Document:

EXHIBIT 10.3

CONSOLIDATED AMENDED AND RESTATED MASTER LEASE

THIS
CONSOLIDATED AMENDED AND RESTATED MASTER LEASE (“Lease”) is executed and
delivered as of this 8th day of November, 2000, effective as of October
1, 2000, and is entered into by (i) STERLING ACQUISITION CORP., a Kentucky
corporation (“Lessor”), the address of which is 900 Victors Way, Suite 350, Ann
Arbor, Michigan 48108, and (ii) DIVERSICARE LEASING CORPORATION, a Tennessee
corporation, the address of which is 277 Mallory Station Road, Suite 130,
Franklin, Tennessee 37067 (“Lessee”).

RECITALS

The
circumstances underlying the execution and delivery of this Lease are as
follows:

A.            Capitalized terms used and not
otherwise defined herein have the respective meanings given them in Article II,
below.

B.            The parties hereto are parties to
the Existing Leases.  Prior hereto, all
of the lessor’s interests in the Existing Leases have been consolidated into
Lessor, and all of the lessee’s interests in the Existing Leases have been
consolidated into Lessee.

C.            The parties hereto wish to amend,
restate, and consolidate the Existing Leases on the terms and conditions set
forth herein.

NOW
THEREFORE Lessor and Lessee agree as follows:

ARTICLE I

1.1           Lease.   Upon and subject to the terms and conditions
hereinafter set forth, Lessor leases to Lessee the Leased Properties located in
Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, and West Virginia and
comprising the Facilities described on Exhibits A- 1 through A-28 (the “Leased
Properties”).

The
Existing Leases are hereby amended, restated and consolidated in their entirety
as set forth in this Lease to provide for the continued leasing of the Leased
Properties by Lessee. From and after the Commencement Date, the leasing of the
Leased Properties by Lessee from Lessor, and the rights and obligations of the
parties with respect thereto, shall be determined as set forth and described in
this Lease.  However, the lessees and
lessors pursuant to the Existing Leases are only released from those
obligations under the Existing Leases only to the extent set forth in the
Settlement and Restructuring Agreement.

The
Leased Properties are leased subject to all covenants, conditions,
restrictions, easements and other matters affecting each Leased Property,
whether or not of record, including the Permitted Encumbrances and other
matters which would be disclosed by an inspection of the Leased Properties or
by an accurate survey thereof, provided, however, that the foregoing will 

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not materially interfere with the Primary Intended Use
of the Leased Property by Lessee as set forth in this Lease.

This
Lease constitutes one indivisible lease of the Leased Properties to multiple
tenants, and not separate leases governed by similar terms. The Leased
Properties constitute one economic unit, and the Base Rent and all other
provisions have been negotiated and agreed to based on a demise of all of the
Leased Properties as a single, composite, inseparable transaction and would
have been substantially different had separate leases or a divisible lease been
intended. Except as expressly provided herein for specific, isolated purposes
(and then only to the extent expressly otherwise stated), all provisions of
this Lease apply equally and uniformly to all the Leased Properties as one
unit. An Event of Default with respect to any Leased Property is an Event of
Default as to all of the Leased Properties. The parties intend that the
provisions of this Lease shall at all times be construed, interpreted and
applied so as to carry out their mutual objective to create an indivisible
lease of all the Leased Properties and, in particular but without limitation,
that for purposes of any assumption, rejection or assignment of this Lease
under 11 U.S.C. 365, this is one indivisible and non-severable lease and
executory contract dealing with one legal and economic unit which must be
assumed, rejected or assigned as a whole with respect to all (and only all) the
Leased Properties covered hereby.

1.2           Term.  The initial term of this Lease (“Initial Term”)
shall be ten (10) Lease Years.  The
Initial Term shall commence on the Commencement Date and end on the Initial
Term Expiration Date, subject to renewal as set forth in Section 1.3, below.

1.3           Option to Renew.  Lessee is hereby granted one (1) option to
renew this Lease for an additional, successive period of ten (10) Lease Years,
for a maximum Term if such option is exercised of twenty (20) Lease Years, on
the following terms and conditions: (a) the option to renew is exercisable only
by Notice to Lessor at least three hundred sixty-five (365) days prior to the
expiration of the Initial Term;  (b) the
absence of any Event of Default both at the time a renewal option is exercised
and at the commencement of a Renewal Term is a condition precedent to any
renewal of the Term; and (c) during a Renewal Term, all of the terms and
conditions of this Lease shall remain in full force and effect.

1.4           Saving Provisions.   If Lessee fails to notify Lessor of the
exercise of the extension option which Lessee has the right to exercise
hereunder within the required time, its option to extend shall nevertheless
remain full force and effect for a period of fifteen (15) days after Notice
from Lessor subsequent to the required time setting forth the expiration date
of this Lease and advising Lessee that Notice of extension has not been
received.  The right to renew as thereby
extended shall expire on the close of business on the fifteenth day after
Notice, and may be thereafter not be exercised by Lessee.

ARTICLE II

2.1           Definitions. For all purposes
of this Lease, except as otherwise expressly provided or unless the context
otherwise requires, (i) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular, (ii) all accounting

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terms not otherwise defined herein have the meanings
assigned to them in accordance with GAAP as at the time applicable, (iii) all
references in this Lease to designated “Articles,” “Sections” and other
subdivisions are to the designated Articles, Sections and other subdivisions of
this Lease, and (iv) the words “herein,” “hereof” and “hereunder” and other
words of similar import refer to this Lease as a whole and not to any
particular Article, Section or other subdivision.

Additional
Charges:  All
Impositions and other amounts, liabilities and obligations which Lessee assumes
or agrees to pay under this Lease, including, without limitation, the Annual
Site Inspection Fee.

Adjustment
Date: October 1, 2003, and each October 1 thereafter
throughout the Term of this Lease.

Advocat:
Advocat, Inc., a Delaware corporation.

Advocat
Concentration Account: As defined in the Settlement and
Restructuring Agreement.

Affiliate:  Any Person which, directly or indirectly,
Controls or is Controlled by or is under common Control with another Person.

AmSouth:
AmSouth Bank.

AmSouth
Loan Documents: The documents evidencing and securing the
indebtedness of Advocat and its Affiliates to AmSouth as of the date of
execution and delivery of this Lease.

Annual
Site Inspection Fee: 
An annual fee of One Thousand Dollars ($1,000.00) for each Facility
included within the Leased Properties actually inspected by Lessor during each
Lease Year throughout the Term beginning with the Second (2nd) Lease Year which
shall be paid by Lessee within thirty (30) days after receipt by Lessee of an
invoice therefor together with a copy of the complete site inspection report
made with respect to each Facility for which payment is requested.

Approval
Threshold: One Hundred Fifty Thousand Dollars ($150,000.00).

Assessment:  Any governmental assessment on the Leased
Properties or any part thereof for public or private improvements or benefits,
whether or not commenced or completed prior to the date hereof and whether or
not to be completed within the Term.

Assumed
Indebtedness:  Any
indebtedness or other obligations of third parties from whom Lessor has
acquired any Leased Property, expressly assumed in writing by Lessor, and
existing at the time of acquisition of the Leased Property secured by a mortgage,
deed of trust or other security agreement to which Lessor’s title to the Leased
Properties is subject.

Award:  All compensation, sums or anything of value
awarded, paid or received in connection with a total or partial Taking.

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Base
Rent:

(A)
During the Initial Term, the Base Rent shall be:

(1)           For
the first (1st)
Lease Year, Ten Million Eight Hundred Seventy Five Thousand Dollars
($10,875,000.00);

(2)           For
the second (2nd)
Lease Year, Ten Million Eight Hundred Seventy Five Thousand Dollars ($10,875,000.00);

(3)           For
the third (3rd)
Lease Year, Eleven Million Five Hundred Thousand Dollars ($11,500,000.00);

(4)           For
each of the fourth (4th)
through tenth (10th)
Lease Years, the lesser of (i) the Base Rent for the third (3rd) Lease Year
increased by a percentage equal to two (2) times the percentage increase in the
CPI (if positive) from the commencement date of the third (3rd) Lease Year to
the Adjustment Date in each of the fourth (4th) through tenth (10th) Lease
Years, as applicable and (ii) the following amounts for each Lease Year:

	
  Lease Year

  	
   

  	
   

  	
   

  	
  Base Rent

  	
   

  
	
  4

  	
   

  	
  $

  	
  11,845,000

  	
   

  
	
  5

  	
   

  	
  $

  	
  12,200,350

  	
   

  
	
  6

  	
   

  	
  $

  	
  12,566,360

  	
   

  
	
  7

  	
   

  	
  $

  	
  12,943,351

  	
   

  
	
  8

  	
   

  	
  $

  	
  13.331.651

  	
   

  
	
  9

  	
   

  	
  $

  	
  13,731,601

  	
   

  
	
  10

  	
   

  	
  $

  	
  14,143,549

  	
   

  

 

Under no circumstances will the Base Rent in any Lease
Year be less than the Base Rent during the preceding Lease Year.

(B)           During the Renewal Term, the Base
Rent shall be:

(1)           For the first Lease Year of the
Renewal Term, the greater of (a) the Base Rent during the tenth (10th) Lease Year of the Initial
Term and (b) the Fair Market Rent for the Leased Properties on the first day of
such Renewal Term as agreed upon by Lessor and Lessee, or, if prior to the
commencement of the Renewal Term they are unable to agree, as determined by an
appraisal pursuant to Article XXXII of this Lease; provided,
however, that the Base Rent for the first Lease Year of the Renewal
Term shall not exceed one hundred ten percent (110%) of the Base Rent for the
Lease Year immediately preceding the commencement of the Renewal Term; and

(2)           For each of the second (2nd) through the tenth (10th) Lease Years during the
Renewal Term, the lesser of (i) the Base Rent for the first (1st) Lease Year of
the Renewal Term, increased by a percentage equal to two (2) times the
percentage increase in the CPI (if positive) from the commencement date of the
Renewal Term to the Adjustment Date in each of the second (2nd) through tenth

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(10th) Lease Years, as applicable (the ”Adjustment
Date”), and (ii) the product of the Base Rent during the first (1st) Lease Year of the Renewal
Term and the following percentage:

	
  Lease Year During

  Renewal Term

  	
   

  	
   

  	
   

  	
  Applicable Percentage

  	
   

  	
   

  
	
   2

  	
   

  	
  1.03

  	
  %

  	
   

  
	
   3

  	
   

  	
  1.061

  	
  %

  	
   

  
	
   4

  	
   

  	
  1.093

  	
  %

  	
   

  
	
   5

  	
   

  	
  1.126

  	
  %

  	
   

  
	
   6

  	
   

  	
  1.159

  	
  %

  	
   

  
	
   7

  	
   

  	
  1.194

  	
  %

  	
   

  
	
   8

  	
   

  	
  1.23

  	
  %

  	
   

  
	
   9

  	
   

  	
  1.267

  	
  %

  	
   

  
	
  10

  	
   

  	
  1.305

  	
  %

  	
   

  

 

Under no circumstances will the Base Rent in any Lease
Year during the Renewal Term be less than the Base Rent during the preceding
Lease Year.

Business
Day:  Each Monday,
Tuesday, Wednesday, Thursday and Friday which is not a day on which national
banks in the City of New York, New York are authorized, or obligated, by law or
executive order, to close.

Capital
Expenditures Reserve Account: As defined in Section 8.3.1.

Capitalization
Rate:  Nine percent
(9%) (See Section 15.3).

Capitalized
Leases: Leases that in accordance with GAAP are required to
be capitalized for financial reporting purposes.

Capitalized
Lease Obligations:  All
obligations under Capitalized Leases the amount of the indebtedness for which
shall be the capitalized amount of such obligations determined in accordance
with GAAP.

Casualty/Condemnation
Reduction Percentage: The percentage obtained by dividing the
Retained Amount by the Investment Amount.

Citation:
Any operational or physical plant deficiency set forth in writing with respect
to a Facility by any governmental body or agency, or Medicare intermediary,
having regulatory oversight over a Facility, Lessee or Manager, with respect to
which the scope and severity of the penalty for such deficiency, if not cured,
is one or more of the following: loss of licensure, decertification of a
Facility from participation in the Medicare and/or Medicaid programs,
appointment of a temporary manager or denial of payment for new admissions.

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Clean-Up:  The investigation, removal, restoration,
remediation and/or elimination of, or other response to, Contamination, in each
case to the satisfaction of all governmental agencies having jurisdiction, in
compliance with or as may be required by Environmental Laws.

Code:  The Internal Revenue Code of 1986, as
amended.

Commencement
Date:  October 1, 2000,
even though this Lease has been executed subsequent thereto.  Base Rent and other payments made by Lessee
under the Existing Leases attributable to the period on and after October 1, 2000
and prior to the date of execution of this Lease shall be applied to Base Rent
and other payments due hereunder.

Condemnor:  Any public or quasi-public authority,
or private corporation or individual, having the power of condemnation.

Consolidated
Financial Statement:

(a)           For each quarter during Lessee’s
fiscal year, on a consolidated basis for Lessee, (i) a statement of earnings
for the current period and fiscal year to the end of such period, with a
comparison to the corresponding figures for the corresponding period in the
preceding fiscal year from the beginning of the fiscal year to the end of such
period, and (ii) a balance sheet as of the end of the period, with a comparison
to the corresponding figures for the corresponding period in the preceding
fiscal year from the beginning of the fiscal year to the end of such period.

(b)           For Lessee’s fiscal year, the
Consolidated Financial Statement shall be a financial report for Lessee on a
consolidated basis, reviewed by a “big five” accounting firm or any other firm
of independent certified public accountants reasonably acceptable to Lessor,
containing the Lessee’s balance sheet as of the end of that year, its related
profit and loss, a statement of shareholder’s equity for that year, a statement
of cash flows for that year, and such comments and financial details as are
customarily included in reports of like character. Lessor shall have the right
upon reasonable Notice to Lessee to cause any such Consolidated Financial
Statement to be audited at Lessor’s expense by certified public accountants
selected by Lessor. Lessee shall cooperate in any such audit and shall provide
the auditors selected by Lessor with access to and the opportunity to copy at
Lessor’s expense such books, records and other materials as such auditors may
reasonably request in order to perform their audit.

(c)           For Advocat’s fiscal year, the
Consolidated Financial Statements shall be an audited financial report prepared
by a “big five” accounting firm or any other firm of independent certified
public accountants reasonably acceptable to Lessor, containing Advocat’s
balance sheet as of the end of that year, its related profit and loss, a
statement of shareholder’s equity for that year, a statement of cash flows for
that year, and such comments and financial details as are customarily included
in reports of like character and the opinion of the certified public
accountants as to the fairness of the statements therein.

Construction
Funds:  The Net Proceeds and such additional funds as may be deposited
with Lessor by Lessee pursuant to Section 14.6 for restoration or repair work
pursuant to this Lease.

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Contamination:  The presence, Release or threatened Release
of any Hazardous Substance at the Leased Properties in violation of any
Environmental Law, or in a quantity that would give rise to any affirmative
Clean-Up obligations under an Environmental Law, including, but not limited to,
the existence of any injury or potential injury to public health, safety,
natural resources or the environment associated therewith, or any other
environmental condition at, in, about, under or migrating from or to the Leased
Properties.

Control
(and its corollaries “Controlled by” and “under common Control with”):  Possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, through the ownership of voting securities, partnership interests or
other equity interests, or by any other device.

CPI
or Consumer Price Index:  As of any date, the United States Department
of Labor, Bureau of Labor Statistics Revised Consumer Price Index for All Urban
Consumers (1982=84=100), U.S. City Average, All Items, or, if that index is not
available at the time in question, the index designated by such Department as
the successor to such index, and if there is no index so designated, an index
for an area in the United States that most closely corresponds to the entire
United States, published by such Department, or if none, by any other
instrumentality of the United States, calculated in this Lease as the CPI
attributable to the month three months prior to the applicable date herein
(e.g., the CPI used to calculate the adjustment in Base Rent as of October 1,
2005, shall be the CPI for the month of July, 2005, compared to the CPI for the
month of July, 2002).

Coverage
Ratio: For any period, the ratio of EBITDARM divided by Debt
Service.

Current
Ratio: At any period, Lessee’s Current Assets divided by
Lessee’s Current Liabilities.

Date
of Taking:  The date on
which the Condemnor has the right to possession of the Leased Property that is
the subject of the Taking or Partial Taking.

Debt:  As of any date, all (a) obligations of a Person, whether current or long-term, that in accordance
with GAAP should be included as liabilities on such Person’s balance sheet; (b)
Capitalized Lease Obligations of such Person; (c) obligations of others for
which that Person is liable directly or indirectly, by way of guaranty (whether
by direct guaranty, suretyship, discount, endorsement, take-or-pay agreement,
agreement to purchase or advance or keep in funds or other agreement having the
effect of a guaranty) or otherwise; (d) liabilities and obligations secured by
liens of any assets of that Person, whether or not those liabilities or
obligations are recourse to that Person; and (e) liabilities of that Person,
direct or contingent, with respect to letters of credit issued for the account
of that Person or others or with respect to bankers acceptances created for
that Person.

Debt
Service:  With respect
to any fiscal period of a Person, the sum of (a) all interest due on Debt
during the period (other than interest imputed, pursuant to GAAP, on any
Capitalized Lease Obligations and interest on Debt that comprises Purchase
Money Financing), (b) all payments of principal of Debt required to be made
during the period and (c) all Rent due during the period.

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Distribution:
Any payment or distribution of cash or any assets of Lessee or a Sublessee to
one or more shareholders of Lessee or to any Affiliate of Lessee, whether in
the form of a dividend, a fee for management in excess of the fee required by
the terms of a Management Agreement, a payment for services rendered (except as
provided in the next sentence), a reimbursement for overhead incurred on behalf
of Lessee, or a payment on any debt required by this Lease to be subordinated
to the rights of Lessee.  Notwithstanding
the foregoing, none of the following are a Distribution: (i) payment of
the fee permitted by the terms of the Management Agreement, (ii) any
payment pursuant to a contract with an Affiliate of Lessee or Sublessee which
contract is upon terms and conditions that are fair and substantially similar
to those that would be available on an arm’s length basis, and
(iii) reimbursement by Lessee or Sublessee to an Affiliate for third party
expenses (but not overhead) paid by the Affiliate on behalf of or which are
fairly allocable to Lessee or Sublessee.

DLC:   Diversicare Leasing Corporation, a Tennessee
corporation and a Lessee herein.

EBITDARM:
For any period, the sum of (a) Net Income of Lessee arising solely from the
operation of the Facilities during the period, and (b) the amounts deducted in
computing the Net Income of Lessee for the period for (i) depreciation. (ii)
amortization, (iii) Base Rent, (iv) interest (including payments in the nature
of interest under Capitalized Leases and interest on any Purchase Money
Financing), (v) income taxes (or, if greater, income taxes actually paid during
the period) and (vi) management fees.

Encumbrance:  Any mortgage, deed of trust, lien,
encumbrance or other matter affecting title to the Leased Properties, or any
portion thereof or interest therein, securing any borrowing or other means of
financing or refinancing.

Environmental
Audit:   A written certificate,
in form and substance satisfactory to Lessor, from an environmental consulting
or engineering firm acceptable to Lessor, which states that there is no
Contamination on the Leased Properties and that the Leased Properties are
otherwise in strict compliance with Environmental Laws.

Environmental
Documents:   Each and
every (i) document received by Lessee or any Affiliate from, or submitted by
Lessee or any Affiliate to, the United States Environmental Protection Agency
and/or any other federal, state, county or municipal agency responsible for
enforcing or implementing Environmental Laws with respect to the condition of
the Leased Properties, or Lessee’s operations at the Leased Properties; and
(ii) review, audit, report, or other analysis data pertaining to environmental
conditions, including, but not limited to, the presence or absence of Hazardous
Substances, at, in, or under or with respect to the Leased Properties that have
been prepared by, for or on behalf of Lessee.

Environmental
Laws: All federal, state and local laws (including, without
limitation, common law), statutes, codes, ordinances, regulations, rules,
orders, permits or decrees of the United States and the States (or any
political subdivision thereof) in which any Leased Property is located relating
to the introduction, emission, discharge or Release of Hazardous Substances
into the indoor or outdoor environment (including without limitation, air,
surface water, groundwater, land or soil) or otherwise relating to the
manufacture, processing,

 8
 

 

distribution, use, treatment, storage, transportation,
disposal, or Release of Hazardous Substances; or the Clean-Up of Contamination,
all as are now or may hereinafter be in effect.

Event
of Default:  The
occurrence of any of the following:

(a)           Lessee fails to pay or cause to be
paid the Rent when due and payable and such failure is not cured by Lessee
within a period of five (5) days after Notice thereof from Lessor, provided
that Lessee shall be entitled to such Notice and may avail itself of such cure
period no more than two (2) times in any calendar year;

(b)           Lessee, on a petition in bankruptcy
filed against it, is adjudicated a bankrupt or has an order for relief
thereunder entered against it, or a court of competent jurisdiction enters an
order or decree appointing a receiver of Lessee or any Guarantor or of the
whole or substantially all of its property, or approving a petition filed
against Lessee seeking reorganization or arrangement of Lessee under the
federal bankruptcy laws or any other applicable law or statute of the United
States of America or any state thereof, and such judgment, order or decree is
not vacated or set aside or stayed within sixty (60) days from the date of the
entry thereof, subject to the applicable provisions of the Bankruptcy Code (11
USC ‘101 et. seq.) and to the provisions of Section 16.7, below;

(c)            Lessee:  (i) Admits in writing its inability to pay
its debts generally as they become due, (ii) files a petition in bankruptcy or
a petition to take advantage of any insolvency law, (iii) makes a general
assignment for the benefit of its creditors, (iv) consents to the
appointment of a receiver of itself or of the whole or any substantial part of
its property, or (v) files a petition or answer seeking reorganization or arrangement
under the Federal bankruptcy laws or any other applicable law or statute of the
United States of America or any state thereof, subject to the applicable
provisions of the Bankruptcy Code (11 USC ‘101 et. seq.) and to the provisions
of Section 16.7, below;

(d)           Lessee is finally liquidated or
dissolved, or begins proceedings toward such liquidation or dissolution, or has
filed against it a petition or other proceeding to cause it to be liquidated or
dissolved and the proceeding is not dismissed within thirty (30) days
thereafter, or Lessee in any manner permits the sale or divestiture of
substantially all of its assets necessary or related to the use and operation
of the Leased Properties;

(e)           The estate or interest of Lessee in
the Leased Properties or any part thereof is levied upon or attached in any
proceeding and the same is not vacated or discharged within thirty (30) days
thereafter (unless Lessee is in the process of contesting such lien or
attachment in good faith in accordance with Article XII hereof);

(f)            Lessee voluntarily ceases operation
of any Facility for a period in excess of five (5) Business Days except upon
prior Notice to, and with the express prior written consent of Lessor pursuant
to the terms of the Settlement and Restructuring Agreement or other written
agreement of the Lessor and Lessee, or as the unavoidable consequence of damage
or destruction as a result of a casualty, or a Partial or total Taking;

 9
 

 

(g)           Any representation or warranty made
by Lessee in the Settlement and Restructuring Agreement, the Stock Issuance and
Subscription Agreement, or in the certificates delivered in connection
therewith proves to be untrue when made in any material respect, Lessor is
materially and adversely affected thereby, and Lessee fails within thirty (30)
days after Notice from Lessor thereof to cure such condition by terminating
such adverse effect and making Lessor whole for any damage suffered therefrom,
or, if with due diligence such cure cannot be effected within thirty (30) days,
if Lessee has failed to commence to cure the same within the thirty (30) days
or failed thereafter to proceed promptly and with due diligence to cure such
condition and complete such cure prior to the time that such condition causes a
default in any Facility Mortgage or any other lease to which Lessee is subject
and prior to the time that the same results in civil or criminal penalties to
Lessor, Lessee, any Affiliates of either or the Leased Properties;

(h)           Lessee (or, if applicable, any
Sublessee or Manager):

(i)                                     has
its license to operate any Facility as a provider of health care services in
accordance with its Primary Intended Use suspended or revoked, or its right to
so operate a Facility suspended, and the effect of such suspension or
revocation is not stayed or cured within three (3) Business Days of Lessee’s
first knowledge thereof;

(ii)                                  has
its right to accept patients suspended, and the effect is not stayed or cured
within thirty (30) days of Lessee’s first knowledge thereof;

(iii)                               receives
a Citation with respect to a Facility and fails to cure the condition that is
the subject of the Citation within the period of time required for such cure by
the issuer of the Citation or, if longer, the period of time set forth in a
Plan of Correction accepted by the issuer of the Citation;

Notwithstanding
the foregoing, the conditions described in the Subsection (h) shall not be an
Event of Default if such conditions at any time are applicable to two (2) or
fewer Facilities, and if Lessee complies with the provisions of
Section 39.2 relating to increasing the Security Deposit.

(i)            Lessee defaults, or permits a
default (which default was not exclusively in Lessor’s control) under any Facility Mortgage, related documents or obligations
thereunder which default is not cured within any applicable cure period
provided for therein;

(j)            A default occurs under any Guaranty, which default is not cured within the
applicable cure period, if any;

(k)           A Transfer occurs without the prior
written consent of Lessor;

(l)             A default occurs under the Security
Agreement, which default is not cured within the applicable cure period, if
any;

 10
 

 

(m)           A default occurs under the Settlement
and Restructuring Agreement, which default is not cured within the applicable
cure period, if any;

(n)           Advocat fails to begin paying
interest on the Subordinated Note, fails to begin paying cash dividends on the
Preferred Stock (as defined in the Settlement and Restructuring Agreement) or
defaults beyond any applicable notice and cure period in its obligations under
the Subordinated Note or the instruments governing the Preferred Stock.

(o)            A default occurs under the
Subordinated Note, which default is not cured within the applicable cure
period, if any;

(p)            A default occurs under the Stock
Issuance and Subscription Agreement, which default is not cured within the
applicable cure period, if any;

(q)           A default by Lessee occurs under any
other contract affecting any Facility or Lessee,
which default results in a material adverse affect on any Facility or Lessee,
and which default is not cured within the applicable time period, if any;

(r)            Any “Triggering Event” occurs under
the terms of the Settlement and Restructuring Agreement;

(s)           Lessee or an Affiliate
of Lessee defaults beyond any applicable grace period in the payment of any
material amount or the performance of any material act required of Lessee or
such Affiliate by the terms of any other lease or
other agreement between Lessee or such Affiliate
and Lessor or any Affiliate of Lessor;

(t)            Lessee fails to observe or perform
any other term, covenant or condition of this Lease and the failure is not
cured by Lessee within a period of thirty (30) days after Notice thereof from
Lessor, unless the failure cannot with due diligence be cured within a period
of thirty (30) days, in which case such failure shall not be deemed an Event of
Default if and for so long as Lessee proceeds promptly and with due diligence
to cure the failure and completes the cure prior to the time that the same
causes a default in any Facility Mortgage and prior to the time that the same
results in civil or criminal penalties to Lessor, Lessee, any Affiliates of
either or to the Leased Properties; or

(u)           Lessee breaches any of the covenants
set forth in Article VIII hereof and the breach is not cured within a period of
the shorter of (i) thirty (30) days after the Notice thereof from Lessor, and
(ii) fifteen (15) days following the date of delivery of a certificate pursuant
to Section 23.1 (i) or 23.1 (ii).

Lessor, at Lessor’s
sole discretion, may deliver Notice to Lessee electing to not treat a default
as an Event of Default hereunder.

Executive
Officer:  The Chairman
of the Board of Directors, the Chief Executive Officer, the Chief Operating
Officer, the President, any Vice President and the Secretary of any
corporation, a general partner of any partnership and a managing member of any
limited liability company upon which service of a Notice is to be made.

 11
 

 

Existing
Leases:  (i) That
certain Master Lease dated August 14, 1992 by and between Diversicare
Corporation of America, Inc., as lessee, and Omega Healthcare Investors, Inc.,
as lessor covering nineteen (19) of the Facilities located in Tennessee,
Arkansas and Alabama, as amended by Consent, Assignment and Amendment Agreement
dated May 10, 1994 and First Amendment to Master Lease dated as of
March 3,1999, the lessee’s interest in which has been assigned to and
assumed by Lessee and the lessor’s interest in which has been acquired by the
lessor herein; and

(ii)
That certain Master Lease dated December 1, 1994 by and between Sterling Health
Care Management, Inc., a Kentucky corporation, as lessee, and the Lessor
herein, as lessor, covering six (6) of the Facilities located in Kentucky and
Ohio, as amended by First Amendment to Master Lease dated as of March 3, 1999,
the lessee’s interest in which has been assigned to and assumed by Lessee; and

(iii)
That certain Master Sublease dated December 1, 1994 by and between Sterling
Health Care Management, Inc., a Kentucky corporation, as sublessee, and OS Leasing
Company, as sublessor and as lessee under an Overlease with Sterling
Acquisition Corp. II, as lessor, covering one (1) of the Facilities located in
Ohio, as amended by First Amendment to Master Sublease dated as of March 3,
1999, the Lessee’s interest in which has been assigned to and assumed by Lessee
and the sublessor’s interest in which, as well as the lessor’s interest under
the Overlease, has been acquired by the Lessor herein; and

(iv)
That certain Master Lease dated February 1, 1997 by and between Sterling Health
Care Management, Inc., as lessee, and Lessor here, as lessor, covering the two
(2) Facilities located in West Virginia, as amended by First Amendment to
Master Lease dated as of August 10, 2000.

Expiration
Date: The Initial Term Expiration Date or the Renewal Term
Expiration Date, as applicable.

Facility(ies):
Each health care facility on the Land, including the Leased Property associated
with such Facility, and together, all such facilities on the Leased Properties.

Facility
Mortgage: Any mortgage, deed of trust or other security
agreement placed upon any or all of the Leased Properties and of which Notice
together with a copy of such mortgage, deed of trust or other security
agreement has been provided to Lessee, which with the express, prior, written
consent of Lessor is a lien upon any or all of the Leased Properties, whether
such lien secures an Assumed Indebtedness or another obligation or obligations.

Facility
Mortgagee: The secured party to a Facility Mortgage.

Facility
Trade Names: The name(s) under which the Facilities have done
business during the Term. The Facility Trade Names in use by the Facilities on
the Commencement Date are set forth on attached Exhibit A.

Fair
Market Rent: The rent
that, at the relevant time, a Facility would most probably command in the open
market, under a lease on substantially the same terms and

 12

 

 

conditions as are
set forth in this Lease with a lessee unrelated to Lessor having experience and
a reputation in the health care industry and a credit standing reasonably
equivalent to that of Lessee, and, if this Lease is guaranteed, with such lease
being guaranteed by guarantors having a net worth at least equal to that of
Guarantors, with evidence of such rent being the rent that is being asked and
agreed to at such time under any leases of facilities comparable to such
Facility being entered into at such time in which the lessees and lease
guarantors meet the qualifications set forth in this sentence. Fair Market Rent
shall be determined in accordance with the appraisal procedure set forth in
Article XXXII or in such other manner as may be mutually acceptable to Lessor
and Lessee.

Fair
Market Value:  The fair
market value of a Facility at the relevant time (i) assuming the same is
unencumbered by this Lease, and (ii) determined in accordance with the
appraisal procedure set forth in Article XXXII or in such other manner as may
be mutually acceptable to Lessor and Lessee.

Fixtures:
Collectively, all permanently affixed equipment, machinery, fixtures, and other
items of real and/or personal property (excluding Lessor’s Personal Property),
including all components thereof, now and hereafter located in, on or used in
connection with, and permanently affixed to or incorporated into the Leased
Improvements, including, without limitation, all furnaces, boilers, heaters,
electrical equipment, heating, plumbing, lighting, ventilating, refrigerating,
incineration, air and water pollution control, waste disposal, air-cooling
and air-conditioning systems and apparatus (other than individual units),
sprinkler systems and fire and theft protection equipment, built-in oxygen
and vacuum systems, towers and other devices for the transmission of radio,
television and other signals, all of which, to the greatest extent permitted by
law, are hereby deemed by the parties hereto to constitute real estate,
together with all replacements, modifications, alterations and additions
thereto.

Force
Majeure: An event or condition beyond the control of a
Person, including without limitation a flood, earthquake, or other Act of God;
a fire or other casualty resulting in a complete or partial destruction of the
Facility in question; a war, revolution, riot, civil insurrection or commotion,
terrorism, or vandalism; unusual governmental action, delay, restriction, or
regulation not reasonably to be expected; a contractor or supplier delay or failure
in performance (not arising from a failure to pay any undisputed amount due),
or a delay in the delivery of essential equipment or materials; bankruptcy or
other insolvency of a contractor, subcontractor, or construction manager (not
an Affiliate of the party claiming Force Majeure); a strike, slowdown, or other
similar labor action; or any other similar event or condition beyond the
reasonable control of the party claiming that Force Majeure is delaying or
preventing such party from timely and fully performing its obligations under
this Lease; provided that in any such event, the party claiming the existence
of Force Majeure shall have given the other party Notice of such claim within
fifteen (15) days after becoming aware thereof, and if the party claiming Force
Majeure shall fail to give such Notice, then the event or condition shall not
be considered Force Majeure for any period preceding the date such Notice shall
be given.  No lack of funds shall be
construed as Force Majeure.

GAAP:  Generally accepted accounting principles in
effect at the time in question.

 13
 

 

 

Gross
Revenues:  All revenues
received or receivable from or by reason of the operation of the Facilities, or
any other use of the Leased Properties, including without limitation all
patient revenues received or receivable for the use of or otherwise by reason
of all rooms, beds, and other facilities provided, meals served, services
performed, space or facilities subleased or goods sold on the Leased Properties
and, except as provided below, any consideration received for any
sublease,  license or other arrangement
with an unrelated third party in possession, or using, any portion of the
Leased Properties.  Gross Revenues shall
not, however, include:

(i)            revenue from professional fees or
charges by physicians when and to the extent such charges are paid over to such
physicians or are accompanied by separate charges for use of a Facility or any
portion thereof,

(ii)           non-operating revenues such as
interest income or income from the sale of assets not sold in the ordinary
course of business,

(iii)          contractual allowances and reasonable
reserves (relating to any period during the Term) for billings not paid by or
received from the appropriate governmental agencies,  third party providers or other payors,

(iv)          all proper patient billing credits and
adjustments according to generally accepted accounting principles relating to
health care accounting, and

(v)           federal, state or local sales or
excise taxes and any tax based upon or measured by said revenues which is added
to or made a part of the amount billed to the patient or other recipient of
such services or goods, whether included in the billing or stated separately.

If
any of the Leased Properties or any part thereof is subleased, or a license
permitting the use thereof is granted to an Affiliate of Lessee, Gross Revenues
shall include all revenues received or receivable by the sublessee or licensee
from its use of the Leased Properties and any rent or equivalent payment by the
sublessee or licensee received or receivable by Lessee from such sublease or
licensee shall be excluded from Gross Revenues (provided, however, that in the
case of a sublease of space for the placement or erection of antennae or
similar device, the rent or equivalent payment shall be included in Gross
Revenues).

Guarantor(s):  Advocat, Diversicare Management Services Co.,
a Tennessee corporation, and Advocat Finance, Inc., a Delaware corporation.

Guaranty:
The Amended and Restated Guaranty of even date herewith executed by the Guarantors.

Hazardous
Substance: Any dangerous, toxic or hazardous material,
substance, pollutant, contaminant, chemical, or waste (including, without
limitation, medical waste) defined, listed or described as such under any
Environmental Law, including, without limitation, petroleum products, asbestos
and PCBs.

 14
 

 

 

Impositions:  Collectively, all taxes (including, without
limitation, all capital stock and franchise taxes of Lessor, and all ad
valorem, sales and use, single business, gross receipts, transaction privilege,
rent or similar taxes to the extent the same are assessed against Lessor on the
basis of its interest in the Leased Property), assessments (including
Assessments), ground rents, water, sewer or other rents and charges, excises,
tax levies, fees (including, without limitation, license, permit, inspection,
authorization and similar fees), and all other governmental charges, in each
case whether general or special, ordinary or extraordinary, or foreseen or
unforeseen, of every character in respect of the Leased Properties or the
businesses conducted thereon by Lessee and/or the Rent (including all interest
and penalties thereon), which at any time prior to, during or in respect of the
Term may be assessed or imposed on or in respect of or be a lien upon (i)
Lessor or Lessor’s interest in the Leased Properties, (ii) the Leased
Properties or any part thereof or any rent therefrom or any estate, right,
title or interest therein, (iii) any occupancy, operation, use or possession
of, or sales from, or activity conducted on, or in connection with the Leased
Properties or the leasing or use of the Leased Properties or any part thereof,
or (iv) the Rent; notwithstanding the foregoing, Impositions shall not
include:  (i) except as provided
above, any tax imposed on Lessor’s gross and/or net income whether generally or
specifically arising in connection with the Leased Properties, or (ii) any
transfer or other tax imposed with respect to the sale, exchange or other
disposition by Lessor of the Leased Properties or any part thereof or the
proceeds thereof.  If a tax is assessed
against Lessor in part based on Lessor’s interest in the Leased Property and in
part based on Lessor’s gross and/or net income, the portion of the tax which
is  based on Lessor’s interest in the
Leased Property shall be treated as an Imposition.

Initial
Term: As defined in Section 1.2 hereof.

Initial
Term Expiration Date: September 30, 2010

Insurance
Requirements:  All
terms of any insurance policy required by this Lease and all requirements of
the issuer of any such policy.

Intercreditor
Agreement: Intercreditor Agreement of even date herewith by
and between Lessor and AmSouth.

Investigation:
Any soil and chemical test or any other environmental investigation,
examination or analysis.

Investment
Amount: $96,635,048.00, increased by a percentage equal to
the percentage increase in the CPI from the Commencement Date through the
applicable Proceeds Date.

Judgment
Date:   The date on
which a judgment is entered against Lessee which establishes, without the
possibility of appeal, the amount of liquidated damages to which Lessor is
entitled hereunder.

Land:
The real property described in Exhibits A-1 through A-28 attached hereto.

Lease:  As defined in the Preamble.

 15
 

 

 

Lease
Year: October 1, 2000 through September 30, 2001, and each
twelve month period thereafter.

Leased
Improvements: Collectively, all buildings, structures,
Fixtures and other improvements of every kind on the Land including, but not
limited to, alleyways and connecting tunnels, sidewalks, utility pipes,
conduits and lines (on-site and off-site), parking areas and
roadways appurtenant to such buildings and structures.

Leased
Property:  The portion
of the Land on which a Facility is located, the legal description of which is
set forth beneath the Facility’s name on Exhibits A-1 through A-28, the Leased
Improvements on such portion of the Land, the Related Rights with respect to
such portion of the Land,  and Lessor’s
Personal Property with respect to such Facility.

Leased
Properties:  All of the
Land, Leased Improvements, Related Rights and Lessor’s Personal Property.

Legal
Requirements:  All
federal, state, county, municipal and other governmental statutes, laws, rules,
orders, waivers, regulations, ordinances, judgments, decrees and injunctions
affecting the Leased Properties or any portion thereof, Lessee’s Personal
Property or the construction, use or alteration thereof, including but not
limited to the Americans with Disabilities Act, whether enacted and in force
before, after or on the Commencement Date, and including any which may (i)
require repairs, modifications, alterations or additions in or to any portion
or all of the Facilities, or (ii) in any way adversely affect the use and
enjoyment thereof, and all permits, licenses and authorizations and regulations
relating thereto including, but not limited to, those relating to existing
health care licenses, those authorizing the current number of licensed beds and
the level of services delivered from the Leased Properties, and all covenants,
agreements, restrictions and encumbrances contained in any instruments, either
of record or known to Lessee (other than encumbrances created by Lessor without
the consent of Lessee), in force at any time during the Term.

Lessee:
The Lessee under this Lease from time to time, subject to Section 22.1.

Lessee’s
Certificate:  A
statement in writing in substantially the form of Exhibit C attached hereto
(with such changes thereto as may reasonably be requested by the person relying
on such certificate).

Lessee’s
Current Assets:  At any
date, all assets of Lessee and Sublessees that, on a consolidated basis in
conformity with GAAP, should be carried as current assets on the balance sheet
of Lessee at such date.

Lessee’s
Current Liabilities: 
At any date, all liabilities of Lessee and Sublessees that, on a
consolidated basis in conformity with GAAP, should be carried as current
liabilities on the balance sheet of Lessee at such date.

Lessee’s
Personal Property: 
Personal Property owned or leased by Lessee that is not included within
the definition of Lessor’s Personal Property but is used by Lessee in the

 16
 

 

operation of the
Facilities, including Personal Property provided by Lessee in compliance with
Section 6.3 hereof.

Lessor’s
Future Rent Loss:  An
amount equal to the Rent which would have been payable by Lessee  from and after the Liquidated Damages Payment
Date through the Expiration Date had the Lease not been terminated.

Lessor’s
Interim Rent Loss:  An
amount equal to the Rent which would have been payable by Lessee from the
Termination Date through the Judgment Date had the Lease not been terminated
(including interest and late charges determined on the basis of the date or
dates on which Lessor’s Interim Rent Loss is actually paid by Lessee).

Lessor’s
Monthly Rent Loss:  For
any month, an amount equal to the installment of Rent which would have been due
in such month under the Lease if it had not been terminated, plus, if such
amount is not paid on or before the day of the month on which such installment
of Rent would have been due, the amount of interest and late charges thereon
which would also have been due under the Lease.

Lessor’s
Personal Property:  All
Personal Property and intangibles, if any, now or hereafter owned by Lessor,
together with any and all replacements thereof, and all Personal Property that
pursuant to the terms of the Lease becomes the property of Lessor during the
Term.

Liquidated
Damages Payment Date: 
The date on which Lessee pays Lessor all of the liquidated damages for
which it is liable under Article XVI.

Management
Agreement:  Any
agreement pursuant to which management of a Facility is delegated by Lessee to
any person not an employee of Lessee or to any other related or unrelated
party.

Manager:  The Person to which management of the
operation of a Facility is delegated pursuant to a Management Agreement, which
at the Commencement Date is Diversicare Management Services Co., a Tennessee
corporation.

Minimum
Qualified Capital Expenditures: As defined in Section 8.3.2.

Net
Income:  For any
period, the net income (or loss) of Lessee and its subsidiaries for such
period, determined on a consolidated basis and in accordance with GAAP,
provided, however, that Lessee’s Net Income shall not include:

(a)                                  any
after-tax gains or losses attributable to returned surplus assets of any
pension-benefit plan;

(b)                                 any
extraordinary gains or nonrecurring gains;

(c)                                  any
gains or losses realized upon the sale or other disposition of property which
is not sold or otherwise  disposed of in
the ordinary course of business;

 17
 

 

 

(d)                                 any
gains or losses realized upon the sale or other disposition of any capital
stock of any Person;

(e)                                  any
gains from the disposal of a discontinued business;

(f)                                    the
cumulative effect on prior years of any change in an accounting principle;

(g)                                 the
income or loss of any Person acquired by Lessee or an Affiliate in a pooling of
interests transaction for any period prior to the date of such acquisition;

(h)                                 the
income from any sale of assets in which the book value of such assets had been
the book value of any Person acquired in a pooling-of-interests transaction
prior to the date such Person became an Affiliate of Lessee;

(i)                                     the
income (or loss) of any Person (other than a subsidiary) in which Lessee has an
ownership interest; provided, however, that (i) Lessee’s Net Income shall
include amounts in respect of the income of such Person when actually received
in cash by Lessee in the form of dividends or similar distributions and (ii)
Lessee’s Net Income shall be reduced by the aggregate amount of all
investments, regardless of the form thereof, made by Lessee in such Person for
the purpose of funding any deficit or loss of such Person;

(j)                                     the
income of Lessee to the extent the payment of such income is not permitted,
whether on account of any law, statute, judgment, decree or governmental order,
rule or regulation applicable to such Lessee;

(k)                                  all
amounts included in computing such net income (or loss) in respect of the
write-up of any asset or the write-down of any Debt at less than face value
after the later of the Commencement Date or the date on which such asset or
Debt was first properly included on Lessee’s balance sheet.

(l)                                     the
reduction in income tax expense resulting from an increase in a deferred income
tax asset due to the anticipation of future income tax benefits; or

(m)                               the
reduction in income tax expense resulting from an increase in a deferred income
tax asset or from a decrease in a deferred income tax liability due to a change
in a statutory tax rate.

Net
Proceeds:  All
proceeds, net of any costs incurred by Lessor in obtaining such proceeds,
payable by reason of any loss or damage to any Leased Property under any policy
of insurance required by Article XIII of this Lease (including any proceeds
with respect to Lessee’s Personal Property that Lessee is required or elects to
restore or replace pursuant to Section 14.3) or paid by a Condemnor for
the Taking of any of all or any portion of a Leased Property.

 18
 

 

 

Net
Reletting Proceeds: Proceeds of the reletting of any portion
of the Leased Property received by Lessor, net of Reletting Costs.

New
Sub: As defined in the Settlement and Restructuring
Agreement.

Notice:  A notice given in accordance with Article
XXXI hereof.

Notice
of Termination:  A
Notice from Lessor that it is terminating this Lease by reason of an Event of
Default.

Officer’s
Certificate: If for a corporation, a certificate signed by
one or more officers of the corporation authorized to do so by the bylaws of
such corporation or a resolution of the Board of Directors thereof; if for a
partnership, limited liability company or any other kind of entity, a
certificate signed by a Person having the authority to so act on behalf of such
entity.

Omega:
Omega Healthcare Investors, Inc., a Maryland corporation.

Overdue
Rate:  On any date, the
interest rate that is equal to three and one-half percent (3 2%)  (three hundred fifty (350)  basis points) above the Prime Rate, but in no
event greater than the maximum rate then permitted under applicable law.

Partial
Taking:  A taking of
less than the entire fee of a Leased Property that either (i) does not render
the Leased Property Unsuitable for its Primary Use, or (ii) renders a Leased
Property Unsuitable for its Primary Intended Use, but neither Lessor nor Lessee
elects pursuant to Section 15.1 hereof to terminate this Lease.

Payment
Date:  Any due date for
the payment of the installments of Base Rent or for the payment of Additional
Charges or any other amount required to be paid by Lessee hereunder.

Permitted
Encumbrances: Encumbrances listed on attached Exhibit B.

Person:  Any natural person, trust, partnership,
corporation, joint venture, limited liability company or other legal entity.

Personal
Property:  All
machinery, equipment, furniture, furnishings, movable walls or partitions,
computers (and all associated software), trade fixtures and other personal
property (but excluding consumable inventory and supplies owned by Lessee) used
in connection with the Leased Properties, together with all replacements  and alterations thereof and additions
thereto, except items, if any, included within the definition of Fixtures or
Leased Improvements.

Present
Value: The value of future payments, determined by
discounting each such payment at a rate equal to the yield on the specified date
on securities issued by the United States Treasury (bills, notes and bonds)
maturing on the date closest to the date such future payment would have been
due.

 19
 

 

 

Primary
Intended Use: Skilled nursing facilities, except as
specifically set forth on Schedule B attached hereto.

Prime
Rate:  On any date, an
interest rate equal to the prime rate published by the Wall Street Journal, but
in no event greater than the maximum rate then permitted under applicable law.
If the Wall Street Journal ceases to be in existence, or for any reason no
longer publishes such prime rate, the Prime Rate shall be the rate announced as
its prime rate by Fleet Bank, and if such bank no longer exists or does not
announce a prime rate at such time, the Prime Rate shall be the rate of
interest announced as its prime rate by a national bank selected by Lessor.

Proceeding:
Any action, proposal or investigation by any agency or entity, or any complaint
to such agency or entity.

Proceeds
Date: Any date upon which Lessor or a Facility Mortgagee
receives a Retained Amount.

Purchase
Money Financing: Any financing provided by a Person to Lessee
in connection with the acquisition of Personal Property used in connection with
the operation of a Facility, whether by way of installment sale or otherwise.

Qualified
Capital Expenditures: 
Expenditures capitalized on the books of Lessee for alterations,
renovations, repairs and replacements to the Facilities including without
limitation any of the following:

Replacement of furniture,
fixtures and equipment, including refrigerators, ranges, major appliances,
bathroom fixtures, doors (exterior and interior), central air conditioning and
heating systems (including cooling towers, water chilling units, furnaces,
boilers and fuel storage tanks) and major replacement of siding; major roof
replacements, including major replacements of gutters, down spouts, eaves and
soffits; major repairs and replacements of plumbing and sanitary systems;
overhaul of elevator systems; major repaving, resurfacing and sealcoating of
sidewalks, parking lots and driveways; repainting of entire building exterior;
but excluding additions, normal maintenance and repairs.  For purposes of this definition, “additions”
shall mean any expansion of a Facility, including the construction of a new
wing or a new story on an existing Facility.

Regulatory
Actions:  Any claim,
demand, notice, action or proceeding brought, threatened or initiated by any
governmental authority in connection with any Environmental Law, including,
without limitation, civil, criminal and administrative proceedings, whether or
not the remedy sought is costs, damages, equitable remedies, penalties or
expenses.

Related
Rights:  All easements,
rights and appurtenances relating to the Land and the Leased Improvements.

 20
 

 

 

Release:  The intentional or unintentional spilling,
leaking, dumping, pouring, emptying, seeping, disposing, discharging, emitting,
depositing, injecting, leaching, escaping, abandoning, or any other release or
threatened release, however defined, of any Hazardous Substance.

Reletting
Costs: Expenses incurred by Lessor in connection with the
reletting of the Leased Properties in whole or in part after an Event of
Default, including without limitation attorneys’ fees and expenses, brokerage
fees and expenses, marketing expenses and the cost of repairs and renovations
reasonably required for such reletting.

Renewal
Term: A period for which the Term is renewed in accordance
with Section 1.3.

Renewal
Term Expiration Date: September 30, 2020.

Rent:  Collectively, the Base Rent and Additional
Charges.

Replacement
Cost:  As to each
Leased Property, the actual replacement cost of such Leased Improvements,
Fixtures and Personal Property, including an increased cost of construction
endorsement, less exclusions provided in the standard form of fire insurance
policy.  In all events Replacement Cost
shall be an amount sufficient that neither Lessor nor Lessee is deemed to be a
co-insurer of the Leased Property in question. Lessor shall have the right from
time to time, but no more frequently than once in any period of three (3)
consecutive Lease Years, to have Replacement Cost reasonably redetermined by
the fire insurance company which is then carrying the largest amount of fire
insurance on the Leased Properties, which determination shall be final and
binding on the parties hereto, and upon such determination Lessee shall
forthwith increase, but not decrease, the amount of the insurance carried
pursuant to Section 13.2.1 to the amount so determined, subject to the approval
of any Facility Mortgagee.   Lessee shall
pay the fee, if any, of the insurer making such determination.

Retained
Amount: An amount equal to either (a) Net Proceeds received
by Lessor and/or a Facility Mortgagee pursuant to the terms of Article 14 of
this Lease, if such Net Proceeds are not made available for the restoration of
the Leased Property or (b) an Award received by Lessor and/or a Facility
Mortgagee pursuant to Article 15 of this Lease, if such Award is not made
available to the Lessee for the restoration of the Leased Property.

SEC:  Securities and Exchange Commission.

Security Agreement: The Security
Agreement dated as of the date hereof between Lessor as secured party and
Lessee as debtor.

Security
Deposit: Three Hundred Forty Thousand Three Hundred Four and
35/100 Dollars ($340,304.35), delivered and held in accordance with Article
XXXIX hereof.

Settlement
and Restructuring Agreement: The Settlement and Restructuring
Agreement of even date herewith by and among Lessee, the Guarantors, Sterling
Health Care Management, Inc., Lessor, and Omega.

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Special
Project Capital Expenditures: As defined in Section 8.3.1.

State(s):
The State or States in which the Leased Properties are located.

Stock
Issuance and Subscription Agreement: The Stock Issuance and
Subscription Agreement of even date herewith by and between Advocat and Omega.

Stressed
Coverage Ratio: For any period, a fraction, (1) the numerator
of which is EBITDARM, less the sum of (a) Minimum Qualified Capital
Expenditures and (b) management fees, and (2) the denominator of which is
Debt Service.

Subordinated
Note: The Subordinated Note of even date herewith from
Advocat to Omega in the original principal amount of One Million Seven Hundred
Thousand and 00/100 Dollars ($1,700,000.00).

Sublessee:
A permitted sublessee of Lessee pursuant to the conditions of Section 22.4

Taken:
Conveyed pursuant to a Taking.

Taking:  A taking or voluntary conveyance during the
Term of all or part of a Leased Property, or any interest therein or right
accruing thereto or use thereof, as the result of, or in settlement of any
condemnation or other eminent domain proceeding affecting the Leased Property
whether or not the same shall have actually been commenced.

Term:  Collectively, the Initial
Term plus the Renewal Term or Renewal Terms, if any, subject to earlier
termination pursuant to the provisions hereof.

Termination
Date:  The date on
which a Notice of Termination is given.

Third
Party Claims:  Any
claims, actions, demands or proceedings (other than Regulatory Actions) howsoever
based (including without limitation those based on negligence, trespass, strict
liability, nuisance, toxic tort or detriment to health welfare or property) due
to Contamination, whether or not the remedy sought is costs, damages, penalties
or expenses, brought by any person or entity other than a governmental agency.

Transfer:  The (a) assignment, mortgaging or other
encumbering of all or any part of Lessee’s interest in this Lease or in the
Leased Properties, or (b) subletting of the whole or any part of any Leased
Property, or (c) entering into of any Management Agreement or other arrangement
under which any Facility is operated by or licensed to be operated by an entity
other than Lessee, or (d) merger, consolidation or reorganization of a corporate
Lessee or Manager (except, for Manager only, to an Affiliate), or the sale,
issuance, or transfer, cumulatively or in one transaction, of any voting stock
of Lessee or Manager (except, for Manager only, to an Affiliate) by Persons who
are stockholders of record of Lessee, which results in a change of Control of
Lessee or Manager (except, for Manager only, to an Affiliate), or (e) sale,
issuance or transfer, cumulatively or in one transaction, of any interest, or
the termination of any interest, in Lessee or Manager (except, for Manager
only, to an Affiliate), if Lessee or such Manager, is a

 22

 

joint
venture, partnership, limited liability company or other association, which
results in a change of Control of such joint venture, partnership or other
association.

Transferee:
An assignee, subtenant or other occupant of a Leased Property pursuant to a
Transfer.

Triggering
Event: As defined in the Settlement and Restructuring
Agreement.

Unsuitable
for Its Primary Intended Use: 
A state or condition of a Facility such that by reason of damage or
destruction, or a Partial Taking, the Facility cannot be operated on a
commercially practicable basis for its Primary Intended Use, taking into
account, among other relevant factors, the number of usable beds permitted by
applicable law and regulation in the Facility after the damage or destruction
or Partial Taking, the square footage damaged or Taken and the estimated
revenue impact of such damage or destruction or Partial Taking.

ARTICLE III

3.1           Base Rent; Monthly Installments.
In addition to all other payments to be made by Lessee under this Lease, Lessee
shall pay Lessor the Base Rent in lawful money of the United States of America
which is legal tender for the payment of public and private debts, in advance,
in equal, consecutive monthly installments, each of which shall be in an amount
equal to one-twelfth (1/12) of the Base Rent payable for the Lease Year in
which such installment is payable. The first installment of Base Rent shall be payable on the Commencement Date,
together with a prorated amount of Base Rent for the period from
November 1, 2000 until the fifteenth (15th) day of November, 2000.  Thereafter, installments of Base Rent shall
be payable on the fifteenth (15th) day of each calendar month during the
Term.  Base Rent shall be paid to Lessor,
or to such other Person as Lessor from time to time may designate by Notice to
Lessee, by wire transfer of immediately available federal funds to the bank
account designated in writing by Lessor. If Lessor directs Lessee to pay any
Base Rent or Additional Charges to any Person other than Lessor, Lessee shall send
to Lessor simultaneously with such payment a copy of the transmittal letter or
invoice and check whereby such payment is made, or such other evidence of such
payment as Lessor may require.

3.2           Additional
Charges.   In addition to the Base Rent, Lessee will also pay as and when due (a) the
Annual Site Inspection Fee and (b) all Additional Charges.

3.3           Late
Charge.  If any Rent payable to
Lessor is not paid when due and such failure is not cured by Lessee within a
period of five (5) days after Notice thereof from Lessor, provided that Lessee
shall be entitled to such Notice and may avail itself of such cure period no
more than two (2) times in any calendar year, Lessee shall pay Lessor on
demand, as an Additional Charge, a late charge equal to the greater of
(i) two percent (2%) of the amount not paid when due and (ii) any and all
charges, expenses, fees or penalties imposed on Lessor by a Facility Mortgagee
for late payment, and in addition, if such Rent (including the late charge) is
not paid within thirty (30) days of the date on which such Rent was due,
interest thereon at the Overdue Rate from such thirtieth (30th) day until such
Rent (including the late charge and interest) is paid in full.

3.4           Net Lease.

 23
 

 

3.4.1        The
Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to
Lessor the full amount of the Rent payable to Lessor hereunder throughout the
Term, subject only to any provisions of the Lease which expressly provide for
adjustment or abatement of Rent or other charges.

3.4.2        If
Lessor commences any proceedings for non-payment of Rent, Lessee will not
interpose any counterclaim or cross complaint or similar pleading of any nature
or description in such proceedings unless Lessee would lose or waive such claim
by the failure to assert it, but Lessee does not waive any rights to assert
such claim in a separate action brought by Lessee.  The covenants to pay Rent are independent
covenants, and Lessee shall have no right to hold back, offset or fail to pay
any Rent because of any alleged default by Lessor or for any other reason
whatsoever.

3.5           Payments
In The Event of a Rent Adjustment. In the event this Lease provides for
adjustment of the Base Rent on any basis that requires a determination of Base
Rent which cannot be made on or before the due date of the first installment of
Base Rent following the Adjustment Date, Lessee shall continue to pay the Base
Rent at the rate previously in effect until Lessor gives Lessee Notice of its
determination of the adjusted Base Rent. 
Upon such determination, the Base Rent shall be retroactively adjusted
as of the Adjustment Date.  On or before
the second (2nd) Payment Date for Base Rent following receipt by Lessee of
Lessor’s Notice of the adjustment, Lessee shall make an additional payment of Base
Rent in such amount as will bring the Base Rent, as adjusted, current on or
before such second (2nd) Payment Date, plus interest on the amount of such
additional payment (i.e. the difference between the monthly installment of Base
Rent before and after the increase as of the Adjustment Date, divided by thirty
(30) and multiplied by the number of days between the Adjustment Date and the
date of payment by Lessee) at the Prime Rate from the Adjustment Date through
the date of such additional payment, and thereafter Lessee shall pay the
adjusted Base Rent in correspondingly adjusted monthly installments until the
Base Rent is next adjusted as required herein. This Section 3.5 shall survive
the expiration or termination of this Lease with respect to any adjustment
which is not known or fully paid as of the date of expiration or termination.

ARTICLE IV

4.1           Payment of Impositions.  Subject to Article XII relating to permitted
contests, Lessee will pay all Impositions before any fine, penalty, interest or
cost is added for non-payment, such payments to be made directly to the
taxing authorities where feasible, and will promptly, upon request, furnish to
Lessor copies of official receipts or other satisfactory proof evidencing such
payments. If at the option of the taxpayer any Imposition may lawfully be paid
in installments, Lessee may pay the same in the required installments provided
it also pays any and all interest due thereon as and when due.

Lessor
shall, to the extent required or permitted by applicable law, prepare and file
all tax returns and reports as may be required by governmental authorities in
respect of Lessor’s net income, gross receipts, sale and use, single business,
transaction privilege, rent, ad valorem,
franchise taxes and taxes on its capital stock.   Lessee shall, to the extent required or
permitted by applicable law, prepare and file as and when required all other
tax returns and reports required by 

 24
 

 

governmental
authorities with respect to all Impositions. 
Lessor and Lessee shall each, upon request, provide the other with such
data, including without limitation cost and depreciation records, as is
maintained by the party to whom the request is made as is necessary to prepare
any required returns and reports. If any provision of any Facility Mortgage
requires deposits for payment of Impositions, Lessee shall either pay the
required deposits to Lessor monthly and Lessor shall make the required
deposits, or, if directed in writing to do so by Lessor, Lessee shall make such
deposits directly.

Lessee
shall be entitled to receive and retain any refund from a taxing authority in
respect of an Imposition paid by Lessee if at the time of the refund no Event
of Default has occurred and is continuing, but if an Event of Default has
occurred and is continuing at the time of the refund, Lessee shall not be
entitled to receive or retain such refund and if and when received by Lessor
such refund shall be applied as provided in Article XVI.

In
the event governmental authorities classify any property covered by this Lease
as personal property, Lessee shall file all personal property tax returns in
such jurisdictions where it may legally so file.  Where Lessor is legally required to file
personal property tax returns, Lessee will be provided with copies of assessment
notices in sufficient time for Lessee to file a protest.  Billings for reimbursement by Lessee to
Lessor of personal property taxes shall be accompanied by copies of a bill
therefor and payments thereof which identify the personal property with respect
to which such payments are made.

Lessee
may, upon Notice to and with the prior written consent of Lessor, which consent
shall not be unreasonably withheld, at Lessee’s sole cost and expense, protest,
appeal, or institute such other proceedings as Lessee may deem appropriate to
effect a reduction of real estate or personal property assessments and Lessor,
at Lessee’s expense as aforesaid, shall cooperate with Lessee in such protest,
appeal, or other action.  In any such
proceeding brought by Lessor, Lessee shall cooperate with Lessor at Lessee’s
sole cost and expense.  Lessee shall
reimburse Lessor for Lessor’s direct costs of cooperating with Lessee for such
protest, appeal or other action.

4.2           Notice
of Impositions.  Lessor shall give
prompt Notice to Lessee of all Impositions payable by Lessee hereunder of which
Lessor at any time has knowledge, but Lessor’s failure to give any such Notice
shall in no way diminish Lessee’s obligations hereunder to pay such
Impositions, but such failure shall obviate any default hereunder for a
reasonable time after Lessee receives Notice of any Imposition which it is
obligated to pay.

4.3           Adjustment
of Impositions.  Impositions imposed
in respect of the tax-fiscal period during which the Term ends shall be
adjusted and prorated between Lessor and Lessee, whether or not imposed before
or after the expiration of the Term or the earlier termination thereof, and
Lessee’s obligation to pay its prorated share thereof shall survive such
expiration or earlier termination.

4.4           Utility
Charges.  Lessee will pay or cause to
be paid when due all charges for electricity, power, gas, oil, water and other
utilities used in each Leased Property during the Term and imposed upon the
Leased Properties or upon Lessor or Lessee with respect to the Leased
Properties.

 25
 

 

4.5           Insurance
Premiums. Lessee shall pay or cause to be paid when due all premiums for
the insurance coverage required to be maintained pursuant to Article XIII
during the Term.

ARTICLE V

5.1           No Termination, Abatement, etc.  Except as otherwise specifically provided in
this Lease, Lessee shall not take any action without the consent of Lessor to
modify, surrender or terminate this Lease, and shall not seek or be entitled to
any abatement, deduction, deferment or reduction of Rent, or setoff against
Rent.  Except as otherwise specifically
provided in this Lease, the respective obligations of Lessor and Lessee shall
not be affected by reason of (i) any damage to, or destruction of, the Leased
Properties or any portion thereof from whatever cause or any Taking of the
Leased Properties or any portion thereof, other than any damage to or
destruction of a Leased Property that Lessee conclusively establishes was
caused solely by Lessor;  (ii) the lawful
or unlawful prohibition of, or restriction upon, Lessee’s use of the Leased
Properties, or any portion thereof, or the interference with such use by any
Person or by reason of eviction by paramount title, other than any prohibition
or restriction of use of a Leased Property that Lessee conclusively establishes
was solely caused by Lessor; (iii) any claim which Lessee has or might have
against Lessor or by reason of any default or breach of any warranty by Lessor
under this Lease or any other agreement between Lessor and Lessee, or to which
Lessor and Lessee are parties, except where such claims result in a termination
of this Lease, (iv) any bankruptcy, insolvency, reorganization, composition,
readjustment, liquidation, dissolution, winding up or other proceedings
affecting Lessor or any assignee or transferee of Lessor, or (v) any other
cause whether similar or dissimilar to any of the foregoing other than a
discharge of Lessee from any such obligations as a matter of law.  For purposes of this Section 5.1, a matter
shall be deemed to be conclusively established by Lessee if (a) Lessor
agrees in writing or (b) (i) Lessee shall have given Lessor Notice thereof and
a time reasonable under the circumstances to cure any claimed default of Lessor
and (ii) Lessee thereafter establishes such contention in an arbitration
proceeding as provided for in Article XXXV of this Lease.  Lessee hereby specifically waives all rights,
arising from any occurrence whatsoever, which may now or hereafter be conferred
upon it by law to (i) modify, surrender or terminate this Lease or quit or
surrender the Leased Properties or any portion thereof, or (ii) entitle Lessee
to any abatement, reduction, suspension or deferment of the Rent or other sums
payable by Lessee hereunder except as otherwise specifically provided in this
Lease.

ARTICLE VI

6.1           Ownership of the Leased Properties.  Lessee acknowledges that the Leased
Properties are the property of Lessor and that Lessee has only the right to the
possession and use of the Leased Properties upon the terms and conditions of this
Lease.  Lessee will not (i) file any
income tax return or other associated documents; (ii) file any other document
with or submit any document to any governmental body or authority; (iii) enter
into any written contractual arrangement with any Person; or (iv) release any
Financial Statements or other financial statements of Lessee, in any case that
take any position other than that throughout the Term Lessor is the owner of
the Leased Properties for federal, state and local income tax purposes and this
Lease is a “true lease,” and an “operating lease” and not a “capital lease”.

 26
 

 

6.2           Lessor’s
Personal Property.  Lessee shall,
during the entire Term, maintain all of Lessor’s Personal Property in good
order, condition and repair as shall be necessary in order to operate the
Facilities for the Primary Intended Use in compliance with all applicable
licensure and certification requirements, all applicable Legal Requirements and
Insurance Requirements, and customary industry practice for the Primary
Intended Use.  Lessee shall not permit or
suffer Lessor’s Personal Property to be subject to any lien, charge,
encumbrance, financing statement, contract of sale, equipment lessor’s interest
or the like, except for any purchase money security interest or equipment lessor’s
interest expressly approved in advance, in writing, by Lessor.  At the expiration or earlier termination of
this Lease, all of Lessor’s Personal Property shall be surrendered to Lessor
with the Leased Properties at or before the time of the surrender of the Leased
Property in at least as good a condition as at the Commencement Date (or, as to
replacements, in at least as good a condition as when placed in service at the
Facilities) except for ordinary wear and tear.

6.3           Lessee’s
Personal Property.  Lessee shall
provide and maintain during the Term such Personal Property, in addition to
Lessor’s Personal Property, as shall be necessary and appropriate in order to
operate the Facilities for the Primary Intended Use in compliance with all
licensure and certification requirements, in compliance with all applicable
Legal Requirements and Insurance Requirements and otherwise in accordance with
customary practice in the industry for the Primary Intended Use (“Lessee’s
Personal Property”).  Except to the
extent specifically allowed under Section 8.2.1.4, without the prior
written consent of Lessor, which consent shall not be unreasonably withheld,
Lessee shall not permit or suffer Lessee’s Personal Property to be subject to
any lien, charge, encumbrance, financing statement or contract of sale or the
like other than that provided for in Section 6.4 below.  Except for those items of Personal Property
listed on Schedule A attached hereto, upon the expiration of the Term or
the earlier termination of this Lease, without the payment of any additional
consideration by Lessor, Lessee shall be deemed to have sold, assigned,
transferred and conveyed to Lessor all of Lessee’s right, title and interest in
and to any of Lessee’s Personal Property that, in Lessor’s reasonable judgment,
is necessary or integral to the Primary Intended Use of the Facilities (or if
some other use thereof has been approved by Lessor as required herein, such
other use as is then being made by Lessee) and, as provided in Section 34.1
hereof, Lessor shall have the option to purchase any of Lessee’s Personal
Property that is not then necessary or integral to such use (“Lessee’s
Incidental Personal Property”).  In
connection with any Personal Property sold, assigned, transferred or conveyed
to Lessor pursuant to the preceding sentence, Lessor shall assume any lease or
equipment financing obligations of Lessee permitted under Section 8.2.1.4
hereof.  Without Lessor’s prior written
consent, Lessee shall not remove Lessee’s Personal Property that is in use at
the expiration or earlier termination of the Term from the Leased Properties
until such option to purchase has expired or been sooner waived in writing by
Lessor.  Any of Lessee’s Incidental
Personal Property that is not purchased by Lessor pursuant to Section 34.1,
together with the Personal Property listed on Schedule A attached hereto,
may be removed by Lessee upon the expiration or earlier termination of this
Lease, and, if not removed within twenty (20) days following the expiration or
earlier termination of this Lease, shall be considered abandoned by Lessee and
may be appropriated, sold, destroyed or otherwise disposed of by Lessor without
giving notice thereof to Lessee and without any payment to Lessee or any
obligation to account therefor.  Lessee
shall reimburse Lessor for any and all expense incurred by Lessor in disposing
of any of Lessee’s Personal Property that Lessee may remove but within such
twenty (20) day period fails to 

 27
 

 

remove,
and shall either at its own expense restore the Leased Properties to the
condition required by Section 9.1.5, including repair of all damage to the
Leased Properties caused by the removal of any of Lessee’s Personal Property,
or reimburse Lessor for any and all expense incurred by Lessor for such
restoration and repair.  Lessor claims to
own all of the Personal Property (other than the items listed on
Schedule A) now used in connection with the operation of the
Facilities.  Lessee claims to own certain
of the Personal Property which it has purchased as replacement of certain
Personal Property owned by Lessor at the commencement of the Existing Leases
and certain additional non-replacement Personal Property placed at the
Facilities since the commencement of the Existing Leases.  Both parties agree that Lessor owned all of
the Personal Property at the Facilities at the time of commencement of the
Existing Leases, and that Lessee may use all of the Personal Property during
the Term.  Both parties acknowledge and
agree that neither (i) the entry into this Lease and related documents,
nor (ii) their failure during the Term to insist on resolution of their
disagreement as to whether Lessee now owns certain of the Personal Property
shall prejudice their respective claims to ownership of the Personal Property
at the end of the Term and that the continuance of this disagreement shall not
be an Event of Default under this Lease.

6.4           Grant
of Security Interest in Lessee’s Personal Property and Accounts.  Lessee has concurrently granted to Lessor a
security interest in the Collateral as defined in the Security Agreement, which
includes, without limitation, Lessee’s Personal Property as defined herein and
Lessee’s Accounts as defined in the Security Agreement.

ARTICLE VII

7.1           Condition of the Leased Properties.  Lessee acknowledges that prior to the
execution of this Lease, Lessee has been operating the Leased Properties
pursuant to the Existing Leases, and that as a consequence, Lessee has
knowledge of the condition of the Leased Properties and has found the same to
be in good order and repair and satisfactory for its purposes hereunder.  Lessee is leasing the Leased Properties “as
is” in their condition on the Commencement Date.  Lessee waives any claim or action against
Lessor in respect of the condition of the Leased Properties.  LESSOR MAKES NO WARRANTY OR REPRESENTATION
EXPRESS OR IMPLIED, IN RESPECT OF ANY LEASED PROPERTY OR ANY PART THEREOF,
EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR
PURPOSE OR OTHERWISE AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN,
LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY
LESSEE.  Lessee further acknowledges that
throughout the Term Lessee is solely responsible for the condition of the Leased
Properties.

7.2           Use
of the Leased Properties.  Throughout
the Term Lessee shall, except if otherwise agreed to in writing by Lessor,
continuously use the Leased Properties for the Primary Intended Use and such
other uses as may be necessary or incidental thereto. Lessee shall not use the
Leased Properties or any portion thereof for any other use without the prior
written consent of Lessor.  No use shall
be made or permitted to be made of, or allowed in, the Leased Properties, and
no acts shall be done, which will cause the cancellation of, or be prohibited
by, 

 28
 

 

any
insurance policy covering the Leased Properties or any part thereof, nor shall
the Leased Properties or Lessee’s Personal Property be used for any unlawful
purpose. Lessee shall not commit or suffer to be committed any waste on the
Leased Properties, or cause or permit any nuisance thereon, or suffer or permit
the Leased Properties or any portion thereof, or Lessee’s Personal Property, to
be used in such a manner as (i) might reasonably tend to impair Lessor’s (or
Lessee’s, as the case may be) title thereto or to any portion thereof, or (ii)
may reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or of implied dedication of the Leased
Properties or any portion thereof. 
Lessor covenants that during the Term of this Lease it will cooperate
with Lessee and use commercially reasonable efforts, where necessary or
required from Lessor as the owner of the Leased Properties, to enable Lessee to
obtain and maintain in force and effect and good standing any licenses,
permits, certifications, or approvals needed by Lessee to use and operate each
Leased Property for its Primary Intended Use and will obtain and maintain in
force and effect and good standing any licenses, permits, certificates, or
approvals, including certificates of need, necessary or required to be owned
and maintained by the owner of each Leased Property in order to use and operate
the Leased Property for its Primary Intended Use.

7.3           Certain Environmental Matters.

(a)           Prohibition
Against Use of Hazardous Substances. 
Lessee shall not permit, conduct or allow on the Leased Properties, the
generation, introduction, presence, maintenance, use, receipt, acceptance,
treatment, manufacture, production, installation, management, storage, disposal
or release of any Hazardous Substance except for those types and quantities of
Hazardous Substances necessary for and ordinarily associated with the conduct
of Lessee’s business which are used in full compliance with all Environmental
Laws.

(b)           Notice of Environmental Claims,
Actions or Contaminations.  Lessee
shall notify Lessor, in writing, immediately upon learning of any existing,
pending or threatened: (a) investigation, inquiry, claim or action by any
governmental authority in connection with any Environmental Laws, (b) Third
Party Claims, (c) Regulatory Actions, and/or (id) Contamination of any portion
of the Leased Properties

(c)           Costs of Remedial Actions with
Respect to Environmental Matters.  If
any investigation and/or Clean-Up of Contamination or any other violation
of Environmental Law with respect to a Leased Property is required by any
Environmental Law, Lessee shall complete, at its own expense, such
investigation and/or Clean-Up or cause any other Person that may be
legally responsible therefore to complete such investigation and/or Clean-Up.

(d)           Delivery of Environmental
Documents.  Lessee shall deliver to
Lessor complete copies of any and all Environmental Documents that may now be
in or at any time hereafter come into the possession of Lessee.

(e)           Environmental Audit.  At Lessee’s expense, Lessee shall from time
to time, upon and within thirty (30) days of Lessor’s request therefor, deliver
an Environmental Audit to Lessor.  All
tests and samplings shall be conducted using 

 29
 

 

generally accepted and
scientifically valid technology and methodologies.  Lessee shall give the engineer or
environmental consultant conducting the Environmental Audit reasonable and
complete access to the Leased Properties and to all records in the possession
of Lessee that may indicate the presence (whether current or past) of a Release
or threatened Release of any Hazardous Substances on, in, under, about and
adjacent to any Leased Property.  Lessee
shall also provide the engineer or environmental consultant full access to and
the opportunity to interview such persons as may be employed in connection with
the Leased Properties as the engineer or consultant deems appropriate.  However, Lessor shall not be entitled to request
an Environmental Audit from Lessee unless (i) after the Commencement Date there
have been changes, modifications or additions to Environmental Laws as applied
to or affecting any of the Leased Properties; (ii ) a significant change in the
condition of any of the Leased Properties has occurred; (iii) there are fewer
than six (6) months remaining in the Term; or (iv)  Lessor has another good reason for requesting
such certificate or certificates.  If the
Environmental Audit discloses the presence of Contamination or any
noncompliance with Environmental Laws, Lessee shall immediately perform all of
Lessee’s obligations hereunder with respect to such Hazardous Substances or
noncompliance.

(f)            Entry onto Leased Properties for
Environmental Matters.  If Lessee
fails to provide an Environmental Audit as and when required by Subparagraph
(e) hereof, in addition to Lessor’s other remedies Lessee shall permit Lessor
from time to time, by its employees, agents, contractors or representatives, to
enter upon the Leased Properties for the purpose of conducting such
Investigations as Lessor may desire, the expense of which shall promptly be
paid or reimbursed by Lessee as an Additional Charge.  Lessor, and its employees, agents,
contractors, consultants and/or representatives, shall conduct any such Investigation
in a manner which does not unreasonably interfere with Lessee’s use of and
operations on the Leased Properties (however, reasonable temporary interference
with such use and operations is permissible if the investigation cannot
otherwise be reasonably and inexpensively conducted).  Other than in an emergency, Lessor shall
provide Lessee with prior notice before entering any of the Leased Properties
to conduct such Investigation, and shall provide copies of any reports or
results to Lessor, and Lessee shall cooperate fully in such Investigation.

(g)           Environmental Matters Upon
Termination of the Lease or Expiration of Term.  Upon the expiration or earlier termination of
the Term of this Lease, Lessee shall cause the Leased Properties to be
delivered free of any and all Regulatory Actions and Third Party Claims and
otherwise in compliance with all Environmental Laws with respect thereto, and
in a manner and condition that is reasonably required to ensure that the then
present use, operation, leasing, development, construction, alteration,
refinancing or sale of the Leased Property shall not be restricted by any
environmental condition existing as of the date of such expiration or earlier
termination of the Term.

(h)           Compliance with Environmental Laws.  Lessee shall comply with, and cause its
agents, servants and employees, to comply with, and shall use reasonable
efforts to cause each occupant and user of any of the Leased Properties, and
the agents, servants and employees of such occupants and users, to comply with
each and every 

 30
 

 

Environmental Law
applicable to Lessee, the Leased Properties and each such occupant or user with
respect to the Leased Properties. 
Specifically, but without limitation:

(i)            Maintenance of Licenses and
Permits.  Lessee shall obtain and
maintain (and Lessee shall use reasonable efforts to cause each tenant,
occupant and user to obtain and maintain) all permits, certificates, licenses
and other consents and approvals required by any applicable Environmental Law
from time to time with respect to Lessee, each and every part of the Leased
Properties and/or the conduct of any business at a Facility or related thereto;

(ii)           Contamination.  Lessee shall not cause, suffer or permit any
Contamination;

(iii)          Clean-Up.  If a Contamination occurs, the Lessee
promptly shall Clean-Up and remove any Hazardous Substance or cause the
Clean-Up and the removal of any Hazardous Substance and in any such case
such Clean-Up and removal of the Hazardous Substance shall be effected to
Lessor’s reasonable satisfaction and in any event in strict compliance with and
in accordance with the provisions of the applicable Environmental Laws;

(iv)          Discharge of Lien.  Within twenty (20) days of the date any lien
is imposed against the Leased Properties or any part thereof under any
Environmental Law, Lessee shall cause such lien to be discharged (by payment,
by bond or otherwise to Lessor’s absolute satisfaction);

(v)           Notification of Lessor.  Within five (5) Business Days after receipt
by Lessee of notice or discovery by Lessee of any fact or circumstance which
might result in a breach or violation of any covenant or agreement, Lessee
shall notify Lessor in writing of such fact or circumstance; and

(vi)          Requests, Orders and Notices.  Within five (5) Business Days after receipt
of any request, order or other notice relating to the Leased Properties under
any Environmental Law, Lessee shall forward a copy thereof to Lessor.

(i)            Environmental Related Remedies.  In the event of a breach by Lessee beyond any
applicable notice and/or grace period of its covenants with respect to
environmental matters, Lessor may, in its sole discretion, do any one or more
of the following (the exercise of one right or remedy hereunder not precluding
the simultaneous or subsequent exercise of any other right or remedy
hereunder):

(i)            Cause a Clean-Up.  Cause the Clean-Up of any Hazardous
Substance or other environmental condition on or under the Leased Properties,
or both, at Lessee’s cost and expense; or

(ii)           Payment of Regulatory Damages.  Pay on behalf of Lessee any damages, costs,
fines or penalties imposed on Lessee or Lessor as a result of any Regulatory
Actions; or

 31
 

 

(iii)          Payments to Discharge Liens.  On behalf of Lessee, make any payment or
perform any other act or cause any act to be performed which will prevent a
lien in favor of any federal, state or local governmental authority from
attaching to the Leased Properties or which will cause the discharge of any
lien then attached to the Leased Properties; or

(iv)          Payment of Third Party Damages.  Pay, on behalf of Lessee, any damages, cost,
fines or penalties imposed on Lessee as a result of any Third Party Claims; or

(v)           Demand of Payment.  Demand that Lessee make immediate payment of
all of the costs of such Clean-Up and/or exercise of the remedies set
forth in this Section 7.2 incurred by Lessor and not theretofore paid by Lessee
as of the date of such demand.

(j)            Environmental Indemnification.  Except to the extent caused by Lessor’s gross
negligence or wilful misconduct, Lessee shall and does hereby indemnify, and
shall defend and hold harmless Lessor, its principals, officers, directors,
agents and employees from each and every incurred and potential claim, cause of
action, damage, demand, obligation, fine, laboratory fee, liability, loss,
penalty, imposition settlement, levy, lien removal, litigation, judgment,
proceeding, disbursement, expense and/or cost (including without limitation the
cost of each and every Clean-Up), however defined and of whatever kind or
nature, known or unknown, foreseeable or unforeseeable, contingent, incidental,
consequential or otherwise (including, but not limited to, attorneys’ fees,
consultants’ fees, experts’ fees and related expenses, capital, operating and
maintenance costs, incurred in connection with (i) any Investigation or
monitoring of site conditions, and (ii) any Clean-Up required or performed by
any federal, state or local governmental entity or performed by any other
entity or person because of the presence of any Hazardous Substance, Release, threatened
Release or any Contamination on, in, under or about any of the Leased
Properties) which may be asserted against, imposed on, suffered or incurred by,
each and every indemnitee arising out of or in any way related to, or allegedly
arising out of or due to any environmental matter that is created or first
occurs during the Term of this Lease or which is caused by or at any time
arises from Lessee’s and/or Lessee’s related or affiliated
predecessors-in-interest use and occupancy of the Leased Properties (whether
under this Lease, the Existing Leases, or otherwise), including, but not
limited to, any one or more of the following:

(i)            Release Damage or Liability.  The presence of Contamination in, on, at,
under, or near a Leased Property or migrating to a Leased Property from another
location;

(ii)           Injuries.  All injuries to health or safety (including
wrongful death), or to the environment, by reason of environmental matters
relating to the condition of or activities past or present on, at, in, under a Leased
Property;

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(iii)          Violations of Law.  All violations, and alleged violations, of
any Environmental Law relating to a Leased Property or any activity on, in, at,
under or near a Leased Property;

(iv)          Misrepresentation.  All material misrepresentations relating to
environmental matters in any documents or materials furnished by Lessee to
Lessor and/or its representatives in connection with the Lease;

(v)           Event of Default.  Each and every Event of Default relating to
environmental matters;

(vi)          Lawsuits.  Any and all lawsuits brought or threatened,
settlements reached and governmental orders relating to any Hazardous
Substances at, on, in, under or near a Leased Property, and all demands of
governmental authorities, and all policies and requirements of Lessor’s, based
upon or in any way related to any Hazardous Substances at, on, in, under a
Leased Property; and

(vii)         Presence of Liens.  All liens imposed upon any of the Leased
Properties in favor of any governmental entity or any person as a result of the
presence, disposal, release or threat of release of Hazardous Substances at,
on, in, from, or under a Leased Property.

(k)           Rights Cumulative and Survival.  The rights granted Lessor under this Section
are in addition to and not in limitation of any other rights or remedies
available to Lessor hereunder or allowed at law or in equity or rights of
indemnification provided to Lessor in any agreement pursuant to which Lessor
purchased any of the Leased Property. 
The payment and indemnification obligations set forth in this Section
7.3 shall survive the expiration or earlier termination of the Term of this
Lease.

ARTICLE VIII

8.1           Compliance
with Legal and Insurance Requirements. 
In its use, maintenance, operation and any alteration of the Leased
Properties, Lessee, at its expense, will, subject to the provisions of Article
XII relating to permitted contests, promptly (i) comply with all Legal
Requirements and Insurance Requirements, whether or not compliance therewith
requires structural changes in any of the Leased Improvements (which structural
changes shall be subject to Lessor’s prior written approval, which approval
shall not be unreasonably withheld or delayed) or interferes with or prevents
the use and enjoyment of the Leased Properties, and (ii) procure, maintain and
comply with all licenses, certificates of need, provider agreements and other
authorizations required for the use of the Leased Properties and Lessee’s
Personal Property then being made, and for the proper erection, installation,
operation and maintenance of the Leased Properties or any part thereof. The
judgment of any court of competent jurisdiction, or the admission of Lessee in
any action or proceeding against Lessee, whether or not Lessor is a party
thereto, that Lessee has violated any such Legal Requirements or Insurance
Requirements shall be conclusive of that fact as between Lessor and Lessee.

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8.2           Certain Covenants.

8.2.1        Certain Financial Covenants.

8.2.1.1     Limitation
of Distributions.  From and after the
transfer of Lessee’s interest to New Sub as contemplated by the Settlement and
Restructuring Agreement, and in the absence of any Triggering Event, Event of
Default, or other event that with notice and/or the passage of time would
become an Event of Default, in or with respect to any Lease Year, Lessee shall
not make any Distributions, unless all three (3) of the following conditions
have been met for the prior four (4) calendar quarters and such conditions will
still be met following such payment or distribution: (1) Lessee’s Coverage
Ratio for the preceding four (4) calendar quarters equals or exceeds 1.7; (2)
Lessee’s Stressed Coverage Ratio for the preceding four (4) calendar quarters
equals or exceeds 1.25; and (3) if such Distribution had been made on the last
day of the preceding month, following such Distribution Lessee’s Current Ratio
would have equaled or exceeded 1.3.  From
and during a Triggering Event, Event of Default, or other event that with
notice and/or the passage of time would become an Event of Default, Lessee
shall not make any Distributions.  The
limitations on Distributions set forth in this Section 8.2.1.1 shall not
prevent the deposit of Lessee’s funds into the Advocat Concentration Account
for the purposes and to the extent contemplated by the Settlement and
Restructuring Agreement.  This Subsection
is a limitation on Distributions, and Lessee’s failure to comply with one or
more of the three (3) conditions set forth above shall not be a default or
Event of Default hereunder, unless a Distribution is made during a period of
time when any one or more of such conditions is not satisfied.

8.2.1.2             Accounts
Receivable Financing.  Except as may
be expressly provided in the Settlement and Restructuring Agreement and the
Intercreditor Agreement, Lessee and/or Sublessee shall not pledge or otherwise
encumber any of the accounts receivable generated through the operation of the
Facilities to secure principal and interest on any Debt.

8.2.1.3             Guarantees
Prohibited.  From and after the
transfer of Lessee’s interest to New Sub as contemplated by the Settlement and
Restructuring Agreement, neither Lessee nor any Sublessee shall guarantee any
indebtedness of any Affiliate or other third party, except those guarantees for
the benefit of AmSouth in effect as of the date hereof or as may be required under
the AmSouth Loan Documents.

8.2.1.4             Equipment
Financing.  The aggregate amount of
principal,  interest and lease payments
due from Lessee and/or Sublessee with respect to any equipment leases or
financing secured by equipment utilized in the operation of the Facilities
shall not at any time during the Term exceed $609,000.00 in any one Lease Year.

8.3           Required Capital Expenditures

8.3.1        Special Project Capital Expenditures.
Lessee shall at its expense before the end of the second Lease Year complete and
pay for “Special Project Capital Expenditures” (as defined in the
Settlement and Restructuring Agreement) in the cumulative amount of not less
than One Million and No/100 Dollars 

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($1,000,000.00).  As set forth in the Settlement and
Restructuring Agreement, Lessee shall expend an amount not less than Two
Hundred Fifty Thousand and No/100 Dollars ($250,000.00) on or before
June 30, 2001, and shall expend, unless prevented from doing so by Force
Majeure, not less than Two Hundred Fifty Thousand and No/100 Dollars
($250,000.00), on a cumulative basis, during each six-month period
thereafter, through the date Lessee satisfies the requirement of this Section
8.3.1 to expend $1,000,000.00 for Special Project Capital Expenditures. To the
extent Lessee fails to expend the funds within the time frames required by the
immediately preceding sentence, a reserve account (“Capital Expenditures
Reserve Account”) shall be established to assure the payment thereof, and
on or before the fifteenth (15th) day of the month following a six-month
period in which the required cumulative amount has not been expended, Lessee
shall deposit with Lessor, an amount equal to the unexpended amount, less any
funds already deposited in the Capital Expenditures Reserve Account.  Lessee hereby grants to Lessor a security
interest in such Capital Expenditure Reserve Account, as may from time to time
exist, to secure all of Lessee’s obligations under this Lease.  From and after an Event of Default, Lessor
may apply the funds held in the Capital Expenditure Reserve Account in the same
manner as Lessor may apply the Security Deposit in accordance with Section 39.2
below.  To evidence its compliance with
the foregoing obligations, Lessee shall spend, or have plans in place
reasonably acceptable to Omega to spend, for Special Project Capital
Expenditures at least Five Hundred Thousand Dollars ($500,000.00) (on a
cumulative basis) by September 30, 2001 and shall spend, or have plans in
place reasonably acceptable to Omega to spend, for Special Project Capital
Expenditures the required One Million Dollars ($1,000,000.00) (on a cumulative
basis) by May 31, 2002.

8.3.2        Minimum Qualified Capital
Expenditures.  Each Lease Year Lessee
shall expend with respect to each Leased Facility at least Three Hundred Twenty
Five Dollars ($325.00) per-licensed-bed for Qualified Capital Expenditures to
improve the applicable Facility, which amount shall be increased each Lease
Year, beginning with the second Lease Year, in proportion to increases in the
CPI from the Commencement Date to the commencement of each such Lease Year (“Minimum
Qualified Capital Expenditures”). 
The parties acknowledge that the amount expended by Lessee in completion
of the Special Project Capital Expenditures shall not be offset against Lessee’s
obligation to fund the Minimum Qualified Capital Expenditures set forth in this
Section 8.3.2.  If Lessee expends with
respect to any Facility more than the Minimum Qualified Capital Expenditures in
any Lease Year, the excess Minimum Qualified Capital Expenditures shall be
credited against Lessee’s Minimum Qualified Capital Expenditures required with
respect to such Facility for the next Lease Year, and if the amount of the
credit exceeds Lessee’s Minimum Qualified Capital Expenditures required with
respect to such Facility for the next Lease Year, such excess shall be credited
against Lessee’s Minimum Qualified Capital Expenditures required with respect
to such Facility for the following Lease Years. 
At least annually, at the request of Lessor, Lessor and Lessee shall
review capital 

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expenditures budgets and
reasonably agree on modifications, if any, required by changed circumstances
and the changed conditions of the Leased Properties.

8.4           Management
Agreements.  Lessee shall not enter
into, amend, modify, renew, replace or otherwise change the terms of any
Management Agreement without the prior written consent of Lessor as to the
identity of the Manager and the terms of the agreement, which consent Lessor
may withhold in its sole discretion, and in no event without the execution by
Lessee, Manager and Lessor, of an agreement, satisfactory to Lessor in form and
substance, pursuant to which Manager’s right to receive its management fee is
subordinated to the obligation of Lessee to pay the Rent to Lessor.  Lessor hereby consents to the continued
management of the Facilities by Diversicare Management Services Co. under its
current Management Agreement with Lessee. 
In addition, prior to the employment of any Manager, such Manager must
execute a Consent and Agreement of Manager in the form attached hereto as
Exhibit E.  Notwithstanding any of the
foregoing terms of this Section 8.4, the annual management fee payable to any
Manager (other than an Affiliate of Lessee) during the term of this Lease shall
not exceed five percent (5%) of Gross Revenues.

8.5           Other
Facilities.  Neither Lessee nor any
Affiliate shall own, operate or manage any nursing home, rest home, assisted
living facility, subacute facility, retirement center or similar health care
facility within a ten (10) mile radius of any Facility, other than any Facility
which is a Leased Property under this Lease or which Lessee or any Affiliate of
Lessee owns or operates as of the Commencement Date and set forth on Schedule C
attached hereto.

8.6           Separateness.        Lessee (from and after the transfer of
Lessee’s interest to New Sub as contemplated by the Settlement and
Restructuring Agreement) shall:

a.                                       Maintain
records and books of account separate from those of any Affiliate.

b.                                      Conduct
its own business in its own names and not in the name of any Affiliate (except
to the extent that the business of the Facilities may be conducted in the name
of the Manager).

c.                                       Maintain
financial statements separate from any Affiliate.

d.                                      Maintain
any contractual relationship with any and all Affiliates, except upon terms and
conditions that are fair and substantially similar to those that would be
available on an arm’s length basis.

e.                                       Except
for the benefit of AmSouth as set forth in the Intercreditor Agreement or as
otherwise required under the AmSouth Loan Documents, not guarantee or become
obligated for the debts of any other entity, including any Affiliate, or hold
out its credit, jointly or severally, as being available to satisfy the
obligations of others, except for obligations which represent Lessee’s or
Sublessee’s trade payables or accrued expenses incurred by Manager in the
ordinary course of owning and operating the Facilities.

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f.                                         Except
for the benefit of AmSouth as set forth in the Intercreditor Agreement, not
pledge its assets, jointly or severally, for the benefit of any other entity,
including any Affiliate.

g.                                      Hold
itself out to the public as a legal entity separate from any Affiliates.

h.                                      At
all times cause its Board of Directors to hold appropriate meetings (or act by
unanimous consent) to authorize all appropriate corporate actions, and in
authorizing such actions, to observe all formalities.

ARTICLE IX

9.1           Maintenance and Repair.

9.1.1        Lessee,
at its expense, will keep the Leased Properties, and all landscaping, private
roadways, sidewalks and curbs appurtenant thereto which are under Lessee’s
control and Lessee’s Personal Property in good order and repair, whether or not
the need for such repairs arises out of Lessee’s use, any prior use, the
elements or the age of the Leased Property or any portion thereof, or any cause
whatsoever except the act or negligence of Lessor, and with reasonable
promptness shall make all necessary and appropriate repairs thereto of every
kind and nature, whether interior or exterior, structural or non-structural,
ordinary or extraordinary, foreseen or unforeseen or arising by reason of a
condition existing prior to the Commencement Date (concealed or otherwise);
provided, however, that Lessee shall be permitted to prosecute claims against
Lessor’s predecessor in title for breach of any representation or warranty made
to or on behalf of Lessor, or for latent defects in any Leased Property.  Lessee shall at all times maintain, operate
and otherwise manage the Leased Properties on a quality basis and in a manner
consistent with the standards of the highest quality competing facilities in
the market areas served by the Leased Properties.  All repairs shall, to the extent reasonably
achievable, be at least equivalent in quality to the original work or, subject
to the provisions of Paragraph 9.1.4, below, the property to be repaired shall
be replaced.  Lessee will not take or
omit to take any action the taking or omission of which might materially impair
the value or the usefulness of the Leased Properties or any parts thereof for
the Primary Intended Use.

9.1.2        Lessor
shall not under any circumstances be required to maintain, build or rebuild any
improvements on the Leased Properties (or any private roadways, sidewalks or
curbs appurtenant thereto), or to make any repairs, replacements, alterations,
restorations or renewals of any nature or description to the Leased Properties,
whether ordinary or extraordinary, structural or non-structural, foreseen
or unforeseen, or upon any adjoining property, whether to provide lateral or
other support or abate a nuisance, or otherwise, or to make any expenditure
whatsoever with respect thereto, in connection with this Lease.  Lessee hereby waives, to the extent permitted
by law, the right to make repairs at the expense of Lessor pursuant to any law
in effect at the time of the execution of this Lease or hereafter enacted.

9.1.3        Nothing
contained in this Lease shall be construed as (i) constituting the consent or
request of Lessor, expressed or implied, to any contractor, subcontractor,
laborer, materialmen or vendor to or for the performance of any labor or
services or the furnishing of any 

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materials
or other property for the construction, alteration, addition, repair or
demolition of or to any Leased Property or any part thereof, or (ii) giving
Lessee any right, power or permission to contract for or permit the performance
of any labor or services or the furnishing of any materials or other property
in such fashion as would permit the making of any claim against Lessor in
respect thereof or to make any agreement that may create, or in any way be the
basis for any right, title, interest, lien, claim or other encumbrance upon the
estate of Lessor in the Leased Properties, or any portion thereof.  Lessor shall have the right to give, record
and post, as appropriate, notices of non-responsibility under any
mechanics’ and construction lien laws now or hereafter existing.

9.1.4        Lessee
shall, from time to time, promptly replace any of the Leased Improvements or
Lessor’s Personal Property which (i) become worn out, obsolete or unusable
for the purpose for which intended, (ii) have been Taken, or
(iii) have been lost, stolen, damaged or destroyed.  If any of Lessor’s Personal Property requires
replacement as a result of damage, theft, loss or destruction or a Taking, then
Lessee shall be entitled to that portion of any insurance proceeds payable in
respect thereof or any Award made therefore. 
All replacements shall have a then value (adjusted for inflation) and
utility at least equal to the value of the items replaced as of the date hereof
in the case of clause (i) above, and immediately prior to the events specified
in clauses (ii) and (iii) above.  All
replacements of Lessor’s Personal Property shall be owned by Lessor and become
a part of the Leased Properties immediately upon their acquisition.  Lessee shall promptly repair all damage to a
Leased Property incurred in the course of such replacement.

9.1.5        Lessee
will, upon the expiration or prior termination of the Term, vacate and
surrender the Leased Properties to Lessor in the condition in which they were
originally received from Lessor, in good operating condition, ordinary wear and
tear excepted, except as repaired, rebuilt, restored, altered or added to as
permitted or required by the provisions of this Lease.

9.2           Encroachments,
Restrictions, etc.   If any of the
Leased Improvements shall, at any time, encroach upon any property, street or
right-of-way adjacent to the Leased Property, or shall violate the
agreements or conditions contained in any lawful restrictive covenant or other
agreement affecting the Leased Property, or any part thereof, or shall impair
the rights of others under any easement or right-of-way to which
any Leased Property is subject, then promptly upon the request of Lessor or at
the behest of any person affected by any such encroachment, violation or
impairment, Lessee shall, at its expense, subject to its right to contest the
existence of any encroachment, violation or impairment as provided in Article
XII and in such case, in the event of an adverse final determination, either
(i) obtain valid and effective waivers or settlements of all claims,
liabilities and damages resulting from each such encroachment, violation or
impairment, whether the same shall affect Lessor or Lessee or (ii) make such
changes in the Leased Improvements, and take such other actions, as Lessee in
the good faith exercise of its judgment deems reasonably practicable, to remove
such encroachment, and to end such violation or impairment, including, if
necessary, the alteration of any of the Leased Improvements, and in any event
take all such actions as may be necessary in order to be able to continue the
operation of the Leased Improvements for the Primary Intended Use substantially
in the manner and to the extent the Leased Improvements were operated prior to
the assertion of such violation, impairment or encroachment.

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ARTICLE X

10.1         Construction of Alterations and
Additions to the Leased Properties. 
Lessee shall not (a) make or permit to be made any structural
alterations, improvements or additions of or to the Leased Properties or any
part thereof, or (b) materially alter the plumbing, HVAC or electrical systems
thereon or (c) make any other alterations, improvements or additions to any
Leased Property or any part thereof, the cost of which exceeds One Hundred
Thousand Dollars ($100,000.00), unless and until Lessee has (a) caused
complete plans and specifications therefor to have been prepared by a licensed
architect (or licensed plumbing contractor or electrical contractor in the case
of alterations to the plumbing, HVAC or electrical systems) and submitted to
Lessor at least thirty (30) Business Days before the planned start of
construction thereof, (b) obtained Lessor’s written approval thereof and the
approval of any Facility Mortgagee, which approval shall not be unreasonably
withheld, conditioned or delayed, and if no response has been received by
Lessee within thirty (30) Business Days after submission of the plans and
specifications for approval then such approval shall be deemed to have been
given, and (c), if required to do so by Lessor, provide Lessor with reasonable
assurance of the payment of the cost of any such alterations, improvements or
additions, in the form of a bond, letter of credit or cash deposit. If Lessor
requires a deposit, Lessor shall retain and disburse the amount deposited in
the same manner as is provided for insurance proceeds in Section 14.6.  If the deposit is reasonably determined by
Lessor at any time to be insufficient for the completion of the alteration,
improvement or addition, Lessee shall immediately increase the deposit to the
amount reasonably required by Lessor. Lessee shall be responsible for the
completion of such improvements in accordance with the plans and specifications
approved by Lessor, and shall promptly correct any failure with respect
thereto.

Alterations
and improvements not falling within the categories described in the first
sentence of the preceding paragraph may be made by Lessee without the prior
approval of Lessor, but Lessee shall give Lessor at least fifteen (15) Business
Days prior written Notice of any such alterations and improvements.

All
alterations, improvements and additions shall be constructed in a first class,
workmanlike, manner, in compliance with all Insurance Requirements and Legal
Requirements, be in keeping with the character of the Leased Properties and the
area in which the Leased Property in question is located and be designed and
constructed so that the value of the Leased Properties will not be diminished
or and that the Primary Intended Use of the Leased Properties will not be
changed.  All improvements, alterations
and additions shall immediately become a part of the Leased Properties.

Lessee
shall have no claim against Lessor at any time in respect of the cost or value
of any such improvement, alteration or addition.  There shall be no adjustment in the Rent by
reason of any such improvement, alteration or addition.  With Lessor’s consent, which shall not be
unreasonably withheld, expenditures made by Lessee pursuant to this Article X,
other than expenditures for additions (as defined in the definition of
Qualified Capital Expenditures), may be included as capital expenditures for
purposes of inclusion in the capital expenditures budget for the Facilities and
for measuring compliance with the obligations of Lessee set forth in Section
8.3 of this Lease.

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In
connection with any alteration which involves the removal, demolition or
disturbance of any asbestos-containing material, Lessee shall cause to be
prepared at its expense a full asbestos assessment applicable to such
alteration, and shall carry out such asbestos monitoring and maintenance
program as shall reasonably be required thereafter in light of the results of
such assessment.

ARTICLE XI

11.1         Liens.  Subject to the provisions of Article XII
relating to permitted contests, without the consent of Lessor or as expressly
permitted elsewhere herein, Lessee will not directly or indirectly create or
allow to remain and will promptly discharge at its expense any lien,
encumbrance, attachment, title retention agreement or claim upon the Leased
Properties, and any attachment, levy, claim or encumbrance in respect of the
Rent, except for (i) Permitted Encumbrances, (ii) restrictions, liens and other
encumbrances which are consented to in writing by Lessor and any Facility
Mortgagee, (iii) liens for those taxes of Lessor which Lessee is not required
to pay hereunder, (iv) any Facility Mortgage, (v) liens of mechanics, laborers,
materialmen, suppliers or vendors for sums either disputed, not yet due, or
contested pursuant to Section 12.1 below, and (vi) liens created by the
wrongful acts or negligence of Lessor.

ARTICLE XII

12.1         Permitted
Contests.  Lessee, on its own or on
Lessor’s behalf (or in Lessor’s name), but at Lessee’s sole cost and expense,
shall have the right to contest, by appropriate legal proceedings conducted in
good faith and with due diligence, the amount or validity of any real or
personal property assessment, Imposition, Legal Requirement or Insurance
Requirement, or any lien, attachment, levy, encumbrance, charge or claim or any
encroachment or restriction burdening the Leased Property (“Claim”), provided
(a) prior Notice of such contest is given to Lessor, (b) the Leased Properties
would not be in any danger of being sold, forfeited or attached as a result of
such contest, and there is no risk to Lessor of a loss of or interruption in
the payment of, Rent, (c) in the case of an unpaid Imposition or Claim,
collection thereof is suspended during the pendency of such contest, (d) in the
case of a contest of a Legal Requirement, compliance may legally be delayed
pending such contest. Upon request of Lessor, Lessee shall provide a bond or letter
of credit, deposit funds or assure Lessor in some other manner reasonably
satisfactory to Lessor that the amount to be paid by Lessee that is the subject
of a contested Imposition, Legal Requirement, Insurance Requirement or Claim,
together with interest and penalties, if any, thereon, and any and all costs
for which Lessee is responsible will be paid if and when required upon the
conclusion of such contest. Lessee shall defend, indemnify and save harmless
Lessor from all costs or expenses arising out of or in connection with any such
contest, including but not limited to attorneys’ fees. If at any time Lessor
reasonably determines that payment of any Imposition or Claim, or compliance
with any Legal or Insurance Requirement being contested by Lessee is necessary
in order to prevent loss of any of the Leased Properties or Rent or civil or
criminal penalties or other damage, upon such prior Notice to Lessee as is
reasonable in the circumstances Lessor may pay such amount, require Lessee to
comply with such Legal or Insurance Requirement or take such other action as it
may deem necessary to prevent such loss or damage. If reasonably necessary or
legally required, upon Lessee’s written request Lessor, at Lessee’s expense,
shall cooperate with Lessee in a permitted 

 40
 

 

contest,
provided Lessee upon demand makes arrangements satisfactory to Lessor to assure
the reimbursement of any and all Lessor’s costs incurred in cooperating with
Lessee in such contest.  Lessee shall be
entitled to any refunds of any claim, and such charges and penalties or
interest thereon, which have been paid by Lessee or paid by Lessor and for
which Lessor has been fully reimbursed.

12.2         Lessor’s
Requirement for Deposits.  Following
an Event of Default, Lessor, in its sole discretion, shall be entitled to
require Lessee to deposit with Lessor monthly, at the time of its payments of
Base Rent, a pro rata portion of the amounts required to comply with
Insurance Requirements, Impositions and Legal Requirements, and when such
obligations become due, Lessor shall pay them (to the extent of the deposit)
upon Notice from Lessee requesting such payment.  In the event that sufficient funds have not
been deposited to cover the amount of the obligations due at least thirty (30)
days in advance of the due date, Lessee shall forthwith deposit the same with
Lessor upon Notice from Lessor.  Lessor
shall  not be obligated to segregate such
deposited funds from its other funds, or to pay Lessee any interest on any
deposit so held by Lessor.  Upon an Event
of Default, any of the funds remaining on deposit may be applied under this
Lease in any manner and on such priority as may be determined by Lessor.

ARTICLE XIII

13.1         General
Insurance Requirements.  Lessee shall
keep the Leased Properties, and all property located in or on the Leased
Properties, including Lessor’s Personal Property and Lessee’s Personal
Property, insured with insurance meeting the following requirements: (a) all
insurance shall be written by companies authorized to do insurance business in
the applicable States and having a rating classification of not less than A-
and a financial size category of “Class VII” or larger, according to the then
most recent issue of Best’s Key Rating Guide; (b) all policies must name Lessor
as an additional insured, and name as an additional insured any Facility
Mortgagee by way of a standard form of mortgagee’s loss payable endorsement in
use in the applicable States and in accordance with any such other requirements
as may be established by such Facility Mortgagee; (c) casualty losses must
be payable to Lessor or Lessee as provided in Article XIV, and loss adjustments
shall require the written consent of Lessor, any Facility Mortgagee and,
provided no Event of Default has occurred and is continuing at the time, Lessee,
which consent shall not be unreasonably withheld by either Lessor or Lessee;
(d) each insurer must agree that it will give Lessor and any Facility Mortgagee
at least thirty (30) days’ written notice before its policy shall be altered,
allowed to expire or canceled; (e) the amount of any deductible or retention
must be approved by Lessor prior to the issuance of any policy, which approval
will not be unreasonably withheld, conditioned or delayed; and (f) the form of
all policies shall be approved by Lessor and any Existing Facility Mortgagee,
whose approval shall not unreasonably be withheld, conditioned or delayed,
provided that such policies conform to the requirements of this article
XIII.  Notwithstanding the foregoing,
Lessee may obtain so-called “umbrella” policies, comprehensive liability
policies and professional liability policies of insurance from non-admitted
surplus line carriers acceptable to Lessor.

13.2         Risks
to be Insured.  The policies covering
the Leased Properties and Lessee’s Personal Property shall insure against the
following risks:

13.2.1      Loss
or damage by fire, vandalism and malicious mischief, earthquake, extended
coverage perils commonly known as “Special Risk,” and all physical loss perils 

 41
 

 

normally
included in such Special Risk insurance, including but not limited to sprinkler
leakage, in an amount not less than one hundred percent (100%) of Replacement
Cost (provided that earthquake coverage may have a sublimit coverage of
$5,000,000.00);

13.2.2      Loss
or damage by explosion of steam boilers, pressure vessels or similar apparatus
in such amounts as may be required by Lessor from time to time;

13.2.3      Business
interruption insurance or a blanket earnings and expense coverage endorsement
covering risk of loss during reconstruction necessitated by the occurrence of
any of the hazards described in Sections 13.2.1 or 13.2.2 (but in no event for
a period less than twelve (12) months) in an amount sufficient to prevent
Lessor and Lessee from becoming a co-insurer;

13.2.4      Claims
for personal injury or property damage under a policy of commercial general
public liability insurance with a combined single limit per occurrence in
respect of bodily injury and death and property damage of One Million Dollars
($1,000,000.00), and an aggregate limitation of Three Million Dollars
($3,000,000.00), with a minimum One Million Dollar ($1,000,000.00) excess
policy, which insurance shall insure Lessee’s contractual liability to Lessor
under the indemnity provisions of Article XXI of this Lease, and if written on
a “claims-made” basis, Lessee shall also provide continuous liability
coverage for claims arising during the Term either by obtaining an endorsement
providing for an extended reporting period reasonably acceptable to Lessor in
the event such policy is canceled or not renewed for any reason whatsoever, or
by obtaining “tail” insurance coverage providing coverage for a period of at
least three (3) years beyond the expiration of the Term;

13.2.5      Claims
arising out of malpractice in an amount not less than Two Million Dollars
($2,000,000.00) for each person and for each occurrence and, if written on a “claims-made”
basis, Lessee shall also provide continuous liability coverage for claims
arising during the Term either by obtaining an endorsement providing for an
extended reporting period reasonably acceptable to Lessor in the event such
policy is canceled or not renewed for any reason whatsoever, or by obtaining “tail”
insurance coverage providing coverage for a period of at least three (3) years
beyond the expiration of the Term;

13.2.6      Flood
(with respect to any portions of the Leased Properties located in whole or in
part within a designated flood plain area) and such other hazards and in such
amounts as may be customary for comparable properties in the area up to the
maximum limit that can be obtained under the Federal Flood Insurance Program;

13.2.7      During
such time as Lessee is constructing any improvements, (i) worker’s compensation
insurance and employers’ liability insurance covering all persons employed in
connection with the improvements in statutory limits, (ii) builder’s risk
insurance, completed value form, covering all physical loss, in an amount
satisfactory to Lessor, and (iii) such other insurance, in such amounts, as
Lessor deems necessary to protect Lessor’s interest in the Leased Properties
from any act or omission of Lessee’s contractors or subcontractors, and
certificates of insurance evidencing such coverage, in form satisfactory to
Lessor, shall be presented to Lessor prior to the commencement of construction
of such improvements;

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13.2.8      Primary
automobile liability insurance with limits of One Million Dollars
($1,000,000.00) per occurrence each for owned and non-owned and hired
vehicles.

13.3         Payment
of Premiums; Copies of Policies; Certificates. Lessee shall pay when due
all of the premiums for the insurance required by this Lease, and shall deliver
to Lessor and to any Facility Mortgagee requesting such evidence, certificates
of insurance in form satisfactory to Lessor and such Facility Mortgagee.  Satisfactory evidence of insurance required
by this Lease or certificates thereof shall be delivered to Lessor prior to
their effective date (and, with respect to any renewal policy, Lessee will use
commercially reasonable efforts to provide the same within twenty (20) days but
in all events not less than five (5) Business Days prior to the expiration of
the existing policy) with copies of such policies to be provided as available,
and in the event of the failure of Lessee either to carry the required
insurance or pay the premiums therefor, or to deliver copies of policies or
certificates to Lessor as required, Lessor shall be entitled, but shall have no
obligation, to obtain such insurance and pay the premiums therefor when due,
which premiums shall be repayable to Lessor upon written demand therefor as
Additional Charges.

13.4   Premium
Deposits.     If any provision of a
Facility Mortgage requires deposits of premiums for insurance to be made with
the Facility Mortgagee, Lessee shall pay to Lessor monthly the amounts required
and Lessor shall transfer such amounts to the Facility Mortgagee, unless,
pursuant to written direction by Lessor, Lessee makes such deposits directly
with the Facility Mortgagee.

13.5   Umbrella Policies. If Lessee chooses
to carry umbrella liability coverage to obtain the limits of liability required
under this Lease, the umbrella policies must provide coverage in the same
manner as the primary commercial general liability policy and must contain no
exclusions in addition to, or limitations materially different than, those of
the primary policy.

13.6         Additional
Insurance.  In addition to the
insurance described above, Lessee shall maintain such insurance as may be
required from time to time by any Facility Mortgagee, and shall at all times
comply with all Legal Requirements with respect to worker’s compensation
insurance coverage.

13.7         No
Liability; Waiver of Subrogation. 
Lessor shall have no liability to Lessee, and, provided Lessee provides
the insurance required of it by this Lease, Lessee shall have no liability to
Lessor, regardless of the cause, for any loss or expense resulting from or in
connection with damage to or the destruction or other loss of any Leased
Property or Lessee’s Personal Property, and neither party will have any right
or claim against the other for any such loss or expense by way of subrogation.
Each insurance policy carried by either party covering any of the Leased
Properties and Lessee’s Personal Property, including without limitation,
contents, fire and casualty insurance, shall contain an express waiver of any
right of subrogation on the part of the insurer against the other party.  Lessee shall pay any additional costs or
charges for obtaining such waiver.

13.8         Increase
in Limits.   From time to time, but
not more often than once every two (2) years, in the event that Lessor shall
reasonably determine that the limits of the commercial general liability
insurance then carried are insufficient, Lessor shall give Lessee Notice of
acceptable increased limits for such insurance to be carried; and Lessee shall
then obtain 

 43
 

 

and
maintain such insurance with such increased limits unless and until further
increase as permitted under the provisions of this Section.  Lessor’s determination of increased limits shall
be accompanied by a description of the basis for such determination.

13.9         Blanket
Policy.  Any insurance required by
this Lease may be provided by so-called blanket policies of insurance
carried by Lessee, provided, however, that the coverage afforded Lessor thereby
may not thereby be less than or materially different from that which would be
provided by a separate policies meeting the requirements of this Lease, and
provided further that such policies meet the requirements of all Facility
Mortgages.

13.10       No Separate Insurance.

13.10.1            Lessee
shall not on its own initiative or pursuant to the request or requirement of
any third party, take out separate insurance concurrent in form or contributing
in the event of loss with that required by this Lease, to be furnished by, or
which may reasonably be required to be furnished by, Lessee, or increase the
amount of any then existing insurance by securing an additional policy or
additional policies, unless all parties having an insurable interest in the
subject matter of the insurance, including in all cases Lessor and all Facility
Mortgagees, are named therein as additional insureds, and losses are payable
thereunder in the same manner as losses are payable under this Lease.

13.10.2            Nothing
herein shall prohibit Lessee, upon Notice to Lessor, from (i) securing
insurance required to be carried hereby with higher limits of liability than
required in this Lease, or (ii) securing insurance against risks not required
to be insured pursuant to this Lease, and as to such insurance, Lessor and any
Facility Mortgagee need not be included therein as additional insureds, nor
must losses thereunder be payable in the same manner as losses are payable
under this Lease, except to the extent required to avoid a default under a Facility
Mortgage or any other encumbrance.

ARTICLE XIV

14.1         Insurance Proceeds.  Net Proceeds shall be paid to Lessor and
held, disbursed or retained by Lessor as provided herein.

14.1.1   Proceeds of Special Risk Insurance.
If the Net Proceeds are less than the Approval Threshold, and no Event of
Default has occurred and is continuing, Lessor shall pay the Net Proceeds to
Lessee promptly after Lessor receives the Net Proceeds and Lessee shall apply
the Net Proceeds solely to the completion of the restoration of the damaged or
destroyed Leased Property.  If the Net
Proceeds equal or exceed the Approval Threshold, and no Event of Default has
occurred and is continuing, the Net Proceeds shall be made available for restoration
or repair as provided in Section 14.6. Within fifteen (15) days of the receipt
of the Net Proceeds of Special Risk Insurance, Lessor and Lessee shall agree as
to the portion thereof, if any, attributable to the Lessee’s Personal Property
that Lessee is not required and does not elect to restore or replace, and if
they cannot agree they shall submit the matter to arbitration pursuant to
Article XXXV hereof, and the portion of the proceeds of such Special Risk
Insurance agreed or 

 44
 

 

determined by arbitration to be attributable to the
Lessee’s Personal Property that Lessee is not required and does not elect to
restore or replace shall be paid to Lessee.

14.2   Restoration
in the Event of Damage or Destruction.           If
all or any portion of a Leased Property is damaged by fire or other casualty,
Lessee shall (a) give Lessor Notice of such damage or destruction within five
(5) Business Days of the occurrence thereof, (b) within sixty (60) days of the
occurrence commence the restoration of such Leased Property and (c) thereafter
diligently proceed to complete such restoration to substantially the same (or
better) condition as such Leased Property was in immediately prior to the
damage or destruction as quickly as is reasonably possible, but subject to
Force Majeure, in any event within two hundred forty (240) days of the
occurrence. Regardless of the anticipated cost thereof, if the restoration of a
Leased Property requires any modification of structural elements, prior to
commencing such modification Lessee shall obtain Lessor’s written approval of
the plans and specifications therefor. 
In performing such restoration or repair, and as a condition to Lessee’s
obligation to restore or repair the Leased Property, the Net Proceeds payable
with respect to such damage or destruction shall be paid or disbursed to Lessee
as provided in Section 14.1 or Section 14.7 hereof.  If there remains any surplus of Net Proceeds
after completion of the repair or restoration of the Leased Property, such
surplus shall belong and be paid to Lessee.

14.3         Restoration
of Lessee’s Property. 
Notwithstanding the foregoing terms of Section 14.1, all insurance
proceeds payable by reason of or damage to any of Lessee’s Personal Property
shall be paid to Lessee and Lessee shall hold such insurance proceeds in trust
to pay the cost of repairing or replacing damaged Lessee’s Personal
Property.   If Lessee is required to
restore a Leased Property, Lessee shall also concurrently restore any of Lessee’s
Personal Property that is integral to the Primary Intended Use of such Leased
Property at the time of the damage or destruction.

14.4         No
Abatement of Rent.  Absent
termination of this Lease as provided herein, there shall be no abatement of
Rent by reason of any damage to or the partial or total destruction of any
Leased Property.

14.5         Waiver.  Except as provided elsewhere in this Lease,
Lessee hereby waives any statutory or common law rights of termination which
may arise by reason of any damage to or destruction of a Leased Property.

14.6   Extension of Time Periods.    In the event that Lessee is unable to
complete any action required by this Article XIV in the time period provided,
and Lessee establishes to the reasonable satisfaction of Lessor that Lessee has
been acting in good faith and diligently, then Lessor shall grant to Lessee a
reasonable extension of time in which to complete the repair or reconstruction
of any damaged Facility, prior to the time that Lessee would otherwise be
required to repurchase such damaged Facility.

14.7         Disbursement
of Insurance Proceeds Equal to or Greater Than The Approval Threshold.  If Lessee restores or repairs a Leased
Property pursuant to this Article XIV, and if the Net Proceeds equal or exceed
the Approval Threshold, the restoration or repair and disbursement of funds to
Lessee shall be in accordance with the following procedures:

 45
 

 

(i)            The restoration or repair work shall
be done pursuant to plans and specifications approved by Lessor and a certified
construction cost statement, to be obtained by Lessee from a contractor
reasonably acceptable to Lessor, showing the total cost of the restoration or
repair; to the extent the cost exceeds the Net Proceeds, Lessee shall deposit
with Lessor the amount of the excess cost, and Lessor shall disburse the funds
so deposited in payment of the costs of restoration or repair before any
disbursement of Net Proceeds.

(ii)           Construction Funds shall be made
available to Lessee upon request, no more frequently than monthly, as the
restoration and repair work progresses, pursuant to certificates of an
architect selected by Lessee that, in the judgment of Lessor, reasonably
exercised, is highly qualified in the design and construction of the type of
Facility being repaired and is otherwise reasonably acceptable to Lessor, which
certificates must be in form and substance reasonably acceptable to
Lessor.  Payment of Construction Funds
shall be subject to a ten percent (10%) holdback until the architect certifies
that the work is fifty percent (50%) complete, after which, so long as there is
no Event of Default under this Lease and so long as the architect certifies
that work is proceeding in accordance with the schedule and budget, there shall
be no further retainage.

(iii)          After the first disbursement to
Lessee, sworn statements and lien waivers in an amount at least equal to the amount
of Construction Funds previously paid to Lessee shall be delivered to Lessor
from all contractors, subcontractors and material suppliers covering all labor
and materials furnished through the date of the previous disbursement.

(iv)          Lessee shall deliver to Lessor such
other evidence as Lessor may reasonably request from time to time during the
course of the restoration and repair, as to the progress of the work,
compliance with the approved plans and specifications, the cost of restoration
and repair and the total amount needed to complete the restoration and repair,
and showing that there are no liens against such Leased Property arising in
connection with the restoration and repair and that the cost of the restoration
and repair at least equals the total amount of Construction Funds then
disbursed to Lessee hereunder.

(v)           If the Construction Funds are at any
time determined by Lessor to be inadequate for payment in full of all labor and
materials for the restoration and repair, Lessee shall immediately pay the
amount of the deficiency to Lessor to be held and disbursed as Construction
Funds prior to the disbursement of any other Construction Funds then held by
Lessor.

(vi)          The Construction Funds may be
disbursed by Lessor to Lessee or to the persons entitled to receive payment
thereof from Lessee, and such disbursement in either case may be made directly
or through a third party escrow agent, such as, but not limited to, a title
insurance company, or its agent, all as Lessor may determine in its sole discretion.  Provided Lessee is not in default hereunder,
any excess Construction Funds shall be paid to Lessee upon completion of the
restoration or repair.

 46

 

(vii)         If Lessee at any time fails to promptly
and fully perform the conditions and covenants set out in subparagraphs (i)
through (vi) above, and the failure is not corrected within ten (10) days of
written Notice thereof, or if during the restoration or repair an Event of
Default occurs hereunder, Lessor may, at its option, immediately cease making
any further payments to Lessee for the restoration and repair.

(viii)        Lessor may reimburse itself out of the
Construction Funds for its reasonable expenses incurred in administering the
Construction Funds and inspecting the restoration and repair work, including
without limitation attorneys’ and other professional fees and escrow fees and
expenses.

(ix)           If damage or destruction shall occur
either (a) during the final Lease Year of the Initial Term and Lessee has not
exercised its option to extend the Term of this Lease pursuant to Section 1.3
above or (b) during the final Lease Year of the Renewal Term, then Lessor, at
Lessor’s sole option, may elect to terminate the Lease as to the affected
Facility (in which case Lessee shall surrender possession of the affected
Facility and Lessee shall transfer to Lessor all of Lessee’s interest in the
Facility, including, without limitation, Lessee’s interest in the licenses pursuant
to which the Facility is then operated) and receive the Net Proceeds in lieu of
Lessee restoring or repairing the damage or destruction.  The election to terminate the Lease as to the
affected Facility and receive the Net Proceeds pursuant to this Section
14.7(ix) must be exercised by Lessor by Notice to Lessee on or prior to the
tenth (10th)
Business Day following Lessor’s receipt of Notice of such event of damage or
destruction.  If Lessor elects to
terminate the Lease as to the affected Facility and receive the Net Proceeds in
lieu of Lessee restoring or repairing the damage or destruction, then, as of
the Proceeds Date, the annual Base Rent due under this Lease during the
remainder of the Term shall be reduced by an amount equal to the product of the
annual Base Rent in effect from time to time and the Casualty/Condemnation
Reduction Percentage.

14.8         Net
Proceeds Paid to Facility Mortgagee. 
Notwithstanding anything herein to the contrary, if any Facility
Mortgagee is entitled to any Net Proceeds, or any portion thereof, under the
terms of any Facility Mortgage, the Net Proceeds shall be applied, held and/or
disbursed in accordance with the terms of the Facility Mortgage. Lessor shall
make commercially reasonable efforts to cause the Net Proceeds to be applied to
the restoration of the Leased Property. 
If the Facility Mortgagee elects to apply the insurance proceeds to the
indebtedness secured by the Facility Mortgage, Lessee shall either (i) restore
the Facility to substantially the same (or better) condition as existed
immediately before the damage or destruction, or (ii) terminate this Lease as
to such Leased Property upon Notice to Lessor, such termination to be effective
as of the first day of the calendar month following the later of (a) the date
Lessee learns of the action of the Facility Mortgagee or (b) fifteen (15) days
after the date Lessor learns of the action of the Facility Mortgagee,  unless within fifteen (15) days of the notice
from the Facility Mortgagee the Lessor agrees to make available to Lessee for
restoration to or repair of the Leased Property funds equal to the amount
applied by the Facility Mortgagee. 
Unless the damage or destruction is such as to entitle Lessor or Lessee
to otherwise terminate this 

 47
 

 

Lease
as to such Facility under this Article XIV and Lessor or Lessee, as the case
may be, shall fail to elect to terminate this Lease as to such Facility, in the
time and in the manner provided, Lessor shall disburse such funds to Lessee as
provided in Section 14.7 of this Master Lease and Lessee shall restore the
Leased Property (as nearly as possible under the circumstances) to a complete
architectural unit of the same general character and condition as the Leased
Property existing immediately prior to such damage or destruction.

In
the event this Master Lease is so terminated as to such Facility (in which case
Lessee shall surrender possession of the affected Facility and Lessee shall
transfer to Lessor all of Lessee’s interest in the Facility, including, without
limitation, Lessee’s interest in the licenses pursuant to which the Facility is
then operated), as of the Proceeds Date, the annual Base Rent due under this
Lease during the remainder of the Term shall be reduced by an amount equal to
the product of the annual Base Rent in effect from time to time and the
Casualty/Condemnation Reduction Percentage.

ARTICLE XV

15.1  Total Taking or Other Taking with Leased
Property Rendered Unsuitable for Its Primary Intended Use. If title to the
fee of the whole of a Leased Property is Taken, this Lease shall cease and
terminate as to the Leased Property Taken as of the Date of Taking by the
Condemnor and Rent shall be apportioned as of the termination date. If title to
the fee of less than the whole of a Leased Property is Taken, but such Leased
Property is thereby rendered Unsuitable for Its Primary Intended Use, Lessee
and Lessor shall each have the option by written Notice to the other, at any
time prior to the taking of possession by, or the date of vesting of title in,
the Condemnor, whichever first occurs, to terminate this Lease with respect to
such Leased Property as of the date so determined, in which event this Lease
shall thereupon so cease and terminate as of the earlier of the date specified
in such Notice or the date on which possession is taken by the Condemnor.  If this Lease is so terminated as to a Leased
Property (in which case Lessee shall surrender possession of the affected
Facility and Lessee shall transfer to Lessor all of Lessee’s interest in the
Facility, including, without limitation, Lessee’s interest in the licenses
pursuant to which the Facility is then operated), as of the Proceeds Date, the
annual Base Rent due under this Lease during the remainder of the Term shall be
reduced by an amount equal to the product of the annual Base Rent in effect
from time to time and the Casualty/Condemnation Reduction Percentage.

15.2         Allocation
of Award.  The total Award made with
respect to all or any portion of a Leased Property or for loss of Rent, or for
loss of business, shall be solely the property of and payable to Lessor.  Nothing contained in this lease will be
deemed to create any additional interest in Lessee, or entitle Lessee to any
payment based on the value of the unexpired term or so-called “bonus
value” to Lessee of this Lease.  Any
Award made for the taking of Lessee’s Personal Property, or for removal and
relocation expenses of Lessee in any such proceedings shall be payable to
Lessee. In any proceedings with respect to an Award, Lessor and Lessee shall
each seek its own Award in conformity herewith, at its own expense.  Notwithstanding the foregoing, Lessee may
pursue a claim for loss of its business, provided that under the laws of the
State, such claim will not diminish the Award to Lessor.

 48
 

 

15.3         Partial
Taking.  In the event of a Partial
Taking, Lessee, at its own cost and expense, shall within sixty (60) days of
the taking of possession by, or the date of vesting of title in, the Condemnor,
whichever first occurs, commence the restoration of the affected Leased
Property to a complete architectural unit of the same general character and
condition (as nearly as may be possible under the circumstances) as existed
immediately prior to the Partial Taking, and complete such restoration with all
reasonable dispatch, but in any event, subject to Force Majeure, within two
hundred forty (240) days of the date on which such Notice is given.  Lessor shall contribute to the cost of
restoration such portion of the Award as is made therefor, together with
severance and other damages awarded for Leased Improvements Taken; provided,
however, that the amount of such contribution shall not exceed such cost.  As long as no Event of Default has occurred
and is continuing, if such portion of the Award is in an amount less than the
Approval Threshold, Lessor shall pay the same to Lessee upon commencement of
such restoration.  As long as no Event of
Default has occurred and is continuing, if such portion of the Award is in an
amount equal to or greater than the Approval Threshold, Lessor shall make such
portion of the Award available to Lessee in the manner provided in Section 14.6
with respect to Net Proceeds in excess of the Approval Threshold.  Notwithstanding anything to the contrary
elsewhere herein, if the Fair Market Rent of the affected Leased Property is
reduced by reason of the Partial Taking, from and after the date on which
possession is taken by the Condemnor the annualized Base Rent shall be reduced
by an amount determined by dividing the portion of the Award made to Lessor
expressly for such reduction in Fair Market Rent by the Capitalization Rate.

15.4         Temporary
Taking.  If there is a Taking of
possession or the use of all or part of a Leased Property, but the fee of such
Leased Property is not Taken in whole or in part, until such Taking of
possession or use continues for more than six (6) months, all the provisions of
this Lease shall remain in full force and effect and the entire amount of any
Award made for such Taking shall be paid to Lessee provided there is then no
Event of Default. Upon the termination of any such period of temporary use or
occupancy, Lessee at its sole cost and expense shall restore the affected
Leased Property, as nearly as may be reasonably possible, to the condition
existing immediately prior to such Taking. 
If any temporary Taking continues for longer than six (6) months, and
fifty percent (50%) or more of the patient capacity of the affected Facility is
thereby rendered Unsuitable for Its Primary Use, such Taking shall be
considered a Total Taking governed by Section 15.1 and this Lease shall cease
and terminate as to the affected Leased Property only as of the last day of the
sixth (6th) month, but if less than fifty percent (50%) of the patient capacity
of such Facility is thereby rendered Unsuitable for Its Primary Use, Lessee and
Lessor shall each have the option by at least sixty (60) day’s prior written
Notice to the other, at any time prior to the end of the temporary taking, to
terminate this Lease as to the affected Leased Property of the date set forth
in such Notice, and Lessee shall be entitled to any Award made for the period
of such temporary Taking prior to the date of termination of the Lease. Rent
shall not abate during the period of any temporary Taking.

15.5           Awards
Paid to Facility Mortgagee. 
Notwithstanding anything herein to the contrary, if any Facility
Mortgagee is entitled to any Award or any portion thereof, under the terms of
any Facility Mortgage such Award shall be applied, held and/or disbursed in
accordance with the terms of the Facility Mortgage.  If the Facility Mortgagee elects to apply the
Award to 

 49
 

 

the
indebtedness secured by the Facility Mortgage: 
(i) if the Award represents an Award for Partial Taking as described in
Section 15.3 above, Lessee shall restore the affected Facility (as nearly as
possible under the circumstances) to a complete architectural unit of the same
general character and condition as that of the Facility existing immediately
prior to such Taking; or (ii) if the Award represents an Award for a Total
Taking as described in Section 15.1 above, Lessee shall transfer to Lessor all
of Lessee’s interest in the Facility, including, without limitation, Lessee’s
interest in the licenses pursuant to which the Facility is then operated.  In any such restoration or purchase, Lessee
shall receive full credit for any portion of any Award retained by Lessor and
the Facility Mortgagee, and as of the Proceeds Date, the Base Rent shall be
reduced by a percentage equal to the Casualty/Condemnation Reduction Percentage.

15.6         Extension
of Time Periods.   In the event that
Lessee is unable to complete any action required by this Article XV in the time
period provided, and Lessee establishes to the reasonable satisfaction of
Lessor that Lessee has been acting in good faith and diligently, then Lessor
shall grant to Lessee a reasonable extension of time in which to complete the
repair or reconstruction of any Facility subject to Taking, prior to the time
that Lessee would otherwise be required to repurchase such Facility subject to
a Taking.

ARTICLE XVI

16.1         Lessor’s Rights Upon an Event of
Default. If an Event of Default shall occur Lessor may terminate this Lease
by giving Lessee a Notice of Termination in accordance with the laws of the
States in which each Facility is located, and in such event, the Term shall end
and all rights of Lessee under this Lease shall cease on the Termination Date
specified in the Notice of Termination. 
In addition to Lessor’s right to terminate this Lease, Lessor shall have
all other rights set forth in this Lease and all remedies available at law and
in equity.

Lessee
shall, to the extent permitted by law, pay as Additional Charges all costs and
expenses incurred by or on behalf of Lessor, including, without limitation,
reasonable attorneys’ fees and expenses (whether or not litigation is
commenced, and if litigation is commenced, including fees and expenses incurred
in appeals and post-judgment proceedings) as a result of any default of Lessee
hereunder.  Lessor shall, to the extent
permitted by law, pay Lessee all costs and expenses incurred by or on behalf of
Lessee, including, without limitation, reasonable attorneys’ fees and expenses
(whether or not litigation is commenced, and if litigation is commenced,
including fees and expenses incurred in appeals and post-judgment proceedings)
as a result of any default of Lessor hereunder.

No
Event of Default (other than a failure to make payment of money) shall be
deemed to exist if and for so long as Lessee is unable to prevent such Event of
Default because of Force Majeure, provided that upon the cessation of such
Force Majeure, Lessee shall forthwith proceed to remedy the action or condition
giving rise to such Event of Default within the applicable cure period as
extended by such Force Majeure.

16.2         Certain
Remedies.  If an Event of Default
shall occur, whether or not this Lease has been terminated pursuant to Section
16.1, if required to do so by Lessor Lessee shall 

 50
 

 

immediately
surrender the Leased Properties to Lessor in the condition required by Section
9.1.5 and quit the same, and Lessor may enter upon and repossess the Leased
Properties by reasonable force, summary proceedings, ejectment or otherwise,
and may remove Lessee and all other persons and any and all personal properties
from the Leased Properties, subject to rights of any residents or patients and
to any Legal Requirements.  In addition
to all other remedies set forth or referred to in this Article XVI, Lessor
shall have the right to suspend any Management Agreement as to one or more or
all Facilities and to retain a manager of the affected Facility or all
Facilities at the expense of Lessee, such manager to serve for such term and at
such compensation as Lessor reasonably determines is necessary under the
circumstances.

16.3         Damages.  Neither (i) the termination of this Lease
pursuant to Section 16.1, (ii) the repossession of the Leased Properties, (iii)
the failure of Lessor to relet the Leased Properties, (iv) the reletting of all
or any portion thereof, nor (v) the failure of Lessor to collect or
receive any rentals due upon such any reletting, shall relieve Lessee of its
liability and obligations hereunder, all of which shall survive any such
termination, repossession or reletting.  In
the event this Lease is terminated by Lessor, Lessee shall forthwith pay to
Lessor all Rent due and payable with respect to the Leased Properties to and
including the Termination Date, including without limitation all interest and
late charges payable under Section 3.3 hereof with respect to any late payment
of such Rent.  Lessee shall also pay to
Lessor, as liquidated damages, at Lessor’s option, either:

(A)                              The
sum of:

(i)            Lessor’s Interim Rent Loss, minus
Net Reletting Proceeds for such period, and minus the portion of Lessor’s
Interim Rent Loss, if any, that Lessee prove could reasonably have been
mitigated by Lessor, plus

(ii)           the Present Value on the Judgment
Date of Lessor’s Future Rent Loss, assuming the Cost of Living Index were to
increase four (4) percentage points per Lease Year from the Judgment Date
through the Expiration Date, minus the Present Value on the Termination Date of
the portion of  Lessor’s Future Rent Loss
that Lessee proves could reasonably be mitigated by Lessor;

or

(B)           Each month between the Termination
Date and the Expiration Date, Lessor’s Monthly Rent Loss, minus the Net
Reletting Proceeds for such month, and minus the portion, if any, of Lessor’s
Monthly Rent Loss that Lessee proves could reasonably have been avoided. Any
suit brought to recover liquidated damages payable under this subsection “(B)”
shall not prejudice Lessor’s right to collect liquidated damages for subsequent
months in a similar proceeding.

16.4         Intentionally Omitted

16.5         Waiver.  If this Lease is terminated pursuant to
Section 16.1, Lessee waives, to the extent permitted by applicable law, (i) any
right of reentry, repossession or redesignation, (ii) any right to a trial by
jury in the event of summary proceedings to enforce the remedies set forth in
this Article XVI, and (iii) the benefit of any laws now or hereafter in force
exempting property 

 51
 

 

from
liability for rent or for debt. 
Acceptance of Rent at any time does not prejudice or remove any right of
Lessor as to any right or remedy.  No
course of conduct shall be held to bar Lessor from literal enforcement of the
terms of this Lease.

16.6         Application
of Funds.  Any payments received by
Lessor under any of the provisions of this Lease during the existence or
continuance of any Event of Default shall be applied to Lessee’s obligations in
the order which Lessor may determine or as may be prescribed by law.

16.7         Bankruptcy.

(a)                                  Neither
Lessee’s interest in this Lease, nor any estate hereby created in Lessee’s
interest nor any interest herein or therein, shall pass to any trustee or
receiver or assignee for the benefit of creditors or otherwise by operation of
law, except as may specifically be provided pursuant to the Bankruptcy Code (11
USC ‘101 et. seq.), as the same may be amended from time to time.

(b)                                 Rights
and Obligations Under the Bankruptcy Code.

(1)                                  Upon
filing of a petition by or against Lessee under the Bankruptcy Code, Lessee, as
debtor and as debtor-in-possession, and any trustee who may be
appointed with respect to the assets of or estate in bankruptcy of Lessee,
agree to pay monthly in advance on the fifteenth (15th) day of each month, as reasonable
compensation for the use and occupancy of the Leased Premises, an amount equal
to all Rent due pursuant to this Lease.

(2)                                  Included
within and in addition to any other conditions or obligations imposed upon
Lessee or its successor in the event of the assumption and/or assignment of the
Lease are the following: (i) the cure of any monetary defaults and
reimbursement of pecuniary loss within not more than thirty (30) days of
assumption and/or assignment; (ii) the deposit of an additional amount equal to
not less than three (3) months’ Base Rent, which amount is agreed to be a
necessary and appropriate deposit to secure the future performance under the
Lease of Lessee or its assignee; (iii) the continued use of the Leased Premises
for the Primary Intended Use; and (iv) the prior written consent of any
Facility Mortgagee.

ARTICLE XVII

17.1         Lessor’s
Right to Cure Lessee’s Default.  If
Lessee fails to make any payment or perform any act required to be made or
performed under this Lease, and fails to cure the same within any grace or cure
period applicable thereto, upon such Notice as may be expressly required herein
(or, if Lessor reasonably determines that the giving of such Notice would risk
loss to the Leased Properties or cause damage to Lessor, upon such Notice as is
practical under the circumstances), and without waiving or releasing any
obligation of Lessee, Lessor may make 

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such
payment or perform such act for the account and at the expense of Lessee, and
may, to the extent permitted by law, enter upon the Leased Properties for such
purpose and take all such action thereon as, in Lessor’s sole opinion, may be
necessary or appropriate.  No such entry
shall be deemed an eviction of Lessee.  All
amounts so paid by Lessor and all costs and expenses (including, without
limitation, reasonable attorneys’ fees and expenses) so incurred, together with
the late charge and interest provided for in Section 3.3 thereon, shall be paid
by Lessee to Lessor on demand.  The
obligations of Lessee and rights of Lessor contained in this Article shall
survive the expiration or earlier termination of this Lease.

ARTICLE XVIII

18.1         Holding
Over.  If Lessee remains in
possession of all or any of the Leased Properties after the expiration of the
Term or earlier termination of this Lease, such possession shall be as a month-to-month
tenant, and throughout the period of such possession Lessee shall pay as Rent
for each month one and one-half (1 2) times the sum of:(i) one-twelfth
(1/12th) of the Base Rent payable during the Lease Year in which such
expiration or termination occurs, plus (ii) all Additional Charges accruing
during the month, plus (iii) any and all other sums payable by Lessee pursuant
to this Lease.  During such period of
month-to-month tenancy, Lessee shall be obligated to perform and
observe all of the terms, covenants and conditions of this Lease, but shall
have no rights hereunder other than the right, to the extent given by
applicable law to month-to-month tenancies, to continue its
occupancy and use of the Leased Properties until the month-to-month
tenancy is terminated.  Nothing contained
herein shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination of this
Lease.

18.2         Indemnity.  If Lessee fails to surrender the Leased
Properties in a timely manner and in accordance with the provisions of Section
9.1.5 upon the expiration or termination of this Lease, in addition to any other
liabilities to Lessor accruing therefrom, Lessee shall defend, indemnify and
hold Lessor, its principals, officers, directors, agents and employees harmless
from loss or liability resulting from such failure, including, without limiting
the generality of the foregoing, loss of rental with respect to any new lease
in which the rental payable thereunder exceeds the Rent paid by Lessee pursuant
to this Lease during Lessee’s hold-over and any claims by any proposed new
tenant founded on such failure.  The provisions
of this Section 18.2 shall survive the expiration or termination of this Lease.

ARTICLE XIX

19.1         Subordination.  Upon written request of Lessor, any Facility
Mortgagee, or the beneficiary of any deed of trust of Lessor, Lessee will enter
into a written agreement subordinating its rights pursuant to this Lease (i) to
the lien of any mortgage, deed of trust or the interest of any lease in which
Lessor is the lessee and to all modifications, extensions, substitutions
thereof (or, at Lessor’s option, agree to the subordination to this Lease of
the lien of said mortgage, deed of trust or the interest of any lease in which
Lessor is the lessee), and (ii) to all advances made or hereafter to be made
thereunder.  In connection with any such
request, 

 53
 

 

Lessor shall provide Lessee with a “Non-Disturbance
Agreement” reasonably acceptable to such mortgagee, beneficiary or lessor
providing that if such mortgagee, beneficiary or lessor acquires the Leased
Properties by way of foreclosure or deed in lieu of foreclosure, such
mortgagee, beneficiary or lessor will not disturb Lessee’s possession under
this Lease and will recognize Lessee’s rights hereunder if and for so long as
no Event of Default has occurred and is continuing.  Lessee agrees to consent to amend this Lease
as reasonably required by any Facility Mortgagee, and shall be deemed to have
unreasonably withheld or delayed its consent if the required changes do not
materially (i) alter the economic terms of this Lease, (ii) diminish the rights
of Lessee, or (iii) increase the obligations of Lessee, provided that Lessee
shall also have received the non-disturbance agreement provided for in
this Article.

19.2         Attornment.  If any proceedings are brought for
foreclosure, or if the power of sale is exercised under any mortgage or deed of
trust made by Lessor encumbering the Leased Properties, or if a lease in which
Lessor is the lessee is terminated, Lessee shall attorn to the purchaser or
lessor under such lease upon any foreclosure or deed in lieu thereof, sale or
lease termination and recognize the purchaser or lessor as Lessor under this
Lease, provided the purchaser or lessor acquires and accepts the Leased
Properties subject to this Lease.

19.3         Lessee’s
Certificate.  Lessee shall, upon not
less than ten (10) days prior Notice from Lessor, execute, acknowledge and
deliver to Lessor a Lessee’s Certificate containing then-current facts.  It is intended that any Lessee’s Certificate
delivered pursuant hereto may be relied upon by Lessor, any prospective tenant
or purchaser of the Leased Properties, any mortgagee or prospective mortgagee,
and by any other party who may reasonably rely on such statement.  Lessee’s failure to deliver the Lessee’s
Certificate within such time shall constitute an Event of Default.  In addition, Lessee hereby authorizes Lessor
to execute and deliver a certificate to the effect (if true) that Lessee
represents and warrants that (i) this Lease is in full force and effect without
modification, and (ii) Lessor is not in breach or default of any of its
obligations under this Lease.

ARTICLE XX

20.1         Risk
of Loss.  During the Term, the risk
of loss or of decrease in the enjoyment and beneficial use of the Leased
Properties in consequence of the damage or destruction thereof by fire, the
elements, casualties, thefts, riots, wars or otherwise, or in consequence of
foreclosures, attachments, levies or executions (other than those caused by
Lessor and those claiming from, through or under Lessor) is assumed by Lessee,
and, in the absence of gross negligence, willful misconduct or material breach
of this Lease by Lessor, Lessor shall in no event be answerable or accountable
therefor nor shall any of the events mentioned in this Section entitle Lessee
to any abatement of Rent, except as specifically provided in this Lease.

ARTICLE XXI

21.1         Indemnification.  Notwithstanding the existence of any
insurance or self-insurance provided for in Article XIII, and without
regard to the policy limits of any such 

 54
 

 

insurance or self-insurance, Lessee shall
protect, indemnify, save harmless and defend Lessor, its principals, officers,
directors and agents and employees from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including, without limitation, reasonable attorneys’ fees and expenses), to
the extent permitted by law, imposed upon or incurred by or asserted against
Lessor by reason of: (i) any accident, injury to or death of persons or loss of
or damage to property occurring on or about the Leased Properties or adjoining
sidewalks during the Term, including without limitation any claims of
malpractice, (ii) any use, misuse, non-use, condition, maintenance or
repair by Lessee of the Leased Properties, (iii) the failure to pay any
Impositions as herein provided which are the obligation of Lessee to pay
pursuant to this Lease, (iv) any failure on the part of Lessee to perform or
comply with any of the terms of this Lease, and (v) the nonperformance of any
contractual obligation, express or implied, assumed or undertaken by Lessee or
any party in privity with Lessee with respect to the Leased Properties or any
business or other activity carried on with respect to the Leased Properties
during the Term or thereafter during any time in which Lessee or any such other
party is in possession of the Leased Properties or thereafter to the extent
that any conduct by Lessee or any such party (or failure of such conduct
thereby if the same should have been undertaken during such time of possession
and leads to such damage or loss) causes such loss or claim.  Any amounts which become payable by Lessee
under this Section shall be paid within ten (10) days after liability therefor
on the part of Lessee is determined by litigation or otherwise, and if not
timely paid, shall bear interest (to the extent permitted by law) at the
Overdue Rate from the date of such determination to the date of payment.  Nothing herein shall be construed as
indemnifying Lessor against its own grossly negligent acts or omissions or
willful misconduct.

Lessor
shall indemnify, save harmless and defend Lessee from and against all
liabilities, obligations, claims, damages, penalties, causes of action, costs
and expenses imposed upon or incurred by or asserted against Lessee as a result
of the gross negligence or willful misconduct of Lessor.

Lessee’s
or Lessor’s liability for a breach of the provisions of this Article arising
during the Term hereof shall survive any termination of this Lease for three
(3) years following any termination of this Lease, provided that Lessee’s
obligations to indemnify Lessor with respect to environmental matters shall
continue for six (6) years after such termination.

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ARTICLE XXII

22.1         General Prohibition against
Transfers.   Lessee acknowledges that
a significant inducement to Lessor to enter into this Lease with Lessee on the
terms set forth herein is the combination of financial strength, experience,
skill and reputation possessed by the Lessee named herein, the Person or
Persons in Control of Lessee, the Guarantor(s) (if any) and the Manager of the
Facilities on the Commencement Date, together with Lessee’s assurance that
Lessor shall have the unrestricted right to approve or disapprove any proposed
Transfer. Therefore, there shall be no Transfer except as specifically
permitted by this Lease or consented to in advance by Lessor in writing.  Lessor hereby consents to the sublease of the
Boone and Laurel facilities to Sterling Health Care Management, Inc., a
Kentucky corporation, for the purpose of continuing its lease of those facilities
under the Existing Lease applicable to those facilities which are been
consolidated, amended and restated as part of this Lease.  Lessee agrees that Lessor shall have the
right to withhold its consent to any proposed Transfer on the basis of Lessor’s
judgment as to the effect the proposed Transfer may have on the Facilities and
the future performance of the obligations of the Lessee under this Lease,
whether or not Lessee agrees with such judgment.  Any attempted Transfer which is not
specifically permitted by this Lease or consented to by Lessor in advance in
writing shall be null and void and of no force and effect whatsoever.  In the event of a Transfer, Lessor may
collect Rent and other charges from the Transferee and apply the amounts
collected to the Rent and other charges herein reserved, but no Transfer or
collection of Rent and other charges shall be deemed to be a waiver of Lessor’s
rights to enforce Lessee’s covenants or an acceptance of the Transferee as
Lessee, or a release of the Lessee named herein from the performance of its
covenants. Notwithstanding any Transfer, Lessee shall remain fully liable for
the performance of all terms, covenants and provisions of this Lease.  Any violation of this Lease by any Transferee
shall be deemed to be a violation of this Lease by Lessee.

22.2         Subordination
and Attornment.  Lessee shall insert
in any sublease permitted by Lessor provisions to the effect that (i) such
sublease is subject and subordinate to all of the terms and provisions of this
Lease and to the rights of Lessor hereunder, (ii) if this Lease terminates
before the expiration of such sublease, the sublessee thereunder will, at
Lessor’s option, attorn to Lessor and waive any right the sublessee may have to
terminate the sublease or to surrender possession thereunder, as a result of
the termination of this Lease, and (iii) if the sublessee receives a written
Notice from Lessor or Lessor’s assignee, if any, stating that Lessee is in
default under this Lease, the sublessee shall thereafter be obligated to pay
all rentals accruing under the sublease directly to the party giving such
Notice, or as such party may direct, which payments shall be credited against
the amounts owing by Lessee under this Lease.

22.3         Sublease
Limitation.  Anything contained in
this Lease to the contrary notwithstanding, even if a sublease of a Leased
Property is permitted, Lessee shall not sublet such Leased Property on any
basis such that the rental to be paid by the sublessee thereunder would be
based, in whole or in part, on either (i) the income or profits derived by the
business activities of the sublessee, or (ii) any other formula such that any
portion of the sublease rental received by Lessor would fail to qualify as “rents
from real property” within the meaning of Section 856(d) of the Code, or any
similar or successor provision thereto. 
The parties agree that this paragraph shall not be deemed waived or
modified by implication, but may be waived or modified only by an instrument in
writing explicitly referring to this paragraph by number.

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22.4         Permitted
Sublease.   Lessee shall be entitled
to sublease any Leased Property in its entirety to an Affiliate of Lessee upon
Lessee’s written acknowledgment, provided that (i) Lessee submits an original
copy of any such sublease to Lessor for its reasonable approval and written
acknowledgment prior to the date of commencement of same, which such sublease
shall memorialize that the sublessee shall be fully liable for the performance
of all of the obligations of Lessee under this Lease with respect to such
Leased Property; (ii) subject to the rights and priorities set forth in the
Intercreditor Agreement, each sublessee shall jointly and severally guaranty
the obligations of Lessee under the Lease; (iii) Lessor shall be provided
security for the performance by each sublessee of its obligations reasonably
satisfactory to Lessor, which security shall include, without limitation,
subject to the rights and priorities set forth in the Intercreditor Agreement,
a pledge of the stock of or other membership interest of Lessee in each
sublessee, an assignment of the sublease, and a security interest in sublessee
>s Personal Property and Accounts as required of Lessee pursuant to Section
6.4 hereof; (iv) the sole asset of any such sublessee shall be its interest in
the contemplated sublease and Lessee’s Personal Property relating to such
Facility(ies); and (v) the sublessee shall be a wholly-owned subsidiary of
Lessee.  Lessee shall notify Lessor at
least thirty (30) days in advance of the date on which Lessee desires to make
such sublease.  Lessee shall reimburse
Lessor for the actual and reasonable legal fees actually incurred by Lessor in
connection with Lessee’s request.  Lessee
shall provide Lessor with a copy of the proposed sublease and such information
as Lessor reasonably requests concerning the proposed sublessee to allow Lessor
to make an informed judgment as to whether the sublease satisfies the
provisions of this Section 22.5 and to obtain the security provided for herein.

ARTICLE XXIII

23.1         Officer’s
Certificates and Financial Statements. 
Lessee shall furnish (or as appropriate cause each Guarantor to furnish)
to Lessor:

(i)            Within ninety (90) days after the
end of each of Advocat’s fiscal years: 
(a) Consolidated Financial Statements for the Lessee (from and after the
transfer of Lessee’s interest to New Sub as contemplated by the Settlement and
Restructuring Agreement) and Advocat, (b) separate financial statements for
each of the Facilities, in each case certified by an financial officer of
Lessee; and (c) an Officer’s Certificate stating that to the best knowledge and
belief of such officer after making due inquiry, Lessee is not in default in
the performance or observance of any of the terms of this Lease, or if Lessee
is in default, specifying all such defaults, the nature thereof, and the steps
being taken to remedy the same.

(ii)           Within forty-five (45) days after the
end of each of Advocat’s quarters, quarterly consolidated financial reports of
Advocat, together with an Officer’s Certificate that Lessee is not in default
of any covenant set forth in Section 8 of this Lease and Guarantor is not in
default of any covenant under the Guaranty, or if Lessee or Guarantor is in
default, specifying all such defaults, the nature thereof, and the steps being
taken to remedy the same;

(iii)          Within forty-five (45) days after the
end of each of Advocat’s quarters, a quarterly Financial Statement from Advocat
(provided, however, that such quarterly

 57

 

 

Financial Statements need
not be certified by a certified public accountant, but shall be certified by
Advocat to be complete and accurate);

(iv)          Within thirty-five (35) days after the
end of each month, monthly financial reports for each Facility with detailed
statements of income and expense and detailed operational statistics regarding
occupancy rates, patient mix and patient rates by type for the Facility;

(v)           A copy of each cost report filed with
a governmental agency for any Facility;

(vi)          Within fifteen (15) days after they
are required to be filed with the SEC, copies of any annual or quarterly report
and of information, documents and other reports (or copies of such portions of
any of the foregoing as the SEC may by rules and regulations prescribe) which
Advocat is required to file with the SEC pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934;

(vii)         Within thirty (30) days of Lessee’s or
Manager’s receipt thereof, copies of surveys performed by the appropriate
governmental agencies for licensing or certification purposes, and any plan of
correction thereto as approved by the appropriate governmental agency for any
Facility.

(viii)        Immediate Notice to Lessor of any
action, proposal or investigation by any agency or entity, or complaint to such
agency or entity, known to Lessee, the result of which could be to (i) modify
in a way adverse to Lessee or revoke or suspend or terminate, or fail to renew
or fully continue in effect, any license or certificate or operating authority
pursuant to which Lessee carries on any part of the Primary Intended Use of any
Facility, or (ii) suspend, terminate, adversely modify, or fail to renew or
fully continue in effect any cost reimbursement or cost sharing program by any
state or federal governmental agency, including but not limited to Medicaid or
Medicare or any successor or substitute therefor, or seek return of or
reimbursement for any funds previously advanced or paid pursuant to any such
program, or (iii) impose any bed hold, limitation on patient admission or
similar restriction on any Leased Property, or (iv) prosecute any party with
respect to the operation of any activity on any Leased Property or enjoin any
party or seek any civil penalty in excess of Ten Thousand Dollars ($10,000.00)
in respect thereof;

(ix)           As soon as it is prepared in each
Lease Year, a capital and operating budget for the Facilities for that and the
following Lease Year;

(x)            With reasonable promptness, such
other information respecting the financial condition and affairs of Lessee and
the Facilities as Lessor may reasonably request from time to time including,
without limitation, any such other information as may be available to the
administration of the Leased Properties; and

(xi)           At times reasonably required by
Lessor, and upon request as appropriate, such additional information and
unaudited quarterly financial information concerning the

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Leased Properties and
Lessee as Lessor may require for its on-going filings with the Securities
and Exchange Commission, under both the Securities Act of 1933, as amended and
the Securities Exchange Act of 1934, as amended, including, but not limited to
10-Q Quarterly Reports, 10-K Annual Reports and registration
statements to be filed by Lessor during the Term of this Lease.

Lessor’s
right to the statements referred to in Subparagraph (x) shall be subject to any
prohibitions or limitations on disclosure of any such data under applicable
laws or regulations, including, without limitation, any duly enacted “Patients’
Bill of Rights” or any similar legislation, including such limitations as may
be necessary to preserve the confidentiality of the Facility-patient
relationship and the physician-patient privilege.  Further, except for statements or information
which are already public, Lessor shall not disclose the contents of any such
statement, except to a Facility Mortgagee, proposed Facility Mortgagee, lender
of Lessor, proposed Lender of Lessor, prospective investor, prospective
purchaser, or Lessor’s attorneys, accountants or agents, and except as
permitted in Section 23.2.

23.2         Public
Offering Information.  Lessee
specifically agrees that Lessor may include financial information and
information concerning the operation of the Facilities that does not violate
the confidentiality of the facility-patient relationship and the
physician-patient privilege under applicable laws, in offering memoranda
or prospectus, or similar publications in connection with syndications or
public offerings of Lessor’s securities or interests, and any other reporting
requirements under applicable Federal and State Laws, including those of any
successor to Lessor.  Lessee agrees to
provide such other reasonable information necessary with respect to Lessee and
the Leased Properties to facilitate a public offering or to satisfy SEC or
regulatory disclosure requirements. 
Lessor shall provide to Lessee a copy of any information prepared by
Lessor to so be published and Lessee shall have a reasonable period of time
(not to exceed three (3) Business Days) after receipt of such information to
notify Lessor of any corrections.  Lessor
shall reimburse Lessee for its out-of-pocket costs to its qualified public
accountants for their services in connection with such public offering information
and interim or “stub” financial information and “comfort letters” required
pursuant to Section 23.1 (xi) as requested by Lessor.

ARTICLE XXIV

24.1         Lessor’s Right to Inspect.  Lessee shall permit Lessor and its authorized
representatives to inspect the Leased Properties and the books and records of
Lessee and/or Sublessees relating to the operation of the Facilities during
normal business hours at any time without Notice subject to any security,
health, safety or confidentiality requirements any governmental agency or
insurance requirement relating to the Leased Properties, or imposed by law or
applicable regulations.

ARTICLE XXV

25.1         No
Waiver.  No failure by Lessor to
insist upon the strict performance of any term hereof or to exercise any right,
power or remedy consequent upon a breach hereof, and no

 59
 

 

 

acceptance
of full or partial payment of Rent during the continuance of any such breach,
shall constitute a waiver of any such breach or of any such term.  No waiver of any breach shall affect or alter
this Lease, which shall continue in full force and effect with respect to any
other then existing or subsequent breach.

ARTICLE XXVI

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

ARTICLE XXVII

27.1         Acceptance
of Surrender.  No surrender to Lessor
of this Lease or of the Leased Properties or any part thereof, or of any
interest therein, shall be valid or effective unless agreed to and accepted in
writing by Lessor, and no act by Lessor or any representative or agent of
Lessor, other than such a written acceptance by Lessor, shall constitute an
acceptance of any such surrender.

ARTICLE XXIII

28.1         No
Merger of Title.  There shall be no
merger of this Lease or of the leasehold estate created hereby by reason of the
fact that the same person, firm, corporation or other entity may acquire, own
or hold, directly or indirectly, (i) this Lease or the leasehold estate created
hereby or any interest in this Lease or such leasehold estate, and (ii) the fee
estate in the Leased Properties.

28.2         No
Partnership.  Nothing contained in
this Lease will be deemed or construed to create a partnership or joint venture
between Lessor and Lessee or to cause either party to be responsible in any way
for the debts or obligations of the other or any other party, it being the
intention of the parties that the only relationship hereunder is that of Lessor
and Lessee.

ARTICLE XXIX

29.1         Conveyance
by Lessor.  If Lessor or any
successor owner of the Leased Properties conveys the Leased Properties other
than as security for a debt, and the grantee or transferee of the Leased
Properties shall expressly assume all obligations of Lessor hereunder arising
or accruing from and after the date of such conveyance, Lessor or such
successor owner, as the case may be, shall thereupon be released from all
future liabilities and obligations of Lessor under this

 60
 

 

 

Lease
arising or accruing from and after the date of such conveyance or other
transfer and all such future liabilities and obligations shall thereupon be
binding upon the new owner.

ARTICLE XXX

30.1         Quiet
Enjoyment.  So long as Lessee pays
all Rent as it becomes due and complies with all of the terms of this Lease and
performs its obligations hereunder, Lessee shall peaceably and quietly have,
hold and enjoy the Leased Properties for the Term, free of any claim or other
action by Lessor or anyone claiming by, through or under Lessor, but subject to
the Permitted Encumbrances and all liens and encumbrances hereafter provided
for in this Lease or consented to by Lessee. 
Except as otherwise provided in this Lease, no failure by Lessor to
comply with the foregoing covenant will give Lessee any right to cancel or
terminate this Lease or abate, reduce or make a deduction from or offset
against the Rent or any other sum payable under this Lease, or to fail to
perform any other obligation of Lessee. 
Lessee shall, however, have the right, by separate and independent
action, to pursue any claim it may have against Lessor as a result of a breach
by Lessor of the covenant of quiet enjoyment contained in this Section.

ARTICLE XXXI

31.1         Notices.  Any notice, request or other communication to
be given by any party hereunder shall be in writing and shall be sent by
registered or certified mail, postage prepaid, or by hand delivery or facsimile
transmission to the following address:

	
  

  	
  To Lessee:

  	
   

  	
  Diversicare Leasing Corp.

  
	
   

  	
   

  	
   

  	
     c/o
  Advocat, Inc.

  
	
   

  	
   

  	
   

  	
     277
  Mallory Station Road, Suite 130

  
	
   

  	
   

  	
   

  	
     Franklin,
  TN 37067

  
	
   

  	
   

  	
   

  	
     Attn:
  Chief Financial Officer

  
	
   

  	
   

  	
   

  	
     Telephone
  No.: (615) 771-7575

  
	
   

  	
   

  	
   

  	
     Facsimile
  No.: (615) 771-7409

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  With copy to

  	
   

  	
     Harwell Howard Hyne Gabbert & Manner,
  P.C.

  
	
   

  	
  (which shall not

  	
   

  	
     315 Deaderick Street, Suite 1800

  
	
   

  	
  constitute notice):

  	
   

  	
     Nashville, TN 37238

  
	
   

  	
   

  	
   

  	
     Attn: J.
  Mark Manner

  
	
   

  	
   

  	
   

  	
     Telephone
  No.: (615) 256-0500

  
	
   

  	
   

  	
   

  	
     Facsimile
  No.: (615) 251-1057

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  To Lessor:

  	
   

  	
  Omega Healthcare Investors, Inc.

  
	
   

  	
   

  	
   

  	
     900 Victors Way, Suite 350

  
	
   

  	
   

  	
   

  	
     Ann Arbor, Michigan 48108

  
	
   

  	
   

  	
   

  	
     Attn.: F.
  Scott Kellman and Susan Allene Kovach

  
	
   

  	
   

  	
   

  	
     Telephone
  No.: (734) 887-0200

  
	
   

  	
   

  	
   

  	
     Facsimile
  No.: (734) 887-0201

  
	
   

  	
   

  	
   

  	
   

  

 

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  With copy to

  	
   

  	
     Dykema Gossett PLLC

  
	
   

  	
  (which shall not

  	
   

  	
     39577 Woodward Ave., Suite 300

  
	
   

  	
  constitute notice):

  	
   

  	
     Bloomfield Hills, Michigan 48304

  
	
   

  	
   

  	
   

  	
     Attn:
  Fred J. Fechheimer

  
	
   

  	
   

  	
   

  	
     Telephone
  No.: (248) 203-0743

  
	
   

  	
   

  	
   

  	
     Facsimile
  No.: (248) 203-0763

  

 

or to such other
address as either party may hereafter designate. Notice shall be deemed to have
been given on the date of delivery if such delivery is made on a Business Day,
or if not, on the first Business Day after delivery. If delivery is refused, Notice
shall be deemed to have been given on the date delivery was first attempted.
Notice sent by facsimile transmission shall be deemed given upon confirmation
that such Notice was received at the number specified above or in a Notice to
the sender.  If Lessee has vacated the
Leased Properties, Lessor’s Notice may be posted on the door of a Leased
Property.

ARTICLE XXXII

32.1         Appraisers.  If it becomes necessary to determine Fair
Market Value or Fair Market Rent for any purpose under this Lease, the party required
or permitted to give Notice of such required determination shall include in the
Notice the name of a person selected to act as appraiser on its behalf.  Within ten (10) days after such Notice, the
party receiving such Notice shall give Notice to the other party of its
selection of a person to act as appraiser on its behalf.  The appraisers thus appointed, each of whom
must be a member of the Appraisal Institute (or any successor organization
thereto) and experienced in appraising facilities used for purposes similar to
the Primary Intended Use of the Facilities, shall, within forty-five (45) days
after the date of the Notice appointing the first appraiser, proceed to
appraise the Leased Property or Leased Properties, as the case may be, to
determine the Fair Market Value or Fair Market Rent thereof as of the relevant
date (giving effect to the impact, if any, of inflation between the date of
their decision and the relevant date); provided, however, that if only one
appraiser has been so appointed, or if two appraisers have been so appointed
but only one such appraiser has made such determination within fifty (50) days
after the date of the Notice appointing the first appraiser, then the
determination of such appraiser shall be final and binding upon the
parties.  To the extent consistent with
sound appraisal practice at the time of any such appraisal, such appraisal
shall be made on a basis consistent with the basis on which the Leased Property
or Leased Properties were appraised for purposes of determining its Fair Market
Value at the time of Lessor’s acquisition thereof.  If two appraisers have been appointed and
have made their determinations within the respective requisite periods set
forth above, and if the difference between the amounts so determined does not
exceed ten percent (10%) of the lesser of such amounts, then the Fair Market
Value or Fair Market Rent shall be an amount equal to fifty percent (50%) of
the sum of the amounts so determined.  If
the difference between the amounts so determined exceeds ten percent (10%) of
the lesser of such amounts, then such two appraisers shall within twenty (20)
days appoint a third appraiser.  If no
such appraiser is appointed within such twenty (20) days or within ninety (90)
days of the date of the Notice appointing the first appraiser, whichever is
earlier, either Lessor or Lessee may apply to any court having jurisdiction to
have such appointment made by such court. 
Any appraiser appointed by the original appraisers or by such court
shall be instructed to determine the Fair Market Value or Fair

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Market
Rent within forty-five (45) days after appointment of such
appraiser.  The determination of the
appraiser which differs most in terms of dollar amount from the determinations
of the other two appraisers shall be excluded, and the average of the remaining
two determinations shall be final and binding upon Lessor and Lessee as the
Fair Market Value or Fair Market Rent of the Leased Property or Leased
Properties, as the case may be. If the Fair Market Rent is being determined for
more than one year, the Fair Market Rent may include such annual increases, if
any, as the appraisers determine to be in accordance with the terms of this
Lease.

This
provision for determining by appraisal shall be specifically enforceable to the
extent such remedy is available under applicable law, and any determination
hereunder shall be final and binding upon the parties except as otherwise
provided by applicable law, and judgment may be entered upon such determination
in a court of competent jurisdiction. 
Lessor and Lessee shall each pay the fees and expenses of the appraiser
appointed by it and each shall pay one-half of the fees and expenses of
the third appraiser and one-half of all other costs and expenses incurred
in connection with each appraisal.

ARTICLE XXXIII

33.1         Breach by Lessor.   Lessor shall not be in breach of this Lease
unless Lessor fails to observe or perform any term, covenant or condition of
this Lease on its part to be performed and such failure continues for a period
of thirty (30) days after written Notice specifying such failure and the
necessary curative action is received by Lessor from Lessee.  If the failure cannot with due diligence be
cured within a period of thirty (30) days, the failure shall not be deemed to
continue if Lessor, within said thirty (30) day period, proceeds promptly and
with due diligence to cure the failure and diligently completes the curing
thereof.  The time within which Lessor
shall be obligated to cure any such failure shall also be subject to extension
of time due to Force Majeure.

33.2         Compliance
With Facility Mortgage.  Except for
payments due under any Facility Mortgage (which shall be the responsibility of
the Mortgagor thereunder), Lessee covenants and agrees that it will duly and
punctually observe, perform and comply with all of the terms, covenants and
conditions (including, without limitation, covenants requiring the keeping of
books and records and delivery of financial statements and other information)
of any Facility Mortgage as to which Lessee has been given Notice and that it
will not directly or indirectly, do any act or suffer or permit any condition
or thing to occur, which would or might constitute a default under a Facility
Mortgage as to which Lessee has been given Notice.  Anything in this Lease to the contrary
notwithstanding, if the time for performance of any act required of Lessee by
the terms of a Facility Mortgage as to which Lessee has been given Notice is
shorter than the time allowed by this Lease for performance of such act by
Lessee, then Lessee shall perform such act within the time limits specified in
such Facility Mortgage.

ARTICLE XXXIV

34.1         Disposition
of Personal Property on Termination; Lessor’s Option to Purchase.   Upon the expiration or earlier termination
of this Lease, Lessee shall immediately surrender, turn

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over
and deliver to Lessor, without the payment of any additional consideration by
Lessor, all Personal Property then located on or at or used in the operation of
the Leased Properties, other than Lessee’s Incidental Personal Property and the
items of Personal Property listed on Schedule A attached hereto.  Upon Lessor’s request, Lessee shall, without
any charge or cost to Lessor, execute and deliver to Lessor such bills of sale,
assignments or other instruments necessary, appropriate or reasonably requested
by Lessor to establish Lessor’s ownership of such Personal Property.  In addition, Lessor shall have the option on
the terms hereinafter set forth to purchase all (but not less than all) of
Lessee’s Incidental Personal Property (specifically excluding, the items set
forth on Schedule A), if any, at the expiration or termination of this
Lease, for an amount equal to the then book value thereof (acquisition cost
less accumulated depreciation on the books of Lessee pertaining thereto),
subject to, and with appropriate credits for, any obligations owing from Lessee
to Lessor and for the then outstanding balances owing on all equipment leases,
conditional sale contracts and any other encumbrances to which such Lessee’s
Personal Property is subject.  Lessor’s
option shall be exercised by Notice to Lessee no more than one hundred eighty
(180) days, nor less than ninety (90) days, before the expiration of the
Initial Term or, if the Term is renewed as provided herein, before the
expiration of the last Renewal Term, unless this Lease is terminated prior to
its expiration date by reason of an Event of Default, in which event Lessor’s
option shall be exercised not more than thirty (30) days after the Termination
Date. Lessor’s option shall terminate upon Lessee’s purchase of the Leased
Properties.  If Lessee does not receive
Lessor’s Notice exercising its option before the expiration of the relevant
required time period, Lessee shall give Lessor Notice thereof and Lessor’s
option shall continue in full force and effect for a period of thirty (30) days
after such Notice from Lessee. If Lessor exercises its option,  Lessee shall, in exchange for Lessor’s
payment of the purchase price, deliver the purchased Lessee’s Personal Property
to Lessor, together with a bill of sale and such other documents as Lessor may
reasonably request in order to carry out the purchase, and the purchase shall
be closed by such delivery and such payment on the date set by Lessor in its
Notice of exercise.

34.2         Facility
Trade Names.  If this Lease is
terminated pursuant to Section 16.1 or Lessor exercises its option to purchase
Lessee’s Personal Property pursuant to Section 34.1, Lessee shall be deemed to
have assigned to Lessor the right to use the Facility Trade Names in the
markets in which the Facilities are located, and Lessee shall not after any
such termination use the Facility Trade Names in the same market in which any
Facility is located in connection with any business that competes with such
Facility provided, however, that nothing contained in this Section 34.2 grants
Lessor any right to use the name “Diversicare” for any Leased Property or
Facility.

34.3         Transfer
of Operational Control of the Facilities. 
Lessee shall cooperate fully in transferring operational control of the
Facilities to Lessor or Lessor’s nominee if the Term expires without renewal or
purchase by Lessee, or this Lease is terminated upon the occurrence of an Event
of Default or for any other reason, and shall use its reasonable best efforts
to cause the business conducted at the Facilities to continue without
interruption.  To that end, pending
completion of the transfer of the operational control of the Facilities to
Lessor or its nominee:

(i)            Lessee will not terminate the
employment of any employees without just cause, or change any salaries,
provided, however, that without the advance written consent of Lessor Lessee
may grant pre-announced wage increases of which Lessor has

 64
 

 

 

knowledge, increases required
by written employment agreements and normal raises to non-officers at
regular review dates; and Lessee will not hire any additional employees except
in good faith in the ordinary course of business;

(ii)           Lessee will provide all necessary
information requested by Lessor or its nominee for the preparation and filing
of any and all necessary applications or notifications of any federal or state
governmental authority having jurisdiction over a change in the operational
control of the Facilities, and any other information reasonably required to
effect an orderly transfer of the Facilities, and Lessee will use its best
efforts to cause all operating health care licenses to be transferred to Lessor
or to Lessor’s nominee;

(iii)          Lessee shall use its best efforts to
keep the business and organization of the Facilities intact and to preserve for
Lessor or its nominee the goodwill of the suppliers, distributors, residents
and others having business relations with Lessee with respect to the
Facilities;

(iv)          Lessee shall engage only in
transactions or other activities with respect to the Facilities which are in
the ordinary course of its business and shall perform all maintenance and
repairs reasonably necessary to keep the Facilities in satisfactory operating
condition and repair, and shall maintain the supplies and foodstuffs at levels
which are consistent and in compliance with all health care regulations, and
shall not sell or remove any personal property except in the ordinary course of
business and in accordance with the terms and conditions of this Lease;

(v)           Lessee shall provide Lessor or its
nominee with full and complete information regarding the employees of the
Facilities and shall reimburse Lessor or its nominee for all outstanding
accrued employee benefits, including accrued vacation, sick and holiday pay
calculated on a true accrual basis, including all earned and a prorated portion
of all unearned benefits;

(vi)          Lessee shall use its best efforts to
obtain the acknowledgment and the consent of any creditor, lessor or sublessor,
mortgagee, beneficiary of a deed of trust or security agreement affecting the
real and personal properties of Lessee or any other party whose acknowledgment
and/or consent would be required because of a change in the operational control
of the Facilities and transfer of personal property.  The consent must be in form, scope and
substance satisfactory to Lessor or its nominee, including, without limitation,
an acknowledgment in respect to all such contracts, leases, deeds of trust, mortgage,
security agreements, or other agreements that Lessee and all predecessors or
successors-in-interest thereto are not in default in respect
thereto, that no condition known to the consenting party exists which with the
giving of notice or lapse of time would result in such a default, and, if
requested, affirmatively consenting to the change in the operational control of
the Facilities;

(vii)         Lessee shall not encourage the transfer
of any patients from the Facilities;

 65
 

 

 

(viii)        Lessee consents to Lessor, or its
nominee, seeking to employ any on-site employees of the Facilities, but neither
Lessor nor its nominee shall have any obligation to employ any employees of the
Facilities;

(ix)           To more fully preserve and protect
Lessor’s rights under this Section, Lessee does hereby make, constitute and
appoint Lessor its true and lawful attorney-in-fact, for it and in
its name, place and stead to execute and deliver all such instruments and
documents, and to do all such other acts and things, as Lessor may deem to be
necessary or desirable to protect and preserve the rights granted under this
Section, including, without limitation, the preparation, execution and filing
with the Board of Health (or similar agency) of each State or any and all
required “Letters of Responsibility” or similar documents.  Lessee hereby grants to Lessor the full power
and authority to appoint one or more substitutes to perform any of the acts
that Lessor is authorized to perform under this Section, with a right to revoke
such appointment of substitution at Lessor’s pleasure.  The power of attorney granted pursuant to
this Section is coupled with an interest and therefore is irrevocable.  Any person dealing with Lessor may rely upon
the representation of Lessor relating to any authority granted by this power of
attorney, including the intended scope of the authority, and may accept the
written certificate of Lessor that this power of attorney is in full force and
effect.  Photographic or other facsimile
reproductions of this executed Lease may be made and delivered by Lessor, and
may be relied upon by any person to the same extent as though the copy were an
original.  Anyone who acts in reliance
upon any representation or certificate of Lessor, or upon a reproduction of
this Lease, shall not be liable for permitting Lessor to perform any act
pursuant to this power of attorney. 
Notwithstanding the foregoing, Lessor covenants with Lessee that Lessor
shall refrain from exercising the power of attorney granted hereby except in
the case of an Event of Default hereunder or in the event of a default, which,
in Lessor’s reasonable judgment, may lead to the suspension or revocation of
any license of Lessee or of any sublessee.

34.4         Intangibles
and Personal Property. 
Notwithstanding any other provision of this Lease but subject to Section
6.4 relating to the security interest in favor of Lessor, Lessor’s Personal
Property shall not include goodwill nor shall it include any other intangible
personal property that is severable from Lessor’s “interests in real property”
within the meaning of Section 856(d) of the Code, or any similar or successor
provision thereto.

ARTICLE XXXV

35.1         Arbitration.  Except with respect to the payment of Rent
under this Lease and any proceedings to recover possession of one or more of
the Leased Properties, in case any controversy arises between the parties
hereto as to any of the provisions of this Lease or the performance thereof,
and the parties are unable to settle the controversy by agreement or as
otherwise provided herein, the controversy shall be decided by
arbitration.  The arbitration shall be
conducted by three arbitrators selected in accordance with the rules and
procedures of the American Arbitration Association.  The decision of the arbitrators shall be
final and binding, and judgment may be entered thereon in any court of
competent jurisdiction.  The decision
shall set forth in writing the basis for the decision.  In rendering the decision and award, the
arbitrators

 66
 

 

 

shall
not add to, subtract from, or otherwise modify the provisions of this
Lease.  The expense of the arbitration
shall be divided between Lessor and Lessee unless otherwise specified in the
award.  Each party in interest shall pay
the fees and expenses of its own counsel. 
The arbitration shall be conducted in Ann Arbor, Michigan.  In any arbitration, the parties shall be
entitled to conduct discovery in the same manner as permitted under Federal
Rules of Civil Procedure 26 through 37, as amended.  No provision in this Article shall limit the
right of any party to this Agreement to obtain provisional or ancillary
remedies from a court of competent jurisdiction before, after, or during the
pendency of any arbitration, and the exercise of such remedies does not
constitute a waiver of the right of either party to arbitration.

ARTICLE XXXVI

36.1         Miscellaneous.

36.1.1      Survival,
Choice of law.  Anything contained in
this Lease to the contrary notwithstanding, all claims against, and liabilities
of, Lessee or Lessor arising prior to the date of expiration or termination of
this Lease shall survive such expiration or termination.  If any term or provision of this Lease or any
application thereof is held invalid or unenforceable, the remainder of this
Lease and any other application of such term or provisions shall not be
affected thereby.  If any late charges
provided for in any provision of this Lease are based upon a rate in excess of
the maximum rate permitted by applicable law, the parties agree that such
charges shall be fixed at the maximum permissible rate. Neither this Lease nor
any provision hereof may be changed, waived, discharged or terminated except by
an instrument in writing and in recordable form signed by Lessor and
Lessee.  All the terms and provisions of this
Lease shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns. 
The headings in this Lease are for convenience of reference only and
shall not limit or otherwise affect the meaning hereof.  This Lease shall be governed by and construed
in accordance with the laws of the state of Michigan, as to all matters other
than (i) those matters relating to the enforcement or exercise of any
possessory or summary remedies of Lessor under this Lease, which shall be
governed by the laws of the applicable State or States and (ii) matters which
under applicable procedural conflicts of laws rules require the application of
laws of another State.

LESSEE
CONSENTS TO IN PERSONAM JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF THE
STATES OF MICHIGAN AND EACH STATE IN WHICH A FACILITY IS LOCATED, AND AGREES
THAT ALL DISPUTES CONCERNING THIS AGREEMENT BE HEARD IN THE STATE AND FEDERAL
COURTS LOCATED IN THE STATES OF MICHIGAN OR ANY STATE IN WHICH A FACILITY IS
LOCATED.  LESSEE AGREES THAT SERVICE OF
PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF
THE STATES OF MICHIGAN OR ANY STATE IN WHICH A FACILITY IS LOCATED AND
IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF
THE STATES OF MICHIGAN OR ANY SUCH STATE.

36.1.2      Limitation
on Recovery.  Lessee specifically
agrees to look solely to Lessor’s interest in the Leased Properties for
recovery of any judgment from Lessor, it being

 67
 

 

 

specifically
agreed that no constituent shareholder, officer or director of Lessor shall
ever be personally liable for any such judgment or for the payment of any
monetary obligation to Lessee.  The
provision contained in the foregoing sentence is not intended to, and shall
not, limit any right that Lessee might otherwise have to obtain injunctive
relief against Lessor or Lessor’s successors in interest or any action not
involving the personal liability of Lessor (original or successor).
Furthermore, except as otherwise expressly provided herein, Lessor (original or
successor) shall never be liable to Lessee for any indirect or consequential
damages suffered by Lessee from whatever cause. 
Lessor agrees to look solely to the assets of Lessee and not to any
director, officer or shareholder (other than Guarantor pursuant to the Guaranty)
of Lessee for payment of Lessee for payment of any monetary obligation to
Lessor or for recovery of any judgment from Lessee.

36.1.3      Waivers.  Lessee waives any defense by reason of any
disability of Lessee, and waives any other defense based on the termination of
Lessee’s (including Lessee’s successor’s) liability from any cause.  Lessee waives all presentments, demands for
performance, notices of nonperformance, protests, notices of protest, notices
of dishonor, and notices of acceptance, and waives all notices of the
existence, creation, or incurring of new or additional obligations.

36.1.4      Consents.  Whenever the consent or approval of Lessor or
Lessee is required hereunder, Lessor or Lessee may in its sole discretion and
without reason withhold that consent or approval unless otherwise specifically
provided.

36.1.5      Counterparts.  This Lease may be executed in separate
counterparts, each of which shall be considered an original when each party has
executed and delivered to the other one or more copies of this Lease.

36.1.6      Options
Personal.  The renewal options
granted to Lessee in this Lease are granted solely to Lessee and are not
assignable or transferrable except in connection with a Transfer permitted in
Article XXII.

36.1.7      Rights
Cumulative.  Except as provided
herein to the contrary, the respective rights and remedies of the parties
specified in this Lease shall be cumulative and in addition to any rights and
remedies not specified in this Lease.

36.1.8      Entire
Agreement.  There are no oral or written
agreements or representations between the parties hereto affecting this
Lease.  This Lease supersedes and cancels
any and all previous negotiations, arrangements, representations, brochures,
agreements and understandings, if any, between Lessor and Lessee.

36.1.9      Amendments
in Writing.  No provision of this
Lease may be amended except by an agreement in writing signed by Lessor and
Lessee.

36.1.10     Severability.  If any provision of this Lease or the
application of such provision to any person, entity or circumstance is found
invalid or unenforceable by a court of competent jurisdiction, such
determination shall not affect the other provisions of this Lease and all other
provisions of this Lease shall be deemed valid and enforceable.

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36.1.11     Time
of the Essence.  Except for the
delivery of possession of the Facilities to Lessee, time is of the essence of
all provisions of this Lease of which time is an element.

ARTICLE XXXVII

37.1         Commissions.  Lessor or Lessee each represent and
warrant  to the other that no real estate
commission, finder’s fee or the like is due and owing to any person in
connection with this Lease.  Lessor and
Lessee each agree to save, indemnify and hold the other harmless from and
against any and all claims, liabilities or obligations for brokerage, finder’s
fees or the like in connection with this Lease or the transactions contemplated
hereby, asserted by any person on the basis of any statement or act alleged to
have been made or taken by that party.

ARTICLE XXXVIII

38.1         Memorandum or Short Form of Lease.  Lessor and Lessee shall, promptly upon the
request of either, enter into a Memorandum or Short Form of this Lease,
substantially in the form of attached Exhibit D with such modifications as may
be appropriate under the laws and customs of the States and in the customary
form suitable for recording under the laws of each of the States.  Lessee shall pay all costs and expenses of
recording such memorandum or short form of this Lease.

ARTICLE XXXIX

39.1         Security
Deposit. Lessor acknowledges that it holds the Security Deposit in the form
of cash. Lessor shall continue to hold the Security Deposit as security for the
full and faithful performance by Lessee of each and every term, provision,
covenant and condition of this Lease. 
The Security Deposit shall be deposited by Lessor into an account which
shall earn interest for the benefit of Lessee, which cash shall remain on
deposit as security and be available to Lessor as provided in this
Article.  The Security Deposit shall not
be considered an advance payment of Rent (or of any other sum payable to Lessee
under this Lease) or a measure of Lessor’s damages in case of a default by
Lessee.  The Security Deposit shall not
be considered a trust fund, and Lessee expressly acknowledges and agrees that
Lessor is not acting as a trustee or in any fiduciary capacity in controlling
or using the Security Deposit. 
Notwithstanding the foregoing, Lessor shall maintain the Security
Deposit separate and apart from Lessor’s general and/or other funds.  Provided that Lessee is not then in default,
Lessor shall disburse to Lessee the earnings on the Security Deposit on a
quarterly basis.  The Security Deposit,
less any portion thereof applied as provided in Section 39.2 shall be returned
to Lessee within sixty (60) days following the expiration of the Term or
earlier termination of this Lease. 
Lessee may satisfy the Security Deposit obligation by providing one or
more letters of credit, subject to the following conditions: (a) Lessor shall
reasonable approve the form of any proposed letter of credit; and (b) Lessee
shall execute a letter of credit agreement in a form acceptable to Lessor, in
Lessor’s sole discretion.

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39.2         Additional
Security Deposit.  If a Facility is
affected by any of the conditions described in Subsection (h) under the
definition of Event of Default, and such condition continues beyond the shorter
of (i) the period during which Lessor is in good faith appealing such
condition, and (ii) ninety (90) days, then Lessee shall increase the amount
of the Security Deposit.  The increase (“Increase”)
shall be in an amount equal to the fair market value which the affected
Facility would have if none of the conditions described in Subsection (h)
existed with respect to that Facility and if the Facility had licensed beds
equal to the number of licensed beds in the Facility as of the Effective Date,
an occupancy rate equal to the State average occupancy rate for facilities
utilized for the Primary Intended Use of the Facility, less the actual fair market
value of the Facility.  If the parties
cannot agree upon the amount of the Increase, the amount of the Increase shall
be determined in accordance with the arbitration procedures set forth in
Article XXXV.  Lessee may fund the
Increase in equal monthly installments beginning on the first (1st) day of the first (1st) month following the end of
the time periods set forth above and ending on the earlier of (i) three
(3) years thereafter, and (ii) two (2) years prior to the end of the Term;
provided, however, that if the obligation to fund occurs during the last two
(2) years of the Term, the Increase shall be funded immediately.  If an Increase has been funded, the Facility
is subsequently no longer affected by any of the conditions described in
Subsection (h), the Facility has been reopened, and no Event of Default is
continuing, the Increase shall be returned to Lessee.  Pending an agreement between Lessor and
Lessee as to the amount of the Increase, Lessee will fund the Increase based
upon Lessee’s good faith estimate of the amount thereof.

39.3         Application
of Security Deposit.  If Lessee
defaults in respect of any of the terms, provisions, covenants and conditions
of this Lease, including, but not limited to, payment of any Rent and other
sums of money payable by Lessee, Lessor may, but shall not be required to, in
addition to and not in lieu of any other rights and remedies available to
Lessor use, apply all or any part of the Security Deposit to the payment of any
sum in default, or any other sum, including but not limited to, any damages or
deficiency in reletting the Leased Properties, which Lessor may expend or be
required to expend by reason of Lessee’s default.  Whenever, and as often as, Lessor has applied
any portion of the Security Deposit to cure Lessee’s default hereunder, Lessee
shall, within ten (10) days after Notice from Lessor, deposit additional money
with Lessor sufficient to restore the Security Deposit to the full amount
originally provided or paid, and Lessee’s failure to do so shall constitute an
Event of Default hereunder without any further Notice.

39.4         Transfer
of Security Deposit.  If Lessor
transfers its interest under this Lease, Lessor shall assign the Security
Deposit to the new lessor and thereafter Lessor shall have no further liability
for the return of the Security Deposit, and Lessee agrees to look solely to the
new lessor for the return of the Security Deposit.  The provisions of the preceding sentence
shall apply to every transfer or assignment of Lessor’s interest under this
Lease.  Lessee agrees that it will not
assign or encumber or attempt to assign or encumber the Security Deposit and
that Lessor, its successors and assigns, may return the Security Deposit to the
last Lessee in possession at the last address for Notice given by such Lessee
and that Lessor shall thereafter be relieved of any liability therefor,
regardless of one or more assignments of this Lease or any such actual or
attempted assignment or encumbrances of the Security Deposit.

SIGNATURE PAGES FOLLOW

 70
 

 

 

IN WITNESS
WHEREOF, the parties have executed this Lease by their duly authorized officers
as of the date first above written.

	
   

  	
  LESSOR:

  
	
   

  	
   

  	
   

  
	
   

  	
  STERLING
  ACQUISITION CORP., a Kentucky corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: Susan A.
  Kovach

  
	
   

  	
   

  	
  Title: Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  LESSEE:

  
	
   

  	
   

  	
   

  
	
   

  	
  DIVERSICARE
  LEASING CORPORATION, a Tennessee corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
   

  	
  Name: James F.
  Mills, Jr.

  
	
   

  	
   

  	
  Title: Executive
  Vice President

  

 

 71
 

 

 

	
  THE STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  :ss

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

This
instrument was acknowledged before me on the    
day of November, 2000, by Susan A. Kovach, the Vice President of
Sterling Acquisition Corp., a Delaware corporation, on behalf of the
corporation

 

Notary Public
                                   ,
County,

My commission expires:

 

	
  THE STATE OF

  	
   

  	
   

  	
  )

  
	
   

  	
   

  	
   

  	
  :ss

  
	
  COUNTY OF

  	
   

  	
   

  	
  )

  

 

This
instrument was acknowledged before me on the       day of November, 2000, by James F.
Mills, Jr., the Senior Vice President of Diversicare Leasing Corporation, a
Tennessee corporation, on behalf of the corporation

 

Notary Public
                                   ,
County,

My commission expires:

 72
 

 

 

LIST OF EXHIBITS TO LEASE

Exhibit A -
Description of Land

Exhibit B -
Permitted Encumbrances

Exhibit C -
Form of Lessee’s Certificate

Exhibit D -
Form of Memorandum and Short Form of Lease

Exhibit E - Form
of Consent and Agreement of Manager

LIST OF SCHEDULES TO LEASE

Schedule A -
Excluded Personal Property of Lessee

Schedule B -
Exceptions to Permitted Use

Schedule C -
Excepted Facilities to Radius Restriction

 73

 

 

EXHIBIT A

DESCRIPTION OF LAND

 A-74

 

 

EXHIBIT B

PERMITTED ENCUMBRANCES

 B-75

 

 

EXHIBIT C

LESSEE’S CERTIFICATE

The                                                                                                                                                                 undersigned
(“Lessee”) under that certain Lease (the “Lease”) dated 199  - and
made with                                                         ,
a
                            
(“Lessor”), hereby certifies:

1.    That it is Lessee under the Lease; that
attached hereto as Exhibit “A” is a true and correct copy of the Lease;
that the Lease is now in full force and effect and has not been amended,
modified or assigned except as disclosed or included in Exhibit “A”; and
that the Lease constitutes the entire agreement between Lessor and Lessee.

2.    That there exist no defenses or offsets to
enforcement of the Lease; that there are, as of the date hereof, no breaches or
uncured defaults on the part of Lessee or, to the best of Lessee’s knowledge,
Lessor thereunder; and that Lessee has no notice or knowledge of any prior
assignment, hypothecation, subletting or other transfer of Lessor’s interest in
the Lease.

3.    That the Base Rent for the first Lease Year
under this Lease is $              .  All Rent which is due has been paid, and
there are no unpaid Additional Charges owing by Lessee under the Lease as of
the date hereof.  No Base Rent or other
items (including without limitation security deposit and any impound account or
funds) have been paid by Lessee in advance under the Lease except for the
security deposit held by Lessor [in the form of an irrevocable letter of
credit] in the amount of $******* and the monthly installment of Base Rent that
became due on                                 .

4.    That Lessee has no claim against Lessor for
any security deposit, impound account or prepaid Rent except as provided in
paragraph 3 of this Certificate.

5.    That there are no actions, whether voluntary
or otherwise, pending against the undersigned under the bankruptcy laws of the
United States or any state thereof, nor has Lessee nor, to the best of Lessee’s
knowledge has Lessor begun any action, or given or received any notice for the
purpose of termination of the Lease.

6.    That there are, as of the date hereof, no
breaches or uncured defaults on the part of Lessee under any other agreement
executed in connection with the Lease.

7.    This Certificate has been requested by
Lessor pursuant to Section 19.3 of this Lease and for the benefit of                                     
(“Relying Party”).  The Relying Party is
entitled to rely on the statements of Lessee contained in this certificate.

8.    All capitalized terms used herein and not
defined herein shall have the meanings for such terms set forth in the Lease.

Dated:       ,
199                     LESSEE:

By:                                                             

 C-76

 

 

EXHIBIT D

MEMORANDUM OR SHORT FORM OF LEASE

THIS INSTRUMENT PREPARED
BY,

AND AFTER RECORDING, RETURN TO:

Kyle R. Hauberg, Esq.

Dykema Gossett PLLC

39577 Woodward Avenue

Suite 300

Bloomfield Hills, Michigan 48304-2820

MEMORANDUM OF
CONSOLIDATED, AMENDED AND RESTATED LEASE

THIS
MEMORANDUM OF CONSOLIDATED, AMENDED AND RESTATED LEASE, made and entered into
as of November      , 2000 by and between Sterling
Acquisition Corp., a Kentucky corporation, having its principal office at c/o
Omega Healthcare Investors, Inc., 900 Victors Way, Suite 350, Ann Arbor,
Michigan 48108 as Lessor and Diversicare Leasing Corp., a Tennessee
corporation, having its principal  office
at c/o Advocat, Inc., 277 Mallory Station Road, Suite 130, Franklin, Tennessee
37067 as Lessee with respect to the real property identified in Exhibit “A”  attached hereto and located in Phenix City,
Alabama.

WITNESSETH:

1.                  Omega Healthcare
Investors, Inc., a Maryland corporation and Diversicare Corporation of America,
a Delaware corporation, entered into a Master Lease dated August 11, 1992 (the “Original
Lease”), as evidenced by the Short Form Lease dated August 11, 1992 and
recorded on              
in Book             
at Page            in the
Office of                             .

2.                  Lessor and
Lessee, as the successors-in-interest to the Original Lease, have entered into
a Consolidated, Amended and Restated Master Lease of even date herewith (the “Amended
Lease”).

3.                  For and in
consideration of the rents reserved and the other covenants contained in the
Amended Lease, Lessor has and does hereby continue to lease to Lessee, and
Lessee has and does hereby continue to take and rent from Lessor, all of Lessor’s
rights and interest in and to the parcel of real property described in Exhibit
“A” and the improvements, fixtures, personal and other property included
within the definition of  “Leased
Properties” as set forth in the Lease.

4.                  The Initial Term
of the Amended Lease is approximately ten (10) years, commencing October 1,
2000 (the “Commencement Date”) and ending on September 30, 2012.

5.                  As more
particularly provided in the Amended Lease, Lessee may elect to renew the
original term for one (1) ten (10)  year
optional renewal periods (“Renewal Terms”) for a maximum term, if exercised, of
twenty (20) years after the Commencement Date.

 

 

6.                  This instrument
is executed and recorded for the purpose of giving notice of Lessee’s interest
in the Leased Properties and giving notice of the existence of the Lease, to
which reference is made for a full statement of the terms and conditions
thereof.  The respective addresses of the
parties hereto are:

Lessee:

Diversicare Leasing Corp.

c/o Advocat, Inc.

277 Mallory Station Road,
Suite 130

Franklin, Tennessee 37067

Attn: Chief Financial
Officer

Telephone:            (615) 771-7575

Telecopier:            (615) 771-7409

Lessor:

Sterling Acquisition
Corp.

c/o Omega Healthcare
Investors, Inc.

900 Victors Way, Suite
350

Ann Arbor, Michigan 48108

Attn.: F. Scott Kellman
and Susan Allene Kovach

Telephone:            (734) 887-0200

Telecopier:            (734) 887-0201

 

 D-78

 

 

IN WITNESS WHEREOF, the
parties have caused this instrument to be executed by their duly authorized
officer or officers and general partners, as applicable, all as of the day and
date first above written.

	
  LESSOR:

  	
   

  	
   

  	
   

  	
  LESSEE:

  
	
   

  	
   

  	
   

  
	
  STERLING
  ACQUISITION CORP.,

  	
   

  	
  DIVERSICARE LEASING
  CORP.,

  
	
  a Kentucky
  corporation

  	
   

  	
  a Tennessee corporation

  
	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
  By:

  
	
   

  	
  Susan A. Kovach,
  Vice President

  	
   

  	
  Name:

  
	
   

  	
   

  	
  Its:

  
						

 

 D-79

 

 

STATE OF MICHIGAN      )

)SS

COUNTY OF
WASHTENAW           )

On this      
day of October, 2000, before me,                    ,
a Notary Public within and for the County and State aforesaid, duly qualified,
commissioned and acting, appeared in person the within named Susan A. Kovach,
to me personally well known, who stated that they were the Vice President, of
STERLING ACQUISITION CORP., a Kentucky corporation, and were duly authorized in
their respective capacities to execute the foregoing Memorandum of Amended and
Restated Lease for and in the name and behalf of said corporation, and further
stated and acknowledged that they had so signed, executed and delivered said
Memorandum of Amended and Restated Lease in the capacities and for the consideration
and purposed therein mentioned and set forth.

IN TESTIMONY WHEREOF, I
have hereunto set my hand and official seal on this      
day of October, 2000.

_______________________________

Notary Public

(NOTARY SEAL)

My commission
expires:          

STATE OF                                            )

)SS

COUNTY OF                                                                                              )

On this      
day of October, 2000, before me,                   ,
a Notary Public within and for the County and State aforesaid, duly qualified,
commissioned and acting, appeared in person the within named                   ,
to me personally well known, who stated that they were the                   ,
of DIVERSICARE LEASING CORP., a Tennessee corporation, and were duly authorized
in their respective capacities to execute the foregoing Memorandum of Amended
and Restated Lease for and in the name and behalf of said corporation, and
further stated and acknowledged that they had so signed, executed and delivered
said Memorandum of Amended and Restated Lease in the capacities and for the
consideration and purposed therein mentioned and set forth.

IN TESTIMONY WHEREOF, I
have hereunto set my hand and official seal on this      
day of October, 2000.

_______________________________

Notary Public

(NOTARY SEAL)

My commission
expires:          

 

 

SCHEDULE A

Excluded Personal
Property of Lessee

1.                  Lessee’s
continuous quality improvement program, manuals and materials; management
information systems; policy, procedure and educational manuals and materials
and similar proprietary property.

2.                  Computer
hardware, and related equipment which is integrated with the computer system
maintained by Advocat, and computer software, provided, however, that Lessee
shall cause all data that is reasonably necessary for the continuing operation
of one or more of the Facilities, and which may be accessed through such
computers or software, to be made available to Lessor in a reasonably
accessible form without material cost to Lessee.

 

 S-81

 

 

TABLE OF CONTENTS

	
  

  	
   

  	
   

  	
   

  	
  Page

  
	
  RECITALS

  	
   

  	
   

  	
   

  	
  1

  
	
  ARTICLE I

  	
   

  	
   

  	
   

  	
  1

  
	
  1.1

  	
   

  	
  Lease

  	
   

  	
  1

  
	
  1.2

  	
   

  	
  Term

  	
   

  	
  2

  
	
  1.3

  	
   

  	
  Option to Renew

  	
   

  	
  2

  
	
  ARTICLE II

  	
   

  	
   

  	
   

  	
  3

  
	
  2.1

  	
   

  	
  Definitions

  	
   

  	
  3

  
	
  ARTICLE III

  	
   

  	
   

  	
   

  	
  25

  
	
  3.1

  	
   

  	
  Base Rent; Monthly Installments

  	
   

  	
  25

  
	
  3.2

  	
   

  	
  Additional Charges

  	
   

  	
  26

  
	
  3.3

  	
   

  	
  Late Charge

  	
   

  	
  26

  
	
  3.4

  	
   

  	
  Net Lease

  	
   

  	
  26

  
	
  3.5

  	
   

  	
  Payments In The Event of a Rent Adjustment

  	
   

  	
  27

  
	
  ARTICLE IV

  	
   

  	
   

  	
   

  	
  27

  
	
  4.1

  	
   

  	
  Payment of Impositions

  	
   

  	
  27

  
	
  4.2

  	
   

  	
  Notice of Impositions

  	
   

  	
  28

  
	
  4.3

  	
   

  	
  Adjustment of Impositions

  	
   

  	
  28

  
	
  4.4

  	
   

  	
  Utility Charges

  	
   

  	
  28

  
	
  4.5

  	
   

  	
  Insurance Premiums

  	
   

  	
  28

  
	
  ARTICLE V

  	
   

  	
   

  	
   

  	
  29

  
	
  5.1

  	
   

  	
  No Termination, Abatement, etc.

  	
   

  	
  29

  
	
  ARTICLE VI

  	
   

  	
   

  	
   

  	
  29

  
	
  6.1

  	
   

  	
  Ownership of the Leased Properties

  	
   

  	
  29

  
	
  6.2

  	
   

  	
  Lessor’s Personal Property

  	
   

  	
  30

  
	
  6.3

  	
   

  	
  Lessee’s Personal Property

  	
   

  	
  30

  
	
  6.4

  	
   

  	
  Grant of Security Interest in Lessee’s Personal
  Property and Accounts

  	
   

  	
  31

  
	
  ARTICLE VII

  	
   

  	
   

  	
   

  	
  31

  
	
  7.1

  	
   

  	
  Condition of the Leased Properties

  	
   

  	
  31

  
	
  7.2

  	
   

  	
  Use of the Leased Properties

  	
   

  	
  32

  
	
  7.3

  	
   

  	
  Certain Environmental Matters

  	
   

  	
  32

  
	
  ARTICLE VIII

  	
   

  	
   

  	
   

  	
  37

  
	
  8.1

  	
   

  	
  Compliance with Legal and Insurance Requirements

  	
   

  	
  37

  
	
  8.2

  	
   

  	
   

  	
   

  	
  37

  
	
   

  	
   

  	
  Certain Covenants

  	
   

  	
  37

  
	
  8.4

  	
   

  	
  Management Agreements

  	
   

  	
  40

  
	
  8.5

  	
   

  	
  Other Facilities

  	
   

  	
  40

  
	
  8.6

  	
   

  	
  Separateness

  	
   

  	
  40

  
	
  ARTICLE IX

  	
   

  	
   

  	
   

  	
  41

  
	
  9.1

  	
   

  	
  Maintenance and Repair

  	
   

  	
  41

  
	
  9.2

  	
   

  	
  Encroachments, Restrictions, etc.

  	
   

  	
  42

  

 

 82
 

 

 

	
  ARTICLE X

  	
   

  	
   

  	
   

  	
  43

  
	
  10.1

  	
   

  	
  Construction of Alterations and Additions to the
  Leased Properties

  	
   

  	
  43

  
	
  ARTICLE XI

  	
   

  	
   

  	
   

  	
  44

  
	
  11.1

  	
   

  	
  Liens

  	
   

  	
  44

  
	
  ARTICLE XII

  	
   

  	
   

  	
   

  	
  44

  
	
  12.1

  	
   

  	
  Permitted Contests

  	
   

  	
  44

  
	
  12.2

  	
   

  	
  Lessor’s Requirement for Deposits

  	
   

  	
  45

  
	
  ARTICLE XIII

  	
   

  	
   

  	
   

  	
  45

  
	
  13.1

  	
   

  	
  General Insurance Requirements

  	
   

  	
  45

  
	
  13.2

  	
   

  	
  Risks to be Insured

  	
   

  	
  46

  
	
  13.3

  	
   

  	
  Payment of Premiums; Copies of Policies;
  Certificates

  	
   

  	
  47

  
	
  13.4

  	
   

  	
  Premium Deposits

  	
   

  	
  48

  
	
  13.5

  	
   

  	
  Umbrella Policies

  	
   

  	
  48

  
	
  13.6

  	
   

  	
  Additional Insurance

  	
   

  	
  48

  
	
  13.7

  	
   

  	
  No Liability; Waiver of Subrogation

  	
   

  	
  48

  
	
  13.8

  	
   

  	
  Increase in Limits

  	
   

  	
  48

  
	
  13.9

  	
   

  	
  Blanket Policy

  	
   

  	
  48

  
	
  13.10

  	
   

  	
  No Separate Insurance

  	
   

  	
  49

  
	
  ARTICLE XIV

  	
   

  	
   

  	
   

  	
  49

  
	
  14.1

  	
   

  	
  Insurance Proceeds

  	
   

  	
  49

  
	
  14.2

  	
   

  	
  Restoration in the Event of Damage or Destruction

  	
   

  	
  50

  
	
  14.3

  	
   

  	
  Restoration of Lessee’s Property

  	
   

  	
  50

  
	
  14.4

  	
   

  	
  No Abatement of Rent

  	
   

  	
  50

  
	
  14.5

  	
   

  	
  Waiver

  	
   

  	
  50

  
	
  14.7

  	
   

  	
  Disbursement of Insurance Proceeds Equal to or
  Greater Than The Approval Threshold

  	
   

  	
  50

  
	
  14.8

  	
   

  	
  Net Proceeds Paid to Facility Mortgagee

  	
   

  	
  52

  
	
  ARTICLE XV

  	
   

  	
   

  	
   

  	
  53

  
	
  15.1 

  	
   

  	
  Total Taking or Other Taking with Leased Property
  Rendered Unsuitable for Its Primary Intended Use

  	
   

  	
  53

  
	
  15.2

  	
   

  	
  Allocation of Award

  	
   

  	
  54

  
	
  15.3

  	
   

  	
  Partial Taking

  	
   

  	
  54

  
	
  15.4

  	
   

  	
  Temporary Taking

  	
   

  	
  54

  
	
  15.5

  	
   

  	
  Awards Paid to Facility Mortgagee

  	
   

  	
  55

  
	
  ARTICLE XVI

  	
   

  	
   

  	
   

  	
  56

  
	
  16.1

  	
   

  	
  Lessor’s Rights Upon an Event of Default

  	
   

  	
  56

  
	
  16.2

  	
   

  	
  Certain Remedies

  	
   

  	
  56

  
	
  16.3

  	
   

  	
  Damages

  	
   

  	
  56

  
	
  16.4

  	
   

  	
   

  	
   

  	
  57

  
	
  16.5

  	
   

  	
  Waiver

  	
   

  	
  57

  
	
  16.6

  	
   

  	
  Application of Funds

  	
   

  	
  57

  
	
  16.7

  	
   

  	
  Bankruptcy

  	
   

  	
  58

  
	
  ARTICLE XVII

  	
   

  	
   

  	
   

  	
  58

  
	
  17.1

  	
   

  	
  Lessor’s Right to Cure Lessee’s Default

  	
   

  	
  58

  
	
  ARTICLE XVIII

  	
   

  	
   

  	
   

  	
  59

  
	
  18.1

  	
   

  	
  Holding Over

  	
   

  	
  59

  

 

 83
 

 

 

	
  18.2

  	
   

  	
  Indemnity

  	
   

  	
  59

  
	
  ARTICLE XIX

  	
   

  	
   

  	
   

  	
  59

  
	
  19.1

  	
   

  	
  Subordination

  	
   

  	
  59

  
	
  19.2

  	
   

  	
  Attornment

  	
   

  	
  60

  
	
  19.3

  	
   

  	
  Lessee’s Certificate

  	
   

  	
  60

  
	
  ARTICLE XX

  	
   

  	
   

  	
   

  	
  60

  
	
  20.1

  	
   

  	
  Risk of Loss

  	
   

  	
  60

  
	
  ARTICLE XXI

  	
   

  	
   

  	
   

  	
  61

  
	
  21.1

  	
   

  	
  Indemnification

  	
   

  	
  61

  
	
  ARTICLE XXII

  	
   

  	
   

  	
   

  	
  62

  
	
  22.1

  	
   

  	
  General Prohibition against Transfers

  	
   

  	
  62

  
	
  22.2

  	
   

  	
  Subordination and Attornment

  	
   

  	
  62

  
	
  22.3

  	
   

  	
  Sublease Limitation

  	
   

  	
  62

  
	
  ARTICLE XXIII

  	
   

  	
   

  	
   

  	
  63

  
	
  23.1

  	
   

  	
  Officer’s Certificates and Financial Statements

  	
   

  	
  63

  
	
  23.2

  	
   

  	
  Public Offering Information

  	
   

  	
  65

  
	
  ARTICLE XXIV

  	
   

  	
   

  	
   

  	
  66

  
	
  24.1

  	
   

  	
  Lessor’s Right to Inspect

  	
   

  	
  66

  
	
  ARTICLE XXV

  	
   

  	
   

  	
   

  	
  66

  
	
  25.1

  	
   

  	
  No Waiver

  	
   

  	
  66

  
	
  ARTICLE XXVI

  	
   

  	
   

  	
   

  	
  66

  
	
  26.1

  	
   

  	
  Remedies Cumulative

  	
   

  	
  66

  
	
  ARTICLE XXVII

  	
   

  	
   

  	
   

  	
  66

  
	
  27.1

  	
   

  	
  Acceptance of Surrender

  	
   

  	
  66

  
	
  ARTICLE XXIII

  	
   

  	
   

  	
   

  	
  66

  
	
  28.1

  	
   

  	
  No Merger of Title

  	
   

  	
  66

  
	
  28.2

  	
   

  	
  No Partnership

  	
   

  	
  67

  
	
  ARTICLE XXIX

  	
   

  	
   

  	
   

  	
  67

  
	
  29.1

  	
   

  	
  Conveyance by Lessor

  	
   

  	
  67

  
	
  ARTICLE XXX

  	
   

  	
   

  	
   

  	
  67

  
	
  30.1

  	
   

  	
  Quiet Enjoyment

  	
   

  	
  67

  
	
  ARTICLE XXXI

  	
   

  	
   

  	
                  

  	
  67

  
	
  31.1

  	
   

  	
  Notices

  	
   

  	
  67

  
	
  ARTICLE XXXII

  	
   

  	
   

  	
   

  	
  68

  
	
  32.1

  	
   

  	
  Appraisers

  	
   

  	
  68

  
	
  ARTICLE XXXIII

  	
   

  	
   

  	
   

  	
  70

  
	
  33.1

  	
   

  	
  Breach by Lessor

  	
   

  	
  70

  
	
  33.2

  	
   

  	
  Compliance With Facility Mortgage

  	
   

  	
  70

  
	
  ARTICLE XXXIV

  	
   

  	
   

  	
   

  	
  70

  
	
  34.1

  	
   

  	
  Disposition of Personal Property on Termination;
  Lessor’s Option to Purchase

  	
   

  	
  70

  
	
  34.2

  	
   

  	
  Facility Trade Names

  	
   

  	
  71

  
	
  34.3

  	
   

  	
  Transfer of Operational Control of the Facilities

  	
   

  	
  71

  
	
  34.4

  	
   

  	
  Intangibles and Personal Property

  	
   

  	
  73

  
	
  ARTICLE XXXV

  	
   

  	
   

  	
   

  	
  73

  

 

 84
 

 

 

	
  35.1

  	
   

  	
  Arbitration

  	
   

  	
  73

  
	
  ARTICLE XXXVI

  	
   

  	
   

  	
   

  	
  74

  
	
  36.1

  	
   

  	
  Miscellaneous

  	
   

  	
  74

  
	
  ARTICLE XXXVII

  	
   

  	
   

  	
   

  	
  76

  
	
  37.1

  	
   

  	
  Commissions

  	
   

  	
  76

  
	
  ARTICLE XXXVIII

  	
   

  	
   

  	
   

  	
  76

  
	
  38.1

  	
   

  	
  Memorandum or Short Form of Lease

  	
   

  	
  76

  
	
  ARTICLE XXXIX

  	
   

  	
   

  	
   

  	
  76

  
	
  39.3

  	
   

  	
  Application of Security Deposit

  	
   

  	
  77

  
	
  39.4

  	
   

  	
  Transfer of Security Deposit

  	
   

  	
  78

  
	
  EXHIBIT A

  	
   

  	
   

  	
   

  	
  A-1

  
	
  DESCRIPTION OF LAND

  	
   

  	
  A-1

  
	
  EXHIBIT B

  	
   

  	
   

  	
   

  	
  B-1

  
	
  PERMITTED
  ENCUMBRANCES

  	
   

  	
  B-1

  
	
  EXHIBIT C

  	
   

  	
   

  	
   

  	
  C-1

  
	
  LESSEE’S
  CERTIFICATE

  	
   

  	
  C-1

  
	
  EXHIBIT D

  	
   

  	
   

  	
   

  	
  D-1

  
	
  MEMORANDUM OR
  SHORT FORM OF LEASE

  	
   

  	
  D-1

  
	
  SCHEDULE AExcluded Personal Property of Lessee

  	
   

  	
  S-1

  

 85

 

MASTER LEASE

MULTIPLE LESSEE

MULTIPLE FACILITIES

STERLING ACQUISITION CORP., LESSOR

AND

DIVERSICARE LEASING CORPORATION, LESSEE

DATED: November 8,
2000

(effective October 1, 2000)

 

 

 

FIRST AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

THIS FIRST AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE (“Amendment”) is executed
and delivered as of this 30th  day of September, 2001 by and between STERLING ACQUISITION CORP., a Kentucky
corporation (“Lessor”), and DIVERSICARE
LEASING CORPORATION, a Tennessee corporation (“Lessee”).

RECITALS:

A.            Lessor
and Lessee have entered into that certain Consolidated Amended and Restated
Master Lease dated as of November 8, 2000 to be effective as of October 1, 2000
(the “Lease”), providing for the amendment, restatement and consolidation of
the “Existing Leases” as more particularly described therein.

B.            Lessor
and Lessee desire to mutually amend and modify the Lease as more particularly
set forth herein.

C.            Lessor
and Lessee agree that for and in consideration of the mutual covenants of the
parties hereto, and other good and valuable consideration to the parties
hereto, the receipt and sufficiency of which is hereby acknowledged and confessed
by the parties, and for the benefit which will inure to each party from the
execution of this Amendment, Lessor and Lessee hereby agree to amend and modify
the Lease as follows, with each amendment and modification to be effective as
of the date above.

The parties agree as follows:

1.             Amendment
Definitions.  Any capitalized term
used but not defined in this Amendment will have the meaning assigned to such
term in the Lease.  In addition to the
other definitions contained herein, when used in this Amendment the following
term shall have the following meaning:

Transaction Documents: The Lease and
the security agreements, pledge agreements, subordination agreements,
guaranties and other documents which evidence, secure or otherwise relate to
the Lease.

2.             New
Facility to Exhibits A and Exhibit B. 
Exhibit A to the Lease is amended by the addition of Exhibit A-29 to
this Amendment.  Effective as of the date
hereof, the real property described on Exhibit A-29 to this Amendment and the
improvements thereon commonly known as Hardee Manor Care Center shall
constitute a Leased Property and comprise a part of the Leased Properties
described in and subject to the lease. 
Exhibit B to the Lease is amended by the addition of the items listed in
Exhibit B to this Amendment.

3.             Amended
and Restated Security Agreement. 
Lessor and Lessee agree that Schedule 1 of that certain Amended and
Restated Security Agreement by and between the parties hereto and dated
November 8, 2000 shall be amended to include the new facility added in Exhibit A-29 to this Amendment.

 

 

4.             Execution
and Counterparts.  This Amendment may
be executed in any number of counterparts, each of which, when so executed and
delivered, shall be deemed to be an original, but when taken together shall
constitute one and the same Amendment.

5.             Headings.  Section headings used in this Amendment are
for convenience of reference only and shall not affect the construction of the
Amendment.

6.             Enforceability
of Transaction Documents.  Except as
expressly and specifically set forth herein, the Transaction Documents remain
unmodified and in full force and effect. 
In the event of any discrepancy between any other Transaction Document
and this Amendment, the terms and conditions of this Amendment will control and
such other Transaction Document is deemed amended to conform hereto.

SIGNATURE PAGES FOLLOW

 

 

IN WITNESS WHEREOF, the parties have executed this
Amendment by their duly authorized officers as of the date first above written.

	
  

  	
  LESSOR:

  	
   

  
	
   

  	
   

  
	
   

  	
  STERLING
  ACQUISITION CORP., a Kentucky corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Scott Kellman

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  Scott Kellman

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  COO

  	
   

  	 

	
   

  	
   

  	
   

  
	
   

  	
  LESSEE:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  DIVERSICARE
  LEASING CORPORATION,

  
	
   

  	
   

  
	
   

  	
  a Tennessee
  corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R.
  Council III

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
  William R.
  Council III

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
  Executive Vice
  President

  	
   

  
														

 

 

THE STATE OF Michigan)

:ss

COUNTY OF Washtenaw)

This instrument was acknowledged before me on the 20th day of September, 2001, by Scott Kellman,
the Chief Operating Officer of Sterling Acquisition Corp., a Delaware
corporation, on behalf of the corporation

/s/ Jacqueline P. March                       [Notary Stamp]

Notary
Public

Washtenaw, County, Michigan

My
commission expires: July 23, 2005

THE STATE OF Tennessee)

:ss

COUNTY OF Williamson)

This instrument was acknowledged before me on the 19th day of September, 2001, by William R. Council
III, the Executive Vice President of Diversicare Leasing Corporation, a
Tennessee corporation, on behalf of the corporation

/s/ Andrea Neiderland

Notary
Public                        [Notary
Stamp]

Davidson, County, Tennessee

My
commission expires:

 

 

ACKNOWLEDGMENT

The undersigned consents to the transactions
contemplated by this Amendment, ratifies and affirms its Guaranty dated as of
November 8, 2000 and acknowledges and agrees that the performance of the
Transaction Documents, including the Lease, is secured by its Guaranty on the
same terms and conditions in effect prior to this Amendment.

	
  

  	
  GUARANTORS:

  	
   

  
	
   

  
	
   

  	
  ADVOCAT, INC., a Delaware corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title: 

  	
  Executive Vice President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADVOCAT FINANCE, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title: 

  	
  Executive Vice President

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  	
  William R. Council III

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title: 

  	
  Executive Vice President

  	
   

  
									

 

 

EXHIBIT A TO AMENDMENT

EXHIBIT A-29

DESCRIPTION OF LAND

Name of Facility:                                                       Hardee
Manor Care Center

Facility Address:                                                     401
Orange Place, Wauchula, Florida  33873

Legal Description:

All of Blocks E and F of MOONLIGHT PARK SUBDIVISION,
to the City of Wauchula, in Section 9, Township 34 South, Range 25 East and in
Plat Book 4, page 9, public records of Hardee County, Florida.

Being the same property conveyed to Grantor herein by
Warranty Deed recorded in Book 244, Page 522, in the Office of Circuit Court
Clerk, Hardee County, Florida.

AND

That portion of Ninth Avenue lying between Orange
Place and Grove Street and between Blocks E and F of MOONLIGHT PARK SUBDIVISION
to the City of Wauchula, public records of Hardee County, Florida.

Being the same property conveyed to Grantor herein by
Warranty Deed recorded in Book 257, Page 497, in the Office of Circuit Court
Clerk, Hardee County, Florida.

 

 

EXHIBIT B TO AMENDMENT

EXHIBIT B

PERMITTED EXCEPTIONS

     39. Taxes for the year 2001
and subsequent years.  (Affects Hardee,
Hardee County, Florida)

     40. Applicable zoning
ordinances.  (Affects Hardee, Hardee
County, Florida)

     41. Bill of Sale Absolute
recorded in O.R. Book 200, page 278 of the public records of Hardee County,
Florida.  (Transfers ownership from First
Hardee Service Corporation to City of Wauchula, of all rights and privileges of
water main, fire hydrants service, meter and accessories, sanitary sewers, lift
station pumps and accessories and easements as shown on the plans thereof) both
blocks in Hardee County, Florida. 
(Affects Hardee, Hardee County, Florida)

     42. Rights of patients under
unrecorded resident agreements.  (Affects
Hardee, Hardee County, Florida)

 

SECOND AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

THIS SECOND AMENDMENT TO CONSOLIDATED AMENDED AND
RESTATED MASTER LEASE (“Amendment”) is executed and delivered as of this 15th day of June 2005 by and between STERLING
ACQUISITION CORP., a Kentucky corporation (“Lessor”), and DIVERSICARE LEASING
CORPORATION, a Tennessee corporation (“Lessee”).

RECITALS:

A.            Lessor
and Lessee have entered into that certain Consolidated Amended and Restated
Master Lease dated as of November 8, 2000 to be effective as of October 1,
2000, as amended by that certain First Amendment to Consolidated Amended and
Restated Master Lease dated as of September 30, 2001 (as amended, the “Lease”),
providing for the amendment, restatement and consolidation of the “Existing Leases”
as more particularly described therein.

B.            Lessor
and Lessee desire to mutually amend and modify the Lease as more particularly
set forth herein.

C.            Lessor
and Lessee agree that for and in consideration of the mutual covenants of the
parties hereto, and other good and valuable consideration to the parties
hereto, the receipt and sufficiency of which is hereby acknowledged and
confessed by the parties, and for the benefit which will inure to each party
from the execution of this Amendment, Lessor and Lessee hereby agree to amend
and modify the Lease as follows, with each amendment and modification to be
effective as of the date above.

The parties agree as follows:

1.             Amendment Definitions.  Any capitalized term used but not defined in
this Amendment will have the meaning assigned to such term in the Lease.

2.             Capital Improvements.  Lessor acknowledges that it has been advised
by Lessee that Lessee intends to perform certain capital improvements to the
Facilities (the “Capital Improvements”). 
Lessee shall select the architects, engineers, contractors and
subcontractors of its choice to complete the Capital Improvements, subject to
the reasonable approval of Lessor.  Prior
to commencing construction of any Capital Improvements, Lessee shall have (a)
submitted complete plans and specifications prepared by such architects to
Lessor for Lessor’s review and approval at least twenty (20) days before the
planned start of construction thereof, (b) obtained Lessor’s written approval
thereof and, if required, the approval of any Facility Mortgagee (which Lessor
shall use its prompt and best efforts to obtain), which approval shall not be
unreasonably withheld, conditioned or delayed, and if no response has been
received by Lessee within fifteen (15) days after submission of the plans and
specifications for approval then such approval shall be deemed to have been
given.  Lessee shall be 

 

responsible for the
completion of such improvements in accordance with the plans and specifications
approved by Lessor, and shall promptly correct any failure with respect
thereto.

All alterations, improvements and additions shall be
constructed in a first class, workmanlike manner, in compliance with all
Insurance Requirements and Legal Requirements, be in keeping with the character
of the Leased Properties and the area in which the Leased Property in question
is located and be designed and constructed so that the value of the Leased
Properties will not be diminished or and that the primary Intended Use of the
Leased Properties will not be changed. 
All improvements, alterations and additions shall immediately become a
part of the Leased Properties.

Any Capital Improvements made by Lessee pursuant to
this Paragraph 2, other than expenditures for additions (as defined in the
definition of Qualified Capital Expenditures), the cost of which Capital
Improvements are not paid for by Lessor as part of the Improvement Allowance in
accordance with Paragraph 3, below, shall be included as capital expenditures
for purposes of inclusion in the capital expenditures budget for the Facilities
and for measuring compliance with the obligations of Lessee set forth in
Section 8.3 of the Lease.

In connection with any alteration which involves the
removal, demolition or disturbance of any asbestos-containing material, Lessee
shall cause such removal, demolition or disturbance to be performed in
accordance with, and shall carry out such asbestos monitoring and maintenance
program with respect thereto as may be required by, all applicable Legal
Requirements.

Anything herein or in the Lease to the contrary
notwithstanding, in the event of any conflict or inconsistency between this
Paragraph 2 and Section 10.1 of the Lease, the terms and provisions of this
Paragraph 2 shall be deemed to control and govern the approval and construction
of the Capital Improvements.

3.             Tenant Improvement Allowance.  In connection with the completion of the
Capital Improvements, Lessor agrees to make available to Lessee an improvement
allowance equal to Five Million and 00/100 Dollars ($5,000,000.00) (the “Improvement
Allowance”).  The Improvement Allowance
shall only be used for the completion of the Capital Improvements.  The Improvement Allowance shall be disbursed
not more often than monthly and for a minimum amount of Two Hundred Thousand
and 00/100 Dollars ($200,000.00) per disbursement.  The Improvement Allowance shall only be
available for Capital Improvements completed on or before December 31, 2006,
and the final request for disbursement shall be no later than February 28, 2007.  Any qualifying installment of the Improvement
Allowance requested by Lessee shall be paid and disbursed by Lessor to Lessee
on the first business day of the calendar month (an “Adjustment Month”)
following the date that is fifteen (15) days after the date Lessor receives
written request for payment of such installment from Lessee, so long as such
request is accompanied by invoices, sworn statements and lien waivers (partial
or full, as applicable) with respect to the work for which such request is made.  Lessor and 

 2
 

 

Lessee agree to cooperate
in good faith in attempting to resolve any disputed portions of any installment
payment request.  In the event such
dispute cannot be so resolved, Lessor and Lessee shall submit the matter to the
architect approved by Lessor pursuant to Paragraph 2, above for resolution,
whose decision shall be binding on both parties.

4.             Increase in Base Rent.  The annual Base Rent payable under the Lease
shall be increased by One Hundred Two and 50/100 Dollars ($102.50) per $1,000 of
the Improvement Allowance disbursed pursuant to Paragraph 3 above, effective
immediately as of the first day of the respective Adjustment Month.  The increases in the annual Base Rent as a
result of this Paragraph 4 of this Amendment shall be collectively referred to
as the “Improvement Allowance Adjustment Amount.”  Lessor shall provide Lessee with written
notice of the then current annual Base Rent, as adjusted by the “Improvement
Allowance Adjustment Amount”, at or prior to each disbursement made pursuant to
Paragraph 3, above.  To the extent such
written notice of the then current Base Rent is not received by Lessee prior to
the payment by Lessee of Base Rent for an Adjustment Month, then Lessee shall
include any increased differential in Base Rent with the payment of the
following month’s installment of Base Rent.

5.             Insurance.  Lessor acknowledges that the liability
insurance coverage and the malpractice insurance coverage required pursuant to
Sections 13.2.4 and 13.2.5 of the Lease, are currently unavailable generally in
the nursing home industry at commercially affordable rates and that Lessee
currently maintains and has in place general liability and malpractice
insurance with single limit coverage of Two Hundred Fifty Thousand Dollars
($250,000.00) per occurrence and Five Hundred Thousand Dollars ($500,000.00)
cumulative, with a deductible of Twenty Five Thousand Dollars (25,000.00).  Lessor hereby agrees that, the provisions of
Sections 13.2.4 and 13.2.5 of the Lease to the contrary notwithstanding, until
such time as the insurance coverage required therein is generally available in
the nursing home industry at commercially affordable rates, Lessee shall not be
required obtain the coverages required therein and Lessor agrees to accept
Lessee’s current coverage in lieu thereof for the remainder of the Initial Term
of the Lease.  Lessee shall not be deemed
to be in default of the provisions of Article XIII of the Lease as a result
thereof.  Lessee shall provide Lessor, on
an annual basis, information from its insurance carrier and from comparable
insurance carriers of the costs of insurance premiums to meet Lessor’s
insurance requirements.  At such time as
the premium amounts quoted are commercially affordable, Lessee shall
immediately purchase any and all insurance policies necessary to meet the
requirements of Sections 13.2.4 and 13.2.5 of the Lease.  This provision does not relieve Lessee from
its agreement of indemnity under Article XXI of the Lease nor does it modify
the provisions thereof.  Notwithstanding
the foregoing, Lessee acknowledges and agrees that the provisions of this
Paragraph 5 shall (i) be applicable only during the Initial Term of the Lease
and not any Renewal Term and (ii) not be applicable in the event of any
Transfer.  Lessee acknowledges and agrees
that Lessor shall have the right to (i) require that the Lessee provide the
insurance coverages required by the provisions of Sections 13.2.4, and 13.2.5
during any Renewal Term of the Lease and (ii) withhold its consent to any
proposed Transfer unless the Transferee 

 3
 

 

agrees to provide the
insurance coverage required by the provisions of Section 13.2.4 and 13.2.5 of
the Lease.

6.             Failure to Pay.  In the event Lessor fails to pay Lessee any
installment request when and as provided in Paragraph 3, above, and Lessor does
not cure such failure within ten (10) days after written notice from Lessee,
then Lessee shall have the right to and may set off against and deduct from
each one of the next successive monthly installments of Base Rent due under the
Lease the amount of such installment payment, together with interest thereon at
the Overdue Rate until paid, until such time as the entire amount, together
with interest has been paid to Lessee in full. 
The amount of any such installment request (exclusive of the interest
thereon) deducted by Lessee from the monthly installments of Base Rent due
under the Lease pursuant to this Paragraph 6 shall be credited against the
amount of the Improvement Allowance made available to Lessee hereunder and shall
result in a corresponding increase in the Base Rent pursuant to Paragraph 4 of
this Amendment.

7.             Execution and Counterparts.  This Amendment may be executed in any number
of counterparts, each of which, when so executed and delivered, shall be deemed
to be an original, but when taken together shall constitute one and the same
Amendment.

8.             Headings.  Section headings used in this Amendment are
for convenience of reference only and shall not affect the construction of the
Amendment.

9.             Enforceability of Transaction
Documents.  Except as expressly and
specifically set forth herein, the Transaction Documents remain unmodified and
in full force and effect.  In the event
of any discrepancy between any other Transaction Document and this Amendment,
the terms and conditions of this Amendment will control and such other
Transaction Document is deemed amended to conform hereto.

Signatures
page follows.

 4
 

 

 

IN WITNESS WHEREOF, the
parties have executed this Amendment by their duly authorized officers as of
the date first above written.

	
  

  	
  LESSOR:

  
	
   

  	
   

  	
   

  
	
   

  	
  STERLING ACQUISITION CORP., a Kentucky

  
	
   

  	
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Daniel J. Booth

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  Daniel J. Booth

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Chief Operating Officer

  
	
   

  	
   

  	
   

  
	
   

  	
  LESSEE:

  
	
   

  	
   

  	
   

  
	
   

  	
  DIVERSICARE LEASING CORPORATION,

  
	
   

  	
  a Tennessee corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  

 

 5
 

 

 

	
  THE STATE OF Maryland )

  
	
   

  	
   

  	
                  :ss

  
	
  COUNTY OF Baltimore     )

  

 

This instrument was acknowledged before me on the 15th day of June, 2005, by Daniel J. Booth, the COO
of Sterling Acquisition Corp., a Delaware corporation, on behalf of the
corporation.

	
  /s/ Judith A. Jacobs

  	
   

  	
   

  
	
  Notary Public

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

	
  Baltimore, County Maryland

  	
   

  	
   

  

 

	
  My commission expires:

  	
  May 1, 2008

  	
   

  	
   

  

 

	
  THE STATE OF Tennessee )

  
	
   

  	
   

  	
                  :ss

  
	
  COUNTY OF Williamson    )

  

 

This instrument
was acknowledged before me on the 15th day
of June, 2005, by William R. Council, III, the President of Diversicare Leasing
Corporation., a Tennessee corporation, on behalf of the corporation.

	
  /s/ Jacqueline S. Reed

  	
   

  	
   

  
	
  Notary Public

  	
   

  	
   

  
	
   

  	
   

  	
   

  

 

	
  Williamson, County

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
				

 

	
  My commission expires:

  	
  2/20/2006

  	
   

  	
   

  

 

 6
 

 

 

ACKNOWLEDGMENT

The undersigned consents to the transactions
contemplated by this Amendment, ratifies and affirms its Guaranty dated as of
November 8, 2000 and acknowledges and agrees that the performance of the
Transaction Documents, including the Lease, is secured by its Guaranty on the same
terms and conditions in effect prior to this Amendment.

	
  

  	
  GUARANTORS:

  
	
   

  	
   

  	
   

  
	
   

  	
  ADVOCAT, INC., a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  ADVOCAT FINANCE, INC., a Delaware

  
	
   

  	
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  DIVERSICARE MANAGEMENT SERVICES

  
	
   

  	
  CO.,, a Tennessee corporation

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
  William R. Council III

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  President

  

 

 7Exhibit 10.4

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

This
Third Amendment to Consolidated Amended and Restated Master Lease (this “Amendment”)
is executed and delivered as of this 20th day of October, 2006, to be effective as of October
1, 2006 (the “Effective Date”) by and between STERLING ACQUISITION
CORP., a Kentucky corporation (“Lessor”), the address of which is 9690 Deereco Road, Suite 100, Timonium, MD 21093,
and DIVERSICARE LEASING CORP., a Tennessee corporation, the address of which is
1621 Galleria Boulevard, Brentwood, TN 
37027.

RECITALS:

A.            Lessee
has executed and delivered to Lessor a Consolidated Amended and Restated Master
Lease dated as of November 8, 2000, but effective as of October 1, 2000, as
amended by a First Amendment to Consolidated Amended and Restated Master Lease
dated as of September 30, 2001, and a Second Amendment to Consolidated Amended
and Restated Master Lease dated as of June 15, 2005 (the “Existing Master
Lease”) pursuant to which Lessee leased from Lessor certain healthcare
facilities.

B.            Pursuant
to that certain Restructuring, Stock Issuance and Subscription Agreement dated
as of the date of this Amendment among Advocat Inc., a Delaware corporation (“Advocat”),
Omega Healthcare Investors, Inc. (“Omega”), a Maryland corporation,
Lessor, and Lessee, Lessor and Lessee have agreed, among other things, to (i)
have the Initial Term expire as of September 30, 2006, (ii) exercise the first
twelve year Renewal Term, (iii) add a second twelve year Renewal Term, and (iv)
increase the Base Rent payable under the Existing Master Lease, all as set
forth in this Amendment.

NOW
THEREFORE, the parties agree as follows:

1.             Definitions.  Any capitalized term used but not defined in
this Amendment will have the meaning assigned to such term in the Existing
Master Lease.  From and after the date of
this Amendment, each reference in the Existing Master Leases or the other
Transaction Documents to the “Lease” or “Master Lease” means, as applicable,
the Existing Master Lease or Existing Master Leases as modified by this
Amendment.

2.             Term. 
Section 1.2 of the Existing Master Lease is hereby amended and restated
as follows:

1.2           Term.  The initial term of this Lease (“Initial
Term”) shall be six (6) Lease Years. 
The Initial Term shall commence on the Commencement Date and end on the
Initial Term Expiration Date, subject to renewal as set forth in Section 1.3,
below.

3.             Renewal Options. 
Section 1.3 of the Existing Master Lease is hereby amended and restated
as follows:

1.3           Options to Renew.  Lessee is hereby granted two (2) options to
renew this Lease for an additional, successive period of twelve (12) Lease
Years, for a maximum 

 

Term if such options are exercised of thirty (30)
Lease Years, on the following terms and conditions: (a) the second option to
renew is exercisable only by Notice to Lessor at least three hundred sixty-five
(365) days prior to the expiration of the first Renewal Term; (b) the
absence of any Event of Default both at the time a renewal option is exercised
and at the commencement of a Renewal Term is a condition precedent to any
renewal of the Term; and (c) during a Renewal Term, all of the terms and
conditions of this Lease shall remain in full force and effect.

4.             Exercise of First Renewal Option.  Lessor and Lessee hereby agree that the first
Renewal Option has been exercised and the first Renewal Term has commenced as
of the Effective Date.

5.             Tenant Improvement Allowance.

(a)           Pursuant to the Existing Master
Lease, Lessor agreed to make available to Lessee the Improvement
Allowance.  As of the Effective Date,
Lessor has advanced $3,854,180.35 of the Improvement Allowance, leaving a
balance of $1,145,819.65 which may be funded. 
Lessee acknowledges and agrees that, as of the Effective Date, the
Improvement Allowance Adjustment Amount (which is an annual amount) is
$395,053.49.

(b)           In connection with this Amendment,
Lessor has agreed to make available to Lessee an additional improvement
allowance equal to $5,000,000.00 to be used for certain capital improvements to
the Facilities.  Such additional
improvement allowance shall be used only for completion of capital improvements
to the Facilities which shall be approved and constructed in accordance with
the terms and provisions of Paragraph 2 of the Second Amendment to Consolidated
and Restated Master Lease dated as of June 25, 2005 (the “Second Amendment”).  The term “Capital Improvements” as and where
used in Paragraph 2 of the Second Amendment shall be deemed to include such
capital improvements.  The additional
$5,000,000.00 improvement allowance shall be requested and disbursed in
accordance with the provisions of Paragraph 3 of the Second Amendment.  The term “Improvement Allowance”, as and
where used in Paragraph 3 of the Second Amendment, shall be deemed to include
and refer to the additional $5,000,000.00 improvement allowance, except that
such additional improvement allowance shall be available for Capital
Improvements completed on or before June 30, 2008 and the final request for
disbursement shall be no later than August 31, 2008.  The Base Rent payable under the Existing
Master Lease shall be increased by the Improvement Allowance Adjustment Amount
for each disbursement of such additional $5,000,000.00 improvement allowance as
provided in Paragraph 4 of the Second Amendment.  In the event Lessor fails to pay Lessee any
installment request for the additional improvement allowance as provided in
Paragraph 3 of the Second Amendment, Lessee shall have the rights and remedies
provided in Paragraph 4 of the Second Amendment and the provisions of Paragraph
4 of the Second Amendment shall apply to Lessee’s exercise of such rights and
remedies.

6.             Settlement and Restructuring
Agreement.  Lessor and Omega (which
joins in this Amendment for the sole purpose of agreeing to the provisions of
this Section 6) hereby acknowledge and agree that the obligations of Lessee and
its Affiliates, Advocat, SHCM, AFI and DMSC (as defined in the Settlement and
Restructuring Agreement) to comply with Paragraph 4.F (creation of New Sub),
Paragraphs 4.G and 4.H (New Cash Management System) 

 2
 

 

and Paragraph 14.B (Deferred Compensation) of the
Settlement and Restructuring Agreement are hereby waived and released by Lessor
and Omega.  Except for the obligations
waived and released in the preceding sentence, neither Lessor or Omega, nor
Lessee, Advocat, SHCM, AFI or DMSC, are aware of any default, or nay
circumstances which with the giving of notice or passage of time (or both)
would constitute a default, on the part of Lessee, Advocat, SHCM, AFI, or DMSC
in the performance of any of their respective obligations under the Settlement
and Restructuring Agreement as of the date of this Amendment.  Notwithstanding the foregoing, Lessor and
Omega acknowledge and agree that, from and after the Effective Date, Lessee
shall have the right, but shall not be obligated, to create the NewSub as
contemplated by Paragraph 4.F. of the Settlement and Restructuring Agreement
and, subject to the requirements of Paragraph 4.F., make the transfer of the
Facilities provided for therein.

7.             Definitions.

(a)           The following definitions set forth
in Section 2.1 of the Existing Master Lease are hereby amended and restated as
follows:

Advocat:  Advocat, Inc., a Delaware corporation, and
its successors by merger, consolidation, reorganization or other business
combination.

Approval Threshold:
Two Hundred Thousand Dollars ($200,000.00).

Base Amount:
means (i) during the first three months of the first Renewal Term (October 1,
2006 thru December 31, 2006), the annual sum of Twelve Million Nine Hundred
Forty Three Thousand Three Hundred Fifty and 96/100 Dollars ($12,943,350.96),
and (ii) on and after January 1, 2007, the annual sum of Thirteen Million Six
Hundred Thirty Thousand One Hundred Fifty Six Dollars and 18/100 ($13,630,156.18).

Base Rent:

(A)          During the Initial Term, the Base Rent
shall be:

(1)           For
the first Initial Term (being the period of October 1, 2000 thru September 30,
2006), the amount set forth for such period in the Existing Master Lease;

(2)           For
the first (1st)
Lease Year of the first Renewal Term (October 1, 2006 thru September 30, 2007),
the Base Amount plus the Improvement Allowance Adjustment Amount (as adjusted
during such Lease Year);

(3)           For
each of the second (2nd)
through twelfth (12th)
Lease Years of the first Renewal Term, the lesser of (i) the Base Amount as of
the end of first (1st) Lease Year of the Renewal Term plus Improvement
Allowance Adjustment Amount, increased by a percentage equal to two (2) times
the percentage increase in the CPI (if positive) from the commencement date of
the first Renewal Term to the Adjustment Date in each of the second (2nd)
through twelfth (12th)
Lease Years, as applicable (the ”Adjustment 

 3
 

 

Date”), and (ii) the product of the
Base Amount as of the end of the first Lease Year plus the Improvement
Allowance Adjustment Amount and the following factor: 

	
  Lease Year During

  First Renewal Term

  	
   

  	
  Applicable Factor

  
	
  2

  	
   

  	
  1.030

  
	
  3

  	
   

  	
  1.061

  
	
  4

  	
   

  	
  1.093

  
	
  5

  	
   

  	
  1.126

  
	
  6

  	
   

  	
  1.159

  
	
  7

  	
   

  	
  1.194

  
	
  8

  	
   

  	
  1.230

  
	
  9

  	
   

  	
  1.267

  
	
  10

  	
   

  	
  1.305

  
	
  11

  	
   

  	
  1.344

  
	
  12

  	
   

  	
  1.384

  

 

Under no circumstances will the Base Rent in any Lease
Year be less than the Base Rent during the preceding Lease Year.

(B)           During the second Renewal Term, the
Base Rent shall be:

(1)           For the first Lease Year of the
second Renewal Term, the greater of (a) the Base Rent during the last
Lease Year of the Initial Term and (b) the Fair Market Rent for the Leased
Properties on the first day of such Renewal Term as agreed upon by Lessor and
Lessee, or, if prior to the commencement of the Renewal Term they are unable to
agree, as determined by an appraisal pursuant to Article XXXII of this Lease; provided, however, that the Base Rent for the first Lease
Year of the second Renewal Term shall not exceed one hundred ten percent (110%)
of the Base Rent for the Lease Year immediately preceding the commencement of
the second Renewal Term; and

(2)           For each of the second (2nd) through the twelfth (12th) Lease Years during the
second Renewal Term, the lesser of (i) the Base Rent for the first (1st) Lease
Year of the second Renewal Term, increased by a percentage equal to two (2)
times the percentage increase in the CPI (if positive) from the commencement
date of the second Renewal Term to the Adjustment Date in each of the second (2nd) through twelfth (12th) Lease Years, as applicable
(the ”Adjustment Date”), and (ii) the product of the Base Rent
during the first (1st)
Lease Year of the second Renewal Term and the following factor:

 4
 

 

 

	
  Lease Year During

  Second Renewal Term

  	
   

  	
  Applicable Factor

  
	
  2

  	
   

  	
  1.030

  
	
  3

  	
   

  	
  1.061

  
	
  4

  	
   

  	
  1.093

  
	
  5

  	
   

  	
  1.126

  
	
  6

  	
   

  	
  1.159

  
	
  7

  	
   

  	
  1.194

  
	
  8

  	
   

  	
  1.230

  
	
  9

  	
   

  	
  1.267

  
	
  10

  	
   

  	
  1.305

  
	
  11

  	
   

  	
  1.344

  
	
  12

  	
   

  	
  1.384

  

 

Under no circumstances will the Base Rent in any Lease
Year during the Renewal Term be less than the Base Rent during the preceding
Lease Year.

Current Ratio:  At any period, the Facilities Current Assets
divided by the Facilities Current Liabilities.

Debt Service:
With respect to any fiscal period of the Facilities, the sum of (a) all
interest due on Debt during the period (other than interest imputed, pursuant
to GAAP, on any Capitalized Lease Obligations and interest on Debt that
comprises Purchase Money Financing), (b) all payments of principal of Debt
required to be made during the period and (c) all Rent due during the period.

Distribution:  Any payment or distribution of cash or any
assets of the Facilities to one or more shareholders of Lessee or to any
Affiliate of Lessee, whether in the form of a dividend, a fee for management in
excess of the fee required by the terms of a Management Agreement, a payment
for services rendered (except as provided in the next sentence), a
reimbursement for overhead incurred on behalf of the Facilities, or a payment
on any debt required by this Lease to be subordinated to the rights of Lessee.
Notwithstanding the foregoing, none of the following are a Distribution: (i)
payment of the fee permitted by the terms of the Management Agreement, (ii) any
payment pursuant to a contract with an Affiliate of Lessee or Sublessee which
contract is upon terms and conditions that are fair and substantially similar
to those that would be available on an arm’s length basis, (iii) reimbursement
by Lessee or Sublessee to an Affiliate for third party expenses (but not
overhead) paid by the Affiliate on behalf of or which are fairly allocable to
the Facilities, and (iv) so long as (1) Advocat and Lessee maintain financial
records which will make it possible to identify (x) funds deposited into such
account from the Facilities and (y) expenses of the Facilities paid with funds
in such account and (2) no Event of Default under subsections (a), (b), (c),
(d), (k), (o) or (p) of the definition of Event of Default has occurred and is
continuing, deposit of Lessee’s or Sublesser’s funds 

 5
 

 

into a concentration
account maintained by Advocat to be used in accordance with existing practices.

EBITDARM:  For any period, the sum of (a) Net Income of
Lessee arising solely from the operation of the Facilities during the period,
and (b) the amounts deducted in computing the Net Income of the Lessee for the
period for (i) the provision for self-insured, professional and general
liability, (ii) depreciation, (iii) amortization, (iv) Base Rent, (v) interest
(including any payments in the nature of interest under Capitalized Leases and
interest on any Purchase Money Financing), (vi) income taxes (or, if greater,
income taxes actually paid during the period) and (vii) management fees, less
(c) the Cash Cost of Self-Insured Professional and General Liability.  The Cash Cost of Self-Insured Professional
and General Liability shall mean:  For
any period, the total cash expenditure associated with professional and general
liability related settlements, legal fees, or administration for all facilities
owned and/or operated by Lessee and Affiliates divided by the total number of
licensed beds for all facilities owned and/or operated by Lessee and
Affiliates, then multiplied by the number of licensed beds for the Facilities
that are part of the Leased Properties subject to this Lease.

Expiration Date:
The Initial Term Expiration Date, the First Renewal Term Expiration Date or the
Second Renewal Term Expiration Date, as applicable.

Facilities Current Assets:  At any date, all assets of the Facilities
that, on a consolidated basis in conformity with GAAP, should be carried as
current assets on the balance sheet of Lessee (which includes Sublessee) at
such date.

Facilities Current
Liabilities: At any date, all liabilities of the Facilities
that, on a consolidated basis in conformity with GAAP, should be carried as
current liabilities on the balance sheet of Lessee (which includes Sublessee)
at such date.

First Renewal Term
Expiration Date: September 30, 2018.

Initial Term Expiration
Date: September 30, 2006

Second Renewal Term
Expiration Date: September 30, 2030.

Security Deposit:
means (i) the Three Hundred Forty Thousand Three Hundred Four and 35/100
Dollars ($340,304.35), delivered and held in accordance with Article XXXIX
hereof plus accrued interest, (ii) any Increase (as defined in Section 39.2),
and (iii) the A/R Replacement Security Deposit (as defined below).

Stock Issuance and
Subscription Agreement: The Restructuring Stock Issuance and
Subscription Agreement of even date with this Amendment by and between Advocat,
Omega, Lessor and Lessee.

Subordinated Note:
The Subordinated Note of even date herewith from Advocat to Omega in the
original principal amount of Two Million Five Hundred Thirty-Three Thousand Six
Hundred Fourteen and 53/100 Dollars ($2,533,614.53).

 6
 

 

Transfer:  The (a) assignment, mortgaging or other
encumbering of all or any part of Lessee’s interest in this Lease or in the
Leased Properties, or (b) subletting of the whole or any part of any Leased
Property, or (c) entering into of any Management Agreement or other arrangement
under which any Facility is operated by or licensed to be operated by an entity
other than Lessee, or (d) merger, consolidation or reorganization of a
corporate Lessee or Manager (except, for Manager only, to an Affiliate), or the
sale, issuance, or transfer, cumulatively or in one transaction, of any voting
stock of Lessee or Manager (except, for Manager only, to an Affiliate) by
Persons who are stockholders of record of Lessee, which results in a change of
Control of Lessee or Manager (except, for Manager only, to an Affiliate), or
(e) sale, issuance or transfer, cumulatively or in one transaction, of any
interest, or the termination of any interest, in Lessee or Manager (except, for
Manager only, to an Affiliate), if Lessee or such Manager, is a joint venture,
partnership, limited liability company or other association, which results in a
change of Control of such joint venture, partnership or other association, or
(d) sale, issuance or transfer, cumulatively or in one transaction, of any
direct or indirect interest in Lessee if after such transaction(s), Lessee
ceases to be Controlled, directly or indirectly, by Advocat, or (e) merger,
consolidation, reorganization or other business combination involving Advocat
in which Advocat is not the surviving entity unless the successor entity of
Advocat executes and delivers to Lessor a Guaranty, in substantially the form
of the Guaranty executed by Advocat, pursuant to which the successor entity
guarantees to Lessor the payment and performance by Lessee of its obligations
under this Lease.

(b)           The following subparagraphs of the
definition of “Event of Default” set forth in Section 2.1 of the Existing
Master Lease are hereby amended and restated as follows:

(g)           Any representation or warranty made
by Lessee in the Stock Issuance and Subscription Agreement, or in the
certificates delivered in connection therewith, proves to be untrue when made
in any material respect, Lessor is materially and adversely affected thereby,
and Lessee fails within thirty (30) days after Notice from Lessor thereof to
cure such condition by terminating such adverse effect and making Lessor whole
for any damage suffered therefrom, or, if with due diligence such cure cannot
be effected within thirty (30) days, if Lessee has failed to commence to cure
the same within the thirty (30) days or failed thereafter to proceed promptly
and with due diligence to cure such condition and complete such cure prior to
the time that such condition causes a default in any Facility Mortgage or any
other lease to which Lessee is subject and prior to the time that the same
results in civil or criminal penalties to Lessor, Lessee, any Affiliates or
either or the Leased Properties;

*****

(i)            Subject to Section 33.2, Lessee
defaults, or permits a default (which default was not exclusively in Lessor’s
control) under any Facility Mortgage, related documents or obligations
thereunder which default is not cured within any applicable cure period
provided for therein;

*****

 7
 

 

(m)          Intentionally Deleted;

(n)           Intentionally Deleted;

*****

(q)           A default by Lessee occurs under any
other contract affecting any Facility or Lessee, which default results in a
material adverse affect on any Facility or Lessee, and which default is not
cured within the applicable time period, if any; provided that such conditions
shall not be an Event of Default if such conditions at any time are applicable
to two (2) or fewer Facilities and Lessee is in good faith contesting such
default and, if legal proceedings are commenced with respect to such default, will
conduct such contest pursuant to the provisions of Section 12.1 as if such
default constituted a “Claim” under such Section;

(r)            AmSouth Bank (or its successors and
assigns) declares an event of default under the AmSouth Loan Documents, and
accelerates any or all of the indebtedness evidenced and secured thereby, or
commences any action against Lessee or Sublessee to realize on AmSouth’s
interest in the accounts receivable from the Facilities under the AmSouth Loan
Documents.

8.             Lessee’s Personal Property.

(a)           Section 6.3 of the Existing Master
Lease is hereby amended and restated in its entirety as follows:

6.3           Lessee’s Personal Property.  Lessee shall provide and maintain during the
Term such Personal Property, in addition to Lessor’s Personal Property, as
shall be necessary and appropriate in order to operate the Facilities for the
Primary Intended Use in compliance with all licensure and certification
requirements, in compliance with all applicable Legal Requirements and
Insurance Requirements and otherwise in accordance with customary practice in
the industry for the Primary Intended Use (“Lessee’s Personal Property”).  Except to the extent specifically allowed
under Section 8.2.1.4, without the prior written consent of Lessor, which
consent shall not be unreasonably withheld, Lessee shall not permit or suffer
Lessee’s Personal Property to be subject to any lien, charge, encumbrance,
financing statement or contract of sale or the like other than that provided
for in Section 6.4 below.  Except for
those items of Personal Property listed on Schedule A which shall at all times
belong to and may be removed by Lessee, upon the expiration of the Term or the
earlier termination of this Lease, without the payment of any additional
consideration by Lessor, Lessee shall be deemed to have sold, assigned,
transferred and conveyed to Lessor all of Lessee’s right, title and interest in
and to any of Lessee’s Personal Property. 
In connection with any Personal Property sold, assigned, transferred or
conveyed to Lessor pursuant to the preceding sentence, Lessor shall assume any
lease or equipment financing obligations of Lessee permitted under Section
8.2.1.4 hereof.  Both parties agree that
Lessor owned all of the Personal Property at the Facilities at the commencement
of the Existing Leases.

 8
 

 

(b)           Section 34.1 of the Existing Master
Lease is hereby amended and restated in its entirety as follows:

34.1         Disposition of Personal Property on
Termination:  Upon the expiration or
earlier termination of this Lease, Lessee shall immediately surrender, turn
over and deliver to Lessor, without the payment of any additional consideration
by Lessor, all Personal Property then located on or at or used in the operation
of the Leased Properties, other than the items of Personal Property listed on
Schedule A attached hereto. Upon Lessor’s request, Lessee shall, without any
charge or cost to Lessor, execute and deliver to Lessor such bills of sale,
assignments or other instruments necessary, appropriate or reasonably requested
by Lessor to establish Lessor’s ownership of such Personal Property.

(c)           Lessee acknowledges and agrees that,
as of the date of this Amendment, all of Lessee’s Personal Property currently
located at the Facilities, other than the items of Personal Property listed on
Schedule A attached to the Existing Master Lease, is Personal Property that
shall be sold, assigned, transferred and conveyed to the Lessor as provided in
Section 6.3, above, upon the expiration or earlier termination of the Term.

9.             Certain Covenants.  Sections 8.2.1.1, 8.2.1.2, 8.2.1.3, 8.2.1.4
and 8.2.1.6 of the Existing Master Lease are hereby amended and restated in
their entirety as follows:

8.2.1.1     Limitation of Distributions.  In the absence of an Event of Default, or
other event that with notice and/or the passage of time would become an Event
of Default, in or with respect to any Lease Year, Lessee shall not make any
Distributions, unless all three (3) of the following conditions have been met
for the prior four (4) calendar quarters and such conditions will still be met
following such payment or distribution: (1) Lessee’s Coverage Ratio for the
preceding four (4) calendar quarters equals or exceeds 1.7; (2) Lessee’s
Stressed Coverage Ratio for the preceding four (4) calendar quarters equals or
exceeds 1.25; and (3) if such Distribution had been made on the last day of the
preceding month, following such Distribution Lessee’s Current Ratio would have
equaled or exceeded 1.3.  From and during
an Event of Default, or other event that with notice and/or the passage of time
would become an Event of Default, Lessee shall not make any Distributions.  This Subsection is a limitation on
Distributions, and Lessee’s failure to comply with one or more of the three (3)
conditions set forth above shall not be a default or Event of Default
hereunder, unless a Distribution is made during a period of time when any one
or more of such conditions is not satisfied.

8.2.1.2     Accounts Receivable Financing.  Except as may be expressly provided in
Section 39.5 of this Lease and the Intercreditor Agreement, Lessee and/or
Sublessee shall not pledge or otherwise encumber any of the accounts receivable
generated through the operation of the Facilities to secure principal and
interest on any Debt.

8.2.1.3     Guarantees Prohibited.  Neither Lessee nor any Sublessee shall
guarantee any indebtedness of any Affiliate or other third party, except those
guarantees for the benefit of AmSouth in effect as of the Commencement Date or
as may be required under the AmSouth Loan Documents as of the Commencement Date
or those guarantees 

 9
 

 

for the benefit of any
working capital lender to whom a first priority security interest in the
accounts receivable from the Facilities has been granted in accordance with the
requirements of Section 39.5 of this Lease.

8.2.1.4     Equipment Financing.  The aggregate amount of principal,  interest and lease payments due from Lessee
and/or Sublessee with respect to any equipment leases or financing secured by
equipment utilized in the operation of the Facilities shall not at any time
during the Term exceed $750,000.00 in any one Lease Year.

* * * **

8.6           Separateness.  From and after a transfer of Lessee’s
interest to New Sub as contemplated by the Settlement and Restructuring
Agreement, New Sub, as Lessee hereunder, shall:

a.             Maintain records and books of
account separate from those of any Affiliate.

b.             Conduct its own business in its own
names and not in the name of any Affiliate (except to the extent that the
business of the Facilities may be conducted in the name of the Manager).

c.             Maintain financial statements
separate from any Affiliate.

d.             Maintain any contractual
relationship with any and all Affiliates, except upon terms and conditions that
are fair and substantially similar to those that would be available on an arm’s
length basis.

e.             Except for the benefit of AmSouth
(or its successors and assigns) as set forth in the Intercreditor Agreement or
as otherwise required under the AmSouth Loan Documents, or for the benefit of
any working capital lender as required under the Line of Credit Documents
described in Section 39.5 of this Lease, not guarantee or become obligated for
the debts of any other entity, including any Affiliate, or hold out its credit,
jointly or severally, as being available to satisfy the obligations of others,
except for obligations which represent Lessee’s or Sublessee’s trade payables
or accrued expenses incurred by Manager in the ordinary course of owning and
operating the Facilities.

f.              Except for the benefit of AmSouth
(or its successors and assigns) as set forth in the Intercreditor Agreement, or
any working capital lender as set forth in the intercreditor agreement required
under Section 39.5 of this Lease, not pledge its assets, jointly or severally,
for the benefit of any other entity, including any Affiliate.

g.             Hold itself out an to the public as
a legal entity separate from any Affiliates.

h.             At all times cause its Board of
Directors to hold appropriate meetings (or act by unanimous consent) to
authorize all appropriate corporate actions, and in authorizing such actions,
to observe all formalities.

 10

 

10.           Amount of Alternations and
Additions.  The amount specified in
the first clause (c) of Section 10.1 of the Existing Master Lease shall be and
hereby is increased from One Hundred Thousand Dollars ($100,00.00) to One
Hundred Fifty Thousand Dollars ($150,000.00).

11.           Insurance.

(a)           Section 13.2.1 of the Existing Master
Lease is amended and restated as follows:

13.2.1      Loss or damage by fire, vandalism and
malicious mischief, earthquake, extended coverage perils commonly known as “Special
Risk”, and all physical loss perils normally included in such Special Risk
insurance, including but not limited to sprinkler leakage, in an amount not
less than one hundred percent (100%) of Replacement Cost) provided that
earthquake coverage and flood coverage may have a sublimit coverage of
$5,000,000.00);

(b)           Paragraph 5 of the Second Amended is
hereby amended and restated in its entirety as follows:

5.             Insurance. 
Lessor acknowledges that the liability insurance coverage and the
malpractice insurance coverage required pursuant to Sections 13.2.4 and 13.2.5
of the Lease, are currently unavailable generally in the nursing home industry
at commercially affordable rates and that Lessee currently maintains and has in
place general liability and malpractice insurance with single limit coverage of
One Hundred Thousand Dollars ($100,000.00) per occurrence and Five Hundred
Thousand Dollars ($500,000.00) cumulative, with a deductible of Twenty Five
Thousand Dollars ($25,000.00).  Lessor
hereby agrees that, the provisions of Sections 13.2.4 and 13.2.5 of the Lease
to the contrary notwithstanding, until such time as the insurance coverage
required therein is generally available in the nursing home industry at
commercially affordable rates, Lessee shall not be required obtain the coverages
required therein and Lessor agrees to accept Lessee’s current coverage in lieu
thereof for the first Renewal Term of the Lease.  Lessee shall not be deemed to be in default
of the provisions of Article XIII of the Lease as a result thereof.  Lessee shall provide Lessor, on an annual
basis, information from its insurance carrier and from comparable insurance
carriers of the costs of insurance premiums to meet Lessor’s insurance
requirements.  At such time as the
premium amounts quoted are commercially affordable, Lessee shall immediately
purchase any and all insurance policies necessary to meet the requirements of
Sections 13.2.4 and 13.2.5 of the Lease. 
This provision does not relieve Lessee from its agreement of indemnity
under Article XXI of the Lease nor does it modify the provisions thereof.  Notwithstanding the foregoing, Lessee
acknowledges and agrees that the provisions of this Paragraph 5 shall not be
applicable in the event of any Transfer. 
Lessee acknowledges and agrees that Lessor shall have the right to
withhold its consent to any proposed Transfer unless, among other things, the
Transferee agrees to provide the insurance coverage required by the provisions
of Sections 13.2.4 and 13.2.5 of the Lease.

 11
 

 

12.           Notices.  The addresses of the Lessor and the Lessee
for purposes of giving any notice, request or other communication currently set
forth in Section 31.1 of the Existing Master Lease are hereby amended and
restated as follows:

	
  To Lessee:

  	
   

  	
  Diversicare Leasing
  Corp.

  	
   

  
	
   

  	
   

  	
  c/o Advocat Inc.

  	
   

  
	
   

  	
   

  	
  1621 Galleria Boulevard

  	
   

  
	
   

  	
   

  	
  Brentwood, TN 37027

  	
   

  
	
   

  	
   

  	
  Attention: Chief
  Financial Officer

  	
   

  
	
   

  	
   

  	
  Telephone No.: (615)
  771-7575

  	
   

  
	
   

  	
   

  	
  Facsimile No.: (615)
  771-7409

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  To
  Lessor:

  	
   

  	
  Sterling Acquisition
  Corp.

  	
   

  
	
   

  	
   

  	
  c/o Omega Healthcare
  Investors, Inc.

  	
   

  
	
   

  	
   

  	
  9690 Deereco Road,
  Suite 100

  	
   

  
	
   

  	
   

  	
  Timonium, MD 21093

  	
   

  
	
   

  	
   

  	
  Telephone No.: (410)
  427-1700

  	
   

  
	
   

  	
   

  	
  Facsimile No.: (410)
  427-8800

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  And with copy to

  	
   

  	
  Doran Derwent, PLLC

  	
   

  
	
  (which shall not

  	
   

  	
  125 Ottawa Ave., N.W.,
  Suite 410

  	
   

  
	
  constitute notice):

  	
   

  	
  Grand Rapids, Michigan
  49503

  	
   

  
	
   

  	
   

  	
  Attn: Mark E. Derwent

  	
   

  
	
   

  	
   

  	
  Telephone No.: (616)
  233-9720

  	
   

  
	
   

  	
   

  	
  Facsimile No.: (616) 451-8697

  	
   

  

 

13.           Facility Mortgage.  Section 33.2 of the Existing Master Lease is
herby amended and restated as follows:

33.2         Compliance With Facility Mortgage.  Except for payments due under any Facility
Mortgage (which shall be the responsibility of the Mortgagor thereunder),
Lessee covenants and agrees that, to the extent within Lessee’s control, it
will duly and punctually observe, perform and comply with all of the terms,
covenants and conditions (including, without limitation, covenants requiring
the keeping of books and records and delivery of financial statements and other
information) of any Facility Mortgage as to which Lessee has been given Notice
and that it will not directly or indirectly do any act or suffer or permit any
condition or thing to occur that is within Lessee’s control, which would or
might constitute a default under a Facility Mortgage as to which Lessee has
been given Notice.  Anything in this
Lease to the contrary notwithstanding, (i) if the time for performance of any
act required of Lessee by the terms of a Facility Mortgage as to which Lessee
has been given Notice is shorter than the time allowed by this Lease for
performance of such act by Lessee, then Lessee shall perform such act within
the time limits specified in this Lease and (ii) Lessee shall not be required
to comply with the terms, covenants and conditions of any Facility Mortgage that
materially (i) alter the economic terms of this Lease, (ii) diminish the
rights of Lessee under this Lease in any material respect, or
(iii) increase the obligations of Lessee under this Lease in any material
respect.

 12
 

 

14.           New Section 39.5 is hereby added to
the Existing Master Lease as follows:

39.5         Line of Credit; A/R Replacement
Security Deposit.

(a)           Line of Credit.  As of the date of this Amendment, pursuant to
the Security Agreement, Lessee has granted to Lessor a first priority security
interest in the accounts receivable generated by the Facilities.  Lessee currently has a working capital line
of credit with AmSouth Bank under the AmSouth Loan Documents.  AmSouth Bank currently has a security
interest in the accounts receivable from the Facilities that is subordinate to
the security interest of the Lessor in accordance with the Intercreditor
Agreement.  If Lessee and/or the
Sublessees, or any Affiliate of Lessee (other than Affiliates who are the
operators of the Florida Managed Facilities, as defined in the Settlement and
Restructuring Agreement), obtain, concurrently with or after the date of this
Amendment, a working capital line of credit (the “Line of Credit”) from
a third-party working capital lender that requires that, in order to secure the
Line of Credit, Lessee and/or the Sublessees must grant to the working capital
lender a first priority security interest in the accounts receivable from the
Facilities accruing during the Term, then Lessor will subordinate its security
interest in the accounts receivable from the Facilities accruing during the
Term to the security interest of such working capital lender, provided that:

(i)            The working capital lender executes
and delivers to Lessor an intercreditor agreement in form and substance
reasonably satisfactory to Lessor; and

(ii)           The lien of Lessor in accounts
receivable from the Facilities shall be subordinated to the lien of the working
capital lender therein only to the extent of amounts advanced from time to time
by the working capital lender to Lessee and/or the Sublessees with respect to
the Facilities and only in the amount of $12,000,000.00, plus interest,
penalties and other charges under the loan documents evidencing the Line of
Credit (the “Line of Credit Documents”) with respect to principal
amounts advanced;

(iii)          Lessee delivers to Lessor the A/R
Replacement Security Deposit and the Letter of Credit Agreement (as defined
below);

(iv)          The Advocat/AmSouth Indebtedness (as
defined in the Intercreditor Agreement) has been repaid in full; and

(v)           As of the date of entry by Lessor
into the intercreditor agreement, no Event of Default has occurred and is
continuing.

(b)           Lessee acknowledges and agrees that
on the occurrence of a “Default”, “Event of Default” or similar event or
occurrences which causes the lender under the Line of Credit Documents to
accelerate any or all of the indebtedness thereby or to exercise any rights or
remedies under such documents to realize on its interest in the accounts
receivable from the Facilities, or to cease funding under the Line of Credit,
which is not 

 13
 

 

cured within any applicable cure period under the Line
of Credit Documents or any written agreement by lender, shall constitute an
Event of Default under this Lease.

(c)           Concurrently with the delivery of the
intercreditor agreement by Lessor pursuant to Section 39.5(a) above, Lessee
shall deliver to Lessor an additional Security Deposit in the amount equal to
six (6) times the monthly Base Rent then payable under this Lease (the “Initial
Amount”), in the form of an absolute, unconditional site draft letter of
credit for a term of one (1) year (renewable automatically) issued by an “A”
rated financial institution (“A/R Replacement Security Deposit”), which
Lessor shall hold as security for the full and faithful performance by Lessee
of each and every term, provision, covenant and condition of this Lease in
accordance with, and subject to, the terms and conditions of a Letter of Credit
Agreement in form and substance reasonably acceptable to Lessor (the “Letter
of Credit Agreement”).   On the first
anniversary of the delivery of the A/R Replacement Security Deposit, and each
subsequent anniversary, the amount of the A/R Replacement Security Deposit
required to be maintained by Lessee on deposit with Lessor shall be reduced by
16.66% (or 1/6) of the Initial Amount if and only if on the applicable
anniversary date (i) Lessee has maintained a Stressed Coverage Ratio for the
trailing twelve months of at least 1.45 and (ii) no Event of Default exists.  Notwithstanding the foregoing, at no time
shall the A/R Replacement Security Deposit be less than fifty percent (50%) of
the Initial Amount.

15.           Representations and Warranties of
Lessee.  Lessee hereby represents and
warrants to Lessor that (i) it has the right and power and is duly authorized
to enter into this Agreement; (ii) the execution of this Agreement does not and
will not constitute a breach of any provision contained in any agreement or
instrument to which Lessee is or may become a party or by which Lessee is or
may be bound or affected; (iii) Lessee (or the Sublessee of the Boone and
Laurel Facilities is described in Section 22.1) is the licensed operator of all
of the Facilities and, except for the Boone and Laurel Facilities described in
Section 22.1, has not subleased all or any portion of any of the Facilities;
(iv) “NewSub” (as defined in the Settlement and Restructuring Agreement) was
never created; and (v) the Reimbursement Note (as defined in the Intercreditor
Agreement) has been repaid in full.

16.           Expenses of Lessor.  Lessee shall pay all reasonable expenses of
Lessor incurred in connection with this Amendment, including reasonable
attorneys’ fees.

17.           Execution and Counterparts.  This Amendment may be executed in any number
of counterparts, each of which, when so executed and delivered, shall be deemed
to be an original, but when taken together shall constitute one and the same
Amendment.

18.           Headings.  Section headings used in this Amendment are
for reference only and shall not affect the construction of the Amendment.

19.           Enforceability.  Except as expressly and specifically set
forth herein, the Existing Master Lease remains unmodified and in full force
and effect.  In the event of any
discrepancy between the Existing Master Lease and this Amendment, the terms and
conditions of this Amendment will control and the Existing Master Lease is
deemed amended to conform hereto.

 14
 

 

[SIGNATURE PAGES,
ACKNOWLEDGEMENTS, AND JOINDER FOLLOW]

 15

 

Signature
Page to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

	
  

  	
  LESSOR: 

  
	
   

  	
   

  
	
   

  	
  STERLING ACQUISITION CORP., a Kentucky corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Taylor Pickett

  
	
   

  	
  Name:

  	
  Taylor Pickett

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  

 

	
  STATE OF

  	
  Maryland

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Baltimore

  	
  )

  

 

This instrument
was acknowledged before me on the 20th day of October, 2006, by Taylor Pickett, the CEO
of STERLING ACQUISITION CORP., a Kentucky corporation, on behalf of said
company.

	
  

  	
  /s/ Jennie M. Bathras

  
	
   

  	
  Notary Public, A.A. County, MD

  
	
   

  	
  My commission expires:

  
	
   

  	
  [Notary Stamp]

  

 

 1
 

 

 

	
  

  	
  LESSEE:

  
	
   

  	
   

  
	
   

  	
  DIVERSICARE LEASING CORP., a Tennessee corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council, III

  
	
   

  	
  Name:

  	
  William R. Council, III

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

	
  STATE OF

  	
  Tennessee

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Williamson

  	
  )

  

 

This instrument
was acknowledged before me on the 20th day
of October, 2006, by William R. Council, III, the President & CEO of
DIVERSICARE LEASING CORP., a Tennessee corporation, on behalf of said company

	
  

  	
  /s/ Jacqueline S. Reed

  
	
   

  	
  Notary Public, Tennessee County, Williamson

  
	
   

  	
  My commission expires: 1/24/2010

  
	
   

  	
  [Notary Stamp]

  

 

 2

 

Acknowledgment
to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

The
undersigned hereby consent to the transactions contemplated by this Third
Amendment to Consolidated Amended and Restated Master Lease (the “Third
Amendment”), ratify and affirm their respective Guaranties, Pledge
Agreements,  Security Agreements,
Subordination Agreements and other Transaction Documents, and acknowledge and
agree that the performance of the  Master
Lease and obligations described therein are secured by their Guaranties, Pledge
Agreements, Security Agreement, Subordination Agreement and other Transaction
Documents on the same terms and conditions in effect prior to this Amendment.  The undersigned hereby join in the execution
of this Third Amendment for the limited purpose of agreeing to the provisions
of Section 6 and for no other purpose.

	
  

  	
  ADVOCAT, INC. a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council, III

  
	
   

  	
  Name:

  	
  William R. Council

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

	
  STATE OF

  	
  Tennessee

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Williamson

  	
  )

  

 

The foregoing
instrument was acknowledged before me this 20th day of October, 2006, by William R. Council,
III, who is President & CEO of ADVOCAT, INC. a Delaware corporation, on
behalf of the corporation, who acknowledged the same to be his or her free act
and deed and the free act and deed of the corporation.

	
  

  	
  /s/ Jacqueline S. Reed

  
	
   

  	
  Notary Public, Tennessee County, Williamson

  
	
   

  	
  My commission expires: 1/24/2010

  
	
   

  	
  [Notary Stamp]

  

 

 1
 

 

 

	
  

  	
  DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council, III

  
	
   

  	
  Name:

  	
  William R. Council, III

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

	
  STATE OF

  	
  Tennessee

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Williamson

  	
  )

  

 

The foregoing
instrument was acknowledged before me this 20th day of October, 2006, by William R. Council,
III, who is President & CEO of DIVERSICARE MANAGEMENT SERVICES CO., a
Tennessee corporation, on behalf of the corporation, who acknowledged the same
to be his or her free act and deed and the free act and deed of the
corporation.

	
  

  	
  /s/ Jacqueline S. Reed

  
	
   

  	
  Notary Public, Tennessee County, Williamson

  
	
   

  	
  My commission expires: 1/24/2010

  
	
   

  	
  [Notary Stamp]

  

 

 2
 

 

 

	
  

  	
  ADVOCAT FINANCE INC., a Delaware corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council, III

  
	
   

  	
  Name:

  	
  William R. Council, III

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

	
  STATE OF

  	
  Tennessee

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Williamson

  	
  )

  

 

The
foregoing instrument was acknowledged before me this 20th day of October, 2006, by William R. Council,
III, who is President & CEO of ADVOCAT FINANCE INC., a Delaware
corporation, on behalf of the corporation, who acknowledged the same to be his
or her free act and deed and the free act and deed of the corporation.

	
  

  	
  /s/ Jacqueline S. Reed

  
	
   

  	
  Notary Public, Tennessee County, Williamson

  
	
   

  	
  My commission expires: 1/24/2010

  
	
   

  	
  [Notary Stamp]

  

 

 3
 

 

 

	
  

  	
  STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ William R. Council, III

  
	
   

  	
  Name:

  	
  William R. Council, III

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  

 

	
  STATE OF

  	
  Tennessee

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Williamson

  	
  )

  

 

This foregoing
instrument was acknowledged before me on the 20th day of October, 2006, by William R. Council,
III, who is President & CEO of STERLING HEALTH CARE MANAGEMENT, INC., a
Kentucky corporation, on behalf of said corporation, who acknowledged the same
to be his or her free act and deed and the free act and deed of the
corporation.

	
  

  	
  /s/ Jacqueline S. Reed

  
	
   

  	
  Notary Public, Tennessee County, Williamson

  
	
   

  	
  My commission expires: 1/24/2010

  
	
   

  	
  [Notary Stamp]

  

 4

 

Joinder
to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

The
undersigned hereby join in the execution of this Third Amendment to
Consolidated Amended and Restated Master Lease for the limited purpose of
agreeing to the provisions of Section 6 and for no other purpose.

	
  

  	
  OMEGA HEALTHCARE INVESTORS, INC., a Maryland
  corporation

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Taylor Pickett

  
	
   

  	
  Name:

  	
  Taylor Pickett

  
	
   

  	
  Title:

  	
  Chief Executive Officer

  

 

	
  STATE OF

  	
  Maryland

  	
  )

  
	
   

  	
   

  	
  ) ss.

  
	
  COUNTY OF

  	
  Baltimore

  	
  )

  

 

This instrument
was acknowledged before me on the 20th day of October, 2006, by Taylor Pickett, the CEO
of OMEGA HEALTHCARE INVESTORS, INC., a Maryland corporation, on behalf of said
corporation.

	
  

  	
  /s/ Jennie M. Bathras

  
	
   

  	
  Notary Public, A.A. County, MD

  
	
   

  	
  My commission expires:

  
	
   

  	
  [Notary Stamp]

  

 

 1

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