Document:

Strategic American Oil Corporation: Exhibit 10.1 - Filed by newsfilecorp.com

	 
	PURCHASE AND SALE
      AGREEMENT 
	 

Among each of:

CW NAVIGATION, INC., KD NAVIGATION, INC.
and KW NAVIGATION, INC.
(as the Seller
Parties)

And:

SPE NAVIGATION I, LLC
(as the
Company)

And:

STRATEGIC AMERICAN OIL CORPORATION
(as the
Buyer)

Strategic American Oil Corporation
800 Gessner
Road, Suite 200, Houston, Texas, U.S.A., 77024 
__________

TABLE OF CONTENTS

	ARTICLE
      I DEFINITIONS 	1
      
	 	1.1
      	Certain
      Definitions 	1
      
	ARTICLE
      II SALE AND PURCHASE OF INTERESTS 	11
      
	 	2.1
      	Sale
      and Purchase of Interests 	11
      
	 	2.2
      	Purchase
      Price 	11
      
	 	2.3
      	Resale
      Restrictions and Legending of Share Certificates 	11
      
	 	2.4
      	Post-Closing
      Settlement Statement 	13
      
	ARTICLE
      III REPRESENTATIONS AND WARRANTIES OF SELLERS AND THE COMPANY
      	14
      
	 	3.1
      	Authorization
      of Agreement 	14
      
	 	3.2
      	Valid
      and Binding Agreement 	14
      
	 	3.3
      	No
      Conflicts 	14
      
	 	3.4
      	Approvals
      	14
      
	 	3.5
      	Ownership
      and Transfer of Interests 	15
      
	 	3.6
      	Litigation
      	15
      
	 	3.7
      	Financial
      Advisors 	15
      
	 	3.8
      	Organization
      and Good Standing 	15
      
	 	3.9
      	Capitalization
      	15
      
	 	3.10
      	Subsidiaries
      	16
      
	 	3.11
      	Governing
      Documents 	16
      
	 	3.12
      	Compliance
      with Law 	16
      
	 	3.13
      	Taxes
      	16
      
	 	3.14
      	Employee
      Related Matters 	17
      
	 	3.15
      	Contracts
      	17
      
	 	3.16
      	Oil
      and Gas Properties 	18
      
	 	3.17
      	Real
      Property 	19
      
	 	3.18
      	Expense
      Accounts 	20
      
	 	3.19
      	Intellectual
      Property 	20
      
	 	3.20
      	Insurance;
      Bonds, Letters of Credit and Guaranties 	21
      
	 	3.21
      	Activities
      of the Company 	21
      
	 	3.22
      	Bank
      Accounts; Power of Attorney 	21
      
	 	3.23
      	Records
      	21
      
	 	3.24
      	Current
      Commitments 	21
      
	 	3.25
      	Permits
      	21
      
	 	3.26
      	Financial
      Statements; Accounts Receivable; Undisclosed Liabilities 	21
      
	 	3.27
      	Absence
      of Certain Changes 	22
      
	 	3.28
      	Leases
      and Contracts 	23
      
	 	3.29
      	Seismic
      Data. 	23
      
	 	3.30
      	Disclaimers.
      	23
      
	ARTICLE
      IV REPRESENTATIONS AND WARRANTIES OF BUYER 	24
      
	 	4.1
      	Organization
      and Good Standing 	24
      
	 	4.2
      	Authorization
      of Agreement 	24
      
	 	4.3
      	Valid
      and Binding Agreement 	24
      

- i -

	 	4.4 	No Conflicts
      	24

	 	4.5 	Approvals 	24 
	 	4.6 	Bankruptcy
      	25

	 	4.7 	Title to Assets 	25 
	 	4.8 	Licenses and
      Permits 	25

	 	4.9 	Litigation 	25 
	 	4.10 	No Material
      Adverse Effect 	25

	 	4.11 	Permits. 	25 
	 	4.12 	Tax. 	25

	 	4.13 	No Breach. 	26 
	 	4.14 	Activities
      of the Company. 	26

	 	4.15 	Corporate Changes 	26 
	 	4.16 	No Cease
      Trades. 	26

	 	4.17 	Investment Intention 	26 
	 	4.18 	Financial
      Advisors 	27

	 	4.19 	Financial Capability 	27 
	 	4.20 	Sophisticated Buyer 	27

	 	4.21 	Buyer Acknowledgements,
      Waivers and Agreements 	27 
	 	4.22 	  	27

	ARTICLE V BUYER’S
      INSPECTION 	28 
	 	5.1 	Access to
      Records 	28

	 	5.2 	Access to Properties 	28 
	 	5.3 	Buyer
      Indemnification 	29

	ARTICLE VI TITLE
      MATTERS 	30 
	 	6.1 	Defensible
      Title to the Properties 	30

	 	6.2 	Casualty Loss 	32 
	ARTICLE VII
      ENVIRONMENTAL MATTERS 	33

	 	7.1 	Environmental
      Representations 	33 
	 	7.2 	Environmental Notice 	34

	 	7.3 	Remedy for Environmental
      Breach 	35 
	 	7.4 	Limitations
      on Sellers’ Obligations 	36

	 	7.5 	Exclusive Remedy 	37 
	 	7.6 	Environmental Due Diligence Activities 	37

	 	7.7 	Dispute Resolution 	37 
	ARTICLE
      VIII COVENANTS 	38

	 	8.1 	Further Assurances 	38 
	 	8.2 	Operation of
      the Business 	38

	 	8.3 	Books and Records 	40 
	 	8.4 	Affiliation
      	41

	 	8.5 	Confidentiality 	41 
	 	8.6 	Exclusivity
      	42

	 	8.7 	Public Announcements.
	42 
	 	8.8 	Filing of
      Tax Returns 	43

	ARTICLE IX CONDITIONS TO
      CLOSING 	47 

- ii -

	 	9.1
      	Conditions
      to Obligations of Sellers 	47
      
	 	9.2
      	Conditions
      to Obligations of Buyer 	47
      
	ARTICLE
      X INDEMNIFICATION 	48
      
	 	10.1
      	Survival
      of Obligations 	48
      
	 	10.2
      	Indemnification
      by Seller Parties 	49
      
	 	10.3
      	Limits
      on Indemnification 	50
      
	 	10.4
      	Indemnification
      Procedures 	50
      
	ARTICLE
      XI CLOSING 	52
      
	 	11.1
      	Closing
      	52
      
	 	11.2
      	Closing
      Deliveries by Sellers 	52
      
	 	11.3
      	Closing
      Deliveries by Buyer 	53
      
	ARTICLE
      XII TERMINATION 	54
      
	 	12.1
      	Termination
      of Agreement 	54
      
	 	12.2
      	Effect
      of Termination 	55
      
	ARTICLE
      XIII MISCELLANEOUS 	55
      
	 	13.1
      	Interpretive
      Matters 	55
      
	 	13.2
      	Entire
      Agreement 	56
      
	 	13.3
      	Injunctive
      Relief 	56
      
	 	13.4
      	Successors
      	56
      
	 	13.5
      	Assignments
      	56
      
	 	13.6
      	Notices
      	57
      
	 	13.7
      	Counterparts
      	57
      
	 	13.8
      	Governing
      Law; Jurisdiction; Venue; Jury Waiver 	58
      
	 	13.9
      	Amendments
      and Waivers 	58
      
	 	13.10
      	Electronic
      Signatures 	58
      
	 	13.11
      	Severability.
      	58
      

- iii -

PURCHASE AND SALE AGREEMENT

     THIS PURCHASE AND SALE
AGREEMENT (the “Agreement”), dated as of September 1, 2011 (the
Effective Date herein), and fully executed as of this 20th day of September,
2011, is made by and among CW NAVIGATION, INC., KD NAVIGATION, INC. and
KW NAVIGATION, INC., each a Texas corporation (the “Sellers”),
SPE NAVIGATION I, LLC, a Nevada limited liability company (the
“Company”), and STRATEGIC AMERICAN OIL CORPORATION, a Nevada
corporation (“Buyer”). Sellers and the Company are sometimes referred to
collectively herein as the “Seller Parties” and individually as a
“Seller Party.” The Seller Parties and Buyer are sometimes referred to
collectively herein as the “Parties” and individually as a
“Party.”

     WITNESSETH:

     WHEREAS, Seller Parties
collectively own 100% of the issued and outstanding membership interests of the
Company (the “Interests”), with each Seller holding an equal share in the
Interests; and

     AND WHEREAS, Seller Parties
desire to sell to Buyer, and Buyer desires to purchase from Seller Parties, all
of the Interests for the consideration and upon the terms and conditions
hereinafter set forth.

     NOW, THEREFORE, in
consideration of the premises and the mutual covenants and agreements
hereinafter contained, the Parties hereby agree as follows:

ARTICLE I 
DEFINITIONS

1.1      Certain
Definitions. For purposes of this Agreement, the following terms
shall have the respective meanings specified in this Section 1.1 or in
the section, subsections or other subdivisions referred to below:

“AFE’s” has the meaning set
forth in Section 3.24.

“Affiliate” means, with respect
to any Person, any other Person that, directly or indirectly, through one or
more intermediaries, controls, or is controlled by, or is under common control
with, such Person. For the purposes of this definition, the term
“control” (including the terms “controlled by” and “under
common control with”) means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.

“Agreement” has the meaning set
forth in the preamble.

Page 1

“Allocated Value” means, with
respect to a particular Oil and Gas Property, the allocated value of such Oil
and Gas Property as shown on Exhibit “A”.

“Business Day” means any day
other than a Saturday, Sunday or legal holiday on which national banking
institutions in Houston, Texas are required or authorized by Law to close.

“Buyer” has the meaning set
forth in the preamble.

“Buyer Confidential Information”
has the meaning set forth in Section 8.5(b) .

“Buyer Indemnified Parties” has
the meaning set forth in Section 10.2(a) .

“Buyer Representative” has the
meaning set forth in Section 8.5(a) .

“Casualty Loss” has the meaning
set forth in Section 6.3.

“Closing” has the meaning set
forth in Section 11.1.

“Closing Date” has the meaning
set forth in Section 11.1.

“Code” means the Internal
Revenue Code of 1986, or any successor statute thereto, as amended, and any
regulations promulgated thereunder by the Treasury Department of the United
States.

“Company” has the meaning set
forth in the preamble.

“Contract” means any written or
oral contract, agreement, agreement regarding indebtedness, indenture,
debenture, note, bond, loan, collective bargaining agreement, lease, mortgage,
franchise, license agreement, purchase order, binding bid, commitment, letter of
credit or any other legally binding arrangement, excluding, however, any Lease
or other oil and gas lease, easement, right-of-way, permit or other instrument
creating or evidencing the conveyance or transfer of an interest in the Leases
or a real or immovable property related to or used in connection with the
operations of any Lease or any lands pooled or unitized therewith.

“Decommissioning Obligations”
means any and all existing and future claims, costs, charges, expenses,
liabilities and obligations associated with, and liability for, abandoning,
decommissioning, removing or making safe all Wells and Fixtures, Facilities and
Equipment, whether such claims, costs, charges, expenses, liabilities and
obligations are incurred under or pursuant to any of the Leases or under
statutory, common law, regulation, order, permit, judgment, decree or other
obligation, and including any residual liability for anticipated or necessary
continuing insurance, maintenance and monitoring costs. Decommissioning
Obligations include all of the following:

Page 2

	 	(a) 	
      the plugging, replugging and abandonment of all Wells,
      either active or inactive;

	 	 	 
	 	(b) 	
      the removal, abandonment and disposal of structures,
      facilities, foundations, wellheads, tanks, pipelines, flowlines, pumps,
      compressors, separators, heater treaters, valves, fittings and equipment
      and machinery of any nature and all materials contained therein, located
      on or used in connection with the Properties;

	 	 	 
	 	(c) 	
      the clearance, restoration and remediation of the lands,
      groundwater and waterbottoms covered or burdened by the Leases or
      otherwise affected by the Properties; and

	 	 	 
	 	(d) 	
      the removal, remediation and abatement of any petroleum
      material, any contamination or pollution (including spilling, leaking,
      pumping, pouring, emitting, emptying, discharging, leaching, dumping,
      disposing or other release of any chemical substance, pollutant,
      contaminant, toxic substance, radioactive material, hazardous substance,
      NORM, waste, saltwater, cuttings, muds, crude oil, or petroleum product)
      of surface soils and water, subsurface soils, air, groundwater, or any
      vessel, piping, equipment, tubing or subsurface structure or strata
      associated with the Properties.

“Defensible Title” has the
meaning set forth in Section 6.1(a) .

“Effective Date” means September
1, 2011, as of 7:00 a.m. Central Daylight Time.

“Environmental Breach” has the
meaning set forth in Section 7.2.

“Environmental Breach Notice
Date” has the meaning set forth in Section 7.2.

“Environmental Defect Value” has
the meaning set forth in Section 7.2(e) .

“Environmental Due Diligence
Period” has the meaning set forth in Section 7.6.

“Environmental Incident
Deductible” has the meaning set forth in Section 7.4(a) .

“Environmental Laws” means all
national, state, municipal or local laws, rules, regulations, statutes,
ordinances or orders of any Governmental Body relating to (a) the use, storage,
emission, discharge, cleanup, Release or threatened Release of pollutants,
contaminant, chemical or industrial, toxic or hazardous substances or Hazardous
Materials on or into the environment (including ambient air, oceans, waterways,
wetlands, surface water, ground water (tributary and non-tributary)), and land
(surface or subsurface strata); (b) the manufacture, processing, distribution,
use, treatment, storage, disposal, transportation or handling of Hazardous
Materials; and (c) exposure to hazardous, toxic or other substances alleged to
be harmful (including Hazardous Materials), in each case, as in effect on the
date of this Agreement. The term “Environmental Laws” shall include the
following statutes and the regulations promulgated thereunder: the Clean Air
Act, 42 U.S.C. § 7401 et seq., the Clean Water Act, 33 U.S.C. § 1251 et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., the
Superfund Amendments and Reauthorization Act, 42 U.S.C. § 11011 et seq., the
Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., the Safe Drinking Water
Act, 42 U.S.C. § 300f et seq., the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. § 9601 et seq., the Occupational
Safety and Health Act, 29 U.S.C. § 651 et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. § 1801 et seq., and any state, county, or local
regulations similar thereto.

Page 3

“Environmental Liabilities”
means any and all Losses (including any remedial, removal, response, abatement,
clean-up, investigation and/or monitoring costs and associated legal costs)
incurred or imposed (a) pursuant to any agreement, order, notice of
responsibility, directive (including directives embodied in Environmental Laws),
injunctions, judgment or similar documents (including settlements) arising out
of, in connection with, or under Environmental Laws, or (b) pursuant to any
claim by a Governmental Body or any other Person for personal injury, property
damage, damage to natural resources, remediation, or payment or reimbursement of
response costs incurred or expended by such Governmental Body or other Person
pursuant to common law or statute and related to the use or release of Hazardous
Materials.

“Environmental Notice” has the
meaning set forth in Section 7.2.

“Environmental Permits” has the
meaning set forth in Section 7.1(a)(iv) .

“Financial Statements” has the
meaning set forth in Section 3.26.

“GAAP” means generally accepted
accounting principles.

“Governmental Body” means any
court or tribunal in any jurisdiction (domestic or foreign) or any federal,
state, county, municipal, or other public, governmental, quasi-governmental or
regulatory body, agency, department, commission, board, bureau, or other
authority or instrumentality (domestic or foreign).

“Hazardous Materials” means (a)
any “hazardous substance,” as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended; (b) any “hazardous
waste” or “solid waste” in either case as defined by the Resource Conservation
and Recovery Act, as amended; (c) any hazardous, dangerous, radioactive or toxic
chemical, material, waste or substance, within the meaning of and regulated by
any Environmental Law; (d) any asbestos containing materials within the meaning
of any Environmental Law; (e) any polychlorinated biphenyls within the meaning
of any Environmental Law; (f) petroleum, petroleum hydrocarbons, or any fraction
or byproducts thereof within the meaning of any Environmental Law; and (g) any
other chemical, pollutant, or contaminant that is regulated under any
Environmental Law.

Page 4

“Hedge” means any future
derivative, swap, collar, put, call, cap, option or other contract that is
intended to benefit from, relate to, or reduce or eliminate the risk of
fluctuations in interest rates, basis risk or the price of commodities,
including Hydrocarbons or securities, to which the Company is bound.

“Hydrocarbons” means oil,
condensate, gas, casinghead gas, distillate, natural gas liquids and other
liquid or gaseous hydrocarbons or minerals, or any of them or any combination
thereof, and all products and substances extracted, separated, refined,
processed and produced therefrom, together with all minerals produced in
association with these substances.

“Incident” has the meaning set
forth in Section 7.4(a) .

“Indebtedness” means: (a) all
obligations of the Company for borrowed money; (b) all obligations of the
Company evidenced by bonds, debentures, loans, notes or other similar
instruments; (c) all indebtedness of the Company on which interest charges are
customarily paid or accrued; (d) the unfunded or unreimbursed portion of all
letters of credit issued for the account of the Company; (e) any obligation of
the Company representing the deferred purchase price of property or services
purchased by the Company other than trade payables incurred in the Ordinary
Course of Business and which are not more than 90 days past invoice date; (f)
any indebtedness, liability or obligation secured by a Lien on the assets of the
Company other than indebtedness relating to obligations which are not delinquent
as of the Closing Date, whether or not such indebtedness, liability or
obligation is otherwise non-recourse to the Company; (g) the present value of
all obligations in respect of leases that are capitalized on the books and
records of the Company; (h) liabilities with respect to payments received in
consideration of oil, gas or other minerals yet to be acquired or produced at
the time of payment (including obligations under “take-or-pay” contracts to
deliver gas in return for payments already received and the undischarged balance
of any production payment created by the Company or for the creation of which
the Company directly or indirectly received payment); and (i) all liability of
the Company as a general partner or joint venture for obligations of the nature
described in clauses (a) through (h) preceding.

“Indemnification Claim” has the
meaning set forth in Section 10.4(a) .

“Indemnified Party” has the
meaning set forth in Section 10.4(a) .

“Indemnifying Party” has the
meaning set forth in Section 10.4(a) .

“Independent Accounting Firm”
has the meaning set forth in Section 8.8(b) .

“Intellectual Property” means
all intellectual property and intellectual property rights of the Company,
including: (a) all names and marks, including product names, all registered and
unregistered trademarks, trade names, service marks and applications therefor
and all goodwill associated therewith; (b) all patents, patent applications and
inventions, including any provisional, utility, continuation,
continuation-in-part or divisional applications filed in the
United States or other jurisdiction, and all reissues thereof and all
reexamination certificates issuing therefrom; (c) all ownership rights to any
copyrightable works, including all related copyright registrations; (d) all
confidential and any other proprietary information and techniques, in any form
(including paper, electronically-stored data, magnetic media file and
microfilm), and all know-how or other trade secrets, whether or not reduced to
practice, including geological data, geophysical data, engineering data, maps,
interpretations, and other technical information; (e) the right to sue for and
recover damages, assert, settle and/or release any claims or demands and obtain
all other remedies and relief under applicable Law or equity for any past,
present or future infringement or misappropriation of any such intellectual
property or intellectual property rights; (f) all licenses, options to license
and other contractual rights to use such intellectual property and intellectual
property rights; (g) all computer and electronic data processing programs and
software programs, including source code, operating systems, application
programs, file and utility programs, whether run locally or remotely via a
network, including the Internet or an intranet or extranet, and all related
documentation, existing research projects, computer software presently under
development (including all source code) and all proprietary information, data,
processes, formulae and algorithms, used in the development, maintenance,
support and delivery of such software; and (h) all corresponding rights
throughout other parts of the world.

Page 5

“Interests” has the meaning set
forth in the preambles.

“Knowledge” of a specified
Person (or similar references to a Person’s knowledge) means the actual
knowledge of any of (a) in the case of the Seller Parties, Michael E. Watt,
President of the Company, or (b) in the case of Buyer, Jeremy G. Driver,
President of the Buyer.

“Law” means any foreign,
federal, state, local law, statute, code, ordinance, rule or regulation.

“Leased Real Property” means all
leasehold or subleasehold estates and other rights to use or occupy any land,
buildings, structures, improvements, fixtures, or other interest in real
property held by the Company (other than Oil and Gas Properties).

“Legal Proceeding” means any
judicial, administrative or arbitral actions, suits or proceedings (public or
private) by or before a Governmental Body.

“Lien” means any lien,
encumbrance, pledge, mortgage, deed of trust, security interest, claim, lease,
charge, option, right-of-way, right of first refusal, easement, encroachment,
servitude, restriction or other encumbrance of every type and description,
whether imposed by Law, agreement, understanding, or otherwise.

“Loss(es)” has the meaning set
forth in Section 10.2.

Page 6

“Material Adverse Effect” means
an occurrence or condition which has a material adverse effect on (a) the
business, assets, properties, liabilities, capitalization, results of operations or financial condition of
the Company or (b) the ability of the Seller Parties or Buyer, as the case may
be, to perform on a timely basis any material obligation under this Agreement or
any agreement, instrument, or document entered into or delivered by such Party
in connection herewith or to consummate the transactions contemplated by this
Agreement; provided, however, that the following shall not be deemed to
constitute, create or cause a Material Adverse Effect: any changes,
circumstances or effects: (i) that affect generally the U.S. oil and gas
industry, such as fluctuations in the price of oil and gas, and that result from
(A) international, national, regional, state or local economic conditions, (B)
changes in applicable Law or the application or interpretation thereof by any
Governmental Body, or (C) other general economic conditions, facts or
circumstances that are not subject to the control of such Party; (ii) that
result from the effects of conditions or events resulting from an outbreak or
escalation of hostilities (whether nationally or internationally), or the
occurrence of any other calamity or crisis (whether nationally or
internationally), including, the occurrence of one or more terrorist attacks;
(iii) that are actions taken by Buyer or its Affiliates with respect to the
transactions contemplated hereby or with respect to the Company; (iv) that are
attributable to changes in applicable Laws; or (v) that result from the public
announcement of this Agreement, Sellers’ compliance with the terms of this
Agreement or the consummation of the transactions contemplated by this
Agreement.

“Net Revenue Interest” means an
interest (expressed as a percentage or decimal fraction) in and to all
Hydrocarbons produced and saved from or attributable to an Oil and Gas Property,
net of all landowner’s royalties, overriding royalties, production payments or
other burdens or other non-operating interests attributable thereto.

“Oil and Gas Property” means all
right, title and interest of the Company in and to the Leases, as set forth on
Exhibit “A”, and the Wells, including the Wells set forth on Exhibit
“B”.

“Order” means any order,
injunction, judgment, decree, ruling, writ, assessment or arbitration award of a
Governmental Body.

“Ordinary Course of Business”
means the ordinary and usual course of normal day-today operations of the
Company consistent with past custom and practice.

“Organizational Documents” means
(a) the articles or certificate of incorporation and the bylaws of a
corporation; (b) the limited liability company agreement and the certificate of
formation of a limited liability company; (c) any charter or similar document
adopted or filed in connection with the creation, formation, or organization of
a Person; and (d) any amendment to any of the foregoing.

“Owned Real Property” means all
land, together with all buildings, structures, improvements, and fixtures
located thereon, and all easements and other rights and interests appurtenant
thereto, owned by the Company (other than Oil and Gas Properties) and used in
the business of the Company.

“Party” or “Parties” has
the meaning set forth in the preamble.

Page 7

“Permits” means any approvals,
orders, consents, licenses, permits, franchises, variances, exemptions,
certificates, and other authorizations of or from a Governmental Body, including
any performance bonds required under the Laws of Texas to be obtained from a
reputable financial institution for plugging and abandonment obligations under
state Law.

“Person” means any individual,
estate, corporation, partnership (general or limited), limited liability
company, firm, joint venture, association, joint-stock company, trust,
enterprise, unincorporated organization, Governmental Body or other entity.

“Post-Closing Settlement Date”
has the meaning set forth in Section 2.4. 

“Post-Closing Settlement
  Payment” has the meaning set forth in Section 2.4. 

“Post-Closing
  Settlement Statement” has the meaning set forth in Section 2.4.

“Properties” means all of the
Company’s Owned Real Property, Leased Real Property, and Oil and Gas Properties,
including the following:

	 	(a) 	
      all of the Company’s rights, titles and interests in and
      to the oil, gas or mineral leases, leasehold estates, operating rights and
      other rights authorizing the owner thereof to explore or drill for and
      produce Hydrocarbons and other minerals, contractual rights to acquire any
      such of the foregoing interests, which have been earned by performance,
      and fee mineral, royalty and overriding royalty interests, net profits
      interests, production payments and other interests payable out of
      Hydrocarbon production, in each case, in which the Company has an interest
      (the “Leases”);

	 	 	 
	 	(b) 	
      all of the Company’s rights, titles and interests in and
      to any wells situated on the land described in the Leases or on land
      pooled, communitized or unitized therewith, including the wells described
      in Exhibit “B” or related to the Leases/Fields listed on Exhibit
      “A” (the “Wells”), together with all of the Company’s interests
      in and to all of the (i) crude oil, condensate or products in storage and
      produced after the Effective Date or in pipelines and (ii) materials,
      supplies, machinery, equipment, personal property, fixtures, improvements
      and other property, whether real, personal or mixed, now or as of the
      Effective Date on, appurtenant to or used or obtained by the Company in
      connection with the Leases or the Wells or with the production, injection,
      treatment, sale or disposal of Hydrocarbons and all other substances
      produced therefrom or attributable thereto including all equipment,
      machinery, fixtures and other tangible personal property and improvements
      located on the Oil and Gas Properties or used or held for use primarily in
      connection with the operation of the Oil and Gas Properties, including any
      Wells, wellhead equipment, tanks, boilers, buildings, fixtures, injection
      facilities, saltwater disposal facilities, compression facilities, pumping
      units and engines, flowlines, pipelines, gathering systems, gas and oil
      treating facilities, machinery, power lines, telephone and telegraph
      lines, roads, and other appurtenances, improvements and facilities (collectively,
  the “Fixtures, Facilities and Equipment”);

Page 8

	 	(c) 	
      all of the Company’s rights, titles and interests in
      royalty interests, overriding royalty interests, net profits interests,
      operating interests, reversionary interests and other interests or
      benefits or credits owned by the Company in and to the Leases and Wells or
      in any other land or leases or in or attributable to production therefrom,
      and all rights, properties and interests of the Company relating to such
      interests, including without limitation all oil, gas and other minerals
      relating to the Leases credited to the account of or owned by the Company
      and its Subsidiaries for the period prior to the Effective Date pursuant
      to any balancing agreements relating to the Leases or otherwise arising by
      virtue of the fact that the Company may not have taken or marketed their
      full share of oil, gas or other minerals attributable to the
  Leases;

	 	 	 
	 	(d) 	
      all of the Company’s right, titles and interests in and
      to, or otherwise derived from (i) all operating agreements and exploration
      agreements related to the properties described in subsections (a) through
      (c) above; (ii) pooling, communitization, and unitization agreements,
      declarations, designations and and/or orders and in and to the properties
      covered and the units created thereby (including without limitation, all
      units formed under orders, rules, regulations, or other official acts of
      any federal, state or other authority having jurisdiction, and voluntary
      unitization agreements, designations and/or declarations) relating to the
      properties described in subsections (a) through (c) above; and (iii)
      farmout agreements, joint venture agreements, product purchase and sale
      contracts, transportation, processing, treatment or gathering agreements,
      leases, permits, rights-of-way, easements, rights of surface use,
      licenses, options, declarations, orders, contracts, agreements,
      instruments in any way relating to the properties described in subsections
      (a) through (c) above and other rights and interests used in connection
      with the exploration, development, operation or maintenance of the
      properties described in subsections (a) through (c) above (the “Oil and
      Gas Agreements”); and

	 	 	 
	 	(e) 	
      the Records.

“Purchase Price” has the meaning
set forth in Section 2.2.

“Real Property Leases” has the
meaning set forth in Section 3.17(b) .

“Records” has the meaning set
forth in Section 5.1.

“Release” means any depositing,
spilling, leaking, pumping, pouring, placing, emitting, discarding, abandoning,
emptying, discharging, migrating, injecting, escaping, leaching, dumping, or
disposing.

“Rules” has the meaning set
forth in Section 7.7.

Page 9

“Securities Act” means the
United States Securities Act of 1933, as amended, and the rules and regulations
thereunder.

“Sellers” has the meaning set
forth in the preamble.

“Sellers Confidential
Information” has the meaning set forth in Section 8.5(a) .

“Seller Party” or “Seller
Parties” has the meaning set forth in the preamble.

“Sellers Representative” has the
meaning set forth in Section 8.5(b) .

“Shares” has the meaning set
forth in Section 2.2.

“Subsidiary” means any Person of
which a majority of the outstanding share capital, voting securities or other
voting equity interests is owned, directly or indirectly, by another Person.

“Survival Period” has the
meaning set forth in Section 10.1(a) .

“Tangible Personal Property”
means the structures, barges, boats, vehicles, and other tangible personal
property described on Exhibit “C”.

“Tax” or “Taxes” means
(a) any federal, state, local, Indian, or foreign income, gross receipts, gross
margin, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code Section
59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar excises), unemployment, disability, ad valorem, real
property, personal property, sales, use, transfer, registration, value added,
alternative or add-on minimum, estimated, or other tax of any kind whatsoever,
including any interest, penalty, or addition thereto, whether disputed or not,
by any Governmental Body responsible for imposition of any such tax (domestic or
foreign), (b) in the case of the Company, liability for the payment of any
amount of the type described in clause (a) as a result of being or having been
on or before the Closing Date a member of an affiliated, consolidated, combined
or unitary group, or a party to any agreement or arrangement, as a result of
which liability of the Company to a Governmental Body is determined or taken
into account with reference to the liability of any other Person, and (c)
liability of the Company for the payment of any amount as a result of being
party to any Tax Sharing Agreement or with respect to the payment of any amount
of the type described in clause (a) or (b) as a result of any existing express
or implied obligation (including an indemnification obligation).

“Tax Return” means any return,
declaration, disclosure, election, schedule, estimate, report, claim for refund,
estimates or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.

“Tax Sharing Agreement” means
all existing agreements or arrangements (whether or not written) binding on the
Company that provide for the allocation, apportionment, sharing or assignment of any Tax
liability or benefit, or the transfer or assignment of income, revenues,
receipts or gains for the principal purpose of determining any Person’s Tax
liability.

Page 10

“Termination Date” has the
meaning set forth in Section 12.1(b)(i) .

“Title Defect” has the meaning
set forth in Section 6.1(a) .

“Title Defect Amount” has the
meaning set forth in Section 6.1(c) .

“Title Defect Notice” has the
meaning set forth in Section 6.1(b) .

“Title Defect Notice Date” has
the meaning set forth in Section 6.1(b) .

“Title Defect Property” has the
meaning set forth in Section 6.1(b) .

“Working Interest” means the
percentage of costs and expenses attributable to the maintenance, development
and operation of an Oil and Gas Property.

ARTICLE II
SALE AND PURCHASE OF
INTERESTS

2.1           Sale
and Purchase of Interests. At Closing, subject to the terms and
conditions contained herein, Sellers shall sell to Buyer, and Buyer shall
purchase from Sellers, the Interests. Such sale of Interests shall be made on
the Closing Date, but shall be effective as of the Effective Date.

2.2           Purchase
Price. In consideration for the sale of the Interests which
include the assets described in Exhibits “A”, “B”, “C”, and Schedule
3.21, Buyer shall issue an aggregate of 95,000,000 restricted common shares
in the capital of the Buyer (the “Shares”) (the “Purchase Price”)
to the Sellers in the following allocation: 

	Seller 	Shares 
	  	  
	CW Navigation, Inc. 	31,666,667; 
	KD Navigation, Inc. 	31,666,667; and 
	KW Navigation, Inc. 	31,666,666.

                    At
the Closing, Buyer will issue the Shares to the Sellers in accordance with each
of the Sellers’ direction and registration instructions delivered to the Buyer
at the time of Closing.

2.3           Resale
Restrictions and Legending of Share Certificates. The Sellers
hereby acknowledge and agree that the Buyer makes no representations as to any
resale or other restriction affecting the Shares and that it is presently
contemplated that the Shares will be issued by the Buyer to the Sellers in
reliance upon the registration and prospectus exemptions contained in certain sections of the Securities Act or “Regulation S”
promulgated under the Securities Act, which will impose a trading restriction in
the United States on the Shares for a period of at least six months from the
Closing Date. In addition, the Sellers hereby also acknowledge and agree that
the within obligation of the Buyer to issue the Shares pursuant to Section
“2.2” hereinabove will be subject to the Buyer being satisfied that an
exemption from applicable registration and prospectus requirements is available
under the Securities Act, and all applicable securities laws, in respect of each
of the Buyer, the Interests and the Shares, and the Buyer shall be relieved of
any obligation whatsoever to purchase any Interest of the Sellers and to issue
any Shares in respect of the Sellers where the Buyer reasonably determines that
a suitable exemption is not available to it. The Sellers hereby also acknowledge
and understand that neither the issuance of the Shares which the Sellers are
acquiring nor any of the Shares themselves have been registered under the
Securities Act, or any state securities laws, and, furthermore, that the Shares
must be held indefinitely unless subsequently registered under the Securities
Act, or an exemption from such registration is available. The Sellers also
acknowledge and understand that the certificates representing the Shares will be
stamped with the following legends (or substantially equivalent language)
restricting transfer in the following manner if such restriction is required
under any applicable securities Laws:

Page 11

	
      “The securities represented by this certificate have not
      been registered under the United States Securities Act of 1933, as amended
      (the “U.S. Securities Act”) or applicable state securities laws. They may
      not be sold, offered for sale, pledged or otherwise transferred except
      pursuant to an effective registration statement under the U.S. Securities
      Act and in accordance with any applicable state securities laws, or
      pursuant to an exemption or exclusion from registration under the U.S.
      Securities Act and any applicable state securities laws. The securities
      represented by the certificate cannot be the subject of hedging
      transactions unless such transactions are conducted in compliance with the
      U.S. Securities Act.”. 

and the Sellers hereby consent to the Buyer making a notation
on its records or giving instructions to any transfer agent of the Buyer in
order to implement the restrictions on transfer set forth and described
hereinabove.

	 		
      The Sellers also acknowledge and understand
  that:

	 	 	 
	 	(a) 	
      the Shares are restricted securities within the meaning
      of “Rule 144” promulgated under the Securities Act;

	 	 	 
	 	(b) 	
      the exemption from registration under Rule 144 will not
      be available in any event for at least six months from the date of
      issuance of the Shares to the Sellers, and even then will not be available
      unless (i) a public trading market then exists for the common stock of the
      Buyer, (ii) adequate information concerning the Buyer is then available to
      the public and (iii) other terms and conditions of Rule 144 are complied
      with; and

	 	 	 
	 	(c) 	
      any sale of the Shares may be made by the Sellers only in
      limited amounts in accordance with such terms and
  conditions.

Page 12

2.4           Post-Closing
Settlement Statement. As promptly as practicable after the
Closing Date, but in any event not later than 90 calendar days thereafter, Buyer
shall, or shall cause the Company to, prepare and submit to the Sellers a
proposed statement (the “Post-Closing Settlement Statement”), which shall
show the revenues earned and the expenses and liabilities incurred by the
Company from and including the Effective Date to but excluding the Closing Date
with respect to the Interests as described in Exhibits “A”, “B” and “C”.
In the event that such expenses and liabilities exceed such revenues, then the
Buyer shall pay the Sellers the difference, and in the event that such revenues
exceed such expenses and liabilities, then the Sellers shall pay the Buyer the
difference, in each case such difference being referred to herein as the
“Post-Closing Settlement Payment”, not later than 120 calendar days after
the Closing Date (the “Post-Closing Settlement Date”) except as otherwise
provided in this Section 2.4.

As soon as possible after receipt of the Post-Closing
Settlement Statement, but in any event within 30 calendar days after receipt
thereof, Sellers shall deliver to Buyer a written report containing the changes,
if any, that the Sellers propose to be made to the Post-Closing Settlement
Statement. Buyer covenants and agrees that, from the Closing Date until the
Post-Closing Settlement Date, Buyer shall, or shall cause the Company to, make
available for Sellers at the Company’s offices such financial and other records
and information relating to the Company as are necessary for Sellers to create
such report and agree upon the Post-Closing Settlement Statement. In the event
no response is made by Sellers within such 30-day period, it shall be
conclusively presumed that Sellers concur with the Post-Closing Settlement
Statement, and such Post-Closing Settlement Statement shall be the basis for the
Post-Closing Settlement Payment, if any. In the event that the Sellers submit a
response, the Sellers and Buyer shall exercise all reasonable efforts to agree
upon a mutually acceptable Post-Closing Settlement Payment on or before the
Post-Closing Settlement Date.

To the extent that Buyer and the Sellers have not agreed with
respect to the amounts due pursuant to this Section 2.4 before the
Post-Closing Settlement Date, then either the Sellers or Buyer may refer the
issues in dispute to a mutually agreed Independent Accounting Firm. The
Independent Accounting Firm shall be instructed by the Sellers and Buyer to
resolve the issues in dispute as soon as reasonably practicable in light of the
circumstances but in no event in excess of 15 calendar days following the
submission of such issues in dispute to the Independent Accounting Firm. The
resolution of such issues by such firm shall be final and binding on the Sellers
and Buyer. The costs of such public accountants shall be borne by the Party
referring the issues in dispute unless the resolution of such issues results in
adjustments to the Post-Closing Settlement Statement in excess of $15,000 in
favor of the Party referring the issues, in which case the other Party shall be
responsible for such costs. In this case, payment of the Post-Closing Settlement
Payment shall be made within five Business Days of the Post-Closing Settlement
Date or the decision by the Independent Accounting Firm by the Party owing the
same by confirmed wire transfer to a bank account or accounts to be designated
by notice from the receiving Party.

Page 13

ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
SELLERS AND THE COMPANY

               Each
of the Sellers and the Company, jointly and severally, hereby represents and
warrants to Buyer that:

3.1           Authorization
of Agreement. Each of the Sellers and the Company have all
requisite corporate or limited liability company power, as applicable, and
authority to execute, deliver and perform this Agreement and each other
agreement, instrument, or document executed or to be executed by it in
connection with the transactions contemplated hereby to which it is a party and
to consummate the transactions contemplated hereby and thereby. The execution,
delivery, and performance by each of the Sellers and the Company of this
Agreement and each other agreement, instrument, or document executed or to be
executed by it in connection with the transactions contemplated hereby to which
it is a party, and the consummation by it of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary limited liability
company action of such Party. The Company has all requisite limited liability
company power and authority to conduct its business in the manner that it is
currently being conducted.

3.2           Valid
and Binding Agreement. This Agreement has been duly executed and
delivered by each of the Sellers and the Company and constitutes, and each other
agreement, instrument, or document executed or to be executed by it in
connection with the transactions contemplated hereby to which it is a party has
been, or when executed will be, duly executed and delivered by such party and
constitutes, or when executed and delivered will constitute, a valid and legally
binding obligation of such Party, enforceable against it in accordance with
their respective terms, except that such enforceability may be limited by (a)
applicable bankruptcy, insolvency, reorganization, moratorium, and similar Laws
affecting creditors’ rights generally and (b) equitable principles which may
limit the availability of certain equitable remedies (such as specific
performance) in certain instances.

3.3          
No Conflicts. The execution and delivery by Sellers or the
Company of this Agreement, the consummation of the transactions contemplated
hereby, or compliance by the Sellers or the Company with any of the provisions
hereof do not and will not conflict with, or result in any violation of or
default (with or without notice or lapse of time or both) under, give rise to a
right of termination, cancellation or acceleration of any material obligation or
to the loss of a material benefit under, or result in the creation of any Lien
on any of the Interests or any of the properties or assets of the Company under
any provision of (a) the Organizational Documents of Sellers or the Company; (b)
any Contract or Permit to which Sellers or the Company is a party or by which
any of the properties or assets of the Company are bound; (c) any Order of any
Governmental Body applicable to Seller or the Company or by which any of the
properties or assets of the Company are bound; or (d) any applicable Law binding
upon Sellers or the Company or applicable to Sellers or the Company or by which
any of the properties or assets of the Company are bound.

3.4           Approvals.
No consent, approval, order, or authorization of, or declaration, filing, or
registration with, any Governmental Body or of any third party is required to be
obtained or made by either Sellers or the Company in connection with the
execution, delivery, or performance by it of this Agreement, each other agreement,
instrument, or document executed or to be executed by such Party in connection
with the transactions contemplated hereby to which it is a party or the
consummation by such Party of the transactions contemplated hereby and
thereby.

Page 14

3.5           Ownership
and Transfer of Interests. All of the Interests are owned by Sellers, of
record and beneficially, free and clear of any and all Liens, other than (a)
Liens that arise out of any actions taken by or on behalf of Buyer or its
Affiliates; or (b) Liens that will be released at or before Closing; or (c)
restrictions on transfer that may be imposed by federal or state securities
Laws. Sellers’ delivery of such Interests as provided in this Agreement will
convey to Buyer legal and beneficial title to such Interests, free and clear of
any and all Liens, other than (a) Liens that arise out of any actions taken by
or on behalf of Buyer or its Affiliates or (b) restrictions on transfer that may
be imposed by federal or state securities Laws.

3.6          
Litigation. Except as set forth in Schedule 3.6, (a)
there are no Legal Proceedings pending or, to the Knowledge of the Seller
Parties, threatened against or affecting, the Company or any its Properties or
affecting the execution and delivery of this Agreement by Sellers or the Company
or the consummation of the transactions contemplated herein and (b) there are no
outstanding Orders, awards or decrees of any Governmental Body against or naming
the Company. Schedule 3.6 contains a complete and correct list of all
Legal Proceedings pending or, to the Knowledge of the Seller Parties, threatened
against the Company or relating to the Properties. The Company has not received
any notice of any pending or, to the Knowledge of the Seller Parties, threatened
condemnation, taking or similar proceeding affecting any of the Properties.

3.7          
Financial Advisors. No broker, investment banker, financial
advisor or other Person is entitled to any broker’s, finder’s, financial
advisor’s or other similar fee or commission for which Buyer may be liable in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Sellers or the Company.

3.8           Organization
and Good Standing. Each of the Sellers is a corporation and the
Company is a limited liability company; and each of the Sellers and the Company
is duly organized, validly existing and in good standing under the Laws of, in
the case of the Sellers, the State of Texas, and in the case of the Company, the
State of Nevada, and has all requisite corporate or limited liability company
power, as applicable, and authority to own, lease and operate its properties and
to carry on its business as now conducted. The Company does not conduct any
business or activity outside the State of Nevada and the State of Texas.

3.9           Capitalization.
The Interests constitute all of the issued and outstanding interests of
the Company. All of the Interests have been duly authorized, validly issued and
are fully paid and non-assessable, and none of the Interests are subject to, or
have any been issued in violation of, preemptive or similar rights. No
authorization or consent of any Person is required in order to consummate the
transactions contemplated by this Agreement by virtue of any such Person having
an equitable or beneficial interest in the Company or the Interests. Except for
the Interests and the rights created by this Agreement, there are outstanding or
in existence (a) no membership interests or other equity or debt securities of
the Company, (ii) no securities or obligations of the Company convertible into
or exchangeable for membership interests or other equity or debt securities of the Company, (iii) no options,
warrants, calls, commitments or other rights or Contracts to acquire from the
Company, and no obligation or plan of the Company to issue or sell, any
membership interests or other equity or debt securities of the Company or any
securities of the Company convertible into or exchangeable for such membership
interests or equity or debt securities, and (iv) no equity equivalents,
interests in the ownership or earnings, or other similar rights of or with
respect to the Company. There are no outstanding obligations or plans of the
Sellers or the Company to repurchase, redeem, or otherwise acquire any of the
foregoing membership interests (including the Interests), securities, options,
equity equivalents, interests, or rights. Except for this Agreement, neither
Sellers nor the Company is a party to any voting trust or other Contract with
respect to the voting, sale, transfer or other disposition of the Interests.

Page 15

3.10          
Subsidiaries. The Company has no Subsidiaries.

3.11           Governing
Documents. Sellers have provided to Buyer accurate and complete copies
of the Organizational Documents of the Company, as currently in effect and the
minutes of all meetings of the Company’s board of managers (or similar governing
body), any committees of such board, and the Company’s members (and all consents
in lieu of such meetings). Such records, minutes, and consents accurately
reflect the ownership of the Company and in all material respects all actions
taken by the Company’s board, any committees of such board, and the Company’s
members. 

3.12          
Compliance with Law.

	 	(a) 	
      To the Knowledge of Seller Parties, the Company is in
      compliance in all material respects with all applicable Laws. The Company
      has not received any notice from any Governmental Body, or any other
      Person, alleging that the Company is in violation of, or has violated, any
      applicable Law in any material respect and to the Knowledge of the Seller
      Parties, no such allegation has been filed, commenced or threatened
      against the Company.

	 	 	 
	 	(b) 	
      Notwithstanding the foregoing, this Section 3.12
      does not relate to Environmental Laws, Environmental Liabilities,
      Environmental Permits or matters that would or could constitute
      Environmental Breaches, which are addressed solely in Section
      7.1.

3.13           Taxes.

	 	(a) 	
      To the Knowledge of Seller Parties: (i) the Company has
      timely filed (taking into account any properly granted extensions of time
      to file) all Tax Returns with the appropriate taxing authorities required
      to have been filed, and each such Tax Return is correct and complete in
      all material respects; (ii) all material Taxes due and owed by the
      Company, whether or not shown on any Tax Return, have been timely paid;
      (iii) the Company and its officers, directors or employees responsible for
      Tax matters have complied with all rules and regulations relating to the
      withholding of Taxes and the remittance of withheld Taxes in connection
      with any amounts paid or owing to any employee, independent contractor,
      creditor, stockholder or other third party; (iv) the Company has
      not waived any statute of limitations in respect of its Taxes or agreed to
      any extension of time with respect to a Tax assessment of deficiency,
      which waiver or extension is currently in effect; (v) there are no liens
      for Taxes (other than Taxes not yet due and payable) upon any of the
      assets of the Company; (vi) the Company has not received any written
      notice from any Tax authority that such Tax authority currently plans to
      assess any additional Taxes for any period for which Tax Returns have been
      filed; (vii) no tax audits or administrative or judicial Tax proceedings
      are pending or being conducted with respect to the Company; (viii) the
      Company has not received from any taxing authority (including
      jurisdictions in which the Company has not filed Tax Returns) any
      currently unresolved (A) written notice indicating an intent to open an
      audit or other review, (B) written or oral request for information related
      to Tax matters or (C) notice of deficiency or proposed adjustment for any
      amount of Tax, proposed, asserted or assessed by any taxing authority
      against the Company; and (ix) the Company has never been treated as an
  S-corporation as defined in Section 1361 under the Code.

Page 16

	 	(b) 	
      The Company has delivered to Buyer (i) complete copies of
      all Tax Returns of the Company requested by Buyer, and of all examination
      reports and statements of deficiencies assessed against or agreed to by
      the Company for all taxable periods for which the applicable statute of
      limitations has not yet expired, and (ii) complete copies of all private
      letter rulings, revenue agent reports, information documents requests,
      notices of proposed deficiencies, deficiency notices, protests, petitions,
      closing agreements, settlement agreements, pending ruling requests, and
      any similar documents, submitted by, received by, agreed to by or on
      behalf of or otherwise relating to the Company with respect to a taxable
      period for which the statute of limitations has not yet expired.

	 	 	 
	 	(c) 	
      The Company does not own any interest or has not owned an
      interest in any Person treated as a partnership for Tax
  purposes.

3.14           Employee
Related Matters. The Company has no employees.

3.15          
Contracts.

	 	(a) 	
      Schedule 3.15 lists all material Contracts to
      which the Company is a party or by which it or its assets or Properties
      may be bound.

	 	 	 
	 	(b) 	
      To the Knowledge of Seller Parties, each material
      Contract is a valid and binding, in full force and effect and enforceable
      against the Company and, to the Knowledge of Seller Parties, the other
      parties thereto in accordance with their respective terms, except as such
      enforceability may be limited by applicable bankruptcy, insolvency,
      moratorium or other similar laws affecting or relating to the enforcement
      of creditors’ rights generally and the application of general principles
      of equity (regardless of whether that enforceability is considered in a
      proceeding at law or in equity). To the Knowledge of Seller Parties: i)
      neither the Company nor any other party thereto is in default thereunder
      and ii) no condition exists with respect to any such
Contract, which, with the passage of time or the giving of notice or both, could
reasonably be expected to have a Material Adverse Effect. Neither the Company
nor Sellers have received notice of any claim of breach or default under any
Contract, except for such breaches or defaults which would not, individually or
in the aggregate, have a Material Adverse Effect. The consummation of the
transactions contemplated by this Agreement would not give any party to any
Contract the right to terminate or alter the terms of such Contract or to
declare a breach or default thereunder except for such terminations or
alterations which would not, individually or in the aggregate, have a Material
Adverse Effect. Each Contract in the possession of Company or Sellers has been
provided to Buyer. The right, title and interest of Company in each Contract is
free and clear of all Liens (other than Liens specified in such Contract).
Except as disclosed in Schedule 3.15, (i) no material Contract will be
terminated by the Company or Sellers prior to Closing and (ii) neither the
Company, Sellers nor any other party to any Contract, have given or, to the
Knowledge of the Seller Parties, threatened to give notice of any action to
terminate, cancel, rescind or procure a judicial reformation of any material
Contract or any provisions thereof.

Page 17

3.16           Oil
and Gas Properties.

	 	(a) 	
      Sellers and the Company specially warrant by, through or
      under Sellers or the Company, but not otherwise that:

	 	 	 	 
	 		(i) 	
      the Oil and Gas Properties are free and clear of all
      Liens; and

	 	 	 	 
	 		(ii) 	
      with respect to each of the Wells set forth on Exhibit
      “B” the ownership by the Company entitles the Company to receive a
      decimal share of the oil, gas and other hydrocarbons produced from such
      Well not less than the decimal share set forth in Exhibit “A” as
      the “Net Revenue Interest” for such Well and causes the Company to be
      obligated to bear a decimal share of the cost of operation of such Well
      not greater than the decimal share set forth in Exhibit “A” as the
      “Working Interest” for such Well, and such shares of production which the
      Company is entitled to receive, and shares of expenses which the Company
      is obligated to bear, are not subject to change (unless the Net Revenue
      Interest for such asset is greater than the Net Revenue Interest set forth
      on Exhibit “A” in the same proportion as any increase in such
      Working Interest).

	 	 	 	 
	 	(b) 	
      Except as set forth in Schedule 3.24, the Company
      has not entered into any commitment to incur any individual capital
      expenditure in excess of $100,000 or any two or more commitments which in
      the aggregate exceed $250,000 in connection with the ownership or
      operation of the Oil and Gas Properties, other than routine expenses
      incurred in the normal and ordinary operation of the Oil and Gas
      Properties in accordance with generally accepted practices in the oil and
      gas industry. Further, the Company has not abandoned, or, agreed to
      abandon, any Wells (or removed any material items of equipment, except
      those replaced by items of substantially equivalent suitability and value)
  on the Oil and Gas Properties since the Effective Date.

Page 18

	 	(c) 	
      All expenses (including all bills for labor, materials
      and supplies used or furnished for use by the Company in connection with
      the Oil and Gas Properties, and all severance, production, ad valorem,
      windfall profit and other similar Taxes) relating to the ownership or
      operation of the Oil and Gas Properties by the Company, have been, and are
      being paid (timely, and before the same become delinquent) by the Company,
      except such expenses and Taxes as are disputed in good faith by the
      Company and except for such expense or Tax, the non-payment of which,
      either individually or in the aggregate, would not reasonably be expected
      to result in a Material Adverse Effect. With respect to the Oil and Gas
      Properties operated by the Company, the Company is not delinquent in any
      material respect, and with respect to the Oil and Gas Properties operated
      by third parties, to the Knowledge of the Seller Parties, such third party
      is not delinquent in any material respect, with respect to its obligations
      to bear costs and expenses relating to the development and operation of
      such Oil and Gas Properties. The Company is not delinquent with respect to
      its obligations to pay any material royalties, overriding royalties,
      compensatory royalties and other payments due from or in respect of
      production, with respect to the Oil and Gas Properties it
  operates.

	 	 	 
	 	(d) 	
      All proceeds from the sale of Hydrocarbons produced from
      the Oil and Gas Properties are being received by the Company in a timely
      manner.

	 	 	 
	 	(e) 	
      No Person has any call upon, option to purchase,
      preferential right to purchase or similar rights with respect to the Oil
      and Gas Properties or to the production therefrom.

3.17          
Real Property.

	 	(a) 	
      Other than the Oil and Gas Properties, Schedule
      3.17(a) sets forth the legal description of each parcel of Owned Real
      Property. With respect to each parcel of Owned Real Property, and except
      as specified in Schedule 3.17(a):

	 	 	 	 
	 		(i) 	
      the Company has good and marketable title, free and clear
      of all Liens;

	 	 	 	 
	 		(ii) 	
      the Company has not leased or otherwise granted to any
      Person the right to use or occupy such Owned Real Property or any portion
      thereof;

	 	 	 	 
	 		(iii) 	
      there are no outstanding options, rights of first offer
      or rights of first refusal to purchase such Owned Real Property or any
      portion thereof or interest therein;

	 	 	 	 
	 		(iv) 	
      other than the Company, there are no parties in
      possession of the parcel of Owned Real Property;
and

Page 19

	 		(v) 	
      all facilities located on the parcels of Owned Real
      Property are supplied with utilities and other services necessary for the
      operation of such facilities, including electricity and water all of which
      services are adequate and are provided via public roads or via appurtenant
      easements benefiting the parcels of Owned Real Property.

	 	 	 	 
	 	(b) 	
      Other than the Oil and Gas Properties, Schedule
      3.17(b) sets forth the address of each parcel of Leased Real Property
      which is material to the business of the Company (“Real Property
      Leases”), and a true and complete list of all Real Property Leases for
      each such parcel of Leased Real Property. The Company has made available
      to Buyer a true and complete copy of each Real Property Lease. With
      respect to each of the Real Property Leases:

	 	 	 	 
	 		(i) 	
      each such Real Property Lease is legal, valid, binding,
      enforceable, and in full force and effect;

	 	 	 	 
	 		(ii) 	
      each such Real Property Lease will continue to be legal,
      valid, binding, enforceable, and in full force and effect on identical
      terms following the consummation of the transactions contemplated by this
      Agreement;

	 	 	 	 
	 		(iii) 	
      the Company has not received notice of, and to the
      Knowledge of Seller Parties is not in, breach or default under such Real
      Property Lease, and to the Knowledge of Seller Parties no event has
      occurred which, with notice or lapse of time, would constitute a breach or
      default or permit termination, modification, or acceleration
      thereunder;

	 	 	 	 
	 		(iv) 	
      no other party to such Real Property Lease has repudiated
      or breached any provision thereof;

	 	 	 	 
	 		(v) 	
      all facilities leased or subleased under such Real
      Property Lease have received all approvals of Governmental Bodies
      (including Permits) required in connection with the operation thereof and,
      to the extent operated by Company, have been operated and maintained in
      accordance with applicable Laws; and

	 	 	 	 
	 		(vi) 	
      except as set forth on Schedule 3.17(b), all
      facilities leased or subleased under such Real Property Lease are supplied
      with utilities and other services necessary for the operation of such
      facilities, including electricity and water all of which services are
      adequate and are provided via public roads or via appurtenant easements
      benefiting the parcel of Leased Real Property.

3.18          
Expense Accounts. The Company has no expense accounts. 

3.19          
Intellectual Property. The Company has no Intellectual Property
other than as may be contained in the Records.

Page 20

3.20          
Insurance; Bonds, Letters of Credit and Guaranties.
Schedule 3.20 lists all bonds, letters of credit, guaranties and other
similar instruments outstanding and issued by the Company.

3.21           Activities
of the Company. The Company has engaged in no business other than owning
and operating the Properties, disposing of Hydrocarbons from the Oil and Gas
Properties, performing its obligations under the Contracts and matters incident
to the foregoing. Except as set forth on Schedule 3.21, the Company does
not own any material assets other than the Properties and investments in cash or
cash equivalents.

3.22           Bank
Accounts; Power of Attorney. Except as set out in Schedule 3.22,
the Company has no bank accounts and has granted no powers of attorney.

3.23          
Records. The books of account and other financial records of the
Company that have been previously furnished to Buyer are substantially complete
and correct in all material respects and have been in all material respects
maintained in accordance with good business practice and all Laws. Sellers make
no warranty whatsoever as to any documents or records created by any party other
than Sellers or Company.

3.24           Current
Commitments. Schedule 3.24 sets forth as of the date of this
Agreement all authorities for expenditures (“AFE’s”) relating to the
Company’s interest in the Leases to drill or rework Wells or for other capital
expenditures pursuant to any of the Contracts or any applicable joint operating
agreement for which all of the activities anticipated in such AFE’s or
commitments have not been completed by the date of this Agreement.

3.25           Permits.

	 	(a) 	
      The Company or the operators of the Oil and Gas
      Properties, hold all Permits required under applicable Law and necessary
      to carry on operations connected with the Oil and Gas Properties as
      currently conducted, except where the failure to obtain such permits or
      licenses would not have a Material Adverse Effect.

	 	 	 
	 	(b) 	
      The Company or such operator is in compliance with the
      terms, provisions and conditions of each of its Permits, except where the
      failure to be in compliance would not have a Material Adverse
    Effect.

	 	 	 
	 	(c) 	
      Sellers have made available to Buyer in the offices of
      the Company true and complete copies of (i) all material Permits of the
      Company and (ii) any and all pending applications of additional material
      Permits that have been submitted to any Governmental Body by or on behalf
      of the Company.

3.26           Financial
Statements; Accounts Receivable; Undisclosed Liabilities.

	 	(a) 	
      Buyer has been provided copies or access to balance
      sheets and statements of operations, income and cash flows of the Company
      for the period ended August 31, 2011 (the “Financial Statements”),
      which are attached hereto as Exhibit “D”. Such financial statements
      and notes fairly present the financial condition and the results of operations and changes in cash flow at
      the respective dates of and for the periods referred to in such financial
  statements.

Page 21

	 	(b) 	
      Any accounts receivable as of August 31, 2011 will be
      retained by the Sellers.

	 	 	 
	 	(c) 	
      Except as set forth in this Agreement or on the Financial
      Statements and any related footnotes thereto, the Company has no
      liabilities or obligations, including off balance sheet arrangements of
      any nature (whether accrued, absolute, fixed, contingent or otherwise and
      whether due or become due) except for (a) liabilities and obligations
      incurred since the date of the Financial Statements in the Ordinary Course
      of Business or operations, (b) liabilities and obligations incurred since
      the date of the Financial Statements pursuant to this Agreement, (c)
      liabilities and obligations disclosed in this Agreement (or its schedules)
      or (d) liabilities or obligations that would not reasonably be expected to
      have a Material Adverse Effect.

3.27           Absence
of Certain Changes Except as may be contemplated by this Agreement, (a)
the Company has conducted its business in the Ordinary Course of Business
consistent with past practice (including with respect to the collection of
accounts receivable and payment of accounts payable) (b) there has not been a
Material Adverse Effect, and (c) the Company has not:

	 	(i) 	
      borrowed any amount or incurred or become subject to any
      liabilities (other than liabilities specifically indicated in the balance
      sheet of the Financial Statements attached as Exhibit
  “D”);

	 	 	 
	 	(ii) 	
      mortgaged, pledged or subjected to any Lien, charge or
      other encumbrance, any material portion of its assets;

	 	 	 
	 	(iii) 	
      sold, assigned or transferred any portion of its tangible
      assets outside the ordinary course of business;

	 	 	 
	 	(iv) 	
      issued, sold or transferred any of its capital stock or
      other equity securities, securities convertible into its capital stock or
      other equity securities or warrants, options or other rights to acquire
      its capital stock or other equity securities, or any bonds or debt
      securities;

	 	 	 
	 	(v) 	
      made any loan to any other Person;

	 	 	 
	 	(vi) 	
      Other than as specified in Sections 3.16(b) or
      3.24 made any capital expenditures or commitments therefor in
      excess of $100,000 individually or in excess of $250,000 in the
      aggregate;

	 	 	 
	 	(vii) 	
      made any loan to, or entered into any other transaction
      with, any of its directors, officers, and employees outside the ordinary
      course of business;

	 	 	 
	 	(viii) 	
      amended its Organizational
Documents;

Page 22

	 	(ix) 	
      made any material change in any method of accounting or
      accounting principles or practice or made any change in revenue
      recognition practice;

	 	 	 
	 	(x) 	
      terminated or otherwise amended any material Contracts
      other than in the Ordinary Course of Business;

	 	 	 
	 	(xi) 	
      incurred any loss, destruction or casualty affecting the
      Company not covered by insurance;

	 	 	 
	 	(xii) 	
      (A) made or revoked any election relating to Taxes, (B)
      settled or compromised any claim, action, suit, litigation, proceeding,
      arbitration, investigation, audit or controversy relating to Taxes, (C)
      filed any amended Tax Return, or (D) changed any methods of reporting
      income or deductions for federal income tax purposes; or

	 	 	 
	 	(xiii) 	
      committed or agreed in writing, orally or otherwise to do
      any of the foregoing.

3.28           Leases
and Contracts.

	 	(a) 	
      All royalties and other payments due as of the Effective
      Date under the Leases have been or will be properly and timely paid in
      accordance with applicable Lease provisions and federal, state or tribal
      regulations, and all conditions within the control of the Company
      necessary to keep the Leases in force have been fully performed.

	 	 	 
	 	(b) 	
      The material Oil and Gas Agreements are in full force and
      effect and constitute binding obligations of the parties thereto. (i) the
      Company is not in breach or default (and no situation exists that with the
      passage of time or giving of notice would create such a breach or default)
      of its obligations under the material Oil and Gas Agreements and (ii) no
      breach or default by any third party (or situation that with the passage
      or time or giving of notice would create such a breach or default)
      exists.

3.29          
Seismic Data. The Company does not own any seismic data.

3.30          
Disclaimers. Sellers make all of the following disclaimers:

	 	(a) 	
      Except as specifically stated in this Agreement,
      SELLER PARTIES MAKE NO REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS
      OR IMPLIED, WITH RESPECT TO ANY MATTER OR THING AND DISCLAIM ALL LIABILITY
      AND RESPONSIBILITY FOR ANY REPRESENTATION, WARRANTY, COLLATERAL CONTRACT,
      STATEMENT, ASSURANCE, OPINION OR INFORMATION MADE OR COMMUNICATED (ORALLY
      OR IN WRITING) TO BUYER (INCLUDING THOSE BY ANY OFFICER, DIRECTOR,
      EMPLOYEE, AGENT, ADVISER, CONSULTANT OR REPRESENTATIVE OF SELLERS, COMPANY
      OR ANY AFFILIATE THEREOF).

Page 23

	 	(b) 	
      The Parties agree that, to the extent required by
      applicable Law to be effective, the disclaimers of certain representations
      and warranties contained in this Section 3.30 are “conspicuous”
      disclaimers for the purpose of any applicable
Laws.

ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
BUYER

Buyer hereby represents and warrants to Sellers and the Company
that:

4.1           Organization
and Good Standing. Buyer is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Nevada and has all
requisite corporate power and authority to own, lease and operate its properties
and to carry on its business as now conducted.

4.2           Authorization
of Agreement. Buyer has all requisite power and authority to
execute, deliver and perform this Agreement and each other agreement,
instrument, or document executed or to be executed by it in connection with the
transactions contemplated hereby to which it is a party and to consummate the
transactions contemplated hereby and thereby. The execution, delivery, and
performance by Buyer of this Agreement and each other agreement, instrument, or
document executed or to be executed by it in connection with the transactions
contemplated hereby to which it is a party, and the consummation by it of the
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action of Buyer.

4.3           Valid
and Binding Agreement. This Agreement has been duly executed and
delivered by Buyer and constitutes, and each other agreement, instrument, or
document executed or to be executed by Buyer in connection with the transactions
contemplated hereby to which it is a party has been, or when executed will be,
duly executed and delivered by Buyer and constitutes, or when executed and
delivered will constitute, a valid and legally binding obligation of Buyer,
enforceable against it in accordance with their respective terms, except that
such enforceability may be limited by (a) applicable bankruptcy, insolvency,
reorganization, moratorium, and similar laws affecting creditors’ rights
generally and (b) equitable principles which may limit the availability of
certain equitable remedies (such as specific performance) in certain
instances.

4.4          
No Conflicts. None of the execution and delivery by Buyer
of this Agreement, the consummation of the transactions contemplated hereby, or
the compliance by Buyer with any of the provisions hereof will conflict with, or
result in any violation of or default (with or without notice or lapse of time,
or both) under, or give rise to a right of termination, cancellation or
acceleration of any material obligation or to the loss of a material benefit
under any provision of (a) the certificate of incorporation or bylaws of Buyer;
(b) any Contract or Permit to which Buyer is a party or by which Buyer or its
properties or assets are bound; (c) any Order of any Governmental Body
applicable to Buyer or by which any of the properties or assets of Buyer are
bound; or (d) any applicable Law binding upon or applicable to Buyer or by which
any of the properties or assets of Buyer are bound.

4.5          
Approvals. No consent, approval, order, or authorization
of, or declaration, filing, or registration with, any Governmental Body or of
any third party is required to be obtained or made by Buyer in connection with the execution, delivery, or
performance by it of this Agreement, each other agreement, instrument, or
document executed or to be executed by Buyer in connection with the transactions
contemplated hereby to which it is a party or the consummation by it of the
transactions contemplated hereby and thereby. 

Page 24

4.6          
Bankruptcy. No proceedings are pending for, and the Buyer
is unaware of, any basis for the institution of any proceedings leading to the
dissolution or winding up of the Buyer or the placing of the Buyer in bankruptcy
or subject to any other laws governing the affairs of an insolvent company.

4.7           Title
to Assets. The Buyer owns and possesses and has good and
marketable title to and possession of all of its business assets free and clear
of all actual or threatened liens, charges, options, encumbrances, voting
agreements, voting trusts, demands, limitations and restrictions of any nature
whatsoever, save and except for those actual or threatened liens, charges,
encumbrances, demands, limitations and restrictions which are listed in
Schedule 4.7.

4.8          
Licenses and Permits. Save and except as set forth in the
Schedule 4.8, the Buyer holds all licenses and permits required for the
conduct in the ordinary course of the operations of its business and for the
uses to which its business assets have been put and are in good standing, and
such conduct and uses are in compliance with all laws, zoning and other by-laws,
building and other restrictions, rules, regulations and ordinances applicable to
the Buyer and its business and assets, and neither the execution and delivery of
this Agreement nor the completion of the transactions contemplated hereby will
give any person the right to terminate or cancel any said license or permit or
affect such compliance.

4.9           Litigation.
There are no Legal Proceedings pending or, to the Knowledge of Buyer,
threatened, in which it is or may be a party affecting the execution and
delivery of this Agreement by Buyer or the consummation of the transactions
contemplated herein by Buyer.

4.10         No
Material Adverse Effect. Save and except as set forth in Schedule
4.11, the Buyer has not experienced, nor is the Buyer aware of, any
occurrence or event which has had, or might reasonably be expected to have, a
materially adverse affect on its business or on the results of its
operations.

4.11         Permits.
Save and except as set forth in Schedule 4.12, the Buyer holds or
has applied for all permits, licenses, consents and authorities issuable by any
federal, state, regional or municipal government or agency thereof which are
necessary or desirable in connection with its operations.

4.12         Tax.
There is not now, and there will not be by the Closing Date, any
proceeding, claim or, to the best of the knowledge, information and belief of
the Buyer, after making due inquiry, any investigation by any federal, state or
municipal taxation authority, or any matters under discussion or dispute with
such taxation authorities, in respect of taxes, governmental charges,
assessments or reassessments in connection with the Buyer, and the Buyer is not
aware of any contingent tax liabilities or any grounds that could result in an
assessment, reassessment, charge or potentially adverse determination by any
federal, state or municipal taxation authority as against the Buyer.

Page 25

4.13           No
Breach. The Buyer is not in breach of any provision or condition of, nor
have they done or omitted anything that, with or without the giving of notice or
lapse or both, would constitute a breach of any provision or condition of, or
give rise to any right to terminate or cancel or accelerate the maturity of any
payment under, any deed of trust, contract, certificate, consent, permit,
license or other instrument to which it is a party, by which it is bound or from
which it derives benefit, any judgment, decree, order, rule or regulation of any
court or governmental authority to which it is subject, or any statute or
regulation applicable to it, to an extent that, in the aggregate, has a Material
Adverse Effect on it.

4.14           Activities
of the Company. Until the Closing Date the Buyer will:

	 	(i) 	
      maintain its assets in a manner consistent with and in
      compliance with applicable law; and

	 	 	 
	 	(ii) 	
      not enter into any material transaction or assume or
      incur any material liability outside the normal course of its
    business.

4.15          
Corporate Changes. The Buyer has not committed to making and until
the Closing Date will not make or commit itself, without the written consent of
each of the Sellers and the Company, to:

	 	(i) 	
      declare or pay any dividend, or make any distribution of
      its properties or assets to its shareholders, or purchase or retire any of
      its shares;

	 	 	 
	 	(ii) 	
      sell all or any part of its assets or agree to do or
      perform any act or enter into any transaction or negotiation which could
      reasonably be expected to interfere with this Agreement or which would
      render inaccurate any of the representations, warranties and covenants set
      forth in this Agreement; or

	 	 	 
	 	(iii) 	
      merge, amalgamate or consolidate into or with any entity,
      or enter into any other corporate reorganization;

provided, however, that the provisions hereof shall not
preclude the Buyer pending the Closing or the termination of this Agreement,
whichever shall first occur, from carrying on its business in the normal course
thereof.

4.16           No
Cease Trades. Save and except for those matters which are listed in
Schedule 4.17 which is attached hereto, the shares in the capital of the
Buyer are not subject to or affected by any actual or, to the knowledge of the
Buyer, pending or threatened cease trading, compliance or denial of use of
exemptions orders of, or action, investigation or proceeding by or before, any
securities regulatory authority, Court, administrative agency or other
tribunal.

4.17           Investment
Intention. Buyer is acquiring the Interests for its own account
for investment purposes only and not with a view to the distribution (as such
term is used in Section 2(11) of the Securities Act), except in compliance with
applicable federal and state securities Laws. Buyer understands that the
Interests have not been registered under the Securities Act and cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available.

Page 26

4.18          
Financial Advisors. No broker, investment banker, financial
advisor or other Person is entitled to any broker’s, finder’s, financial
advisor’s or other similar fee or commission for which Sellers may be liable in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Buyer.

4.19           Financial
Capability. Buyer (a) has sufficient funds available to pay any
expenses incurred by Buyer in connection with the transactions contemplated by
this Agreement and (b) has the resources and capabilities (financial or
otherwise) to perform its obligations hereunder.

4.20          
Sophisticated Buyer. Buyer is a knowledgeable purchaser, owner and
operator of oil and gas properties, has the ability to evaluate oil and gas
properties, and in fact has evaluated the Properties for purchase, and is
acquiring the Properties based upon its own evaluation.

4.21          
Buyer Acknowledgements, Waivers and Agreements.

	 	(a) 	
      Buyer acknowledges and agrees that at Closing, it shall
      accept all Properties in its then “AS IS, WHERE IS” condition and with all
      faults, with an expressed acceptance and understanding of the disclaimers
      contained in this Agreement.

	 	 	 	 
	 	(b) 	
      Buyer further acknowledges each of the
  following:

	 	 	 	 
	 		(i) 	
      that the Oil and Gas Properties and the Facilities,
      Fixtures and Equipment have been used for oil and gas exploration,
      drilling and producing operations, pipeline, transportation or gathering
      operations, and other related oilfield operations, including, possibly the
      injection, storage or disposal of produced water or waste materials
      incidental to or occurring in connection with such operations;

	 	 	 	 
	 		(ii) 	
      that physical changes in the land, groundwater or
      subsurface may have occurred as a result of any such uses and that Buyer
      has entered into this Agreement on the basis of Buyer's own investigation
      of, or right to investigate, the physical condition of the Properties,
      including the Oil and Gas Properties and the surface and subsurface
      conditions;

	 	 	 	 
	 		(iii) 	
      that Buyer assumes the risk that adverse physical
      conditions, including the presence of unknown, abandoned or unproductive
      oil wells, gas wells, equipment, pits, landfills, flowlines, pipelines,
      water wells, injection wells and sumps, which may or may not have been
      revealed by Buyer's investigation, are located thereon or therein, and
      whether discovered, discoverable, hidden, known or unknown to Buyer as of
      Closing;

	 	 	 	 
	 		(iv) 	
      Buyer acknowledges the disclaimers set forth in this
      Section 4.22, and acknowledges and affirms that it has not relied
      upon any representation, warranty, statement, opinion or information of
      Seller Parties except as specifically stated in this Agreement in entering
      into or carrying out the transactions contemplated by this Agreement;
      and

Page 27

	 	(v) 	
      Buyer acknowledges that it has had access to the
      Properties, the officers and certain representatives of the Company, and
      the books, records, and files of the Company relating to the Properties,
      and Buyer has made, will make, or has arranged for others to make, or has
      been afforded the opportunity to make, an inspection and inventory of the
      Properties and, if not performed, waives such right at and with
      Closing.

	 	(c) 	
      The Parties agree that, to the extent required by
      applicable Law to be effective, the disclaimers of certain representations
      and warranties contained in this Section 4.22 are “conspicuous”
      disclaimers for the purpose of any applicable
Laws.

ARTICLE V
 BUYER’S INSPECTION

5.1          
Access to Records. From the date hereof to Closing, the Company
shall, and Sellers shall cause the Company to, afford to Buyer and its
authorized representatives reasonable access during normal business hours to the
office, personnel and books and records of the Company. Such books and records
(the “Records”) shall include all abstracts of title, title opinions,
title files, ownership maps, drilling reports, lease files, assignments,
division orders, operating records and agreements, well files, financial and
accounting records, environmental data, seismic data, geophysical data,
geological data, gravitational data, paleontological data, chemical data and
engineering records, analysis and evaluations, in each case relating to the
Properties and insofar as same may now be in existence and in the possession of
such Party, excluding, however, any information that such Party is prohibited
from disclosing by bona fide, third party confidentiality restrictions;
provided, that if requested by Buyer, Sellers and/or the Company shall
use its commercially reasonable efforts to obtain a waiver of any such
restrictions in favor of Buyer. Sellers and/or the Company shall permit Buyer to
inspect and photocopy (at Buyer’s expense) the Records only to the extent, in
each case, that such Party may do so without violating legal constraints or any
obligation of confidence or other contractual commitment of such Party to a
third party. Subject to the consent and cooperation of third parties, Sellers
and the Company will cooperate with Buyer in Buyer’s reasonable efforts to
obtain, at Buyer’s sole expense, such additional information relating to the
Wells and associated drilling and spacing units as Buyer may reasonably desire,
to the extent in each case that such Party may do so without violating legal
constraints or any obligation of confidence or other contractual commitment of
such Party to a third party. To the extent either Sellers or the Company is
unable to provide any Records or additional information to Buyer under this
Section 5.1 without violating legal constraints, any obligation of
confidence or other contractual commitments, such Party shall deliver to Buyer
prompt written notice thereof.

5.2           Access
to Properties. After the execution of this Agreement, upon advance
written notice to the Seller Parties, Sellers shall, and shall cause the Company
to, promptly grant Buyer and/or Buyer’s authorized representatives, agents and
employees, at Buyer’s expense, during reasonable business hours, reasonable
access to the Properties to allow Buyer to conduct, at Buyer’s sole risk and
expense, and subject to the terms of Section 5.3, reasonable on-site
inspections, samples and assessments of the Properties. In addition, Buyer may
request Sellers’ or the Company’s assistance in gaining access to the Properties
operated by others, but Buyer will be responsible for contacting the operators
of such Properties to arrange for review and inspection, at Buyer’s sole cost,
risk and expense. Buyer agrees that the Seller Parties shall have the right to
have a representative present at all times during any inspections, interviews
and examinations conducted at or on the offices, plants, or other facilities or
properties of the Company. Additionally, any such inspections, interviews and
examinations shall be made pursuant to, and the information obtained by Buyer
therefrom shall be subject to, the terms of Section 8.5. The Seller
Parties shall cooperate with Buyer for the performance by Buyer of any
additional environmental testing at Buyer’s expense prior to Closing, which
testing shall be conducted in a reasonable manner so as not to interfere with
Sellers’ or the Company’s or operator’s operation of the Properties, and the
Seller Parties and Buyer shall cooperate to ensure that such testing is
performed on an expedited and confidential basis before Closing.

Page 28

5.3           Buyer
Indemnification. BUYER HEREBY INDEMNIFIES AND SHALL DEFEND AND HOLD
SELLERS, THE COMPANY, THEIR RESPECTIVE AFFILIATES, AND ITS AND THEIR RESPECTIVE
OWNERS, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, REPRESENTATIVES, CONTRACTORS,
SUCCESSORS, AND PERMITTED ASSIGNS HARMLESS FROM AND AGAINST ANY AND ALL OF THE
FOLLOWING LOSSES TO THE EXTENT ARISING FROM BUYER’S INSPECTING AND OBSERVING THE
ASSETS PURSUANT TO THIS ARTICLE V: (a) LOSSES FOR PERSONAL
INJURIES TO OR DEATH OF EMPLOYEES OF BUYER, ITS CONTRACTORS, AGENTS,
CONSULTANTS, AND REPRESENTATIVES, AND FOR DAMAGE TO THE PROPERTY OF BUYER OR
OTHERS ACTING ON BEHALF OF BUYER, EXCEPT FOR INJURIES, DEATH OR DAMAGE CAUSED BY
THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF SELLERS, THE COMPANY, THEIR
RESPECTIVE AFFILIATES OR ITS OR THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, AGENTS,
CONSULTANTS, OR REPRESENTATIVES; AND (b) LOSSES FOR PERSONAL INJURIES TO OR
DEATH OF EMPLOYEES OF SELLERS, THE COMPANY OR THIRD PARTIES, AND FOR DAMAGE TO
THE PROPERTIES OR ANY OTHER ASSETS OF SELLERS, THE COMPANY OR THIRD PARTIES, TO
THE EXTENT CAUSED BY THE NEGLIGENCE, GROSS NEGLIGENCE, OR WILLFUL MISCONDUCT OF
BUYER, ITS CONTRACTORS, AGENTS, CONSULTANTS AND REPRESENTATIVES. TO THE EXTENT
PROVIDED ABOVE, THE FOREGOING INDEMNITY INCLUDES, AND THE PARTIES INTEND IT TO
INCLUDE, AN INDEMNIFICATION OF THE INDEMNIFIED PARTIES FROM AND AGAINST LOSSES
ARISING OUT OF OR RESULTING, IN WHOLE OR PART, FROM THE CONDITION OF THE
RELEVANT PROPERTY OR ASSET OR THE SOLE, JOINT, COMPARATIVE, OR CONCURRENT
NEGLIGENCE OR STRICT LIABILITY OF ANY OF THE INDEMNIFIED PARTIES. THE PARTIES
HERETO AGREE THAT THE FOREGOING COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS
CONSPICUOUS.

Page 29

ARTICLE VI 
TITLE MATTERS

6.1          
Defensible Title to the Properties.

	 	(a) 	
      As used in this Section 6.1:

	 	 	 	 
	 		
      “Defensible Title” means, as of the date of this
      Agreement and the Closing Date, with respect to the Oil and Gas
      Properties, such record title and ownership by the Company that:

	 	 	 	 
	 		(i) 	
      entitles the Company to receive and retain, without
      reduction, suspension or termination, not less than the percentage set
      forth in Exhibit “A” as the Company’s Net Revenue Interest, of all
      Hydrocarbons produced, saved and marketed from each Lease comprising such
      Oil and Gas Property as set forth in Exhibit “A”, through plugging,
      abandonment and salvage of all wells comprising or included in such Oil
      and Gas Property, and except for changes or adjustments that result from
      the actions of Buyer or Company after Closing, the establishment of units,
      changes in existing units (or the participating areas therein), the
      operation of the provisions of any operating agreement covering the Oil
      and Gas Properties or the entry into pooling or unitization agreements
      after the date hereof unless made in breach of the provisions of
      Section 8.2;

	 	 	 	 
	 		(ii) 	
      obligates the Company to bear not greater than the
      percentage set forth in Exhibit “A” as the Company’s Working
      Interest of the costs and expenses relating to the maintenance,
      development, operation and production of Hydrocarbons from each Lease
      comprising or included in such Oil and Gas Property, through plugging,
      abandonment and salvage of all Wells comprising or included in the Oil and
      Gas Property, and except for changes or adjustments that result from the
      actions of Buyer or Company after Closing, the establishment of units,
      changes in existing units (or the participating areas therein), the
      operation of the provisions of any operating agreement covering the Oil
      and Gas Properties, or the entry into pooling or unitization agreements
      after the date hereof unless made in breach of the provisions of
      Section 8.2;

	 	 	 	 
	 		(iii) 	
      is free and clear of all Liens and defects that would
      create a material impairment of use and enjoyment or a material loss of
      interest in the affected Oil and Gas Properties; and

	 	 	 	 
	 		(iv) 	
      reflects that all consents to assignment and notices of
      assignment or preferential purchase rights that are applicable to or must
      be complied with in connection with the transactions contemplated by this
      Agreement, have been obtained and complied with to the extent the failure
      to obtain or comply with the same could render this transaction (or any
      right or interest affected thereby) void or voidable or
could result in Buyer or the Company incurring any material liability. 

Page 30

	 		
      “Title Defect” means any particular defect in or
      failure of, or a series of related defects in or failures of, the
      ownership of any Oil and Gas Property by the Company: (A) that causes the
      Company to not have Defensible Title to such Oil and Gas Property and (B)
      that has attributable thereto a Title Defect Amount of $100,000 or more,
      measured without taking into account materiality or similar standards.
      Notwithstanding any other provision in this Agreement to the contrary, the
      following matters shall not constitute, and shall not be asserted as, a
      Title Defect: (1) defects or irregularities arising out of lack of
      corporate authorization or variation in corporate or entity name; (2)
      defects or irregularities that have been cured or remedied by the
      applicable statutes of limitation or statutes for prescription; (3)
      defects or irregularities in the chain of title consisting of the failure
      to recite marital status in documents or omissions of heirship
      proceedings; (4) minor defects or irregularities in title outstanding from
      and after the date that Sellers took possession of the Properties which
      have not delayed or prevented the Company, as applicable, from receiving
      its Net Revenue Interest share of the proceeds of production and have not
      caused the Company to bear a share of expenses and costs greater than its
      Working Interest share from each Lease, unit or Well; (5) gas imbalances
      (e.g., a situation where the Company or its predecessor in title to an Oil
      and Gas Property has taken more or less gas from a well than their
      ownership of the Oil and Gas Properties would entitle it to receive); (6)
      defects or irregularities in title made the subject of requirements in
      title opinions which were waived by the operator consistent with normal
      oil and gas industry practice (e.g., surveys, Taxes, prior unreleased
      leases or units, or unreleased Liens on non-drill site or non-wellbore
      tracts or for which no notice of default has been received); (7) defects
      or irregularities resulting from or related to probate proceedings or the
      lack thereof which defects or irregularities have been outstanding from
      and after the date that Sellers took possession of the Properties; and (8)
      defects or irregularities, litigation, or other matters or circumstances,
      disclosed in Schedule 6.1(a)(iii).

	 	 	 
	 	(b) 	
      Notice of Title Defects. Buyer shall give Sellers
      written notice of any Oil and Gas Property that Buyer alleges in good
      faith to have a Title Defect (a “Title Defect Notice”) no later
      than September 30, 2011, at 5:00 p.m., Central Daylight Time (the
      “Title Defect Notice Date”). Such notice shall be in writing and
      shall include the following information: (i) a description of the Title
      Defect, (ii) the reasonable basis for the Title Defect, (iii) the
      Allocated Value of the affected Oil and Gas Property, and (iv) the Title
      Defect Amount and the computations upon which Buyer’s belief is based.
      Upon the written request of Sellers, Buyer shall promptly make available
      or deliver to Sellers (by electronic mail or otherwise) any reasonable
      documentation supporting the basis for any Title Defect set forth in a
      Title Defect Notice. In determining which portions of an Oil and Gas
      Property has a Title Defect, it is the intent of the parties to include,
      to the extent possible, only that portion of the affected Oil and Gas
      Property (whether a Well, unit or leasehold interest, as applicable)
      materially and adversely affected by the defect or basis for such Oil and Gas Property being
      treated as having a Title Defect. Subject only to the special warranty of
      title set forth in the conveyances and the limited title warranty set
      forth in Section 3.16(a), any matters that may otherwise constitute
      Title Defects, but of which Sellers have not been specifically notified by
      Buyer in accordance with the foregoing by the Title Defect Notice Date,
      shall be deemed to be waived by Buyer for all purposes. Upon the receipt
      of an effective Title Defect Notice from Buyer, Sellers shall have the
      option, but not the obligation, to attempt to cure such Title Defect at
      Sellers’ sole cost and expense at any time prior to Closing. The Oil and
      Gas Property affected by any uncured Title Defect at Closing shall be a
  “Title Defect Property”.

Page 31

	 	(c) 	
      Title Defect Amount. The amount by which the
      Allocated Value of an affected Title Defect Property has been reduced by a
      Title Defect (the “Title Defect Amount”) shall be determined as
      follows:

	 	 	 	 
	 		(i) 	
      the Title Defect Amount with respect to a Title Defect
      Property shall be determined by taking into consideration the Allocated
      Value of the Title Defect Property, the portion of such Title Defect
      Property subject to such Title Defect, and the legal effect of such Title
      Defect on the Property; provided, however, that: (A) if such Title Defect
      is in the nature of the Company’s Net Revenue Interest in an Oil and Gas
      Property being less than the Net Revenue Interest set forth in Exhibit
      “A” and there is not a proportionate reduction in the Working Interest
      set forth for such Oil and Gas Property in Exhibit “A”, then the
      Title Defect Amount shall be equal to the Allocated Value for such Oil and
      Gas Property multiplied by a fraction, the numerator of which is the
      reduction in such Net Revenue Interest as a result of such Title Defect
      and the denominator of which is the Net Revenue Interest specified for
      such Title Defect Property in Exhibit “A” or (B) if such Title
      Defect is in the nature of a Lien, then the Title Defect Amount shall
      equal the amount required to fully discharge such Lien; and

	 	 	 	 
	 		(ii) 	
      If the Title Defect results from any matter not described
      in Section 6.1(c)(i), the Title Defect Amount shall be an amount
      equal to the difference between the value of the Title Defect Property
      with such Title Defect and the value of such Title Defect Property without
      such Title Defect (taking into account the portion of the Allocated Value
      of the Title Defect Property).

6.2           Casualty
Loss. If, after the date of this Agreement but prior to the Closing,
all, or any portion of the Properties are destroyed or damaged by fire, flood,
earthquake, storm, theft, vandalism, explosion, blowout, riot, sabotage,
accident or other casualty of a similar nature or shall be taken by condemnation
or under the right of eminent domain (all of which are herein called
“Casualty Loss”), and the aggregate amount of any such Casualty Loss
exceeds 5% of the Purchase Price, either Buyer or Sellers shall have the right
to terminate this Agreement, in which event this Agreement shall terminate. If
the aggregate amount of any such Casualty Loss or taking is less than 5% of the
Purchase Price, this Agreement may not be terminated based on such loss or taking. If any such Casualty Loss as a result of
such individual casualty or taking exceeds 2% of the Purchase Price, Buyer may
elect on or before the Closing (a) to treat the Casualty Loss as a Title Defect
in accordance with this Article VI; or (b) to proceed with the Closing
notwithstanding any such destruction or taking (without reduction of the
Adjusted Purchase Price) in which case Sellers shall, at the Closing, pay to
Buyer all sums paid to Sellers by third parties by reason of the destruction,
damage or taking of such Property and shall assign, transfer and set over unto
Buyer all of the right, title and interest of Sellers in and to any claims
against or unpaid proceeds or other payments from third parties arising out of
such destruction or taking, including insurance proceeds. Prior to the Closing,
Sellers shall not voluntarily compromise, settle or adjust any amounts payable
by reason of any Casualty Loss with respect to any Property during the
aforementioned period without first obtaining the written consent of Buyer,
which consent may not be unreasonably withheld or delayed.

Page 32

ARTICLE VII 
ENVIRONMENTAL MATTERS

7.1           Environmental
Representations.

	 	(a) 	
      Each of the Sellers and the Company hereby represents and
      warrants to Buyer that, except as disclosed in Schedule
  7.1:

	 	 	 	 
	 		(i) 	
      the Seller Parties have made available to Buyer copies of
      all environmental reports, assessments, studies and compliance audits, and
      all other documents and correspondence addressing any actual, potential or
      alleged violation of Environmental Laws or Environmental Liabilities that
      relate to the Properties that are in the possession or control of any of
      the Seller Parties or any of their respective Affiliates;

	 	 	 	 
	 		(ii) 	
      Seller Parties have not received any notice of any
      pending and to the Knowledge of the Seller Parties, there are no
      threatened claims, demands, actions, notices of noncompliance,
      administrative proceedings, lawsuits, or investigations or outstanding
      orders, judgments, or decrees against the Company or relating to the
      Properties under any Environmental Laws, or claiming any personal injury,
      property damage, or other harm allegedly resulting from the release of or
      exposure to any Hazardous Material, or otherwise arising from any
      violations of Environmental Laws or concerning any Environmental
      Liabilities, which, individually or in the aggregate, would reasonably be
      expected to result in a Material Adverse Effect;

	 	 	 	 
	 		(iii) 	
      none of the Seller Parties and/or their respective
      Affiliates has received any notice or request for information indicating
      that it is a potentially responsible party under the Comprehensive
      Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9601
      et seq., or any similar Law with respect to any Property or any location
      where substances may have been disposed from any of the Properties, or any
      notice of any Governmental Body’s allegation or investigation of any
  violation of Environmental Law;

Page 33

	 	(iv) 	
      to the Knowledge of the Seller Parties: (A) the Company
      holds all material Permits under Environmental Laws needed to operate the
      Properties as they are being operated as of the date of this Agreement
      (the “Environmental Permits”); (B) all such Environmental Permits
      are in effect; (C) no appeal or any other action is pending to revoke any
      such Environmental Permit, and (D) the Company has received no notice that
      it is not in compliance with all terms and conditions of all such
      Environmental Permits, except where such ineffectiveness, appeal, action
      to revoke, or noncompliance would not reasonably be expected to result in
      a Material Adverse Effect;

	 	 	 
	 	(v) 	
      the Company has not entered into any agreement that may
      require it to pay to, reimburse, guarantee, pledge, defend, indemnify or
      hold harmless any Person from or against any Environmental Liabilities,
      excluding any such agreement as to which the time period for making any
      claim against the Company has expired;

	 	 	 
	 	(vi) 	
      to the Knowledge of Seller Parties, none of the Oil and
      Gas Properties operated by the Company have, or based on their operations,
      are required to have, a permit to operate a treatment, storage or disposal
      facility pursuant to the federal Resource Conservation and Recovery Act,
      42 U.S.C. § 6901 et seq., or Laws that regulate the treatment, storage or
      disposal of hazardous waste; and

	 	 	 
	 	(vii) 	
      to the Knowledge of Seller Parties, none of the
      Properties have Hazardous Materials present or have had a Release of
      Hazardous Materials that could give rise to Environmental
    Liabilities.

7.2           Environmental
Notice. Buyer shall give Sellers written notice (“Environmental
Notice”) no later than September 30, 2011 at 5:00 p.m., Central Daylight
Time (the “Environmental Breach Notice Date”) of any fact or circumstance
that: (i) evidences a breach of any of either Seller Party’s representations and
warranties set forth in Section 7.1 or (ii) evidences any breach of the
Environmental Laws (an “Environmental Breach”). Such Environmental Notice
shall only be valid and effective, if and only if it satisfies all of the
following conditions precedent:

	 	(a) 	
      if an Environmental Breach is discovered by Buyer, an
      Environmental Notice must be received by Sellers as soon as reasonably
      practical after discovery of the Environmental Breach, but in any event no
      later than the Environmental Breach Notice Date;

	 	 	 
	 	(b) 	
      the Environmental Notice must be based on credible
      scientific or probative evidence substantiated in good faith by Buyer that
      establishes that an Environmental Breach exists;

Page 34

	 	(c) 	
      the evidence referred to in Section 7.2(b) must be
      fully described and substantiated in good faith by Buyer. If the alleged
      Environmental Breach relates to the presence of Hazardous Materials, then
      such evidence must include sampling results sufficient to demonstrate the
      presence of such Hazardous Materials. Complete copies of all reports,
      tests, photographs, and other evidence supporting the position that an
      Environmental Breach has occurred must also be enclosed;

	 	 	 	 
	 	(d) 	
      the Environmental Notice must reasonably describe the
      action, remediation and/or restoration required to remedy the
      Environmental Breach, or the damages claimed and likely to be recovered by
      a third party, each as recommended or estimated in good faith by
    Buyer;

	 	 	 	 
	 	(e) 	
      the Environmental Notice must state Buyer’s good faith
      estimate of the amount attributable to the Environmental Breach, which
      estimate shall be reasonably based on the credible scientific or probative
      evidence included in the Environmental Notice under Section 7.2(b)
      (the “Environmental Defect Value”);

	 	 	 	 
	 	(f) 	
      such alleged Environmental Breach is such that:

	 	 	 	 
	 		(i) 	
      prosecution, if instituted, would be reasonably likely to
      result in a penalty, fine or damage payment on the part of Sellers of
      $100,000 or more; and

	 	 	 	 
	 		(ii) 	
      performance of corrective work in respect of such alleged
      Environmental Breach required by Environmental Laws would be reasonably
      likely to result in expenditures of $100,000 or more, net to Sellers’
      interest in the affected Property; and

	 	 	 	 
	 	(g) 	
      notwithstanding anything to the contrary in this
      Article VII, no Decommissioning Obligation shall be considered an
      Environmental Breach.

7.3           Remedy
for Environmental Breach. If Buyer gives a valid Environmental Notice in
accordance with Section 7.2, Sellers shall prior to the Closing Date
elect by delivering to Buyer written notice thereof one of the following
remedies with respect to each Environmental Breach that is described in such
Environmental Notice, but each such remedy, and the aggregate of all remedies
shall be limited in accordance with Section 7.4 :

	 	(a) 	
      Remedy. Subject to the provisions of Section
      7.3(b) and 7.3(c) and the provisions of Section 7.4, if
      Buyer delivers a valid Environmental Notice to Sellers, Sellers, at its
      election, shall have the option of (i) remediating the Environmental
      Breach to the satisfaction of the appropriate state and federal agencies
      having jurisdiction; or (ii) reducing the Purchase Price by an amount
      equal to the Environmental Defect Value attributable to such Environmental
      Breach; or (iii) agreeing to indemnify Buyer.

	 	 	 
	 	(b) 	
      Remediation. In the event Sellers elect the remedy
      set forth in Section 7.3(a)(i), (i) Sellers shall commence the
      remediation or cure of such Environmental Breach as soon as reasonably practicable and continue diligently
      thereafter until completion of the cure or remediation of such
      Environmental Breach and (ii) to the extent Sellers have failed to cure or
      remediate each Environmental Breach that it elected to cure or remediate
      under this Agreement by Closing, Sellers and Buyer shall enter into an
      access agreement at Closing allowing Sellers access to the Properties
      affected by each such Environmental Breach and containing such other terms
      and conditions as may be mutually agreed upon by Sellers and Buyer. In the
      event Sellers fail to deliver its election notice to Buyer prior to
      Closing, then Sellers shall be deemed to have elected the remedy set forth
  in Section 7.3(a)(ii).

Page 35

	 	(c) 	
      Indemnification. In the event Sellers elect the
      remedy set forth in Section 7.3(a)(iii), Buyer shall accept the
      Properties subject to such alleged Environmental Breach and the Closing
      shall take place without any adjustment of the Purchase Price. Sellers
      shall indemnify and defend Buyer and the Buyer Indemnified Parties against
      all claims, demands and liabilities incurred by Buyer with respect to such
      alleged Environmental Breach, up to, but in no event to exceed, the sum of
      $800,000 (such amount being cumulative for any and all claims of alleged
      Environmental Breach made by Buyer). Sellers’ obligation to pay up to the
      aforementioned sum applies only after such Losses exceed $300,000, which
      $300,000 amount shall be borne and paid by Buyer. In the event of a claim
      of an alleged Environmental Breach and a demand for indemnification by
      Buyer hereunder, Sellers reserve the right to jointly negotiate with Buyer
      and the agency or party, if any, making such claim the right of access to
      the affected site, the use of temporary storage and resources at such
      site, to the full extent held by Buyer, and the right to perform
      assessment, removal and remedial operations for such alleged Environmental
      Breach, at its cost and risk.

7.4           Limitations
on Sellers’ Obligations. Sellers’ obligations under this Article
VII are limited as follows:

	 	(a) 	
      for each valid Environmental Notice, Sellers’ obligations
      under Section 7.3 shall only arise if the amount of the
      Environmental Defect Value attributable to an Environmental Breach exceeds
      $100,000 per “Incident” or condition (the “Environmental
      Incident Deductible”). Any Release of the same substance that occurs
      or reoccurs in the same general area on account of a singular cause or
      course of conduct shall be considered as a single Incident;

	 	 	 
	 	(b) 	
      if the alleged Environmental Breach relates to the
      presence of Hazardous Materials on, at or under the Oil and Gas
      Properties, for each valid Environmental Notice, Sellers’ obligations
      shall arise only if corrective actions to remedy the Environmental Breach
      are required by an Environmental Law or by a Governmental Body, and
      Sellers’ obligations shall be limited to the minimal amount required under
      the applicable Environmental Law or by the Governmental Body to remedy the
      Environmental Breach; and

Page 36

	 	(c) 	
      with respect to any Environmental Breach, Sellers’
      obligations under this Article VII shall apply only to the extent
      that the amount of the Environmental Defect Value exceeds the
      Environmental Incident Deductible.

7.5          
Exclusive Remedy. Section 7.3 shall be the exclusive right
and remedy of Buyer with respect to any Environmental Breach. Buyer hereby
waives any claims of cost recovery or contribution from the Sellers related to
the Oil and Gas Properties under any Environmental Laws or any other cause of
action.

7.6          
Environmental Due Diligence Activities. For the purposes of this
Agreement, Buyer has already or will, to the extent it deems appropriate,
conduct all of its environmental due diligence activities with respect to the
Oil and Gas Properties prior to the Environmental Breach Notice Date (such
period being the “Environmental Due Diligence Period”). Such due
diligence activities shall be conducted in accordance with and subject to the
provisions of Section 5.2 and shall be limited to those activities
reasonably related to investigating the existence of any Environmental Breach.
During the Environmental Due Diligence Period, Buyer and Sellers agree to keep
any data or information (including all analysis of such data) relating to
Environmental Matters acquired by Buyer or provided by Buyer to Sellers under
Section 7.2 strictly confidential among Buyer and Sellers.

7.7           Dispute
Resolution. The Parties agree to attempt to initially resolve all
disputes concerning the occurrence of a Title Defect or an Environmental Breach,
and the associated Title Defect Amount or Environmental Defect Value through
good faith negotiations. If the Parties cannot resolve such disputes on or
before Closing, the Parties shall, subject to the terms and conditions set forth
in this Agreement, close the transactions contemplated hereby and, in such
event, agree to submit all such disputes to binding arbitration to be finally
determined by an arbitrator mutually agreeable by Sellers and Buyer taking into
account appropriate factors and employing such independent attorneys and
petroleum engineers as the arbitrator deems necessary or as reasonably requested
by the Parties. If Sellers and Buyer cannot mutually agree on the selection of
an arbitrator after 30 days, the arbitrator shall be selected in accordance with
the Commercial Arbitration Rules of the AAA (the “Rules”). Disputes to be
resolved by the arbitrator shall be resolved in accordance with mutually agreed
procedures and rules and failing such agreement, in accordance with the Rules.
On or before 30 days after submission of the matter to arbitration, Buyer and
Sellers shall present their respective positions in writing to the arbitrator,
together with such evidence as each party deems appropriate. The arbitrator
shall be instructed to resolve the dispute through a final decision within 30
days after submission of Buyer’s and Sellers’ positions to the arbitrator. The
costs incurred in employing the arbitrator shall be borne equally by the Sellers
and Buyer. After the arbitrator makes a determination as to the disputes, the
arbitrator shall instruct the Parties to implement its decision or to pay
monies, as appropriate. The decision and award of the arbitrator shall be
binding upon the Parties as an award under the Federal Arbitration Act and final
and non-appealable to the maximum extent permitted by Law, and such decision may
be filed in any court of competent jurisdiction and may be enforced by any Party
as a final judgment of such court.

Page 37

ARTICLE VIII 
COVENANTS

8.1           Further
Assurances Each Party agrees that it will not voluntarily undertake any
course of action inconsistent with the provisions or intent of this Agreement
and will use its reasonable best efforts to take, or cause to be taken, all
action and to do, or cause to be done, all things reasonably necessary, proper,
or advisable under applicable Laws to consummate the transactions contemplated
in this Agreement, including cooperating with the other Parties to obtain any
consent, waiver, approval, Order, Permit or authorization of, or declaration or
filing with, or notification to, any Person or Governmental Body required of or
in respect of the Company in connection with the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby.

8.2          
Operation of the Business. Except as expressly consented to in
writing by Buyer, from and after the date of this Agreement and until the
Closing, Sellers and the Company hereby covenant and agree that:

	 	(a) 	
      the Company shall, and Sellers shall cause the Company
      to, carry on its business and conduct its operations in the Ordinary
      Course of Business and use its reasonable efforts to maintain, preserve,
      and protect the assets and goodwill of Company in accordance with past
      practices. The Parties acknowledge that any revenues earned or expenses
      incurred with respect to the working interests in the Properties prior to
      the Effective Date will be the property and responsibility of the
      Sellers;

	 	 	 	 
	 	(b) 	
      the Company shall not, and Seller Parties shall cause the
      Company to not:

	 	 	 	 
	 		(i) 	
      amend the Organizational Documents of the
  Company;

	 	 	 	 
	 		(ii) 	
      adopt or propose any change to the Company’s structure or
      organization, including any splits, combinations, or reclassifications of
      any Interests or any other securities or equity equivalents in the
      Company;

	 	 	 	 
	 		(iii) 	
      declare, set aside or pay any dividend or other
      distribution in respect of any Interests or any other securities or equity
      equivalents in the Company;

	 	 	 	 
	 		(iv) 	
      repurchase, redeem or otherwise acquire any Interests or
      any other securities or equity equivalents in the Company or adopt a plan
      of complete or partial liquidation or resolutions providing for or
      authorizing a liquidation, dissolution, merger, consolidation,
      restructuring, recapitalization, or other reorganization of the
      Company;

	 	 	 	 
	 		(v) 	
      acquire (by merger, consolidation, or acquisition of
      stock or assets or otherwise) any other Person;

	 	 	 	 
	 		(vi) 	
      acquire, sell, license, lease, transfer, abandon or
      otherwise dispose of, directly or indirectly, any assets or Properties,
      except for (A) acquisitions, sales, leases, transfers, abandonments or
      dispositions of assets or Properties not exceeding individually or $250,000 in the aggregate;
      (B) sales of Hydrocarbons or entering into oil and gas leases in the
      Ordinary Course of Business; or (C) sales of inventory and excess or
      obsolete assets in the Ordinary Course of Business or personal property in
      the Ordinary Course of Business that is either replaced by equivalent
      property or normally consumed in the operation of the business of the
  Company;

Page 38

	 	 	(vii) 	
      amend any Tax Return or settle or compromise any material
      federal, state, local, or foreign Tax liability or enter into any
      agreement or preliminary settlement with any Governmental Body concerning
      material Taxes; make or revoke any Tax election except elections
      consistent with past practices and which are required to be made in
      connection with Tax Returns filed for any tax period ending prior to the
      Closing Date; file with, or provide to, any Governmental Body any waiver
      extending the statutory period for assessment or reassessment of Taxes or
      any other waiver of restrictions on assessment or collection of any
      Taxes;

	 	 	 	 
	 	 	(viii) 	
      issue sell, or deliver or commit to issue, sell or
      deliver (in each case, whether through the issuance or granting of
      options, warrants, commitments, subscriptions, rights to purchase, or
      otherwise) any additional Interests or any other securities or equity
      equivalents in the Company, or amend in any respect any of the terms of
      any Interests or other security of the Company outstanding as of the date
      of this Agreement;

	 	 	 	 
	 	 	(ix) 	
      create, incur, guarantee, or assume any Indebtedness or
      otherwise become liable or responsible for the obligations of any other
      Person;

	 	 	 	 
	 	 	(x) 	
      make any loans, advances, or capital contributions to, or
      investments in, any other Person, including any officer, director,
      employee or owner of Interests;

	 	 	 	 
	 	 	(xi) 	
      pledge or otherwise encumber the Interests or other
      equity securities of the Company; or mortgage or pledge any Company
      assets, tangible or intangible, or create or suffer to exist any Lien
      thereupon (except for customary Liens contained in or arising under joint
      operating (or similar) agreements binding on the Company with respect to
      amounts not yet due or not yet delinquent and except for statutory Liens
      for amounts not yet due or not yet delinquent);

	 	 	 	 
	 	 	(xii) 	
      (A) enter into, adopt, or amend or terminate any bonus,
      profit sharing, compensation, severance, termination, stock option, stock
      appreciation right, restricted stock, performance unit, stock equivalent,
      stock purchase, pension, retirement, deferred compensation, incentive
      compensation, employment, or other employee benefit agreement, trust,
      plan, fund, or other arrangement for the benefit or welfare of any
      director, officer, or employee, including any company benefit plan; (B)
      increase in any manner the compensation or fringe benefits of any director,
      officer, or employee, other than increases in the Ordinary Course of
      Business; (C) pay to any director, officer, or employee any benefit not
      required by any company benefit plan or employee benefit agreement, trust,
      plan, fund, or other arrangement as in effect on the date hereof; or (D)
      fail to make any required contribution to any company benefit
  plan;

Page 39

	 	 	(xiii) 	
      (A) waive or release any material claim or right of value
      or cancel any debt or claim held by it or (B) enter into any settlement in
      an amount greater than $50,000;

	 	 	 	 
	 	 	(xiv) 	
      pay, discharge or satisfy any material claims,
      liabilities, obligations or Indebtedness (whether accrued, absolute,
      contingent, unliquidated or otherwise, and whether asserted or
      unasserted), other than payment, discharge or satisfaction in the Ordinary
      Course of Business;

	 	 	 	 
	 	 	(xv) 	
      change any of the financial or Tax accounting principles
      or practices used by it;

	 	 	 	 
	 	 	(xvi) 	
      (A) make or agree to make any capital expenditure, or (B)
      incur or agree to incur any liability (absolute or contingent) or
      obligation under any contract or commitment requiring performance or
      payment by the Company involving amounts, in each case, which individually
      is in excess of $50,000 or in the aggregate is in excess of
    $100,000;

	 	 	 	 
	 	 	(xvii) 	
      enter into any Contract that would be required to be
      disclosed in Schedule 3.15, or any Hedges, or amend, modify or
      change in any material respect, or waive any material right under, any
      existing Contract; or

	 	 	 	 
	 	 	(xviii) 	
      authorize or propose, or agree in writing or otherwise to
      take, any of the actions described in this Section
  8.2.

8.3           Books
and Records. At or promptly after Closing, Sellers shall cause the
Company to deliver to Buyer all records of the Company that are in the
possession, custody or control of Sellers, including minute books and other
corporate books and records and accounts, policies of insurance, real property,
equipment, materials and service contracts, Permits and Leases, and all
regulatory, environmental, tariff, financial, audit, and tax data, records,
reports, returns, filings, notices, correspondence, memoranda, and other
information (in physical or digital form), as they are available to Sellers,
including all documents supporting such reports, returns, filings,
correspondence and memoranda. Buyer will preserve all records so delivered by
Sellers for a period of three years following the Closing and will allow Sellers
reasonable access to such records at all reasonable times upon reasonable prior
notice for a purpose reasonably related to (a) Sellers’ ownership of Interests
before the Closing, (ii) any inquiry by any Tax authority, or (iii) the
performance by Sellers of their obligations, and the enforcement by Seller of
its rights hereunder.

Page 40

8.4           Affiliation.
Each of the Sellers and Buyer agrees that it will not at any time hold
itself out as having any affiliation with the other Party, any of its Affiliates
or the prior management team of the Company.

8.5           Confidentiality.

	 	(a) 	
      Buyer agrees that all Sellers Confidential Information
      shall be kept confidential by Buyer prior to the Closing as required by
      this Section 8.5(a); provided, however, that (i) any of such
      Sellers Confidential Information may be disclosed to such directors,
      officers, employees, investors, lenders and authorized representatives
      (including attorneys, accountants, consultants, bankers and financial
      advisors) of Buyer (collectively, for purposes of this Section
      8.5(a), “Buyer Representatives”) as necessary for the purpose
      of evaluating the transactions contemplated herein (it being understood
      that such Buyer Representatives shall be informed by Buyer of the
      confidential nature of such information and shall be required to treat
      such information confidentially), (ii) any disclosure of Sellers
      Confidential Information may be made to the extent to which Sellers
      consents in writing, and (iii) Sellers Confidential Information may be
      disclosed by Buyer or any Buyer Representative to the extent that, in the
      opinion of counsel for Buyer or such Buyer Representative, Buyer or such
      Buyer Representative is legally compelled to do so, provided that, prior
      to making such disclosure, Buyer or such Buyer Representative, as the case
      may be, advises and consults with Sellers regarding such disclosure and
      provided, further, that Buyer or such Buyer Representative, as the case
      may be, discloses only that portion of the Sellers Confidential
      Information as is legally required. Buyer agrees that none of the Sellers
      Confidential Information will be used for any purpose other than in
      connection with the transactions contemplated herein. The term “Sellers
      Confidential Information,” as used herein, means all information
      obtained by or on behalf of Buyer from the Company pursuant to Section
      5.1 or Section 5.2 and all similar information obtained from
      Sellers or the Company by or on behalf of Buyer prior to the date of this
      Agreement, other than information that (i) was or becomes generally
      available to the public other than as a result of disclosure by Buyer or
      any Buyer Representative, (ii) was or becomes available to Buyer on a
      non-confidential basis prior to disclosure to Buyer by Sellers or the
      Company or their respective representatives, or (iii) was or becomes
      available to Buyer from a source other than Sellers or the Company and
      their respective representatives, provided that such source is not known
      by Buyer to be bound by a confidentiality agreement with Sellers or the
      Company. If this Agreement is terminated, Buyer shall promptly return or
      destroy, and shall use its reasonable best efforts to cause all Buyer
      Representatives to promptly return or destroy, all Sellers Confidential
      Information to Sellers or the Company without retaining any copies
      thereof.

	 	 	 
	 	(b) 	
      Sellers agree that all Buyer Confidential Information
      shall be kept confidential by Sellers after the Closing as required by
      this Section 8.5(b); provided, however, that (i) any disclosure of
      Buyer Confidential Information may be made to the extent to which Buyer
      consents in writing and (ii) Buyer Confidential Information may be
      disclosed by Sellers or any of its directors, officers, employees,
      investors, lenders and authorized representatives
(including attorneys, accountants, consultants, bankers and financial advisors)
(collectively, for purposes of this Section 8.5(b) , “Sellers
Representatives”) to the extent that, in the opinion of counsel for Sellers
or such Sellers Representative, Sellers or such Sellers Representative is
legally compelled to do so, provided that, prior to making such disclosure,
Sellers or such Sellers Representative, as the case may be, advises and consults
with the Buyer regarding such disclosure and provided, further, that Sellers or
such Sellers Representative, as the case may be, discloses only that portion of
the Buyer Confidential Information as is legally required. The term “Buyer
Confidential Information,” as used herein, means all information regarding
the Company or obtained from Buyer or the Company, including while the Company
was owned by, or a borrower from, Sellers, other than information that (i) was
or becomes generally available to the public other than as a result of
disclosure by Sellers or any Sellers Representative, (ii) was or becomes
available to Sellers on a non-confidential basis prior to disclosure to Sellers
by Buyer, the Company, or their respective representatives, or (iii) was or
becomes available to Sellers from a source other than Buyer, the Company, and
their respective representatives, provided that such source is not known by
Sellers to be bound by a confidentiality agreement with Buyer or the
Company.

Page 41

8.6           Exclusivity
Upon execution of this Agreement by all the parties hereto, Sellers shall not
(and Sellers will not cause or permit the Company to) directly or indirectly
through any director, officer, employee, agent, representative or otherwise (i)
solicit, initiate, or encourage the submission of any proposal or offer from any
Person relating to the acquisition of any voting securities or any substantial
portion of the assets of the Company or any equity interest in Sellers
(including any acquisition structured as a merger, consolidation, or share
exchange), or (ii) participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner any effort or attempt by any Person to do or seek any of the
foregoing. Sellers will notify Buyer immediately if any Person makes any
proposal, offer, inquiry, or contact with respect to any of the foregoing.

8.7          
Public Announcements. Neither Buyer, on the one hand, nor the
Sellers, on the other hand, shall, or, in the case of Sellers, permit the
Company to, directly or indirectly, issue any press release, have any
communication with the press (whether or not for attribution), make any
statement to the public generally with respect to this Agreement or the
transactions contemplated herein without the prior written consent of both Buyer
and Sellers (which consent shall not be unreasonably withheld or delayed);
provided, however, that either Buyer or Sellers may make any public disclosure
that, as reasonably determined by counsel, is required by applicable Law (in
which case the disclosing Party shall use all reasonable best efforts to advise
the other Party, and give the other Party an opportunity to comment on the
proposed disclosure, prior to making the disclosure). Notwithstanding the
foregoing, Buyer shall be permitted in the context of public or private
financing to disclose the details of and information regarding this Agreement
and/or the transactions contemplated herein to securities regulators and stock
exchanges, its advisers (including underwriters and their counsel), financial
institutions (including lenders), potential investors and the investing public,
whether by way of prospectus, information memorandum, filing with securities
regulatory authorities or otherwise.

Page 42

8.8           Filing
of Tax Returns.

	 	(a) 	
      The Company shall prepare or cause to be prepared and
      file or cause to be filed all Tax Returns of the Company that are required
      to be filed on or prior to the Closing Date (taking into account, for
      these purposes, any extension of the time to file any such Tax Return),
      including any amended Tax Returns required for such periods. Unless
      otherwise required by applicable Law, every material position taken on
      such Tax Returns shall be reasonably consistent with the methodology and
      elections employed by the Company in prior years. The Company shall
      provide Buyer with copies of any Tax Returns described in the preceding
      sentence that have not been provided to Buyer prior to the date
    hereof.

	 	 	 
	 	(b) 	
      Sellers shall prepare or cause to be prepared and Buyer
      shall file or cause to be filed all Tax Returns for the Company for all
      Tax periods ending on or prior to the Closing Date that are required to be
      filed after the Closing Date. Unless otherwise required by applicable Law,
      every material position taken on such Tax Returns shall be reasonably
      consistent with the methodology and elections employed by the Company in
      prior years. Sellers shall permit Buyer to review and comment on each such
      Tax Return described in the preceding sentence prior to filing as provided
      herein. Not less than 30 days before the earlier of the due date of any
      such Tax Return or the date on which such Tax Returns are to be filed,
      Sellers shall furnish a draft of such Tax Return (as proposed to be filed)
      to Buyer for its review. Not less than 20 days before the earlier of the
      due date of such Tax Return or the date on which such Tax Return is to be
      filed, Buyer shall forward to Sellers any comments it may have relating to
      such Tax Return, and Buyer and Sellers agree to resolve in good faith any
      disputes regarding such Tax Return. Not less than 15 days before a payment
      is due with respect to such Tax Return (or extension request), Sellers
      shall forward to Buyer a schedule indicating the amount of Tax due with
      respect to the Tax Return (or extension request). Not less than five days
      before the earlier of the due date of such Tax Return (or extension
      request) or the date on which such Tax Return (or extension request) is to
      be filed, Sellers shall forward to Buyer the Tax Return (or extension
      request) to be filed. Any dispute regarding such Tax Returns that cannot
      be resolved by negotiation between Buyer and Sellers shall be resolved by
      a mutually agreed accounting firm (an “Independent Accounting
      Firm”); provided, that, in resolving a dispute with respect to a Tax
      Return, the Independent Accounting Firm shall be bound by the requirement
      that the Tax Return be prepared in a manner consistent with past reporting
      practices of the Company unless otherwise required in accordance with
      applicable Law (it being understood that a position taken on a Tax Return
      is in accordance with applicable Law if there is at least a reasonable
      basis for such position). The fees and expenses of the Independent
      Accounting Firm (a) shall be borne by Sellers in the proportion that the
      aggregate dollar amount of such disputed items so submitted that are
      successfully disputed by Buyer (as finally determined by the Independent
      Accounting Firm) bears to the aggregate dollar amount of such items so
      submitted and (b) shall be borne by Buyer in the proportion that the
      aggregate dollar amount of such disputed items so submitted that are
      unsuccessfully disputed by Buyer (as finally determined by
  the Independent Accounting Firm) bears to the aggregate
      dollar amount of such items so submitted. Buyer and Sellers shall make
      available to the Independent Accounting Firm and to each other all
      relevant books and records and working papers relating to the Tax Return
      under dispute and all other items reasonably requested by the Independent
      Accounting Firm. If any dispute with respect to a Tax Return is not
      resolved prior to the due date of such Tax Return, such Tax Return shall
      be filed in the manner in which the Party responsible for filing such Tax
      Return deems correct and the Tax shown as due on such Tax Return shall be
      paid in accordance with this, and if the dispute is subsequently resolved
      by the Independent Accounting Firm in a manner that differs from the
      manner in which the Tax Return was filed, Buyer shall cause the Company to
      promptly file an amended Tax Return in a manner consistent with the
      resolution of the dispute, and any Tax refund or Tax credit shall be paid
      to Sellers. Sellers shall reimburse Buyer for any Taxes of the Company
      with respect to such periods within 15 days after payment by Buyer or the
      Company of such Taxes to the extent such Taxes are not reflected in the
      reserve for Tax liability (rather than any reserve for deferred Taxes
      established to reflect timing differences between book and Tax income)
  shown on the Financial Statements (or in any notes thereto).

Page 43

	 	(c) 	
      Buyer shall prepare or cause to be prepared and file or
      cause to be filed any Tax Returns of the Company for Tax periods which
      begin before the Closing Date and end after the Closing Date. Unless
      otherwise required by applicable Law, every material position taken on
      such Tax Returns shall be reasonably consistent with the methodology and
      elections employed by the Company in prior years. Buyer shall permit
      Sellers to review and comment on each such Tax Return described in the
      first sentence of this clause (c) prior to filing as provided herein. Not
      less than 30 days before the earlier of the due date of any such Tax
      Return or the date on which such Tax Returns are to be filed, Buyer shall
      furnish a draft of such Tax Return (as proposed to be filed) to Sellers
      for their review. Not less than 20 days before the earlier of the due date
      of such Tax Return or the date on which such Tax Return is to be filed,
      Sellers shall forward to Buyer any comments it may have relating to such
      Tax Return, and Buyer and Sellers agree to resolve in good faith any
      disputes regarding such Tax Return. Not less than five days before the
      earlier of the due date of such Tax Return or the date on which such Tax
      Return is to be filed, Buyer shall forward to Sellers the Tax Return to be
      filed. Any dispute regarding such Tax Returns that cannot be resolved by
      negotiation between Buyer and Sellers shall be resolved by the Independent
      Accounting Firm; provided, that, in resolving a dispute with respect to a
      Tax Return, the Independent Accounting Firm shall be bound by the
      requirement that the Tax Return be prepared in a manner consistent with
      past reporting practices of the Company unless otherwise required by
      applicable Law (it being understood that a position is in accordance with
      applicable Law if there is at least a reasonable basis for such position).
      The fees and expenses of the Independent Accounting Firm (a) shall be
      borne by Sellers in the proportion that the aggregate dollar amount of
      such disputed items so submitted that are unsuccessfully disputed by
      Sellers (as finally determined by the Independent Accounting Firm) bears
      to the aggregate dollar amount of such items so submitted and (b) shall be
      borne by Buyer in the proportion that the aggregate dollar amount of such
disputed items so submitted that are successfully disputed by Sellers (as
finally determined by the Independent Accounting Firm) bears to the aggregate
dollar amount of such items so submitted.

Page 44

Buyer and Sellers shall make available
to the Independent Accounting Firm and to each other all relevant books and
records and working papers relating to the Tax Return under dispute and all
other items reasonably requested by the Independent Accounting Firm. If any
dispute with respect to a Tax Return is not resolved prior to the due date of
such Tax Return, such Tax Return shall be filed in the manner in which the Party
responsible for filing such Tax Return deems correct and the Tax shown as due on
such Tax Return shall be paid in accordance with this Section, and if the
dispute is subsequently resolved by the Independent Accounting Firm in a manner
that differs from the manner in which the Tax Return was filed, Buyer shall
cause the Company to promptly file an amended Tax Return in a manner consistent
with the resolution of the dispute, and any Tax refund or Tax credit that
relates to the portion of the Tax period covered by the Tax Return shall be paid
to Sellers. Sellers shall pay to Buyer within 15 days after the date on which
Taxes are paid with respect to such periods an amount equal to the portion of
such Taxes which relates to the portion of such Taxable period ending on the
Closing Date to the extent such Taxes are not reflected in the reserve for Tax
liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) shown on the face of the
Financial Statements (or in any notes thereto). For purposes of this Section, in
the case of any Taxes that are imposed on a periodic basis and are payable for a
Taxable period that includes (but does not end on) the Closing Date, the portion
of such Tax which relates to the portion of such Taxable period ending on the
Closing Date shall (x) in the case of any Taxes other than Taxes based upon or
related to income or receipts, be deemed to be the amount of such Tax for the
entire Taxable period multiplied by a fraction the numerator of which is the
number of days in the Taxable period ending on the Closing Date and the
denominator of which is the number of days in the entire Taxable period, and (y)
in the case of any Tax based upon or related to income or receipts, be deemed
equal to the amount which would be payable if the relevant Taxable period ended
on the Closing Date. Any credits relating to a Taxable period that begins before
and ends after the Closing Date shall be allocated to the period before the
Closing Date and the period after the Closing Date on a closing of the books
method, except that credits shall not be allocated to the period before the
Closing Date to the extent such credit is reflected on the Post-Closing
Settlement Statement, and any refunds (or portions thereof) relating to the
Taxable period ended on or prior to the Closing Date shall be promptly paid to
Sellers. All determinations necessary to give effect to the foregoing
allocations shall be made in a manner consistent with prior practice of the
Company. Should Buyer take a purely elective tax position in a Tax Return of the
Company that relates solely to periods after the Closing Date in which Buyer
adopts a purely elective filing position different or otherwise inconsistent
with that taken with respect to periods prior to, or inclusive of periods prior
to, the Closing Date and such position directly results in a requirement that
the Company or its Affiliates must amend prior tax returns or become liable for additional Taxes with respect to
      pre-Closing periods arising from such position, Sellers shall not bear any
responsibility for such additional Taxes.

Page 45

	 	(d) 	
      Buyer and Sellers shall cooperate fully, as and to the
      extent reasonably requested by the other Party, in connection with the
      filing of Tax Returns pursuant to this Section 8.8 and any audit,
      litigation or other proceeding with respect to Taxes. Such cooperation
      shall include the retention and (upon the other Party’s request) the
      provision of records and information which are reasonably relevant to any
      such audit, litigation or other proceeding and making employees available
      on a mutually convenient basis to provide additional information and
      explanation of any material provided hereunder. Buyer and Sellers agree to
      (i) retain all books and records with respect to Tax matters pertinent to
      the Company relating to any Taxable period beginning before the Closing
      Date until the expiration of the statute of limitations (and, to the
      extent notified by Buyer or Sellers, any extensions thereof) of the
      respective Taxable periods, and to abide by all record retention
      agreements entered into with any Taxing authority, and (ii) give the other
      Party reasonable written notice prior to transferring, destroying or
      discarding any such books and records and, if the other Party so requests,
      the Company or Sellers, as the case may be, shall allow the other Party to
      take possession of such books and records. In addition, Buyer and Sellers
      will, to the maximum extent allowed by applicable Law, elect with the
      relevant Taxing authorities to treat the portion any Tax periods described
      in Section 8.8(c) that begins before the Closing Date as a short
      Taxable period that ends on the Closing Date.

	 	 	 
	 	(e) 	
      Buyer and Sellers further agree, upon request, to use
      their reasonable best efforts (including those actions described in
      Section 8.8(f)) to obtain any certificate or other document from
      any Governmental Body or any other Person as may be necessary to mitigate,
      reduce or eliminate any Tax that could be imposed (including with respect
      to the transactions contemplated hereby).

	 	 	 
	 	(f) 	
      All transfer, documentary, sales, use, stamp,
      registration and other such Taxes and fees (including any penalties and
      interest) incurred in connection with this Agreement shall be paid by
      Buyer when due, and Sellers and Buyer shall cooperate in filing all
      necessary Tax Returns and other documentation with respect to all such
      transfer, documentary, sales, use, stamp, registration and other Taxes and
      fees, and, if required by applicable Law, the other Party shall, and shall
      cause its Affiliates to, join in the execution of any such Tax Returns and
      other documentation. The expense of such filings shall be paid by
      Buyer.

Page 46

ARTICLE IX 
CONDITIONS TO CLOSING

9.1           Conditions
to Obligations of Sellers. The obligations of the Seller Parties to
consummate the transactions contemplated in this Agreement shall be subject to
the fulfillment on or prior to the Closing Date of each of the following
conditions:

	 	(a) 	
      Each of the representations and warranties of Buyer
      contained in Article IV shall be true and correct in all material
      respects (other than those representations and warranties of Buyer that
      are qualified by materiality or Material Adverse Effect, which shall be
      true and correct in all respects) as of the date made and (having been
      deemed to have been made again on and as of the Closing Date in the same
      language) on and as of the Closing Date, except (i) to the extent that any
      such representation or warranty is made as of a specified date, in which
      case such representation or warranty shall have been true and correct in
      all material respects as of such specified date or (ii) any such
      inaccuracies or breaches which, in the aggregate, have not had or could
      not reasonably be expected to have a Material Adverse Effect.

	 	 	 
	 	(b) 	
      Buyer shall have performed and complied in all material
      respects with each of the covenants and agreements required by this
      Agreement to be performed or complied with by it on or prior to the
      Closing Date.

	 	 	 
	 	(c) 	
      No Order shall have been entered and be in effect by any
      Governmental Body of competent jurisdiction, and no statute, rule,
      regulation or other requirement shall have been promulgated or enacted and
      be in effect, that on a temporary or permanent basis restrains, enjoins or
      invalidates the transactions contemplated herein.

	 	 	 
	 	(d) 	
      The Board of Directors of the Buyer shall have approved
      of the issuance by the Buyer to the order and direction of the Sellers of
      all of the Shares in accordance with Section 2.2 hereinabove and,
      in addition, the Board of Directors of the Buyer, if required, having also
      approved and received any required notices of such other matters as may be
      agreed to as between the Parties hereto prior the completion of the
      transactions contemplated by this Agreement.

9.2           Conditions
to Obligations of Buyer. The obligations of Buyer to consummate the
transactions contemplated in this Agreement shall be subject to the fulfillment
on or prior to the Closing Date of each of the following conditions:

	 	(a) 	
      Each of the representations and warranties of the Seller
      Parties contained in Article III and Article VII shall be
      true and correct in all material respects (other than those
      representations and warranties of the Seller Parties that are qualified by
      materiality or Material Adverse Effect, which shall be true and correct in
      all respects) as of the date made and (having been deemed to have been
      made again on and as of the Closing Date in the same language) on and as
      of the Closing Date, except (i) to the extent that any such representation
      or warranty is made as of a specified date, in which case such representation or
      warranty shall have been true and correct in all material respects as of
      such specified date or (ii) any such inaccuracies or breaches which have
      been remedied in accordance with Section 7.3 or, (iii) in the
      aggregate, have not had or could not reasonably be expected to have a
  Material Adverse Effect.

Page 47

	 	(b) 	
      Each of the Seller Parties shall have performed and
      complied in all material respects with each of the covenants and
      agreements required by this Agreement to be performed or complied with by
      it on or prior to the Closing Date.

	 	 	 
	 	(c) 	
      No Order shall have been entered and be in effect by any
      Governmental Body of competent jurisdiction, and no statute, rule,
      regulation or other requirement shall have been promulgated or enacted and
      be in effect, that on a temporary or permanent basis restrains, enjoins or
      invalidates the transactions contemplated herein.

	 	 	 
	 	(d) 	
      Buyer shall have received certified copies of the
      resolutions duly adopted by each of Seller’s and the Company’s board of
      managers or other governing body, as applicable, authorizing the
      execution, delivery and performance of this Agreement and the other
      agreements contemplated hereby, and the consummation of all transactions
      contemplated hereby and thereby.

	 	 	 
	 	(e) 	
      Buyer shall have received the written resignation of each
      of the Company’s managers and officers, such resignation to be effective
      immediately upon the consummation of the transactions contemplated in this
      Agreement, in form and substance reasonably acceptable to
  Buyer.

ARTICLE X 
INDEMNIFICATION

10.1           Survival
of Obligations.

		(a) 	
      The representations, warranties and covenants of the
      Parties contained in this Agreement shall survive the Closing and claims
      may be asserted with respect thereto to the extent and only to the extent
      permitted by this Article X. Subject to the other limitations and
      procedures of this Article X, the liability of the Seller Parties
      under the representations and warranties of the Seller Parties contained
      in Section 3.16(a) and Article VII shall terminate at
      Closing, except for any indemnification obligations arising under
      Section 7.3(c); (ii) the liability of the Seller Parties under the
      representations and warranties of the Seller Parties contained in
      Article III (other than Section 3.16(a)) shall survive until
      the eighteen-month anniversary of the Closing Date, except that (A) the
      liability of the Seller Parties under the representations and warranties
      of the Seller Parties contained in Section 3.1, Section 3.2,
      Section 3.5, Section 3.8, Section 3.9 and Section
      3.10 shall survive indefinitely, and (B) the liability of the Seller
      Parties under the representation and warranty of the Seller Parties
      contained in Section 3.13 shall survive the Closing Date until the end
      of the applicable statute of limitations period and (ii) the liability of
      Buyer under the representations and warranties of Buyer contained in Section 4.2, Section 4.3, Section 4.7 and Section
      4.10 shall survive the Closing Date until the end of the applicable
      statute of limitations period. All of the covenants or other agreements of
      the Parties contained in this Agreement shall survive until fully
      performed or fulfilled, unless and to the extent only that non-compliance
      with such covenants or agreements is waived in writing by the Party
      entitled to such performance. The period, if any, for which a
      representation, warranty and covenant survives is herein called the
      “Survival Period.” From and after the expiration of a Survival
      Period, a Party shall be liable with respect to any representation or
      warranty or covenant to which such Survival Period relates only as to
      which notice has been received in accordance with Section
  13.5.

Page 48

	 	(b) 	
      No Party shall have any indemnification obligation
      pursuant to this Article X or otherwise in respect of any
      representation, warranty or covenant unless it shall have received from
      the Party seeking indemnification written notice of the existence of the
      claim for or in respect of which indemnification in respect of such
      representation, warranty or covenant is being sought on or before the
      expiration of the Survival Period with respect to such representation,
      warranty or covenant. Such notice shall set forth with reasonable
      specificity (i) the basis under this Agreement, and the facts that
      otherwise form the basis of such claim, (ii) the estimate of the amount of
      such claim (which estimate shall not be conclusive of the final amount of
      such claim) and an explanation of the calculation of such estimate,
      including a statement of any significant assumptions employed therein, and
      (iii) the date on and manner in which the Party delivering such notice
      became aware of the existence of such claim.

10.2           Indemnification
by Seller Parties.

	 	(a) 	
      In addition to the indemnification obligations of Sellers
      under Section 7.3(c) and subject in all respects to the terms and
      conditions of this Article X (including, without limitation, the
      Survival Period limitations contained in Section 10.1(a)), Sellers
      shall indemnify, defend and hold harmless, to the fullest extent permitted
      under applicable Law, each of Buyer, the Company, its Affiliates and its
      and their respective successors and permitted assigns and all of their
      respective directors, managers, officers, employees, stockholders,
      members, partners, agents, attorneys and representatives (collectively,
      the “Buyer Indemnified Parties”) from and against any and all
      losses, liabilities, claims, demands, judgments, damages (excluding
      incidental and consequential damages), fines, settlements, penalties,
      suits, actions, costs and expenses (including reasonable attorneys’ fees
      and expenses) (individually and collectively, “Losses”) asserted
      against, resulting to, imposed upon, or incurred by Buyer, directly or
      indirectly, by reason of or resulting from (a) the failure of any
      surviving representations and warranties of the Company or Sellers
      contained in Article III or any certificate delivered by Sellers or
      the Company at Closing to have been true and correct when made or as of
      the Closing Date (except for such representations and warranties that are
      made as of a specified date, in which case the failure of such
      representations and warranties to be true and correct as of such date); or
      (b) any breach of any covenant or agreement of Sellers or the Company
      contained in this Agreement (other than the breach of any of such
  obligations of the Company that occurs after the Closing Date).

Page 49

	 	(b) 	
      Sellers shall cooperate, and cause its Affiliates to
      cooperate, with any Buyer Indemnified Party in the defense of any claim
      for Losses pursuant to Section 10.2(a) and shall provide access to
      properties and individuals as reasonably requested and furnish or cause to
      be furnished records, information and testimony, and attend such
      conferences, discovery proceedings, hearings, trials or appeals, as may be
      reasonably requested in connection therewith.

10.3          
Limits on Indemnification.

	 	(a) 	
      Notwithstanding anything to the contrary contained in
      this Agreement, the maximum aggregate amount for which Sellers may be
      liable for indemnification under Section 10.2(a) is the Purchase
      Price.

	 	 	 	 
	 	(b) 	
      The indemnification obligations of the Parties pursuant
      to this Article X shall be limited to actual Losses and shall not
      include incidental, consequential, indirect, punitive, or exemplary
      damages, provided that any incidental, consequential, indirect, punitive,
      or exemplary damages recovered by a third party (including a Governmental
      Body, but excluding any Affiliate of any Party) against a Party entitled
      to indemnity pursuant to this Article X shall be included in the
      damages recoverable under such indemnity. Indirect or consequential loss,
      including all of the following:

	 	 	 	 
	 		(i) 	
      loss of production, including production of petroleum or
      petroleum products;

	 	 	 	 
	 		(ii) 	
      loss of prospective economic advantage or
  benefit;

	 	 	 	 
	 		(iii) 	
      loss of business opportunity;

	 	 	 	 
	 		(iv) 	
      punitive or exemplary damages; and

	 	 	 	 
	 		(v) 	
      lost profits.

10.4          
Indemnification Procedures.

	 	(a) 	
      In the event that any Legal Proceedings shall be
      instituted or any claim or demand for which a party (an “Indemnifying
      Party”) would be liable to the other party under Section 10.2
      or Section 5.3 (an “Indemnified Party”) is asserted
      against or sought to be collected from an Indemnified Party by a third
      party (an “Indemnification Claim”), the Indemnified Party shall
      with reasonable promptness notify the Indemnifying Party of such claim or
      demand, but the failure so to notify the Indemnifying Party shall not
      relieve the Indemnifying Party of its obligations under this Article X,
      except to the extent the Indemnifying Party demonstrates that the defense
  of such claim or demand is materially prejudiced thereby.

Page 50

	 	(b) 	
      Subject to the provisions of this Section 10.4,
      the Indemnifying Party shall have the right, at its sole expense, to be
      represented by counsel of its choice, which must be reasonably
      satisfactory to the Indemnified Party, and to defend against, negotiate,
      settle or otherwise deal with any Indemnification Claim which relates to
      any Losses indemnified against by it hereunder; provided, that the
      Indemnifying Party shall have acknowledged in writing to the Indemnified
      Party its unqualified obligation to indemnify the Indemnified Party as
      provided hereunder. If the Indemnifying Party elects to defend against,
      negotiate, settle or otherwise deal with any Indemnification Claim which
      relates to any Losses indemnified against by it hereunder, it shall within
      five days of the Indemnified Party’s written notice of the assertion of
      such Indemnification Claim (or sooner, if the nature of the
      Indemnification Claim so requires) notify the Indemnified Party of its
      intent to do so; provided, that the Indemnifying Party must conduct the
      defense of the Indemnification Claim actively and diligently thereafter in
      order to preserve its rights in this regard. If the Indemnifying Party
      elects not to defend against, negotiate, settle or otherwise deal with any
      Indemnification Claim which relates to any Losses indemnified against
      hereunder, fails to notify the Indemnified Party of its election as herein
      provided or contests its obligation to indemnify the Indemnified Party for
      such Losses under this Agreement, the Indemnified Party may defend
      against, negotiate, settle or otherwise deal with such Indemnification
      Claim. If the Indemnified Party defends any Indemnification Claim, then
      the Indemnifying Party shall reimburse the Indemnified Party for the all
      of the costs and expenses related to defending such Indemnification Claim
      upon submission of period bills. If the Indemnifying Party shall assume
      the defense of any Indemnification Claim, the Indemnified Party may
      participate, at his or its own expense, in the defense of such
      Indemnification Claim; provided, however, that such Indemnified Party
      shall be entitled to participate in any such defense with separate counsel
      at the expense of the Indemnifying Party if (i) so requested by the
      Indemnifying Party to participate or (ii) in the reasonable opinion of
      counsel to the Indemnified Party, a conflict or potential conflict exists
      between the Indemnified Party and the Indemnifying Party that would make
      such separate representation advisable. The Parties agree to cooperate
      fully with each other in connection with the defense, negotiation or
      settlement of any such Indemnification Claim. Notwithstanding anything in
      this Section 10.4 to the contrary, neither the Indemnifying Party
      nor the Indemnified Party shall, without the written consent of the other
      party, settle or compromise any Indemnification Claim or permit a default
      or consent to entry of any judgment unless the claimant and such party
      provide to such other party an unqualified release from all liability in
      respect of the Indemnification Claim.

	 	 	 
	 	(c) 	
      After any final decision, judgment or award shall have
      been rendered by a Governmental Body of competent jurisdiction and the
      expiration of the time in which to appeal therefrom, or a settlement shall
      have been consummated, or the Indemnified Party and the Indemnifying Party shall have
      arrived at a mutually binding agreement with respect to an Indemnification
      Claim hereunder, the Indemnified Party shall forward to the Indemnifying
      Party notice of any sums due and owing by the Indemnifying Party pursuant
      to this Agreement with respect to such matter and the Indemnifying Party
      shall pay all of such remaining sums so due and owing to the Indemnified
      Party in immediately available funds within five Business Days after the
      date of such notice.

Page 51

	 	(d) 	
      IT IS THE EXPRESS INTENTION OF THE PARTIES THAT EACH
      PARTY TO BE INDEMNIFIED PURSUANT TO THIS ARTICLE X
      SHALL BE INDEMNIFIED AND HELD HARMLESS FROM AND AGAINST ALL
      LOSSES AS TO WHICH INDEMNITY IS PROVIDED FOR UNDER THIS ARTICLE
      X, NOTWITHSTANDING ANY SUCH LOSSES ARISING OUT OF OR RESULTING
      FROM THE ORDINARY, STRICT, SOLE, OR CONTRIBUTORY NEGLIGENCE OF SUCH PARTY
      AND REGARDLESS OF WHETHER ANY OTHER PARTY (INCLUDING THE OTHER PARTIES) IS
      OR IS NOT ALSO NEGLIGENT. THE PARTIES ACKNOWLEDGE THAT THE FOREGOING
      COMPLIES WITH THE EXPRESS NEGLIGENCE RULE AND IS
  CONSPICUOUS.

ARTICLE XI 
CLOSING

11.1          
Closing. Subject to the terms and conditions of this Agreement,
the closing of the transactions contemplated herein (the “Closing”) shall
take place at the Buyer’s office, located at 800 Gessner Road, Suite 200,
Houston, Texas, U.S.A., 77024, at 2 p.m., local time, on the earlier of the
third Business Day following the satisfaction or waiver of the conditions to
Closing in Article IX (other than those conditions that by their nature
are to be satisfied at Closing, but subject to satisfaction or waiver of those
conditions at that time) but in no event later than September 30, 2011, or at
such other place, date and time as Sellers and Buyer may agree in writing. The
date on which the Closing is required to take place is herein referred to as the
“Closing Date.” All Closing transactions shall be deemed to have occurred
simultaneously.

11.2           Closing
Deliveries by Sellers. Subject to the terms and conditions set forth in
this Agreement, on the Closing Date, Sellers shall deliver or shall cause to be
delivered to Buyer: 

	 	(a) 	
      an assignment of the Interests together with any
      certificates representing the Interests, duly endorsed (or accompanied by
      duly executed stock powers);

	 	 	 
	 	(b) 	
      a certified copy of an ordinary resolution of the
      shareholders of the Company approving the terms and conditions of this
      Agreement and the transactions contemplated hereby and thereby together
      with certification of any required notice to all shareholders of the
      Company of such written consent resolutions;

	 	 	 
	 	(c) 	
      all documentation as may be necessary and as may be
      required by counsel for the Buyer, acting reasonably, to ensure that all
      of the Interests have been transferred, assigned and are registerable in the name of and for the
      benefit of the Buyer under all applicable corporate and securities
  laws;

Page 52

	 	(d) 	
      a certified copy of the resolutions of the Board of
      Directors of the Company authorizing the transfer by the Sellers to the
      Buyer of the Interests;

	 	 	 
	 	(e) 	
      a copy of all corporate records and books of account of
      the Company and including, without limiting the generality of the
      foregoing, a copy of all minute books, share register books, share
      certificate books and annual reports of the Company;

	 	 	 
	 	(f) 	
      all necessary consents and approvals in writing to the
      completion of the transactions contemplated herein;

	 	 	 
	 	(g) 	
      that all Interests have been duly authorized and issued
      and are fully paid and non- assessable;

	 	 	 
	 	(h) 	
      all necessary steps and proceedings have been taken in
      connection with the execution, delivery and performance of this Agreement
      and the transactions contemplated herein;

	 	 	 
	 	(i) 	
      that the Interests have been duly issued to and
      registered in the name of the Buyer in compliance with all applicable
      corporate and securities laws;

	 	 	 
	 	(j) 	
      based on actual knowledge and belief, such counsel knows
      of no claims, judgments, actions, suits, litigation, proceedings or
      investigations, actual, pending or threatened, against either the Sellers
      or the Company which might materially affect either the Company, the
      Company’s Properties or which could result in any material liability to
      either of the Company, the Company’s Properties;

	 	 	 
	 	(k) 	
      all such other documents and instruments as the Buyer’s
      counsel may reasonably require; and

	 	 	 
	 	(l) 	
      the other certificates, documents and agreements as
      required by Section 9.1.

11.3           Closing
Deliveries by Buyer Subject to the terms and conditions set forth in
this Agreement, on the Closing Date, Buyer shall deliver or shall cause to be
delivered to Sellers:’

	 	(a) 	
      a certified copy of an ordinary resolution of the
      directors of the Buyer approving the terms and conditions of this
      Agreement and the transactions contemplated hereby;

	 	 	 
	 	(b) 	
      share certificates, subject to the normal resale
      provisions applicable thereto, representing all of the Shares issued and
      registered in the name or names as notified by the Sellers to the Buyer
      prior to Closing in accordance with Sections 2.2 and 2.3
      hereinabove;

Page 53

	 	(c) 	
      all necessary consents and approvals in writing to the
      completion of the transactions contemplated herein;

	 	 	 
	 	(e) 	
      all such other documents and instruments as the Sellers’
      and the Company’s counsel may reasonably require; and

	 	 	 
	 	(f) 	
      the other certificates, documents and agreements as
      required by Section 9.2.

ARTICLE XII 
TERMINATION

12.1          
Termination of Agreement. This Agreement may be terminated and the
transactions contemplated herein abandoned at any time prior to the Closing in
the following manner:

	 	(a) 	
      by mutual written consent of Buyer and Sellers;

	 	 	 	 
	 	(b) 	
      by either Buyer or Sellers, if:

	 	 	 	 
	 		(i) 	
      the Closing does not occur on or before September 30,
      2011 (the “Termination Date”) for any reason; provided, however,
      that such Termination Date may be extended in writing by mutual agreement
      of the Parties; or

	 	 	 	 
	 		(ii) 	
      there shall be any statute, rule, or regulation that
      makes consummation of the transactions contemplated herein illegal or
      otherwise prohibited or a Governmental Body shall have issued an order,
      decree, or ruling or taken any other action permanently restraining,
      enjoining, or otherwise prohibiting the consummation of the transactions
      contemplated herein, and such order, decree, ruling, or other action shall
      have become final and non- appealable;

	 	 	 	 
	 	(c) 	
      by Sellers, if (i) Buyer shall have failed to fulfill in
      any material respect any of its obligations under this Agreement; or (ii)
      any of the representations and warranties of Buyer contained in Article
      IV shall not be true and correct in all material respects and, in the
      case of each of clauses (i) and (ii), such failure, misrepresentation, or
      breach of warranty (provided it can be cured) has not been cured prior to
      the Termination Date; or (iii) if the conditions to Closing specified in
      Section 9.1 have not been satisfied;

	 	 	 	 
	 	(d) 	
      by Buyer, if (i) Sellers shall have failed to fulfill in
      any material respect any of its obligations under this Agreement; or (ii)
      any of the representations and warranties of Sellers or the Company
      contained in Article III and Article VII shall not be true
      and correct in all material respects and, in the case of each of clauses
      (i) and (ii), such failure, misrepresentation, or breach of warranty
      (provided it can be cured) has not been cured prior to the Termination Date;
      or (iii) if the conditions to Closing specified in Section 9.2 have
  not been satisfied; or

Page 54

	 	(e) 	
      by Buyer at anytime if it is not satisfied, in its sole
      discretion with the results of its due diligence, or Sellers’ rejection of
      an Environmental Defect Value as provided in Section
  7.3(c).

12.2           Effect
of Termination.

	 	(a) 	
      To terminate this Agreement pursuant to Section 12.1
      (other than Section 12.1(a)), the terminating Party must notify
      the other Party specifying the provision hereof pursuant to which such
      termination is made, whereupon (i) this Agreement shall become void and
      have no effect, except that the agreements contained in this Article
      XII, in Section 5.3, Section 7.6, Section 8.5 and
      in Article XIII shall survive the termination
  hereof.

	 	 	 
	 	(b) 	
      Upon the termination of this Agreement in accordance with
      this Article XII, Sellers will be free to sell the Interests (or
      any portion thereof) to any other Person without any limitation under or
      because of this Agreement. Buyer will promptly execute any instrument
      evidencing the termination of Buyer’s right to acquire the Interests as
      Sellers may reasonably request.

	 	 	 
	 	(c) 	
      Upon the termination of this Agreement in accordance with
      this Article XII, Buyer will return to Sellers all data and other
      information (and all copies thereof and analysis therefrom) furnished to
      Buyer by or on behalf of Sellers or the Company in connection with this
      transaction.

ARTICLE XIII 
MISCELLANEOUS

13.1          
Interpretive Matters. Unless otherwise expressly provided herein,
for purposes of this Agreement, the following rules of interpretation shall
apply:

	 	(a) 	
      Calculation of Time Period. When calculating the
      period of time before which, within which or following which any act is to
      be done or step taken pursuant to this Agreement, the date that is the
      reference date in calculating such period shall be excluded unless
      otherwise specified. If the last day of such period is a non- Business
      Day, the period in question shall end on the next succeeding Business
      Day.

	 	 	 
	 	(b) 	
      Gender and Number. Any reference in this Agreement
      to gender shall include all genders, and words imparting the singular
      number only shall include the plural and vice versa.

	 	 	 
	 	(c) 	
      Headings. The division of this Agreement into
      Articles, Sections and other subdivisions and the insertion of headings
      are for convenience of reference only and shall not affect or be utilized in construing or
      interpreting this Agreement. All references in this Agreement to any
      “Section” are to the corresponding Section of this Agreement unless
  otherwise specified.

Page 55

	 	(d) 	
      Herein. The words such as “herein,”
      “hereinafter,” “hereof,” and “hereunder” refer to
      this Agreement as a whole and not merely to a subdivision in which such
      words appear unless the context otherwise requires.

	 	 	 
	 	(e) 	
      Including. The word “including” or any
      variation thereof means (unless the context of its usage otherwise
      requires) “including, without limitation” and “including but not
      limited to” and shall not be construed to limit any general statement
      that it follows to the specific or similar items or matters immediately
      following it.

	 	 	 
	 	(f) 	
      No Presumption. The Parties have participated
      jointly in the negotiation and drafting of this Agreement and, in the
      event an ambiguity or question of intent or interpretation arises, this
      Agreement shall be construed as jointly drafted by the Parties and no
      presumption or burden of proof shall arise favoring or disfavoring any
      Party by virtue of the authorship of any provision of this
    Agreement.

13.2           Entire
Agreement. This agreement, together with the certificates, documents,
instruments and writings that are delivered pursuant hereto, constitutes the
entire agreement and understanding of the parties in respect of its subject
matter and supersedes all prior understandings, agreements, or representations
by or among the parties, written or oral, to the extent they relate in any way
to the subject matter hereof or the transactions contemplated hereby. Except as
expressly contemplated by Sections 10.2, there are no third party
beneficiaries having rights under or with respect to this agreement.

13.3           Injunctive
Relief. The Parties acknowledge and agree that irreparable damage would
occur in the event any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the Parties shall be entitled to an injunction or
injunctions to prevent breaches of the provisions of this Agreement, and shall
be entitled to enforce specifically the provisions of this Agreement, in any
court of the United States or any state thereof having jurisdiction, in addition
to any other remedy to which the Parties may be entitled under this Agreement or
at Law or in equity.

13.4           Successors.
All of the terms, agreements, covenants, representations, warranties, and
conditions of this Agreement are binding upon, and inure to the benefit of and
are enforceable by, the Parties and their respective successors and assigns.

13.5           Assignments.
No Party may assign either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the other Parties;
provided, however, Buyer may (a) assign or delegate any or all of its rights and
interests hereunder to one or more of its Affiliates and (b) designate one or
more of its Affiliates to perform its obligations hereunder without the consent
of Sellers or the Company; provided, further, however, that in any or all of
such cases Buyer nonetheless will remain responsible for the performance of all
of its obligations hereunder.

Page 56

13.6           Notices.
All notices, requests, demands, claims and other communications hereunder will
be in writing. Any notice, request, demand, claim or other communication
hereunder will be deemed duly given if (and then three business days after) it
is sent by registered or certified mail, return receipt requested, postage
prepaid, and addressed to the intended recipient as set forth below:

	 	(a) 	If to the Sellers, and before the
      Closing, to the Company: 
	 	  	  	  
	 	  	CW Navigation, Inc., KD Navigation,
      Inc. and KW Navigation, Inc. 
	 	  	SPE Navigation I, LLC 
	 	  	1423 Lakepoint Parkway, First Floor,
      Sugar Land, Texas, U.S.A., 77478 
	 	  	Attn. Mr. Michael E. Watts 
	 	  	Tel: 	(281) 240-0940 
	 	  	Fax: 	(281) 240-0948 
	 	  	E-mail: 	mwatts1956@gmail.com. 
	 	  	  	  
	 	(b) 	If to Buyer, and after the Closing,
      to the Company: 
	 	  	  	  
	 	  	Strategic American Oil Corporation  
	 	  	800 Gessner Road, Suite 200, Houston,
      Texas, U.S.A., 77024 
	 	  	Attn. Mr. Jeremy G. Driver, President    
	 	  	Tel: 	(281) 408-4880 
	 	  	Fax: 	(408) 408-4879 
	 	  	E-mail: 	jdriver@strategicamericanoil.com; 
	 	  	  	  
	 	  	and with a copy to: 
	 	  	  	  
	 	  	Thomas J. Deutsch 
	 	  	McMillan LLP 
	 	  	1500 – 1055 West Georgia Street,
      Vancouver, B.C., Canada, V6E 4N7 
	 	  	Tel: 	(604) 691-7445 
	 	  	Fax: 	(604) 893-2679 
	 	  	E-mail: 	thomas.deutsch@mcmillan.ca.

                
 Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth above
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication will be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Parties notice in the manner herein set forth.

13.7           Counterparts.
This Agreement may be executed in two or more counterparts, each of which will
be deemed an original but all of which together will constitute one and the same
instrument.

Page 57

13.8           Governing
Law; Jurisdiction; Venue; Jury Waiver. THIS AGREEMENT AND THE LEGAL
RELATIONS AMONG THE PARTIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS, EXCLUDING ANY CONFLICTS OF LAW RULE OR
PRINCIPLE THAT WOULD REQUIRE THE APPLICATION OF ANY OTHER LAW. EACH OF THE
PARTIES CONSENT TO THE EXERCISE OF EXCLUSIVE JURISDICTION IN PERSONAM, FORUM AND
VENUE BY THE COURTS OF THE STATE OF TEXAS LOCATED IN HOUSTON, HARRIS COUNTY AND
(IF IT HAS JURISDICTION) THE FEDERAL COURTS LOCATED IN HOUSTON, HARRIS COUNTY IN
THE STATE OF TEXAS FOR ANY ACTION ARISING OUT OF THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. EACH PARTY HERETO WAIVES, TO THE FULLEST
EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT.

13.9          
Amendments and Waivers. No amendment, modification, replacement,
termination or cancellation of any provision of this Agreement will be valid,
unless the same will be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, may be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising because of any such
prior or subsequent occurrence.

13.10         Electronic
Signatures. Notwithstanding the Electronic Signatures in Global
and National Commerce Act (15 U.S.C. Sec. 7001 et. seq.), the
Uniform Electronic Transactions Act, or any other Law relating to or enabling
the creation, execution, delivery, or recordation of any contract or signature
by electronic means, and notwithstanding any course of conduct engaged in by the
Parties, no Party will be deemed to have executed this Agreement or other
document contemplated hereby (including any amendment or other change hereto or
thereto) unless and until such Party shall have executed this Agreement or such
other document on paper by a handwritten original signature or any other symbol
executed or adopted by a Party with current intention to authenticate this
Agreement or such other document.

          
      Delivery of a copy of this Agreement or such
other document bearing an original signature by facsimile transmission (whether
directly from one facsimile device to another by means of a dial-up connection
or whether mediated by the worldwide web), by electronic mail in “portable
document format” or “.pdf” form, or by any other electronic means
intended to preserve the original graphic and pictorial appearance of a
document, will have the same effect as physical delivery of the paper document
bearing the original signature, provided a copy bearing an original signature on
paper is subsequently physically delivered. “Originally signed” or
“original signature” means or refers to a signature that has not been
mechanically or electronically reproduced.

Page 58

13.11         Severability. If any provision of this Agreement is held to be unenforceable,
this Agreement shall be considered divisible and such provision shall be deemed
inoperative to the extent it is deemed unenforceable, and in all other respects
this Agreement shall remain in full force and effect; provided, however, that if
any such provision may be made enforceable by limitation thereof, then such provision shall be deemed to be
so limited and shall be enforceable to the maximum extent permitted by
Applicable Law.

Signatures on Following Page
__________

Page 59

     IN WITNESS WHEREOF, the Parties
have caused this Agreement to be executed by their respective authorized
officers, as of the date first written above.

	 SELLERS: 	 
	 	CW NAVIGATION, INC. 
	 	 
	 	By: /s/ Christopher M. Watts 
	 	 Signatory: Christopher M. Watts
  
	 	Title: President 
	 	 
	 	KD NAVIGATION, INC. 
	 	 
	 	By: /s/ Kara M. Driver 
	 	Signatory: Kara M. Driver 
	 	Title: Secretary 
	 	 
	 	KW NAVIGATION, INC. 
	 	 
	 	By: /s/ Christopher M. Watts 
	 	Signatory: Christopher M. Watts 
	 	Title: Vice President 
	 	 
	 COMPANY: 	 
	 	SPE NAVIGATION I, LLC 
	 	 
	 	By: /s/ Christopher M. Watts 
	 	Signatory: Christopher M. Watts 
	 	Title: Vice President 
	 	 
	 BUYER: 	 
	 	STRATEGIC AMERICAN OIL
      CORPORATION 
	 	 
	 	By: /s/ Jeremy G. Driver 
	 	Signatory: Jeremy G. Driver 
	 	Title: President

EXHIBIT “A”

OIL AND GAS PROPERTIES and LEASES/FIELDS/INTEREST

 

EXHIBIT “B”

OIL AND GAS PROPERTIES AND WELLS

	

Well Name 	Working
      

      Interest - 
SPE 	Net Revenue
      

    Interest - 
SPE 
	STATE TRACT 343 #18 Total 	25.00% 	17.34% 
	STATE TRACT 343 #9 Total 	25.00% 	18.05% 
	RFR Tract 247 #21 Total 	25.00% 	19.85% 
	RFR Tract 246 #120 Total 	25.00% 	20.60% 
	RFR ST. 225 #139 Total 	25.00% 	21.13% 
	RFR Tract 247 #188 Total 	25.00% 	20.60% 
	RFR ST. 247 #198 Total 	25.00% 	20.60% 
	RFR Tract 224 # 185 Total 	25.00% 	21.13% 
	RFR Tract 224 # 141-U Total 	25.00% 	21.13% 
	RFR ST. 246 #183 Total 	25.00% 	20.60% 
	FISHERS REEF ST TR 2-3A Total 	25.00% 	18.18% 
	Fishers Reef ST 2-3A -Tract 1 Total 	25.00% 	18.18% 
	FR Unit 539 Tract 1-4C Total 	25.00% 	19.33% 
	FR Unit 539 Unit 9-12A Total 	25.00% 	19.33% 
	FR Unit 539 Tract 1-4A Total 	25.00% 	20.38% 
	FR Unit 539 Tract 1-4B Total 	25.00% 	20.38% 
	FR Unit #539 Tract 45 Total 	25.00% 	20.38% 
	FR Unit 539 Tract 46 Total 	25.00% 	19.85% 
	FR Unit 539 Tract 5-8A Total 	25.00% 	20.38% 
	FR Unit 539 Tract 5-8B Total 	25.00% 	20.38% 
	FR Unit 539 Tract 9-12B Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 1 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 2 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 3 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 4 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 5 Total 	25.00% 	19.33% 
	TB State Unit 1 (536) TR 6 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 7 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 8 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 9 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 10 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 11 Total 	25.00% 	19.33% 
	TB State Unit 1 (536) TR 12 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 13 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 14 Total 	25.00% 	19.33% 
	TB State Unit 1 (536) TR 15 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 16 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 17 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 18 Total 	25.00% 	20.38% 
	TB State Unit 1 (536) TR 19 Total 	25.00% 	19.33% 
	ST 236/237 Unit (Sojourner) Total 	17.50% 	12.48% 

	

Well Name 	Working
      

      Interest - 
SPE 	Net Revenue
      

    Interest - 
SPE 
	State Tract 5-8 A #1 - TRACT 1 Total 	21.88% 	18.01% 
	State Tract 5-8 A #1 - TRACT 2 Total 	21.88% 	18.01% 
	State Tract 5-8 A #1 - TRACT 3 Total 	21.88% 	15.86% 
	State Tract 5-8 A #1 - TRACT 4 Total 	21.88% 	15.86% 
	State Tract 5-8 A #1 - TRACT 5 Total 	21.88% 	15.86% 
	Fishers Reef ST TR 6-7 A #1 Total 	18.75% 	13.50% 
	ST 199 #1 (Davis Petroleum Operated) 	1.67% 	1.25% 
	ST 65 #2R (Davis Petroleum Operated) 	12.50% 	0.00% 
	ST 75#2 (Davis Petroleum Operated) 	12.50% 	0.00% 
	ST 132 #1 (Davis Petroleum Operated) 	1.25% 	0.91% 
	Beach City/ST 69# 1 	25.00% 	N/A 
	Dickinson / Joe Piazza 	25.00% 	N/A 
	Greens Lake / Creston King 	25.00% 	N/A 
	Seabrook E. 	25.00% 	varies

EXHIBIT “C”

TANGIBLE PERSONAL PROPERTY

There is no tangible personal property. 

EXHIBIT “D”

FINANCIAL STATEMENTS

SCHEDULE 3.6

LEGAL PROCEEDINGS

There are no legal proceedings.

SCHEDULE 3.15

MATERIAL CONTRACTS

There are no material contracts.

SCHEDULE 3.17(a)

OWNED REAL PROPERTY

There is no owned real property.

SCHEDULE 3.17(b)

LEASED REAL PROPERTY

There is no leased real property. 

SCHEDULE 3.20

BONDS, LETTERS OF CREDIT, GUARANTIES AND 
OTHER SIMILAR
INSTRUMENTS

There are no such instruments.

SCHEDULE 3.21

ADDITIONAL ASSETS

1,000,000 shares of Hyperdynamics Corporation (NYSE: HDY)
common stock. 

SCHEDULE 3.22

BANK ACCOUNTS

JPMorgan Chase Bank, N.A. Account No. 974205197

SCHEDULE 3.24

AUTHORITIES FOR EXPENDITURES (“AFE’s”)

GALVESTON BAY ENERGY, LLC
AUTHORITY FOR EXPENDITURE

SCHEDULE 4.7

EXCEPTIONS TO SECTION 4.7

There are no such exceptions.

SCHEDULE 4.8

EXCEPTIONS TO SECTION 4.8

There are no such exceptions.

SCHEDULE 4.11

EXCEPTIONS TO SECTION 4.11

There are no such exceptions. 

SCHEDULE 4.12

EXCEPTIONS TO SECTION 4.12

There are no such exceptions.

SCHEDULE 4.17

EXCEPTIONS TO SECTION 4.17

There are no such exceptions.

SCHEDULE 6.1(a)(iii)

LIST OF TITLE DEFECTS

There are no such Title Defects.

SCHEDULE 7.1

ENVIRONMENTAL EXCEPTIONS

There are no such exceptions.exh_1023.htm

 

3124121105

 

RECORDING REQUESTED BY:

 

 

 

  

  

  

RECORDING REQUESTED BY: LandAmerica Commercial Services

 

PREPARED/DRAFTED BY AND RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO:

 

BEST & FLANAGAN LLP 225 South Sixth Street, Suite 4000 Minneapolis, Minnesota 55402 Attn: Bradley F. Williams

 

Order/Escrow No.: PHI-D5-18594HSE

 

Loan No.: 010-00001242

 

[Missing Graphic Reference]

	 
	
(SPACE ABOVE THIS LINE FOR RECORDER'S USE)

	
TRUSTOR:

	
Name:

	
CALIFORNIA VALLEY ASSOCIATES

	
Address:

	
1150 First Avenue, Suite 920

	  	
King of Prussia, Pennsylvania 19506

	
TRUSTEE:

	  
	
Name:

	
COMMONWEALTH LAND TITLE

	
Address:

	
3131 Camino Del Rio, Suite 1400

	  	
San Diego, California 92103

	
BENEFICIARY:

	  
	
Name:

	
ARTESIA MORTGAGE CAPITAL CORPORATION

	
Address:

	
1180 NW Maple Street, Suite 202

	  	
Issaquah, Washington 98027

	
(SPACE ABOVE THIS LINE FOR RECORDER'S USE)

	
TRUSTOR:

	
Name:

	
CALIFORNIA VALLEY ASSOCIATES

	
Address:

	
1150 First Avenue, Suite 920

	  	
King of Prussia, Pennsylvania 19506

	
TRUSTEE:

	  
	
Name:

	
COMMONWEALTH LAND TITLE

	
Address:

	
3131 Camino Del Rio, Suite 1400

	  	
San Diego, California 92103

	
BENEFICIARY:

	  
	
Name:

	
ARTESIA MORTGAGE CAPITAL CORPORATION

	
Address:

	
1180 NW Maple Street, Suite 202

	  	
Issaquah, Washington 98027

NOTICE: THE DEBT SECURED HEREBY IS SUBJECT TO CALL IN FULL OR THE TERMS THEREOF BEING MODIFIED IN THE EVENT OF SALE OR CONVEYANCE OF THE PROPERTY HEREIN CONVEYED.  NOTICE: DO NOT DESTROY THIS DEED OF TRUST OR THE NOTE (IF IT IS IN YOUR POSSESSION) WHICH IT SECURES AS THESE MUST BE PRESENTED TO THE TRUSTEE FOR CANCELLATION IN ORDER TO OBTAIN A RECONVEYANCE. THE RECONVEYANCE MUST BE RECORDED IN THE OFFICE OF THE COUNTY RECORDER, THIS DOCUMENT CONSTITUTES A FIXTURE FlLING IN ACCORDANCE WITH SECTION 9502(c) OF THE CALIFORNIA UNIFORM COMMERCIAL CODE.

Description: San Bernardino, CA Document-Year. Doc ID 2005.202586 Page: 2 of 58 Order: 327283 Comment:

  

  

  

COMMERCIAL DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING FINANCING STATEMENT AND ASSIGNMENT OF LEASES, RENTS, INCOME AND PROFITS THE PROMISSORY NOTE SECURED HEREBY PROVIDES FOR A: FIXED INTEREST RATE

THIS COMMERCIAL DEED OF TRUST, SECURITY AGREEMENT, FIXTURE FILING FINANCING STATEMENT AND ASSIGNMENT OF LEASES, RENTS, INCOME AND PROFITS (this "Security Instrument,,) is made and given as of February 21, 2005, by CALIFORNIA VALLEY ASSOCIATES, a(n) New York limited partnership, whose address is 1150 First Avenue, Suite 920, King of Prussia, Pennsylvania 19506 ("Borrower," and for purposes of Article 3 hereof, "Assignor"), to COMMONWEALTH LAND TITLE, and all successors and assigns, whose address is 3131 Camino Del Rio, Suite 1400, San Diego, California 92103, Attn: Anni Fredericksen (herein called "Trustee"), for the benefit of ARTESIA MORTGAGE CAPITAL CORPORATION, a Delaware corporation, whose address is 1180 NW
Maple Street, Suite 202, Issaquah, Washington 98027, and its successor and assigns (in each case, "Lender," and for purposes of Article 3 hereof, 'Assignee").

 

WHEREAS, Borrower is justly indebted to Lender in the principal sum of Three Million Eight Hundred Fifty Thousand and 00/100 Dollars ($3,850,000.00), pursuant to a certain Fixed Rate Note of even date herewith, more particularly described below,

 

NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, including the Indebtedness herein recited and the trust herein created, the receipt of which is hereby acknowledged, Borrower hereby grants a first priority security Interest In, and Irrevocably gives, grants, transfers, aliens, enfeoffs, conveys, confirms, warrants, assigns, mortgages, bargains, sells and pledges to Trustee, IN TRUST FOREVER, WITH ALL POWERS OF SALE AND STATUTORY RIGHTS, for the benefit and security of Lender, under and subject to the terms and conditions hereinafter set forth, the following property, rights, interests and estates now owned, or hereafter acquired, by Borrower (collectively, the 'Property"):

 

(a) the real property described in Exhibit A attached hereto and made a part hereof (collectively, the "Land,,), together with additional lands, estates and development rights hereafter acquired by Borrower for use in connection with the development, ownership or occupancy of such real property, and all additional lands and estates therein which may, from time to time, by supplemental mortgage or otherwise be expressly made subject to the lien of this Security Instrument;

 

(b) any and all buildings, structures and other improvements now or hereafter erected, constructed, placed or located on the Land including, without limitation, fixtures, tenements, attachments, appliances, equipment, building systems, machinery, and other articles now or hereafter attached to or used in connection with said buildings, structures and other improvements (collectively, the 'Improvements"), and any and all additions to, substitutions for or replacements of such Improvements and such Land and all interests, estates or other claims, both In law and equity, which Borrower now has or may hereafter acquire in the Land or the Improvements, including, without limitation, all right, title and interest now
owned or hereafter acquired by Borrower in and to any greater estate in the Land or the Improvements;

 

(c) all easements, tenements, hereditaments, appurtenances, rights-of-way and rights now owned or hereafter acquired by Borrower used or useful in connection with, or located on, under or above all or any part of, the Land or as a means of access thereto, including, without limitation, all rights pursuant to any trackage agreement; all rights to the nonexclusive use of common drive entries; all oil and gas and other hydrocarbons; all minerals, crops, timber and other emblements; all mineral rights, gas rights, royalties and profits arising from or accruing to the Property, water, groundwater, water rights and shares of stock evidencing the same; water stock and
irrigation rights accruing 10 or necessary for the use of the Property including but not limited to all water rights, ditch and ditch rights, reservoir and reservoir

-2­

 

Description: San Bernardino, CA Document-Year. Doc ID 2005.202686 Page: 3 of 58 Order: 327283 Comment::

  

  

  

rights, stock or interest in water, irrigation or ditch companies, any and all right, title and interest of Borrower, now owned or hereafter acquired, in and to any land lying within the right-of-way of any street, open or proposed, adjoining the Land; and any and all sidewalks, vaults, alleys and strips and gores of land adjacent to or used in connection with the Land (collectively, the "Appurtenances,,);

 

(d) all leasehold estate, right, title and interest of Borrower in and to all written and oral leases, subleases, subtenancies, licenses, franchises, usufructs, occupancy agreements and other agreements affecting all or any portion of the Property or the Improvements or the use or occupancy thereof, now or hereafter existing or entered into, whether before or after any proceeding is instituted by or against Borrower under 11 U.S.C. § 101 et seq, as amended (the "Bankruptcy Code"), including, without limitation, extensions, renewals and subleases (all of the foregoing, individually, a "lease" and collectively, "leases"), and all rights and claims of
any kind that Borrower may have against any tenant under the Leases or in connection with the termination or rejection of the Leases in a bankruptcy or insolvency proceeding, and all right, title and interest of Borrower thereunder, including, without limitation, all cash or security deposits, prepaid or advance rentals, and deposits or payments of similar. nature which are hereby specifically assigned, transferred and set over to Lender; including, without limitation, all rents, royalties, issues, revenues, profits, proceeds, income and other benefits, including, without limitation, accounts receivable, of, accruing to or derived from such Leases and from the renting, leasing or bailment of Improvements and equipment, including, without limitation, any payments made by tenants under Leases In connection with the termination of any Lease and all oil, gas and other mineral rights,
royalties and profits, whether paid or accruing before or after any proceeding is instituted by or against Borrower under the Bankruptcy Code (all of the foregoing, collectively, "Rents"), and all proceeds from the sale or other disposition of the Leases and the right to receive and apply the Rents to the payment of the Secured Obligations (defined below) and all lease guaranties, letters of credit and any other supporting obligation for any of the Leases (collectively, "Lease Guaranties') given by any guarantor in connection with any of the Leases, and all rights, powers, privileges, options and other benefits of Borrower as lessor under the Leases and beneficiary under Lease Guaranties;

 

(e) all the estate, interest, right, title, other claim or demand, both in law and in equity, including, without limitation, claims or demands with respect to the proceeds of and any unearned premiums on Insurance policies In effect with respect to the Property, which Borrower now has or may hereafter acquire in the Property, including, without limitation, the right to receive and apply the proceeds of any insurance, judgments or settlements made in lieu thereof, for damage to the Properly, and any and all awards made for the taking by eminent domain, or by any proceeding of purchase in lieu thereof, of the whole or any part of the Property, including, without limitation, any awards resulting from a change of grade
of streets and awards for severance damages;

 

(f) all goods, Chattels, construction materials, furniture, furnishings, equipment, machinery, apparatus, appliances, and other items of personal property, whether tangible or intangible, of any kind, nature or description, whether now owned or hereafter acquired by Borrower, including, without limitation, improvements including, without limitation, furnaces, steam boilers, hot water boilers, oil burners, pipes, radiators, air conditioning and sprinkling systems, gas and electric fixtures, carpets, rugs, shades, awnings, screens, elevators, motors, dynamos, cabinets, and all other furnishings, tools, equipment and machinery, appliances, building supplies, materials, fittings and fixtures of every kind, which is, are
or shall hereafter be located upon, attached, affixed to or used or useful, either directly or indirectly, in connection with the complete and comfortable use, occupancy and operation of the Property and Improvements, whether or not any of such personal property is now or becomes a Fixture (defined below), including, without limitation, any and all licenses, permits or franchises used or required in connection with such use, occupancy or operation, together with any and all additions, replacements or substitutions thereto, thereof or therefor, as well as the proceeds thereof or therefrom regardless of form (hereinafter sometimes together referred to as the "Personal Property"; such Personal Property shall include, without limitation, all Accounts, Documents, Instruments, Chattel Paper, Goods, Equipment, General lntangibles, Fixtures and Inventory, as those terms are defined in the
Uniform Commercial Code of the State where the Property is located);

-3­

 

Description: San Bernardino, CA Document-Year. Doc ID 2005.202685 Page: 4 of 58 Order: 327283
Comment:

  

  

  

(g) all plans and specifications, contracts and subcontracts for the construction of any Improvements, density rights, bonds, permits and other development or use entitlements, licenses, guarantees, warranties, causes of action, claims, condemnation proceeds, profits, security deposits, utility deposits, governmental agency fees and deposits and refunds thereof, refunds of taxes or insurance premiums, policies, claims, and proceeds of insurance, claims and proceeds arising from condemnation, vehicles, together with all present and future attachments, accessions, replacements, additions, products and proceeds thereof;

(h) all monies deposited by Borrower, or deposited on behalf of Borrower, with any City, County, public body or agency, Irrigation, sewer or water district or company, and any other body or agency, for the installation, or to secure the installation, of any utility pertaining to the Property;

(i) all refunds, rebates, reimbursements, reserves, deferred payments, deposits, cost savings, governmental subsidy payments, governmentally-registered credits (such as emissions reduction credits), other credits, waivers and payments, whether In cash or in kind, due from or payable by (i) any federal, state, municipal or other governmental or quasi-governmental agency, authority or district (each, a "Governmental Agency") or (ii) any Insurance or utility company relating to any or all of the Property or arising out of the satisfaction of any conditions imposed upon or the obtaining of any approvals for the development or rehabilitation of the Property;

 

(j) all refunds, rebates, reimbursements, credits and payments of any kind due from or payable by any Governmental Agency for any taxes, special taxes, assessments, or similar governmental or quasi-governmental charges or levies imposed upon Borrower with respect to the Property or upon any or all of the Property or arising out of the satisfaction of any conditions imposed upon or the obtaining of any approvals for the development or rehabilitation 01 the Property;

 

(k) all monies deposited by Borrower with or for the benefit of Lender pursuant to any reserve, escrow or cash collateral agreements executed by Borrower in favor of Lender;

 

(l) contract rights, accounts receivable, management agreements, business records;

 

(m) all additions, accessions, replacements, substitutions, proceeds and products of the real and personal property, tangible and Intangible, described herein;

(The Property does not include any equipment, inventory, furniture, furnishings or trade fixtures owned and supplied by tenants of the Property, except to the extent of Borrower's landlord's lien (if any) therein.)

 

FOR THE PURPOSE OF SECURING:

 

	
1.  

	
repayment of indebtedness in the total principal amount of Three Million Eight Hundred Fifty Thousand and 00/100 Dollars ($3,850,000.00) with interest, additional interest, default interest, late charges, prepayment charges and other sums and charges thereon (the "Loan"), evidenced by that certain Fixed Rate Note, of even date herewith, and all modifications, extensions, renewals and replacements thereof or judgments thereon (collectively, the "Note"), executed by Borrower in favor of Lender, and with a final maturity date of April 11, 2015, the terms of which are incorporated by reference as though set forth in full;

 

	
2.  

	
the payment of any additional amounts, with interest thereon, that may be hereafter loaned by Lender to Borrower, which additional loans are evidenced by a promissory note or notes containing a recitation that this Security Instrument secures the payment of such note or notes.

	
3.  

	
payment of all sums advanced by Lender, its successors and assigns, or Trustee to protect, cure for or maintain the Property, or any portion thereof, with interest thereon at the Default Rate (as defined in the Note) and all sums advanced by Lender or Trustee under the terms of or for the

-4­

 

Description: San Bernardino, CA  Document-Year.DocID 2005.202686 Page: 5 of 58 Order: 327283 Comment:

  

  

  

enforcement of the Loan Documents (defined below), with interest thereon at the Default Rate (as defined in the Note);

	
4.  

	
observance, performance and discharge of every obligation, covenant or agreement of Borrower contained herein or in the Note;

 

	
5.  

	
observance, performance and discharge of every obligation, covenant and agreement of Borrower contained in any document, instrument or agreement now or hereafter executed by Borrower which recites that the obligations thereunder are secured by this Security Instrument, including, without limitation, payment of all other sums, with interest thereon, which may hereafter be loaned to Borrower, or its successors or assigns, by Lender, or its successors or assigns, when evidenced by a promissory note or notes containing a recitation that they are secured by this Security Instrument;

 

	
6.  

	
compliance with and performance of each and every material provision of any declaration of covenants, conditions and restrictions pertaining to the Property or any portion thereof; and

 

	
7.  

	
payment and performance of all obligations of Borrower arising from any and all existing and future agreements with lender which may afford interest rate protection to all or part of the Loan, when such agreement recites that the obligations thereunder are secured by this Security instrument.

(The principal of and the interest on the indebtedness evidenced by the Note; all charges, fees and other sums as provided In the loan Documents; and the principal of and interest on any other indebtedness secured by this Security Instrument are referred to herein, collectively, as the "Secured Obligations".)

 

PROVlDED,·HOWEVER, that if·the Secured Obligations shall have-been.-paid-in cash and performed In full, then, in such case the Trustee, at Lender's direction, shall, at the request and expense of Borrower, satisfy this Instrument and the estate, right, title and interest of the Trustee and Lender in the Property Shall cease, and upon payment to lender of all costs and expenses incurred for the preparation of the release hereinafter referenced and all recording costs if allowed by law, the Trustee and Lender shall release this Instrument and the lien, operation and effect hereof by proper instrument.

 

The Note, this Security Instrument and any other document or instrument executed by Borrower in connection with the Loan shall be collectively referred to as the "Loan Documents: All initially capitalized terms used herein which are defined in the Note shall have the same meaning herein unless the context otherwise requires.

 

TO PROTECT THE SECURlTY OF THIS SECURlTY INSTRUMENT, BORROWER HEREBY COVENANTS AND AGREES AS FOLLOWS:

 

ARTICLE 1. COVENANTS AND AGREEMENTS OF BORROWER

 

1.01 Payment of Secured Obligations. Borrower shall pay and perform as and when due the Secured Obligations.

 

1,02 Performance of Other Obligations; Preservation, Maintenance and Management of

Property. Borrower shall perform, comply with and abide by each and every one of the covenants, agreements and conditions contained and set forth in the Note and this Security Instrument Borrower:

(a) shall keep the Property in good condition and repair;

 

(b) shall not remove, demolish or structurally alter any of the Improvements without the prior written consent of Lender; provided, however, Lender's consent shall not be required in connection with cosmetic and non-structural alterations;

 

-5­

 

Description: San BernardinorCA Document-Year.DocID 2005.202686 Page: 6 of 58 Order: 327283 Comment:

 

  

  

  

(c) shall complete promptly and in a good and workmanlike manner any Improvement which may be now or hereafter constructed on the Property and promptly restore in like manner any portion of the Improvements which may be damaged or destroyed from any cause whatsoever, and pay when due all claims for labor performed and materials furnished therefor;

 

(d) shall comply with and abide by all laws, ordinances, rules, regulations and orders of governmental authorities now or hereafter affecting the Property or any part thereof or requiring any alterations or improvements to be made thereon, including without limitation, all Environmental Laws (as defined in Section 1.03 hereof), and the Americans with Disabilities Act:

 

(e) shall comply with and abide by all of its obligations under any covenant, condition, ; restriction or agreement of record affecting the Property;

 

(f) shall not commit or permit any waste or deterioration of the Property

 

(g) shall not allow changes in the use for which all or any part of the Property is intended;

(h) shall maintain all certificates, licenses and permits necessary to keep the Property operating in conformity with the use for which all or any part of the Property is Intended;

(i)  shall not initiate or acquiesce in a change in the zoning classification of the Property without Lender's prior written consent;

(j) shall insure that at all limes the Land constitutes one or more separate legal lots complying with all subdivision or platting laws, ordinances, rules or regulations applicable to the Property, or other laws relating to the division Dr separation of real property;

(k) shall Insure that at all times the Land Is assessed for real estate tax purposes as one Dr more wholly independent tax lot or lots, separate from any adjoining land or improvements not constituting a part of such lot or lots, and no other land or Improvements Is assessed and taxed together with the Property or any portion thereof;

(l) shall not abandon the Property; and

(m) shall do any and all other acts which, from the character and use of the Property, may be reasonably necessary to maintain, protect and preserve the Property and protect the security of Lender.

The Property shall be managed by either: (I) Borrower or a person/entity affiliated with Borrower approved by Lender for 50 long 85 Borrower or said affiliated person/entity is managing the Property in a commercially prudent and reasonable manner; or (iO a professional property management company approved by Lender. Management by said affiliated person/entity or professional property management company (in either case, the 'Property Manager") shall be pursuant to a written agreement approved by Lender (the 'Management Agreement. In no event shall any manager be removed or replaced or the terms of any Management Agreement modified or amended without prior written consent of Lender. Notwithstanding the provisions of
any Management Agreement or any other agreement now or hereafter existing or entered into (together with any and all extensions, renewals, substitutions, replacements, amendments, modifications and/or restatements thereof, the 'Management Agreements; to the contrary. Borrower shall not pay any Property Manager, nor shall any Property Manager accept, total management fees (i.e., on-site and off-site management fees or other compensation, whether monetary or nonmonetary) ("Management Fees; in excess of four percent (4%) of the effective gross income from the Property per year, nor shall such Management Fees be payable in advance of receipt of such income. The Management Agreements and all of the rights and interests thereunder including, without limitation, the rights to Management Fees are and at all times will be subject and subordinate to the Loan and the Loan Documents and to any
renewals, extensions, modifications, assignments, replacements, or consolidations thereof, and the rights, privileges and powers of Lender hereunder and thereunder. Such

Description: San Bernardino,CA Document-Year.DocID 2005.202686 Page: 7 of 58

Order: 327283 COmment:

  

  

  

subordination shall be self-operative and no further instrument shall be required to effect such subordination, but Borrower agrees to execute and deliver, and to cause any Property Manager to execute and deliver, any instrument which Lender may deem necessary or appropriate to confirm such subordination. Such subordination means, among other things, that Management Fees shall not be paid or accepted unless all current expenses attributable to the ownership and operation of the Property, including, without limitation, current expenses relating to Borrower's liabilities and obligations with respect to the Loan and the Loan Documents (collectively, "operating Expenses"), have been paid. In the event (x) of any Event
of Default (defined below) under the Loan Documents or under any Management Agreement then in effect, which default is not cured within any applicable grace or cure period, (y) the debt service coverage ratio applicable to the Property is less than 1.15 to 1.00 for the twelve (12) month period immediately preceding the calculation, or (z) of the bankruptcy or insolvency of the manager, or Borrower, if the Property Manager is affiliated with Borrower, Lender shall have the right to immediately terminate, or to direct Borrower to immediately terminate, such Management Agreement and to retain, or to direct Borrower to retain, a new management agent approved by Lender. All Rents generated by or derived from the Property shall first be utilized solely for Operating Expenses, and none of the Rents generated by or derived from the Property shall be diverted by Borrower and utilized for any
other purpose unless all such current expenses attributable to the ownership and operation of the Property have been fully paid and satisfied.

1.03 Hazardous Waste. Borrower at all times shall keep the Property and groundwater of the Property free of Hazardous Substances (defined below). Borrower shall not permit its tenants or any third party to enter tile Property to use, generate, manufacture, store, release, threaten release, or dispose of Hazardous Substances in, on or about the Property; provided, however, that Borrower may permit reasonable incidental use and storage of Hazardous Substances on the Property provided that such use and storage complies with the following: (a) such use and storage shall be limited to customary supplies which are normal incidents of the ownership and management Of real
property which is similar to the Property ("Permitted Uses"); (b) no such products or supplies create any risk of harm to persons or property. including, without limitation, the Property; and (c) all such products and supplies are used and stored In strict compliance with all applicable Environmental Laws (defined below). Borrower shall give Lender prompt written notice of any claim by any person, entity, or governmental agency that a violation of Environmental Laws has occurred with respect to all or any portion of the Property, or that a release or disposal of Hazardous Substances has occurred on the Property (except Permitted Uses as may be permitted pursuant to the preceding sentence), or that Hazardous Substances are present at the Property or otherwise affect the Property (except Permitted Uses). Borrower, through its professional engineers and at Its cost, shall promptly and
thoroughly Investigate suspected Hazardous Substances contamination of the Property and shall provide to Lender a detailed description of the investigation, and any copies of reports at Borrower's expense. Borrower shall forthwith remove, repair, clean up, and/or detoxify any Hazardous Substances from the Property, to the extent that the presence andlor maintenance of such Hazardous Substances in, on or about the Property constitutes a violation of any federal, state or local law, ordinance, order, decree or regulation now or hereafter in effect and applicable to Borrower or the Property, and whether or not Borrower was responsible for the existence of the Hazardous Substances in, on or about the Property. "Hazardous Substances" shall mean (i) any
chemical, compound, material, mixture or substance that is now or hereafter defined or listed in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous substance: "hazardous material; 'hazardous waste; "extremely hazardous waste; "acutely hazardous waste: "radioactive waste,' "infectious waste," "biohazardous waste” “Toxic substance” "pollutant," "Toxic pollutant," and “contaminant," as well as any formulation not mentioned herein intended to define, list, or classify substances by reason of deleterious properties such as igniteabilty, corrosivity, reactivity, carcinogenicity, toxicity, reproductive toxicity, "EP toxicity,' or "TCLP toxicity"; (ii) petroleum, natural gas, natural gas liquids, liquefied natural gas, synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas) and ash produced by a resource recovery
facility utilizing a municipal solid waste stream, and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas, or geothermal resources; (iii) asbestos in any form; (IV) urea formaldehyde foam insulation; (v) polychlorinated biphenyls (PCBs); (vi) radon; (vii) any other chemical, material, or substance which is (because of its quantity, concentration, or physical or chemical characteristics) limited or regulated for health and safety reasons by any governmental authority, or which poses a significant

 

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present or potential hazard to human health and safety or to the environment if released into the workplace or the environment; (viii) any 'Hazardous Substance' or terms of similar import as defined in the State where Property is located or substances otherwise regulated or controlled in such State because of concerns for health, safety and/or property, and (IX) lead-based paint. 'Environmental Laws' means any and all requirements of courts including, without limitation, state courts whose decisions may be based on the common law of the aforementioned state} or governmental authorities relating to health, safety, the environment or to any Hazardous substances, including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act (“CERCLA”), the Resource Conservation and Recovery Act ("RCRA”), the Hazardous Substances Transportation Act, the Toxic Substances Control Act, the Clean Water Act, the Endangered Species Act, the Clean Air Act, the Occupational Safety and Health Act and all similar federal, state and local environmental statutes, ordinances, and the rules, regulations, orders, decrees and guidance documents related thereto, whether any of the foregoing shall not exist or shall hereafter be enacted, decided, promulgated or published.

Borrower represents and warrants to Lender that to the best of Borrower's knowledge, except as set forth In that certain Environmental Questionnaire delivered by Borrower to Lender prior to the date hereof, and that certain environmental site assessment delivered to Lender in connection with the Loan (collectively, the "Environmental Report'): (A) during the period of Borrower's ownership of the Property: (1) there has been no use, generation, manufacture, storage, treatment, disposal, discharge, release, or threatened release of any Hazardous Substances by any person on or around the Property except Permitted Uses; and (2) there have been no Hazardous Substances transported over or through the Property except In
connection with Permitted Uses; (B) after diligent inquiry, Borrower has no knowledge of, or reason to believe that there has been: any use generation, manufacture, storage, treatment, disposal, release, or threatened release of any Hazardous Substance, hazardous waste or other waste by any prior owners or prior occupants of the Property or by any third parties onto the Property; or any actual or threatened litigation or claims of any kind by any person relating to these matters; (C) no Hazardous Substances in excess of permitted levels or reportable quantities under applicable Environmental Laws are present in or about the Property or any nearby real property that could migrate to the Property; (0) no underground storage tanks of any kind are or ever have been located in or about the Property; (E) the Property and all operations and activities at, and the use and occupancy of, the
Property, comply with all applicable Environmental Laws; (F) Borrower and every person currently having an interest in or conducting operations on the Property has complied wHh, and is now in strict compliance with, every permit, license, and approval required by all applicable Environmental Laws for all activities and operations at, and the use and occupancy of, the Property; and «(3) there are no claims related to Hazardous Substances pending or threatened with regard to the Property or against Borrower or any indemnitor other than Borrower (Individually or collectively, 'Indemnitorj under the Environmental Indemnity (as hereinafter defined). Borrower represents and warrants that, to the best of Borrower's knowledge, any written disclosure submitted by or on behalf of Borrower to Lender concerning any release or threatened release, past or present compliance by Borrower, or any
other person of any Environmental Laws applicable to the Property, and any environmental concerns relating to the Property, was true and complete when submitted and continues to be true and complete as of the date of this security Instrument

 

Borrower (1) releases and waives any future claims against Lender for indemnity or contribution In the event Borrower becomes liable for Cleanup or other costs under any Environmental Laws or under any Hazardous Substances-related claim; (2) shall reimburse Lender, on demand, for all costs and expenses incurred by Lender in connection with any review, approval, consent, or inspection relating to the environmental provisions in this Security Instrument together with interest, after demand, at the highest rate permitted under applicable law; and (3) shall indemnify, defend, and hold Lender and Trustee harmless from and against all losses, costs, claims, damages,
penalties, liabilities, causes of action, judgments, court costs, attorneys' fees and other legal expenses, costs of evidence of title, cost of evidence of value, and other expenses (collectively, "Expenses,,), including, without limitation, any Expenses incurred or accruing after the foreclosure of the lien of this Security Instrument, which either may suffer or incur and which directly or indirectly arise out of or are in any way connected with the breach of any environmental provision either In this Security Instrument or in any Loan Document or as a consequence of any release or threatened release or the presence, use, generation, manufacture,

 

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storage, disposal, transportation, release, or threatened release of any Hazardous Substances on or about the Property caused or permitted by Borrower, any prior owner or operator of the Property, any adjoining landowner or any other party, including, without limitation, the cost of any required or necessary monitoring, investigation, repair, cleanup, remedy, or detoxification of any Hazardous Substances and the preparation of any closure, remedial action, or other required plans, whether that action is required or necessary by reason of ads or omissions occurring prior to or following the recordation of this Security Instrument. Borrower's obligations will survive the satisfaction, release, or cancellation of the
Loan, the release and reconveyance or partial release and reconveyance of this Security Instrument, and the foreclosure of the lien of this Security Instrument or deed in lieu thereof. Notwithstanding anything in this paragraph to the contrary, this paragraph shall not apply to the introduction and initial release of Hazardous Substances on the Property from and after the date that Lender acquires title to the Property through foreclosure or a deed in lieu of foreclosure (the "Transfer Date"); provided, however, Borrower shall bear the burden of proof that the introduction and initial release of such Hazardous Substances: (i) occurred subsequent to the Transfer Date, (ii) did not occur as the result of any act or omission of Borrower or its agents, and (iii) did not occur as a result of a continuing leaching, seeping, migration or release of any Hazardous Substances introduced prior to
the Transfer Date in, on, under or near the Property.

 

To the extent permitted by applicable law, Lender or its agents, representatives, alid employees may waive its lien against the Property or any portion of it, including, without limitation, the Improvements and the Personal Property, to the extent that the Property is found to be environmentally Impaired and to exercise all rights and remedies of an unsecured creditor against Borrower and all of Borrower's assets and property for the recovery of any deficiency and environmental costs, including, without limitation, seeking an attachment order. Borrower will have the burden of proving that Borrower or any related party (or an affiliate or agent of Borrower or any related party) was not In any way negligent in
permitting the release or threatened release of the Hazardous Substances.

 

Anything contained in this Security Instrument or in the Loan Documents to the contrary notwithstanding, the Expenses will be exceptions to any nonrecourse or exculpatory provision of the Loan Documents, and Borrower will be fully and personally liable for the Expenses. That liability will not be Iimited to the original principal amount of the obligations secured by this Security Instrument, and Borrower's obligations will survive the foreclosure, deed in lieu of foreclosure, release, reconveyance, or any other transfer of the Property or this Security Instrument. For the purposes of any action brought under this subsection, Borrower waives the defense of laches and any applicable statute of
limitations.

 

Lender and any other person or entity designated by Lender, Including, without limitation, any representative of a governmental entity, and any environmental consultant, and any receiver appointed by any court of competent Jurisdiction, shall have the right, but not the obligation, to enter upon the Property at all reasonable times to assess any and all aspects of the environmental condition of the Property and its use, including, without limitation, conducting any environmental assessment or audit (the scope of which shall be detennined by Lender) and taking samples of soli, groundwater or other water, air, or building materials, and conducting other invasive testing. Borrower shall cooperate with and provide
access to Lender and any such person or entity designated by Lender.

 

If recommended by the Environmental Report or any other environmental assessment or audit of the Property, Borrower shall establish and comply with an operations and maintenance program with respect to the Property, in form and substance reasonably acceptable to Lender, prepared by an environmental consultant reasonably acceptable to Lender, which program shall address any asbestos containing material or lead based paint that may now or in the future be detected at or on the Property. Without limiting the generality of the preceding sentence, Lender may require (1) periodic notices or reports to Lender in form, substance and at such intervals as Lender may specify, (2) an amendment to such operations and
maintenance program to address changing circumstances, laws or other matters,

(3) at Borrower's sale expense, supplemental examination of the Property by consultants specified by Lender, (4) access to the Property by Lender, its agents or servicer, to review and assess the environmental condition of the Property and Borrower's compliance with any operations and maintenance

 

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program, and (5) variation of the operations and maintenance program in response to the reports provided by any such consultants.

 

1.04 Funds for Taxes, Insurance and Other Charges. Subject to applicable law or to a written waiver by Lender, Borrower shall pay to Lender, on the day monthly installments of principal and interest are payable under the Note (or on another day designated in writing by Lender) until the Note is paid in full, a sum (herein “Impounds” equal to one-twelfth (1/12) of: (a) all real property taxes and assessments (general and special), and all other taxes and assessments of any kind or nature whatsoever, including. without limitation, nongovernmental levies or assessments such as maintenance charges, levies or charges resulting from covenants, conditions and restrictions affecting the Property, which are
assessed or Imposed upon the Property or any portion of ii, or become due and payable, and which create, may create or appear to create a lien upon the Property, or any part thereof, or upon any person, property, equipment or other facility used in the operation or maintenance thereof, or any tax or assessment on the Property, or any portion of it, in lieu thereof Dr in addition thereto, or any license fee, tax or assessment imposed on Lender and measured by or based in whole or in part upon the amount of the outstanding Secured Obligations (collectively, "Taxes”; (b) the yearly premium installments for fire and other hazard insurance, rent loss insurance, commercial general liability insurance and such other insurance covering the Property as Lender may require pursuant to Section 1.07 hereof (collectively, “Insurance Premiums”; and (c) if this Security Instrument is
on a leasehold, the yearly fixed ground rent, if any, under any ground lease affecting the Property or any portion thereof, all as reasonably estimated initially and from time to time by Lender on the basis of assessments and bills and reasonable estimates thereof. Lender may require Borrower to pay to Lender, in advance, such other Impounds for other taxes, charges, premiums, assessments and impositions in connection with Borrower or the Property which Lender shall reasonably deem necessary to protect Lender's interests (collectively "Other Impositions”. (The Taxes, Insurance Premiums, Other Impositions, and other Hems for which Lender is authorized to collect Impounds hereunder are referred to collectively as "Impositions".) Unless otherwise provided by applicable law, Lender may require Impounds for Other Impositions to be paid by Borrower In a lump sum or in periodic
installments, at Lender's option. Any waiver by Lender of a requirement that Borrower pays such Impounds may be revoked by Lender a\ any time upon notice In writing to Borrower.

 

Lender shall apply the Impounds to pay such Impositions so long as Borrower is not in breach of such rates, ground rent, Taxes, assessments, Insurance Premiums and other Impositions and so long as Borrower is not in breach of any covenant or agreement in this Security Instrument. Lender shall make no charge to Borrower for holding and applying the Impounds, annually analyzing such accounts, or for verifying and compiling said assessments and bills, unless Lender pays Borrower interest, earnings or profits on the Impounds and applicable law permits Lender to make such a charge. If requested by Lender, Borrower shall cause to be furnished to Lender a tax reporting service contract covering the Property of the type,
duration and with a company satisfactory to Lender. Unless applicable law requires Interest, earnings or profits to be paid, Lender shall not be required to pay Borrower any Interest, earnings or profits on the Impounds. Lender shall give to Borrower, without charge, an annual accounting of the Impounds, showing credits and debits to the Impounds and the purpose for which each debit to the Impounds was made. The Impounds are pledged as additional security for all sums secured by this Security Instrument.

 

If the Impounds held by Lender at the time of the annual accounting thereof exceed the amounts deemed necessary by Lender to provide for the payment of such Impositions, as they fall due, or exceed the amounts permitted to be held by applicable law, if no Event of Default is in effect under any of the Loan Documents, Lender shall credit such excess Impounds on the next monthly installment or installments of Impounds due. If at any time the amount of the Impounds held by Lender shall be less than is sufficient to pay such Impositions as they fall due, Borrower shall pay to Lender the amount necessary to make up the deficiency within thirty (30) days after notice from Lender to Borrower requesting payment
thereof.

 

Upon the occurrence of any Event of Default under any of the Loan Documents or Borrower's breach of any covenant or agreement of Borrower In this security Instrument, Lender may apply, in any amount and in any order as Lender shall determine, any Impounds held by Lender at the time of

 

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application, (i) to pay Impositions which are now or will hereafter become due, or (il) as a credit against the sums secured by this Security Instrument. Upon payment in full of all sums secured by this Security Instrument or upon Defeasance (as defined in the Note, if so defined), Lender shall promptly refund to Borrower any Impounds held by Lender.

 

1.05 Application of Payments. Unless applicable law provides otherwise, all payments received by Lender from Borrower under the Note or this Security Instrument shall be applied by Lender in the following order of priority: (i) to interest payable on the Note; (ii) to principal due on the Note; (iii) to interest payable on advances made pursuant to Section 1.14 hereof; (iv) to principal of advances made pursuant to Section 1.14 hereof; (v) to amounts payable to Lender by Borrower under Section 1.04 hereof; and (vi) any other sums secured by this Security Instrument In such order as Lender, at Lender's option, may determine; provided, however, that Lender may, at Lender's option, apply any sums payable pursuant to
Section 1.14 hereof prior to Interest on and principal of the Nota, but such application shall not otherwise affect the order of priority of application specified in this Section 1.05.

 

1.06 Charges; Liens. Unless Lender shall be collecting (and Borrower shall have paid as required) Impounds pursuant to Section 1.04 above, Borrower shall pay, at Borrower's cost and expense, all Impositions attributable to the Properly, the Note, this Security Instrument, or any part thereof or interest therein by Borrower making or causing to be made payment, when due, directly to the payee thereof, or in such other manner as Lender may designate in writing. Borrower shall promptly furnish to Lender all notices of amounts due under this Section 1.06, and if Borrower shall make payment directly, Borrower shall promptly furnish to Lender receipts evidencing such payments. Borrower shall pay and promptly discharge,
at Borrower's cost and expense, all liens, encumbrances and charges upon, and the claims of all persons supplying labor or materials to or in connection with, the Property, or any part thereof or interest therein, without regard to whether such lien, encumbrance, charge or claim is or may be senior and superior to, equal with or junior and inferior to the lien of this Security Instrument. If Borrower shall fail to pay, remove and discharge any such lien, encumbrance, charge or claim, then in addition to any other right or remedy of Lender, Lender may, but shall not be obligated to, discharge the same, either by paying the amount claimed to be due or by procuring the discharge of such lien, encumbrance, charge or claim by depositing in a court a bond or the amount claimed or otherwise giving security for such claim, or by procuring such discharge in such manner as is or may be prescribed
by law. Borrower shall, immediately upon demand therefor by Lender, pay to Lender an amount equal to all costs and expenses incurred by Lender in connection with the exercise by Lender of the foregoing right to discharge any such lien, encumbrance, charge or claim, together with interest thereon from the date of such expenditure at the Default Rate.

 

Borrower shall give Lender prompt written notice of (a) the proposed creation of any county, municipal, quasi governmental or other improvement or special district of any nature or (b) any action in respect to such district, which may affect the Property, including, without limitation, any proposed service plan or modification of such plan, proposed organization of such district and election in regard to such organization, the proposed issuance of bonds by such district and election in regard to such issuance and the proposed inclusion of the Properly in any such district, and Borrower shall not consent to the creation of any such district or any such action in respect to such district without the prior written
consent of Lender, which consent shall not be unreasonably withheld.

 

1.07 Required Insurance; Delivery of Policies. Borrower shall at all times provide, maintain and keep in force or cause to be provided, maintained and kept In force, at no expense to Trustee or Lender, policies of insurance in form and amounts, covering such casualties, risks, perils, liabilities and other hazards >IS provided below. All such insurance policies shall be written by a company or companies authorized and admitted to Issue insurance In the State where the Property is located and having a rating of A2 or better for ratings by Moody's Investors Service, Inc., or A or better for ratings by Fitch Investors Service, LP. or Standard & Poor's Ratings Services.

 

(a) Borrower shall initially maintain, until Lender shall otherwise indicate in writing, the following insurance:

 

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(1) Property Insurance. Borrower, at its sole cost and expense, shall keep all Improvements, boilers and machinery, and all other Personal Property of Borrower now or hereafter situated on the Property insured during the term of this Security Instrument against loss or damage by fire and against loss or damage by other risks now embraced by 'Special Form" or "All Risk" coverage, so called, (including without limitation, riot and civil commotion, vandalism, malicious mischief, water, fire, burglary and theft) without any exclusion for terrorism, boiler and machinery coverage (If applicable), flood and/or earthquake Insurance (if applicable), all as may be
required by lender, in amounts at all times sufficient to prevent Lender from becoming a co-insurer within the terms of the applicable policies and under applicable insurance law, providing for deductibles (not to exceed the lesser of 1% of the face amount of any such policy or $10,000), maintained in an amount not less than 100% of the full replacement cost of the Improvements and betterments and Personal Property (equivalent to the insurable value of the Improvements and Personal Property as determined by an appraisal acceptable to Lender), on an agreed amount basis, without deduction for depreciation and without reference to co­insurance (an insurance to value provision is not
permitted in the policy).

 

(2) Liability Insurance. Borrower shall also provide commercial general liability insurance, on the so-called "occurrence" form naming Lender as an additional insured, including personal injury, death and property damage liability, and against any and all claims, including all legal liability to the extent insurable and imposed upon Lender and all court costs and legal fees and expenses, in an amount not less than One Million Dollars ($1,000,000), combined single limit policy, Two Million Dollars ($2,000,000) In the aggregate, for personal injury and property damage, to be without a deductible.

 

(3) Business Income Insurance. "Business income" and/or "rental income" insurance, each naming Lender as loss payee, in an amount sufficient to avoid any co insurance penalty and to provide proceeds which will cover a period of not less than twelve (12) months from the date of casualty or loss; the term "rental income" shall mean the sum of (A) the total then ascertainable Rents payable under the Leases (defined below) and (8) the total ascertainable amount of all other amounts to be received by Borrower from third parties which are the legal obligation of the tenants under such Leases, reduced to the extent such amounts would not be received
because of operating expenses not incurred during a period of non occupancy of that portion of the Property then not being occupied.

 

(4) Flood Insurance. If the Property is now, or hereafter becomes, situated in a federally designated special flood hazard area, then Borrower shall obtain and maintain at all times thereafter, a policy of flood insurance in such amount as lender may, from time to time require, and shall otherwise comply with the requirements of the National Flood Insurance Program. A Life of Loan Flood Hazard Certificate shall be provided to lender identifying the Flood Hazard Zone in which the Property is situated.

 

(5) Law and Ordinance Insurance. If any of the Improvements or the use of the Property shall at any time constitute a legal non-conforming structure or use, Borrower shall obtain an "Ordinance or Law Coverage" or "Enforcement" endorsement, which shall Include coverage for (A) loss of value On an amount no less than 100% of the full replacement cost of the Improvements), (8) demolition and debris removal costs On an amount not less than 15% of the policy limit or insured value), and (C) increased costs of construction (in an amount not less than 15% of the policy limit or insured value).

 

(6) Builder's Risk Insurance. At all times during which structural construction, repairs or alterations are being made with respect 10 the Improvements, Borrower shall also maintain (A) owner's contingent or protective liability insurance covering claims not covered by or under the terms or provisions of the above-mentioned commercial general liability insurance policy; and (B) the insurance provided for in subsection (1) above written in a so-called builder's risk completed value form (w) on a non-reporting basis, (Xl against all risks insured against pursuant to the first sentence of this paragraph, (y) Including permission to occupy the Property, and (z) with an Agreed Amount endorsement waiving
co­insurance provisions.

 

(7) Workers' Compensation Insurance. If Borrower has employees, Borrower shall also maintain workers' compensation, subject to the statutory limits of the state where the Property

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Is located, and employer's liability insurance with a limit of at least $1,000,000 per accident and per disease per employee, with respect to any work or operations on or about the Property.

(b) The original policy or policies and renewals thereof (or, at the sole option of Lender, duplicate originals or certified copies thereof), together with receipts evidencing payment of the premium therefor, shall be deposited with Lender, and Borrower hereby assigns to lender the proceeds of such policy or policies as additional security for the Secured Obligations. Not more than forty-five (45) days after closing the Loan, Borrower shall deliver to Lender the Origin,.1 policy or policies (or, at the sole option of Lender, duplicate originals or certified copies thereof). Such insurance may be provided in one policy or separate policies for hazard Insurance, rental or business Income Insurance, general
liability, earthquake, environmental or flood (or other special perils) insurance. Each such policy of insurance shall contain a non-contributing loss payable clause and a mortgagee clause in favor of and In form acceptable to Lender for policies referred to under subsections 1.07(a)(I), (3), (4), (5), and (6), and naming Lender as an additional insured for policies referred to under subsections 1.07(a) (2) and (7), and shall provide for not less than thirty (30) days prior written notice to Lender of any intent to modify, cancel, or terminate the policy or policies or the expiration of such policies of insurance, and must include a Lender's Loss Payable endorsement, and such other endorsements as required by Lender, including a replacement cost endorsement and agreed amount endorsement. If the insurance required under this Section 1.07 or any portion thereof is maintained pursuant to a
blanket policy, Borrower shall furnish to Lender a certified copy of such policy, together with an Original Evidence of Insurance (Accord Form 2B) indicating that Lender (and its successors and/or assigns) is an insured under such policy in regard to the Property and showing the amount of coverage apportioned to the Property which coverage shall be in an amount sufficient to satisfy the requirements hereof. Not less than thirty (30) days prior to the expiration dates of each policy required of Borrower hereunder, Borrower will deliver to Lender a renewal policy or policies marked "premium paid" or accompanied by other evidence of payment and renewal satisfactory to Lender, and In the event of foreclosure of this Security Instrument, any purchaser or purchasers of the Property shall succeed to all rights of Borrower, including, without limitation, any rights to unearned premiums, in and
to all insurance policies assigned and delivered to Lender pursuant to the provisions of this Section 1.07.

 

(C) Notwithstanding the foregoing, at any time while any amounts remain outstanding under the Loan, upon the written request of Lender, Borrower shall be required to maintain such insurance as may from time to time be required under Lender's then current underwriting guidelines.

1.08 Payment of Premiums. If Lender shall collect and Borrower shall pay in full Impounds for premiums in accordance with the provisions of Section 1.04 above, Borrower shall be deemed to have "paid" the premiums for the purposes of this Section 1.0B. in the event Borrower falls to provide, maintain, keep in force or deliver to Lender the policies of insurance required by this Security Instrument or by any Loan Document, Lender may (but shall have no obligation to) procure such insurance or single-Interest insurance for such risks covering Lender's interest, and Borrower will pay all premiums thereon and reimburse Lender for all amounts paid or incurred by Lender In connection therewith promptly upon demand by
Lender, and until such payment is made by Borrower, the amount of all such premiums shall be added to the principal amount of the Loan and shall bear interest at the Default Rate.

 

1.09 casualties; Insurance and Condemnation Proceeds. In the event of a casualty or a taking by eminent domain, the following provisions shall apply in connection with the Restoration (defined below) of the Property:

 

(a) If the Property shall be damaged or destroyed, in whole or in part, by fire or other casualty, or if the Property or any portion thereof is taken in any condemnation or eminent domain proceeding, Borrower shall give prompt notice of such damage or taking to Lender and shall promptly commence and diligently prosecute the completion of the repair and restoration of the Property as nearly as possible to the condition of the Property was in immediately prior to such fire or other casualty or taking, with such alterations as may be approved by Lender (the 'Restoration").

 

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(b) The term "Net Proceeds' for purposes of this Section 1.09 shall mean: 0) the net amount of all insurance proceeds under the policies carried pursuant to Section 1.07 hereof as a result of such damage or destruction, after deduction of Lender's reasonable costs and expenses (including, without limitation, attorneys' fees), if any, in collecting the same, or (ii) the net amount of all awards and payments received by Lender with respect to a taking referenced in Section 1.17 hereof, after deduction of lender's reasonable costs and expenses including, without limitation, attorneys' fees), if any, In collecting the same, whichever
the case may be. If (i) the Net Proceeds do not exceed $50,000 (the "Net Proceeds Availability Threshold”); (ii) the costs of completing the Restoration as reasonably estimated by Borrower shall be less than or equal to the Net Proceeds; (iii) no Event of Default exists under the Note, this Security Instrument or any of the other Loan Documents; (iv) the Property and the use thereof after the Restoration will be in compliance with, and permitted under, all applicable zoning laws, ordinances rules and regulations (Including, without limitation, laws relating to legal nonconforming structures or uses and all applicable Environmental Laws; (v) (A) if the Net Proceeds are insurance proceeds, less than twenty-five percent (25%) of the total floor area of the Improvements has been damaged or destroyed, or rendered unusable as a result of such fire or other casualty; or (9) if the Net
Proceeds are condemnation awards, less than 25% of the Property is taken, such Property that is taken is located along the perimeter or periphery of the Property, no portion of the Improvements is located on such Property, and such taking does not materially impair access to the Property; and (vi) Lender shall be satisfied that any operating deficits, including, without limitation, all scheduled payments of principal and interest under the Note which will be incurred with respect to the Property as a result of the occurrence of any such fire or other casualty or taking, whichever the case may be, will be covered out of (1) the Net Proceeds, or (2) other funds of Borrower. then the Net Proceeds will be disbursed directly to Borrower.

(c) If the Net Proceeds are greater than the Net Proceeds Availability Threshold, such Net Proceeds shall, subject to the provisions of the leases that are superior to the lien of this Security Instrument or with respect to which subordination and non-disturbance agreements binding upon Lender have been entered Into and such subordination and non-disturbance agreements apply to the deposits of Net Proceeds, be forthwith paid to Lender to be held by lender in a segregated account to be made available to Borrower for the Restoration in accordance with the provisions of this Subsection 1.09(c).

The Net Proceeds held by lender pursuant to Subsection 1.09(c) hereof shall be made available to Borrower for payment or reimbursement of Borrower's expenses in connection with the Restoration, subject to the following conditions:

 

(1) no Event of Default exists under the Note, this Security Instrument or any of the other Loan Documents;

 

(2) Lender shall, within a reasonable period of time prior to a request for an initial disbursement, be furnished with an estimate of the cost of the Restoration accompanied by an independent architect's opinion based on due professional investigation as to such costs and appropriate plans and specifications for the Restoration, such plans and specifications and cost estimates to be subject to Lender's approval, not to be unreasonably withheld or delayed;

 

(3) the Net Proceeds, together with any cash or cash equivalent deposited by Borrower with lender, are sufficient to cover the cost of the Restoration as such costs are certified by the independent architect;

 

(4) Net Proceeds are less than the outstanding principal balance of the Note;

 

(5) (A) If the Net Proceeds are Insurance proceeds, less than sixty percent (60%) of the total floor area of the Improvements has been damaged or destroyed, or rendered unusable as a result of such fire or other casually; or (B) if the Net Proceeds are condemnation awards, less than 25% of the Property Is taken, such Property that is taken is located along the perimeter or periphery of the Property, no portion of the Improvements is located on such Property and such taking does not materially impair access to the Property;

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(6) Lender shall be satisfied that any operating deficits, including, without limitation, all scheduled payments of principal and interest under the Note Which will be incurred with respect to the Property as a result of the· occurrence of any such fire or other casually or taking, whichever the case may be, will be covered out of (1) the Net Proceeds. or (2) other funds of Borrower;

 

(7) Lender shall be satisfied that. upon completion of the Restoration, the gross cash flow and the net cash flow of the Property will be restored to a level sufficient to cover all carrying costs and operating expenses of the Property, including, without limitation, debt service on the Note at a coverage ratio (after deducting all required reserves as required by Lender from net operating Income) of at leas11.55 to 1.0, which coverage ratio shall be determined by Lender on the basis of the Applicable Interest Rate (as defined in the NOTE);

 

(8) the Restoration can reasonably be completed on or before the earliest to occur of (A) six (6) months prior to the Maturity Date (defined in the Note), (B) the earliest date required for such completion under the terms of any Major Leases (defined below) and (C) such time as may be required under applicable zoning law, ordinance rule or regulation in order 10 repair and restore the Property to as nearly as possible the condition it was in immediately prior to such fire or other casualty or to such taking, as applicable;

 

(9) the Property and use thereof after the Restoration will be in compliance with, and permitted under, all applicable zoning laws, ordinances, rules and regulations including, without limitation, laws relating to legal nonconforming structures or uses and all applicable Environmental Laws; and

 

(10) each Major Lease in effect as of the date of the occurrence of such fire or other casualty shall remain In full force and effect during and after the completion of the Restoration without abatement of rent beyond the time required for Restoration.

For purposes hereof, the term "Major Lease" shall mean (I) any Lease which (A) provides for rental Income representing ten percent (10%) or more of the total rental income for the Property, (B) covers ten percent (10%) or more of the total space at the Property, in the aggregate, or (C) provides for a lease term of more than ten (10) years Including options to renew and (ii) any instrument guaranteeing or providing credit support for any Major lease.

 

(d) The Net Proceeds held by lender until disbursed in accordance with the provisions of this Section 1.09 shall constitute additional security for the Secured Obligations. If Borrower is entitled to Net Proceeds pursuant to the terms hereof, the Net Proceeds (other than the Net Proceeds paid under the policy described in Section 1.07(a)(3) hereof for loss of rents or business interruption) shall be disbursed by Lender to, or as directed by, Borrower, In an amount equal to the costs actually incurred from time to time for work ( in place as part of the Restoration less customary retainage from time to time during the course of the Restoration, not more frequently than once per month, upon receipt of evidence
satisfactory to Lender that (A) all materials installed and work ( and labor performed (except to the extent that they are to be paid for out of the requested disbursement) in connection with the Restoration have been paid for in full, and (B) there exist no notices of pendency, stop orders, mechanic's or materialman's liens or notices of intention to file the same. or any other liens or encumbrances of any nature whatsoever on the Property arising out of the Restoration which have not either been fully bonded and discharged of record or in the alternative fully insured to the satisfaction of Lender by the title company Insuring the lien of this Security Instrument. The Net Proceeds paid under the policy described in Section 1.07(b)(3) shall be disbursed by Lender to pay for debt service under the Loan. to pay other expenses incurred by Borrower In connection with the ownership and
operation of the Property, and the remainder thereof, to, or as directed by, Borrower to pay for the cost of the Restoration in accordance with this Section 1.09(d). Final payment shall be made after submission to lender of all licenses, permits, certificates of occupancy and other required approvals of governmental authorization having jurisdiction and Casualty Consultant's (defined below) certification that the Restoration has been fully completed.

 

(e) Lender shall have the use of the plans and specifications and all permits, licenses and approvals required or obtained in connection with the Restoration. The identity of the contractors,

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subcontractors and materialmen engaged in the Restoration, as well as the contracts under which they have been engaged, shall be subject to prior review and acceptance by lender and an independent consulting engineer selected by Lender (the "casualty Consultant"), such acceptance not to be unreasonably withheld or delayed. All costs and expenses incurred by Lender in connection with making the Net Proceeds available for the Restoration, including, without limitation, attorneys' fees and disbursements and the casualty Consultant's fees, shall be paid by Borrower.

 

(f) If at any time the Net Proceeds or the undisbursed balance thereof shall not, in the reasonable opinion of Lender, be sufficient to pay in full the balance of the costs which are estimated by the casualty Consultant to be incurred in connection with the completion of the Restoration, Borrower shall deposit the deficiency in immediately available funds (the "Net Proceeds Deficiency") witl1lender before any further disbursement of the Net Proceeds shall be made. The Net Proceeds Deficiency deposited with Lender shall be held by Lender and shall be disbursed for costs actually incurred in connection with the Restoration on the same conditions applicable to the disbursement of the Net Proceeds, and until so
disbursed pursuant to this Section 1.09 shall constitute additional security for the secured Obligations.

 

(g) Unless an Event of Default exists, Borrower shall settle any insurance claims with respect to the Net Proceeds which in the aggregate are less than the Net Proceeds Availability Threshold. Lender shall have the right to participate in and reasonably approve any settlement for Insurance claims with respect to the Net Proceeds which in the aggregate are greater than the Net Proceeds Availability Threshold. If an Event Of Default exists, Borrower hereby irrevocably empowers lender, at Lender's sale election, in the name of Borrower as its true and lawful attorney-in-fact, to file and prosecute such claims and to collect and to make receipt for any such payment. Notwithstanding the foregoing, lender's failure 10
file and prosecute any such claims shall not diminish or impair Lender's rights and remedies against Borrower under the Loan Documents. If the Net Proceeds are received by Borrower, such Net Proceeds shall, until the completion of the related work, be held in trust for Lender and shall be segregated from other funds of Borrower to be used to pay for the cost of the Restoration in accordance with the terms hereof.

 

(h) The excess, If any, of the Net Proceeds and the remaining balance, if any, of the Net Proceeds Deficiency deposited with Lender after (i) the Casualty Consultant certifies to Lender that the Restoration has been completed in accordance with the provisions of this Section 1.09, and (ii) the receipt by Lender of evidence satisfactory to lender that all costs incurred in connection with the Restoration have been paid in full and all required permits, licenses, certificates of occupancy and other required approvals of governmental authorities having jurisdiction have been issued, shall be remitted by Lender to Borrower, provided no Event of Default shall have occurred and shall be continuing under the Note, this
Security Instrument or any of the other Loan Documents.

 

(I) All Net Proceeds not required (i) 10 be made available for the Restoration or (ii) to be returned to Borrower as excess Net Proceeds pursuant to Subsection 1.09(h) hereof shall be retained and applied by Lender toward the payment of the secured Obligations whether or not then due and payable in such order, priority and proportions as Lender shall determine, without Prepayment Charge, or, at Lender's sole election, the same shall be paid, either in whole or in part, to Borrower. If lender shall receive and retain Net Proceeds, the lien of this Security Instrument shall be reduced only by the amount received and retained by Lender and actually applied by Lender in reduction of the Secured
Obligations.

BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT IT IS AWARE OF AND UNDERSTANDS SCHOOLCRAFT V. ROSS (81 CAL APP. 3D 75 (1981)) AND ITS PROGENY AS WELL AS CAUFORNIA CIVIL CODE SECTION 2924.7 AND CAUFORNIA FINANCIAL CODE SECTIONS 1227.3 AND 7462, WHICH PERMIT LENDER TO REQUIRE INSURANCE BUT OBLIGATE LENDER TO ALLOW BORROWER TO USE CASUALTY INSURANCE PROCEEDS FOR THE PURPOSE OF REPAIRING OR RESTORING THE REAL PROPERTY PLEDGED AS SECURITY FOR THE BORROWER'S OBUGATIONS TO LENDER UNLESS LENDER'S SECURITY HAS BEEN IMPAIRED. BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT, IN THE EVENT OF A

 

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CASUALTY TO THE PROPERTY, IF BORROWER FAILS TO REPAIR OR RESTORE THE PROPERTY IN A MANNER CONSISTENT WITH THE PROVISIONS OF THIS SECTION 1.09 ABOVE, REGAROLESS OF WHETHER SUCH FAILURE IS THE RESULT OF ANY VOLUNTARY ACTION OR INACTION BY BORROWER, OR ANY ACT OR DETERMINATION OF ANY GOVERNMENTAL AUTHORITY (WHETHER PURSUANT TO ANY ZONNG, LAND USE OR OTHER ORDINANCE, CODE, REGULATION OR REQUIREMENT OR OTHERWISE), SUCH FAILURE IS AND SHALL BE DEEMED A SUBSTANTIAL IMPAIRMENT OF THE PROPERTY ENTITLING LENDER TO APPLY THE NET INSURANCE PROCEEDS TO THE INDEBTEDNESS IN SUCH ORDER AND MANNER AS LENDER MAY ELECT, WHETHER OR NOT DUE
AND PAYABLE, WITH ANY EXCESS PAID TO BORROWER. BY CAUSING THOSE PERSONS EXECUTING THIS SECURITY INSTRUMENT ON ITS BEHALF TO SEPARATELY INITIAL THIS PROVISION BY PLACING THEIR INITIALS BELOW THIS PROVISION IN THE SPACE PROVIDED BELOW, BORROWER HEREBY ACKNOWLEDGES AND AGREES THAT THE TERMS OF THIS PROVISION HAVE BEEN SPECIFICALLY BARGAINED FOR AND ARE A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN AND WITHOUT WHICH LENDER WOULD NDT MAKE THE LOAN.

INITIALS:~ 

 

a;:.,.

 

1.10 Assignment of Policies Upon Foreclosure. In the event of foreclosure of this Security Instrument or other transfer of title or assignment of the Property in extinguishment, in whole or in part, of the debt secured hereby, all right, title and interest of Borrower In and to all policies of insurance required by Section 1.07 hereof shall Inure to the benefit of and pass to the successor in interest to Borrower or the purchaser or grantee of the Property.

 

1.11 Indemnification; Subrogation; Waiver of Offset. (a) Notwithstanding any other provisions of this Security, Lender is not undertaking any obligations, nor shall Lender have any obligations, under the Leases; or with respect to agreements, contracts, certificates, instruments, franchises, permits, licenses and other items which are part of the Property. If Lender or Trustee is made a party to any litigation concerning the Note, this Security Instrument, any of the Loan Documents. the Property or any part thereof or interest therein, or the occupancy of the Property by Borrower, then Borrower shall Indemnify, defend and hold Lender and Trustee harmless from all liability by reason of said litigation, including,
without limitation, attorneys' fees and expenses incurred by Lender or Trustee as a result of any such litigation, whether or not any such litigation is prosecuted to judgment. Lender and Trustee may employ an attorney or attorneys selected by It to protect Its rights hereunder, and Borrower shall pay to Lender and Trustee attorneys' fees and costs incurred by Lender and Trustee. (b) Borrower waives any and all right to claim or recover against Lender, Trustee, or their respective officers, employees, agents and representatives, for loss of or damage to Borrower, the Property, Borrowers property or the property of others under Borrower's control from any cause insured against or required to be insured against by the provisions of this Security Instrument

 

(c) All sums payable by Borrower pursuant to this Security Instrument or the Note shall be paid without notice, demand, counterclaim, setoff, deduction or defense and without abatement suspension, deferment, diminution or reduction, and the obligations and liabilities of Borrower hereunder shall in no way be released. discharged or otherwise affected (except as expressly provided herein) by reason of: (i) any damage to or destruction of or any condemnation or similar taking of the Property or any part thereof; 01) any restriction or prevention of or Interference by any third party with any use of the Property or any part thereof; (III) any title defect or
encumbrance or any eviction from the Property, the Improvements or any part thereof by title paramount or otherwise; (Iv) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other Bile proceeding relating to Lender, or any action taken with respect to this Security Instrument by any trustee or receiver of Lender, or by any court, in any such proceeding; (v) any claim which Borrower has or might have against Lender;

 

(vi) any default or failure on the part of Lender to perform or comply with any of the terms hereof or of any other agreement with Borrower; or (vii) any other occurrence whatsoever, whether similar or dissimilar to

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the foregoing and whether or not Borrower shall have notice or knowledge of any of the foregoing. Except as expressly provided herein, Borrower waives all lights now or hereafter conferred by statute or otherwise to any abatement, suspension, deferment, diminution or reduction of any sum secured hereby and payable by Borrower.

 

1.12 Utilities. Borrower shall payor shall cause to be paid when due all utility charges which are incurred by Borrower for the benefit of the Property and all other assessments or charges of a similar nature, whether or not suoh charges are or may become liens thereon.

 

1.13 Actions Affecting Property. Borrower shall promptly give Lender written notice of, and shall appear in and contest, any action Dr proceeding purporting to affect the Property or any portion thereof or interest therein, or the security of this Security Instrument or the rights or powers of Lender or Trustee; and shall pay all costs and expenses, including, without limitation, the cost of evidence of title and attorneys' fees, in any such action or proceeding in which Lender or Trustee may appear.

 

1.14 Actions by Trustee or Lender to Preserve Property. If Borrower fails to make any payment or to do any act as and in the manner provided in any of the Loan Documents, Lender and/or Trustee, each at its own election, without obligation so to do, without releasing Borrower from any obligation, and without notice to or demand upon Borrower, may make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof. In connection therewith (without limiting their general powers, whether conferred herein, in any other Loan Documents or by law), Lender and Trustee shall have and are hereby given the right, but not the obligation, (i) to enter upon and take possession of the
Property; (ii) to make additions, alterations, repairs and improvements to the Property which they or either of them may consider necessary or proper to keep the Property in good condition and repair; (iii) To appear and participate in any action or proceeding affecting or which may affect the Property or any portion thereof or Interest therein, the security of this Security Instrument or the rights or powers of Lender or Trustee; (Iv) to pay, purchase, contest or compromise any encumbrance, claim, charge, lien or debt which in the judgment of either may affect or appears to affect the security of this Security Instrument or be prior or superior hereto; and (v) in exercising such powers, to pay necessary expenses, including, without limitation, attorneys' fees and costs or other necessary or desirable consultants. Borrower shall, immediately upon demand therefor by Lender and Trustee or
either of them, pay to Lender and Trustee an amount equal to all respective costs and expenses incurred by such party In connection with the exercise of the foregoing rights, Including, without limitation, costs of evidence of title, court costs, appraisals, surveys and receiver's, trustee's and attorneys' fees and costs and expenses, together with interest thereon from the date of such expenditure al the Default Rate.

 

1.15 Transfers; Due On Sale/Encumbrance.

 

(a) Lender Reliance. Borrower acknowledges that Lender has examined and relied on the experience of Borrower or its general partners, managing partners, managing members, principals Of any direct or indirect legal or beneficial owner of Borrower In owning and operating properties such as the Property in agreeing to make the Loan, and will continue to rely on Borrower's ownership of the Property as a means of maintaining the value of the Property as security for payment and performance of the Secured Obligations. Borrower acknowledges that Lender has a valid interest In maintaining the value of the Property so as to ensure that, should Borrower default in the payment or the performance of the Secured Obligations,
Lender can recover the Secured Obligations by a sale of the Property.

 

(b) Transfer Definitions. For purposes of this Section 1.15, an "Affiliated Manager" shall mean any Property Manager In which Borrower, any Guarantor (as hereinafter defined) or any Indemnitor has, directly or indirectly, any legal, beneficial or economic interest; a "Restricted Party" shall mean Borrower, any Guarantor, any Indemnitor, or any Affiliated Manager or any shareholder, partner, member or non-member manager, or any direct or indirect legal or beneficial owner of Borrower, any Guarantor, any Indemnitor, any Affiliated Manager or any lien-member manager; a “Sale" shall mean a voluntary or involuntary sale, conveyance or transfer of a legal or beneficial Interest; and a "Pledge" shall mean a pledge
of or grant of a security interest in a legal or beneficial Interest; the term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or

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activities of a person or entity, whether through ownership of voting securities, by contract, by operation of law, or otherwise.

 

	
  

	
(c) No Sale/Encumbrance.

 

(1) Except as is set forth below in Section 1.1S(d) with respect to Permitted Transfers (as hereinafter defined), Borrower shall not sell, convey, mortgage, grant, bargain, encumber, pledge, assign, grant options with respect to, or otherwise transfer or dispose of (directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, and whether Dr not for consideration or of record) the Property or any part thereof or any legal or beneficial interest therein or permit a Sale or Pledge of an interest in any Restricted Party (collectively a "Transfer”, without the prior written consent of Lender, which consent may be withheld at Lender's sole election, regardless of whether the conditions
set forth in Subsection 1.15(e) hereof have been satisfied, without limiting the foregoing, there shall be no subordinate financing placed on any portion of the Property.

 

(2) A Transfer shall include, without limitation: (i) an installment sales agreement wherein Borrower agrees to sell the Property or any part thereof for a price to be paid in installments; (ii) an agreement by Borrower leasing all or a substantial part of the property for other than actual occupancy by a space tenant thereunder or a sale, assignment or other transfer of, or the grant of a security interest in, Borrower's right, sale and interest in and to any Leases or any Rents; (iii) if a Restricted Party is a corporation, any merger, consolidation, Sale or Pledge of such corporation's stock or the creation or issuance of new stock in such corporation; (IV) if a Restricted Party is a limited Dr general
partnership or joint venture, any merger or consolidation or the change, removal, resignation or addition of any general partner or joint venturer, or the Sale or Pledge of the partnership Interest of any limited partner, general partner or joint venturer, or the Sale or Pledge of any profits or proceeds relating to such partnership interest, or the creation or issuance of new partnership interests; (v) if a Restricted Party is a limited liability company, any merger or consolidation or the change, removal, resignation or addition of any managing member or non-member manager (or If no managing member or non-member manager, any member) or the sale or Pledge of the membership interest of any member or any profits or proceeds relating to such membership interest, or the creation 'or issuance of new membership interests; (vi) If a Restricted Party is a trust or nominee trust, any merger or
consolidation or the Sale or Pledge of the legal or beneficial interests in such Restricted Party or the creation or issuance of new legal or beneficial interests; (vii) the removal or the resignation of the Property Manager (including, without limitation, an Affiliated Manager) other than in accordance with Section 1.02 hereof; and (viii) without limitation to the foregoing, any Sale or Pledge by any person or entity which directly or indirectly controls Borrower of its direct or indirect controlling interest in Borrower.

 

(d) Permitted Transfers.

 

(1) Notwithstanding the provisions of Sections 1.15(b) and (e) hereof, the following transfers shall not be deemed to be a Transfer: (i) transfers by devise or descent or by operation of law upon the death of a member, partner or shareholder of a Restricted Party; (ii) the Sale, in one or a series of transactions, of not more than forty-nine percent (49%) of the stock in a Restricted Party; (iii) the Sale, in one or a series of transactions, of not more than forty-nine percent (49%) of the limited partnership interests or non-managing membership interests, as the case may be, in a Restricted Party; (iv) inter vivos and testamentary transfers of the legal or beneficial interests (including, without limitation,
stock, partnership interests and membership interests) in a Restricted Party (A) to an existing owner of a legal or beneficial interest including, without limitation, a shareholder, limited partner, general partner, joint venturer or member} in such Restricted Party on the date hereof (an "Existing Owner”, (B) to a lineal descendant or spouse of an Existing Owner, (C) to a trust, the beneficiary of which is (and so long as any part of the Loan remains unpaid continues to be) an Existing Owner or a lineal descendant or spouse of an Existing Owner, or (D) to a corporation, limited or general partnership, limited liability company or other legal enemy which Is (and so long as any part of the Loan remains unpaid continues to be wholly owned and controlled by an Existing Owner; and (v) pursuant to Leases for which Lender's consent is not required in accordance with the provisions of
Section 1.26 (b) hereof; Notwithstanding the introductory clause of this paragraph, the transfers described in clauses (i) through (iv) inclusive of this paragraph

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(collectively, "Permitted Transfers") shall be subject to lender's prior written consent, which consent Lender shall provide upon satisfaction of the conditions set forth in Subsection 1.15(e) hereof.

(e) Conditions Precedent. Lender's consent to any Transfer/Permitted Transfer. regardless of whether Lender has consented to any previous Transfer/Permitted Transfer, is subject to satisfaction of the following conditions precedent:

 

(1) Lender shall have received at least thirty (30) days prior written notice of the Transfer/Permitted Transfer, together with copies of such documents and information relating to the Transfer/Permitted Transfer as Lender may request, including, without limitation, the Sale documents (including, without limitation, purchase/sale agreement, If any), the terms and structure of the Sale and the nature and structure of the Sale (including, without limitation, debt/equity structure, if any).

 

(2) the Transfer/Permitted Transfer shall not result In a change In the control of any Restricted Party or a change In the control or management of the Borrower and the Property, or, in the alternative, the person{s) or entity(ies) proposed to assume control of such Restricted Party and the person(s) or entity(ies) proposed to assume control and management of the Borrower and the Property shall be acceptable to Lender In all respects (Including, without limitation, financial condition, credit history and management ability/experience and other relevant criteria, all as determined by Lender);

 

(3) the Transfer/Permitted Transfer shall not release any Guarantor or Indemnitor or their respective estates from their respective obligations under the Loan Documents;

 

(4) the Transfer/Permitted Transfer shall not release the Borrower from Hs obligations under the Note, this Security Instrument, or any other Loan Documents;

 

(5) the Transfer/Permitted Transfer shall not have any adverse effect either on the Borrower's compliance with the provisions of this Security Instrument, including, without limitation, Section 1.29 (captioned "Single Purpose Entity") and Section 1.30 (captioned "ERISA") hereof, or on the Borrower's status as a continuing legal entity liable for the payment and performance of the Secured Obligations;

(6) Borrower shall pay all of Lender's costs and expenses, including, without limitation, attorneys' fees and costs, and title insurance costs (if any).

 

(f) Lender's Rights. Lender reserves the right to condition any consent required hereunder upon a modification of the terms hereof (excludin9 a modification of the interest rate, amortization term, maturity date, or payment schedule) and on an assumption of the Note, this Security Instrument and the other Loan Documents as so modified in connection with the proposed Transfer, payment of an assumption fee (except with respect 10 Permitted Transfers) of one percent (1 %) of the principal balance of the Note (the "Assumption Fee"), payment of a $2,000.00 processing fee (the 'Processing Fee"), payment of expenses incurred by Lender (Including attorneys' fees) In connection with any proposed Transfer (the "Transfer
Expenses"), the approval by a Rating Agency (defined below) of the proposed transferee, and such other conditions and legal opinions as Lender shall determine to be in the interest of Lender. If the holder of the Note shall be a "real estate mortgage investment conduit" or "REMIC' (as such terms are defined in Section 8600 of the United States Internal Revenue Code, as amended, and any related United States Treasury Department regulations) (the "REMIC Trust"), such opinions shall include, without limitation, an opinion of counsel In form and substance satisfactory to Lender, from counsel approved by Lender, stating that the tax qualification and status of the REMIC Trust as a REMIC will not be adversely affected or impaired as a result of such modification or assumption. The Transfer Expenses and the processing Fee shall be payable by Borrower whether or not Lender consents to the
Transfer. Lender shall not be required to demonstrate any actual impairment of its security Dr any increased risk of default hereunder in order to declare the Secured Obligations immediately due and payable upon a Transfer without Lender's consent. Any Transfer made in contravention of this Section

1.15 shall be null and void and of no force and effect. The provisions of this Section 1.15 shall apply to

 

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every Transfer regardless of whether voluntary or no~ or whether or not Lender has consented to any previous Transfer.

 

(g) Assumption and Release. Provided that no event of Default shall have occurred and shall be continuing, Lender shall consent to a sale of the Property and assumption of the Loan by the purchaser (transferee) and the release of Borrower from liability under the Loan, except for any liability arising or accruing prior to the closing of said assumption, upon (1) Borrower's completion of an assumption application in such form as Lender may require from time to time, (2) Lender’s review and approval, which approval shall not be. unreasonably withheld, of the creditworthiness and other qualifications of the proposed transferees (including, without Iimitation, the development, business or management expertise of
the proposed transferee, if deemed relevant under the circumstances by Lender in its good faith judgment) under Lenders underwriting criteria at the time 01 said assumption, (3) the execution by the transferee of an assumption agreement in such form as Lender may require from time to time, and (4) payment to Lender of the Assumption Fee, the Processing Fee and the Transfer Expenses. In addition, in connection with said assumption, but subject to all of the conditions referred to above in this Subsection 1.15(g), Lender shall consent to the release of the Guarantor and Indemnitor, except for any liability arising or accruing prior to the dosing of said assumption, provided that Lender approves in writing substitute guarantor(s)/Indemnitor(s) acceptable to Lender in Its sole discretion in terms of creditworthiness and other qualifications under Lender's underwriting criteria at the time
of said assumption, and further provided that such substitute guarantor(s)/indemnitor (s) execute guaranties and/or indemnities In form and content acceptable to Lender.

 

BY CAUSING THOSE PERSONS EXECUTING THIS SECURITY INSTRUMENT ON ITS BEHALF TO SEPARATELY INITIAL THIS PROVISION BY PLACING THEIR INITIALS BELOW THIS PROVISION IN THE SPACE PROVIDED BELOW, BORROWER ACKNOWLEDGES AND WARRANTS THAT IT HAS READ AND UNDERSTOOD THE PROVISIONS OF THIS SECTION 1.15 AND INITIALS THIS SECTION

1.15 AS PROOF OF THIS STATEMENT.

 

INITIALS::___

 

(h) Permitted "Soft Second" Debt. Notwithstanding anything to the contrary contained in Sections 1.15 or 1.29 hereof, Lender shall consent to Borrower incurring so called soft second", (I.e., unsecured and subordinate) debt (the "Junior “), in accordance with the terms and conditions of the governing organizational documents to the Borrower (the "Entity Documents") to the Junior Lender (defined below), provided that no Event of Default has occurred and is continuing, and further provided that, all of the foIlo11ring additional terms and conditions are satisfied:

 

(1) Borrower shall pay Lender aft costs and expenses incurred In connection with the Junior Debt including, without limitation, reasonable attorneys' fees, costs and expenses and the customary fees of the Rating Agencies [defined below! in connection with any Rating Agency Confirmation [defined below]); "Rating Agencies" shall mean, prior to Securitization (defined below), Fitch, Inc., Moody's Investors Service, Inc., Standard & Poor’s Ratings Services, or any other nationally· recognized rating agency designated by Lender, and after Securitization, shall mean any of the foregoing that have rated any Securities (as defined In Section 4.01 hereof); "Securitization" means the sale or securitization of
the Loan (or any portion thereof) in one or more transactions through the issuance of Securities; "Rating Agency Confirmation" means that each of the Rating Agencies shall have confirmed in writing that the occurrence 01 the event for which such Rating Agency Confirmation is sought shall not result in a downgrade, qualification or withdrawal 01 the applicable rating or ratings ascribed by the applicable Rating Agencies to any of the Securities then outstanding, which confirmation may be granted or denied by the Rating Agencies in their sole discretion; further, in the event that no Securities are outstanding or the Loan is not part of a Securitization, "Rating Agency Confirmation" means that Lender shall have given its prior written consent to any action that would otherwise require a Rating Agency Confirmation, which consent shall not be unreasonably withheld;

 

(2) The "Junior Lender" shall be DOWNEY SAVINGS & LOAN ASSOCIATION, FA, a Federal association;

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(3) The Junior Debt shall in all respects be subject, subordinate and Inferior In lien, right and claim to all liens securing the Secured Obligations, including but not limited to the lien of the Security Instrument, whether present or future rights, and to the rights of all tenants of the Property;

 

(4) The Guarantor under the Limited Recourse Obligations Guaranty, of even date herewith executed in connection with the Loan, and the Indemnitors under the Environmental Indemnification Agreement of even date herewith executed in connection with the Loan, shall have unconditionally and irrevocably consented to the Junior Debt in writing(s) delivered to Lender;

 

(5) Upon Lender's request, the Junior Lender shall execute and deliver to Lender a Subordination Agreement In form and substance acceptable to Lender;

 

(6) Junior Lender or Borrower shall provide Lender with written notice of any defaults under the Junior Debt together with an opportunity to cure such defaults at the sole option of Lender;

 

(T) Actual payments of the payments due under the Junior Debt Documents (defined below) shall not cause or result In an Event of Default under the loan Documents or an event which, with the giving of notice and or the expiration any applicable cure period, would constitute an Event of Default under the Loan Documents, and such actual payments shall be made solely from excess cash now of the Borrower, and there shall be no outstanding trade debt or other obligation of the Borrower then existing which are unpaid, excepting those which are not past due and for which Borrower has set aside sufficient working capital reserve to pay the same as and when due;

 

(8) Evidence of the satisfaction of any conditions that lender may reasonably establish to comply w~h any applicable Securitization requirements; and

(9) The documents (if any) proposed for evidencing the Junior Debt (collectively, the •Junior Debt Documents") shall be delivered to the Lender for its approval, and the Junior Debt Documents shall be in form and substance acceptable to Lender, and lender's consent to the Junior Debt and the Junior Debt Documents [If any) shall be subject to the following terms and conditions:

(i) The indebtedness secured by the Junior Debt shall in no event exceed the amount which would result in a [combined] loan-to-value ratio (as determined by Lender) based on a then-current appraisal acceptable to lender for the Total Financing of greater than .60 to 1.00, and further the principal amount of the loan secured by the Junior Debt shall in no event exceed the amount which would result in a [combined} debt service coverage ratio (as determined by Lender for the Total Financing of less than 1.45 to 1.00; as used herein, "Total Financing" shall mean the combined/aggregate of the Loan and the loan secured by the Junior Debt;

 

(ii) The loan secured by the Junior Debt shall be non-recourse as to the Guarantors and Indemnitors referred to In Section 1.15(h)(5) above;

 

(iii) The maturity date of the loan secured by the Junior Debt shall be on or after March 11. 2017; and

 

(iv) Documents shall not adversely affect. directly or Indirectly, expressly or Implicitly, the bankruptcy remote structure of Borrower.

 

Lender's approval of the Junior Debt shall not be deemed to be a waiver of any of the terms and conditions of Section 1.15 hereof, including without limitation the requirement of Lander's consent, with respect to any other Transfers.

 

1.16 Survival of Warranties. Notwithstanding any investigation of the Property, Borrower. Guarantor or Indemnitor by Lender, Borrower acknowledges: (a) that in accepting the Note, this Security

 

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Instrument and the other loan Documents, lender is expressly and primarily relying on the truth and accuracy of the representations, warranties and covenants of Borrower, Guarantor and Indemnitor contained in any loan application {a "Loan Application” or made to Lender in connection with the Loan or contained in the Loan Documents or Incorporated by reference therein (the "Warranties”; (b) that such reliance existed on the part of Lender prior to the date hereof; (e) that the Warranties are a material inducement to Lender in making the loan; and (d) that Lender would not make the Loan in the absence of the Warranties. All Warranties shall survive the execution and delivery of this Security Instrument
and shall remain continuing obligations, representations, warranties and covenants of Borrower so long as any portion of the Secured Obligations remain outstanding.

 

1.17 Eminent Domain; Condemnation. Borrower shall promptly give lender notice of the actual or threatened commencement of any condemnation or eminent domain proceeding and shall deliver to Lender copies of any and all papers served in connection with such proceedings. Notwithstanding any taking by any public or quasi-public authority through eminent domain or otherwise (including, without limitation, any transfer made in Debt of or in anticipation of the exercise of such taking), Borrower shall continue to pay the Secured Obligations at the time and in the manner provided for its payment in the Note and in this Security Instrument and the Secured Obligations shall not be reduced until any award or payment therefor
shall have been actually received and applied by Lender, after the deduction of expenses of collection, to the reduction or discharge of the Secured Obligations. Lender shall not be entitled to the interest paid on the award by the condemning authority but shall be entitled to receive out of the award Interest at the rate or rates provided in the Note. Borrower shall cause the award or payment made in any condemnation or eminent domain proceeding, which is payable to Borrower, to be applied In accordance with Section 1.09 hereof. In the event Borrower is not entitled to any award or payment pursuant to Section 1.09 hereof, Borrower shall cause the award or payment to be paid directly to lender. Lender may apply the award or payment to the reduction or discharge of the Secured Obligations whether or not then due and payable. If the Property Is sold, through foreclosure or otherwise,
prior to the receipt by Lender of the award or payment, lender shall have the right, whether or not a deficiency judgment on the Note (to the extent permitted In the Note or herein) shall have been sought, recovered or denied, to receive the award or payment, or a portion thereof sufficient to pay the Secured Obligations. If in the event of a total condemnation the award or payment is not sufficient to repay the Note in full, Borrower shall immediately pay any remaining balance, together with all accrued interest thereon. Nothing herein shall be construed to cure or waive any Event of Default or notice of default hereunder or under any other Loan Document or Invalidate any act done pursuant to such notice.

 

1.18 Additional Security. No other security now existing, or hereafter taken, to secure the Secured Obligations shall be impaired or affected by the execution of this Security Instrument and all additional security shall be taken, considered and held as cumulative. The taking of additional security, execution of partial releases of the security, or any extension of the time of payment of the Secured Obligations shall not diminish the force, effect or lien of this Security Instrument and shall not affect or impair the liability of any maker, surety or endorser for the payment of the Secured Obligations. In the event lender at any time holds additional security for any of the Secured Obligations, it may enforce the
sale thereof or otherwise realize upon the same, at its option, either before, concurrently, or after a sale is made hereunder.

 

1.19 Property Use. The Property shall be used only for retail use and for no other use without the prior written consent of Lender.

 

1.20 Successors and Assigns. Without in any way limiting or affecting the provisions of Section 1.15 hereof, this Security instrument applies to, inures to the benefit of and binds all parties hereto and their respective heirs, legatees, devisees. administrators, executors, successors and assigns. The term "Lender" shall mean the owner and holder of the Note, whether or not named as Lender herein. In exercising any rights hereunder or taking any actions provided for herein, Lender may act through its employees, agents, independent contractors or servicers authorized by lender.

 

1.21 Inspections. Lender, or its agents, representatives or employees, are authorized to enter at any reasonable time (and with due regard for rights of tenants) upon or in any part of the Property

 

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for the purpose of inspecting the same and for the purpose of performing any of the acts Lender is authorized to perform hereunder or under the terms of any of the Loan Documents. Without limiting the generality of the foregoing, Lender shall have the same right power and authority to enter and inspect the Property, and the right to appoint a receiver on an ex parte basis, to enforce this right to enter and inspect the Property.

 

1.22 [RESERVED.]

 

1.23 Lender's Powers. Without affecting the liability of any other person liable for the payment of any obligations herein mentioned, and without affecting the lien or charge of this Security Instrument upon any portion of the Property not then or theretofore released as security for the full amount of all unpaid obligations, Lender may, from time to time and without notice (i) release any person so liable, (ii) extend the maturity or alter any of the terms of any such obligation, (iii) grant other indulgences, (IV) release or reconvey, or cause to be released or reconveyed at any time at Lender's option any parcel, portion or all of the Property, (v) take or release any other or additional security for any
obligation herein mentioned, or (vi) make other arrangements with debtors in relation thereto.

 

1.24 Books and Records; Financial Statements.

 

(a) Borrower, any Guarantor and any Indemnitor shall keep (and Borrower shall cause any Guarantor and any Indemnitor to keep) adequate books and records of account in accordance with generally accepted accounting principles ("GAAP,,), or in accordance with other methods acceptable to Lender, consistently applied and furnish to Lender:

 

(1) quarterly and annual (or, if requested by Lender and the Loan has not yet been securitized or sold as a whole loan, monthly) certified rent rolls signed and dated by Borrower, deterring the names of all tenants of the Improvements, the portion of Improvements occupied by each tenant, the base rent and any other charges payable under each Lease and the term of each Lease, including the expiration date, the extent to which any tenant is in default under any Lease, and any other information as is reasonably required by Lender, within twenty (20) days after the end of each calendar month, thirty (30) days after the end of each fiscal quarter or sixty (60) days after the close of each fiscal year of Borrower, as
applicable;

 

(2) quarterly and annual (or If requested by Lender and the Loan has not yet been securitized or sold as a whole loan, monthly) operating statements of the Property, prepared and certified by Borrower in the form required by Lender, detailing the revenues received. the expenses incurred and the net operating Income before and after debt service (principal and interest) and major capital improvements for each month and containing appropriate year to date information, within twenty (20) days after the end of each calendar month, thirty (30) days after the end of each fiscal quarter or sixty (60) days after the close of each fiscal year of Borrower, as applicable;

 

(3) annual (or If requested by Lender and the Loan has not yet been securitized or sold as a whole Loan, quarterly) balance sheets and profit and loss statements of Borrower, any Guarantor and any Indemnitor in the form required by Lender, prepared and certified by the respective Borrower, Guarantor and Indemnitor; and

 

(4) an annual operating budget presented on a monthly basis consistent with the annual operating statement described above for the Property, including cash flow projections for the upcoming year, and all proposed capital replacements and improvements at least fifteen (15) days prior to the start of each fiscal year.

 

(5) Borrower shall use its best efforts to obtain and furnish to Lender gross annual sales and sales per square foot information for tenants of the Property designated by Lender. Further, with respect to Leases under which the tenants are obligated to provide financial or sales statements/information to Borrower, as landlord under such Leases, Borrower agrees to promptly provide

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upon Lender's request all of the statements/information such tenants are obligated to provide to Borrower pursuant to the Lease, provided that the provisions of such Leases or any Subordination Non-Disturbance and Attornment Agreement executed by such tenants in connection with the Loan allow or authorize such statements/information to be provided to Lender or any first lienholder/mortgagee of the Property.

(b) Upon request from Lender, Borrower, any Guarantor and any Indemnitor shall furnish (and Borrower shall cause any Guarantor and any Indemnitor to furnish) in a timely manner to Lender.

 

(1) If the Property is used for multi-family residential use, a property management report for the Property, showing the number of inquiries made and/or rental applications received from tenants or prospective tenants and deposits received from tenants and any other information requested by Lender, in reasonable detail and certified by Borrower (or an Officer, general partner, member or principal of Borrower If Borrower is not an individual) to be true and complete, but no more frequently than quarterly; and

 

(2) an accounting of all security deposits held in connection with any Lease of any part of the Property, including the name and identification number of the accounts in which such security deposits are held, the name and address of the financial institutions in which such security deposits are held and the name of the person to contact at such financial institution, along with any authority or release necessary for Lender to obtain information regarding such accounts directly from such financial institutions.

 

(c) Borrower, any Guarantor and any Indemnitor shall furnish (and Borrower shall cause any Guarantor and any Indemnitor to furnish) Lender with such other additional financial or management information (including, without limitation, state and federal tax returns) as may, from time to time, be reasonably required by lender in form and substance satisfactory to Lender.

 

(d) Borrower, any Guarantor and any Indemnitor shall furnish (and Borrower shall cause any Guarantor and any Indemnitor to furnish) to Lender and its agents convenient facilities for the examination and audit of any such books and records.

 

(e) Borrower shall pay a late fee of $500 to Lender each time Borrower fails to deliver the required financial documents set forth above within the time set forth above, if such delivery delinquency continues for ten (10) days after written notice thereof.

1.25 Borrower Name(s); Matters Affecting Financing Statement Filings. At the request of Lender, Borrower shall execute a certificate in form satisfactory to Lender listing the trade-names or fictitious business names under which Borrower intends to operate the Property or any business located thereon and representing and warranting that Borrower does business under no other trade names or fictitious business names with respect to the Property. Borrower will not change any of the following without notifying the lender of such change in writing at least thirty (30) days prior to the effective date of such change and without first obtaining the prior written consent of the Lender:

 

(a) Borrower's name or identity including, without limitation, its trade name or names);

(b) If Borrower Is an Individual, Borrower's principal residence;

(c) If Borrower is an organization, Borrower's corporate, partnership or other structure;

(d) If Borrower is an organization, Borrower's jurisdiction of organization (i.e., the jurisdiction, or state, under whose law the Borrower is organized); or

(e) If Borrower is an organization, Borrower's place of business [If Borrower has only one place of business) or Borrower's chief executive office of Borrower has more than one place of business).

 

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upon any change in the matters referred to above Of permitted hereunder), Borrower will, upon request of Lender, execute any financing statement amendments, additional financing statements and other documents required by Lender to reflect such change.

1.26 Leaseholds.

 

(a) Space Leases. Borrower shall deliver to Lender a signed copy of all Leases (other than residential Leases) with respect to the Property or executed counterparts thereof, now existing or hereafter made from time to time, within thirty (30) days of signing, affecting all or any part of the Property, and except as is set forth herein, all Leases now or hereafter entered Into with respect to the Property shall be in form and substance subject to the approval of Lender. Borrower shall not, without Lender's prior written consent, execute, modify, surrender or terminate any Lease now existing or hereafter made affecting all or any part of the Property; provided, however, that Borrower may enter into Leases affecting
the Property without Lender's consent if such Leases (i) provide for a term of no less than three (3) years and no more than seven (7) years and at least a market rental rate for comparable properties in the geographic area of the Property (as determined by Lender); (ii) have been negotiated at arms length with a bona fide Independent,   third·party tenant; (iii) demise not more than fifteen (15%) percent of the lesser of gross square footage of, or total Income generated by, the Improvements; (iv) do not contain material modifications from the standard form of Lease previously approved by Lender; (v) do not change the use of the Property In effect. at the time the Loan was made; {vi) do not have a materially adverse effect on the value of the Property taken as a whole; and (vii) are subject and subordinate to this Security Instrument and the lessees thereunder agree
to attorn to Lender. If the Property is multifamily, self-storage, or mobile home park, the prior consent of Lender shall not be required in connection with the making, modification or termination of Leases in the ordinary course of business and In the exercise of Borrower's prudent business judgment, provided 0) the term of such Leases (including any renewal or extension term) shall be no less than six (6) months and no more than eighteen (18) months and (ii) the rental rate for such Leases shall be at least a market rental .rate for comparable properties in the geographic area of the Property. Borrower shall pay a late fee of $500 to Lender each time Borrower fails to deliver the required documents set forth above within the time set forth above, if such delivery delinquency continues for ten (10) days after written notice thereof.

 

1.27 Indemnity. In addition to any other indemnities to Lender specifically provided for in this Security Instrument, Borrower hereby indemnifies and saves Lender and its authorized representative harmless from and against any and all losses, liabilities, suits, obligations, fines, damages, penalties, claims, costs, charges and expenses, including, without limitation, architects', engineers' and attorneys' fees and all disbursements which may be imposed upon, incurred or asserted against Lender and its authorized representative by reason of: (i) the construction of any Improvements, (ii) any capital improvements, other work or things done in, on or about the Property or any part thereof, (iii) any use, nonuse, misuse, possession, occupation, alteration, operation,
maintenance or management of the Property or any part thereof or any street, drive, sidewalk, curb, passageway or space comprising a part thereof or adjacent thereto, (iv) any negligence or willful act or omission on the part of Borrower and its agents, contractors, servants, employees, licensees or invitees, (v) any accident, injury including, without limitation, death) or damage to any person or property occurring In. on or about the Property or any part thereof, (vi) any lien or claim which may be alleged to have arisen on or against the Property or any part thereof under the laws of the local or state government or any other governmental or quasi governmental authority or any liability asserted against Lender with respect thereto, (vii) any tax attributable to the execution, delivery, ruing or recording of this Security Instrument or the Note, (viii) any contest due to Borrower's
actions or failure to act, permitted pursuant to the provisions of this Security Instrument, (ix) any default under the Note or this Security Instrument, (x) any claim by or liability to any contractor or subcontractor perfol111ing work or any party supplying materials In connection with the Property, (xi) any and all claims and demands whatsoever which may be asserted against Lender by reason of any alleged obligations or undertaking on its part to perform or discharge any of the terms, covenants, or agreements contained In any Lease; or (xii) the payment of any commission, charge or brokerage fee to anyone which may be payable in connection with the funding of the loan .

 

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1.28 Representations and Warranties. Borrower covenants, represents and warrants with and to Trustee and Lender that:

(a) Borrower Organization. Borrower is duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, and Borrower is duly qualified to transact business and holds all licenses, registrations or other approvals (or is otherwise exempt), in each other jurisdiction in which the conduct of Borrower's business requires such qualification, licenses, registrations or other approvals. Borrower will continuously maintain its existence and good standing (ff applicable) under the laws of the Jurisdiction of its organization or formation, and Borrower will continuously maintain its qualification to transact business and all licenses, registrations or
other approvals (unless otherwise exempt), in each other jurisdiction in which the conduct of Borrowers business requires such qualification, licenses, registrations or other approvals.

 

(b) Borrower Authority. Borrower has all requisite power and authority to enter into the Loan and to execute and deliver the Loan Documents, and to perform all of the obligations required of Borrower thereunder. Borrower is not required to make any filing with, or to obtain any permit, authorization, consent or approval of, any person or entity as a condition to Borrower's entering into the Loan, executing and delivering the Note, this Security Instrument, or any other Loan Documents, or performing all of the obligations required of Borrower thereunder, or if any such required permit, authorization, consent or approval Is required, it has been obtained.

 

(c) Validity of Documents. The execution and delivery by Borrower of the Note, this Security Instrument and other Loan Documents, and the performance by Borrower of its obligations thereunder, do not violate any prohibition contained In, conflict with, result in a breach of, give rise to any right of termination, cancellation or acceleration under. constitute a default under, or require any additional approval under (i) Borrower's partnership agreement or any other organizational or constituent document or instrument pursuant to which Borrower was formed or by which Borrowers operations are governed; (ii) any material instrument or agreement to which Borrower is a part or by which Borrower is bound or that affects
the Property; or (iii) any law, rule, regulation, ordinance, order, injunction or decree application to Borrower or to the Property or any portion thereof.

 

(d) Warranty of Title. Borrower hereby fully warrants the title to the. Property and will defend the same and the validity and priority of the lien and encumbrance of this Security Instrument against the lawful claims of all persons whomsoever;

 

(e) No Liens or Transfers. Borrower has not obtained, or agreed to obtain, any loan from any person which could result In the creation of a lien upon the Property, or any part thereof, to secure prepayment thereof, except for the lien of the Loan. The Property is free and clear of all liens and encumbrances of any kind, nature or description, save and except only for those matters set forth in a schedule of exceptions to coverage in the title insurance policy approved by Lender and insuring Lender's Interest in the Property. Further, Borrower has not made or permitted any transfer Including, without limitation, a Transfer) which will or could result in subordinate financing being placed on any portion of the
Property, and there is no outstanding Sale or Pledge of an Interest in a Restricted Party.

 

(f) Litigation. There is not pending against Borrower (or any partner of Borrower, if and to the extent applicable) any petition in bankruptcy, whether voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization, liquidation or arrangement under the bankruptcy laws of the United States or of any State thereof, or any other action brought under the aforementioned bankruptcy laws; and, except as disclosed in the due diligence searches obtained by Lender in connection with the closing of the Loan, there is no action, suit, proceeding or investigation pending or, to Borrower's knowledge, threatened, in any court or before any governmental agency (including, without
limitation, condemnation proceedings) involving Borrower (or partner of Borrower, n and to the extent applicable) or the Property or any portion thereof, including, without limitation, any action which would draw into question the validity of the Loan or of Borrower's obligations under the terms of the Note, this Security Instrument and any other Loan Document

(g) Status of Property.

 

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(1) No portion of the Improvements is located in an area identified by the Secretary of Housing and Urban Development or any successor thereto as an area having special flood hazards pursuant to the Flood Insurance Acts or, if any portion of the Improvements is located within such area, Borrower has obtained and will maintain the flood insurance described In Section 1.07 hereof.

 

(2) The Property and the present and contemplated use and occupancy thereof are in substantial compliance with all applicable zoning ordinances, building codes, land use and Environmental Laws and other similar laws. Without limiting the foregoing, the Property is in substantial compliance with the Americans with Disabilities Act of 1990 and all of the regulations promulgated thereunder. The Land constitutes one or more separate tax lots and one or more separate legal lots In compliance with all applicable subdivision regulations.

 

(3) All necessary certificates, licenses and other approvals, governmental and otherwise, necessary for the operation of the Property and the conduct of its business and all required zoning, building code, land use, environmental and other similar permits or approvals, are in full force and effect as of the date hereof and not subject to revocation, suspension, forfeiture or modification.

 

(4) The Property is served by all utilities required for the current or contemplated use thereof, and all utility service is provided by public utilities and the Property has accepted or is equipped to accept such utility service.

(5) All public roads and streets necessary for service of and access to the Property for the current or contemplated use thereof have been completed, are serviceable and all-weather and are physically and legally open for use by the public.

 

(6) The Property is served by public water and sewer systems.

 

(7) The Property is free from material damage by any cause whatsoever, and any and all repairs required by Lender have been completed.

 

(8) All costs and expenses of any and all labor, materials, supplies and equipment used in the construction ofthe Improvements have been paid In full.

 

(9) Borrower has paid in full for, and Is the owner of, all furnishings, fixtures and equipment (other than tenants' property) used In connection with the operation of the Property, free and clear of any and all security Inlerests, liens or encumbrances, except the lien and security interest created hereby.

(10) All liquid and solid waste disposal, septic and sewer systems located on the Property are in a good and safe condition and repair and in compliance with all applicable laws.

 

(11) All the Improvements lie within the boundaries of the Land.

 

(h) No Foreign Person. Borrower is not a "foreign person", "foreign corporation", "foreign partnership·, "foreign trust" or "foreign estate" or other foreign entity as those terms are defined in Section 1445 of the United states Internal Revenue Code, as amended, and the related United States Treasury Department regulations.

 

(I) Separate Tax Lot. The Land is assessed for real estate lax purposes as one or more wholly independent tax lot or lots, separate from any adjoining land or improvements not constituting a part of such lot or lots, and no other land or Improvements are assessed and taxed together With the Land or any portion thereof.

 

(j) Financial Condition. Borrower is solvent, and no bankruptcy, reorganization, insolvency or similar proceeding under any state or federal law with respect to Borrower has been initiated. No

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petition in bankruptcy has ever been filed by or against Borrower, any Guarantor, or any related entity, or any principal, general partner or member thereof, in the last seven (7) years, and neither Borrower, any Guarantor nor any related entity, or any principal, general partner or member thereof, in the last seven (7) years has ever made any assignment for the benefit of creditors or taken advantage of any insolvency act or any act for the benefit of debtors. All Information In all financial statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan are accurate, complete and correct In all material respects. There has been no adverse change in any condition, fact,
circumstance or event that would make any such information inaccurate, Incomplete or otherwise misleading.

 

(k) Business Purposes. The Loan is solely for the business purpose of Borrower, and is not for personal, family, household, or agricultural purposes.

 

(I) Taxes. Borrower and any guarantor of the Loan have filed all federal, state, county, municipal, and city income and other tax returns required to have been filed by them and have paid all taxes and related liabilities which have become due pursuant to such returns or pursuant to any assessments received by them. Neither Borrower nor any guarantor of the Loan knows of any basis for any additional assessment In respect of any such taxes and related liabilities for prior years.

 

(m) No Change In Facts or Circumstances. All Information in all financing statements, rent rolls, reports, certificates and other documents submitted in connection with the Loan are accurate, complete and correct in all respects. There has been no adverse change in any condition, fact, circumstance or event that would make any such information inaccurate, incomplete or otherwise misleading.

 

(n) Disclosure. Borrower has disclosed 10 Lender all material facts and has not failed to disclose any material fact that could cause any representation of warranty made herein to be materially misleading.

 

(0) Illegal Activity. No portion of the Property has been or will be purchased, Improved, equipped or furnished with proceeds of any illegal activity, and, to the best of Borrower's knowledge, there are no illegal activities or activities relating to any controlled substance at the Property.

 

(p) Contracts. All contracts, agreements, consents, waivers, documents and writings of every kind or character at any time to which Borrower is a party to be delivered to Lender pursuant to any of the provisions Of the Loan Documents are valid and enforceable against Borrower and, to the best knowledge of Borrower, are enforceable against all other parties thereto, and, to Borrower's actual knowledge, in all respects are what they purport to be and, to the best knowledge of Borrower, to the extent that any such writing shall Impose any obligation or duty on the party thereto or constitute a waiver of any rights which any such party might otherwise have, said writing shall be valid and enforceable against said
party In accordance with Its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or similar laws affecting the fights of creditors generally.

 

(q) Transfer of Property. To the best of Borrower's knowledge, there is no concurrent or subsequent escrow to be opened or closed upon the closing of the Loan which would have the effect of transferring all or any portion of the Property.

 

1.29 Single Purpose Entity. Borrower covenants, represents, warrants and agrees Ihat it has not done any of the following and shall not do any of the following;

 

(a) engage In any business or activity other than the acquisition, development, ownership, operation, leasing and managing and maintenance of the Property, and entering into the Loan and activities incidental thereto;

 

(b) acquire or own any material assets other than (i) the Property, and (ii) such incidental Personal Property as may be necessary for the operation of the Property;

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(c) merge Into or consolidate with any person or entity or dissolve, terminate or liquidate in whole or in part, transfer or otherwise dispose of all or substantially all of its assets or change its legal structure, without in each case Lender's consent;

(d) (i) fail to observe its organizational formalities or preserve its existence as an entity duly organized, validly existing and in good standing (if applicable) under the laws of the jurisdiction of its organization or formation, and qualification to do business In the State where the Property is located. if applicable, or (ii) without the prior written consent of Lender, amend, modify, terminate or fall to comply with the provisions of Borrower's partnership agreement, articles or certificate of incorporation, articles of organization or similar organizational documents, as the case may be; principals or of any other person or entity, participate in a cash management system with any other entity or person or
fail to use its own separate stationery. Invoices and checks;

(e) own any subsidiary or make any investment in. any person or entity without the consent of Lender;

(f) comingle its assets with the assets of any of its members, general partners, affiliates, principals or of any other person or entity, participate in a cash management system with any other entity or person or fail to use its own separate stationery, invoices and checks.

(g) incur any debt, secured or unsecured, direct or contingent (including, without limitation, guaranteeing any obligation). other than the Loan, except for trade payables in the ordinary course of its business of owning and operating the Property, provided that such debt (i) is not evidenced by a note, (ii) is paid within sixty (60) days of the date incurred, (iii) does not exceed in the aggregate four percent (4%) of the outstanding principal balance of the Note. and (iv) is payable 10 trade creditors and in amounts as are normal and reasonable under the circumstances;

 

(h) fail to pay its debts and liabilities (including. without limitation, es applicable, shared personnel and overhead expenses) from its assets as the same shall become due;

(i) (i) fail to maintain its records (including. without limitation. financial statements). books of account and bank accounts separate and apart from those of the members, general partners, principals and affiliates of Borrower, the affiliates of a member, general partner or principal of Borrower, and any other person or entity, to permit Its assets or liabilities to be listed as assets or liabilities on the financial statement of any other entity or person. or (iii) include the assets or liabilities of any other person or entity on its financial statements;

 

(j) enter Into any contract or agreement with any member, general partner, principal or affiliate of Borrower. any Guarantor, or any member, general partner, principal or affiliate thereof (other than a business management services agreement with an affiliate of Borrower, provided that (i) such agreement is acceptable to Lender. (ii) the manager, or equivalent thereof, under such agreement holds itself out as an agent of Borrower, and (iii) the agreement meets the standards set forth in this subsection (j) following this parenthetical), except upon terms and conditions that are commercially reasonable. Intrinsically fair and substantially similar to those that would be available on an arms-length basis with third
parties other than any member, general partner, principal or affiliate of Borrower, any Guarantor, or any member, general partner, principal or affiliate thereof;

 

(k) fall to correct any known misunderstandings regarding the separate identity of Borrower or any member, general partner, principal or affiliate thereof or any other person;

 

(I) guarantee or become obligated for the debts of any other entity or person or hold itself out to be responsible for the debts of another person;

 

(m) make any loans or advances to any third party, including, without limitation, any member, general partner, principal or affiliate of Borrower, or any member, general partner, principal or affiliate thereof, and shall not acquire obligations or securities of any member, general partner, principal or affiliate of Borrower, or any member, general partner, or affiliate thereof;

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(n) fail to file its own tax returns or, if part of a consolidated group, fail to be shown as a separate member of such group;

 

(o) fail either to hold itself out to the public as a legal entity separate and distinct from any other entity or person Or to conduct its business solely in its own name In order not (i) to mislead others as to the identity with which such other party is transacting business, or (ii) to suggest that Borrower is responsible for the debts of any third party including, without limitation, any member, general partner, principal or affiliate of Borrower, or any member, general partner, principal or affiliate thereof);

 

(p) fail to maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations;

 

(q) share any common logo with or hold Itself out as or be considered as a department or division of (i) any general partner, principal, member or affiliate of Borrower, (ii) any affiliate of a general partner, principal or member of Borrower, or (iii) any other person or entity;

 

(r) fail to allocate fairly and reasonably any overhead expenses that are shared with an affiliate, including, without limitation, paying for office space and services performed by any employee of all corporate actions to the extent permitted by applicable law;

(s) pledge its assets for the benefit of any other person or entity, other than with respect to the Loan;

(t) fail to maintain a sufficient number of employees In light of its contemplated business operations;

	
 

(u) fail to hold its assets in its own name;

 

	  

(v) if Borrower is a corporation, fail to consider the interests of its creditors in connection with all corporate actions to the extent permitted by law;

(w) have any of its obligations (other than the Loan) guaranteed by an affiliate except Guarantor; or

 

(x) fail to provide in its (i) articles of organization, certificate of formation and/or operating agreement, as applicable, if Borrower is a limited liability company, (ii) limited partnership agreement if Borrower is a limited partnership or (iii) certificate of incorporation, if Borrower is a corporation, that for SO long as the Loan is outstanding pursuant to the Note and this Security Instrument, Borrower shall not file or consent to the filing of any petition, either voluntary or Involuntary), to take advantage of any applicable insolvency, bankruptcy, liquidation or reorganization statute, or make an assignment for the benefit of creditors without the affirmative vote of all of the general partners/managing
members/directors of Borrower.

Notwithstanding the foregoing, under the terms of the Subordination Agreement referred to in Section 1.15(h) hereof, Junior Lender (defined in Section 1.15(h) shall have the right, at Junior Lender's option, to cure monetary defaults or monetary Events of default under the Loan Documents, and the provisions of this Section t.29 shall not affect such right.

 

1.30 ERISA.

 

(a) Borrower shall not engage in any transaction which would cause any obligation, or action taken or to be taken, hereunder (or the exercise by Lender of any of its rights under the Note, this Security Instrument and the other Loan Documents) to be a non-exempt (under a statutory or administrative class exemption) prohibited transaction under either the Employee Retirement Income Security Act of 1974, as amended ("ERISA') or the Internal Revenue Code.

 

(b) Borrower represents and warrants that, as of the date hereof and throughout the term of this Security Instrument (1) Borrower is not and will not be an "employee benefit plan" as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA, (2) Borrower is not and will not be a "governmental plan" within the meaning of Section 3(32) of ERISA; (3) Borrower is not and will not be,

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and transactions by or with Borrower are not and will not be, subject 10 state stalutes regulating investments and fiduciary obligations wilh respect to governmental plans; and (4) one or more of the following circumstances is and will be true:

 

(i) Equity interests (as defined in 29 C.F.R. §251 0.3-101 (b)(1)) in Borrower are publicly-offered securities within Ihe meaning of 29 C.F.R. §251 0.3-101 (b)(2);

 

(II) Less than twenty-five percent (25%) of each outstanding class of equity interests in Borrower are held by "benefit plan investors" within the meaning of 29 C.F.R. §2510.3­101 (1)(2); or

(iii) Borrower qualifies as an "operating company" or a "real estate operating company" within the meaning of 29 C.F.R. §2510.3-101{c) or (e), or an Investment company registered under The Investment Company Act of 1940,

 

At Lender's request from time to time throughout the term of this security Instrument, Borrower shall deliver to Lender such certifications and other evidence acceptable to Lender of Borrower's compliance with the covenants, representations and warranties contained in this Section 1.30.

 

ARTICLE 2. DEFAULT

 

2.01 Events of Default. The occurrence of any of the following events shall be an Event of Default hereunder (an "Event of Default):

 

(a) Borrower fails to pay any interest, principal or other monies due under the Note or other Loan Documents on the date any such amount is due;

 

(b) if any of the Impositions or other charges referred to in Sections 1.04 or 1.06 hereof are not paid when the same is due and payable, except to the extent sums sufficient to pay such Impositions or other charges have been deposited with Lender in accordance with the terms of this Security Instrument;

 

(c) if the insurance policies required by Section 1.07 hereof are not kept in full force and effect, or if such insurance policies are not delivered to Lender upon request;

 

(d) any representation or warranty made by Borrower, any Indemnitor or any person guaranteeing payment or performance of the Secured Obligations or any portion thereof (whether one or more, a "Guarantor") in connection with the Property, the Loan, or the application for the Loan proves to have been materially false or materially misleading when made, or Borrower or any Guarantor fails to disclose any material fact respecting the Property, the Loan, or the application for the Loan;

 

(e) any governmental authority takes or Institutes any action, which in the sole opinion of Lender, will adversely affect Borrower's condition, operations, or ability to repay the Loan, or will adversely affect any Guarantor's condition. operations. or ability to repay the Loan, if such action remains effective for more than thirty (30) days;

 

(f) if Borrower violates or does not comply with any of the provisions of special purpose entity requirements set forth in Section 1.29 (captioned "Single Purpose Entity") hereof;

 

(g) Lender fails to have a legal, valid, binding, and enforceable first priority lien acceptable to Lender on the Property;

 

(h) Borrower becomes insolvent or there is a material adverse change in the assets, liabilities or financial position of Borrower, any general partner, or any Guarantor,

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(i) any action or proceeding is commenced by any partner, principal, or member in Borrower which seeks as one of its remedies the dissolution of Borrower or any partner, principal, or member (as applicable) in Borrower;

 

(j) any governmental authority, or any court at the instance thereof, assumes control over the affairs or operations of, or a receiver or trustee is appointed over, or garnishment shall be issued or made against any substantial part of, the property of Borrower or any guarantor of the Loan;

 

(k) Borrower or any Guarantor of the Loan admits in writing its inability to pay its debts when due, or makes an assignment for the benefit of creditors; or Borrower or any Guarantor of the Loan applies for or consents to the appointment of any receiver, trustee or similar officer of Borrower or any such Guarantor, as the case may be, or for all or any substantial part of their respective property; or Borrower or any such Guarantor institutes (by petition, application, answer, consent or otherwise) any bankruptcy, Insolvency, reorganization, arrangement, readjustment of debts, dissolution, liquidation, or similar proceedings relating to Borrower or any such Guarantor, as the case may be, or under the laws of any
jurisdiction;

 

(l) a receiver, trustee or similar officer is appointed for Borrower or any Guarantor of the Loan or for ali or any substantial part of their respective property without the application Of consent of Borrower for any such Guarantor, as the case may be, and such appointment is not discharged within sixty (60) days (whether or not consecutive); or any bankruptcy, insolvency, reorganization, arrangements, readjustment of debt, dissolution, liquidation Dr similar proceedings is instituted (by petition, application or otherwise) against Borrower or any such Guarantor and shall not be dismissed within sixty (60) days;

 

(m) any Transfer or permitted Transfer (as defined in Section 1.15 hereof) occurs without the prior written consent of Lender, including without limitation a Sale, Pledge or an encumbrance of the Property, voluntarily Dr involuntarily, by any lien or encumbrance other than this Security Instrument;

 

(n) the termination or dissolution of Borrower, any general partner in Borrower Dr any Guarantor; or any action or proceeding Is commenced which seeks as one of its remedies the dissolution of Borrower or any general partner in Borrower or any Guarantor;

 

(o) if any default occurs under any guaranty or indemnity executed in connection herewith (including, without limitation, the Environmental Indemnification Agreement executed by Borrower and any other Indemnitor in connection with the Loan [the "Environmental Indemnlty1) and such default continues after the expiration of applicable grace periods, if any;

 

(p) if the Property becomes subject to any mechanic's, materialman's or other lien other than a lien for local real estate taxes and assessments not then due and payable and the lien shall remain undischarged of record (by payment, bonding or otherwise) for a period of thirty (30) days;

 

(q) if any federal tax lien Is filed against Borrower, any member or general partner of Borrower, any Guarantor, Dr any portion of the Property and same is not discharged of record within thirty (3D) days alter same as filed; or

 

(r) if for more than thirty (30) days alter notice from Lender, Borrower shall continue to be In default (other than the failure to pay monies due under the Note or the other Loan Documents) under any term, covenant or condition of the Note, this Security Instrument or the other Loan Documents not set forth in Subsections 2.01(8) through (Q) above; provided that if suoh default cannot reasonably be cured within such thirty (30) day period and Borrower shall have commenced to cure such default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty

 

(30) day period shall be extended for so long as it shall require Borrower in the exercise of due diligence to cure such default, it being agreed that no such extension shall be for a period in excess of sixty (60) days.

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All notice and cure periods provided herein or in any other Loan Document shall run concurrently with any notice or cure periods provided by applicable laws. All notices and cure periods described herein Dr in any other Loan Documents shall not be applicable to any event which with the giving of notice, the passage of time or both would constitute an Event of Default, if such event has occurred as of the date on which Lender commences a nonjudicial foreclosure proceeding (If such proceeding is allowed by law) with respect to another Event of Default. Such event shall constitute an independent Event of Default hereunder.

 

2.02 Acceleration Upon Default; Additional Remedies.

 

(a) Remedies. Upon the occurrence of any Event of Default, Lender mayor acting by or through Trustee may take such action, without notice or demand, as It deems advisable 10 protect and enforce its rights against Borrower in and to Ihe Property, including, without limitation, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as Lender or Trustee may determine, in their sole discretion, without impairing or otherwise affecting Ihe other rights and remedies of Lender or Trustee:

 

(1) declare all Secured Obligations to be Immediately due and payable;

 

(2) institute proceedings, judicial or otherwise, for the complete foreclosure of this Security Instrument under any applicable state or federal law In which case the Property or any interest therein may be sold for cash or upon credit in one or more parcels or in several interests or portions and in any order or manner;

 

(3) with or without entry, to the extent permitted and pursuant to the procedures provided by applicable state or federal law, institute proceedings for the partial foreclosure of this Security Instrument for the portion of the Secured Obligations then due and payable, subject to the continuing lien and security interest of this Security Instrument for the balance of the Secured Obligations not then due, unimpaired and without loss of priority;

 

(4) sell for cash or upon credit the Property or any part thereof and all estate, claim, demand, right, title and interest of Borrower therein and rights of redemption thereof, pursuant to power of sale or otherwise, at one or more sales, in one or more parcels, at such time and place, upon such terms and after such notice thereof as may be required or permitted by law;

 

(5) subject to the provisions of Section 10 (captioned "Exculpation") of the Note, institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained herein, in the Note or in the other Loan Documents;

 

(6) subject to the provisions of Section 10 (captioned "Exculpation") of the Note, recover judgment on the Note either before, during or after any proceedings for the enforcement of this Security Instrument or the other Loan Documents;

 

(7) apply for the appointment of e receiver, trustee, liquidator or conservator of the Property, without notice and without regard for the adequacy of the security for the Secured Obligations and without regard for the solvency of Borrower, any Guarantor, any Indemnitor or of any person, firm or other entity liable for the payment of the Secured Obligations;

 

(8) subject to any applicable state or federal law, the license granted to Borrower under Section 3.02 hereof shall automatically be revoked and Lender may enter into or upon the Property, either personally or by its agents, nominees or attorneys and dispossess Borrower and its agents and servants therefrom, without liability for trespass, damages or otherwise and exclude Borrower and its agents or servants wholly therefrom, and take possession of all rent rolls, Leases (Including, without limitation, the form Lease and amendments and exhibits), subleases (including, without limitation. the form sublease and amendments and exhibits) and rental and license agreements with the tenants,

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subtenants and licensees, in possession of the Property or any part or parts thereof; tenants', subtenants' and licensees' money deposits or other property including, without limitation, any letter of credit) given to secure tenants', subtenants' and licensees' obligations under Leases, subleases or licenses, together with a list of the foregoing; all lists pertaining to current rent and license fee arrears; any and all architects' plans and specifications, licenses and permits, documents, books, records, accounts, surveys and property which relate to the management, leasing, operation, occupancy, ownership, insurance, maintenance, or service of or construction upon the Property and Borrower shall surrender
possession thereof and of the Property to Lender upon demand, and thereupon Lender may (i) use, operate, manage, control, insure, maintain, repair, restore and otherwise deal with all and every part of the Property and conduct the business thereat; (ii) complete any construction on the Property in such manner and form as Lender deems advisable; (iii) make alterations, additions, renewals, replacements and improvements to or on the Property; (iv) exercise all rights and powers of Borrower with respect to the Property, whether in the name of Borrower or otherwise, including, without limitation, the right to make, cancel, enforce or modify Leases, obtain and evict tenants, and demand, sue for, collect and receive all Rents of the Property and every part thereof; (v) either require Borrower (A) to pay monthly In advance to Lender, or any receiver appointed to collect the Rents, the fair and
reasonable rental value for the use and occupation of such part of the Property as may be occupied by Borrower, or (B) to vacate and surrender possession of the Property to Lender or to such receiver and, in default thereof, Borrower may be evicted by summary proceedings or otherwise; and (vi) apply the receipts from the Property to the payment of the Secured Obligations, In such order, priority and proportions as Lender shall determine after deducting therefrom all expenses (Including, without limitation, attorneys' fees) incurred in connection with the aforesaid operations and all amounts necessary to pay the Taxes, Other Impositions, Insurance Premiums and other expenses in connection with the Property, as well as just and reasonable compensation for the services of Lender, Its counsel, agents and employees;

(9) exercise any and all rights and remedies granted to a secured party upon default under the Uniform Commercial Code, Including, without limitation,: (I) the right to take possession of the Personal Property and other UCC collateral or any part thereof, and to take such other measures as Lender or Trustee may deem necessary for the care, protection and preservation of the Personal Property, and other UCC collateral, and (ii) request Borrower at its expense to assemble the Personal Property and other UCC Collateral and make it available to Lender at a convenient place acceptable to Lender. Any notice of sale, disposition or other intended action by Lender or Trustee with respect to the Personal Property and other
UCC collateral sent to Borrower in accordance with the provisions hereof at least ten (10) days prior to such action, shall constitute commercially reasonable notice to Borrower;

 

(10) apply any sums then deposited in the Impounds and any other sums held in escrow or otherwise by Lender In accordance with the terms of this Security Instrument or any other Loan Document to the payment of the following items in any order as determined by Lender:

 

(i) Taxes and Other Impositions;

 

(ii) Insurance Premiums;

 

(iii) Insurance Premiums;

 

(iv) amortization of the unpaid principal balance of the Note;

 

(11) all other sums payable pursuant to the Note, this Security Instrument and the other Loan Documents, including, without Iimitation, advances made by Lender pursuant to the terms of this Security Instrument;

 

(12) surrender the insurance policies maintained pursuant to Section 1.07 hereof, collect the unearned Insurance Premiums and apply such sums as a credit on the Secured Obligations in such priority and proportion as Lender shall determine, and in connection therewith, Borrower hereby appoints Lender as agent and attorney-in-fact (which is coupled with an interest and is therefore Irrevocable) for Borrower to collect such unearned Insurance Premiums;

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(13) apply the undisbursed balance of any Net Proceeds Deficiency deposit, together with interest thereon, 10 the payment of the Secured Obligations in such order, priority and proportions as Lender shall determine; or

(14) pursue such other remedies as Lender may have under applicable state or federal law.

In the event of a sale, by foreclosure, power of sale, or otherwise, of less than all of the Property, this Security Instrument shall continue as a lien and security interest on the remaining portion of the Property unimpaired and without loss of priority. Notwithstanding the provisions of this Section 2.02(a) hereof to the contrary, If any Event of Default as described In clause (h). (I), ID or (k) of Section 2.01 hereof shall occur, the entire unpaid Secured Obligations shall be automatically due and payable, without any further notice, demand or other action by Lender.

 

(b) Application of Proceeds. The purchase money, proceeds and avails of any disposition of the Property, or any part thereof, or any other sums collected by Lender pursuant to the Note, this Security Instrument or the other Loan Documents, may be applied by Lender to the payment of the Secured Obligations in such priority and proportions as Lender shall determine.

 

(c) Right to Cure Defaults. Upon the occurrence of any Event of Default or if Borrower fails 10 make any payment or to do any act as herein provided. lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender or Trustee is authorized to enter upon the Property for such purposes, or appear in, defend, or bring any action or proceeding to protect its interest in the Property or to foreclose this Security Instrument or collect the Secured Obligations. The cost and expense of any cure hereunder
(including, without limitation, attorneys' fees to the extent permitted by law), with interest as provided In this Section 2.02(c) hereof, shall constitute a portion of the Secured Obligations and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender or Trustee in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any such action or proceeding shall bear Interest at the Default Rate (defined In the Note), for the period after notice from Lender that such cost or expense was incurred to the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Secured Obligations and shall be immediately due and payable upon demand by Lender therefor.

 

(d) Actions and Proceedings. Lender or Trustee has the right to appear In and defend any action or proceeding brought with respect to the Property and, after the occurrence and during the continuance of an Event of Default, to bring any action or proceeding, in the name and on behalf of Borrower, which Lender decides should be brought to protect its interest in the Property.

 

(e) Recovery of Sums Required To Be Paid. Lender shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Secured Obligations as the same become due, without regard to whether or not the balance of the Secured Obligations shall be due. and without prejudice to the right of Lender or Trustee thereafter to bring an action of foreclosure, or any other action, for a default or defaults by Borrower existing at the time such earlier action was commenced.

 

(f) Examination of Books and Records. Lender, Its agents, accountants and attorneys shall have the right upon reasonable prior notice to Borrower (unless an Event of Default exists, In which case no notice shall be required), to examine and audit, during reasonable business hours, the records, books, management and other papers of Borrower and its affiliates or of any Guarantor or Indemnitor which pertain to their financial condition or the income, expenses and operation of the Property, at the Property or at any office regularly maintained by Borrower, its affiliates or any Guarantor or Indemnitor where the books and records are located. Lender and its agents shall have the right upon notice to make copies and
extracts from the foregoing records and other papers.

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(g) Other Rights, etc.

 

(1) The failure of Lender or Trustee to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Security Instrument. Borrower shall not be relieved of Borrower's obligations hereunder by reason of (1) the failure of Lender or Trustee to comply with any request of Borrower, any Guarantor or any Indemnitor to take any action to foreclose this Security Instrument or otherwise enforce any of the provisions hereof or of the Note or the other Loan Documents, (2) the release, regardless of consideration, of the whole or any part of the Property, or of any person liable for the Secured Obligations or any portion thereof, or (3) any agreement or stipulation by Lender
extending the time of payment, changing the rate of interest, or otherwise modifying or supplementing the terms of the Note, this Security Instrument or the other Loan Documents.

 

(2) It Is agreed that the risk of loss or damage to the Property is on Borrower, and Lender shall have no liability whatsoever for decline in value of the Property, for failure to maintain the insurance policies required pursuant to Section 1.07 hereof, or for failure to determine whether insurance in force is adequate as to the amount of risks insured. Possession by Lender shall not be deemed an election of judicial relief, if any such possession is requested or obtained, with respect to any portion of the Property, or collateral not in Lender's possession.

 

(3) Lender may resort for the payment of the Secured Obligations to any other security held by Lender in such order and manner as Lender may elect. Lender or Trustee may take action to recover the Secured Obligations, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender or Trustee thereafter to foreclose this Security Instrument The rights of Lender or Trustee under this Security Instrument shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender or Trustee shall be construed as an election to proceed under anyone provision herein to the exclusion of any other provision. Neither Lender nor Trustee shall
be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity.

 

(h) Right to Release Any Portion of the Property. Lender may release any portion of the Property for such consideration as Lender may require without, as to the remainder of the Property, in any way impairing or affecting the lien or priority of this Security Instrument, or improving the position of any subordinate lienholder with respect thereto, except to the extent that the Obligations hereunder shall have been reduced by the actual monetary consideration, if any, received by Lender for such release, and may accept by assignment, pledge or otherwise any other Property in place thereof as Lender may require without being accountable for so doing to any other lienholder. This Security Instrument shall continue as
a lien and security Interest In the remaining portion of the Property.

(i) Violation of Laws. If the Property Is not In compliance with applicable laws, Lender may impose additional requirements upon Borrower in connection herewith including, without limitation, monetary reserves or financial equivalents.

 

(j) Right of Entry. Lender and its agents shall have the right to enter and inspect the Property at all reasonable limes. Except in case of emergency, such entries shall be with reasonable prior notice and shall be with due regard for rights of tenants.

 

ARTICLE 3. ASSIGNMENT OF LEASES, RENTS. INCOME AND PROFITS

 

3.01 Assignment; Priority of Assignment. Borrower (referred to in this Article 3 as "Assignor") hereby irrevocably, absolutely, presently and unconditionally grants, sells, assigns, transfers, pledges and sets over to Lender (referred to in this Article 3 as "Assignee"):

 

(a) any and all Leases, together with all of Assignor's right, title and interest in the Leases including, without Iimitation, all modifications, amendments, extensions and renewals of the Leases and

 

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all rights and privileges Incident thereto and all demands of claims arising thereunder (including, without limitation, any cancellation fees or other premiums collected in connection with the Leases) or under any policies insuring against loss of rents or profits;

 

(b) all Rents, including, without limitation, expenses paid by tenants; and

 

(c) all security deposits, guaranties and other security now or hereafter held by Assignor as security for the perfonnance of the obligations of the tenants under such Leases.

 

The foregoing assignment of Rents and Leases is intended by Assignor and Assignee to create and shall be construed to create a present and absolute assignment to Assignee of all of Assignor's right, title and interest in the Rents and in the Leases and shall not be deemed to create merely an assignment for security only for the payment of any Indebtedness or the performance of any obligations of Assignor under any of the Loan Documents, This assignment is Included within the text of this Security Instrument for convenience only, but such inclusion shall not derogate from its effectiveness any other assignment of Rents or Leases contained in any other Loan Documents or otherwise and all shall be supplementary to
one another.

 

Nothing contained herein shall operate or be construed to obligate Assignee to perform any of the terms, covenants and conditions contained In any Lease or otherwise to Impose any obligation upon Assignee with respect to any Lease, including, without limitation, any obligation arising out of any covenant of quiet enjoyment therein contained In the event the tenant under any such Lease shall have been joined as a party defendant in any action to foreclose and the estate of such tenant shall have been thereby terminated. Assignor and Assignee further agree that, during the term of this Security Instrument, the Rents shall not constitute property of Assignor (or of any estate of Assignor) within the meaning of 11
u.s.c. §541 , as may be amended from time to time. Assignor hereby represents and warrants that (i) Assignor has good title to the Leases and the full power and light to assign the Leases; (ii) no other persons have any title or interest in the Leases; (iii) the Leases are in full force and effect and have not been modified except as set forth in the certified occupancy statement delivered to and approved by Assignee; (Iv) there are no defaults under any of the Leases; (v) no other assignments of all or any portion of the Rents or the Leases exist or remain outstanding; (vi) all Rents due have been paid in full; (vii) none of the Rents reserved in the Leases have been assigned or otherwise pledged or hypothecated; (viii) none of the Rents have been collected for more than one (1) month in advance (except a security deposit shall not be deemed rent collected in advance); (IX) the
property demised under the Leases have been completed and the tenants under the Leases have accepted the same and have taken possession of the same on a rent-paying basis; (x) there exist no offsets or defenses to the payment of any portion of the Rents; (xl) Assignor has received no notice from any tenant challenging the validity or enforceability of any Lease; (xii) there are no agreements with the tenants under the Leases other than expressly set forth in each Lease; (xiii) the Leases are valid and enforceable against Assignor and the tenants set forth therein; (xiv) no Lease contains an option to purchase, right of first refusal to purchase, or any other similar provision; (xv) no person or entity has any possessory interest in, or right to occupy, the Property except under and pursuant to a Lease; (xvi) each Lease Is subordinate to this Security Instrument, either pursuant to its
terms or a recordable subordination agreement; (xvii) no Lease has the benefit of a non-disturbance agreement that would be considered unacceptable to prudent institutional lenders; (xviii) all security deposits relating to the Leases reflected on the certified rent roll delivered to Assignee have been collected by Assignor; and (xix) no brokerage commissions or finders fees are due and payable regarding any Lease.

Assignor shall take such action and to execute, deliver and record such documents as may be reasonably necessary to evidence such assignment, to establish the priority thereof and to carry out the intent and purpose hereof. If requested by Assignee, Assignor shall execute a specific assignment of any Lease now or hereafter affecting all or any portion of tlhe Property and shall cause the tenant or tenants thereunder to execute, deliver and record a Subordination, Non-Disturbance and Attornment Agreement, in form and substance reasonably satisfactory to Assignee.

 

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Assignor shall faithfully perform and discharge all of Assignor's obligations under the Leases and to enforce all obligations undertaken by tenants thereunder. Assignor shall defend Assignee in any action relating to the Leases and shall indemnify, defend and hold Assignee harmless from and against any claims of tenants or third parties with respect to the Leases. Assignor shall not receive or collect any Rents in advance of the date due or waive or defer any terms of the Leases without the consent of Assignee. Assignor shall not pledge, assign or further encumber the Leases or any Rents or (except as is permitted by Section 1.26(b) above) modify or terminate the Leases, or permit any assignment or sublease
thereunder, without Assignee's prior written consent. Assignor Irrevocably appoints Assignee its true and lawful attorney-in-fact, at the option of Assignee at any time and from time to time, to demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, in the name of Assignor, Trustee or Assignee, for all such Rents, and apply the same to the Secured Obligations.

 

3.02 Grant of Revocable License to Collect Rents. So long as an Event of Default shall not have occurred and be continuing under this Security Instrument, Assignee hereby grants to Assignor a revocable license to enforce the Leases, to collect the Rents, to apply the Rents to the payment of the costs and expenses incurred in connection with the Property and to any Secured Obligations. If requested by Assignee, Assignor shall (a) give written notice to the tenants under the Leases of the assignment of Rents and Leases by Assignor to Assignee pursuant to Section 3.01 hereof, of too grant of the revocable license by Assignee to Assignor pursuant to this Section 3.02, and of the respective rights of Assignor and
Assignee under this Article 3; and (b) obtain such tenants' agreements to be bound by and comply with the provisions of such assignment and grant. All Leases hereafter executed with respect to the Property shall contain a reference to the foregoing assignment and grant and shall state that the tenant executing such Lease shall be bound by and shall comply with the provisions hereof.

 

3.03 Revocation of License; Assignee's Rights, upon the occurrence of an Event of Default and at any time thereafter during the continuance thereof, subject to applicable laws, the license granted to Assignor hereunder shall automatically be revoked. Upon such revocation, Assignor shall promptly deliver to Assignee all Rents then held by or for the benefit of Assignor. Assignee, In addition to any other rights granted to Assignee under this Security Instrument, shall have the right: (I) to notify the tenants under the Leases that Assignor's license to collect Rents has been revoked, and, with or without taking possession of the Property, to direct such tenant to thereafter make all payments of Rent and to perform
all obligations under this Lease to or for the benefit of Assignee or as directed by Assignee; (ii) to enter upon the Property and to take over and assume the management, operation and maintenance of the Property, to enforce all Leases and collect all Rents due thereunder, to amend, modify, extend, renew and terminate any or all Leases and execute new leases; and (iii) to perform all other acts which Assignee shall determine to be necessary or desirable to carry out the foregoing. Each tenant under any lease shall be entitled to rely upon any notice from Assignee and shall be protected with respect to any payment of Rent made pursuant to such notice, Irrespective of whether a dispute exists between Assignor and Assignee with respect to the existence of an Event of Default or the rights of Assignee hereunder. The payment of Rent to Assignee pursuant to any such notice and the performance
of obligations under any Lease to or for the benefit of Assignee shall not cause Assignee to assume or be bound by the provisions of such Lease including, without Iimitation, the duly to return any security deposit to the tenant under such Lease unless and to the extent such security deposit was paid to Assignee by Assignor. Assignor shall indemnify, defend and hold Assignee harmless from and against any and all losses, claims, damage or liability arising out of any claim by a tenant with respect thereto,

 

3.04 Application of Rents; Security Deposits. All Rents received by Assignee pursuant to this Security Instrument shall be applied by Assignee, as determined by Assignee, to any of the following:

 

(i) the costs and expenses of collection, including, without limitation, attorneys' fees and receivership fees, costs and expenses; (ii) the costs and expenses incurred In connection with the management, operation and maintenance of the Property; (iii) the establishment of reasonable reserves for working capital and for anticipated or projected costs and expense, including, without limitation, capital improvements which may be necessary or desirable or required by law; and (iv) the payment of any indebtedness then owing by Assignor to Assignee. In connection therewith, Assignor further agrees that all Rents received by Assignee from any tenant may be allocated first, if Assignee so elects, to the payment of all
current obligations of such tenant under its Lease and not to amounts which may be

 

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accrued and unpaid as of the date of revocation of Assignor's license to collect such Rents. Assignee may, but shall have no obligation to, pursue any tenant for the payment of Rent which may be due under its Lease with respect to any period prior to the exercise of Assignee's rights hereunder or which may become due thereafter. Assignor agrees that the collection of Rents by Assignee and the application of such Rents by Assignee to the costs, expenses and obligations referred to in this Section 3.04 shall not cure or waive any default or Event of Default or invalidate any act including, without limitation, any sale of all or any portion of the Property now or hereafter securing the Loan) done in response to or as
a result of such default or Event of Default or pursuant to any notice of default or notice of sale issued pursuant to any Loan Document.

 

3.05 No Mortgagee in Possession. Nothing contained in this Security Instrument shall be construed as constituting Assignee a "mortgagee in possession" in absence of the taking of actual possession of the Property by Lender. In the exercise of the powers herein granted Lender, no liability shall be asserted or enforced against Assignee, all such liability being expressly waived and released by Assignor.

 

ARTICLE 4. SECONDARY MARKET

 

4.01 Transfer of Loan. Lender may, at any time, sell, transfer or assign the Note, this Security Instrument and the other Loan Documents, and any or all servicing rights with respect thereto, or grant participations therein or issue mortgage pass-through certificates or other securities evidencing a beneficial Interest in a rated or unrated public offering or private placement (the securities"). Lender may forward to each purchaser, transferee, assignee, servicer, participant or investor in such Securities or any rating agency ("Rating Agency") rating such Securities (collectively, the 'Investor") and each prospective Investor, all documents and information which Lender now has or may hereafter acquire relating to
the Loan and to Borrower, and the Property, whether furnished by Borrower, or otherwise, as Lender determines necessary or desirable. Borrower shall cooperate with Lender in connection with any transfer made or any Securities created pursuant to this Security Instrument, including, without limitation, the delivery of an estoppel certificate in accordance therewith, and such other documents as may be reasonably required by Lender. Borrower shall also furnish and Borrower consents to Lender furnishing to such Investors or such prospective Investors or Rating Agency any and all information concerning the Property, the Leases, the financial condition of Borrower as may be requested by Lender, any Investor or any prospective Investor or Rating Agency in connection with any sale, transfer or participation interest. Lender may retain or assign responsibility for servicing the Note, this
Security Instrument, and the other Loan Documents, or may delegate some or all of such responsibility and/or obligations to a servicer (including, without limitation, any subservicer or master servicer) or agent. Lender may make such assignment or delegation on behalf of the Investors if the Note is sold or this Security Instrument or the other Loan Documents are assigned. All references to "Lender" In the Loan Documents shall refer to and Include any such servicer or agent, to the extent applicable, In each case as designated by Lender from time to time.

 

4.02 Conversion to Registered Form. At the request and the expense of Lender, Borrower shall appoint, as its agent, a registrar and transfer agent (the "Registrar") acceptable to Lender which shall maintain, subject to such reasonable regulations as it shall provide, such books and records as are necessary for the registration and transfer of the Note In a manner that Shall cause the Note to be considered to be in registered form for purposes of Section 163(1) of the U.S. Internal Revenue Code. The option to convert the Note into registered form once exercised may not be revoked. Any agreement setting out the rights and obligations of the Registrar shall be subject to the reasonable approval of Lender. Borrower
may revoke the appointment of any particular person as Registrar, effective upon the effectiveness of the appointment of a replacement Registrar. The Registrar Shall not be entitled to any fee from Lender or any other Lender in respect of transfers of the Note and this Security Instrument (other than taxes and governmental charges and fees).

 

4.03 Estoppel Certificate. Upon any transfer or proposed transfer contemplated by Section 4.01 above, at Lender's request, Borrower, or any guarantors or indemnitors shall provide an estoppel

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certificate to the Investor or any prospective Investor in such form, substance and detail as Lender, such Investor or prospective Investor may require.

 

ARTICLE 5. FURTHER ASSURANCES

 

5.01 Recording of Security Instrument; Other Assurances. Borrower forthwith upon the execution and delivery of this Security Instrument and thereafter, from time to time, will cause this Security Instrument and any of the Loan Documents creating a lien or security Interest or evidencing the lien hereof upon the Property and each instrument of further assurance to be filed, registered or recorded In such manner and in such places as may be required by any present or future law In order to publish notice of and fully to protect and perfect the lien or security interest hereof upon, and the interest of Lender in, the Property. Borrower will pay all taxes, filing, registration or recording fees, and all expenses
incident to the preparation, execution, acknowledgment and/or recording of the Note, this Security Instrument, the other Loan Documents, any note or deed of trust or mortgage supplemental hereto, any security instrument with respect to the Property and any instrument of further assurance, and any modification or amendment of the foregoing documents, and all federal, state, county and municipal taxes, duties, imposts, assessments and charges arising out of or in connection with the execution and delivery of this Security Instrument, any deed of trust or mortgage supplemental hereto, any security instrument with respect to the Property or any instrument of further assurance, and any modification or amendment of the foregoing documents, except where prohibited by law so to do.

 

5.02 Further Acts. Borrower will, at the cost of Borrower, and without expense to Lender, do, execute, acknowledge and deliver all and every such further acts, deeds, conveyances, deeds of trust, mortgages, assignments, notices of assignments, transfers and assurances as Lender shall, from time to time, require, for the better assuring, conveying, assigning, transferring, and confirming unto Lender and Trustee the Property and rights hereby deeded, mortgaged, granted, bargained, sold. conveyed, confirmed, pledged, assigned, warranted and transferred or Intended now or hereafter so to be, or which Borrower may be or may hereafter become bound to conveyor assign to Lender, or for carrying out the intention or
facilitating the performance of the terms of this Security Instrument or for filing, registering or recording this Security Instrument, or for complying with all applicable laws. Borrower, on demand, will execute and deliver and hereby authorizes Lender to execute in the name of Borrower or without the signature of Borrower to the extent Lender may lawfully do so, one or more financing statements, chattel mortgages or other instruments, to evidence more effectively the security Interest of Lender in the Property. Borrower grants to Lender an Irrevocable power of attorney coupled with an interest for the purpose of exercising and perfecting any and all rights and remedies available to Lender at law and in equity, including, without limitation, such rights and remedies available to Lender pursuant to this paragraph. Borrower specifically agrees that all power granted to Lender under this
Security Instrument may be assigned by Lender to its successors or assigns as holder of the Note.

 

5.03 Changes in Laws Regarding Taxation; Documentary Stamps.

 

(a) In the event of the passage after the date of this Security Instrument of any law of the state where the Property is located deducting from the value of real property for the purpose of taxation any lien or encumbrance thereon or changing in any way the laws for the taxation of mortgages or loans secured by mortgages for slate or local purposes or the manner of the collection of any such taxes, and imposing a tax, (including, without limitation, a withholding tax) either directly or indirectly, on this Security Instrument, the Note or the Loan, Borrower shall, if permitted by law. pay any tax imposed as a result of any such law within the statutory period or within fifteen (1S) days after demand in Lender,
whichever is less, provided, however, that if, In the opinion of the attorneys for Lender, Borrower is not permitted by law to pay such taxes, Lender shall have the right, at its option, to declare the Loan due and payable on a date specified in a prior notice to Borrower of not less than thirty (30) days. Any prepayment made by Borrower pursuant to the terms of this paragraph shall be made without any Prepayment Charge (as defined In the Note),

 

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(b) If at any time the United states of America, any state thereof, or any governmental subdivision of any such State, shall require revenue or other stamps to be affixed to the Note or this Security Instrument, Borrower will, upon demand, pay for the same, with interest and penalties thereon, if any.

ARTICLE 6. STATE-SPECIFIC PROVISIONS/MODIFICATIONS AND OTHER PROVISIONS

 

6.01 Inconsistencies. In the event of any conflicts between the terms and conditions of this Article 6 and the remainder of this Security Instrument, the terms and conditions of this Article 6 shall govern, but only to the extent of any such conflicts.

 

6.02 No Border Zone Property. Borrower hereby represents and warrants that the Property has not been designated as a Border Zone Property under the provisions of California Health and Safety Code, Sections 25220 et. Seq. or any regulation adopted in accordance therewith, and there has been no occurrence or condition on any real property adjoining or in the vicinity of the Property that is reasonably likely to cause the Property or any part thereof to be designated as Border Zone Property.

 

6.03 Environmental Impairment. In furtherance of and not in limitation of any other provisions of this Security Instrument, including without limitation Section 1.03:

 

In accordance with California Code of Civil Procedure Section 726.5, Lender may waive its lien against the Property or any portion thereof, together with fixtures or personal property thereon, to the extent such property is found to be environmentally impaired, and may exercise any and all rights and remedies of an unsecured creditor against Borrower and all of Borrower's assets and property for the recovery of any deficiency, including, without limitation, seeking an attachment order under California Code of Civil Procedure Section 483.010. No such waiver shall be final or binding on Lender unless and until a final money judgment is obtained against Borrower. As between Lender and Borrower, for purposes of
California Code of Civil Procedure Section 726.5, Borrower shall have the burden of proving that the release or threatened release was not knowingly or negligently caused or contributed to, or knowingly or willfully permitted or acquiesced to by Borrower or any related party (or any affiliate or agent of Borrower or any related party) and that Borrower made written disclosure of the release to Lender or that Lender otherwise obtained actual knowledge thereof prior to the making of the loan evidenced by the Note. Notwithstanding anything to the contrary contained in this Security Instrument or the other Loan Documents, Borrower shall be fully and personally liable for all judgments and awards entered against Borrower pursuant to California Code of Civil Procedure 726.5 and such liability shall be an exception to any non-recourse or exculpatory provision in this Security Instrument or the
other Loan Documents and shall not be limited to the original principal amount of the obligations secured by this Security Instrument. Borrower's obligations hereunder shall survive the foreclosure, deed in lieu of foreclosure, release, reconveyance or any other transfer of the Property or this Security Instrument. For the purpose of any action brought under this Section, Borrower hereby waives the defense of laches and any applicable statute of limitations. For purposes of California Code of Civil Procedure 726.5, the acts, knowledge and notice of each "726.5 Party" shall be attributed to and be deemed to have been performed by the party or parties then obligated on and liable for payment of the Note. As used herein, '726.5 Party" shall mean Borrower, any successor owner to Borrower of all or any portion of the Property, any related party of Borrower or any such successor and any
affiliate or agent of Borrower, any such successor or any such related party.

 

Borrower hereby confirms the right of Lender (or a receiver appointed by Lender to enter upon and inspect all or any portion of the Property for the purpose of determining the existence, location, nature and magnitude of any past or present release or threatened release of any hazardous substance into, onto, beneath, or from the Property in accordance with Section 2929.5 of the California Civil Code. All reasonable costs and expenses incurred by Lender pursuant to this provision or pursuant to Section 2929.5 of the California Civil Code, including, without limitation, costs of consultants and contractors, costs of repair of any physical Injury to the Property normal and customary to the tests and studies, court
costs and attorneys' fees, costs and expenses, whether incurred in litigation or not and whether before or

 

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alien judgment, shall be payable by Borrower and the Indemnitor(s) (other than Borrower) under the Environmental Indemnification Agreement executed in connection with the Loan ("Indemnitor(s),) and, to the extent advanced or incurred by Lender, shall be reimbursed to Lender by Borrower and the lndemnitor(s) upon demand. This provision is separate and several, and shall survive merger into any Judgment.

 

In addition, Lender shall have the right to appoint a receiver when permitted under Section 564 of the California Code of Civil Procedure, including, without limitation, in order to enforce Lender's rights under Section 2929.5 of the California Civil Code. The receiver shall have all of the rights and powers to the fullest extent permitted by law. The receiver shall have the right to apply Rents to cleanup, remediation or other response action concerning the release or threatened release of Hazardous Materials, whether or not such actions are pursuant to an order of any federal, state or local governmental agency.

 

6.04 Waiver of Rights Regarding Condemnation Proceeds. Borrower unconditionally and irrevocably waives all rights of a property owner under Section 1265.225(a) of the California Code of Civil Procedure or any successor statute providing for the allocation of condemnation proceeds between a property owner and a lien holder.

 

6.05 Evasion of Prepayment Terms. If an Event of Default shall occur, a tender of any payment of principal by Borrower, its successors or assigns or by anyone on behalf of Borrower, its successors or assigns, In excess of the amount which would have been payable had the Event of Default not occurred, shall constitute an evasion of the prepayment terms of the Note, as incorporated herein by reference, and shall be deemed to be a voluntary prepayment thereunder and any such payment, to the extent permitted by law, must include the prepayment charge computed in accordance with the terms of the Note.

 

6.06 Waiver of Section 2822. Borrower hereby waives, to the extent applicable to Borrower, any right or privilege to which it may be entitled under Section 2822 of the California Civil Code or otherwise to designate the portion of the Limited Recourse Obligations Guaranty executed in connection with the Loan (the "Guaranty”) which is to be satisfied by a partial payment (whether voluntary, as a result of judgment or otherwise) of the Loan. In such event, Borrower acknowledges and agrees that the terms and provisions of the Guaranty shall govern.

 

6.07 Power of Sale and Other Provisions.

 

For any sale under the power of sale granted by this Security Instrument, Lender, its successors and assigns, may elect to cause the Property or any part thereof to be sold as follows:

 

(a) Lender may proceed as if all of the Property were real property, in accordance with subparagraph (d) below, or Lender may elect to treat any of the Property which consists of a right in action or which is property that can be severed from the Property without causing structural damage thereto as if the same were personal property, and dispose of the same in accordance with subparagraph

 

 

(c) below, separate and apart from the sale of real property, the remainder of the Property being treated as real property.

 

(b) Lender may cause any such sale or other disposition to be conducted immediately following the expiration of any grace period, if any, herein provided (or immediately upon the expiration of any redemption period required by law) as specified in subparagraph (a) above or Lender may delay any such sale or other disposition for such period of time as Lender deems to be in its best interest. Should Lender desire that more than one such sale or other disposition be conducted, Lender may at its option, cause the same to be conducted simultaneously. or successively on the same day, or at such different days or limes and in such order as Lender may deem to be in its best interest.

 

(c) Should Lender elect to cause any of the Property to be disposed of as personal property as permitted by subparagraph (a) above, it may dispose of any part hereof in any manner now or

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hereafter permitted by Article 9 of the California Uniform Commercial Code or in accordance with any other remedy provided by law. Both Borrower and Lender shall be eligible to purchase any part or all of such property at any such disposition. Any such disposition may be either public or private as Lender may so elect, subject to the provisions of the California Uniform Commercial Code. Lender shall give Borrower at least ten (10) days' prior written notice of the time and place of any public sale or other disposition of such property or of the time at or after which any private sale or any other intended disposition is to be made, and if such notice is sent to Borrower as provided in subparagraph (k) hereof, it
shall constitute reasonable notice to Borrower.

(d) Should Lender elect to sell the Property which is real property or which Lender has elected to treat as real property, upon such election Lender or Trustee shall give such Notice of Default and Election to Sell as may then be required by law. Thereafter, upon the expiration of such time and the giving of such Notice of Sale as may then be required by law, Trustee, at the time and place specified in the Notice of Sale, shall sail such Property, or any portion thereof specified by Lender, at public auction to the highest bidder for cash in lawful money of the United States, subject, however, to the provisions of subparagraph (i) hereof. Trustee for good cause may, and upon request of Lender shall, from time to
time, postpone the sale by public announcement thereof at the time and place noticed therefor, If the Property consists of several lots or parcels, Lender may designate the order in which such lots or parcels shall be offered for sale or sold. Any person, including Borrower, Trustee or Lender, may purchase at the sale. Upon any sale Trustee shall execute and deliver to the purchaser or purchasers a deed or deeds conveying the property so sold, but without any covenant or warranty whatsoever, express or Implied, whereupon such purchaser or purchasers Shall be let into immediate possession.

 

(e) In the event of a sale or other disposition of any such property, or any part thereof, and the execution of a deed or other conveyance, pursuant thereto, the recitals therein of facts, such as a default, the giving of notice of default and notice of sale, demand that such sale should be made, postponement of sale, terms of sale, sale, purchaser, payment of purchase money, and any other fact affecting the regularity or validity of such sale or disposition, shall be conclusive proof of the truth of such facts for purposes of such sale, conveyance or other disposition; and any such deed of conveyance shall be conclusive against all persons as to such facts recited therein for purposes of such
conveyance.

 

(f) Lender and/or Trustee shall apply the proceeds of any sale or disposition hereunder to payment of the following: (1) the expenses of such sale or disposition together with Trustee's fees and reasonable attorneys' fees, and the actual cost of publishing, recording, mailing and posting notice; (2) the cost of any search and/or other evidence of title procured in connection therewith and transfer tax on any deed or conveyance; (3) all su!'1s expended under the terms hereof, not then repaid, with accrued interest in the amount provided herein; (4) all other sums secured hereby; and (5) the remainder If any to the person or persons legally entitled thereto.

 

(g) The acknowledgement of the receipt of the purchase money, contained in any deed of conveyance executed as aforesaid, shall be sufficient to discharge Borrower from all obligations and to evidence the proper application oftne consideration therefor.

 

(h) Borrower hereby expressly waives any right which it may have to direct the order in which any of the Property shall be sold in the event of any sale or sales pursuant hereto.

(i) Upon any sale of the Property, whether made under a power of sale herein granted or pursuant to judicial proceedings, If the holder of the Note is a purchaser at such sale, it shall be entitled to use and apply all or any portion of the indebtedness then secured hereby for or in settlement or payment of all or any portion of the purchase price of the property purchased, and, in such case, this Security Instrument, the Note and documents evidencing expenditures secured hereby shall be presented to the person conducting the sale in order that the amount of said indebtedness so used or applied may be credited thereon as having been paid.

 

(j) No remedy herein conferred upon or reserved to Trustee or Lender is intended to be exclusive of any other remedy herein or by law provided, but each shall be cumulative and shall be in

 

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addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute. Every power or remedy given by this instrument to Trustee or Lender, or to which either of them may be otherwise entitled, may be exercised from time to time and as often as may be deemed expedient by Trustee or Lender, and either of them may pursue inconsistent remedies. If there exists additional security for the performance of the obligations secured hereby, the holder of the Note, at its sole option and without limiting or affecting any rights or remedies hereunder, may exercise any of the rights and remedies to which it may be entitled hereunder either concurrently with whatever other rights it may
have in connection with such other security or in such order as it may determine.

 

(iI) Borrower hereby requests that every notice of default and every notice of sale be given in accordance with the provisions of Section 7.05 hereof except as otherwise required by statute. Borrower may, from time to time, change the address to which notice of default and sale hereunder shall be sent by both filing a request therefor, In the manner provided by the California Civil Code, Section 2924b, and sending a copy of such request to Lender, its successors or assigns in accordance with the provisions of Section 7.05 hereof.

 

6.08 California Uniform Commercial Code. In furtherance of and not in limitation of any other provisions of this Security Instrument, including without limitation Section 2.02(a):

 

Upon the occurrence of an Event of Default under this Security Instrument, Lender, pursuant to the appropriate provisions of the California Uniform Commercial Code, shall have an option to proceed with respect to both the real property portion of the Property and the Personal Property in accordance with its rights, powers and remedies with respect to such real property, in which event the default provisions of the California Uniform Commercial Code shall not apply. Such option shall be revocable by Lender as to all or any portion of the Personal Property at any time prior to the sale of the remainder of the Property. In such event Lender shall designate Trustee to conduct the sale of the Personal Properly in
combination with the sale of the remainder of the Property. Should Lender elect to sell the Personal Property or any part thereof which is real property or which Lender has elected to treat as real property or which may be sold together with the real property as provided above, Lender or Trustee shall give such notice of default and election to sell as may then be required by law. The parties agree that if Lender shall eject to proceed with respect to any portion of the Personal Property separately from such real properly, ten (10) days notice of the sale of the Personal Property shall be reasonable notice. The reasonable expenses of retaking, holding, preparing for sale, selling and the like incurred by Lender shall include, but not be limited to, reasonable attorneys' fees, costs and expenses, and other expenses incurred by Lender.

 

6.09 Forbearance by Lender Not A Waiver. Borrower waives to the extent permitted by law, notice of election to mature or declare due the whole of the Secured Obligations. Any forbearance by Lender in exercising any right or remedy hereunder, or otherwise afforded by applicable law, shall not be a waiver of or preclude the exercise of any tight or remedy. The acceptance by Lender of payment of any sum secured by this Security Instrument after the due date of such payment shall not be a waiver of Lender’s right either to require prompt payment when due of all other sums so secured or to declare an Event of Default for failure to make prompt payment The procurement of Insurance or the payment of taxes of other
liens or charges by Lender shall not be a waiver of Lender’s right to accelerate the maturity of the Secured Obligations nor shall Lender's receipt of any awards, proceeds or damages under this Security Instrument operate to cure or waive Borrower's default in payment of sums secured by this Security Instrument

 

6.10 Additional Costs. In furtherance of and not in limitation of any other provisions of this Security Instrument, including without limitation Section 7.09:

 

Borrower shall pay all reasonable Costs incurred by Lender in connection with the documentation, modification, workout, collection or enforcement of the Loan or any of the Loan Documents (as applicable), including probate, appellate and bankruptcy proceedings, any post-judgment proceedings to collect or enforce any Judgment or order relating to the Loan or any of the Loan Documents (as applicable), and all such Costs shall be included as additional Secured Obligations

 

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bearing Interest at the Default Rate set forth in the Note until paid. In any action to foreclose the lien hereof or otherwise enforce Lender's rights and remedies hereunder, there shall be allowed and Included as additional Secured Obligations all Costs which may be paid or incurred by or on behalf of Lender. For the purposes hereof 'Costs' means all expenditures and expenses which may be paid or Incurred by or on behalf of Lender including repair costs, payments to remove or protect against liens, attorneys' fees, costs and expenses, receivers' fees, appraisers' fees, engineers' fees, accountants' fees, independent consultants' fees (including environmental consultants), all costs and expenses Incurred in
connection with any of the foregoing, Lender's out-of-pocket costs and expenses related to any audit or inspection of the Property, outlays for documentary and expert evidence, stenographers' charges, stamp taxes, publication costs, and costs (which may be estimates as to Items to be expended after entry of an order or judgment) for procuring all such abstracts of title, title searches and examination, titIe insurance policies, and similar data and assurances with respect to title as Lender may deem reasonably necessary either to prosecute any action or to evidence to bidders at any sale of the membership interests in Borrower the true condition of the title to, or the value of, the Property. Further, all 'Costs" shall include such other costs, expenses and fees as may be Incurred by Lender in the protection of the Property and the maintenance of the lien of this Deed of Trust,
including, attorneys' fees, costs and expenses in any litigation or proceeding affecting this Deed of Trust, the Note, the other Loan Documents, the Property or the Personal Property, Including probate, appellate, and bankruptcy proceedings, and any post·judgment proceedings to collect or enforce any judgment or order relating to this Deed of Trust or the other Loan Documents, to obtain any court order or the appointment of a receiver to enforce Lender's rights pursuant to Section 564 of the California Code of Civil Procedure and/or Section 2929.5 of the California Civil Code or in preparation for the commencement or defense of any action or proceeding, shall be Immediately due and payable to Lender, with interest thereon at the Default Rate, and shall be secured by this Deed of Trust. This provision Is separate and several, and shall survive the merger of this provision into any
judgment.

 

6.11 Default Rate. The "highest rate permitted under applicable law" referred to In Section 1,03 shall mean the Default Rate (as defined in the Note) if such a rate Is not specified by applicable law.

 

ARTICLE 7. MISCELLANEOUS

 

7.01 Amendments. This Instrument cannot be waived, changed, discharged or terminated orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, discharge or termination is sought.

7.02 Borrower Waiver of Rights; Waiver of Automatic Stay.

 

(a) Borrower waives to the extent permitted by law, (i) the benefit of all laws now existing or that may hereafter be enacted providing for any appraisement before sale of any portion of the Property, (ii) all rights of valuation, appraisement, stay of execution, reinstatement and redemption laws and marshaling in the event of foreclosure of the liens hereby created, (iii) all rights and remedies which Borrower may have or be able to assert by reason of the laws of the state where the Property is located pertaining to the rights and remedies of sureties, (iv) the right to assert any statute of limitations as a bar to the enforcement of the lien of this Security Instrument or to any action brought to enforce the Note
or any other obligation secured by this Security Instrument, and (v) any rights, legal or equitable, to require marshaling of assets or to require upon foreclosure sales in a particular order. Lender shall have the right to determine the order in which any or all of the Property shall be subjected to the remedies provided herein. Lender shall have the right to determine the order in which any or all portions of the Secured Obligations are satisfied from the proceeds realized upon the exercise of the remedies provided herein.

 

(b) WITHOUT LIMITING ANY OF THE FOREGOING SET FORTH IN SUBSECTION (a) ABOVE, BORROWER HEREBY AGREES THAT, IN CONSIDERATION OF LENDER'S AGREEMENT TO MAKE THE LOAN AND IN RECOGNITION THAT THE FOLLOWING COVENANT IS A MATERIAL INDUCEMENT FOR LENDER TO MAKE THE LOAN, IF BORROWER SHALL (b) FILE WITH ANY BANKRUPTCY COURT OF COMPETENT JURISDICTION OR BE THE SUBJECT OF ANY PETITION

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UNDER ANY SECTION OR CHAPTER OF THE BANKRUPTCY CODE, OR SIMILAR LAW OR STATUTE: (ii) BE THE SUBJECT OF ANY ORDER FOR RELIEF ISSUED UNDER THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE; (iii) FILE OR BE THE SUBJECT OF ANY PETITION SEEKING ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY, OR OTHER RELIEF FOR DEBTORS; (iv) HAVE SOUGHT OR CONSENTED TO OR ACQUIESCED IN THE APPOINTMENT OF ANY TRUSTEE, RECEIVER, CONSERVATOR, OR LIQUIDATOR; OR (v) BE THE SUBJECT OF AN ORDER. JUDGMENT OR DECREE ENTERED BY ANY COURT OF COMPETENT JURISDICTION APPROVING A PETITION FILED AGAINST ANY
BORROWER FOR ANY REORGANIZATION, ARRANGEMENT, COMPOSITION, READJUSTMENT, LIQUIDATION, DISSOLUTION, OR SIMILAR RELIEF UNDER ANY PRESENT OR FUTURE FEDERAL OR STATE ACT OR LAW RELATING TO BANKRUPTCY, INSOLVENCY OR RELIEF FOR DEBTORS. THEN, SUBJECT TO COURT APPROVAL, LENDER SHALL THEREUPON BY ENTITLED AND BORROWER HEREBY IRREVOCABLY CONSENTS TO, AND WILL NOT CONTEST, AND AGREES TO STIPULATE TO RELIEF FROM ANY AUTOMATIC STAY OR OTHER INJUNCTION IMPOSED BY SECTION 362 OF THE BANKRUPTCY CODE OR SIMILAR LAW OR STATUTE (INCLUDING, WITHOUT LIMITATION, REUEF FROM ANY EXCLUSIVE PERIOD SET FORTH IN SECTION 1121 OF THE BANKRUPTCY CODE) OR OTHERWISE AVAILABLE TO LENDER AS PROVIDED IN THE NOTE AND THE LOAN DOCUMENTS, AND AS OTHERWISE PROVIDED BY LAW, AND BORROWER HEREBY IRREVOCABLY WAIVES ITS RIGHT TO OBJECT TO SUCH RELIEF.

 

7.03 Statements by Borrower. Borrower shall, within ten (10) days after written notice thereof from Lender, deliver to Lender (or any person designated by Lender) a written statement, in form satisfactory to Lender, fully acknowledged, stating the unpaid principal of and interest on the Note and any other amounts secured by this Security Instrument and staling whether any offset, counterclaim or defense exists against such sums and the obligations of this Security Instrument.

 

7.04 Loan Statement Fees, Lender or its authorized loan servicing agent may impose a service charge for any statement requested by Borrower regarding the Secured Obligations; provided, however, that such amount may not exceed the maximum amount allowed by law at the time request for the statement is made.

 

7.05 Notices. Whenever Borrower, Trustee or Lender shall desire to give or serve any notice, demand, request or other communication with respect to this Security Instrument, each such notice, demand, request or communication shall be given in witting at the address of the intended recipient set forth below by any of the following means: (a) personal service including, without limitation, service by overnight courier service): (b) electronic communication, whether by telex, telegram or telecopying (If confirmed in writing sent by personal service or by registered or certified, first class mall, return receipt requested); or (c) registered or certified, first class mail, return receipt requested:

 

	 
	
If to Lender:

	
ARTESIA MORTGAGE CAPITAL CORPORATION

	  	
1180 NW Maple Street, Suite 202

	  	
Issaquah, Washington 98027

	  	
Attn: Servicing Department

	  	
Fax: (425) 313·1005

	
with a copy to:

	
BEST & FLANAGAN LLP

	  	
225 South Sixth street, Suite 4000

	  	
Minneapolis, Minnesota 55402

	  	
Attn: Bradley F. Williams

	  	
Fax: (812) 339-5897

	
If to Lender:

	
ARTESIA MORTGAGE CAPITAL CORPORATION

	  	
1180 NW Maple Street, Suite 202

	  	
Issaquah, Washington 98027

	  	
Attn: Servicing Department

	  	
Fax: (425) 313·1005

	
with a copy to:

	
BEST & FLANAGAN LLP

	  	
225 South Sixth street, Suite 4000

	  	
Minneapolis, Minnesota 55402

	  	
Attn: Bradley F. Williams

	  	
Fax: (812) 339-5897

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If to Borrower. CALIFORNIA VALLEY ASSOCIATES 1150 First Avenue, Suite 920 King of Prussia, Pennsylvania 19506 Tel: (610) 68D-3511 Fax: (610) 992-1166

	
  

	
with a copy to: TUPITZA & BRYMAN, P,C. Attorneys for Managers, Inc. 212 West Gay Street West Chester, Pennsylvania 19380 Attn: Jeffrey Bryman Tel: (610) 696-2600 Fax: (610) 344-7199

 

	
  

	
If to Trustee: COMMONWEALTH LAND TITLE 3131 Camino Del Rio, Suite 1400 San Diego, California 92103 Attn: Anni Fnedertcksen Fax: (619) 686-2181

 

Such addresses may be changed by notice to the other parties given In the same manner as provided above. Any notice, demand or request sent pursuant to either subsection (a) or (b) hereof shall be deemed received upon such personal service or upon dispatch by electronic means, and, If sent pursuant to subsection (e) shall be deemed received five (5) days following deposit in the mail.

 

7.06 Captions. The captions or headings at the beginning of each Section hereof are for the convenience onhe parties and are not a part of this Security Instrument.

 

7.07 Savings Clause; Invalidity of Certain Provisions. Notwithstanding any provisions in the Note or in this Security Instrument to the contrary, the total liability for payments in the nature of Interest, including, without limitation, prepayment charges, default Interest and late fees, shall not exceed the limits imposed by the laws of the state where the Property is located or the United states of America relating to maximum allowable charges of interest. Lender shall not be entitled to receive, collect or apply, as interest on the Secured Obligations, any amount in excess of the maximum lawful rate of interest permitted to be charged by applicable laws. If Lender ever receives, collects or applies as interest
such amount which would be excessive, such interest shall be applied to reduce the unpaid principal balance of the Note, and any remaining excess shall be paid over to person or persons legally entitled thereto. Every provision of this Security Instrument is intended to be severable. In the event any term or provision hereof is declared to be illegal, invalid or unenforceable for any reason whatsoever by a court of competent jurisdiction, such illegality or invalidity shall not affect the balance of the terms and provisions hereof, which terms and provisions shall remain binding and enforceable.

 

7.08 Provisions Regarding Trustees. At any time, or from time to time, without notice therefor and without notice to Borrower, upon written request of Lender and presentation of this Security Instrument and the Note secured hereby for endorsement. and without affecting the personal liability of any person for payment of the Secured Obligations (subject to the limitations on recourse set forth in the Note) or the effect of this Security Instrument upon the remainder of the Property, Trustee [or the one acting] may (i) reconvey any part of the Property, (ii) consent In writing to the making of any map or plat thereof. (iii) join in granting any easement thereon, or (iv) join in any extension agreement or any
agreement subordinating the lien or charge hereof.

 

Trustee shall not be liable for any error of judgment or act done by Trustee, or be otherwise responsible or accountable under any circumstances whatsoever. Trustee shall not be personally liable in case of entry by it or anyone acting by virtue of the powers herein granted it upon the Property for debts contracted or liability or damages incurned in the management or operation of the Property. All monies received by Trustee shall, until used or applied as herein provided, be held in trust for the

 

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purposes for which they were received, but need not be segregated in any manner from any other monies (except to the extent required by law) and Trustee shall be under no liability for interest on any monies received by it hereunder.

 

Trustee may resign by giving of notice of such resignation in writing to Lender. If Trustee shall die, resign or become disqualified from acting, or shall fail or refuse to exercise its powers hereunder when requested by Lender so to do, or if for any reason and without cause Lender shall prefer to appoint a substitute trustee to act instead of the ol1glnal Trustee named herein, or any prior successor or substitute trustee, Lender shall have full power to appoint a substitute trustee and, if preferred, several substitute trustees in succession who shall succeed to all the estate, rights, powers and duties of the aforenamed Trustee. Upon appointment by Lender and upon recording of the substitution in the land
records of the County where the Property Is located, any new Trustee appointed pursuant to any of the provisions hereof shall, without any further act, deed or conveyance, become vested with all the estates, properties, rights, powers and trusts of its predecessor in the rights hereunder with the same effect as if originally named as Trustee herein.

 

7.09 Subrogation. To the extent that proceeds of the Note are used to pay any outstanding lien. charge or prior encumbrance against the Property, such proceeds have been or will be advanced by Lender at Borrower's request and Lender shall be subrogated to any and all rights and liens held by any owner or holder of such outstanding liens, charges and prior encumbrances, irrespective of whether said liens, charges or encumbrances are released.

 

7.10 Costs and Expenses; Attorneys' Fees for Preparation and Enforcement

 

(a) Borrower acknowledges and confirms that Lender shall Impose certain administrative processing and/or commitment fees in connection with (I) the extension, renewal, modification, amendment and termination of the Loan, (ii) the release or substitution of collateral therefor, (10) obtaining certain consents, waivers and approvals with respect to the Property, or (iv) the review of any Lease or proposed Lease or the preparation or review of any subordination, non-disturbance and attornment agreement (the occurrence of any of the above shall be called an "Event”. Borrower further acknowledges and confirms that it shall be responsible for the payment of all costs of reappraisal of the Property or any part
thereof, whether required by law, regulation, Lender or any governmental or quasi­governmental authority. Borrower hereby acknowledges and agrees to pay, immediately, with or without demand, all such fees (as the same may be increased or decreased from time to time), and any additional fees of a Similar type or nature which may be imposed by Lender from time to time, upon the occurrence of any Event or otherwise. Whenever it is provided for herein that Borrower pay any costs and expenses, such costs and expenses shall include, but not be limited to, all attorneys' fees and disbursements of Lender.

 

(b) Borrower shall pay all attorneys' fees Incurred by Lender in connection with (i) the preparation of the Note, this Security Instrument and the other Loan Documents, and (ii) the Items set forth In Section 7.08(a} above. In addition, Borrower shall pay to Lender on demand any and all expenses, including, without limitation, attorneys' fees and costs, incurred or paid by Lender in protecting its interest in the Property or in collecting any amount payable hereunder or in enforcing its rights hereunder with respect to the Property (including, without limitation, commencing any foreclosure action), whether or not any legal proceeding is commenced hereunder or thereunder, together with interest thereon at the
Default Rate from the date paid or Incurred by Lender until such expenses are paid by Borrower.

As used in this Security Instrument, the terms 'attorneys' fees' or "attorneys' fees and costs' or "attorneys' fees, costs and expenses· shall mean the reasonable attorneys' fees and the costs and expenses of counsel to Lender (Including, without limitation, in-house counsel employed by Lender), which may include, without limitation, printing, duplicating, telephone, fax, air freight and other charges, and fees billed for law clerks, paralegals, librarians. expert witnesses and others not admitted to the bar but performing services under the supervision of an attorney and all such fees, costs and expenses incurred with respect to trial, appellate proceedings, arbitrations, out-of-court negotiations, workouts
and

 

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settlements, and bankruptcy or Insolvency proceedings (including, without limitation, seeking relief from stay in bankruptcy proceedings), and whether or not any action or proceeding is brought or is concluded with respect to the matter for which such fees, costs and expenses were incurred, and whether or not the Lender 15 the prevailing party. Lender shall also be entitled to its attorneys' fees, costs and expenses incurred in any post-judgment action or proceeding to enforce and collect the judgment. In the event of any litigation concerning the enforcement, validity or interpretation of the Loan Documents, the prevailing party shall be entitled to recover and the losing party shall pay, all costs, charges and
expense (including attorneys' fees incurred by the prevailing party, whether or not the suit proceeds to final judgment. This Section 7.10 is separate and several, shall survive the discharge of this Security instrument, and shall survive the merger of this Security Instrument into any judgment on this Security Instrument.

 

7.11 No Merger of Lease. If both the Borrower's and tenant's estate under any Lease Dr any portion thereof which constitutes a part of the Property shall at any time become vested in one owner, this Security Instrument and the lien created hereby shall not be destroyed or terminated by application of the doctrine of merger unless Lender so elects as evidenced by recording a written declaration so stating, and, unless and until Lender so elects, Lender shall continue to have and enjoy all of the rights and privileges of Lender as to the separate estates. In addition, upon the foreclosure of the lien created by this Security Instrument on the Property pursuant to the provisions hereof, any leases or subleases then
existing and affecting all or any portion of the Property shall not be destroyed or terminated by application of the law of merger or as a matter of law or as a result of such foreclosure unless Lender or any purchaser at such foreclosure sale shall so elect No act by or on behalf of Lender or any such purchaser shall constitute a termination of any Lease or sublease unless Lender or such purchaser shall give written notice thereof to such tenant or subtenant.

 

7.12 Governing Law. This Security Instrument shall be governed by and construed in accordance with the laws of the State where the Property is located.

 

7.13 Joint and Several Obligations. If this Security Instrument Is signed by more than one party, all obligations herein contained shall be deemed to be the joint and several obligations of each party executing this Security Instrument. Any married person signing this Security Instrument agrees that recourse may be had against community assets and against his or her separate property for the satisfaction of all obligations contained herein.

 

7.14 Interpretation. In this Security Instrument the singular shall Include the plural and the masculine shall include the feminine and neuter and vice versa, if the context so requires.

 

7.15 Reconveyance by Trustee, Upon written request of Lender Slating that all sums secured hereby have been paid, and upon surrender of this Security Instrument and the Note to Trustee for cancellation and retention and upon payment by Borrower of Trustee's fees, Trustee shall reconvey to Borrower, or to the person or persons legally entitled thereto, without warranty, any portion of the Property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in any reconveyance may be described as "the person or persons legally entitled thereto." Such grantee shall pay Trustee a reasonable fee and Trustee's costs Incurred in $0
reconveying the Property.

 

7.18 Counterparts. This document may be executed and acknowledged in counterparts, all of which executed and acknowledged counterparts shall together constitute a single document. Signature and acknowledgment pages may be detached from the counterparts and attached to a single copy of this document to physically form one document, which may be recorded.

 

7.17 Effect of Security Agreement; Fixture Filing. To the extent of the existence of any Personal Property encumbered by this Security Instrument, this Security instrument constitutes both (a) a security agreement Intended to create a security Interest in such Personal Property in favor of Lender; and, (b) a financing statement filed as a fixture filing in the real estate records of the county in which the

 

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Property is located with respect to any and all Fixtures Included within the Personal Property with respect to any goods or other personal property that may now be or hereafter become sue/) fixtures. The information in the subsections below this paragraph is provided in connection with the filing of this Security Instrument as a financing statement as referred to above, and the Borrower hereby represents and warrants sue/) Information to be true and complete as of the date Of this Security Instrument. This Security Instrument shall be self-operative with respect to sue/) Personal Property, but Borrower shall, upon the request of Lender, execute and deliver to Lender, in form and content satisfactory to Lender,
sue/) financing statements, descriptions of property and sue/) further assurances as Lender may determine from time to time to be necessary or desirable to create, perfect, continue and preserve the lien and encumbrances hereof and the security interest granted herein upon and in the Personal Property specifically described herein, or generally described and Intended to be the subject of the security interest, lien and encumbrance hereby created, granted and conveyed. Lender, at the expense of Borrower, may cause such statements, descriptions and assurances as provided in this Security Instrument to be recorded and re-recorded, filed and refiled, at such times and in such places as may be required or permitted by law to so create, perfect and preserve the lien and encumbrance hereof upon all of the Personal Property. By signing this Security Instrument, Borrower authorizes Lender to
file sue/) financing statements before, on or after the date hereof, and to file such amendments or continuation statements, all as Lender determines necessary or desirable from time to time to perfect or continue the lien of the lender's security interest in the Personal Property.

(a) The Borrower is the record owner of the real estate described in this Security Instrument. The name and mailing address of the record owner of the real estate described In this Security Instrument is set for the In the first paragraph of this Security Instrument

(b) The name, mailing address, type of organization and state of formation of the Debtor (Borrower') is set forth in the first paragraph of this Security Instrument. The Organizational Identification Number of the Borrower is CA 198618900006.

 

(c) The name and mailing address of the Secured Party (Lender) is:

 

ARTESIA MORTGAGE CAPITAL CORPORATION 1180 NW Maple Street, Suite 202 Issaquah, Washington 98027 Attn: Servicing Department

 

(d) This document covers goods which are or are to become fixtures.

7.18 Spouse's Separate Property. Any Borrower who is a married person expressly agrees that recourse may be had against his or her separate property, Subject to the limitations on recourse set forth In Section 1 D of the Note.

 

7.19 Offsets. No Secured Obligations shall be deemed to have been offset or to be offset or compensated by all or part of any claim, cause of action, counterclaim or cross claim, whether liquidated or unliquidated, which Borrower or any successor to Borrower now or hereafter may have or may claim to have against lender; and, in respect to the Indebtedness now or hereafter secured hereby, Borrower waives, to the fullest extent permitted by law, the benefits of any law which authorizes or permits sue/) offsets.

 

7.20 Construction of this Security Instrument, Borrower and Lender agree that this Security Instrument shall be Interpreted In a fair, equal and neutral manner as to each of the parties.

 

7.21 Clerical Error. In the event Lender at any time discovers that the Note, any other note secured by this Security Instrument, this Security Instrument or any other Loan Document contains an error that was caused by a clerical mistake, calculation error, computer malfunction, printing error or similar error, Borrower agrees, upon notice from Lender, to re-execute any documents that are necessary

 

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to correct any such error(s}. Borrower further agrees that lender win not be liable to Borrower for any damages incurred by Borrower that are directly or indirectly caused by any such error.

 

7.22 lost, Stolen, Destroyed or Mutilated loan Documents. In the event of the loss, theft or destruction of the Note, any other note secured by this Security Instrument or any other Loan Document, or in the event of the mutilation of any of the Loan Documents, upon Lender's surrender to Borrower of the mutilated Loan Document, Borrower shall execute and deliver to Lender a loan Document in form and content identical to, and to serve as a replacement of, the lost, stolen, destroyed, or mutilated Loan Document and such replacement shall have the same force and effect as the lost, stolen, destroyed, or mutilated Loan Document, and may be treated for all purposes as the original copy of such Loan Document

 

7.23 Time is of the Essence. Time is of the essence in the performance of each provision of this Security Instrument.

 

7.24 Legislation Affecting Lender's Rights. If enactment or expiration of applicable laws has the effect of rendering any material provision of the Note or this Security Instrument unenforceable according to its terms, Lender, at its option, may demand immediate payment in full of all sums secured by this Security Instrument and may invoke any remedies permitted under this Security Instrument.

 

7.25 RESERVED.

 

7.26 Exhibits and Riders. The exhibits and riders, if any, attached hereto are incorporated herein by reference and made a part hereof.

 

7.27 Successors and Assigns. Without in anyway limiting or affecting the provisions of Section 1.15 hereof, all of the terms, covenants, provisions and conditions herein contained shall be for the benefit of, apply to, and bind the heirs, successors and assigns of the Borrower and the Lender, and are intended and shall be held to be covenants running with the Land.

 

7.28 Declaration of No Offset. The Borrower represents and warrants to the Lender that the Borrower has no knowledge of any offsets, counterclaims or defenses to the principal of the Secured Obligations, or to any part thereof. or the interest thereon, either at law or in equity.

 

7.29 Entire Agreement. This Security Instrument and the other loan Documents contain the entire agreement between the Borrower and the Lender relating to or connected with the Loan. Any other agreements relating to or connected with the Loan not expressly set forth in this Security Instrument and/or other Loan Documents are null and void and superseded in their entirety by the provisions of this Security Instrument and the other Loan Documents.

 

7.30 No Joint Venture or Partnership. The relationship of the Borrower and the Lender created hereby is strictly of debtor-creditor and nothing contained herein or in any other documents or instrument secured hereby shall be deemed or construed to create a partnership or joint venture between Borrower and lender.

 

7.31 No Lender Obligations.

 

(a) Notwithstanding any of the provisions contained herein with respect to Lender taking a security interest in the Leases, Lender is not undertaking the performance of any obligations under the Leases.

 

(b) By accepting or approving anything required to be observed, performed or fulfilled or to be given to Lender pursuant to this Security Instrument, the Note or the other Loan Documents, including without limitation, any officer's certificate. balance sheet, statement of profit and loss or other financial statement, survey, appraisal, or insurance policy, Lender shall not be deemed to have warranted,

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consented to, or affirmed the sufficiency, the legality or effectiveness of same, and such acceptance or approval thereof shall not constitute any warranty or affirmation with respect thereto by Lender.

 

7.32 Estoppel Certificates. After request by Lender, Borrower, within ten (10) days, shall furnish Lender or any proposed assignee with a statement, duly acknowledged and certified, setting forth the amount of the original principal amount of the Note, the unpaid principal amount of the Note, the rate of interest of the Note, the terms of payment and maturity date of the Note, the date Installments of interest and/or principal were last paid, that, except as provided in such statement, there are no defaults or events which with the passage of time or the giving of notice or both, would constitute an Event of Default under the Note or this Security
Instrument, that the Note and this Security Instrument are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification, whether any offsets or defenses exist against the Secured Obligations and, if any are alleged to exist, a detailed description thereof, that all Leases are In full force and effect and (provided the Property is not a residential multifamily property) have not been modified (or if modified, setting forth all modifications), the date to which the Rents thereunder have been paid pursuant to the Leases, whether Dr not, to the best knowledge of Borrower, any of the tenants under the Leases are In default under the Leases, and, if any of the tenants are In default, setting forth the specific nature of all such defaults, the amount of security deposits held by Borrower under each Lease and that such amounts are
consistent with the amounts required under each Lease, and as to any other matters reasonably requested by Lender and reasonably related to the Leases, the Secured Obligations. the Property or this Security Instrument

 

7.33 Renewals and Extensions. Any renewal or extension, modification or amendment of the Note and/or this Security Instrument will not operate to release, in any manner, the liability of Borrower or any other party liable for the Loan and their respective successors in interest.

 

7.34 Incorporation. The terms and conditions of all the other Loan Documents are hereby incorporated by reference.

 

[Signatures on Following Pages}].

 

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IN WITNESS WHEREOF, Borrower has executed this Security Instrument as of the day and year first above written.

	
  

	
[ADD WITNESS IF REQUIRED.] BORROWER:

 

CALIFORNIA VALLEY ASSOCIATES, a New York limited partnership

 

By: Managers, Inc., a Pennsylvania corporation, General Partner

 

By:

 

[Missing Graphic Reference]

 

 

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Or Commonwealth

	
  

	
CERTIFICATION PURSUANT TO GOVERNMENT CODE SECTION 27361.7

 

I certify under penalty of perjury that the notary seal on the document to which this statement is attached reads as follows:

 

	 
	
Name ofNotary: Commission Number:

	
NancyJo Mosser 00037817

	
Date Commission Expires

	
October 27, 2005

	
County where bond is filed:

	
N/A

	
Manufacturer/Vendor Number.

	
N/A

	
Place of Execution:

	
Volusia County, FL

	
Date:

	
March 8, 2005

	
Name ofNotary: Commission Number:

	
NancyJo Mosser 00037817

	
Date Commission Expires

	
October 27, 2005

	
County where bond is filed:

	
N/A

	
Manufacturer/Vendor Number.

	
N/A

	
Place of Execution:

	
Volusia County, FL

	
Date:

	
March 8, 2005

March 22, 2005

Date

 

[Missing Graphic Reference]

 

Place of Execution: Margaret J. Craft San Diego, California Type or Print Name

 

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EXHIBIT A LEGAL DESCRIPTION OF PROPERTY

The Property is located in San Bernardino County, California, and is legally described as follows:

 

All that certain real property situated In the County of San Bernardino, State of California, described as follows:

 

Parcel I, 2, 3, 5, 6, 7 and 8 of Parcel Map No. 6163, in the Town of Yucca Valley, County of San Bernardino, Stale of California, as per plat recorded in Book 60 of Parcel Maps, Pages 57 through 62 inclusive records of said County.

 

EXCEPTING from Parcels 5 and 6 those portions conveyed to San Bernardino County Flood Control Distrid by deed recorded March 5, 1981 as Instrument No. 81-047682, Official Records of said County.

 

Together with those non exclusive easements for ingress, egress, automobile parking, public utilities, pedestrian movement, loading and unloading, over, across, through and under the 'Common Area" as said Common Area is defined in that certain Declaration of Establishment of Protective Covenants, Conditions and Restrictions and Grants of Easements dated October 29, 1979 and recorded on November 1,1979, In Book 9805, Page 112, of Official Records and as such Common Area is shown on Exhibit ·C" attached thereto.

 

And together with those non exclusive easements for Ingress, egress, pedestrian walkways and vehicular parking over and across the Common Area of Lots 66 and 67 of Tract No. 4856, In the County of San Bernardino, State of California, as per map recorded in Book 70 of Maps, Pages 94 thru 97 inclusive in the office of the County Recorder of said County as "Exed" on a map attached to Exhibit ·C" in that certain instrument entitled 'Reciprocal Easement Agreement' and recorded July 13, 1979 in Book 9727, Page 344.

 

And together with those non-exclusive easements for driveways, sidewalks and walkways over the Common Areas of Parcel No. 1 of Parcel Map No. 5947, in the County of San Bernardino, State of California, as per map recorded in Book 56 of Parcel Maps, Pages 57 and 58, records of said County, and a 10 foot wide utility easement over the Northerly 10 feet of said Parcel No.1 as contained in that certain Mutual Parking and Access Agreement recorded on February 17, 1981 as Instrument No. 81­033496, Official Records of said County.

 

Excepting therefrom that portion of said land, as shown in Partial Reconveyance recorded May 9, 1996 as Instrument No. 19960163747 of Official Records, and more particularly descr1bed as follows:

 

Parcel B of Parcel Map 6163, in the Town of Yucca Valley, County of San Bernardino, State of California, as per map recorded in Book 60. Page(s) 57 through 62, Inclusive of Parcel Maps, in the office of the County Recorder of said County.

 

Together with those non exclusive easements for ingress, egress, automobile parking, utilities, pedestrian movement, loading and unloading, over, across, through and under the "Common Area" as said Common Area is defined in that certain Declaration Establishment of Protection Covenants, Conditions and Restrictions and Grants of Easements dated October 29, 1979, and recorded on November 1, 1979, in Book 9805, Page(s) 112, Official Records and as such Common Area is shown on Exhibit "C”: attached thereto.

 

And together with those non exclusive easements for ingress, egress, pedestrian walkways and vehicular palll:ing over and across the Common Area of Lots 66 and 67 of Tract 4856, in the San Bernardino, State of California, as per map recorded in Book 70, Page(s) 94 thru 97, of Maps, inclusive in the office of the County Recorder of said Counly as "Exed" on a map attached 10 Exhibit "C· in that

 

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Description: San Ber.nardino,CA Document-Year.DocID 2005.202686 Page: 57 of 58 Order: 327283 Comment:

  

  

  

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certain instrument entitled "reciprocal easement agreement" and recorded July 13, 1979, in Book 9727, Page 344, Official Records.

 

And together with those non-exclusive easements for driveways, sidewalks, and walkways over the Common Areas of Parcel 1 of Parcel Map 5947, In the County of San Bernardino, State of California, as per map recorded In Book 56 of Parcel Maps, Pege(s) 57 and 58, Records of said County, and a

10.00 foot wide utility easement over the Northerly 10.00 feet of said Parcel 1 as contained in that certain mutual parking and access agreement recorded on February 17, 1981, as Instrument No. 81­033496, Official Records.

 

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Description: San Bernardino,CA Document~Year.DocID 2005.202686 Page: 58 of 58 Order: 327283 Comment:

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