document)
security interest in the collateral covered thereby.

     SECTION 9.1.10 Split-Up.  Any order, judgment or decree is entered in any
                    --------
proceeding against the Borrower decreeing a split-up of the Borrower which
requires the divestiture of assets representing a substantial part, or the
divestiture of the stock of any Material Subsidiary whose assets represent a
substantial part, of the consolidated assets of the Borrower and its Material
Subsidiaries (determined in accordance with GAAP) or which requires the
divestiture of assets, or stock of any of their Material Subsidiaries, which
shall have contributed a substantial part of the Consolidated Net Income of the
Borrower and its Material Subsidiaries for any of the three Fiscal Years then
most recently ended, and such order, judgment or decree shall not be dismissed
or execution thereon stayed pending appeal or review within sixty (60) days
after entry thereof, or in the event of such a stay, such order, judgment or
decree shall not be dismissed within sixty (60) days after such stay expires.

     SECTION 9.1.11 Guarantor Defaults.  Any of Star Gas Partners or any
                    ------------------
Material Subsidiary fails in any material respect to perform or observe any
term, covenant or agreement in its Guarantee Agreement; or any Guarantee
Agreement is for any reason partially (including with respect to future
advances) or wholly revoked or invalidated, or otherwise ceases to be in full
force and effect, or any of Star Gas Partners or any Material Subsidiary or any
other Person contests in any manner the validity or enforceability thereof or
denies that it has any further liability or obligation thereunder.

     SECTION 9.2 Action if Bankruptcy.  If any Event of Default described in
                 --------------------
Section 9.1.8 shall occur, the Commitments shall automatically terminate and the
-------------
outstanding principal amount of all outstanding Loans, and all other Obligations
shall automatically be and become immediately due and payable, without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower.

     SECTION 9.3 Action if Other Event of Default.
                 --------------------------------

          (a)  If any Event of Default (other than any Event of Default
     described in Section 9.1.8) shall occur for any reason, whether voluntary
                  -------------
     or involuntary, and be continuing, the Agent, upon the direction of the
     Required Lenders, shall by notice to the Borrower:

                                      63
<PAGE>

               (i)    declare the commitment of each Lender to make Loans to be
          terminated, whereupon such commitments and obligation shall be
          terminated;

               (ii)   declare the unpaid principal amount of all outstanding
          Loans, all interest accrued and unpaid thereon, and all other amounts
          owing or payable hereunder or under any other Loan Document to be
          immediately due and payable (including, without limitation, amounts
          due under Section 5.4), without presentment, demand, protest or other
                    -----------
          notice of any kind, all of which are hereby expressly waived by the
          Borrower; and

               (iii)  exercise on behalf of itself and the Lenders all rights
          and remedies available to it and the Lenders under the Loan Documents
          or applicable law.

          (b)  The affirmative vote of Lenders holding at least 66-2/3% of the
     outstanding principal amount of the Obligations may rescind or annul the
     acceleration at any time; provided, that, all Events of Default have been
     cured or waived at such time.

          (c)  The rights provided for in this Agreement and the other Loan
     Documents are cumulative and are not exclusive of any other rights, powers,
     privileges or remedies provided by law or in equity, or under any other
     instrument, document or agreement now existing or hereafter arising.

                                   ARTICLE X
                                   THE AGENT

     SECTION 10.1 Appointment and Authorization.  Each Lender hereby
                  -----------------------------
irrevocably (subject to Section 10.9) appoints, designates and authorizes the
                        ------------
Agent to take such action on its behalf under the provisions of this Agreement
and each other Loan Document and to exercise such powers and perform such duties
as are expressly delegated to it by the terms of this Agreement or any other
Loan Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Lender, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent.

     SECTION 10.2 Delegation of Duties.  The Agent may execute any of its
                  --------------------
duties under this Agreement or any other Loan Document by or through agents,
employees or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Agent shall not be
responsible for the negligence or misconduct of any agent or attorney-in-fact
that it selects with reasonable care.

                                      64
<PAGE>

     SECTION 10.3 Liability of Agent.  None of the Agent-Related Persons shall
                  ------------------
(a) be liable for any action taken or omitted to be taken by any of them under
or in connection with this Agreement or any other Loan Document or the
transactions contemplated hereby (except for its own gross negligence or willful
misconduct), or (b) be responsible in any manner to any of the Lenders for any
recital, statement, representation or warranty made by Star Gas Partners, the
Borrower or any Subsidiary or Affiliate of the Borrower, or any officer thereof,
contained in this Agreement or in any other Loan Document, or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Agent under or in connection with, this Agreement or any
other Loan Document, or for the value or title to any Collateral or the
validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document, or for any failure of the Borrower or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower or any
of the Borrower's Subsidiaries or Affiliates.

     SECTION 10.4 Reliance by Agent.
                  -----------------

          (a)  The Agent shall be entitled to rely, and shall be fully protected
     in relying, upon any writing, resolution, notice, consent, certificate,
     affidavit, letter, facsimile or telephone message, statement or other
     document or conversation believed by it to be genuine and correct and to
     have been signed, sent or made by the proper Person or Persons, and upon
     advice and statements of legal counsel (including counsel to the Borrower),
     independent accountants and other experts selected by the Agent. The Agent
     shall be fully justified in failing or refusing to take any action under
     this Agreement or any other Loan Document unless it shall first receive
     such advice or concurrence of the Required Lenders as it deems appropriate
     and, if it so requests, it shall first be indemnified to its satisfaction
     by the Lenders against any and all liability and expense which may be
     incurred by it by reason of taking or continuing to take any such action.
     The Agent shall in all cases be fully protected in acting, or in refraining
     from acting, under this Agreement or any other Loan Document in accordance
     with a request or consent of the Required Lenders and such request and any
     action taken or failure to act pursuant thereto shall be binding upon all
     of the Lenders; and

          (b)  For purposes of determining compliance with the conditions
     specified in Section 6.1, each Lender that has executed this Agreement
                  -----------
     shall be deemed to have consented to, approved or accepted or to be
     satisfied with, each document or other matter either sent by the Agent to
     such Lender for consent, approval, acceptance or satisfaction, or required
     thereunder to be consented to or approved by or acceptable or satisfactory
     to the Lender.

     SECTION 10.5 Notice of Default.  The Agent shall not be deemed to have
                  -----------------
knowledge or notice of the occurrence of any Default or Event of Default, except
with respect to defaults in the payment of principal, interest and fees required
to be paid to the Agent for the account of the Lenders, unless the Agent shall
have received written notice from a Lender or the Borrower

                                      65
<PAGE>

referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". The Agent will notify the
Lenders, and the Borrower of its receipt of any such notice. The Agent shall
take such action with respect to such Default or Event of Default as may be
requested by the Required Lenders in accordance with Article IX; provided,
                                                     ----------
however, that unless and until the Agent has received any such request, the
Agent may (but shall not be obligated to) take such action, or refrain from
taking such action, with respect to such Default or Event of Default as it shall
deem advisable or in the best interest of the Lenders.

     SECTION 10.6 Credit Decision.  Each Lender acknowledges that none of the
                  ---------------
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of Star
Gas Partners, the Borrower and its Subsidiaries, shall be deemed to constitute
any representation or warranty by any Agent-Related Person to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon any Agent-Related Person and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation into the
business, prospects, operations, property, financial and other condition and
creditworthiness of the Borrower and its Subsidiaries, and all applicable bank
regulatory laws relating to the transactions contemplated hereby, and made its
own decision to enter into this Agreement and to extend credit to the Borrower
hereunder. Each Lender also represents that it will, independently and without
reliance upon any Agent-Related Person and based on such documents and
information as it shall deem appropriate at the time, continue to make its own
credit analysis, appraisals and decisions in taking or not taking action under
this Agreement and the other Loan Documents, and to make such investigations as
it deems necessary to inform itself as to the business, prospects, operations,
property, financial and other condition and creditworthiness of the Borrower.
Except for notices, reports and other documents expressly herein required to be
furnished to the Lenders by the Agent, the Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of the Borrower which may come into the possession
of any of the Agent-Related Persons.

     SECTION 10.7 Indemnification of Agent.  Whether or not the transactions
                  ------------------------
contemplated hereby are consummated, the Lenders shall indemnify upon demand the
Agent-Related Persons (to the extent not reimbursed by or on behalf of the
Borrower and without limiting the obligation of the Borrower to do so), pro
rata, from and against any and all Indemnified Liabilities; provided, however,
that no Lender shall be liable for the payment to the Agent-Related Persons of
any portion of such Indemnified Liabilities resulting solely from such Person's
gross negligence or willful misconduct. Without limitation of the foregoing,
each Lender shall reimburse the Agent upon demand for its ratable share of any
costs or out-of-pocket expenses (including attorney costs) incurred by the Agent
in connection with the preparation, execution, delivery, administration,
modification, amendment or enforcement (whether through negotiations, legal
proceedings or otherwise) of, or legal advice in respect of rights or
responsibilities under, this Agreement, any other Loan Document, or any document
contemplated by or referred to herein, to the extent that the Agent is not
reimbursed for such expenses by or on behalf of the Borrower. The undertaking in
this Section shall survive the payment of all Obligations hereunder and the
resignation or replacement of the Agent.

                                      66
<PAGE>

     SECTION 10.8 Agent in Individual Capacity.  Chase and each other Lender
                  ----------------------------
that may become the Agent and their respective Affiliates may make loans to,
issue letters of credit for the account of, accept deposits from, acquire equity
interests in and generally engage in any kind of banking, trust, financial
advisory, underwriting or other business with the Borrower and its Subsidiaries
and Affiliates as though Chase (or such other Lender) were not the Agent or a
Lender hereunder and without notice to or consent of the Lenders. The Lenders
acknowledge that, pursuant to such activities, Chase (or such other Lender) or
their respective Affiliates may receive information regarding the Borrower or
its Affiliates (including information that may be subject to confidentiality
obligations in favor of the Borrower or such Subsidiary) and acknowledge that
the Agent shall be under no obligation to provide such information to them. With
respect to its Loans, Chase (or other Lender) shall have the same rights and
powers under this Agreement as any other Lender and may exercise the same as
though it were not the Agent.

     SECTION 10.9 Successor Agent.  The Agent may, and at the request of the
                  ---------------
Required Lenders shall, resign as Agent upon thirty (30) days' notice to the
Lenders. If the Agent resigns under this Agreement, the Required Lenders shall
appoint from among the Lenders a successor agent for the Lenders. If no
successor agent is appointed prior to the effective date of the resignation of
the Agent, the Agent may appoint, after consulting with the Lenders and the
Borrower, a successor agent from among the Lenders. Upon the acceptance of its
appointment as successor agent hereunder, such successor agent shall succeed to
all the rights, powers and duties of the retiring Agent and the term "Agent"
shall mean such successor agent and the retiring Agent's appointment, powers and
duties as Agent shall be terminated. After any retiring Agent's resignation
hereunder as Agent, the provisions of this Article X and Sections 11.4 and 11.5
                                           ---------     -------------     ----
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was Agent under this Agreement. If no successor agent has accepted
appointment as Agent by the date which is thirty (30) days following a retiring
Agent's notice of resignation, the retiring Agent's resignation shall
nevertheless thereupon become effective and the Lenders shall perform all of the
duties of the Agent hereunder until such time, if any, as the Required Lenders
appoint a successor agent as provided for above. Any successor agent shall have
a market capitalization equal to or greater than $500,000,000.

     SECTION 10.10 Withholding Tax.
                   ---------------

          (a)  If any Lender is a "foreign corporation, partnership or trust"
     within the meaning of the Code and such Lender claims exemption from, or a
     reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code,
     such Lender agrees with and in favor of the Agent and the Borrower, to
     deliver to the Agent (with a copy to the Borrower):

               (i)    if such Lender claims an exemption from, or a reduction
          of, withholding tax under a United States tax treaty, properly
          completed IRS Forms 1001 and W-8 (or any successor forms) before the
          payment of any interest in the first calendar year and before the
          payment of any interest, in each third succeeding calendar year during
          which interest may be paid under this Agreement;

                                      67
<PAGE>

               (ii)   if such Lender claims that interest paid under this
          Agreement is exempt from United States withholding tax because it is
          effectively connected with a United States trade or business of such
          Lender, two properly completed and executed copies of IRS Form 4224
          (or any successor form) before the payment of any interest is due in
          the first taxable year of such Lender and in each succeeding taxable
          year of such Lender during which interest may be paid under this
          Agreement, and IRS Form W-9 (or any successor form); and

               (iii)  such other form or forms as may be required under the Code
          or other laws of the United States as a condition to exemption from,
          or reduction of, United States withholding tax.

Such Lender agrees to promptly notify the Agent and the Borrower of any change
in circumstances which would modify or render invalid any claimed exemption or
reduction.

          (b)  If any Lender claims exemption from, or reduction of, withholding
     tax under a United States tax treaty by providing IRS Form 1001 and such
     Lender sells, assigns, grants a participation in, or otherwise transfers
     all or part of the Obligations of the Borrower to such Lender, such Lender
     agrees to notify the Agent of the percentage amount in which it is no
     longer the beneficial owner of Obligations of the Borrower to such Lender.
     To the extent of such percentage amount, the Agent will treat such Lender's
     IRS Form 1001 as no longer valid.

          (c)  If any Lender claiming exemption from United States withholding
     tax by filing IRS Form 4224 with the Agent sells, assigns, grants a
     participation in, or otherwise transfers all or part of the Obligations of
     the Borrower to such Lender, such Lender agrees to undertake sole
     responsibility for complying with the withholding tax requirements imposed
     by Sections 1441 and 1442 of the Code.

          (d)  If any Lender is entitled to a reduction in the applicable
     withholding tax, the Agent may withhold from any interest payment to such
     Lender an amount equivalent to the applicable withholding tax after taking
     into account such reduction. If the forms or other documentation required
     by subsection (a) of this Section are not delivered to the Agent, then the
     Agent may withhold from any interest payment to such Under not providing
     such forms or other documentation an amount equivalent to the applicable
     withholding tax.

          (e)  If the Internal Revenue Service or any other Government Authority
     of the United States or other jurisdiction asserts a claim that the Agent
     did not properly withhold tax from amounts paid to or for the account of
     any Lender (because the appropriate form was not delivered, was not
     properly executed, or because such Lender failed to notify the Agent of a
     change in circumstances which rendered the exemption from, or reduction of,
     withholding tax ineffective, or for any other reason) such Lender shall
     indemnify the Agent fully for all amounts paid, directly or indirectly, by
     the Agent as tax or otherwise, including penalties and interest, and
     including any taxes imposed by any jurisdiction on the amounts payable to
     the Agent under this Section, together with all costs and expenses
     (including attorney costs). The obligation of the Lenders under this

                                      68
<PAGE>

     subsection shall survive the payment of all Obligations and the resignation
     or replacement of the Agent.

     SECTION 10.11 Collateral Matters.
                   ------------------

          (a)  The Agent is authorized on behalf of all the Lenders, without the
     necessity of any notice to or further consent from the Lenders, from time
     to time to take any action with respect to any Collateral or the Security
     Documents which may be necessary to perfect and maintain perfected the
     security interest in and Liens upon the Collateral granted pursuant to the
     Security Documents.

          (b)  The Lenders irrevocably authorize the Agent, at its option and in
     its discretion, to authorize the release of any Lien granted for the
     benefit of the Agent and the Lenders upon any Collateral (i) upon
     termination of the Commitments and payment in full of all Loans and all
     other Obligations known to the Agent and payable under this Agreement or
     any other Loan Document; (ii) constituting property sold or to be sold or
     disposed of as part of or in connection with any disposition permitted
     hereunder; (iii) constituting property leased to the Borrower or any
     Material Subsidiary under a lease which has expired or been terminated in a
     transaction permitted under this Agreement or is about to expire and which
     has not been, and is not intended by the Borrower or such Material
     Subsidiary to be, renewed or extended; (iv) consisting of an instrument
     evidencing Indebtedness or other debt instrument, if the indebtedness
     evidenced thereby has been paid in full; or (v) if approved, authorized or
     ratified in writing by the Required Lenders or all the Lenders, as the case
     may be, as provided in Section 11.1. Upon request by the Agent at any
                            ------------
     time, the Lenders will confirm in writing the Agent's authority to
     authorize the release of particular types or items of Collateral pursuant
     to this Section 10.  11 (b).
             ---------------

          (c)  Each Lender agrees with and in favor of each other (which
     agreement shall not be for the benefit of the Borrower or any Subsidiary)
     that the Borrower's and the other Obligors' obligations to such Lender
     under this Agreement and the other Loan Documents are not and shall not be
     secured by any Lien on real property collateral now or hereafter granted to
     such Lender.

                                  ARTICLE XI
                           MISCELLANEOUS PROVISIONS

     SECTION 11.1 Waivers, Amendments, etc.  The provisions of this Agreement
                  ------------------------
and of each other Loan Document may from time to time be amended, modified or
waived, if such amendment, modification or waiver is in writing and consented to
by the Borrower and the Required Lenders; provided, however, that no such
amendment, modification or waiver which would:

                                      69
<PAGE>

          (a)  modify any requirement hereunder that any particular action be
     taken by all the Lenders or by the Required Lenders shall be effective
     unless consented to by each Lender;

          (b)  modify this Section 11.1, change the definition of "Required
                           ------------
     Lenders", increase any Commitment or the Percentage of any Lender other
     than pursuant to Section 11.11.1, reduce any fees described in Article III,
                      ---------------                               -----------
     release any substantial portion of collateral security, except as otherwise
     specifically provided in any Loan Document, extend the Commitment
     Termination Date or Stated Maturity Dates or change the interest provisions
     contained in Section 3.2 shall be made without the consent of each Lender
                  -----------
     and each holder of a Note;

          (c)  extend the due date for, or reduce the amount of, any scheduled
     repayment or prepayment of principal of or interest on any Loan (or reduce
     the principal amount of or rate of interest on any Loan) shall be made
     without the consent of the holder of that Note evidencing such Loan; or

          (d)  affect adversely the interests, rights or obligations of the
     Agent shall be made without consent of the Agent.

No failure or delay on the part of the Agent, any Lender, or the holder of any
Note in exercising any power or right under this Agreement or any other Loan
Document shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power or right preclude any other or further exercise
thereof or the exercise of any other power or right. No notice to or demand on
the Borrower in any case shall entitle it to any notice or demand in similar or
other circumstances. No waiver or approval by the Agent, any Lender or the
holder of any Note under this Agreement or any other Loan Document shall, except
as may be otherwise stated in such waiver or approval, be applicable to
subsequent transactions. No waiver or approval hereunder shall require any
similar or dissimilar waiver or approval thereafter to be granted hereunder.

     SECTION 11.2  Notices.  All notices and other communications provided to
                   -------
any party hereto under this Agreement or any other Loan Document shall be in
writing or facsimile and addressed, delivered or transmitted to such party at
its address or by facsimile number set forth below its signature hereto or, with
respect to Persons that become Lenders after the date hereof, set forth in an
Assignment and Acceptance Agreement or at such other address or facsimile number
as may be designated by such party in a notice to the other parties. Any notice,
if mailed and properly addressed with postage prepaid or if properly addressed
and sent by pre-paid courier service, shall be deemed given when received; any
notice, if transmitted by facsimile, shall be deemed given when transmitted.

     SECTION 11.3  Payment of Costs and Expenses.  The Borrower agrees to pay
                   -----------------------------
on demand all expenses of the Agent (including the fees and out-of-pocket
expenses of counsel to the Agent and of local counsel, if any, who may be
retained by counsel to the Agent) in connection with:

                                      70
<PAGE>

          (a)  the negotiation, preparation, execution, delivery, syndication
     and administration of this Agreement and of each other Loan Document,
     including schedules and exhibits, and any amendments, waivers, consents,
     supplements or other modifications to this Agreement or any other Loan
     Document as may from time to time hereafter be required, whether or not the
     transactions contemplated hereby are consummated;

          (b)  the filing, recording, refiling or re-recording of the Security
     Agreements and/or any Uniform Commercial Code financing statements relating
     thereto and all amendments, supplements and modifications to any thereof
     and any and all other documents or instruments of further assurance
     required to be filed or recorded or refiled or re-recorded by the terms
     hereof or of the Security Agreements; and

          (c)  the preparation and review of the form of any document or
     instrument relevant to this Agreement or any other Loan Document.

The Borrower agrees to pay to the Agent customary fees in connection with any
amendment or waiver in respect of the Loan Documents in accordance with the then
current market as determined by the Agent.

The Borrower further agrees to pay, and to save the Agent and each Lender
harmless from all liability for, any stamp or other taxes which may be payable
in connection with the execution or delivery of this Agreement, the borrowings
hereunder, or the issuance of the Notes or any other Loan Documents. The
Borrower also agrees to reimburse the Agent and each Lender upon demand for all
reasonable out-of-pocket expenses (including reasonable attorneys' fees and
legal expenses) incurred by the Agent or such Lender in connection with (x) the
negotiation of any restructuring or "work-out" whether or not consummated, of
any Obligations and (y) the enforcement of any Obligations.

     SECTION 11.4 Indemnification.  In consideration of the execution and
                  ---------------
delivery of this Agreement by each Lender and the extension of the Commitments,
the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender
and each of their respective officers, directors, employees and agents
(collectively, the "Indemnified Parties") free and harmless from and against any
                    -------------------
and all actions, causes of action, suits, losses, costs, liabilities and
damages, and expenses incurred in connection therewith (irrespective of whether
any such Indemnified Party is a party to the action for which indemnification
hereunder is sought), including reasonable attorneys' fees and disbursements
(collectively, the "Indemnified Liabilities"), incurred by the Indemnified
                    -----------------------
Parties or any of them as a result of, or arising out of, or relating to:

          (a)  any transaction financed or to be financed in whole or in part,
     directly or indirectly, with the proceeds of any Loan;

          (b)  the entering into and performance of this Agreement and any other
     Loan Document by any of the Indemnified Parties;

                                      71
<PAGE>

          (c)  any investigation, litigation or proceeding related to any
     acquisition or proposed acquisition by the Borrower or any Subsidiaries of
     all or any portion of the stock or assets of any Person, whether or not the
     Agent or such Lender is party thereto;

          (d)  any Environmental Claim or other matter relating to the
     protection of the environment or the Release by the Borrower or any
     Subsidiary of any Hazardous Material; or

          (e)  the presence on or under, or the escape, seepage, leakage,
     spillage, discharge, emission, discharging or releases from, any real
     property owned or operated by the Borrower or any Subsidiary of any
     Hazardous Material (including any losses, liabilities, damages, injuries,
     costs, expenses or claims asserted or arising under any Environmental Law),
     regardless of whether caused by, or within the control of, the Borrower or
     such Subsidiary,

except for any such Indemnified Liabilities arising for the account of a
particular Indemnified Party by reason of the relevant Indemnified Party's gross
negligence or willful misconduct.  If and to the extent that the foregoing
undertaking may be unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment and satisfaction of each of the
Indemnified Liabilities which is permissible under applicable law.

     SECTION 11.5 Survival.  The obligations of the Borrower under Section 5.3,
                  --------                                         -----------
5.4, 5.5, 5.6, 11.3 and 11.4, and the obligations of the Lenders under Section
---  ---  ---  ----     ----                                           -------
10.1, shall in each case survive until the applicable statute of limitations has
----
run on the bringing of any action thereon any termination of this Agreement, the
payment in full of all Obligations and the termination of all Commitments.  The
representations and warranties made by each Obligor in this Agreement and in
each other Loan Document shall survive the execution and delivery of this
Agreement and each such other Loan Document.

     SECTION 11.6 Severability.  Any provision of this Agreement or any other
                  ------------
Loan Document which is prohibited or unenforceable in any jurisdiction shall, as
to such provision and such jurisdiction, be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions of
this Agreement or such Loan Document or affecting the validity or enforceability
of such provision in any other jurisdiction.

     SECTION 11.7 Headings.  The various headings of this Agreement and of each
                  --------
other Loan Document are inserted for convenience only and shall not affect the
meaning or interpretation of this Agreement or such other Loan Document or any
provisions hereof or thereof.

     SECTION 11.8 Execution in Counterparts, Effectiveness, etc.  This Agreement
                  ---------------------------------------------
may be executed by the parties hereto in several counterparts, all of which
shall constitute together but one and the same agreement. This Agreement shall
become effective when counterparts hereof executed on behalf of the Borrower,
the Agent and each Lender (or notice thereof satisfactory to the Agent) shall
have been received by the Agent and notice thereof shall have

                                      72
<PAGE>

been given by the Agent to the Borrower and each Lender and satisfaction of the
conditions set forth in Section 6.1.
                        -----------

     SECTION 11.9 Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES AND
                  -------------------------------
EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK. On the Effective Date,
this Agreement, the Notes, the Security Agreements and the other Loan Documents
shall constitute the entire understanding among the parties hereto with respect
to the subject matter hereof and supersede any prior agreements, written or
oral, with respect thereto.

     SECTION 11.10 Successors and Assigns.  This Agreement shall be binding upon
                   ----------------------
and shall inure to the benefit of the parties hereto and their respective
successors and assigns; provided, however, that:

          (a)  the Borrower may not assign or transfer its rights or obligations
     hereunder without the prior written consent of the Agent and all Lenders
     (and any attempted or purported assignment or transfer in contravention of
     the foregoing shall be null and void); and

          (b)  the rights of sale, assignment and transfer of the Lenders are
     subject to Section 11.11.
                -------------

     SECTION 11.11 Sale and Transfer of Loans and Notes; Participations in its
                   -----------------------------------------------------------
Loans and Notes.  Each Lender may assign or sell participations in, its Loans
---------------
and Commitments to one or more other Persons in accordance with this
Section 11.11.
-------------

     SECTION 11.11.1 Assignments.  Any Lender:
                     -----------

          (a)  with the written consents of the Borrower and the Agent (which
     consents shall not be unreasonably delayed or withheld and which consent,
     in the case of the Borrower, shall be deemed to have been given in the
     absence of a written notice delivered by the Borrower to the Agent, on or
     before the fifth (5th) Business Day after receipt by the Borrower of such
     Lender's request for consent, stating, in reasonable detail, the reasons
     why the Borrower proposes to withhold such consent) may at any time assign
     and delegate to one or more commercial banks or other financial
     institutions; provided that such consent of the Borrower shall not be
     required at any time a Default has occurred and is continuing;

          (b)  with notice to the Borrower and the Agent, but without the
     consent of the Borrower or the Agent, may assign and delegate to any of its
     Affiliates or to any other Lender; and

          (c)  notwithstanding the foregoing, any Lender may at any time pledge
     or assign a security interest in all or any portion of its rights under
     this Agreement to secure obligations of such Lender, including any pledge
     or assignment to secure obligations to a

                                      73
<PAGE>

     Federal Reserve Bank, and this Section shall not apply to any such pledge
     or assignment of a security interest; provided that no such pledge or
     assignment of a security interest shall release a Lender from any of its
     obligations hereunder or substitute any such pledgee or assignee for such
     Lender as a party hereto;

(each Person described in either of the foregoing clauses as being the Person to
whom such assignment and delegation is to be made, being hereinafter referred to
as an "Assignee Lender"), all or any fraction of such Lender's total Loans and
       ---------------
Commitments which assignment shall be a pro rata portion of the assigning
Lender's Facility A Loans, Facility A Commitment, Facility B Commitment and
Facility B Loans in a minimum aggregate amount of $2,000,000; provided, however,
that any such Assignee Lender will comply, if applicable, with the provisions
contained in Section 10.10 and the last sentence of Section 5.6 and provided,
             -------------                          -----------
further, however, that the Borrower, each other Obligor and the Agent shall be
entitled to continue to deal solely and directly with such Lender in connection
with the interests so assigned and delegated to an Assignee Lender until:

          (d)  written notice of such assignment and delegation, together with
     payment instructions, addresses (of credit and administrative contacts) and
     related information with respect to such Assignee Lender, shall have been
     given to the Borrower and the Agent by such Lender and such Assignee
     Lender;

          (e)  such Assignee Lender shall have executed and delivered to the
     Borrower and the Agent an Assignment and Acceptance Agreement, accepted by
     the Agent; and

          (f)  the processing fees described below shall have been paid.

From and after the date that the Agent accepts such Assignment and Acceptance
Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to
have become a party hereto and to the extent that rights and obligations
hereunder have been assigned and delegated to such Assignee Lender in connection
with such Assignment and Acceptance Agreement, shall have the rights and
obligations of a Lender hereunder and under the other Loan Documents, and (y)
the assignor Lender, to the extent that rights and obligations hereunder have
been assigned and delegated by it in connection with such Assignment and
Acceptance Agreement, shall be released from its obligations hereunder and under
the other Loan Documents.  Such Assignee Lender must also pay a processing fee
to the Agent upon delivery of any Assignment and Acceptance Agreement in the
amount of $3,500; provided, however, with respect to assignments made by a
Lender to any of its Affiliates such processing fee shall be $2,000.  Any
attempted assignment and delegation not made in accordance with this Section
                                                                     -------
11.11.1 shall be null and void.
-------

     SECTION 11.11.2 Participations.  Any Lender may at any time sell to one or
                     --------------
more commercial banks or other Persons (each of such commercial banks and other
Persons being herein called a "Participant") participating interests in any of
                               -----------
the Loans, Commitments, or other interests of such Lender hereunder, provided,
however, that:

                                      74
<PAGE>

          (a)  no participation contemplated in this Section 11.11 shall relieve
                                                     -------------
     such Lender from its Commitments or its other obligations hereunder or
     under any other Loan Document;

          (b)  such Lender shall remain solely responsible for the performance
     of its Commitments and such other obligations;

          (c)  the Borrower, each other Obligor and the Agent shall continue to
     deal solely and directly with such Lender in connection with such Lender's
     rights and obligations under this Agreement and each of the other Loan
     Documents;

          (d)  no Participant, unless such Participant is an Affiliate of such
     Lender, or is itself a Lender, shall be entitled to require such Lender to
     take or refrain from taking any action hereunder or under any other Loan
     Document, except that such Lender may agree with any Participant that such
     Lender will not, without such Participant's consent, take any actions of
     the type described in clauses (b) or (c) of Section 11.1; and
                           -----------    ---    ------------

          (e)  the Borrower shall not be required to pay any amount under
     Sections 5.3, 5.4, 5.5 or 5.6 that is greater than the amount which it
     ------------  --------    ---
     would have been required to pay had no participating interest been sold.

The Borrower acknowledges and agrees that, subject to the preceding sentence, a
Participant, for purposes of Sections 5.3, 5.4, 5.5, 5.6, 5.8, 5.9, 11.3 and
                             -----------------------------------------------
11.4, shall be considered a Lender.
-----------------------------------

     SECTION 11.12 Other Transactions.  Nothing contained herein shall preclude
     --------------------------------
the Agent, or any Lender from engaging in any transaction, in addition to those
contemplated by this Agreement or any other Loan Document, with the Borrower or
any of the Borrower's Affiliates in which the Borrower or such Affiliate is not
restricted hereby from engaging with any other Person. The Lenders hereby
acknowledge that Chase is involved in other financings with Affiliates of Star
Gas Partners, the Borrower and the Material Subsidiaries (the "Other
                                                               -----
Facilities") and that Chase's decisions with respect to its exercise of rights
----------
and remedies with respect to the Other Facilities will be made independently and
as if not involved in the credit facilities provided hereunder.

                                      75
<PAGE>

     SECTION 11.13 Forum Selection and Consent to Jurisdiction.  ANY LITIGATION
                   -------------------------------------------
BASED ON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER
SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW
YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW
YORK, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST ANY
COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE
COURTS OF AND JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND.
EACH OF STAR GAS PARTNERS AND BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS
TO THE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND OF THE UNITED
STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF NEW YORK FOR THE PURPOSE OF
ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY
JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION.  EACH OF STAR GAS
PARTNERS AND THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS
BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT
THE STATE OF NEW YORK.  THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR
HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY
SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN
BROUGHT IN AN INCONVENIENT FORUM.

     SECTION 11.14 Waiver of Jury Trial.  EACH OF THE AGENT, THE LENDERS AND THE
                   --------------------
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT
MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR
ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN
DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER
VERBAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER THE
BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT
CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN
DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL
INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH
SUCH OTHER LOAN DOCUMENT.

                         [SIGNATURE PAGE ON NEXT PAGE]

                                      76
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.

                              TOTAL GAS & ELECTRIC, INC.

                              By:
                                    Name: George Leibowitz
                                    Title:    Treasurer

                              Address:   2101 N.  Andrews Avenue
                                         Suite 104
                                         Ft.  Lauderdale, Florida 33311

                              Facsimile No.: (954) 564-7042

                              Attention: Treasurer

                              Copies to:

                                    Richard F.  Ambury
                                    Star Gas Partners, LLC
                                    2187 Atlantic Street
                                    Stamford, CT 06902

                              With copies to:

                                    Alan Shapiro, Esq.
                                    Phillips Nizer Benjamin Krim & Ballon LLP
                                    666 Fifth Avenue
                                    New York, New York 10103

Acknowledged and Agreed:

STAR GAS PARTNERS, L.P.

By: Star Gas LLC, its General Partner

     By:  ____________
          Name:  George Leibowitz
          Title: Chief Financial Officer

                                      77
<PAGE>

                                    THE CHASE MANHATTAN BANK,
                                    as Agent

                                    By:_________________________________
                                         Name:  William A. DeMilt, Jr.
                                         Title: Vice President

                                    Address:  395 North Service Road
                                              Melville, NY   11747

                                    Facsimile No.: (631) 755-5184

                                    Lending Office Base Rate Loans and
                                    LIBOR Loans:
                                         395 North Service Road
                                         Melville, NY 11747
                                         Attention: William A. DeMilt, Jr.
                                         Facsimile No.: (631) 755-5187

                                    Address for Notices:

                                         395 North Service Road
                                         Melville, NY 11747
                                         Attention: William A. DeMilt, Jr.
                                         Facsimile No.: (631) 755-5187

                                      78

<PAGE>

                              BANK OF AMERICA N.A.

                              By:
                                    Name:  Paul Squires
                                    Title: Managing Director

                              Address:   333 Clay Street, Suite 4550
                                         Mail Code TX5-383-45-02
                                         Houston, Texas 77002

                              Facsimile No.: (713) 651-4808

                              Lending Office Base Rate Loans and LIBOR
                              Loans:

                                         Bank of America Plaza
                                         901 Main Street
                                         Dallas, TX 75202-3714
                                         Attention: Ronald Cosgrove
                                         Mail Code TX1-492-14-12
                                         Facsimile No.: (214) 290-9439

                              Address for Notices:

                                         Bank of America Plaza
                                         901 Main Street
                                         Dallas, TX 75202-3714
                                         Attention: Ronald Cosgrove
                                         Mail Code TX1-492-14-12
                                         Facsimile No.: (214) 290-9439

                              With a Copy to:

                                         Pamela K. Rodgers
                                         Bank of America NT & SA
                                         333 Clay Street, Suite 4550
                                         Mail Code TX5-383-45-02
                                         Houston, Texas 77002
                                         Facsimile No.: (713) 651-4904

                                      79
<PAGE>

                         Schedules and Exhibits Omitted
                         ------------------------------

                                      80<PAGE>

                                                                     EXHIBIT 4.1
--------------------------------------------------------------------------------

                      UNIVERSAL HEALTH REALTY INCOME TRUST

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

                              Declaration of Trust

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

                                August __, 1986

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

<PAGE>

                                     INDEX

                                                                            Page
                                                                            ----

1.1    Name ............................................................      3
1.2    Places of Business ..............................................      3
1.3    Nature of Trust .................................................      4
1.4    Definitions .....................................................      5

                                   ARTICLE II
                                    TRUSTEES

2.1    Number, Term of Office and
         Qualifications of Trustees ....................................     16
2.2    Compensation and Other Renumeration .............................     18
2.3    Resignation, Removal and Death of Trustees ......................     18
2.4    Vacancies .......................................................     19
2.5    Successor and Additional Trustees ...............................     20
2.6    Actions by Trustees .............................................     21
2.7    Certification of Changes in Trustees ............................     22
2.8    Committees ......................................................     22
2.9    Power and Authority of Trustees .................................     23
2.10   Specific Powers and Authority ...................................     24
2.11   Employment of Advisor ...........................................     34
2.12   Bylaws ..........................................................     36

                                   ARTICLE III
                           THE SHARES AND SHAREHOLDERS

3.1    Description of Shares ...........................................     36
3.2    Certificates ....................................................     38
3.3    Fractional Shares ...............................................     40
3.4    Legal Ownership of Trust Estate .................................     40
3.5    Shares Deemed Personal Property .................................     41
3.6    Share Record; Issuance and Transferability
         of Shares .....................................................     41
3.7    Dividends or Distributions to Shareholders ......................     43
3.8    Transfer Agent, Dividend Disbursing
         Agent and Registrar ...........................................     44
3.9    Shareholders' Meetings ..........................................     44
3.10   Proxies .........................................................     46
3.11   Reports to Shareholders .........................................     46
3.12   Fixing Record Date ..............................................     47
3.13   Notice to Shareholders ..........................................     48
3.14   Shareholders' Disclosures; Trustees' Right to
         Refuse to Transfer Shares; Limitation on
         Holdings; Redemption of Shares ................................     48
3.15   Special Voting Requirements for Certain
         Business Combinations .........................................     52

                                   ARTICLE IV
                      LIABILITY OF TRUSTEES. SHAREHOLDERS,
                         OFFICERS. EMPLOYEES AND AGENTS,
                                AND OTHER MATTERS

4.1    Limitation of Liability of Shareholders,
         Trustees, Officers, Employees and Agents for
         Obligations of the Trust ......................................     56
4.2    Express Exculpatory Clauses and Instruments .....................     57
4.3    Limitation of Liability of Trustees, Officers,
         Employees and Agents to the Trust and to
         Shareholders for Acts of Omissions ............................     57
4.4    Limitation of Liability of Affiliated Trustees
         and Their Affiliates to the Trust and to
         Shareholders for Acts and Omissions ...........................     58
4.5    Indemnification and Reimbursement of Trustees,
       Officers, Employees and Agents ..................................     58
4.6    Certain Definitions .............................................     62
4.7    Identification and Reimbursement of
         Shareholder ...................................................     62
4.8    Right of Trustees, Officers, Employees and
         Agents to Own Shares or Other Property
         and to Engage in Other business ...............................     62
4.9    Transaction Between Trustees, Officers,
         Employees or Agents and the Trust .............................     65
4.10   Independent Counsel .............................................     68
4.11   Persons Dealing with Trustees, Officers,
         Employees or Agents ...........................................     68
4.12   Reliance ........................................................     69

                                    ARTICLE V
                             DURATION, AMENDMENT AND
                              TERMINATION OF TRUST

5.1    Duration of Trust ...............................................     70
5.2    Termination of Trust ............................................     70
5.3    Amendment Procedure .............................................     71
5.4    Amendments Effective ............................................     72
5.5    Transfer to Successor ...........................................     73

                                   ARTICLE VI
                                  MISCELLANEOUS

6.1    Applicable Law ..................................................     73
6.2    Index and Headings for Reference Only ...........................     74
6.3    Successors In Interest ..........................................     74
6.4    Inspection of Records ...........................................     74
6.5    Counterparts ....................................................     75
6.6    Provisions of the Trust in Conflict with
         Law or Regulations; Severability ..............................     75
6.7    Certifications ..................................................     76
<PAGE>

                              DECLARATION OF TRUST
                                       0F
                      UNIVERSAL HEALTH REALTY INCOME TRUST
                                 August __, 1986

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

      DECLARATION OF TRUST made as of the date set forth above by the
undersigned Trustees.

                                   WITNESSETH:

      WHEREAS, the Trustees desire to create a trust for the principal purpose
of investing in real property and interests therein: and

      WHEREAS, the Trustees desire that such trust qualify as a "real estate
investment trust" under the REIT Provisions of the Internal Revenue Code; and

      WHEREAS, in furtherance of such purpose the Trustees intend to acquire
certain real property and interests therein and to hold, manage and dispose of
all such property as Trustees in the manner hereinafter stated; and
<PAGE>

      WHEREAS, it is proposed that the beneficial interest in the Trust be
divided into transferable Shares of Beneficial Interest, evidenced by
certificates therefor, as hereinafter provided;

      NOW, THEREFORE, it as hereby agreed and declared that the Trustees will
hold any and all property of every type and description which they are acquiring
or may hereafter acquire as Trustees, together with the proceeds thereof, in
trust, to manage and dispose of the same for the benefit of the holders from
time to time of the Shares of Beneficial Interest being issued and to be issued
hereunder in the manner and subject to the stipulations contained herein.

                                      -2-
<PAGE>

                                    ARTICLE I

                             THE TRUST; DEFINITIONS

      1.1 Name. The name of the Trust created by this Declaration of Trust shall
be "Universal Health Realty Income Trust" and so far as may be practicable the
Trustees shall conduct the Trust's activities, execute all documents and sue or
be sued under that name, which name (and the word "Trust" wherever used in this
Declaration of Trust, except where the context otherwise requires) shall refer
to the Trustees collectively but not individually or personally nor to the
officers, agents, employees or Shareholders of the Trust or of such Trustees.
Under circumstances under which the Trustees determine that the use of such name
is not practicable or under circumstances in which the Trustees are
contractually bound to change that name, they may use such other designation or
they may adopt another name under which the Trust may hold property or conduct
its activities.

      1.2 Places of Business. The Trust shall maintain an office in Maryland at
The Corporation Trust Incorporated or such other place in Maryland as the
Trustees may determine from time to time. The Resident Agent of the Trust at
such office shall be The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The Trust may change such

                                      -3-
<PAGE>

Resident Agent from time to time as the Trustees shall determine. The Trust may
have such other offices or places of business within or without the State of
Maryland as the Trustees may from time to time determine.

      1.3 Nature of Trust. The Trust shall be a real estate investment trust
within the meaning of Title 8 of the Corporations and Associations Article of
the Annotated Code of Maryland. It is also intended that the Trust shall carry
on a business as a "real estate investment trust" as described in the REIT
Provisions of the Internal Revenue Code. The Trust is not intended to be, shall
not be deemed to be, and shall not be treated as a general partnership, limited
partnership, joint venture, corporation or joint stock company (but nothing
herein shall preclude the Trust from being treated for tax purposes as an
association under the Internal Revenue Code) nor shall the Trustees or
Shareholders or any of them for any purpose be, nor be deemed to be, nor be
treated in any way whatsoever to be, liable or responsible hereunder as partners
or joint venturers. The relationship of the Shareholders to the Trustees shall
be solely that of beneficiaries of the Trust in accordance with the rights
conferred upon them by this Declaration.

                                      -4-
<PAGE>

      1.4 Definitions. The terms defined in this Section 1.4, wherever used In
this Declaration, shall, unless the context otherwise requires, have the
respective meanings hereinafter specified. Wherever the singular number is used
in this Declaration and when permitted by the context, the same shall include
the plural, and the masculine gender shall include the feminine and neuter
genders, and vice versa. Where applicable, calculations to be made pursuant to
any such definition shall be made in accordance with generally accepted
accounting principles as in effect from time to time except as otherwise
provided in such definition.

            (a) Advisor. "Advisor" shall mean the Person employed by the
      Trustees in accordance with the provisions of the Bylaws.

            (b) Advisory Contract. "Advisory Contract" shall mean the contract
      between the Trust and the Advisor pursuant to which the Advisor is
      employed.

            (c) Affiliate. "Affiliate" shall mean, as to any Person, (i) any
      other Person directly or indirectly controlling, controlled by or under
      common control with such Person, (ii) any other Person that owns
      beneficially, directly or indirectly, five percent (5%) or more of the
      outstanding capital stock, shares or equity interests of such Person, or
      (iii) any officer, director, employee,

                                      -5-
<PAGE>

      general partner or trustee of such Person or of any Person controlling,
      controlled by or under common control with such Person (excluding trustees
      who are not otherwise an Affiliate of such Person).

            (d) Affiliated Trustee. "Affiliated Trustee" shall mean a Trustee
      who is not an Independent Trustee.

            (e) Annual Meeting of Shareholders. "Annual Meeting of Shareholders"
      shall mean the meeting described in the first sentence of Section 3.9.

            (f) Annual Report. "Annual Report" shall have the meaning set forth
      in Section 3.11.

            (g) Average Invested Real Estate Assets. "Average Invested Real
      Estate Assets" for any period shall mean the average of the aggregate book
      value of the consolidated assets of the Trust invested, directly or
      indirectly, in equity interests in, and loans secured by, real estate,
      before reserves for depreciation or bad debt or other similar noncash
      reserves, calculated by taking the average of such values at the end of
      each month during such period.

            (h) Book Value. "Book Value" of an asset or assets shall mean the
      value of such asset or assets of the Trust on the books of the Trust,
      without

                                      -6-
<PAGE>

      deduction for depreciation or other asset valuation reserves and without
      deduction for mortgages or other security interests to which such asset or
      assets are subject, except that no asset shall be valued at more than its
      fair market value as determined by or under procedures adopted by the
      Trustees, and the underlying assets of a partnership, joint venture or
      other form of indirect ownership, to the extent of the Trust's interest
      therein, shall be valued as if owned directly by the Trust.

            (i) Bylaws. "Bylaws" shall have the meaning set forth in Section
      2.12.

            (j) Continuing Trustee. "Continuing Trustee" shall mean each of the
      Trustees identified in this Declaration, or one elected or appointed prior
      to the time the Related Person (as defined in Section 15) in question
      acquires such status, or one designated as a Continuing Trustee (prior to
      his or her initial election or appointment) by all or all but one of the
      Trustees on the Board of Trustees, but only if all or all but one of the
      Trustees on the Board of Trustees shall then consist of Continuing
      Trustees.

            (k) Declaration. "Declaration" or "this Declaration" shall mean this
      Declaration of Trust,

                                      -7-
<PAGE>

      as amended, restated or modified from time to time. References in this
      Declaration to "herein" and "hereunder" shall be deemed to refer to this
      Declaration and shall not be limited to the particular text, article or
      section in which such words appear.

            (1) Independent Trustee. "Independent Trustee" shall mean a Trustee
      who, in his individual capacity, (i) is not an Affiliate of the Advisor
      and (ii) does not perform any services for the Trust except as Trustee.

            (m) Internal Revenue Code. "Internal Revenue Code" shall mean the
      Internal Revenue Code of 1954, as now enacted or hereafter amended, or
      successor statutes and applicable rules and regulations thereunder.

            (n) Invested Assets. "Invested Assets" shall mean the Book Value of
      all the Real Estate Investments of the Trust.

            (o) Mortgage Loans. "Mortgage Loans" shall mean notes, debentures,
      bonds and other evidences of indebtedness or obligations, whether
      negotiable or nonnegotiable, and which are secured or collateralized by
      Mortgages.

                                      -8-
<PAGE>

            (p) Mortgages. "Mortgages" shall mean mortgages, deeds of trust or
      other security interests in Real Property.

            (q) Net Assets. "Net Assets" shall mean the total assets (other than
      intangibles) at cost before deducting depreciation or other non-cash
      reserves less total liabilities, calculated at least quarterly on a basis
      consistently applied.

            (r) Net Income. "Net Income" for any period shall be calculated on
      the basis of the Trust's audited financial statements and shall mean total
      revenues applicable to such period, less the expenses applicable to such
      period, other than additions to reserves for depreciation or bad debts or
      other similar non-cash reserves.

            (s) Person. "Person" shall mean and include individuals,
      corporations, limited partnerships, general partnerships, joint stock
      companies or associations, joint ventures, associations, companies,
      trusts, banks, trust companies, land trusts, business trusts and other
      entities and governments and agencies and political subdivisions thereof.

            (t) Real Estate Investment. "Real Estate Investment" shall mean any
      direct or indirect investment in any interest in Real Property or in

                                      -9-
<PAGE>

      any Mortgage Loan, or in any Person whose principal purpose is to make any
      such investment.

            (u) Real Property. "Real Property" shall mean and include land,
      leasehold interests (including but not limited to interests of a lessor or
      lessee therein), rights and interests in land, and in any building's
      structures, improvements, furnishings and fixtures located on or used in
      connection with land, leasehold interests or rights in land or interests
      therein, but does not include investments in Mortgages, Mortgage Loans or
      interests therein.

            (v) REIT. "REIT" shall mean a real estate investment trust as
      defined in the REIT Provisions of the Internal Revenue Code.

            (w) REIT Provisions of the Internal Revenue Code. "REIT Provisions
      of the Internal Revenue Code" shall mean Parts II and III of Subchapter M
      of Chapter 1 of Subtitle A of the Internal Revenue Code or any successor
      provision.

            (x) Securities. "Securities" shall mean any stock, shares, voting
      trust certificates, bonds, debentures, notes or other evidences of
      indebtedness or in general any instruments commonly known as "securities"
      or any certificates of interest,

                                      -10-
<PAGE>

      shares or participations in, temporary or interim certificates for,
      receipts for, guarantees of, or warrants, options or rights to subscribe
      to, purchase or acquire any of the foregoing.

            (y) Shareholders. "Shareholders" shall mean as of any particular
      time all holders of record of outstanding Shares at such time.

            (z) Shares. "Shares" or, as the context may require, "shares" shall
      mean the shares of beneficial interest of the Trust as described in the
      first sentence of Section 3.1 hereof.

            (aa) Total Assets. "Total Assets" shall mean the Book Value of all
      the assets of the Trust, as such Book Value appears on the most recent
      quarterly balance sheet of the Trust.

            (bb) Total Operating Expenses. "Total Operating Expenses" shall be
      calculated on the basis of the Trust's annual audited financial statement
      and shall mean the aggregate annual expenses regarded as ordinary
      operating expenses (including any compensation payable to the Advisor)
      exclusive of the following:

            (i) the cost of borrowed money;

                                      -11-
<PAGE>

            (ii) taxes on income and taxes and assessments on real property, if
      any, and all other taxes applicable to the Trust;

            (iii) legal, auditing, accounting, underwriting, brokerage, listing,
      reporting, registration and other fees, and printing, engraving and other
      expenses and taxes incurred in connection with the issuance, distribution,
      transfer, trading, registration and stack exchange listing of the Trust's
      securities;

            (iv) expenses of organizing, revising, amending, converting,
      modifying or terminating the Trust;

            (v) fees and expenses paid to Trustees and officers of the Trust who
      are not employees or Affiliates of the Advisor, independent advisors,
      independent contractors, mortgage servicers, consultants, managers, local
      property managers or management firms, accountants, attorneys and other
      agents employed by or on behalf of the Trust who are employees or
      Affiliates of the Advisor to the extent set forth in the Advisory
      Contract;

            (vi) expenses directly connected with the acquisition, disposition
      and ownership of real estate interests or other property (including the

                                      -12-
<PAGE>

      costs of foreclosure, insurance premiums, legal services, brokerage and
      sales commissions, maintenance, repair, improvement and local management
      of property), other than expenses with respect thereto of employees of the
      Advisor, to the extent that such expenses are to be borne by the Advisor
      pursuant to the terms of the Advisory Contract;

            (vii) all insurance costs incurred in connection with the Trust
      (including officer and trustee liability insurance);

            (viii) expenses connected with payments of dividends or interest or
      contributions in cash or any other form made or caused to be made by the
      Trustees to holders of securities of the Trust;

            (ix) all expenses connected with communications to holders of
      securities of the Trust and other bookkeeping and clerical work necessary
      to maintaining relations with holders of securities, including the cost of
      printing and mailing certificates for securities and proxy solicitation
      materials and reports to holders of the Trust's securities;

            (x) transfer agent's, registrar's and indenture trustee's fees and
      charges;

                                      -13-
<PAGE>

            (xi) legal, accounting and auditing fees and expenses;

            (xii) expenses relating to any office or office facilities
      maintained by the Trust separate from the office of the Advisor;

            (xiii) non-cash provisions for depreciation, depletion and
      amortization;

            (xiv) losses on the disposition of assets and provisions for such
      losses; and

            (xv) other extraordinary charges including, without limitation,
      litigation costs.

            (cc) Trust. "Trust" shall mean the Trust created by this
      Declaration.

            (dd) Trustees. "Trustees" shall mean, as of any particular time, the
      original signatories hereto as long as they hold office hereunder and
      additional and successor trustees, and shall not include the officers,
      employees or Agents of the Trust or the Shareholders. Nothing herein shall
      be deemed to preclude the Trustees from also serving as officers,
      employees, or agents of the Trust or owning Shares.

            (ee) Trust Estate. "Trust Estate" shall mean as of any particular
      time any and all property, real, personal or otherwise, tangible or

                                      -14-
<PAGE>

      intangible, which is transferred, conveyed or paid to or purchased by the
      Trust or Trustees and all rents, income, profits and gains therefrom and
      which at such time is owned or held by or for the Trust or the Trustees.

                                      -15-
<PAGE>

                                   ARTICLE II

                                    TRUSTEES

            2.1 Number, Term of Office and Qualifications of Trustees. There
shall be no fewer than three (3) nor more than seven (7) Trustees. The initial
number of Trustees shall be seven (7) until changed by a two-thirds (2/3) vote
of the Continuing Trustees or by an amendment of this Declaration duly adopted
by the Shareholders. The Board of Trustees shall be classified into three
classes, with three (3) Trustees in Class I, two (2) Trustees in Class II, and
two (2) Trustees in Class III. Each class shall consist, as nearly as may be
possible, of one-third of the total number of Trustees constituting the entire
Board of Trustees. If the number of Trustees is changed, any increase or
decrease shall be apportioned among the classes so that the number of Trustees
in each class remains as nearly equal as possible. Each Trustee in Class I shall
serve for an initial term ending at the annual meeting of Shareholders in 1987;
each Trustee in Class II shall serve for an initial term ending at the annual
meeting of Shareholders in 1988; and each Trustee in Class III, shall serve for
an initial term ending at the annual meeting of Shareholders in 1989. After the
respective initial terms of the groups indicated, each such group of Trustees
shall be elected for successive terms ending at the

                                      -16-
<PAGE>

annual meeting of Shareholders held during the third year after election.

The names of the initial Trustees who will serve as Trustees until the
expiration of their respective terms and until their successors are elected and
qualify are as follows:

            Class I:   Alan B. Miller, Lee Ducat and Peter Linneman
            Class II:  Joseph P. Gaynor, III and Daniel M. Cain
            Class III: Sidney Miller and Robert E. Cawthorn

            The initial Trustees shall be the signatories hereto. No reduction
in the number of Trustees shall have the effect of removing any Trustee from
office prior to the expiration of his term. Subject to the provisions of Section
2.3, each Trustee shall hold office until the election and qualification of his
successor. There shall be no cumulative voting in the election of Trustees. A
Trustee shall be an individual at least twenty-one (21) years of age who is not
under legal disability. A majority of the Trustees shall at all times be persons
who are Independent Trustees and at least one independent Trustee shall serve in
each Class; provided, however, that upon a failure to comply with this
requirement because of the resignation, removal or death of a Trustee who is an
Independent Trustee, such requirement shall

                                      -17-
<PAGE>

not be applicable for a period of ninety (90) days. Nominees to serve as
Independent Trustees shall be nominated by the then current Independent
Trustees, if any. Unless otherwise required by law, no Trustee shall be required
to give bond, surety or security in any jurisdiction for the performance of any
duties or obligations hereunder. The Trustees in their capacity as Trustees
shall not be required to devote their entire time to the business and affairs of
the Trust.

            2.2 Compensation and Other Remuneration. The Trustees shall be
entitled to receive such reasonable compensation for their services as Trustees
as the Trustees may determine from time to time. The Trustees and Trust officers
shall be entitled to receive remuneration for services rendered to the Trust in
any other capacity. Subject to the Sections 4.8 and 4.9, such services may
include, without limitation, services as an officer of the Trust, legal,
accounting or other professional services, or services as a broker, transfer
agent or underwriter, whether performed by a Trustee or any person affiliated
with a Trustee.

            2.3 Resignation, Removal and Death of Trustees. A Trustee may resign
at any time by giving written notice to the remaining Trustees at the principal
office of the Trust. Such resignation shall take effect on the date specified in
such notice, without need for prior accounting. A Trustee may be removed at any
time with or without cause by vote or

                                      -18-
<PAGE>

consent of holders of Shares representing two-thirds of the total votes
authorized to be cast by Shares then outstanding and entitled to vote thereon,
or with cause by all remaining Trustees. A Trustee judged incompetent or
bankrupt, or for whom a guardian or conservator has been appointed, shall be
deemed to have resigned as of the date of such adjudication or appointment. Upon
the resignation or removal of any Trustee, or his otherwise ceasing to be a
Trustee, he shall execute and deliver such documents as the remaining Trustees
shall require for the conveyance of any Trust property held in his name, shall
account to the remaining Trustees as they require for all property which he
holds as Trustee and shall thereupon be discharged as Trustee. Upon the
incapacity or death of any Trustee, his legal representative shall perform the
acts set forth in the preceding sentence and the discharge mentioned therein
shall run to such legal representative and to the incapacitated Trustee or the
estate of the deceased Trustee, as the case may be.

            2.4 Vacancies. If any or all the Trustees cease to be Trustees
hereunder, whether by reason of resignation, removal, incapacity, death or
otherwise, such event shall not terminate the Trust or effect its continuity.
Until vacancies are filled, the remaining Trustee or Trustees (even though fewer
than three (3) may exercise the powers of the Trustees hereunder. Vacancies
(including vacancies created

                                      -19-
<PAGE>

by increases in numbers) may be filled by the remaining Trustee or by a majority
of the remaining Trustees (or a majority of the remaining Independent Trustees,
if any, if the vacant position was formerly held by an Independent Trustee or is
required to be held by an Independent Trustee). If at any time there shall be no
Trustees in office, successor Trustees shall be elected by the Shareholders as
provided in Section 3.9. Any Trustee elected to fill a vacancy created by the
resignation, removal or death of a former Trustee shall hold office for the
unexpired term of such former Trustee.

            2.5 Successor and Additional Trustees. The right, title and interest
of the Trustee in and to the Trust Estate shall also vest in successor and
additional Trustees upon their qualification, and they shall thereupon have all
the rights and obligations of Trustees hereunder and until such qualification,
the right, title and interest in the Trust Estate shall vest in the remaining
Trustee on a pro rata basis. Such right, title and interest shall vest in the
Trustees whether or not conveyancing documents have been executed and delivered
pursuant to Section 2.3 or otherwise. Appropriate written evidence of the
election and qualification of successor and additional Trustees shall be filed
with the records of the Trust and in such other offices or places as the
Trustees may deem necessary, appropriate or desirable.

                                      -20-
<PAGE>

            2.6 Actions by Trustees. The Trustees may act with or without a
meeting. A quorum for all meetings of the Trustees shall be a majority of the
Trustees; provided, however, that, whenever pursuant to Section 4.9 or otherwise
the vote of a majority of a particular group of Trustees is required at a
meeting, a quorum for the consideration of the matter requiring such a majority
at such meeting shall be a majority of the Trustees which shall include a
majority of such group. Unless specifically provided otherwise in this
Declaration, any action of the Trustees may be taken at a meeting by vote of a
majority of the Trustees present (if a quorum for such meeting is present) or
without a meeting by written consents of a majority of the Trustees, which
consents shall be filed with the records of meeting of the Trustees. Any action
or actions permitted to be taken by the Trustees in connection with the business
of the Trust may be taken pursuant to authority granted by a meeting of the
Trustees conducted by a telephone conference call, and the transaction of Trust
business represented thereby shall be the same authority and validity as if
transacted at a meeting of the Trustees held in person or by written consent.
The minutes of any Trustees' meeting held by telephone shall be prepared in the
same manner as a meeting of the Trustees held in person. Any agreement, deed,
mortgage, lease or other instrument or writing executed by one or more of the
Trustees

                                      -21-
<PAGE>

or by any authorized Person shall be valid and binding upon the Trustees and
upon the Trust when authorized or ratified by action of the Trustees or as
provided in the Bylaws.

            With respect to the actions of the Trustees, Trustees who have, or
are Affiliates of Persons who have, any direct or indirect interest in or
connection with any matter being acted upon may be counted for all quorum
purposes under this Section 2.6 and, subject to the provisions of Section 4.9,
may vote on the matter as to which they or their Affiliates have such interest
or connection.

            2.7 Certification of Changes in Trustees. No alteration in the
number of Trustees, no removal of a Trustee and no election or appointment of
any individual as Trustee (other than an individual who was serving as a Trustee
immediately prior to such election or appointment) shall become effective unless
and until there shall be delivered to the secretary of the Trust an instrument
in writing signed by a majority of the Trustees, certifying to such alteration
in the number of trustees and/or to such removal of a Trustee and/or naming the
individual so elected or appointed as Trustee, together with his written
acceptance thereof and agreement to be bound thereby.

            2.8 Committee. The Trustees may appoint from among their number an
audit committee and such other standing committees as the Trustees determine.
Each standing commit-

                                      -22-
<PAGE>

tee shall consist of three or more members. All members of the audit committee
shall be Independent Trustees. A majority of the members of each other standing
committee shall be Independent Trustees; provided however, that upon a failure
to comply with this requirement because of the resignation, removal or death of
a Trustee who is an Independent Trustee, such requirement shall not be
applicable for a period of ninety (90) days. Each committee shall have such
powers, duties and obligations as the Trustees may deem necessary or
appropriate. The standing committees shall report their activities periodically
to the Trustees.

            2.9 Power and Authority of Trustees. The Trustees, subject only to
the specific limitations contained in this Declaration, shall have, without
further or other authorization, and free from any power or control on the part
of the Shareholders, full, absolute and exclusive power, control and authority
over the Trust Estate and over the business and affairs of the Trust to the same
extent as if the Trustees were the sole owners thereof in their own right, and
may do all such acts and things as in their sole judgment and discretion are
necessary for or incidental to or desirable for the carrying out of or
conducting the business of the Trust. Any construction of this Declaration or
any determination made in good faith by the Trustees of the purposes of the
Trust or the existence of any power or authority hereunder

                                      -23-
<PAGE>

shall be conclusive. In construing the provisions of this Declaration,
presumption shall be in favor of the grant of powers and authority to the
Trustees. The enumeration of any specific power or authority herein shall not be
construed as limiting the aforesaid powers or the general powers or authority or
any other specified power or authority conferred herein upon the Trustees.

            2.10 Specific Powers and Authority. Subject only to the express
limitations contained in this Declaration and in addition to any powers and
authority conferred by this Declaration or which the Trustees may have by virtue
of any present or future statute or rule or law, the Trustees without any action
or consent by the Shareholders shall have and may exercise at any time and from
time to time the following powers and authorities which may or may not be
exercised by them in their sole judgment and discretion and in such manner and
upon such terms and conditions as they may from time to time deem proper:

            (a) to retain, invest and reinvest the capital or other funds of the
      Trust in, and to acquire, purchase, or own, real or personal property of
      any kind, wherever located in the world, and make commitments for such
      investments, all without regard to whether any such property is authorized
      by law for the investment of trust funds or produces or may produce
      income; to pos-

                                      -24-
<PAGE>

      sess and exercise all the rights, powers and privileges appertaining to
      the ownership of the Trust Estate; and to increase the capital of the
      Trust at any time by the issuance of any additional authorized Shares
      (subject to the Bylaws or other Securities of the Trust for such
      consideration as they deem advisable;

            (b) without limitation of the powers set forth in paragraph (a)
      above, to invest in, purchase or otherwise acquire for such consideration
      as they deem proper, in cash or other property of through the issuance of
      shares or through the issuance of notes, debentures, bonds or other
      obligations of the Trust, and to hold for investment, the entire or any
      participating interests in any Mortgage Loans or interest in Real
      Property, including ownership of, or participations in the ownership of,
      or rights to acquire, equity interests in Real Property or in Persons
      owning, developing, improving, operating or managing Real Property, which
      interests may be acquired independently of or in connection with other
      investment activities of the Trust and, in the latter case, may include
      rights to receive additional payments based on gross income or rental or
      other income from the Real Property or improvements thereon; to invest in
      loans secured by the pledge or transfer of Mortgage Loans;

                                      -25-
<PAGE>

            (c) to sell, rent, lease, hire, exchange, release, partition,
      assign, mortgage, pledge, hypothecate, grant security interests in,
      encumber, negotiate, convey, transfer or otherwise dispose of any and all
      the Trust Estate by deeds (including deeds in lieu of foreclosure), trust
      deeds, assignments, bills of sale, transfers, leases, mortgages, financing
      statements, security agreements and other instruments for any of such
      purposes executed and delivered for and on behalf of the Trust or the
      Trustees by one or more of the Trustees or by a duly authorized officer,
      employee, agent or nominee of the Trust, provided that no disposition of a
      Real Estate Investment shall be accomplished without the approval of a
      majority of the Trustees (including a majority of the Independent
      Trustees);

            (d) to issue Shares, bonds, debentures, notes or other evidences of
      indebtedness, which may be secured or unsecured and may be subordinated to
      any indebtedness of the Trust, to such Persons for such cash, property or
      other consideration (including Securities issued or created by, or
      interests in any Person) at such time or times and on such terms as the
      Trustees may deem advisable and to list any of the foregoing Securities
      issued by the Trust on any securities exchange and to purchase or
      otherwise acquire, hold, cancel, reissue, sell and

                                      -26-
<PAGE>

      transfer any of such Securities, and to cause the instruments evidencing
      such Securities to bear an actual or facsimile imprint of the seal of the
      Trust (if the Trustees shall have adopted such a seal) and to be signed by
      manual or facsimile signature or signatures (and to issue such Securities,
      whether or not any Person whose manual or facsimile signature shall be
      imprinted thereon shall have ceased to occupy the office with respect to
      which such signature was authorized), provided that, where only facsimile
      signatures for the Trust are used, the instrument shall be countersigned
      manually by a transfer agent, registrar or other authentication agent; and
      to issue any of such Securities of different types in combinations or
      units with such restrictions on the separate transferability thereof as
      the Trustees shall determine;

            (e) to enter into leases of real and personal property as lessor or
      lessee and to enter into contracts, obligations and other agreements for a
      term, and to invest in obligations having a term, extending beyond the
      term of office of the Trustees and beyond the possible termination of the
      Trust, or having a lesser term;

            (f) to borrow money and give negotiable or non-negotiable
      instruments therefor; to guarantee, indemnify or act as surety with
      respect to payment or performance

                                      -27-
<PAGE>

      of obligations of third parties; to enter into other obligations on behalf
      of the Trust; and to assign, convey, transfer, mortgage, subordinate,
      pledge, grant security interests in, encumber or hypothecate the Trust
      Estate to secure any indebtedness of the Trust or any other of the
      foregoing obligations of the Trust;

            (g) to lend money, whether secured or unsecured;

            (h) to create reserve funds for any purpose;

            (i) to incur and pay out of the Trust Estate any charges or
      expenses, and to disburse any funds of the Trust, which charges, expenses
      or disbursements are, in the opinion of the Trustees, necessary or
      incidental to or desirable for the carrying out of any of the purposes of
      the Trust or conducting the business of the Trust, including without
      limitation taxes and other governmental levies, charges and assessments,
      of whatever kind or nature, imposed upon or against the Trustees in
      connection with the Trust Estate or any part thereof, and for any of the
      purposes herein;

            (j) to deposit funds of the Trust in banks, trust companies, savings
      and loan associations and other depositories, whether or not such deposits
      will draw interest, the same to be subject to withdrawal on such terms and
      in such manner and by such Person or Persons (including any one or more
      Trustees or officers, em-

                                      -28-
<PAGE>

            ployees or agents of the Trust) as the Trustees may determine;

            (k) to possess and exercise all the rights, powers and privileges
      pertaining to the ownership of all or any Mortgages or Securities issued
      or created by, or interests in, any Person, forming part of the Trust
      Estate, to the same extent that an individual might do so, and, without
      limiting the generality of the foregoing, to vote or give any consent,
      request or notice, or waive any notice, either in person or by proxy or
      power of attorney, with or without power of substitution, to one or more
      Persons, which proxies and powers of attorney may be for meetings or
      action generally or for any particular meeting or action, and may include
      the exercise of discretionary powers;

            (l) to cause to be organized or assist in organizing any Person
      under the laws of any jurisdiction to acquire the Trust Estate or any part
      or parts thereof or to carry on any business in which the Trust shall
      directly or indirectly have any interest, and to sell, rent, lease, hire,
      convey, negotiate, assign, exchange or transfer the Trust Estate or any
      part or parts

                                      -29-
<PAGE>

      thereof to or with any such Person or any existing Parson in exchange for
      the Securities thereof or otherwise, and to merge or consolidate the Trust
      with or into any Person or merge or consolidate any Person into the Trust,
      and to lend money to, subscribe for the Securities of, and enter into any
      contracts with, any Person in which the Trust holds or is about to acquire
      Securities or any other interest;

            (m) to enter into joint ventures, general or limited partnerships,
      participation or agency arrangements and any other lawful combinations or
      associations; provided, however, that the Trustees may not enter into any
      such joint venture or other association as aforesaid unless it has first
      received from counsel an opinion to the effect that such joint venture or
      other association as aforesaid will be treated for tax purposes as a
      partnership;

            (n) to elect, appoint, engage or employ such officers for the Trust
      as the Trustees may determine, who may be removed or discharged at the
      discretion of the Trustees, such officers to have such powers and duties,
      and to serve such terms, as may be prescribed by the Trustees or by the
      Bylaws; to engage or employ any Persons (including, subject to the
      provisions of Sections 4.8 and 4.9, any Trustee or officer, agent or
      employee of the Trust and any Person in which any Trustee, officer

                                      -30-
<PAGE>

      or agent is directly or indirectly interested or with which he is directly
      or indirectly connected) as agents, representatives, employees, or
      independent contractors (including without limitation real estate
      advisors, investment advisors, transfer agents, registrars, underwriters,
      accountants, attorneys at law, real estate agents, managers, appraisers,
      brokers, architects, engineers, construction managers, general contractors
      or otherwise) in one or more capacities, and to pay compensation from the
      Trust for services in as many capacities as such Person may be so engaged
      or employed; and to delegate any of the powers and duties of the Trustees
      to any one or more Trustees, agents, representatives, officers, employees,
      independent contractors or other Persons; provided, however, that no such
      delegation shall be made to an Affiliate of the Advisor, except with the
      approval of a majority of the Independent Trustees;

            (o) to determine or cause to be determined from time to time the
      value of all or any part of the Trust Estate and of any services,
      Securities, property or other consideration to be furnished to or acquired
      by the Trust, and from time to time to revalue or cause to be revalued all
      or any part of the Trust Estate in accordance with such appraisals or
      other information as

                                      -31-
<PAGE>

      are, in the Trustees sole judgment, necessary and/or satisfactory;

            (p) to collect, sue for and receive all sums of money coming due to
      the Trust, and to engage in, intervene in, abandon or adjust, by
      arbitration or otherwise, any actions, suits, proceedings, disputes,
      claims, controversies, demands or other litigation relating to the Trust,
      the Trust Estate or the Trust's affairs, to enter into agreements
      therefor, whether or not any suit is commenced or claim accrued or
      asserted and, in advance of any controversy, to enter into agreements
      regarding arbitration, adjudication or settlement thereof;

            (q) to renew, modify, release, compromise, extend, consolidate or
      cancel, in whole or in part, any obligation to or of the Trust or
      participate in any reorganization of obligors to the Trust;

            (r) to self-insure or to purchase and pay for out of the Trust
      Estate insurance contracts and policies, including contracts of indemnity,
      insuring the Trust Estate and/or all or any of the Trustees, the
      Shareholders, or the officers, employees or agents of the Trust against
      any and all claims and liabilities of every nature asserted by any person
      arising by reason of any action alleged to have been taken or omitted by
      the

                                      -32-
<PAGE>

      Trust or by the Trustees, Shareholders, officers, employees or agents,
      whether or not the Trust would have the power to indemnify such Person or
      Persons against any such claim or liability;

            (s) to cause legal title to any of the Trust Estate to be held by
      and/or in the name of the Trustees, or, except as prohibited by law, by
      and/or in the name of the Trust or one or more of the Trustees or any
      other Person, on such terms, in such manner and with such powers in such
      Person as the Trustees may determine, and with or without disclosure that
      the Trust or Trustees are interested therein;

            (t) to adopt a fiscal year for the Trust, and from time to time to
      change such fiscal year;

            (u) to adopt and use a seal (but the use of a seal shall not be
      required for the execution of instruments or obligations of the Trust);

            (v) to the extent permitted by law, to indemnify or enter into
      agreements with respect to indemnification with any Person with which the
      Trust has dealings, including without limitation any broker/dealer,
      investment bank, investment advisor or independent contractor, to such
      extent as the Trustees shall determine;

            (w) to confess judgment against the Trust;

                                      -33-
<PAGE>

            (x) to discontinue the operations of the Trust;

            (y) to repurchase or redeem Shares and other Securities issued by
      the Trust;

            (z) to declare and pay dividends or distributions, consisting of
      cash, property or Securities, to the holders of Shares of the Trust out of
      any funds legally available therefor; and

            (aa) to do all other such acts and things as are incident to the
      foregoing, and to exercise all powers which are necessary or useful to
      carry on the business of the Trust and to carry out the provisions of this
      Declaration.

            2.11 Employment of Advisor. The Trustees are responsible for the
general policies of the Trust and for the general supervision of the business of
the Trust conducted by all officers, agents, employees, advisors, managers or
independent contractors of the Trust. However, the Trustees are not and shall
not be required personally to conduct the day to day business of the Trust, and
consistent with their ultimate responsibility as stated above and upon such
terms as are specified in the Bylaws, the Trustees shall have the power to
appoint, employ or contract with any Person (including one or more of themselves
or any corporation, partnership, or trust in which one or more of them may be
directors,

                                      -34-
<PAGE>

officers, stockholders, partners or trustees) as the Trustees may deem necessary
or proper for the transaction of the business of the Trust. The Trustees may
therefore employ or contract with such Person (herein referred to as the
"Advisor") and, consistent with their ultimate responsibility as set forth in
this Section 2.11 and upon such terms as are specified in the Bylaws, the
Trustees may grant or delegate such authority to the Advisor as the Trustees may
in their sole discretion deem necessary or desirable without regard to whether
such authority is normally granted or delegated by trustees. Such granted or
delegated authority shall, however, be revocable by a majority vote of the
Independent Trustees. The Advisor shall be required to use its best efforts to
supervise the operation of the Trust in a manner consistent with the investment
policies and objectives of the Trust.

            Subject to the provisions of Article IV of the Bylaws and Section
4.9 of the Declaration, the Trustees shall have the power to determine the terms
and compensation of the Advisor or any other Person whom they may employ or with
whom they may contract for advisory services. The Trustees may exercise broad
discretion in allowing the Advisor to administer and regulate the operations of
the Trust, to act as agent for the Trust, to execute documents on behalf of the
Trustees and to make executive decisions which conform to general

                                      -35-
<PAGE>

policies and general principles previously established by the Trustees.

            2.12 Bylaws. The Trustees may make or adopt and from time to time
amend or repeal Bylaws (the "Bylaws") not inconsistent with law or with this
Declaration, containing provisions relating to the business of the Trust and the
conduct of its affairs and in such Bylaws may define the duties of the officers,
employees and agents of the Trust.

                                   ARTICLE III

                           THE SHARES AND SHAREHOLDERS

            3.1 Description of Shares. The interest of the Shareholders shall be
divided into 100,000,000 shares of beneficial interest, 95,000,000 of which
shall be designated as "Common Shares," and 5,000,000 or which shall be
designated as "Preferred Shares," and all of which shall be known collectively
as "Shares," all of which shall be validly issued, fully paid and nonassessable
by the Trust upon receipt of full consideration for which they have been issued
or without additional consideration if issued by way of share dividend or share
split. Each holder of Shares shall as a result thereof be deemed to have agreed
to and be bound by the terms of this Declaration. The Shares may be issued for
such consideration as the Trustees shall deem advisable. The

                                      -36-
<PAGE>

Shares shall have a par value of $.01 per share. The Trustees are hereby
expressly authorized at any time, and from time to time, to provide for issuance
of Shares upon such terms and conditions and pursuant to such agreements as the
Trustees may determine. The Trustees may classify or reclassify Preferred Shares
from time to time by setting (or changing, if such class has previously been
established) the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such Preferred Shares. The Preferred Shares may
further be divided by the Trustees into special classes or series. However, such
classification or reclassification shall not be done in such manner so as to
result in any Person holding Excess Shares.

            Except as otherwise determined by the Trustees with respect to any
class or series of Preferred Shares, the holders of Shares shall be entitled to
the rights and powers hereinafter set forth in this Section 3.1. The holders of
Shares shall be entitled to receive, when as declared from time to time by the
Trustees out of any funds legally available for the purpose, such dividends or
distributions as may be declared from time to time by the Trustees. In the event
of the termination of the Trust pursuant to Section 5.1 or otherwise, or upon
the distribution of its assets, the assets of the Trust available for payment
and distribution to Share-

                                      -37-
<PAGE>

holders shall be distributed ratably among the holders of Shares at the time
outstanding in accordance with Section 5.2. All Shares shall have equal
noncumulative voting rights at the rate of one vote per Share, and equal
dividend, distribution, liquidation and other rights, and shall have no
preference, conversion, exchange, sinking fund or redemption rights. Absent a
contrary written agreement of the Trust authorized by the Trustees, and
notwithstanding any other determination by the Trustees with respect to any
class or series of Preferred Shares, no holder of Shares shall be entitled as a
matter of right to subscribe for or purchase any part of any new or additional
issue of Shares of any class whatsoever of the Trust, or of securities
convertible into any shares of any class whatsoever of the Trust, whether now or
hereafter authorized and whether issued for cash or other consideration or by
way of dividend.

            3.2 Certificates. Ownership of Shares shall be evidenced by
certificates. Every Shareholder shall be entitled to receive a certificate, in
such form as the Trustees shall from time to time approve, specifying the number
of Shares of the applicable class held by such Shareholder. Subject to Sections
3.6 and 3.14(c) hereof, such certificates shall be treated as negotiable and
title thereto and to the Shares represented thereby shall be transferred by
delivery thereof to the same extent in all respects as a dock certif-

                                      -38-
<PAGE>

icate, and the Shares represented thereby, of a Maryland business corporation.
Unless otherwise determined by the Trustee, such certificates shall be signed by
the Chairman, if any, or the President and shall be countersigned by a transfer
agent, and registered by a registrar if any, and such signatures may be
facsimile signatures in accordance with Section 2.10(d) hereof. There shall be
filed with each transfer agent a copy of the form of certificate so approved by
the Trustees, certified by the Chairman, President, or Secretary, and such form
shall continue to be used unless and until the Trustees approve some other form.

            In furtherance of the provisions of Section 3.14(c) hereof, each
certificate evidencing Shares shall contain legends imprinted thereon to
substantially the following effect or such other legend as the Trustees may from
time to time adopt:

      REFERENCE IS MADE TO THE DECLARATION OF TRUST OF THE TRUST FOR A STATEMENT
      OF ALL THE DESIGNATIONS, PREFERENCES, LIMITATIONS, AND RELATIVE RIGHTS OF
      EACH CLASS OR SERIES OF SHARES THAT THE TRUST IS AUTHORIZED TO ISSUE, THE
      VARIATIONS IN THE RELATIVE RIGHTS AND PREFERENCES OF ANY PREFERRED OR
      SPICIAL CLASS OF SHARES IN SERIES, TO THE EXTENT THEY HAVE BEEN FIXED AND
      DETERMINED, AND THE AUTHORITY OF THE TRUSTEES TO FIX AND DETERMINE THE
      RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT SERIES. ANY SUCH STATEMENT
      SMALL BE FURNISHED WITHOUT CHARGE ON REQUEST TO THE TRUST AT ITS PRINCIPAL
      PLACE OF BUSINESS OR REGISTERED OFFICE.

      IF NECESSARY TO EFFECT COMPLIANCE BY THE TRUST WITH REQUIREMENTS OF THE
      INTERNAL REVENUE CODE RELATING TO REAL ESTATE INVESTMENT TRUSTS, THE
      SHARES REPRESENTED BY THIS CERTIFICATE MAY BE REDEEMED BY THE TRUST AND/OR
      THE TRANSFER THEREOF MAY BE PROHIBITED ALL UPON THE TERMS

                                      -39-
<PAGE>

      AND CONDITIONS SET FORTH IN THE DECLARATION OF TRUST. THE TRUST WILL
      FURNISH A COPY OF SUCH TERMS AND CONDITIONS TO THE REGISTERED HOLDER OF
      THIS CERTIFICATE UPON REQUEST AND WITHOUT CHARGE.

            3.3 Fractional Shares. In connection with any issuance of Shares,
the Trustees may issue fractional Shares or may adopt provisions for the
issuance of scrip including without limitation, the time within which any such
scrip must be surrendered for exchange into full Shares and the rights, if any,
of holders of scrip upon the expiration of the time so fixed, the rights, if
any, to receive proportional distributions, and the rights, if any, to redeem
scrip for cash, or the Trustees may in their discretion, or if they see fit at
the option of each holder, provide in lieu of scrip for the adjustment of the
fractions in cash. The provisions of Section 3.2 hereof relative to certificates
for Shares shall apply so far as applicable to such scrip, except that such
scrip may in the discretion of the Trustees be signed by a transfer agent alone.

            3.4 Legal Ownership of Trust Estate. The legal ownership of the
Trust Estate and the right to conduct the business of the Trust are vested
exclusively in the Trustees (subject to Section 2.10(s), and the Shareholders
shall have no interest therein (other than beneficial interest in the Trust
conferred by their Shares issued hereunder) and they shall have no right to
compel any partition, division, dividend or distribution of the Trust or any of
the Trust Estate.

                                      -40-
<PAGE>

            3.5 Shares Deemed Personal Property. The Shares shall be personal
property and shall confer upon the holders thereof only the interest and rights
specifically set forth or provided for in this Declaration. The death,
insolvency or incapacity of a Shareholder shall not dissolve or terminate the
Trust or affect its continuity nor give his legal representative any rights
whatsoever, whether against or in respect of other Shareholders, the Trustees or
the Trust Estate or otherwise, except the sole right to demand and, subject to
the provisions of this Declaration, the Bylaws and any requirements of law, to
receive a new certificate for Shares registered in the name of such legal
representative, in exchange for the certificate held by such Shareholder.

            3.6 Share Record; Issuance and Transferability of Shares. Records
shall be kept by or on behalf of and under the direction of the Trustees, which
shall contain the names and addresses of the Shareholders, the number of Shares
held by them respectively, and the numbers of the certificates representing the
Shares, and in which there shall be recorded all transfers of Shares. The Trust,
the Trustees and the officers, employees and agents of the Trust shall be
entitled to deem the Persons in whose names certificates are registered on the
records of the Trust to be the absolute owners of the Shares represented thereby
for all purposes of the

                                      -41-
<PAGE>

Trust; but nothing herein shall be deemed to preclude the Trustees or officers,
employees or agents of the Trust from inquiring as to the actual ownership of
Shares. Until a transfer is duly effected on the records of the Trust, the
Trustees shall not be affected by any notice of such transfer, either actual or
constructive.

            Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing upon
delivery to the Trustees or a transfer agent of the certificate or certificates
therefor, properly endorsed or accompanied by duly executed instruments of
transfer and accompanied by all necessary documentary stamps together with such
evidence of the genuineness of each such endorsement, execution or authorization
and of other matters as may reasonably be required by the Trustees or such
transfer agent. Upon such delivery, the transfer shall be recorded in the
records of the Trust and a new certificate for the Shares so transferred shall
be issued to the transferee and in case of a transfer of only a part of the
Shares represented by any certificate, a new certificate for the balance shall
be issued to the transferor. Any Person becoming entitled to any Shares in
consequence of the death of a Shareholder or otherwise by operation of law shall
be recorded as the holder of such Shares and shall receive a new certificate
therefor but only

                                      -42-
<PAGE>

upon delivery to the Trustees or a transfer agent of instruments and other
evidence required by the Trustees or the transfer agent to demonstrate such
entitlement, the existing certificate for such Shares and such releases from
applicable governmental authorities as may be required by the Trustees or
transfer agent. In case of the loss, mutilation or destruction of any
certificate for shares, the Trustees may issue or cause to be issued a
replacement certificate on such terms and subject to such rules and regulations
as the Trustees may from time to time prescribe. Nothing in this Declaration
shall impose upon the Trustees or a transfer agent a duty, or limit their
rights, to inquire into adverse claims.

            3.7 Dividends or Distributions to Shareholders. Subject to the
Bylaws, the Trustees may from time to time declare and pay to Shareholders such
dividends or distributions in cash, property or assets of the Trust or
Securities issued by the Trust, out of current or accumulated income, capital,
capital gains, principal, interest, surplus, proceeds from the increase or
financing or refinancing of Trust obligations, or from the sale of portions of
the Trust Estate or from any other source as the Trustees in their discretion
shall determine. Shareholders shall have no right to any dividend or
distribution unless and until declared by the Trustees. The Trustees shall
furnish the Shareholders with a statement in writing advising as to the source
of the funds

                                      -43-
<PAGE>

so distributed not later than ninety (90) days after the close of the fiscal
year in which the distribution was made.

            3.8 Transfer Agent, Dividend Disbursing Agent and Registrar. The
Trustees shall have power to employ one or more transfer agents, dividend
disbursing agents and registrars (including the Advisor or its Affiliates) and
to authorize them on behalf of the Trust to keep records to hold and to disburse
any dividends or distributions and to have and perform, in respect of all
original issues and transfers to Shares, dividends and distributions and reports
and communications to Shareholders, the powers and duties usually had and
performed by transfer agents, dividend disbursing agents and registrars of a
Maryland business corporation.

            3.9 Shareholders' Meetings. There shall be an annual meeting of the
Shareholders, at such time and place as shall be determined by or in the manner
prescribed in the Bylaws, at which the Trustees shall be elected and any other
proper business may be conducted. The Annual Meeting of Shareholders shall be
held after delivery to the Shareholders of the Annual Report, commencing with
the fiscal year ending December 31, 1986. Special meetings of Shareholders may
be called by the chief executive officer of the Trust or by a majority of the
Trustees or of the Independent Trustees and shall be called by the chief
executive officer of the Trust upon the written request of Shareholders holding
in the

                                      -44-
<PAGE>

aggregate not less than ten percent (10%) of the total votes authorized to be
cast by the outstanding Shares of the Trust entitled to vote at such meeting in
the manner provided in the Bylaws. If there shall be no Trustees, the officers
of the Trust shall promptly call a special meeting of the Shareholders entitled
to vote for the election of successor Trustees. Notice of any special meeting
shall state the purposes of the meeting.

            The holders of Shares entitled to vote at the meeting representing a
majority of the total number of votes authorized to be cast by Shares then
outstanding and entitled to vote on any question present in person or by proxy
shall constitute a quorum at any such meeting for action on such question. Any
meeting may be adjourned from time to time by a majority of the votes properly
cast upon the question, without regard to class, whether or not a quorum is
present, and, except as otherwise provided in the Bylaws, the meeting may be
reconvened without further notice. At any reconvened session of the meeting at
which there shall be a quorum, any business may be transacted at the meeting as
originally noticed.

            Whenever any action is to be taken by the Shareholders, it shall,
except as otherwise clearly indicated in this Declaration or the Bylaws, be
authorized by the affirmative vote of the holders of Shares representing a
majority of

                                      -45-
<PAGE>

all the votes cast at a meeting at which a quorum is present. At all elections
of Trustees, voting by Shareholders shall be conducted under the noncumulative
method and the election of Trustees shall be by the affirmative vote of the
holders of Shares representing a majority of all the votes cast at a meeting at
which a quorum is present.

            No action required to be taken or which may be taken at any annual
or special meeting of Shareholders may be taken without a meeting, and the power
of Shareholders to consent in writing, without a meeting, to the taking of any
action is specifically denied.

            3.10 Proxies. Whenever the vote or consent of a Shareholder entitled
to vote is required or permitted under this Declaration, such vote or consent
may be given either directly by such Shareholder or by a proxy in the form
prescribed in, and subject to the provisions of, the Bylaws. The Trustees may
solicit such proxies from the Shareholders or any of them entitled to vote in
any matter requiring or permitting the Shareholders' vote or consent.

            3.11 Reports to Shareholders. Not later then ninety (90) days after
the close of each fiscal year of the Trust, the Trustees shall mail or deliver a
report of the business and operations of the Trust during such fiscal year to
the Shareholders, which report shall constitute the accounting of the Trustees
for such fiscal year. Subject to

                                      -46-
<PAGE>

Section 8-401 of the Annotated Code of Maryland, the report (the "Annual
Report") shall be in such form and have such content as the Trustees deem
proper. The Annual Report shall include a balance sheet, an income statement and
a surplus statement, each prepared in accordance with generally accepted
accounting principles. Such financial statements shall be certified by an
independent public accountant based on a full examination of the books and
records of the Trust conducted in accordance with generally accepted auditing
procedure. Manually signed copies of the Annual Report and of the auditor's
certificate, will be filed with the Maryland Department of Assessments and
Taxation. A manually signed copy of the accountant's report shall be filed with
the Trustees.

            3.12 Fixing Record Date. The Bylaws may provide for fixing or, in
the absence of such provision, the Trustees may fix, in advance, a date as the
record date for determining the Shareholders entitled to notice of or to vote at
any meeting of Shareholders or to express consent to any proposal without a
meeting or for the purpose of determining Shareholders entitled to receive
payment of any dividend or distribution (whether before or after termination of
the Trust) or any Annual Report or other communication from the Trustees, or for
any other purpose. The record date so fixed shall be not less than ten (10) days
nor more than sixty (60)

                                      -47-
<PAGE>

days prior to the date of the meeting or event for the purposes of which it is
fixed.

            3.13 Notice to Shareholders. Any notice of meeting or other notice,
communication or report to any Shareholder shall be deemed duly delivered to
such Shareholder when such notice, communication or report is deposited, with
postage thereon prepaid, in the United States mail, addressed to such
Shareholder at his address as it appears on the records of the Trust or is
delivered in person to such Shareholder.

            3.14 Shareholders' Disclosures; Trustees' Right to Refuse to
Transfer Shares; Limitation on Holdings; Redemption of Shares.

            (a) The Shareholders shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of the
Shares as the Trustees deem necessary or appropriate to comply with the REIT
Provisions of the Internal Revenue Code or to comply with the requirements of
any taxing authority or governmental agency.

            (b) Whenever in good faith the Trustees deem it reasonably necessary
to protect the status of the Trust as a REIT they may require a statement or
affidavit from each Shareholder or proposed transferee of Shares setting forth
the number of Shares already owned by such Shareholder or proposed transferee
and any related Person specified in the

                                      -48-
<PAGE>

form prescribed by the Trustee for that purpose. If, in the opinion of the
Trustees, which shall be binding upon any Shareholder, or proposed transferee of
Shares, any proposed transfer of Shares would jeopardize the status of the Trust
as a REIT, the Trustees shall have the right, but not the duty, to refuse to
permit such transfer.

            (c) The Trustees, by notice to the holder thereof, may purchase any
or all Shares that have been transferred in a transaction which, in the opinion
of the Trustees, would jeopardize the status of the Trust as a REIT. Without
limiting the generality of the foregoing, if the Trustees shall, at any time and
in good faith, be of the opinion that direct or indirect ownership of Shares
representing more than 9.8% in value of the total Shares outstanding (the
"Excess Shares") has or may become concentrated in the hands of one Person
(taking into account the constructive ownership rules of Sections 318 and 544 of
the Internal Revenue Code), the Trustees shall have the power (i) by lot or
other means deemed equitable by them to call for the purchase from any
Shareholder of such Excess Shares, and (ii) to refuse to transfer or issue
Shares to any Person whose acquisition of such Shares would, in the opinion of
the Trustees, result in any Person's direct or indirect ownership of Excess
Shares. The purchase price for any Shares shall be equal to the fair market
value of the Shares reflected in the closing sale

                                      -49-
<PAGE>

price for the Shares, if then listed on a national securities exchange, or such
price for the Shares on the principal exchange if then listed on more than one
national securities and exchange, or if the Shares are not then listed on a
national securities exchange, the latest bid quotation for the Shares if then
traded over-the-counter, on the last trading day immediately preceding the day
on which notices of such acquisition are sent, or, if no such closing sales
prices or quotations are available, then the purchase price shall be equal to
the net asset value of such Shares as determined by the Trustees in accordance
with the provisions of applicable law. Payment of the purchase price shall be
made in cash or with a note by the Trust at such time, in such manner and upon
such terms as may be determined by the Trustees. From and after the date fixed
for purchase by the Trustees, and so long as payment of the purchase price for
the Shares to be so redeemed shall have been made or duly provided for, the
holder of any Excess Shares so called for purchase shall cease to be entitled to
distributions, voting rights and other benefits with respect to such Shares,
excepting only the right to payment of the purchase price fixed as aforesaid.
Any transfer of Shares, options, warrants or other securities convertible into
Shares that would create a direct or indirect beneficial owner of Excess Shares
shall be deemed void ab initio and the intended transferee shall be deemed

                                      -50-
<PAGE>

never to have an interest therein. If the foregoing provision is determined to
be void or invalid by virtue of any legal decision, statute, rule or regulation,
then the transferee of such Shares, options, warrants or other securities
convertible into Shares shall be deemed, at the option of the Trust to have
acted as agent on behalf of the Trust in acquiring such Shares and to hold such
Shares on behalf of the Trust.

            In addition, if any Person knowingly holds Excess Shares and the
Trust loses its REIT qualification under the Internal Revenue Code or becomes a
personal holding company, that Person would be required to indemnify the Trust
for the full amount of any damages and expenses resulting from the loss of its
REIT qualification or its becoming a personal holding company. This liability
might include, but should not be limited to, increased corporate taxes,
attorneys' fees, and administrative costs.

            (d) Notwithstanding any other provision in this Declaration of Trust
or the Bylaws, the foregoing provision may not be amended or repealed without
the affirmative vote of holders of Shares entitled to cast 95% of the votes
outstanding.

            (e) Notwithstanding any other provision of this Declaration of Trust
to the contrary, any purported

                                      -51-
<PAGE>

acquisition of Shares of the Trust which would result in the disqualification of
the Trust as a REIT shall be null and void.

            (f) Nothing contained in this Section 3.14 or in any other provision
of this Declaration of Trust shall limit the authority of the Trustees to take
such other action as they deem necessary or advisable to protect the Trust and
the interests of the Shareholders by preservation of the Trust's status as a
REIT.

            (g) If any provision of this Section 3.14 or any application of any
such provision is determined to be invalid by any federal or state court having
jurisdiction over the issues, the validity of the remaining provisions shall not
be affected and other applications of such provision shall be affected only to
the extent necessary to comply with the determination of such court. To the
extent this Section 3.14 may be inconsistent with any other provision of this
Declaration of Trust, this Section 3.14 shall be controlling.

            3.15 Special Voting Requirements for Certain Business Combinations.

            (a) The affirmative vote of the holders of Shares representing 95%
of the total number of votes authorized to be cast by holders of Shares then
outstanding and entitled to vote thereon shall be required for the approval or
authorization of any "Business Combination" (as hereinafter defined)

                                      -52-
<PAGE>

of the Trust with any "Related Person" (as hereinafter defined). However, such
95% voting requirement shall not be applicable if: (1) the Board of Trustees by
the vote or written consent of all or all but one of the Continuing Trustees
shall have expressly approved in advance the acquisition of the outstanding
Shares of the Trust that caused the Related Person to become a Related Person or
shall have approved the Business Combination prior to the Related Person
involved in the Business Combination having become a Related Person; or (2) the
Business Combination is solely between the Trust and another trust or
corporation, 100% of the voting securities of which is owned directly or
indirectly by the Trust.

            (b) For purposes of this Section 3.15:

            (i) The term "Business Combination" shall mean (a) any merger or
consolidation of the Trust with or into a Related Person, (b) any sale, lease,
exchange, transfer or other disposition, including without limitation a mortgage
or any other security device, of all or any "Substantial Part" (as hereinafter
defined) of the assets of the Trust (including without limitation any voting
securities of a subsidiary) to a Related Person, (c) any merger or
consolidation of a Related Person with or into the Trust, (d) any sale, lease,
exchange, transfer or other disposition of assets of a Related Person to the
Trust having a book value

                                      -53-
<PAGE>

equal to more than 10% of the Invested Assets of the Trust as of the end of the
Trust's most recent fiscal year ending prior to the time the determination is
made, (e) the issuance of any Securities (other than by way of pro rata
distribution to all Shareholders) of the Trust to a Related Person or to a
person who would become a Related Person upon issuance of any of or all of such
securities, and (f) any agreement, contract or other arrangement providing for
any of the transactions described in this definition of Business Combination.

            (ii) The term "Related Person" shall mean and include any
individual, corporation, partnership or other person or entity which, together
with its "affiliates" and "associates" (as defined on October 1, 1982, in Rule
12b-2 under the Securities Exchange Act of 1934), "beneficially owns" (as
defined on October 1, 1982, in Rule 13d-3 under the Securities Exchange Act of
1934) in the aggregate, shares of beneficial interest of the Trust representing
5% of the total number of votes authorized to be cast by holders of Shares then
outstanding entitled to vote generally in the election of Trustees. A Related
Person is also deemed to own beneficially Shares owned, directly or indirectly,
by any "Affiliate" of the Related Person, as well as (1) Shares which it or any
such Affiliate has a right to acquire, (2) Shares issuable upon the exercise of
options or rights, or upon conversion of convertible securities, held by the
Related

                                      -54-
<PAGE>

Person, and (3) Shares beneficially owned by any other person with whom the
Related Person or any of his Affiliates acts as a partnership, syndicate or
other group pursuant to an agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of shares of the Trust.

            (iii) The term "Substantial Part" shall mean an amount equal to more
than 10% of the Invested Assets of the Trust as of the end of its most recent
fiscal year ending prior to the time the determination is being made.

            (iv) Without limitation, any Shares that any Related Person has the
right to acquire pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise, whether exercisable currently or at
some time in the future, shall be deemed beneficially owned by the Related
Person.

            (c) The Trust elects not to be governed by the provisions of
Subtitle 6 of Title 3 of the Corporations and Associations Article of the
Annotated Code of Maryland, and the provisions of subparagraphs (a) and (b) of
this Section 3.15 shall be in substitution for and to the exclusion of said
Subtitle 6 of Title 3.

            (d) Except as otherwise provided in this Section 3.15, the Trust may
effect any merger or consolidation in accordance with applicable law.

                                      -55-
<PAGE>

                                   ARTICLE IV

                 LIABILITY OF TRUSTEES, SHAREHOLDERS, OFFICERS,

                     EMPLOYEES AND AGENTS, AND OTHER MATTERS

            4.1 Limitation of Liability of Shareholders, Trustees, Officers,
Employees and Agents for Obligations of the Trust. The Trustees and the
officers, employees and agents of the Trust, in incurring any debts liabilities
or obligations or in taking or omitting any other actions for or in connection
with the Trust, are, and shall be deemed to be, acting as trustees, officers,
employees or agents of the Trust and not in their own individual capacities.
Except as otherwise provided in Sections 4.3 and 4.4 hereof with respect to
liability of Trustees or officers, agents or employees of the Trust to the Trust
or to Shareholders, no Shareholder, Trustee or officer, employee or agent of the
Trust shall be liable for any debt, claim, demand, judgment decree, liability or
obligation of any kind (in tort, contract or otherwise) of, against or with
respect to the Trust or arising out of any action taken or omitted for or on
behalf of the Trust, and the Trust shall be solely liable therefor and resort
shall be had solely to the Trust Estate for the payment or performance thereof,
and no Shareholder, Trustee or officer, employee or agent of the Trust shall be
subject to any personal liability whatsoever, in tort, contract or otherwise, to
any other Person or Persons in connection.

                                      -56-
<PAGE>

with the Trust Estate or the affairs of the Trust (or any actions taken or
omitted for or on behalf of the Trust). All such other Persons shall look solely
to the Trust Estate for satisfaction of claims of any nature arising in
connection with the Trust Estate or the affairs of the Trust (or any action
taken or omitted for or on behalf of the Trust).

            4.2 Express Exculpatory Clauses and Instruments. Any written
instrument creating an obligation of the Trust shall include a reference to this
Declaration and provide that neither the Shareholders nor the Trustees nor any
officers, employees or agents of the Trust shall be liable thereunder and that
all Persons shall look solely to the Trust Estate for the payment of any claim
thereunder or for the performance thereof; however, the omission of such
provision from any such instrument shall not render the Shareholders, any
Trustee, or any officer, employee or agent of the Trust liable nor shall the
Shareholders, any Trustee or any officer, employee or agent of the Trust be
liable to anyone for such omission.

            4.3 Limitation of Liability of Trustees, Officers, Employees and
Agents to the Trust and to Shareholders for Acts and Omissions. No Trustee or
officer, employee or agent of the Trust shall have any greater duties than those
established by this Declaration of Trust or, in cases as to which such duties
are not so established, than those of the directors,

                                      -57-
<PAGE>

officers, employees and agents of a Maryland business corporation in effect from
time to time. Subject to the provisions of Section 4.4 hereof, no Trustee or
officer, employee or agent of the Trust shall be liable to the Trust,
Shareholders or to any other Person for any act or omission except for his own
wilful misfeasance, bad faith, gross negligence or reckless disregard of duty.

            4.4 Limitation of Liability of Affiliated Trustees and Their
Affiliates to the Trust and to Shareholders for Acts and Omissions. No
Affiliated Trustee and no Affiliate (as defined in Section 4.6 hereof) of such
Affiliated Trustee shall have any liability to the Trust or to any Shareholder
for any loss suffered by the Trust which arises out of any action or inaction of
such Affiliated Trustee or Affiliate if such Affiliated Trustee or Affiliate, in
good faith, determined that such course of conduct was in the best interest of
the Trust, and such course of conduct did not constitute negligence or
misconduct of such Affiliated Trustee or Affiliate.

            4.5 Indemnification and Reimbursement of Trustees, Officers,
Employees and Agents.

            (a) Except as otherwise provided in paragraph (b) of this Section
      4.5, any Person made a party to any action, suit or proceeding or against
      whom a claim or liability is asserted by reason of the fact that he, his

                                      -58-
<PAGE>

testator or intestate was or is a Trustee, Officer, employee or agent of the
Trust shall be indemnified and held harmless by the Trust against judgments,
fines, amounts paid on account thereof (whether in settlement or otherwise) and
reasonable expenses, including attorneys' fees, actually and reasonably incurred
by him in connection with the defense of such action, suit, proceeding, claim or
alleged liability or in connection with any appeal therein, whether or not the
same proceeds to judgment or is settled or otherwise brought to a conclusion;
provided, however, that no such Person shall be so indemnified or reimbursed for
any claim, obligation or liability which shall have been adjudicated to have
arisen out of or been based upon his wilful misfeasance, bad faith, gross
negligence or reckless disregard of duty; and provided, further, that such
Person gives prompt notice thereof, executes such documents and takes such
action as will permit the Trust to conduct the defense or settlement thereof and
cooperates therein. In the event of a settlement approved by the Trustees of any
such claim, alleged liability, action, suit or proceeding, indemnification and
reimbursement shall be provided except as to such matters covered by the
settlement which the Trust is advised by its counsel would, if adjudicated,
likely be adjudicated

                                      -59-
<PAGE>

to have arisen out of or been based upon such Person's wilful misfeasance, bad
faith, gross negligence, or reckless disregard of duty. Such rights of
indemnification and reimbursement shall be satisfied only out of the Trust
Estate. The rights accruing to any Person under these provisions shall not
exclude any other right to which he may be lawfully entitled, nor shall anything
contained herein restrict such Person's right to contribution as may be
available under applicable law. The Trustees may make advance payments in
connection with indemnification under this Section 4.5, provided that the
indemnified Person shall have given a written undertaking to reimburse the
Trust in the event it is subsequently determined that he is not entitled to such
indemnification. Any action taken by or conduct on the part of a Trustee,
officer, employee or agent of the Trust in conformity with or in good faith
reliance upon the provisions of this Declaration (including without limitation
any provision in Article 7 hereof) shall not constitute wilful misfeasance, bad
faith, gross negligence or reckless disregard of duty.

      (b) Each Affiliated Trustee and any Affiliates (as defined in Section 4.6
hereof) of such Affiliated Trustee shall be indemnified by the Trust against any
losses, judgments, liabilities, expenses and amounts

                                      -60-
<PAGE>

paid in settlement of any claims sustained by them in connection with the Trust,
provided that the same were not the result of negligence or misconduct on the
part of such Affiliated Trustee or Affiliate. Notwithstanding the foregoing,
Affiliated Trustees and their Affiliates and any person acting for the Trust as
a broker/dealer shall not be indemnified for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws
unless (i) there has bean a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular indemnitee or
(ii) such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction as to the particular indemnitee or (iii) a court of
competent jurisdiction approves a settlement of the claim against the particular
indemnitee. In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission and the Maryland Division of
Securities with respect to the issue of indemnification for securities law
violations. The Trust shall not incur the cost of that portion of any insurance,
other than public liability insurance, which insures any party

                                      -61-
<PAGE>

against any liability the indemnification of which is prohibited by this Section
4.5(b).

            4.6 Certain Definitions. For the purposes of Sections 4.4 and 4.5(b)
hereof, the term "Affiliate," when used in connection with the term "Affiliated
Trustee," shall mean any person performing services on behalf of the Trust who
(i) directly or indirectly controls, is controlled by, or is under common
control with such Affiliated Trustee; (ii) owns or controls ten percent (10%) or
more of the outstanding voting securities of such Affiliated Trustee; (iii) is
an officer, director, partner or trustee of such Affiliated Trustee; or (iv) is
a company for which such Affiliated Trustee acts as an officer, director,
partner or trustee. For the purposes of the above definition, the terms
"control," "controlling," "controlled by," and "under common control with" refer
to the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether through the
ownership of voting securities, by contrast, or otherwise.

            4.7 Indemnification and Reimbursement of Shareholder. Any
Shareholder made a party to any action, suit or proceeding or against him a
claim or liabilities asserted by reason of the fact that he, his testate or
intestate was or is a Shareholder shall be indemnified and held harmless by the
Trust against judgments, fines, amounts paid on account

                                      -62-
<PAGE>

thereof (whether in settlement or otherwise) and reasonable expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with the
defense of such action, suit, proceeding, claim or alleged liability or in
connection with any appeal therein, whether or not the same proceeds to judgment
or is settled or otherwise brought to a conclusion; provided, however, that such
Shareholder gives prompt notice thereof, executes such documents and takes such
action as will permit the Trust to conduct the defense of settlement thereof and
cooperates therein. In the event that the assets of the Trust Estate are
insufficient to satisfy the Trust's indemnity obligations hereunder, each
Shareholder shall be entitled to such indemnification pro rata from the Trust
Estate.

            4.8 Right of Trustees, Officers, Employees and Agents to Own Shares
or Other Property and to Engage in Other Business. Any Trustee or officer,
employee or agent of the Trust may acquire, own, hold and dispose of Shares in
the Trust, for his individual account, and may exercise all rights of a
Shareholder to the same extent and in the same manner as if he were not a
Trustee or officer, employee or agent of the Trust. Any Trustee or officer,
employee or agent of the Trust may, in his personal capacity or in the capacity
of trustee, officer, director, stockholder, partner, member, advisor or employee
of any Person or otherwise, have

                                      -63-
<PAGE>

business interests and engage in business activities similar to or in addition
to those relating to the Trust, which interests and activities may be similar to
and competitive with those of the Trust and may include the acquisition,
syndication, holding, management, development, operation or disposition, for his
own account, for the account of such Person or others, of interests in
Mortgages, interests in Real Property, or interests in Persons engaged in the
real estate business. Each Trustee, officer, employee and agent of the Trust
shall be free of any obligation to present to the Trust any investment
opportunity which comes to him in any capacity other than solely as Trustee,
officer, employee or agent of the Trust even if such opportunity is of a
character which, if presented to the Trust, could be taken by the Trust. Subject
to the provisions of Article IV and Section 4.9, any Trustee or officer,
employee or agent of the Trust may be interested as trustee, officer, director,
stockholder, partner, member, advisor or employee or, otherwise have a direct or
indirect interest in, any Person who may be engaged to render advice or services
to the Trust, and may receive compensation from such Person as well as
compensation as Trustee, officer, employee or agent or otherwise hereunder. None
of these activities shall be deemed to conflict with his duties and powers as
Trustee or officer, employee or agent of the Trust.

                                      -64-
<PAGE>

            4.9 Transaction Between Trustees, Officers, Employees or Agents and
the Trust. Except as otherwise provided by this Declaration, and in the absence
of fraud, a contract, act or other transaction between the Trust and any other
Person in which the Trust is interested, shall be valid, and no Trustee or
officer, employee or agent of the Trust shall have any liability as a result of
entering into any such contract, act or transaction, even though (a) one or more
of the Trustees or officers, employees or agents of the Trust are directly or
indirectly interested in or connected with or are trustees, partners, directors,
employees, officers or agents of such other Person, or (b) one or more of
the Trustees or officers, employees or agents of the Trust individually or
jointly with others, is a party or are parties to, or are directly or indirectly
interested in or connected with, such contract, act or transaction; provided
that in each such case (i) such interest or connection is disclosed or known to
the Trustees and thereafter the Trustees authorize or ratify such contract, act
or other transaction by affirmative vote of a majority of the Trustees who are
not so interested or (ii) such interest or connection is disclosed or known to
the Shareholders, and thereafter such contract, act or transaction is approved
by Shareholders holding a majority of the Shares then outstanding and entitled
to vote thereon.

                                      -65-
<PAGE>

            Notwithstanding any other provisions of this Declaration, the Trust
shall not engage in a transaction with (a) any Trustee, officer, employee or
agent of the Trust (acting in his individual capacity), (b) any director,
trustee, partner, officer, employee or agent (acting in his individual capacity)
of the Advisor or any other investment advisor of the Trust, (c) the Advisor or
any other investment advisor of the Trust or (d) an Affiliate of any of the
foregoing, except to the extent that such transaction has, after disclosure of
such affiliation, been approved or ratified by the affirmative vote of a
majority of the Trustees including a majority of the Independent Trustees (or,
if the transaction is with a Person other than the Advisor or an Affiliate of
the Advisor, a majority of the Trustees not having any interest in such
transaction and not Affiliates of any party to the transaction) after a
determination by them that to the extent applicable:

                  (A) such transaction is fair and reasonable to the Trust and
            the Shareholders;

                  (B) based upon an appraisal by a qualified independent real
            estate appraiser who shall, in each case, have been approved by a
            majority of the Independent Trustees (or, if the transaction is with
            a Person other than the Advisor or an Affiliate of the Advisor, a
            majority of the Trustees not

                                      -66-
<PAGE>

      having any interest in such transaction and not Affiliates of any party
      to the transaction), the total consideration is not in excess of the
      appraised value of the interest in Real Property being acquired, if an
      acquisition in involved, or not less than the appraised value of the
      interest in Real Property being disposed of, if a disposition is involved;
      and

            (C) if such transaction involves payments by the Trust for services
      rendered to the Trust by a Person in a capacity other than that of
      Advisor, Trustee or Trust officer, (1) the compensation is not in excess
      of the compensation, if any, paid to such Person by any other Person who
      is not an Affiliate of such Person, for any comparable services in the
      same geographic area, and (2) the compensation is not greater than the
      charges for comparable services generally available in the same geographic
      area from other Persons who are competent and not affiliated with any of
      the parties involved.

This Section 4.9 shall not prevent any sale of Shares issued by the Trust for
the public offering thereof in accordance with a registration statement filed
with the Securities and Exchange Commission under the Securities Act of 1933.
The

                                      -67-
<PAGE>

Trustees are not restricted by this Section 4.9 from forming a corporation,
partnership, trust or other business association owned by any Trustee, officer,
employee or agent or by their nominees for the purpose of holding title to
property of the Trust or managing property of the Trust, provided that the
Trustees make a determination that the creation of such entity for such purpose
is in the best interest of the Trust.

            4.10 Independent Counsel. In the event of a dispute between the
Trust and the Advisor or its Affiliates, or should it be necessary for the Trust
to prepare and negotiate contracts and agreements between the Trust and the
Advisor or its Affiliates which in the good faith judgement of a majority of the
Independent Trustees require the advice or assistance of separate counsel or
accountants from that of the Advisor or its Affiliates, the Trust will retain
such separate counsel or accountants for such matters, the choice of which shall
be made by a majority of the Independent Trustees.

            4.11 Persons Dealing with Trustees, Officers, Employees or Agents.
Any act of the Trustees or of the officers, employees or agents of the Trust
purporting to be done in their capacity as such, shall, as to any Persons
dealing with such Trustees, officers, employees or agents, be conclusively
deemed to be within the purposes of this Trust and within the powers of such
Trustees or officers, employees

                                      -68-
<PAGE>

or agents. No Person dealing with the Trustees or any of them or with the
officers, employees or agents of the Trust shall be bound to see to the
application of any funds or property passing into their hands or control. The
receipt of the Trustees or any of them, or of authorized officers, employees or
agents of the Trust, for moneys or other consideration, shall be binding upon
the Trust.

            4.12 Reliance. The Trustees and the officers, employees and agents
of the Trust may consult with counsel (which may be a firm in which one or more
of the Trustees or the officers, employees or agents, including the Advisor and
its Affiliates, of the Trust is or are members) and the advice or opinion of
such counsel shall be full and complete personal protection to all the Trustees
and the officers, employees and agents of the Trust in respect of any action
taken or suffered by them in good faith and in reliance on or in accordance with
such advice or opinion. In discharging their duties, Trustees or officers,
employees or agents of the Trust, when acting in good faith, may rely upon
financial statements of the Trust represented to them to fairly present the
financial position or results of operations of the Trust by the chief financial
officer of the Trust or the officer of the Trust having charge of its books of
account, or stated in written report by an independent certified public
accountant fairly to present the financial position or results of

                                      -69-
<PAGE>

operations of the Trust. The Trustees and the officers, employees and agents of
the Trust may rely, and shall be personally protected in acting, upon any
instrument or other document believed by them to be genuine.

                                    Article V

                  DURATION, AMENDMENT AND TERMINATION OP TRUST

            5.1 Duration of Trust. The duration of the Trust shall be perpetual;
provided, however, the Trust may be terminated at any time by the affirmative
vote at a meeting of Shareholders of the holders of Shares representing 95% of
the total number of Shares then outstanding and entitled to vote thereon or by a
unanimous vote of the Continuing Trustees.

            5.2 Termination of Trust.

            (a) upon the termination of the Trust:

            (i) the Trust shall carry on no business except for the purpose of
      winding up its affairs;

            (ii) the Trustees shall proceed to wind up the affairs of the Trust
      and all the powers of the Trustees under this Declaration shall continue
      until the affairs of the Trust shall have been wound up, including the
      power to fulfill or discharge the contracts of the Trust, collect its
      assets, sell, convey, assign, exchange, transfer or otherwise dispose of
      all or any part

                                      -70-
<PAGE>

      of the remaining Trust Estate to one or more persons at public or private
      sale (for consideration which may consist in whole or in part of cash,
      Securities or other property of any kind), discharge or pay its
      liabilities, and do all other acts appropriate to liquidate its business;
      and

            (iii) after paying or adequately providing for the payment of all
      liabilities, and upon receipt of such releases, indemnities and refunding
      agreements, as they deem necessary for their protection, the Trustees may
      distribute the remaining Trust Estate (in cash or in kind or partly each)
      among the Shareholders according to their respective rights.

            (b) After termination of the Trust and distribution of the Trust
Estate to the Shareholders as herein provided, the Trustees shall execute and
lodge among the records of the Trust an instrument in writing setting forth the
fact of such termination and such distribution, a copy of which instrument shall
be filed with the Maryland Department of Assessments and Taxation, and the
Trustees shall thereupon be discharged from all further liabilities and duties
hereunder and the rights and interests of all Shareholders shall thereupon
cease.

            5.3 Amendment Procedure. This Declaration may be amended (except
that the provision governing the personal

                                      -71-
<PAGE>

liability of the Shareholders, Trustees and of the officers, employees and
agents of the Trust and the prohibition of assessments upon Shareholders may not
be amended in any respect that could increase the personal liability of such
Shareholders, Trustees or officers, employees and agents of the Trust) at a
meeting of Shareholders by holders of Shares representing ninety-five percent
(95%) of the total number of votes authorized to be cast in respect of Shares
then outstanding and entitled to vote thereon. Notwithstanding the foregoing, if
all or all but one of the Continuing Trustees vote in favor of any proposed
amendment, the affirmative vote of holders of Shares representing a majority of
the total number of votes authorized to be cast in respect of Shares then
outstanding and entitled to vote thereon, will be required to amend this
Declaration. Two-thirds (2/3) of the Continuing Trustees may, after fifteen
(15) days written notice to the Shareholders, also amend this Declaration
without the vote or consent of Shareholders if in good faith they deem it
necessary to conform this Declaration to the requirements of REIT Provisions of
the Internal Revenue Code, but the Continuing Trustees shall not be liable for
failing to do so. Actions by the Trustees pursuant to Section 3.1 or pursuant to
Section 6.6(a) that result in an amendment to this Declaration shall be effected
without vote or consent of Shareholders.

            5.4 Amendments Effective. Any amendment pursuant to any Section of
this Declaration shall not become effective

                                      -72-
<PAGE>

until it is duly filed with the Maryland Department of Assessments and Taxation.

            5.5 Transfer to Successor. Subject to Section 3.15 above, the
Trustees, with the approval of a majority of the Trustees (including a majority
of the Independent Trustees) and the affirmative vote, approving a plan for
this purpose, of the holders of Shares representing ninety-five percent (95%) of
the total number of votes authorized to be cast by Shares then outstanding and
entitled to vote thereon, may (a) cause the organization of a corporation,
association, trust or other organization to take over the Trust Estate and carry
on the affairs of the Trust, (b) merge the Trust into, or sell, convey and
transfer the Trust Estate to, any such corporation, association, trust or
organization in exchange for Securities thereof, or beneficial interests
therein, and the assumption by such transferee of the liabilities of the Trust
and (c) thereupon terminate this Declaration and deliver such shares, Securities
or beneficial interests among the Shareholders in accordance with such plan.

                                   ARTICLE VI

                                  MISCELLANEOUS

            6.1 Applicable Law. This Declaration is executed and acknowledged by
the Trustees with reference to the statutes and laws of the State of Maryland,
and the rights of

                                      -73-
<PAGE>

all parties and the construction and effect of every provision hereof shall be
subject to and construed according to the statutes and laws of such State.

            6.2 Index and Headings for Reference Only. The index and headings
preceding the text, articles and sections hereof have been inserted for
convenience and reference only and shall not be construed to affect the meaning,
construction or effect of this Declaration.

            6.3 Successors in Interest. This Declaration and the Bylaws shall be
binding upon and inure to the benefit of the undersigned Trustees and their
successors, assigns, heirs, distributees and legal representatives, and every
Shareholder and his successors, assigns, heirs, distributees and legal
representatives.

            6.4 Inspection of Records. Trust records shall be available for
inspection by Shareholders at the same time and in the same manner and to the
extent that comparable records of a Maryland business corporation would be
available for inspection by shareholders under the laws of the State of
Maryland. Except as specifically provided for in this Declaration or in Title 8
of the Annotated Code of Maryland, Shareholders shall have no greater right than
shareholders of a Maryland business corporation to require financial or other
information from the Trust, Trustees or Officers of the Trust. Any Federal or
state securities administrator or the

                                      -74-
<PAGE>

Maryland Department of Assessments and Taxation shall have the right, at
reasonable times during business hours and for proper purposes, to inspect the
books and records of the Trust.

            6.5 Counterparts. This Declaration may be simultaneously executed in
several counterparts, each of which when so executed shall be deemed to be an
original, and such counterparts together shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.

            6.6 Provisions of the Trust in Conflict with Law or Regulations;
Severability.

            (a) The provisions of this Declaration are severable, and if the
Trustees shall determine, with the advice of counsel, that any one or more of
such provisions (the "Conflicting Provisions") are in conflict with the REIT
Provisions of the Internal Revenue Code, the Conflicting Provisions shall be
deemed never to have constituted a part of the Declaration; provided, however,
that such determination by the Trustees shall not affect or impair any of the
remaining provisions of this Declaration or render invalid or improper any
action taken or omitted (including but not limited to the election of Trustees)
prior to such determination. An amendment in recordable form signed by a
majority of the Trustees setting forth any such determination and

                                      -75-
<PAGE>

reciting that it was duly adopted by the Trustees, or a copy of this
Declaration, with the Conflicting Provisions removed pursuant to such a
determination, in recordable form, signed by a majority of the Trustees, shall
be conclusive evidence of such determination when filed with the Maryland
Department of Assessments and Taxation. The Trustees shall not be liable for
failure to make any determination under this Section 6.6(a). Nothing in this
Section 6.6(a) shall in any way limit or affect the right of the Trustees to
amend this Declaration as provided in Section 5.3.

            (b) If any provision of this Declaration shall be held invalid or
unenforceable, such invalidity or unenforceability shall attach only to such
provision and shall not in any manner affect or render invalid or unenforceable
any other provision of this Declaration, and this Declaration shall be carried
out as if any such invalid or unenforceable provision were not contained herein.

            6.7 Certifications. The following certifications shall be final and
conclusive as to any Persons dealing with the Trust:

            (a) a certification of a vacancy among the Trustees by reason of
resignation, removal, increase in the number of Trustees, incapacity, death or
otherwise, when made in writing by a majority of the remaining Trustees;

                                      -76-
<PAGE>

            (b) a certification as to the individuals holding office as
Trustees or officers at any particular time, when made in writing by the
secretary of the Trust;

            (c) a certification that a copy of this Declaration or of the Bylaws
is a true and correct copy thereof as then in force, when made in writing by the
secretary of the Trust;

            (d) the certifications referred to in Section 2.7, 5.4 and 6.6(a);
and

            (e) a certification as to any actions by Trustees, other than the
above, when made in writing by the secretary of the Trust or by any Trustee.

                                      -77-
<PAGE>

            IN WITNESS THEREOF, the undersigned have signed these presents all
on the day and year first above written.

                                          /s/ Alan B. Miller
                                    -------------------------------------
                                              Alan B. Miller

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                       /s/ Joseph P. Gaynor, III
                                    -------------------------------------
                                           Joseph P. Gaynor, III

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                         /s/ Robert E. Cawthorn
                                    -------------------------------------
                                             Robert E. Cawthorn

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                           /s/ Sidney Miller
                                    -------------------------------------
                                               Sidney Miller

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                           /s/ Daniel M. Cain
                                    -------------------------------------
                                               Daniel M. Cain

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                              /s/ Lee Ducat
                                    -------------------------------------
                                                  Lee Ducat

                                    Address:
                                            -----------------------------
                                    -------------------------------------

                                      -78-
<PAGE>

                                          /s/ Peter Linneman
                                    -------------------------------------
                                              Peter Linneman

                                    Address:-----------------------------
                                    -------------------------------------

                                      -79-

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