UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended June 30, 1996
OR
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transaction period from to
Commission file number: 1-14022
STERLING HOUSE CORPORATION
__________________________
(Exact name of Registrant as specified in its charter)
KANSAS 48-1097141
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
453 S. WEBB ROAD, SUITE 500
WICHITA, KANSAS 67207
_____________________________
(Address of principal executive offices)
(316) 684-8300
_____________
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
As of August 5, 1996, there were 5,037,309 shares of the Registrant's Common
Stock outstanding.
</PAGE>
STERLING HOUSE CORPORATION
INDEX
PART 1. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements:
Consolidated Balance Sheets at June 30,
1996 and December 31, 1995. 3-4
Consolidated Statements of Operations
for the Three Months and six months
ended June 30, 1996 and 1995 5
Consolidated Statements of Cash Flows for
the Six months ended June 30, 1996 and 1995 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 20
</PAGE>
Sterling House Corporation
Consolidated Balance Sheets
Assets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $36,052,316 $17,396,355
Accounts receivable:
Construction Receivable due from REIT 7,877,505 ---
Trade 427,834 157,616
Affiliates 11,370 90,785
Other 107,234 309,652
Prerental costs 554,935 242,285
Deferred income taxes 151,987 161,713
Principal and interest funds in trust 360,890 299,671
Other 344,917 283,274
----------- -----------
Total current assets 45,888,988 18,941,351
Property and equipment:
Land and improvements 1,033,128 3,714,642
Buildings 6,925,896 14,977,356
Vehicles and equipment 447,354 393,599
Furniture, fixtures and office equipment 902,222 1,273,480
Construction in progress 12,204,855 3,102,364
Leasehold rights and improvements 2,149,301 511,996
----------- -----------
23,662,756 23,973,437
----------- -----------
Less accumulated depreciation (558,211) (406,353)
----------- -----------
Net property and equipment 23,104,545 23,567,084
Other assets:
Deferred Financing Costs 1,577,665 ---
Deferred income taxes 468,715 447,901
Other 1,333,102 608,104
----------- -----------
Total other assets 3,379,482 1,056,005
----------- -----------
Total assets $72,373,015 $43,564,440
=========== ===========
</TABLE>
See accompanying notes.
</PAGE>
Sterling House Corporation
Consolidated Balance Sheets
Liabilities and Stockholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
<S> <C> <C>
Current liabilities:
Short-term borrowings $ --- $ 6,726,428
Accounts payable 4,231,843 1,832,100
Accrued expenses:
Salaries and benefits 419,323 255,316
Interest 440,151 284,620
Other 326,278 133,584
Deferred income taxes 153,655 23,475
Unearned rent and refundable deposits 192,826 189,509
Current maturities of long-term debt
and bonds payable 201,966 277,966
----------- -----------
Total current liabilities 5,966,042 9,722,998
Bonds payable and long-term debt 4,702,125 6,561,808
Convertible debt 35,000,000 ---
Deferred income taxes 1,404,094 1,662,471
Deferred compensation 391,215 412,550
Other 28,100 ---
----------- -----------
Total liabilities 47,491,576 18,359,827
Stockholders' equity:
Preferred stock; no par value
20,000,000 shares authorized,
none issued and outstanding --- ---
Common stock; no par value; 75,000,000 shares
authorized, 5,035,000 shares
issued and outstanding 28,191,965 28,184,228
Accumulated deficit (3,310,526) (2,979,615)
----------- -----------
Total stockholders' equity 24,881,439 25,204,613
----------- -----------
Total liabilities and stockholders'
equity $72,373,015 $43,564,440
=========== ===========
</TABLE>
See accompanying notes.
Sterling House Corporation
Consolidated Statements of Operations
(Unaudited)
<TABLE>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
_______________________________________________________
<S> <C> <C> <C> <C>
Revenues:
Residence rental $3,261,048 $ 206,140 $5,754,476 $ 297,204
Development fees affiliates: --- 67,511 --- 168,273
Initial franchise and royalty fees:
Affiliates 16,224 42,526 28,826 67,803
Other 21,514 41,965 51,697 78,111
Management and service fees:
Affiliates --- 44,052 --- 138,462
Other 16,612 31,057 52,966 55,409
Construction services:
Affiliates --- 65,140 --- 127,888
Other 54,801 151,993 63,123 298,406
__________ __________ __________ __________
Total revenue 3,370,199 650,384 5,951,088 1,231,556
Operating expenses:
Residence operating expenses 2,134,733 144,005 3,796,559 202,262
General and administrative 597,091 436,187 1,191,283 817,395
Construction costs 17,586 178,445 28,245 362,066
Building rental 730,466 --- 1,115,523 ---
Depreciation and amortization 243,155 55,117 470,879 92,258
Equity in net loss from investments
in unconsolidated affiliates --- 72,282 --- 152,040
---------- ---------- ---------- ----------
Total operating expenses 3,723,031 886,036 6,602,489 1,626,021
Loss from operations (352,832) (235,652) (651,401) (394,465)
Other income (expenses):
Interest income 323,258 4,439 534,262 5,342
Interest expense (106,013) (43,484) (332,800) (76,221)
Minority interest in
loss of subsidiaries --- 4,020 --- 5,574
Other (8,039) (5,548) (20,257) 13,894
---------- ---------- ---------- ----------
Total other income (expense) 209,206 (40,573) 181,205 (51,411)
---------- ---------- ---------- ----------
Loss before income taxes (143,626) (276,225) (470,196) (445,876)
---------- ---------- ---------- ----------
Benefit for income taxes 56,979 --- 139,285 ---
---------- ---------- ---------- ----------
Net loss $ (86,647) $ (276,225) $(330,911) $ (445,876)
========== ========== ========= ==========
Net loss per common share $ (.02) $ (.12) $ (.07) $ (.20)
========== ========== ========= ==========
Weighted average number of shares
outstanding during the period 5,035,993 2,281,416 5,035,421 2,281,416
========== ========== ========= ==========
</TABLE>
See accompanying notes.
Sterling House Corporation
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
1996 1995
<S> <C> <C>
Operating activities
Net loss $ (330,911) $ (445,876)
Adjustments to reconcile net loss to net
cash provide by (used in) operating activities:
Depreciation and amortization 470,879 92,258
Amortization of deferred gain 32,405 ---
Deferred income taxes (139,285) ---
Equity in net loss from investments in
unconsolidated affiliates --- 152,040
Minority interest in loss of subsidiaries --- (5,574)
Gain on sale of assets --- (4,750)
Net change in operating assets and liabilities:
Accounts receivable 11,615 129,287
Prerental costs (504,919) (34,571)
Accrued expenses 512,232 (60,470)
Unearned rent and refundable deposits 3,317 7,036
Accounts payable (790,125) 111,446
Deferred compensation (21,335) ---
Other (20,241) (35,758)
----------- -----------
Net cash used in operating activities (776,368) (94,932)
Investing activities
Purchase of property and equipment (16,804,275) (3,144,362)
Proceeds from sale/leaseback transactions 12,292,497 ---
Advances to affiliates --- 18,251
Proceeds from sale of property and equipment --- 8,700
Acquisition of Abilene, net of cash acquired --- (253,053)
Investment in unconsolidated affiliates --- (37,440)
Minority interest --- (12,163)
Other (524,453) 43,409
----------- -----------
Net cash used in investing activities (5,036,231) (3,376,658)
Financing Activities
Net change in line of credit --- 197,800
Proceeds from short-term borrowings 1,473,650 883,644
Principal payments on short-term borrowings (8,200,078) ---
Principal payments on bonds, long-term debt
and capital lease obligations (1,996,856) (141,438)
Convertible debt issued less cost of financing 35,000,000 ---
Proceeds from issuance of long-term debt 61,173 2,589,271
Expenditures for financing costs (1,602,000) (287,225)
Capital distributions to minority members --- (40,200)
Net change in bond reserve funds in trust (275,066) 918
Other 7,737 37,700
----------- -----------
Net cash provided by financing activities 24,468,560 3,240,470
----------- -----------
Net increase (decrease) in cash 18,655,961 (231,120)
Cash at beginning of period 17,396,355 585,089
----------- -----------
Cash at end of period $36,052,316 $ 353,969
=========== ===========
</TABLE>
See accompanying notes.
</PAGE>
STERLING HOUSE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) GENERAL
The accompanying unaudited interim financial statements of Sterling
House Corporation (the "Company") have been prepared pursuant to the rules
and regulations of the United States Securities and Exchange Commission (the
"SEC"). Certain information and note disclosures normally included in annual
financial statements have been condensed or omitted pursuant to those rules
and regulations. In the opinion of management, all adjustments, consisting
of normal, recurring adjustments considered necessary for a fair
presentation, have been included. Although Management believes that the
disclosures made are adequate to ensure that the information presented is not
misleading, it is suggested that these financial statements be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995. The results of the three and six months ended June 30, 1996 and 1995
are not necessarily indicative of the results of operations for the entire
year.
2) ACCOUNTS RECEIVABLE
Accounts Receivable - Trade includes residence billings, franchise fees,
franchisee construction receivables, and other fee receivables which total
approximately $428,000 at June 30, 1996 and $158,000 at December 31, 1995.
Accounts receivable - REIT financing represents receivables from certain
real estate investment trusts (the "REITs") for construction draws on
residences that are being constructed by the Company for the REIT's and
leased to the Company. Such receivables represent unreimbursed construction
costs incurred by the Company during the construction phase. These costs
will be reimbursed to the Company by the REITs throughout the construction
phase of the residence, which is generally five to eight months. At June 30,
1996 and December 31, 1995, the balances for such receivables from the REITs
totaled approximately $7.9 million and $0, respectively.
3) ACQUISITIONS AND DISPOSITION OF ASSETS
On February 29, 1996, the Company entered into a sale/leaseback
transaction with Health Care REIT, Inc. ("HCRI") for its Bartlesville,
Midwest City, Enid, Stillwater and Shawnee, Oklahoma residences. The Company
received approximately $7.4 million for the five residences which had a book
value at the date of sale of approximately $7.6 million, resulting in a
$200,000 loss which is being deferred and amortized over the initial term of
the lease. The loss incurred in this transaction is due to the step-up in the
basis of the assets as a result of the Reorganization Tansaction as described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 11 hereof. On April 18, 1996, the Company entered into
another sale/leaseback transaction with HCRI for its Oklahoma City SW and
Chickasha, Oklahoma residences. The Company received approximately $2.96
million for the two residences resulting in a gain of approximately $334,000
which is also being deferred and amortized over the initial term of the lease.
The terms of the transactions are similar to those as described under
"Sales/leaseback Agreement," in note 10 to the audited consolidated financial
statements filed in the Company's 1995 Annual Report on Form 10-K, and also
as described in Item 7 - Management's Discussion and Analysis of Financial
</PAGE>
Condition and Results of Operations, filed in the Company's 1995 Annual
Report on Form 10-K. The annual lease expense to be incurred by the Company
under the terms of these agreements will total approximately $992,000.
On March 26, 1996, the Company entered into an agreement with Meditrust
to lease three assisted living residences previously owned by franchisees of
the Company, as well as entering into sale/leaseback transactions for two
Company-owned residences located in Wichita, Kansas and Bethany, Oklahoma.
The total aggregate amount financed with Meditrust for the five residences
was approximately $7.5 million. Concurrently with this transaction, the
franchisees, Masters Associates, L.L.C., the owner of the Derby, Kansas
residence, Hays Assisted Living, L.L.C., the owner of the Hays, Kansas
residence, and Wellington Partners, L.L.C., the owner of the Wellington,
Kansas residence, contemporaneously sold all of their assets (principly
consisting of their real property, building, improvements, furniture and
equipment) to Meditrust. The Company has reported this transaction on Forms
8-K dated March 26, 1996 (filed April 8, 1996), and 8-K/A dated March 26,
1996 (filed June 10, 1996). The lease terms for this agreement are similar
to those described under Management's Discussion and Analysis of Financial
Condition and Results of Operations "Liquidity and Capital Resources"
reported herein. The annual lease expense to be incurred by the Company
under the terms of the agreement will total approximately $952,000.
The following supplemental pro forma information presents the combined
results of operations of the Company and the franchised units as though the
acquisition occurred at the beginning of the periods shown.
For the three months For the six months
ended June 30, ended June 30,
1996 1995 1996 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Revenues $3,457,660 $ 766,175 $6,313,911 $1,497,864
Net Loss (86,647) (339,665) (361,663) (581,388)
Net loss per common share (0.02) (0.15) (0.07) (0.25)
Weighted average number
of shares of stock outstanding
during the period 5,035,421 2,281,416 5,035,993 2,281,416
</TABLE>
These pro forma amounts represent the historical operating results of
the franchised residences combined with those of the Company with appropriate
adjustments which give effect to interest expense, depreciation and
amortization, lease expense and intercompany balances. These pro forma
amounts are not necessarily indicative of operating results which would have
occurred if the acquisition had occurred at the beginning of the periods
presented.
</PAGE>
4) Convertible Debt
On May 23, 1996, the Company sold at par $35.0 million of 6.75%
convertible subordinated debentures due June 30, 2006. The debentures were
sold in a private placement to selected entities which qualified as either
"accredited investors" or as "qualified institutional buyers." The
debentures, noncallable for three years, will be convertible into shares of
common stock of the Company at the conversion price of $22.42 per share,
which equates in the aggregate to 1,561,106 shares.
The Company has agreed to use its best efforts, subject to the receipt
of necessary information from the purchasers, to cause a registration
statement with respect to the resale of the debentures and the shares of
common stock issuable upon conversion thereof from time to time to become
effective not later than November 19, 1996.
5) SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company acquired an existing retirement
and assisted living residence in Liberal, Kansas for the purchase price of
$2.2 million. The residence is two years old and has 45 private units
ranging from studios to two-bedroom apartments. This transaction was
reported by the Company on current Report Form 8-K dated August 1, 1996
(filed August 12, 1996).
</PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL. Through the first two quarters of 1996, the Company has
continued to expand its market share in the assisted living residence segment
of the long-term care industry through development, construction, and
acquisition of assisted living residences. On May 23, 1996, the Company
increased its working capital by selling at par $35.0 million of 6.75%
convertible subordinated debentures due June 30, 2006 (the "Debentures").
The Debentures were sold in a private placement to selected entities which
qualified as either "accredited investors" or as "qualified institutional
buyers." The Debentures, noncallable for three years, will be convertible
into shares of common stock of the Company at the conversion price of $22.42
per share, which equates in the aggregate to 1,561,106 shares. The Company
intends to use the net proceeds of approximately $33.4 million from the
Debentures for the development and construction and, to a lessor extent, the
acquisition of additional assisted living residences.
On March 26, 1996, the Company acquired three franchised facilities
located in Derby, Wellington and Hays, Kansas. The Company managed these
units prior to the acquisition. The Company completed construction and
opened five residences in Norman, Edmond, Lawton, Duncan and Broken Arrow,
Oklahoma. The Company also began operations in the state of Texas during the
second quarter of 1996, with the June openings of the Denton, Ennis,
Corsicana, Paris and Palestine, Texas residences. The acquisition and
opening of the new residences brings the total number of residences open and
operating at June 30, 1996, to 39, of which 7 are managed and/or franchised
residences.
The following table presents the number of residences under construction
or development, by state, as of June 30, 1996.
Under Under
Residences by State: Construction Development
Kansas 0 1
Oklahoma 6 3
Texas 11 9
Florida 6 5
Colorado 0 5
Ohio 0 13
---- ----
Total 23 36
==== ====
Units 896 1479
==== ====
The Company plans to finance its development and construction of new
residences through the proceeds of the debentures sold on May 23, 1996, and
the use of financing agreements with certain REITs involving the sale and
immediate lease of the land, building and equipment used at the residences.
</PAGE>
The following table sets forth, for the periods presented, the number of
residences, owned/leased, managed or franchised, the number of units and the
stabilized occupancy percentages.
December 31, June 30,
1993 1994 1995 1996
_____________________ ________
Residence (end of period)
Owned/Leased(1) 3 9 17 32(3)
Managed/Franchised 1 6 10 7
---- ---- ---- ----
Total 4 15 27 39
Units
Owned/Leased 73 250 516 1,021
Managed/Franchised 37 207 358 272
---- ---- ---- ----
Total 110 457 874 1,293
Stabilized Occupancy percentage(2) 100% 95% 96% 96%
Private pay 100% 100% 100% 100%
Average monthly rent/unit $1,355 $1,505 $1,618 $1,642
(1) Prior to the Reorganization Transaction, residences were owned by limited
partnerships, limited liability companies, or a corporation.
(2) Stabilized occupancy percentage represents the occupancy at the end of
periods presented and only includes those residences that have been operat-
ing in excess of nine months or that have reached an occupancy rate of 95%.
(3) Includes the franchise facilities that were purchased March 26, 1996.
In connection with the Company's initial public offering, filed on Form
S-1 dated October 26, 1995, the Company entered into a reorganization
transaction with various individuals, limited liability companies and limited
partnerships of which the Company owned majority or minority interests,
whereby the Company acquired all the stock of Sterling House of Augusta, Inc.
and all of the assets of such limited liability companies and limited
partnerships (Sterling House of Abilene, L.P., Sterling House of Wichita,
L.P., Sterling House of Bethany, L.L.C., Sterling Group, L.L.C., Scotia,
L.L.C. and Corridor Properties, L.L.C.) (the "Reorganization Transaction").
Except for the historical information contained herein, the matters
discussed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations are forward looking statements that involve risks
and uncertainties that could cause actual results to differ materially,
including, without limitation, risks associated with the Company's ability to
develop, construct, acquire or franchise additional assisted living
residences in accordance with the Company's development schedule, management
of quarter to quarter results, and other risks detailed from time to time in
the Company's SEC reports. The risk factors and information set forth in
"Risk Factors" in the Company's S-1 registration statement dated October 26,
1995, along with information contained in the Company's 1995 Form 10-K,
should be carefully considered in the evaluation of the Company, its business
and its investment value. Updated information will be periodically provided
by the Company as required by the Securities Exchange Act of 1934.
</PAGE>
Results of Operations
Three months ended June 30, 1996 and 1995
REVENUES. Total revenue for the three months ended June 30, 1996,
increased to $3,370,000 compared to $650,000 for the three months ended
June 30, 1995, an increase of $2,720,000 or 418%. This increase was
primarily attributable to an increase of $3,055,000 in residence rentals as
a result of the residences acquired in the Reorganization Transaction and
the new residences that have been opened by the Company since June 30, 1995.
Also adding to the increase in revenue was the acquisition of three
franchised residences on March 26, 1996. Other revenues decreased $335,000
from the second quarter of 1995 to $109,000 for the second quarter of the
current fiscal year. These decreases were attributable to decreases in
development fees of $67,511 to $0 in the second quarter of 1996. Initial
franchise and royalty fees decreased to $38,000, a decrease of $46,000 or
55%, management and services fees decreased to $17,000, a decrease of
$58,000 or 77%, and construction services fees dropped to $55,000, a decline
of $162,000 or 75%. The overall decrease in other revenues is primarily due
to the Company's efforts to develop Company owned residences, primarily
through new construction and acquisitions, and the Company's decreasing
emphasis on developing, managing, and constructing franchise residences.
RESIDENCE OPERATING EXPENSES. The increase in residence operating
expense of $1,991,000 to $2,135,000 for the second quarter of 1996 is
attributable to the increase in residence operations previously described.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $597,000 in the second quarter of 1996 from $436,000
during the same period last year, an increase of $161,000 or 37%. The
increase is primarily attributable to the increase in payroll and associated
costs relating to the expansion in the number of management and support
personnel to facilitate the Company's increase in residences and its
development program. Other increases came in the areas of marketing,
advertising and overall increases in other general corporate expenses
incurred to support the growth in personnel and residences.
COST OF CONSTRUCTION SERVICES. Cost of construction services decreased
to $18,000 from $178,000 during the same period in 1995. The decrease was
attributable to a decrease in such services to franchisees.
BUILDING RENTALS. Building rental increased to $730,000 in the second
quarter of 1996, up from $0 during the same period in 1995. Such costs
reflect the operating leases entered into during the third and fourth quarter
of 1995 and additional operating leases entered into during the first and
second quarter of 1996. The Company had 5 residences under such operating
leases at the end of 1995, and entered into an additional 16 operating leases
during the first two quarters of 1996 making a total of 21 residences
currently operating under operating lease agreements.
</PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$188,000 to $243,000 during the second quarter of 1996, up from $55,000
during the second quarter of 1995. The increase was attributable to the
residences acquired in the Reorganization Transaction and the depreciation
related to property and equipment acquired since June 30, 1995.
EQUITY IN NET LOSS FROM INVESTMENTS IN UNCONSOLIDATED AFFILIATES.
Equity in net loss from investments in unconsolidated affiliates decreased to
$0 in the second quarter of 1996 from $72,000 during the second quarter of
1995. The Company's investments in its unconsolidated affiliates were
terminated on October 26, 1995, as the minority interests were acquired in
the Reorganization Transaction.
INTEREST INCOME. Interest income increased to $323,000 during the
second quarter of 1996, up from $4,000 during the second quarter of 1995.
The increase was attributable to the temporary investment of the remaining
public offering proceeds and the proceeds from the Debentures invested, in
U.S. Treasury Securities.
INTEREST EXPENSE. Interest expense increased to $106,000 during the
second quarter of 1996, up from $43,000 during the second quarter of 1995.
The increase was attributable to the assumption of debt associated with the
residences acquired in the Reorganization Transaction and the interest
incurred relating to the Debentures.
INCOME TAXES. In the second quarter of 1996, the Company recorded a tax
benefit of $57,000 compared to $0 during the same period in 1995. This
benefit recognizes the effect of the residences acquired in the Reorganization
Transaction, whereby the Company accounted for the acquisition under the
purchase method of accounting, and as required by FAS 109, the basis differences
between the allocated fair value for book purposes and the assumed historical
tax basis required the Company to establish the necessary deferred tax
liabilities for these temporary differences. As such, the Company's deferred
tax liability position allowed the Company to recognize a tax benefit for the
pre-tax operating losses generated in the subsequent periods. During the
second quarter of 1995, the pre-tax losses incurred by the Company were not
tax benefited because the Company was in a net deferred tax asset position
which required such benefits to be reduced by valuation allowances.
Six months ended June 30, 1996 and 1995
REVENUES. The Company's total revenue for the six months ended June 30,
1996, was $5,951,000 compared to $1,232,000 for the same period in 1995,
an increase of $4,719,000 or 383%. This increase is primarily attributable
to an increase of $5,457,000 in residence rentals as a result of the
residences acquired in the Reorganization Transaction and the new residences
that have been opened by the Company since June 30, 1995. Other revenues
decreased $738,000 from the six months ended June 30, 1995, to $197,000 for
</PAGE>
the six months ended June 30, 1996. These decreases were attributable to
decreases in development fees of $168,000 to $0 in 1996. Initial franchise
and royalty fees decreased to $81,000, a decrease of $65,000 or 45%,
management fees decreased to $53,000, a decrease of $141,000 or 73%, and
construction services fees dropped to $63,000, a decrease of $363,000 or 85%.
The overall decrease in other revenues is primarily due to the Company's
efforts to further develop company owned residences, primarily through new
construction and acquisitions, and the Company's decreasing emphasis on
developing, managing, and constructing franchise residences.
RESIDENCE OPERATING EXPENSES. The increase in residence operating
expense of $3,594,000 to $3,797,000 for the first six months of 1996 is
attributable to the increase in residence operations previously described.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $1,191,000 in the first six months of 1996 from
$817,000 during the same period last year, an increase of $374,000 or 46%.
The increase is primarily attributable to the increase in payroll and
associated costs relating to the expansion in the number of management and
support personnel to facilitate the Company's increase in residences and its
development program. Other increases came in the areas of marketing,
advertising and overall increases in other general corporate expenses
incurred to support the growth in personnel and residences.
COST OF CONSTRUCTION SERVICES. Cost of construction services decreased
to $28,000 from $362,000 during the same period in 1995. The decrease is
attributable to a decrease in such services to franchisees.
BUILDING RENTALS. Building rental increased to $1,116,000 in the first
six months of 1996, up from $0 during the same period in 1995. Such costs
reflect the operating leases entered into during the third and fourth
quarters of 1995 and additional operating leases entered into during the
first six months of 1996. The Company had 5 residences under such operating
leases at the end of 1995, and entered into an additional 16 operating leases
during the first six months of 1996, resulting in a total of 21 residences
currently operating under an operating lease agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$379,000 to $471,000 during the first six months of 1996, up from $92,000
during the same period in 1995. The increase is attributable to the
residences acquired in the Reorganization Transaction and the depreciation
related to property and equipment acquired since June 30, 1995.
EQUITY IN NET LOSS FROM INVESTMENTS IN UNCONSOLIDATED AFFILIATES.
Equity in net loss from investments in unconsolidated affiliates decreased to
$0 in the first six months of 1996 from $152,000 during the first six months
of 1995. The Company's investments in its unconsolidated affiliates were
terminated on October 26, 1995, as the minority interests were acquired in
the Reorganization Transaction.
</PAGE>
INTEREST INCOME. Interest income increased to $534,000 during the first
six months of 1996, up from $5,000 during the first six months of 1995. The
increase is attributable to the temporary investment of the remaining public
offering proceeds, and the proceeds from the Debentures invested in U.S.
Treasury Securities.
INTEREST EXPENSE. Interest expense increased to $333,000 during the
first six months of 1996, up from $76,000 during the first six months of
1995. The increase is attributable to the assumption of debt associated with
the residences acquired in the Reorganization Transaction and the interest
incurred relating to the Debentures.
INCOME TAXES. In the first six months of 1996, the Company recorded a
tax benefit of $139,000 compared to $0 during the same period in 1995. This
benefit recognizes the effect of the residences acquired in the
Reorganization Transaction, whereby the Company accounted for the acquisition
under the purchase method of accounting, and, as required by FAS 109, the
basis differences between the allocated fair value for book purposes and the
assumed historical tax basis required the Company to establish the necessary
deferred tax liabilities for these temporary differences. As such, the
Company's deferred tax liability position allowed the Company to recognize a
tax benefit for the pre-tax operating losses generated in the subsequent
periods. During the first six months of 1995, the pre-tax losses incurred by
the Company were not tax benefited because the Company was in a net deferred
tax asset position which required such benefits to be reduced by valuation
allowances.
Liquidity and Capital Resources
Working capital at June 30, 1996 was $39,923,000, up $30,705,000 from
$9,218,000 at December 31, 1995. Net cash used in operating activities
totaled $584,000 which was primarily due to an increase in prerental costs
and a reduction in accounts payable. Net cash used in investing activities
of $5,229,000 resulted primarily from the addition of $16,997,000 in property
and equipment and offsetting proceeds of $12,292,000 from sale/leaseback
transactions during the first six months of 1996. Net cash provided from
financing activities totaled $24,469,000 which was the result of paying off
the debt associated with the residences for which a sale/leaseback
transactions were effected during the quarter and the proceeds received from
the issuance of $35,000,000 in subordinated debentures.
In August 1995, the Company entered into a financing commitment with
HCRI providing for up to $37 million of development, construction and
permanent financing available for up to 24 residences. On April 3, 1996, the
Company entered into another agreement with HCRI for an additional $43.1
million of development, construction, and permanent financing for up to 24
additional residences in the states of Kansas, Oklahoma, Texas, and Ohio.
Through August 5, 1996, the Company had used $1.9 million to finance the
ongoing construction of 8 residences, and approximately $18 million in
connection with the sale/leaseback financing of 12 residences. Under the
</PAGE>
terms of the financing commitment, the Company enters into a series of
sale/leaseback transactions, whereby the Company sells residences at
negotiated values and concurrently enters into a lease agreement for each
residence for an initial period of 11 to 13 years with three five-year
renewal options. Under the terms of the leases, the Company is responsible
for all operating costs, including but not limited to, repairs, property
taxes and insurance. Under the financing commitment, the Company pays
initial annual base rental during the initial term of each lease as
determined by multiplying the total consideration by an amount equal to 3.75%
over the yield of the most actively traded U.S. Treasury Note with a maturity
comparable to the initial term of the lease in effect at the time of each
transaction. All leases are being accounted for as operating leases. The
original financing commitment expires on May 1, 1998, while the first half of
additional commitment expires January 1, 1998, and the second half expires
August 1, 1999. The Company is obligated to finance 24 residences with HCRI
prior to the expiration of the original financing commitment, including any
residences the construction of which is financed by HCRI.
On October 5, 1995, the Company entered into a financing commitment with
LTC Properties, Inc. providing for up to $15 million of sale/leaseback
financing relating to nine residences. As of August 5, 1996, the Company had
used approximately $6.7 million in connection with the sale/leaseback
financing for 4 residences. Each lease will be for a term of 10 to 13 years
and the Company will have two five-year renewal options. The leases require
the Company to be responsible for all operating costs, including, but not
limited to, repairs, property taxes and insurance. The annual base rent for
the initial term of each lease was determined by multiplying the purchase
price to be paid by the sum of 3.75% plus the effective yield of the ten-year
U.S. Treasury Notes prevailing at the time of each transaction. All
residences leased will be subject to cross-default provisions. All leases
are being accounted for as operating leases.
On December 1, 1995, the Company entered into a $43 million financing
commitment with Meditrust to provide construction and sale/leaseback
financing relating to twenty-five assisted living residences. The commitment
with respect to construction loans expires in two years, and the commitment
with respect to sale/leaseback financing expires June 24, 1999. Each lease
will be for a term of 10 to 15 years and the Company will have two five-year
renewal options. The leases will generally require the Company to be
responsible for all operating costs, including, but not limited to, repairs,
property taxes and insurance. The annual base rent for the initial term of
each lease will be determined by multiplying the purchase price to be paid by
Meditrust by the sum of 3.5 % plus the effective yield of the ten-year U.S.
Treasury Notes prevailing at the time of each transaction. All residences
financed with Meditrust will be subject to cross-default provisions. All
leases are being accounted for as operating leases. Through August 5, 1996,
the Company had used $7.5 million to finance five residences, three of which
were acquired from franchisee on March 26, 1996, and $1.2 million to finance
the ongoing construction of 4 residences.
</PAGE>
As of June 30, 1996, the Company had invested excess cash balances in
U.S. Treasury Securities. Capital expenditures for 1996 are estimated to
total approximately $50 to $60 million, related primarily to the development
of additional residences, which will be financed with a combination of the
Company's available cash and sale/leaseback transactions. The Company
intends to satisfy future capital requirements for its development activities
by various means, including financing obtained from sale/leaseback
transactions, construction financing and, to the extent available, cash
generated from operations. The Company does not anticipate any significant
capital expenditures within the foreseeable future with respect to its
existing residences. It is expected that cash generated from operations will
be sufficient to fund any expenditures the Company may be required to make
with respect to these existing residences.
SUBSEQUENT EVENTS
Subsequent to June 30, 1996, the Company acquired an existing retirement
and assisted living residence in Liberal, Kansas for the purchase price of
$2.2 million. The residence is two years old and has 45 private units
ranging from studios to two-bedroom apartments. This transaction was
reported by the Company on current Report Form 8-K dated August 1, 1996
(filed August 12, 1996.)
Also subsequent to June 30, 1996, an additional franchise agreement was
signed on July 16, 1996, with an existing franchisee for a second Colorado
Springs, Colorado residence location.
</PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders held on May 24, 1996,
the following individuals were elected to the Board of Directors until the
1999 Annual Meeting of Stockholders:
Votes for Votes Withheld
Diana M. Laing 4,470,706 100
Ronald L. Mercer 4,470,706 100
The terms of Dr. D. Ray Cook and Mr. Michael F. Bushee as Directors of
the Company continued after the meeting and will expire at the 1997 Annual
Meeting of Stockholders. The terms of Messrs. Timothy J. Buchanan and Steven
L. Vick as Directors of the Company continued after the meeting and will
expire at the 1998 Annual Meeting of Stockholders.
The following proposals were approved at the Company's Annual Meeting:
Affirmative Negative Votes
Votes Votes Withheld
1. Ratify the appointment of
Ernst & Young, LLP as
independent auditors for
the fiscal year ending
December 31, 1996. 4,470,506 300 0
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
See Index to Exhibits
B. Report on Form 8-K
During the second quarter of 1996, the Company filed the following
reports on Form 8-K:
(i) Current Report on Form 8-K/A dated March 26, 1996 (filed June 10,
1996) reporting information required to be reported under Item
7(a) Financial statements, Pro Forma Financial Information and
Exhibits. The following financial statements of Sterling
Franchise Acquisition Group were filed:
</PAGE>
Report of Independent Auditors
Combined Balance Sheets at December 31, 1994 and 1995
Combined Statements of Operations for the years ended December 31,
1994 and 1995
Combined Statements of Members' Equity at December 31, 1994 and 1995
Combined Statements of Cash Flows for the years ended December 31,
1994 and 1995
Notes to combined Financial Statements
The following Sterling House Corporation pro forma financial information was
filed:
Pro Forma Consolidated Balance Sheet at December 31, 1995
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995
Notes to Pro Forma Consolidated Financial Statements
(ii) Current Report on Form 8-K dated May 23, 1996 (filed June 10,
1996), reporting the Company sold at par $35.0 million of 6.75%
convertible subordinated debentures due June 30, 2006.
</PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated August 14, 1996
STERLING HOUSE CORPORATION
(Registrant)
/s/Timothy J. Buchanan
________________________
Timothy J. Buchanan
Chief Executive Officer
/s/R. Gail Knott
_______________________
R. Gail Knott
Chief Financial Officer
</PAGE>
STERLING HOUSE CORPORATION
INDEX TO EXHIBITS
Exhibit Number Description
_____________________________________________________________________________
10.1 Franchise Agreement, dated July 16, 1996, by and between Sterling
House Corporation and Colorado Springs Assisted Living, L.L.C.
10.2 Form Amendment to Lease, dated July 16, 1996, by and between Sterling
House Corporation and Colorado Springs Assisted Living, L.L.C.
10.3 Form Amendment to Lease, by and between Assisted Living Properties,
Inc. And Meditrust of Kansas, Inc.
10.4 Form Amendment to Lease, by and between Sterling House Corporation
and Kansas LTC Corporation formerly known as Coronado Corporation
10.5 Schedule of executed Amendment to Lease, by and between Sterling House
Corporation and Kansas-LTC Corporation formerly known as Coronado
Corporation
10.6 Form of Lease Agreement, by and between Assisted Living Properties,
Inc. and Meditrust of Florida, Inc.
10.7 Schedule of executed Lease Agreements, by and between Assisted Living
Properties, Inc. and Meditrust of Florida, Inc.
10.8 Form of Second Amendment to Lease Agreement, by and between Sterling
House Corporation and Health Care REIT, Inc.
10.9 Schedule of executed Second Amendment to Lease Agreement, by and
between Sterling House Corporation and Health Care REIT, Inc.
10.10 Form of Amendment to Lease Agreement, by and between Sterling House
Corporation and Health Care REIT, Inc.
10.11 Schedule of executed Amendment of Lease Agreements, by and between
Sterling House Corporation and Health Care REIT, Inc.
27 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only
</PAGE>
EXHIBIT 10.1
STERLING HOUSE
FRANCHISE AGREEMENT
</PAGE>
Colorado Springs Assisted Living, L.L.C.
Franchisee
July 16, 1996
Date of Agreement<PAGE>
STERLING HOUSE
FRANCHISE AGREEMENT
TABLE OF CONTENTS
I. GRANT OF FRANCHISE 3
1.01 Grant of License 3
1.02 Retention of Certain Rights 4
1.03 Improvements to System 4
1.04 Agreement to Operate 4
II. DEVELOPMENT AND OPENING OFTHE RESIDENCE 5
2.01 Architectural Plans 5
2.02 Site Plan Approval: Construction 5
2.03 Residence Development 7
2.04 Residence Opening 8
2.05 Furnishings, Fixtures, Signs and Equipment 8
III. TRAINING AND GUIDANCE 8
3.01 Management Training 8
3.02 Supplemental Management 9
3.03 Residence Managers - Generally 9
3.04 Interference with Employment Relations 10
3.05 Guidance 10
3.06 Operations Manual 11
IV. MARKS 12
4.01 Ownership of Goodwill and Marks 12
4.02 Limitations on Franchisee's Use of Marks 12
4.03 Infringement 13
4.04 Discontinuance of Use of Marks 13
V. RELATIONSHIP OF THE PARTIES/INDEMNIFICATION 14
5.01 Independent Status 14
5.02 Additional Limitations on Franchisee's
Use of Marks 14
5.03 Limitations on Liability 14
5.04 Indemnification 15
VI. FEES 15
6.01 Initial Franchisee Fee 15
6.02 Royalty and Service Fee 15
6.03 Definition of Net Revenues 16
6.04 Interest on Late Payments 16
6.05 Application of Payments 17
6.06 Retention of Fees by the Company 17
</PAGE>
VII. CONFIDENTIAL INFORMATION 17
7.01 Limitation on Interest in Confidential
Information 18
7.02 Confidential Use of Confidential Information 18
7.03 Exception to Restrictions on Confidential
Information 18
7.04 Non-Competition Covenant 19
7.05 Improper Disclosure 20
VIII. RESIDENCE IMAGE AND OPERATING STANDARDS 21
8.01 Condition and Appearance of the Residence 21
8.02 Alterations to the Premises by Company 22
8.03 Alterations to the Premises by Franchisee 22
8.04 Service Providers, Distributors and Suppliers 22
8.05 Resident Offerings 23
8.06 Specifications, Standards and Procedures 23
8.07 Operation of the Residence 24
8.08 Compliance with Laws and Good Business Practices 24
8.09 Employees 25
8.10 Insurance 25
IX. MARKETING 28
9.01 By Company 28
9.02 By Franchisee 30
IX. ACCOUNTING, REPORTS, AND FINANCIAL STATEMENTS 30
XI. ANNUAL REVIEWS, INSPECTIONS, AND AUDITS 31
11.01 Annual Review 31
11.02 Company's Right to Inspect the Residence 31
11.03 Company's Right to Audit 32
XII. TRANSFER 33
12.01 By Company 33
12.02 Franchisee May Not Transfer Without Approval
of Company 33
12.03 Definition of "Transfer" 33
12.04 Conditions for Approval of Transfer 34
12.05 Excepted Transfers 35
12.06 Death or Disability of Franchisee 35
12.07 Effect of Consent to Transfer 36
12.08 Company's Right of First Refusal 36
12.09 Public or Private Offerings 37
XIII. RENEWAL OF FRANCHISE 38
13.01 Franchisee's Right to Renew 38
13.02 Renewal Agreement/Releases 38
</PAGE>
XIV. TERMINATION OF AGREEMENT BY FRANCHISEE OR
CESSATION OF RESIDENCE OPERATION 39
14.01 Termination for Good Cause 39
14.02 Economic Out Provision 40
XV. TERMINATION OF THE FRANCHISE 40
15.01 Grounds of Termination 40
15.02 Efforts to Resolve Termination Disputes
Other Than by Termination 43
XVI. RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISEE
UPON TERMINATION OR EXPIRATION OF THE FRANCHISE 43
16.01 Payment of Amounts Owned to Company 43
16.02 Marks 43
16.03 Modification of Residence Design and Decor 45
16.04 Cessation of Use of Confidential Information 45
16.05 Company has Right to Purchase the Residence 45
16.06 Continuing Obligations 47
XVII. TEMPORARY DE-IDENTIFICATION OF THE RESIDENCE 47
XVIII. CASUALTY LOSS OR CONDEMNATION 48
18.01 Casualty Loss 48
18.02 Condemnation Proceedings 49
XIX. ENFORCEMENT 50
19.01 Severability and Substitution of Valid
Provisions 50
19.02 Waiver of Obligations 51
19.03 Limitations on Liability 52
19.04 Specific Performance/Injunctive Relief 52
19.05 Rights of Parties are Cumulative 52
19.06 Governing Law/Consent to Jurisdiction 53
19.07 Binding Effect/Modification 53
19.08 Construction 53
19.09 Definitions 53
19.10 Counterparts 54
19.11 Consent 54
XX. NOTICES AND PAYMENTS 55
SCHEDULE "1" A-1
EXHIBIT "A" A-3
EXHIBIT "B" B-1
EXHIBIT "C" C-1
FRANCHISE AGREEMENT
</PAGE>
NOW, on this 6th day of July, 1996, Agreement is made,
BY AND BETWEEN STERLING HOUSE CORPORATION
a Kansas corporation
hereinafter referred to as
"Company"
AND Colorado Springs Assisted Living, L.L.C.
hereinafter referred to as
"Franchisee"
WITNESSETH:
WHEREAS, Company owns certain confidential information relating to, and has
designed, instituted, developed and promoted a unique assisted living
residential concept for which substantial goodwill has been created. Such
facilities are intended to provide frail elderly with privacy and
companionship in a comfortable, moderately-priced, non-institutional living
environment, are operated under the trade name STERLING HOUSE, and are
operated with uniform formats, systems, methods, specifications, standards,
procedures and trade dress (hereinafter referred to as the "System"), all
of which may be improved, further developed, or otherwise modified by
Company from time to time. Company uses, promotes, and licenses the
proprietary service mark STERLING HOUSE (and associated designs) and other
trademarks, service marks, logos, and commercial symbols in connection
therewith (hereinafter referred to as the "Marks"); and
WHEREAS, Company grants to persons to meet Company's qualifications and are
willing to undertake the requisite investment and effort to establish and
develop STERLING HOUSE assisted living facilities (hereinafter referred to
as "Residence" or "Residences"), franchises to operate Residences
utilizing the System and the Marks; and WHEREAS, Franchisee acknowledges
that he has read this Agreement and Company's Uniform Franchise Offering
Circular and that Franchisee understands and accepts the terms, conditions
and covenants contained herein as being reasonably necessary to maintain
</PAGE>
Company's high standards of quality and service and the uniformity of those
standards at all Residences in order to protect and preserve the goodwill
of the Marks; and
WHEREAS, Franchisee acknowledges that other franchise agreements have
been or may be granted by Company at different times and in different
situations and further acknowledges that the terms and conditions of such
agreements may vary from those contained in this Agreement; and
WHEREAS, Franchisee acknowledges that he has conducted an independent
investigation of the business venture contemplated by this Agreement and
recognizes that, like any other business, it involves business risks and
the success of the venture is largely dependent upon the business abilities
of Franchisee; and
WHEREAS, Company expressly disclaims the making of, and Franchisee
acknowledges that it has not received or relied upon, any guaranty, express
or implied, as to the revenues, profits, or success of the business venture
contemplated by this Agreement; and
WHEREAS, Franchisee acknowledges that he has not received or relied on
any representations about the franchise granted herein by Company, or its
officers, directors, employees, or agents, that are contrary to the
statements made in Company's Uniform Franchise Offering Circular or to the
terms herein and that in all of their dealings with Franchisee, the
officers, directors, employees, and agents of the Company act only in a
representative capacity and not in an individual capacity; and
WHEREAS, Franchisee further acknowledges that this Agreement, and all
business dealings between Franchisee and such individuals as a result of
this Agreement, are solely between Franchisee and Company; and
WHEREAS, Franchisee further represents to the Company, as an inducement to
its execution of this Agreement, that Franchisee has made no
misrepresentations in obtaining the franchise grated herein.
WHEREAS, Franchisee further represents to the Company, as an inducement to
its execution of this Agreement, that Franchisee has made no
misrepresentations in obtaining the franchise granted herein.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
</PAGE>
I.
GRANT OF FRANCHISE
1.01 Grant of License. Franchisee has applied for a franchise to own and
operate one (1) Residence to be located at/in the southwest corner of
Lexington and Briargate, Colorado Springs, Colorado (the actual physical
location of said Residence wherever situated hereinafter referred to as the
"Premises") and such application has been approved by Company in reliance
upon all of the representations made herein. Subject to the provisions of
this Agreement, Company hereby grants to Franchisee, subject to all of the
terms, provisions, and conditions contained herein, a non-exclusive
franchise (the "Franchise") to operate a Residence solely at the Premises,
and to use the System and Marks in the operation thereof, for a term of
fifteen (15) years commencing on the opening of the Residence unless sooner
terminated, as provided in ARTICLES XIV and XV, herein. Termination or
expiration of this Agreement shall constitute a termination or expiration
of the Franchise.
Provided, Franchisee is in substantial compliance with this Agreement,
Company shall not operate or grant a franchise for the operation of another
Residence within a two and one-half (2.5) mile radius of the above Premises
(hereinafter referred to as "Exclusive Area") nor, without first offering
the opportunity to develop same to Franchisee in a manner comparable to
that provided to
Company in ARTICLE XII of this Agreement, will Company itself operate or
grant a franchise for the operation of any other congregate living facility
primarily designed for rental to the elderly.
1.02 Retention of Certain Rights. Notwithstanding anything to the
contrary, Company retains, for itself and its affiliates, the right in its
sole discretion to:
A) subject only to the territorial rights granted to Franchisee by this
Agreement, itself either directly or through the actions of its affiliates
operate Residences at such locations as Company, in its sole discretion,
deems appropriate;
B) to utilize the System, or any portions thereof, in the operation of
other assisted living facilities, nursing homes, residential care
facilities, and other forms of congregate housing wherever located and
operated by whomsoever, as determined by Company in its sole discretion;
and
C) subject only to the territorial rights granted to Franchisee by this
Agreement, grant other franchises for licensed Residences at such locations
as Company, in its sole discretion, deems appropriate.
1.03 Improvements to System. Notwithstanding anything herein to the
contrary, any and all improvements to the System developed by Franchisee
(including any and all Plans), Company or other franchisees, shall be and
</PAGE>
become the sole and absolute property of Company, and Company may
incorporate the same into the System and shall have the sole and exclusive
right to copyright, register and protect such improvements in Company's own
name to the exclusion of Franchisee. Franchisee's rights and obligations
toward the use of such improvements shall be limited to its rights and
obligations regarding Confidential Information as provided for in ARTICLE
VII, herein.
1.04 Agreement to Operate. Franchisee agrees that it will at all times
faithfully, honestly and diligently perform its obligations hereunder, that
it will continuously exert its best efforts to promote and enhance the
business of the Residence, and that Franchisee will not engage in the
operation of any same or similar business or activity that may conflict
with its obligations hereunder.
II.
DEVELOPMENT AND OPENING OF THE RESIDENCE
2.01 Architectural Plans. Company shall furnish its copyrighted plans,
specifications and drawings, including, without limitation, architectural,
mechanical, electrical, structural, civil engineering, and landscape, for a
prototype Residence reflecting Company's requirements for its design,
materials, layout, equipment, fixtures, furniture, furnishings, signage and
decoration (the "Plans").
The Plans and all modifications thereof, additions and/or deletions thereto
are and shall remain the proprietary property of the Company regardless of
the use of the Plans by the Franchisee or Franchisee's agents.
2.02 Site Plan Approval: Construction. Franchisee shall not commit to
purchase or lease any real property, and Franchisee shall not commence any
construction thereon, unless and until the Company has specifically
accepted in writing the site location of the Residence proposed by
Franchisee and the site plan and other plans and specifications in
accordance with which such Residence is to be constructed and equipped.
Before commencing any construction of the Residence, Franchisee, at its
expense, shall comply, to Company's satisfaction, with all of the following
requirements:
A) Franchisee shall employ, subject to Company's approval, a qualified
architect, design firm or engineer to provide the necessary completed
working drawings. Franchisee shall submit to Company a statement
identifying and describing the qualifications of the architect, design firm
or engineer, as the case may be, accompanied by such written assurances as
Company may reasonably require whereby the architect, design firm and/or
engineer acknowledge and agree that the Plans are and shall be the sole
and exclusive property of Company and that no claim of ownership or other
beneficial interest, direct or indirect, shall accrue to such person or
firms by virtue of any services that may be rendered with regard to the
Plans. It shall be the sole obligation of Franchisee to engage such
architect to supplement and modify Company's Plans to the extent necessary
</PAGE>
to comply with the physical terrain and location of the Premises and all
applicable ordinances, building codes, permit requirements, lease
requirements and restrictions and market considerations; provided, all such
supplements and modifications are hereby deemed incorporated into the Plans
and therefore, are proprietary property of the Company;
B) At least sixty (60) days prior to the commencement of construction,
Franchisee shall submit to Company the adaptation of Company's Plans to
Franchisee's location and to local and state laws, regulations and
ordinances for Company's approval. (It being understood and agreed that
such review and approval by Company shall not constitute any warranty
whatsoever, express or implied, as to the suitability, habitability, or
otherwise of the Plans.) The Plans shall not thereafter be changed or
modified without the prior written consent of Company;
C) Franchisee shall employ, subject to Company's approval, a qualified
general contractor to supervise construction of the Residence and
completion of all improvements, and Franchisee shall submit to Company a state-
ment identifying the general contractor and describing the general
contractor's qualifications and financial responsibility.
D) Franchisee shall obtain all permits and certifications required for
lawful construction and operation of the Residence including, without
limitation, zoning, access, sign, and fire requirements and shall certify
in writing to Company, that all such permits and certifications have been
obtained; and
E) Franchisee shall obtain adequate financing for construction and
furnishing of the Residence, the terms and conditions of the financing to
be evidenced as Company may require from time to time.
Franchisee shall cause all construction and equipping of the Residence
licensed hereunder to be done in strict compliance with the Plans, and no
deviations therefrom shall be made by Franchisee or its contractor(s)
without the express written approval of the Company. The Company shall
have the right to supervise and to inspect all construction to insure its
compliance with approved plans and specifications. In this regard, during
the course of construction, Franchisee shall, and shall cause its
architect, engineer, contractors and subcontractors to, cooperate fully
with Company for the purpose of permitting Company to inspect the Premises
and construction of the Residence in order to determine whether
construction is proceeding in accordance with Company's standards and
specifications and the approved Plans. Franchisee acknowledges that
Company's exercise of its rights to approve the Plans and to inspect the
construction of the Residence shall be solely for the purpose of assuring
compliance with the terms and conditions of this Agreement, and Company
shall have no liability or obligation with respect to the construction of
the Residence. After completion of construction, Franchisee shall not
alter, add to, eliminate or modify the interior or exterior of such
Residence or any equipment, furnishings or fixtures therein without the
prior approval of the Company.
2.03 Residence Development. Franchisee agrees at its expense to do or
cause to be done the following within three hundred sixty-five (365) days
</PAGE>
after the date of this Agreement, each item to be accomplished by no later
than the respective deadlines set forth in Schedule "1" of this
Agreement:A) Secure a suitable site for the Residence in accordance with
the provisions of Section 2.01;
B) Secure all financing required to fully develop the Residence;
C) Obtain all required building, utility, sign, health, sanitation,
business permits and residential care licenses, and any other required
permits and licenses and commence construction;
D) Construct the Residence in compliance with the Plans;
E) Purchase and install all required fixtures, equipment, furniture,
furnishings, supplies, signs, and other items necessary for completion and
opening of the Residence as specified in the Plans and the Operations
Manual;
F) Commence initial marketing activities as required by the Operations
Manual;
G) The Director and the staff successfully complete all training; and
H) Open the Residence for business in accordance with the provisions of
Section 1.04.
In the event Franchisee fails to do or cause to be done any of the
above within the time periods specified above, Franchisee shall pay to
Company weekly, as liquidated damages, the amount of One Hundred Dollars
($100) per day (i) until such time as Franchisee is in compliance with this
Section 2.03 or (ii) until such time as Company shall notify Franchisee
that Company has elected to exercise its rights to terminate this Agreement
in accordance with the terms and conditions of ARTICLE XV. Franchisee and
Company each acknowledge and agree that time is of the essence.
2.04 Residence Opening. Franchisee shall notify Company not less
than sixty (60) days prior to the date when Franchisee reasonably believes
that construction of the Residence will be completed. Further, Franchisee
shall immediately notify Company when construction of the Facility has been
completed. Issuance of an operating license, occupancy permit, or
comparable governmental authorization shall presumptively evidence that
construction has been completed. Company shall inspect the Residence
within thirty (30) days of receipt of Franchisee's notice that the
construction thereof has been completed. The operation of the Residence
and the use of the System may only commence if and when Company gives
Franchisee written notification that Franchisee has satisfactorily complied
with the provisions of this ARTICLE II, which requirements include, but are
not limited to, completed construction of the Residence, installation of
all required signs, furnishings, furniture, equipment, supplies and other
prescribed items, obtaining all requisite licenses, employment of the
necessary qualified staff, and payment of all amounts due to Company and
its affiliates.
2.05 Furnishings, Fixtures, Signs and Equipment. Franchisee agrees to
use in the development and operation of the Residence only those brands,
types, or models of equipment, fixtures, furniture, furnishings and signs,
which Company has approved as meeting its specifications and standards for
</PAGE>
quality, design, appearance, warranties, and function. All such items, if
any, designated by Company from time to time, shall be purchased only from
vendors, contractors, and suppliers approved by Company.
III.
TRAINING AND GUIDANCE
3.01 Management Training. Company shall furnish to Franchisee or its
Director, as the case may be, such training programs, conferences and
seminars as Company deems appropriate from time to time. Provided, the
training may be furnished at one (1) or more locations, including Company's
principal offices, another Residence (including one [1] operated by
Franchisee), and/or the Residence licensed hereunder or any other location
which Company may select in good faith. Franchisee or, if other than
Franchisee, the individual/company designated by Franchisee for being
responsible for the on site day-to-day operation of the Residence (said
person employed by whomsoever hereinafter referred to as "Director") must
successfully complete Company's training program to the satisfaction of
Company and devote fully his/her time and energy to the operation of the
Residence. Franchisee or the Director, as the case may be, must be
employed at least sixty (60) days prior to the proposed opening of the
Residence and successfully undergo training as prescribed by the Company at
least forty-five (45) days prior to the proposed opening of the Residence.
Subsequently hired Directors must also successfully complete Company's
training program and the cost of training all subsequently hired Directors
shall be borned solely by Franchisee.
3.02 Supplemental Management. If it is reasonably necessary, Company
may furnish personnel , who may be provided in Company's discretion on or
off-site by teleconference, written communication or otherwise, for a
period not exceeding forty (40) man-hours to consult with the Director and
the initial staff and assist with the supervision of the operation of the
Residence until the Residence 's staff 's initial training is completed.
All supervision of the operation of the Residence during any such period
shall be for and on behalf of Franchisee, provided that Company shall only
have a duty to utilize its best efforts and shall not be liable to
Franchisee or its owners for any debts, losses, or obligations incurred by
the Residence, or to any creditor of Franchisee for any products,
materials, equipment, fixtures, furnishings, supplies, or services
purchased for the benefit of the Residence during such period.
3.03 Residence Managers - Generally. No later than ninety (90) days
prior to the scheduled opening of the franchised Residence, Franchisee
shall nominate an individual who shall, as Director, be responsible for the
day-to-day operations of the Residence. Each proposed Director for
Franchisee's business must meet the criteria periodically established by
Company as then set forth in the Operations Manual and be approved by
Company, which approval shall be at the sole discretion of Company.
Franchisee shall furnish Company with proper background information
</PAGE>
concerning each proposed Director in order that Company may determine
whether she/he is qualified to act in such capacity along with a copy of
any and all employment agreements, joint venture, stock buy/sell, or other
agreements relating to Director's equity interest in (if any), and
employment by, Franchisee. Each Director shall devote her/his full time
and vocation to and have direct responsibility for, all Residence
operations on a day-to-day basis. If Company does not approve a proposed
Director, then another person or persons shall be nominated by Franchisee
until such time as a person acceptable to Company is found. Any change in
the Director shall also require the approval of Company and any successor
Director must satisfy all of the requirements of this provision. Further,
Franchisee shall replace any Director who Company shall require Franchisee
to replace if and when Company is seriously dissatisfied with the
performance of such Director. Non-compliance by Franchisee with this
Section 3.03 shall be deemed to be a material violation of this Agreement.
In addition to the rights established hereunder, including those in ARTICLE
XI, herein, Company and its representatives shall have the right to
communicate directly with Franchisee's Directors concerning all matters of
an operational nature. Company may require Franchisee and/or previously
trained and experienced Directors to attend periodic refresher courses at
locations designated by Company. Franchisee shall be responsible for all
travel and living expenses which Franchisee and/or its Directors incur in
connection with initial training and any subsequent refresher training programs.
3.04 Interference with Employment Relations. During the term of this
Agreement, neither Company nor Franchisee shall employ, directly or
indirectly, any person serving in a managerial position who is at the time
or was at any time during the prior six (6) months employed by the other
party, its subsidiaries, or by any franchise holder within Company's
franchise system. Provided, this Section shall not be violated if, at the
time Company or Franchisee employ or seek to employ such person, the then
current or former employer, as the case may be, has given written consent.
The parties hereto do acknowledge and agree that in the event this Section
is violated, that notwithstanding Section 15.01, the former employer shall
be entitled to liquidated damages in the amount of Five Thousand Dollars
($5,000) plus reimbursement of all costs and attorney fees incurred. For
purposes of this Section 3.04, "managerial position" includes all employees
at the pay grade of "assistant director" and above.
3.05 Guidance. Company may advise Franchisee from time to time of
operating problems of the Residence disclosed by reports submitted to or
inspections made by Company or by independent persons engaged by Company
and may furnish to Franchisee guidance (which guidance shall be to the
extent of Company's sole discretion) in connection with:
A) Methods, standards, and operating procedures to be utilized at the
Residences;
B) Purchasing approved equipment, furnishings, fixtures, furniture,
signs, products, and supplies;
C) Advertising and marketing programs;
D) Employee training; and
E) Administrative, bookkeeping, accounting, and general operating and
management procedures.
</PAGE>
Such advice and guidance shall be at the sole discretion of Company and
may be furnished in the form of the Company's confidential operations
manual (hereinafter referred to as the "Operations Manual"), bulletins,
other written materials, and/or telephonic consultations or consultations
at the offices of Company or at the Residence. If reasonably requested by
Franchisee, Company may, on an "as available basis", furnish additional
guidance and assistance.
3.06 Operations Manual. Upon Company's receipt of Franchisee's
notification of the construction status of the Residence pursuant to
Section 2.04, Company will then transmit and loan to Franchisee for use
during the term of the Franchisee (1) copy of the Operations Manual. The
Operations Manual shall contain mandatory and suggested policy statements,
specifications, standards, and operating procedures prescribed from time to
time by Company for the Residence and information relative to other
obligations of the Franchisee hereunder and in the operation of the
Residence. The Operations Manual may be modified from time to time to
reflect changes in the image, decor, design, format, appearance, policies,
methods, standards, specifications, operating procedures, and services
approved and/or required for the Residences. Franchisee shall keep her/his
copy of the Operations Manual current, making only the amendments and
deletions to the Operations Manual as Company may direct. In the event of
a dispute relative to the contents of the Operations Manual, the master copy
maintained by the Company at its principal office shall be controlling.
Franchisee shall not at any time without the written consent
of Company, copy, duplicate, record or otherwise reproduce any part of the
Operations Manual, nor otherwise make the same available to any
unauthorized person. Franchisee shall maintain the Operations Manual
in a safe and secure location and shall immediately report the theft or
loss of Operations Manual, or any portion thereof, to Company.
IV.
MARKS
4.01 Ownership of Goodwill and Marks. Franchisee acknowledges that
Franchisee's right to use the Marks is derived solely from this Agreement
and is limited to the conduct of business of Franchisee pursuant to and in
compliance with this Agreement and all applicable standards, pecifications,
and operating procedures prescribed by Company from time to time during the
term of this Agreement. Any unauthorized use of the Marks by Franchisee
shall constitute a breach of this Agreement and an infringement of the
rights of Company in and to the Marks. Franchisee acknowledges and agrees
that all usage of the Marks by Franchisee and any goodwill established
thereby shall inure to the exclusive benefit of Company and that this
Agreement does not confer any goodwill or other interests in the Marks upon
Franchisee other than the right to operate a Residence at the Premises in
compliance with this Agreement. All provisions of this Agreement
applicable to the Marks shall apply to any additional proprietary, trade
and service marks, and commercial symbols hereafter authorized for use by
and licensed to Franchisee by Company.
</PAGE>
4.02 Limitations on Franchisee's Use of Marks. Franchisee shall use
the Marks as the sole identification of the Residence, provided that
Franchisee shall identify itself as the independent owner thereof in the
manner prescribed by Company. Franchisee shall not use any Mark as part of
any corporate or trade name or with any prefix, suffix, or other modifying
words, terms, designs, or symbols (other than logos licensed to Franchisee
hereunder), or in any modified form, nor may Franchisee use any Mark in
connection with the performance or sale of any unauthorized services or
products or in any other manner not expressly authorized in writing by
Company. Franchisee agrees to prominently display the Marks at the
Residence on all signage, displays, and/or materials as may be designated
by Company from time to time, and in connection with any and all
advertising and marketing materials, as may be designated by Company. All
Marks shall only be displayed and/or utilized in the manner prescribed by
Company. Franchisee agrees to give all notices of trade and service mark
registrations as Company specifies and to obtain all fictitious or assumed
name registrations as may be required under applicable law.
4.03 Infringement. Franchisee shall immediately notify Company in
writing of any apparent infringement of, or challenge to Franchisee's use
of any Mark, or claim by any person of any rights in any Mark or similar
trade name, trademark, or service mark of which Franchisee becomes aware.
Franchisee shall not communicate with any person other than Company, its
counsel, or Franchisee's counsel in connection with any infringement,
challenge, or claim. Company shall have sole discretion to take such
action as it deems appropriate and the right to exclusively control any
litigation, U.S. Patent and Trademark Office proceeding, or other
administrative proceeding arising out of any infringement, challenge, or
claim or otherwise relating to any Mark of the System. Franchisee shall
make no claim against Company and shall hold Company harmless from any and
all direct or indirect, costs, damages, demands, expenses, losses or
liabilities suffered by Franchisee as a result of any modification of the
System necessitated by any claim or challenge relating to the Marks or the
System, including the costs of altering the appearance, design, or formate
of the Residence, or any reduction in sales revenues or profits, or
increased capital expenditures or operating costs resulting from such
modification and occasioned by any litigation arising out of any claim or
challenge relating to Franchisee's use of any Mark or right to use the
System, or any part thereof. Franchisee agrees to and shall execute any
and all instruments and documents, render such assistance and do such acts
and things as may, in the opinion of Company's counsel, be reasonably
necessary or advisable to protect and maintain the interests of Company in
any litigation, U.S. Patent and Trademark Office proceeding, other
administrative proceeding, or to otherwise protect and maintain the
interests of Company in the Marks and the System.
4.04 Discontinuance of Use of Marks. If it becomes advisable at any
time in Company's sole discretion for Company and/or Franchisee to modify
or discontinue use of any Mark, and/or to use one (1) or more additional or
substitute trade or service marks, Franchisee agrees to and shall comply
with Company's direction to modify or otherwise discontinue the use of
such Mark within a reasonable time after notice by Company.
</PAGE>
V.
RELATIONSHIP OF THE PARTIES/INDEMNIFICATION
5.01 Independent Status. It is understood and agreed by the parties
hereto that this Agreement does not create a fiduciary relationship between
them, that Company and Franchisee shall be independent contractors, and
that nothing in this Agreement is intended to make either party a general
or special agent, joint venturer, partner, or employee of the other for any
purpose. Franchisee, consistent with the requirements of Section 4.02,
shall conspicuously identify himself in all dealings with
tenants/residents, suppliers, public officials, and others as the owner of
the Residence under a franchise with Company and shall place such other
notices of independent ownership on such forms, documents, business cards,
comment cards, stationery, advertising, and other materials as Company may
require from time to time.
5.02 Additional Limitations on Franchisee's Use of Marks. Company has
not authorized or empowered Franchisee to use the Marks except as provided
by this Agreement and Franchisee shall not employ any of the Marks in
signing any contract, check, purchase agreement, negotiable instrument,
legal obligation, application for any license or permit, or in a manner
that may result in liability of Company for any indebtedness or obligation of
Franchisee. Except as expressly authorized by this Agreement, neither
Company nor Franchisee shall make any express or implied agreements,
warranties, guarantees or representations, or incur any debt, in the name
of or on behalf of the other or represent that their relationship is other
than franchisor and franchisee, respectively.
5.03 Limitations on Liability. Neither Company or Franchisee shall be
obligated by or have any liability under any agreements or for any
representations made by the other that are not expressly authorized
hereunder, nor shall Company be obligated for any damages to any person or
property directly or indirectly arising out of the operation of the
Residence, or Franchisee's business authorized by or conducted pursuant to
the Franchise, whether caused by Franchisee's negligent or willful action
or failure to act to the relative extent such damages do not arise out of
Company's negligence, wrongful act or improper failure to act. Company
shall have no liability for any sales, use, occupation, excise, gross
receipts, income, property or other taxes, whether levied upon Franchisee,
the Residence, or Franchisee's property, or upon Company, in connection
with the business conducted by Franchisee or payments to Company remitted
pursuant to this Agreement.
5.04 Indemnification. Franchisee shall indemnify and hold harmless
Company, Company's affiliates, and their shareholders, directors, officers,
employees, agents, and assignees against any liability for any claims,
including those specified in Section 5.03, herein, arising out of the
operation of the Residence. For purposes of this indemnification, "claims"
shall mean and include all obligations, actual and consequential damages,
taxes, and costs reasonably incurred by Company in the defense of any
claim against Company or in any action in which Company is named as a
party, including without limitation reasonable accountants', attorneys' and
</PAGE>
expert witness fees, costs of investigation and proof of facts, court
costs, and other litigation expenses, including travel and living expenses.
Company shall have the right to defend any claim asserted against it or the
persons delineated herein. Provided, Company shall use its best efforts to
cooperate with Franchisee in any litigation or judicial or administrative
proceeding to avoid duplication of time, effort or expenditure to the
greatest extent possible without compromising Company's interest in such
matter. This indemnity shall continue in full force and effect subsequent
to and notwithstanding the expiration or earlier termination of this
Agreement.
VI.
FEES
6.01 Initial Franchisee Fee. Contemporaneously herewith, Franchisee shall
pay to the Company an initial franchisee fee for the Residence licensed
under this Agreement (hereinafter referred to as "Initial Franchise Fee")
in the amount of Twenty-Five Thousand Dollars ($25,000).
6.02 Royalty and Service Fee. Franchisee shall pay to Company during
the terms of this Agreement on or before the twentieth (20th) day of each
calendar month a royalty and service fee in the amount of three percent
(3%) of the "Net Revenues" derived from the operation of the
Residence licensed under this Agreement for the proceeding calendar month
(hereinafter referred to as "Continuing Royalties").
6.03 Definition of Net Revenues. As used in this Agreement, the term "Net
Revenues" shall mean the total aggregate of all monies and receipts received
by Franchisee and derived from (i) all services performed and the rental of
rooms/apartments by tenants/residents residing at the Residence licensed
hereunder, (ii) entrance, and community, other fees charged/assessed to any
resident/tenant, (iii) vending and laundry machine income, (iv) all proceeds
received by Franchisee from the payment of claims made under any policy of
business interruption insurance which provides for payment of lost royalties,
and (v) all other business whatsoever conducted or transacted at or from the
Premises, and whether the Net Revenues are evidenced by cash, credit, check,
services, property or other means of exchange. Provided further, Net
Revenues shall also be deemed to mean the total aggregate of all monies and
receipts received by Franchisee from any other business operated upon or from
the Premises. However, there shall be excluded from Net Revenues (i) all
sales and use taxes (if any) imposed by governmental authorities directly on
rental or sales and actually collected from residents, provided such taxes
are added to the selling price and are, in fact, paid by Franchisee to the
appropriate governmental authority and (ii) refundable deposits to the extent
such funds are actually refunded to resident/tenant (in which event, the
refund[s] shall be deducted from Net Revenues in the month the refund is
actually remitted). Net Revenues shall be deemed to be realized by
Franchisee at the earlier of the time of the sale or delivery of the
</PAGE>
services, or the time when Franchisee actually receives payment, whether
partial or full, therefor. Net Revenues consisting of property or services
shall be valued at their fair market value at the time such property or
services were received by or for the account of Franchisee.
6.04 Interest on Late Payments. All Continuing Royalties and marketing
contributions due hereunder, amounts due for purchases by Franchisee from
Company or its affiliates, and other amounts which Franchisee owes to Company
or its affiliates shall be paid punctually, without the necessity for invoice
by Company, and shall bear interest after the due date at the highest
applicable legal rate for open account business credit, not to exceed two
percent (2%) per month. Franchisee acknowledges that this Section 6.04 shall
not constitute Company's agreement to accept any payments after same are due
or a commitment by Company to extend credit to, or otherwise finance
Franchisee's operation of the Residence licensed under this Agreement.
Further, Franchisee acknowledges that its failure to pay all amounts when due
shall constitute grounds for termination of this Agreement, as provided in
ARTICLE XV, herein, notwithstanding the provisions of this Section 6.04.
Provided, Franchisee may deposit with the escrow department of a federally-
insured bank any amount, the payment of which is in good faith disputed by
Franchisee, upon giving written notice to Company of Franchisee's actions
within three (3) days thereafter, and upon Franchisee filing an action in
court of property jurisdiction to determine the amount properly due and owing
to Company. If Company prevails in any proceeding, then Franchisee shall
owe interest on the disputed amount from the original due date in compliance
with the provisions of this Section 6.04.
6.05 Application of Payments. Notwithstanding any designation by
Franchisee, Company shall have sole discretion to apply any payments by
Franchisee to any past due indebtedness of Franchisee for Continuing
Royalties or marketing contributions due hereunder, purchases from Company or
its affiliates, interest or any other indebtedness.
6.06 Retention of Fees by the Company. Franchisee acknowledges and agrees
that in the event of the termination of the Franchise granted hereby for any
reason whatsoever, the Company shall be entitled to retain for its own
account any and all Initial Franchise Fee and Continuing Royalty payments
previously remitted by Franchisee, and Franchisee agrees that such payments
shall be deemed fully earned by the Company as of the date of payment, and
whether the Residence licensed hereunder is ever opened for business by
Franchisee for any period of time in the Exclusive Area.
VII.
CONFIDENTIAL INFORMATION
Company possesses certain types of confidential information, including, but
not limited to, architectural plans, designs, and layouts, as well as the
methods, techniques, formats, specifications, procedures, information,
systems, and knowledge of and experience in the operation and franchising
of Residences (hereinafter referred to as "Confidential Information").
Company will disclose the Confidential Information to Franchisee when
rendering guidance and assistance to Franchisee under the terms of this
Agreement, including by way of example, furnishing the Operations Manual
and the Plans.
</PAGE>
7.01 Limitation on Interest in Confidential Information. Franchisee
acknowledges and agrees that, although Franchisee has the right to use
same, Franchisee shall not acquire any interest in the Confidential
Information, other than the right to utilize it in the operation of the
Residence at the Premises (and other Residences, if any, developed under
other agreements with Company) during the term of this Agreement, and that
the use or duplication of the Confidential Information in the operation of
any other business or commercial enterprises would constitute an unfair
method of competition.
7.02 Confidential Use of Confidential Information. Franchisee
acknowledges and agrees that the Confidential Information is proprietary,
may involve trade secrets of Company, and is disclosed to Franchisee
solely on the express condition that Franchisee agrees, and Franchisee does
hereby agree, that Franchisee:
A) Shall not use the Confidential Information in the operation of any
other business, commercial enterprise, or capacity (including any other
business or commercial enterprises engaged in providing housing and/or
care to the frail elderly);
B) Shall maintain the absolute confidentiality of the Confidential
Information during and after the term of this Agreement;
C) Shall not make any unauthorized copy, duplicate, record, or otherwise
reproduce all or any portion of the Confidential Information disclosed
by Company in written, electronic, other tangible or verbal form;
D) Shall never contest the validity of Company's exclusive ownership of
and rights to the System or the Confidential Information; and
E) Shall adopt and implement all reasonable procedures prescribed from
time to time by Company to prevent unauthorized use or disclosure of
the Confidential Information, including without limitation,
restrictions on disclosure thereof to employees, officers, and
directors of Franchisee and the use of non-disclosure and non-
competition clauses as prescribed by Company in any agreements with any
persons who may hereafter have access to the Confidential Information.
7.03 Exception to Restrictions on Confidential Information.
Notwithstanding anything to the contrary contained in this Agreement, the
restrictions on Franchisee's disclosure and use of the Confidential
Information shall not apply to the following:
A) Information, processes, or techniques which, in the opinion of Company,
are or become generally known and used in the frailer elderly housing
and/or care industry, other than through disclosure (whether deliberate
or inadvertent) by Franchisee;
B) Disclosure of the Confidential Information in judicial or
administrative proceedings to the extent that Franchisee is legally
compelled to disclose such information, provided Franchisee shall have
used its best efforts and shall have afforded Company the opportunity
to obtain an appropriate protective order, for other assurance
satisfactory to Company, of confidential treatment of the information
required to be so disclosed; and
C) Disclosure to Franchisee's employees to the extent necessary for the
proper operation of the Residence.
</PAGE>
7.04 Non-Competition Covenant. Franchisee acknowledges and agrees that
Company would be unable to protect the Confidential Information against
authorized use or disclosure and Company would also be unable to encourage
a free exchange of ideas and information among operators of Residences if
franchised owners of Residences were permitted to hold interests in any
competitive or similar businesses, as described herein. Franchisee also
acknowledges that Company has granted the franchise rights to Franchisee
herein set forth in part in consideration of, and in reliance upon,
Franchisee's agreement to deal exclusively with Company. Accordingly,
during the term of this Agreement and any extension thereof, as the case
may be, Franchisee, any shareholder, manager, member of partner (in the
event Franchisee is, respectively, a corporation, limited liability company
or partnership), or any member of the immediate family of Franchisee or of
any shareholder, manager, member or partner of Franchisee, shall not have
any interest as an owner, investor, partner, lender, director, officer,
manager, employee, consultant, representative, or agent, or in any other
capacity shall not directly or indirectly enter into the employ, or work in
concert with or serve as consultant for, any person, partnership,
corporation, limited liability company, association, organization or other
entity engaged in the operation of any other business or commercial
enterprise engaged in business, whether or not intended to be operated for
profit, of providing housing and/or care to senior adults, whether or not
they are frail elderly, including, but not limited to, the operation of any
home health care provider service, nursing home, congregate living
facility, personal care facility or continuing care retirement community
(hereinafter referred to as a "Competitive Business") (wherever situated
and operated by whomsoever) then open or under construction or under lease
or purchase commitment for future construction. Further, for a period of
three (3) years after the termination or non-renewal of this Agreement,
Franchisee, any shareholder, manager, member or partner (in the event
Franchisee is, respectively, a corporation, limited liability company or
partnership), or any member of the immediate family of Franchisee, or of
any shareholder, manager, member or partner of Franchisee, shall not have
any interest as an owner, investor, partner, lender, director, officer,
manager, employee, consultant, representative, or agent, or in any other
capacity shall not directly or indirectly enter into the employ, or work in
concert with or serve as consultant for, any person, partnership,
corporation, association, organization or other entity engaged in the
operation of any other business or commercial enterprise engaged in a
Competitive Business and which has in operation or is planning to open a
business or commercial enterprise within a radius of twenty-five (25) miles
from any Residence (operated wherever by whomsoever) then in operation,
under construction, or under lease or purchase commitment on the effective
date of termination or expiration. Provided, the ownership of a class of
securities listed on a stock exchange or traded on the over-the-counter
market that represents five percent (5%) or less of the number of shares of
such class of securities then issued and outstanding shall not constitute a
violation of this Section 7.04.
</PAGE>
7.05 Improper Disclosure. In the event Franchisee discovers that any of
its current or former officers, directors, partners, Directors,
shareholders, members, limited liability company managers, related parties
thereto or their employees, are violating, have violated, or are commencing
to violate the prohibitions on disclosure or reproduction of Confidential
Information provided for herein, Franchisee shall immediately notify
Company of such violation. Company shall seek such legal and equitable
relief, including seeking monetary damages, as it deems necessary in its
sole discretion. Any and all damages recovered by Company pursuant to any
such cause of action shall be the exclusive property of Company. In the
event it is determined that any of the inquiry or damages have been caused
by the willful or negligent behavior of Franchisee or due to the failure of
Franchisee to properly supervise the actions of the individual found to be
in violation of this Agreement, Company shall be reimbursed by Franchisee
for all costs and expenses, including attorneys' fees, that were incurred
by Company in pursuing the cause of action.
VIII.
RESIDENCE IMAGE AND
OPERATING STANDARDS
8.01 Condition and Appearance of the Residence. Franchisee shall:
A) Not use the Residence licensed under this Agreement or the Premises for
any purpose other than the operation of a STERLING HOUSE assisted living
facility in compliance with this Agreement;
B) Maintain the condition and appearance of the Residence licensed under
this Agreement and the Premises in accordance with the standards of Company
and consistent with the image of a Residence as an attractive, comfortable,
secure and non-institutional residential living environment for the frail
elderly;
C) Affect such maintenance of the Residence licensed under this Agreement
and the Premises as may be required by Company from time to time to
maintain the condition, appearance and efficient operation thereof,
including without limitation:
1) continuous and thorough cleaning and sanitation of the interior and
exterior of the Premises;
2) Continuous and workmanlike interior and exterior repair of the
Premises;
3) maintenance of all equipment at peak efficiency;
4) replacement of worn out or obsolete improvements, fixtures, furniture,
furnishings, equipment, and signs, with duly approved improvements or
replacements thereof;
5) periodic painting and redecorating; and
6) continuously maintain, repair, or replace (as needed) all life safety
systems and components thereof.
</PAGE>
D) Upgrade and/or remodel the Residence licensed under this Agreement (I)
to keep same in compliance with all applicable laws and regulations,
and (ii) provided Franchisee will have a reasonable time period
remaining under the term of this Agreement to amortize the costs of
such improvements at reasonable intervals determined by Company, to
reflect changes in the image, design, format, or operation of
Residences introduced by Company, and required of new franchisees; all
such upgrading and remodeling resulting from whatever reason to be
subject to approval by the Company of detailed plans and specifications
for all construction, repair, or refixturing in connection with such
upgrading or remodeling; and
E) Place or display at the Premises (interior and exterior) only such
signs, emblems, lettering, logos, and display and marketing materials that
are from time to time approved in writing by Company.
8.02 Alterations to the Premises by Company. In the event Franchisee
fails to maintain the condition and appearance of the Residence licensed
under this Agreement and Premises as herein required, Company may, upon not
less than ten (10) days written notice to Franchisee:
A) Arrange for the necessary cleaning or sanitation, repair, remodeling,
upgrading, painting, or decorating; and
B) Replace the necessary leasehold improvements, fixtures, equipment,
and signs. Franchisee shall pay the entire cost thereof as
additional Continuing Royalties on the due date for the next payment
of Continuing Royalties.
8.03 Alterations to the Premises by Franchisee. Franchisee shall not
make any material replacements of or alterations to the Premises,
improvements, layout, fixtures, furniture and furnishings, signs,
equipment, or appearance of the Residence licensed under this Agreement as
originally developed without the prior written approval by Company.
8.04 Service Providers, Distributors and Suppliers. The reputation and
goodwill of Residences is based upon, and can be maintained only by, the
rental of distinctive, high quality rental units, and the providing of
competent services in a residential environment that is perceived by the
residents to be comfortable, secure, moderately-priced and non-institutional.
Franchisee therefore shall conform the Residence to Company's specifications
and quality standards and shall only engage service providers and purchase
from distributors and suppliers approved by Company.
In approving service providers, distributors and suppliers for the
Residence licensed under this Agreement, Company may take into
consideration such factors as governmental licensing/permit requirements,
price and quality of services, products or supplies and reliability of the
proposed provider, distributor or supplier. Company may concentrate
contract/purchases with one (1) or more providers, distributors and/or
other suppliers to obtain the lowest prices and/or the best marketing
support and/or services for any group of Residences, whether franchised
and/or operated by Company. Further, approval of a provider, distributor
or supplier may be conditioned on requirements relating to the frequency of
delivery, standards of service, including prompt attention to complaints,
and concentration of purchases, as set forth above, and may be temporary,
pending a further evaluation by Company of such provider, distributor or
other supplier.
</PAGE>
If Franchisee proposes to retain, engage, or to purchase any services
or goods from a service provider, vendor, distributor, or other supplier who
has not been previously approved by Company, Franchisee shall first
notify Company and submit to Company such information, specifications, and
samples as Company requests. Company shall within a reasonable time
determine whether such proposed services or item meets its specifications
and quality standards and/or whether Company approves such service
provider, distributor or other supplier and shall then notify Franchisee
whether the Residence is authorized to engage, utilize, sell, or rent such
item and/or purchase from such distributor or other supplier.
8.05 Resident Offerings. Franchisee shall continuously offer all
facilities, accommodations, goods and services prescribed by Company. If
Franchisee desires to add or delete any of same, it must first obtain the
prior written approval of Company. Franchisee acknowledges that Company
requires prior approval to assure itself that such accommodations,
services, and items are of the type and quality consistent with the image
and format of the Residences. Franchisee agrees that it will not, without
the prior written approval of Company, offer any products or any services
that are not then authorized by Company for Residences.
8.06 Specifications, Standards and Procedures. Franchisee acknowledges
that each and every detail of the appearance, layout, decor, products,
materials, and supplies utilized, services offered, and operation of the
Residence is important to Company's and other franchisees' Residences.
Company shall endeavor to maintain the high standards of quality and
service at all Residences franchised or operated by Franchisee. To this
end, Franchisee shall cooperate with Company by maintaining these high
standards in the operation of the Residence licensed under this Agreement.
Company shall have the right to rely on responses of independent
persons/business engaged by Company therefor in evaluating Franchisee's
performance under this Agreement. Franchisee shall comply with all
mandatory specifications, standards and operating procedures of Company
including, but not limited to, those relating to:
A) Methods, standards, and operating procedures to be utilized at the
Residence licensed under this Agreement;
B) Appearance, cleanliness, sanitation, standards of service, and
operation of the Residence licensed under this Agreement;
C) Requests for approval of service providers, distributors and
suppliers;
D) Development and construction of the Residence licensed under this
Agreement;
and
E) Marketing, advertising and promotional programs.
Further, Franchisee agrees that all mandatory specifications, standards,
and operating procedures prescribed from time to time by Company in the
Operations Manual, or otherwise communicated to Franchisee in writing,
shall constitute provisions of this Agreement as if fully set forth herein.
Accordingly, all references herein to Franchisee's obligations under this
Agreement shall include all such mandatory specifications, standards, and
operating procedures.
</PAGE>
8.07 Operation of the Residence. Unless otherwise agreed upon by Company
and Franchisee, Franchisee agrees to operate the Residence for three
hundred sixty-five (365)days each calendar year, except such days as the
location is closed for acts of God, repairs and casualty loss or loss by
eminent domain, as provided for in ARTICLE XVIII, herein. Each day, the
Residence shall be appropriately staffed on a twenty-four (24) hour basis
as prescribed by Company in the Operations Manual and as required by
applicable governmental law and regulation.
8.08 Compliance with Laws and Good Business Practices. Franchisee shall
secure and maintain in force in its name all required licenses, permits,
and certificates relating to the operation of the Residence licensed under
this Agreement. Franchisee shall operate the Residence in full compliance
with all applicable laws, ordinances, and regulations, including, without
limitation, all governmental regulations relating to the operation of
residential care facilities, occupational hazards, health, and workers'
compensation insurance, unemployment insurance and the withholding and
payment of federal and state income taxes, social security taxes and sales
taxes. All marketing by Franchisee shall be completely factual, in good
taste as determined in the sole judgement of Company, and shall conform to
the highest standards of ethical advertising. Franchisee shall in all
dealings with its tenants/residents, service providers, suppliers, and the
public adhere to the highest standards of honesty, integrity, fair dealing,
and ethical conduct. Franchisee agrees to refrain from any business or
advertising practice which may be injurious to the business of Company and
the goodwill associated with the Marks and other Residences. Franchisee
shall notify Company in writing within five (5) days of the commencement
of any action, suit or proceeding, and of the issuance of any order, writ,
injunction, award or decree of any court, agency, or other governmental
instrumentality, which may adversely affect the operation or financial
condition of Franchisee or the Residence or of any notice of violation of
any law, ordinance, or regulation relating to the operation or marketing of
the Residence licensed under this Agreement.
8.09 Employees. Franchisee shall hire all employees of the Residence,
be exclusively responsible for the terms of their employment, their
compensation and, except as set forth in ARTICLE III, herein, for the
proper training of all employees in the operation of the Residence.
Franchisee shall require all employees to maintain a neat and clean
appearance and to conform to the standards of dress and grooming specified
by Company from time to time for all Residences.
8.10 Insurance. During the terms of this Agreement, Franchisee shall
maintain in full force under policies of insurance issued by carriers
approved by Company:
A) Comprehensive public and product liability insurance against claims for
bodily and personal injury, death, and property damage caused by or
occurring in conjunction with the operation of the Residence or
otherwise in conjunction with the conduct of business by Franchisee
pursuant to the Franchise;
B) Special Form property insurance on the Residence licensed under this
Agreement and its contents;
</PAGE>
C) Workers' compensation and employer's liability insurance, as may be
required by statute or rule of the state or locality in which the
Premises are located; and
D) Automobile liability insurance, where applicable;
E) Professional Liability protecting the Franchisee against claims for
medical malpractice related to acts or actions of employed nurses while
acting within the scope of their duties for the Franchisee.
Such insurance coverage shall be maintained with limits at least equal
to the following:
A) Comprehensive General Liability
General Aggregate $ 2,000,000
Products/Completed Operations $ 2,000,000
Personal & advertising Injury $ 1,000,000
Each Occurrence $ 1,000,000
Fire Damage Legal $ 50,000
Medical Expense $ 5,000
B) Special Form Property Insurance
C) Workers' Compensation
State Benefits
Statutory
Employers Liability Each Accident (Bodily Injury) $ 100,000
Policy Limit (Disease) $ 500,000
Each Employee (Disease) $ 100,000
D) Automobile - Bodily Injury & Property Damage Liability
Each Accident $ 1,000,000
Uninsured/Underinsured Motorists each Accident $ 1,000,000
Personal Injury Protection, if applicable
Basic Medical Payments each Person $ 5,000
E) Professional Liability
Each Occurrence $ 1,000,000
Aggregate $ 2,000,000
With the exception of coverages B & C, the Company is to be included as an
additional insured on the insurance policies providing the above coverages.
Not less than ten (10) days prior to each anniversary date for each policy,
Franchisee shall provide Company with certificates of insurance evidencing
that the insurance has been secured and paid for the then ensuing year.
Company may periodically increase the amounts of coverage required under
any insurance policies and require different or additional kinds of
insurance at any time, including excess liability insurance, to reflect
inflation, identification of new risks, changes in law or standards of
liability, higher damage awards, or other relevant changes in
circumstances. All insurance policies shall provide for thirty (30)days
prior written notice to Company of any modification adversely affecting the
Company's interest, cancellation, expiration, or non-renewal of a policy.
In connection with any construction, renovation, refurbishing, or
remodeling of the Residence licensed under this Agreement, Franchisee shall
</PAGE>
cause the general contractor to maintain with a reputable insurer (I)
comprehensive general liability insurance including completed operations
and independent contractors coverage, (ii) comprehensive automobile
liability insurance for both owned and non-owned vehicles, (iii) workers'
compensation and employer's liability insurance, (iv) all risk builder's
risk or installation floater coverage, whichever is appropriate for the type
of work to be done and (iv) such other insurance as may be required by
law. The Company is to be named as an additional insured on (I) & (ii)and
included as a named insured along with the Franchisee on (iv).
If Franchisee fails or refuses to maintain any required insurance coverage,
or to furnish satisfactory evidence thereof, Company, at its option and in
addition to its other rights and remedies hereunder, may obtain such
insurance coverage on behalf of Franchisee and Franchisee shall fully
cooperate with Company in its efforts to obtain and maintain such insurance
policies, promptly execute all forms or instruments required to obtain any
such insurance, allow any inspections of the Residence licensed under this
Agreement which are required to obtain or maintain such insurance and pay
to Company, on demand, any costs and premiums incurred by Company
therefore.
Franchisee's obligations to maintain insurance coverage as herein described
shall not be affected in any manner by reason of any separate insurance
maintained by Company, nor shall the maintenance of such insurance relieve
Franchisee of any obligations under Article V of this Agreement.
IX.
MARKETING
9.01 By Company. Recognizing the value of marketing to the goodwill and
public image of the Residences, past and future, Company may, now or
hereafter, elect to maintain and administer a marketing fund (hereinafter
referred to as the "Marketing Fund") for such marketing (including
advertising, promotion, public relations and other marketing programs) as
Company may deem necessary or appropriate, in its sole discretion.
Franchisee shall contribute to the Marketing Fund an amount designated by
Company from time to time, but not exceeding three percent (3%) of the Net
Revenues of the Residence licensed under this Agreement, which shall be
payable monthly together with the Continuing Royalties due hereunder.
Residences owned by Company and its affiliates shall contribute to the
Marketing Fund on the same basis as Franchisee. Company shall have the
right at any time, upon ninety (90) days written notice to Franchisee, to
increase or decrease the amount of such marketing contribution payable by
Franchisee, provided that Franchisee's contributions to the Marketing Fund
provided hereunder will not, during any calendar year occurring during the
term of this Agreement, or any extension thereof, exceed three percent (3%)
of the Net Revenues of the Residence licensed under this Agreement.
Company shall exclusively direct all marketing programs financed by the
Marketing Fund. While Company may from time to time solicit the input of
ideas from franchisees, Company shall nevertheless retain sole discretion
</PAGE>
over the creative concepts, materials, and endorsements used therein, and
the geographic, market, and media placement and allocation thereof.
Franchisee agrees that the Marketing Fund may be used to pay the costs of
conducting marketing surveys and research; employing public relations
firms; preparing and producing video, audio, and written marketing
materials; administering multiregional marketing programs, including,
without limitations, purchasing television, radio, magazine, billboard,
newspaper, and other media advertising, and employing advertising agencies
to assist therewith; and providing marketing materials to Residence
franchisees. Provided, in determining the distribution of the benefits of
the Marketing Fund, Company shall use its best efforts to balance its
interest in promoting the System with each Residence's proportionate
contribution to the Marketing Fund, whether Company or franchisee-owned.
The Marketing Fund shall furnish Franchisee, provided Franchisee is in good
standing, with approved marketing materials on the same terms and
conditions as such materials are furnished to other Residence franchisees.
The Marketing Fund shall be accounted for separately from the other funds
of Company. Further, Company and Franchisee acknowledge and hereby agree
that all sums remitted hereunder by Franchisee shall be held in trust by
Company for the mutual benefit of Franchisee, all other operators of
Residences and Company as herein provided. Company shall not use such
funds to defray any of Company's general operating expenses, except for
such reasonable salaries, administrative costs, and overhead as Company may
incur in activities reasonably related to the administration of the
Marketing Fund and its marketing programs (including, without limitation,
preparing marketing materials and collecting and accounting for contributions
to the Marketing Fund). Company may spend in any fiscal year
an amount greater or less than the aggregate contribution of all Residences
to the Marketing Fund in that year and the Marketing Fund may also borrow
from Company or others to cover temporary deficits in the Marketing Fund or
cause the Marketing Fund to invest any surplus for future use by the
Marketing Fund. All interest earned on monies contributed to the Marketing
Fund will be used to pay marketing costs of the Marketing Fund before other
asserts of the Marketing Fund are expended. A statement of monies
collected and expenditures made by the Marketing Fund shall be prepared
annually by Company and shall be made available to Franchisee upon request.
Franchisee understands and acknowledges that the Marketing Fund is intended
to maximize general public recognition of the Marks and patronage of
Residences for the benefit of all Residences. Company undertakes no
obligation to insure that expenditures by the Marketing Fund in or
affecting any geographic area are proportionate or equivalent to
contributions to the Marketing Fund by Residences operating in any
geographic area or that any Residence will benefit directly or in
proportion to its contribution to the Marketing Fund from the conduct of
marketing programs or the placement of advertising. Except as expressly
provided in this Section 9.01, Company assumes no direct or indirect
liability or obligations to Franchisee with respect to the maintenance,
direction or administration of the Marketing Fund.
</PAGE>
9.02 By Franchisee. Franchisee agrees to spend annually for local media
marketing of the Residence licensed under this Agreement such amounts as
Company requires provided that the aggregate amounts of required local
marketing expenditures for the Residence plus Franchisee's Marketing Fund
contribution will not, following the implementation of the initial
marketing plan during the first year of operation of the Residence, exceed
three percent (3%) of the Residence's Net Revenues for any respective
calendar year. Franchisee shall submit annually, in form satisfactory to
Company, verification of its local marketing expenditures.
Prior to their use by Franchisee, samples of all local marketing
materials (whether new or revised) not prepared or previously approved by
Company shall be submitted to Company for approval. If written disapproval
is not received by Franchisee within thirty (30) days from the date of
receipt by Company of such materials, Company shall be deemed to have
given the required approval. Franchisee shall not use any marketing
materials that Company has disapproved, it being understood that the risk
of disapproval shall be borne solely by Franchisee.
Franchisee acknowledges that Residences operated by Company and other
franchisees may be located outside of the Exclusive Area but within ADI's
or other identifiable marketing areas which include all or a portion of the
Exclusive Area in which the Residence is located. In such instances,
Franchisee shall use its best efforts to cooperate and coordinate with
Company or other franchisees, as the case may be, to maximize the
effectiveness of their respective marketing efforts.
X.
ACCOUNTING, REPORTS, AND
FINANCIAL STATEMENTS
Franchisee shall establish and maintain at its own expense a
bookkeeping, accounting, and record keeping system conforming to the
requirements prescribed by Company from time to time, including, without
limitation, the preparation and retention of books and records. With
respect to the operation and financial condition of the Residence licensed
under this Agreement, Franchisee shall furnish to Company in the form
prescribed by Company the following:
A) By the tenth (10th) day following each of Franchisee's monthly
accounting periods, a report of the gross and Net Revenues of the
Residence for the preceding accounting period and such other data,
information, and supporting records as Company from time to time
requires;
B) By the last day of each month, a profit and loss statement for the
preceding calendar month and a year to date profit and loss statement
and balance sheet;
C) Within one hundred twenty (120) days after the end of Franchisee's
fiscal year, a balance sheet and an annual profit and loss statement
reflecting all year end adjustments for the Residence;
</PAGE>
D) Within thirty (30) days of their filing, exact copies of all state
sales tax returns, and state financial reports; and
E) Upon request, the portions of Franchisee's federal and state income
tax returns which reflect the operation of the Residence.
Each report and financial statement shall be verified and signed
byFranchisee in the manner prescribed by Company. Company reserves the
right to require Franchisee to have annual financial statements
audited,prepared, or reviewed by certified public accountants.
XI.
ANNUAL REVIEWS, INSPECTIONS,
AND AUDITS
11.01 Annual Review. At the discretion of Company, once each
calendaryear, at a time designated by Company, Franchisee and its Director
shall be obligated to meet with representatives of Company at a location
specified by Franchisee, for the purpose of discussing and reviewing the
licensed Residence's operations, status, and financial performance.
11.02 Company's Right to Inspect the Residence. To determine
whetherFranchisee and the Residence licensed under this Agreement are
complying with this Agreement, and with all specifications, standards, and
operating procedures prescribed by Company for the operation of the
Residence, Company or its designated agents shall have the right at
anyreasonable time and without prior notice to Franchisee to:
A) Inspect the Premises;
B) Observe Franchisee, the Director and other employees of the Residence;
C) Interview or survey the Director and other employees of the Residence; and
D) Interview tenants/residents of the Residence.
Franchisee shall present to its tenants/residents all
residentsevaluation forms as are periodically prescribed by Company and
shall participate and/or request that its tenants/residents participate in
all marketing surveys performed by or on behalf of Company.
11.03 Company's Right to Audit. Company shall have the right at any
timeduring business hours, and without prior notice to Franchisee, to
inspect and audit, or cause to be inspected and audited, the business
records, bookkeeping and accounting records, sales and income tax records
and returns which relate to the operation of the Franchise, and other
records of the Residence licensed under this Agreement and the books and
records of any corporation or partnership which holds the Franchise.
Franchisee shall fully cooperate with representatives of Company and
independent accountants hired by Company to conduct any such inspection or
audit. In the event any such inspection or audit shall disclose an
understatement of the Net Revenues of the Residence licensed under this
Agreement, Franchisee shall pay to Company within three (3) days after
receipt of the inspection or audit report, the Continuing Royalties and/or
marketing contributions due on the amount of such understatement, plus
interest, at the rate and on the terms provided in Sections 6.03 and 6.04,
herein, from the date originally due until the date of payment. Further,
</PAGE>
in the event any inspection or audit is made necessary by the failure of
Franchisee to furnish reports, supporting records or other information, as
herein required, or to furnish any reports, records or information on a
timely basis, or if an understatement of Net Revenues for the period of any
audit, which shall not be less than four (4) weeks, is determined by any
such audit or inspection to be greater than two percent (2%), Franchisee
shall reimburse Company for the cost of such audit or inspection,
including, without limitation, the charges of any independent accountants
and the travel expenses, room and board and compensation of employees
and/or agents of Company. The foregoing remedies shall be in addition to
and not in lieu of all other remedies and rights of Company hereunder or
under applicable law.
XII.
TRANSFER
12.01 By Company. This Agreement and the Franchise are fully
transferable by Company and shall inure to the benefit of any transferee or
other legal successor to the interest of Company herein.
12.02 Franchisee May Not Transfer Without Approval of Company.
Franchisee understands and acknowledges that the rights and duties created
by this Agreement are personal to Franchisee or its owner and that Company
has granted the rights set forth herein to Franchisee in reliance upon the
individual or collective character, skill, aptitude, attitude, business
ability, and financial capacity of Franchisee or its owner(s). Any
Residence developed pursuant to this Agreement (or any interest therein),
or any Franchise (or any interest therein) granted pursuant to this
Agreement, may not be transferred without the prior written approval of
Company, and any such transfer without such approval shall constitute a
breach hereof and convey no rights to or interests in this Agreement,
Franchisee, the Residence licensed under this Agreement or the Franchise.
12.03 Definition of "Transfer". As used in this Agreement, the term
"transfer" shall mean and include the voluntary, involuntary, direct or
indirect assignment, sale or other transfer by Franchisee or its owner of
any interest in this Agreement, any part or all of the ownership of
Franchisee, the Residence licensed under this Agreement or any interest in
the Residence, or the Franchise or any interest herein granted pursuant to
this Agreement, including, without limitation: (i) the transfer of
ownership of capital stock or partnership interest; (ii) merger or
consolidation, or issuance of additional securities representing an
ownership interest in Franchisee; (iii) sale of common stock, limited
liability company interests, or partnership interests, of Franchisee sold
pursuant to a private placement or registered public offering; (iv)
transfer of interest in Franchisee, the Franchise granted pursuant hereto,
or the Residence licensed under this Agreement, in a divorce proceeding or
otherwise by operation of law; or (v) transfer of any interest in
Franchisee, the Franchise granted pursuant hereto, or the Residence
licensed under this Agreement, in the event of the death of Franchisee or
an owner of Franchisee by will, declaration of or transfer in trust, or
under the laws of intestate succession.
</PAGE>
12.04 Conditions for Approval of Transfer. If Franchisee and its owners
are in full compliance with this Agreement, Company shall not unreasonably
withhold its approval of a transfer that meets all the applicable
requirements of this Section 12.04. The proposed transferee or its owner
must be an individual of good moral character and otherwise meet Company's
then applicable standards for franchisees. A transfer of ownership in the
Residence licensed under this Agreement may only be made in conjunction
with a transfer of this Agreement. If the transfer is of a controlling
interest in Franchisee, or is one (1) of a series of transfers which in the
aggregate constitute the transfer of a controlling interest in Franchisee,
as a bare minimum, and without in any way limiting its discretion, Company
may require prior to its consent that all of the following conditions must
be satisfied prior to, or concurrently with, the effective date of the
transfer: (i) the transferee must have sufficient business experience,
aptitude, and financial resources to develop the Premises and operate the
Residence; (ii) all obligations of Franchisee and its owner incurred in
connection with this Agreement and the Franchise granted hereby must be
assumed by the transferee; (iii) Franchisee must pay all Continuing
Royalties, marketing contributions, termination payments, amounts owed for
purchases by Franchisee from Company and its affiliates, and any other
amounts of whatever nature owed to Company or its affiliates which are then
due and unpaid; (iv) the transferee or its designated Directors and all new
Directors as specified in ARTICLE III of this Agreement must have
successfully completed Company's training program; (v) the lessors of the
Premises must have consented to the assignment or sublease of the Premises
to the transferee; (vi) the transferee must agree to bound by all terms and
conditions of this Agreement; (vii) Franchisee or the transferee must
reimburse Company for all training and other expenses (including legal
fees) reasonably incurred by Company in connection with the transfer;
(viii) Franchisee and its transferring owner must execute a general
release, in form satisfactory to Company, of any and all claims against
Company, its affiliates and their officers, directors, employees and
agents; (ix) Company must approve the material terms and conditions of the
transfer, including, without limitation, a determination that the price and
terms of payment are not so burdensome as to adversely affect the future
development and operation of the Residence licensed under this Agreement by
the transferee; (x) Franchisee and its transferring owner shall execute a
non-competition covenant in favor of Company and the transferee agreeing
that for a period of not less than three (3) years, commencing on the
effective date of the transfer, it and/or they in strict accordance with
provisions of Section 7.04 shall not have any interest as an owner,
investor, lender, partner, director, officer, manager, employee,
consultant, representative, or agent, or in any other capacity, in any
business or commercial enterprise engaged in a Competitive Business located
(a) within the Exclusive Area or (b) within a radius of twenty-five (25)
miles from any other Residence (wherever situated and operated by
whomsoever) then in operation, under construction, or under lease or
</PAGE.
purchase commitment on the effective date of such transfer; (xi) Franchisee
and its owner must enter into an agreement with Company providing that all
obligations of the transferee to make installment payments of the purchase
price or interest thereon on Franchisee or its owner shall be subordinate
to the obligations of the transferee to pay Continuing Royalties, marketing
contributions, termination payments and obligations for purchases from
Company or its affiliate; and (xii) the Premises be refurbished and/or
redecorated to comply with then current standards.
12.05 Excepted Transfers. If the proposed transfer will not result in a
change of control and is to or among owners of Franchisee or to or among
the immediate family members of Franchisee, Sub-Sections (i), (ii), (iv),
and (v) of Section 12.04 shall not apply and Sub-Section (xi) of Section
12.04 shall not apply to good faith transfers by gift, bequest, or
inheritance.
12.06 Death or Disability of Franchisee. Upon the death or permanent
disability of Franchisee or, if Franchisee is a corporation, limited
liability company, or partnership, the owner of a controlling interest in
Franchisee, the executor, administrator, conservator, or other personal
representative of such person shall transfer its interest in this
Agreement or such interest in Franchisee to either a fellow shareholder,
member or partner, as the case may be, or a third party upon approval of
such transferee by Company. The disposition of this Agreement or such
interest in Franchisee (including, without limitation, transfer by bequest
or inheritance) shall be completed within a reasonable time, not to exceed
twelve (12) months from the date of death or permanent disability and shall
be subject to all the terms and conditions applicable to transfers
contained in Section 12.04, herein. Failure to dispose of this Agreement
or the interest in Franchisee within said period of time shall constitute a
breach of this Agreement.
<PAGE>
12.07 Effect of Consent to Transfer. Company's consent to a transfer of
this Agreement or any interest in Franchisee subject to the restrictions of
this ARTICLE XII shall not constitute a waiver of any claims it may have
against Franchisee, nor shall it be deemed a waiver of Company's rights to
demand exact compliance with any of the terms or conditions of this
Agreement by any transferee. Further, Franchisee for itself and on behalf
of its transferee does acknowledge and agree that Company's approval shall
not be deemed to constitute a guaranty or warranty as to transferee's
success in conducting the business contemplated herein.
12.08 Company's Right of First Refusal. During the term of this
Agreement and for a period of one (1) year after its termination or if
Franchisee has closed the Residence whether with or without the consent of
Company, if Franchisee or its owner shall at any time determine to sell
an interest in this Agreement or any part or all of the ownership of
Franchisee, any interest in the Residence licensed under this Agreement
(including all or substantially all of the assets constituting the
Residence), or the Franchise, or its owner obtains a bona fide, executed
written offer from a responsible and fully disclosed purchaser, Franchisee
</PAGE.
shall promptly submit an exact copy of such offer to Company. Company
shall have the right, exercisable by written notice delivered to Franchisee
or its owner within thirty (30) days from the date of delivery of an exact
copy of the offer to Company, to purchase the interest for the price and on
the terms and conditions contained in the offer. In the event all or any
part of the consideration offered to Franchisee for such interest shall
consist of common or preferred stock or debt securities of any tendering
entity, and in the event Company is either a "public company" or a "public
reporting company" as those terms are defined under the federal securities
laws, Company shall be deemed to have matched any such offer by offering
the number of its common or preferred stock or debt securities with a
market value equivalent to the market value of the securities of the entity
making the offer to Franchisee or at Company's election, tendering cash in
an amount equal to the market value of the securities of the entity making
the offer to Franchisee. In the event Company is privately-owned, Company
may substitute cash for any form of payment proposed in any offer. In the
event all or any portion of the consideration offered to Franchisee
consists of unique assets, Company shall be deemed to have matched any
offer by offering cash in an amount equivalent to the market value of the
unique assets tendered by the entity making the offer to Franchisee.
Further, in the event payment includes any form of indebtedness, Company's
creditworthiness shall be deemed equal to the credit rating of any proposed
purchaser. Company shall have not less than ninety (90) days to prepare
for closing and shall be entitled to all customary representations and
warranties as set forth in Exhibits "A" and "B" of this Agreement. If
Company does not exercise its right of first refusal, Franchisee or its
owner may complete the sale to the proposed purchaser pursuant to and on
the terms of such offer, subject to the Company's approval of the purchaser
as provided in Sections 12.02 and 12.04 of this ARTICLE XII. Provided, if
the sale to any purchaser is not completed within ninety (90) days after
delivery of the offer to Company, or there is a material change in the
terms and conditions of the sale, Company shall then again have the right of
first refusal herein provided.
12.09 Public or Private Offerings. In the event Franchisee shall
attempt to raise or secure funds by the sale of securities (including,
without limitation, common or preferred capital stock, bonds, debentures,
limited liability company or partnership interests), Franchisee,
recognizing that the literature used with respect thereto may reflect upon
Company, agrees to submit all such sales literature or prospectuses to
Company and to obtain the written approval of Company of the method of
financing prior to any offering or sale of any securities.
Each prospectus, circular, or other sales literature utilized in any
securities offering shall, at Company's discretion, contain the following
language in bold-face type on the first textual page thereof:
"STERLING HOUSE CORPORATION and its affiliates have not passed upon the
accuracy or adequacy of the statements made herein nor are they nor will
they be responsible for the inaccuracy or inadequacy of the same. Neither
STERLING HOUSE CORPORATION nor its affiliates will share in any of the
proceeds of this offering and make no recommendation respecting the
advisability of purchasing the investment contemplated by this offering."
</PAGE>
Franchisee agrees to indemnify and hold Company, its affiliates, and their
officers, directors, employees and agents harmless from any and all claims,
demands or liabilities arising from the offer or sale of any securities,
whether asserted by a purchaser of any of the securities or by a
governmental agency. Company shall have the right to defend all claims
asserted against it or the persons delineated herein.
XIII.
RENEWAL OF FRANCHISE
13.01 Franchisee's Right to Renew. Upon expiration of the initial term
of this Agreement, if:
A) Company elects to continue to maintain a Residence at the Premises;
B) Franchisee maintains possession of and agrees to refurbish and
redecorate the Premises, replace fixtures, furnishings, furniture, and
equipment, and signs and otherwise modify the Residence to be in
compliance with all specifications and standards then applicable under
new or renewal franchises for Residences; or if Franchisee is unable to
maintain possession of the Premises, or in the judgement of Company the
Residence should be relocated, and Franchisee secures substitute
premises approved by Company and agrees to develop such substitute
premises in compliance with all specifications and standards then
applicable under new or renewal franchises for Residences; and
C) Franchisee has been in substantial compliance with all of the terms and
conditions of this Agreement during the initial term and continues to
be in substantial compliance up to the expiration hereof;
Franchisee shall have the right to renew this Agreement for three (3) terms
of five (5) years each or for such other period as may be agreed to by
Company and Franchisee. Each renewal shall be without payment of an
Initial Franchise Fee, except that Company shall have the right to charge
Franchisee reasonable charges for services it renders to Franchisee or
expenses it incurs in conjunction with any renewal.
13.02 Renewal Agreement/Releases. To renew the Franchise, Company,
Franchisee and its owner(s) shall execute the then standard form of
franchise agreement and any ancillary agreements then customarily used by
Company in the granting or renewal of franchises for the operation of
Residences with appropriate modifications to reflect the fact that the
agreement relates to the grant of a renewal franchise. Franchisee and its
owners shall also execute a general release, in form satisfactory to
Company, of any and all claims against Company, its affiliates and their
officers, directors, employees, and agents. Failure by Franchisee and its
owner(s) to sign all agreements and releases within sixty (60) days after
delivery thereof to Franchisee shall be deemed an election by Franchisee
not to renew this Agreement.
</PAGE>
XIV.
TERMINATION OF AGREEMENT BY FRANCHISEE OR
CESSATION OF RESIDENCE OPERATION
Franchisee understands and acknowledges that a material inducement to
Company for entering into this Agreement is Franchisee's representation
that it will diligently develop the Premises and the Residence thereon for
the full term of this Agreement and Franchisee agrees that this Agreement
shall not be terminated by Franchisee without good cause. For purposes
hereof, "terminated by Franchisee" shall mean (i) the discontinuance of
business at the Residence operated by Franchisee, (ii) changing or
threatening to change the Residence operated by Franchisee to a different
name, format, style, or use, (iii) willful disregard by Franchisee of the
terms and provisions of this Agreement, or (iv) transferring or threatening
to transfer any of Franchisee's rights under this Agreement or to the
Residence licensed hereunder and operated by Franchisee, to a person or
entity not approved by the Company in accordance with the provisions of
ARTICLE XII hereof.
14.01 Termination for Good Cause. Nothing herein shall be construed to
prevent Franchisee from terminating this Agreement for good cause. For
purposes hereof, the term "good cause" shall be deemed to mean a material
breach of this Agreement by the Company which is not cured within thirty
(30) days after the Company actually receives written notice required
hereunder from Franchisee, or in the event such default cannot be cured
within such thirty (30) day period, the Company shall not have commenced to
cure such default within thirty (30) days and diligently continued
thereafter to attempt to cure such default. If any material breach
consists of the failure by the Company to provide any service or training
assistance required hereunder, then the breach shall be deemed fully cured
upon the tendering of performance by the Company of the services or
assistance within (30) days after receiving notice thereof, but the Company
shall not be under any obligation to compensate Franchisee for any lack or
deficiency in past services or assistance.
14.02. Economic Out Provision. In the event that in accordance with
generally accepted accounting principles reasonably applied in a consistent
manner by Franchisee, and with the concurrence of the Company which shall
not be unreasonably withheld, it is determined that the Residence licensed
hereunder has not been, for two (2) consecutive years, operated at a profit
(profit being defined as generating sufficient revenue to cover all direct
cash operating costs incurred in the ordinary course of business at the
Residence level), then Franchisee may, at its option, terminate this
Agreement. In such event, Franchisee shall immediately comply with the
provisions of ARTICLE XVI, hereof, and for a period of two (2) years
thereafter, the Premises may not be utilized by Franchisee or any business
entity, organization, or venture in which Franchisee or its owners have a
direct or indirect interest who shall operate the Premises and facility as
</PAGE>
a Competitive Business. Provided, the subsequent sale, transfer or
assignment of the Premises or closed facility shall be subject to the terms
and conditions set forth in Section 12.08, herein, for a period of one (1)
year commencing with the last day the facility is operated as a STERLING
HOUSE assisted living facility.
XV.
TERMINATION OF THE FRANCHISE
15.01 Grounds of Termination. This Agreement shall terminate
automatically upon delivery of notice of termination to Franchisee, if
Franchisee or its owners (or any shareholder, member or partner, if
Franchisee is a corporation, limited liability company or partnership):
A) Abandons or fails to actively operate the Residence licensed under this
Agreement;
B) Surrenders or transfers control of the operation of the Residence
licensed under this Agreement;
C) Has made any material misrepresentation or omission in its application
for the Franchise;
D) (or any shareholder, manager, member or partner, if Franchisee is a
corporation, limited liability company, or partnership, and if
Franchisee fails to terminate such owner's interest in Franchisee, as
the case may be, within ninety (90) days thereof) is convicted of or
pleads nolo contendere or the equivalent thereof to a felony or other
crime or offense or is subject to any administrative injunction, order,
or decree that is likely to adversely affect the System, the Marks,
the goodwill associated therewith, Company's interest therein, or the
reputation of Franchisee or the Residence licensed under this
Agreement;
E) Makes a general assignment for the benefit of its creditors, applies
for or consents to the appointment of a receiver, trustee, or
liquidator of all or a substantial part of its assets, files a
voluntary petition in bankruptcy, has an involuntary petition in
bankruptcy filed against it (which is not released within ninety [90]
days), or fails to pay its debts and obligations as they mature in
accordance with normal business practices;
F) Makes an unauthorized assignment or transfer of this Agreement, the
Franchise, the Premises, the Residence licensed under this Agreement,
or an ownership interest in Franchisee;
G) Is a party to any other franchise agreement with Company for which
Company has delivered to Franchisee a notice of termination in
accordance with its terms and conditions for cause (except for a
termination based upon a failure to satisfy an area development quota);
H) Makes any unauthorized use of the Marks or unauthorized use or
disclosure of the Confidential Information or any portion thereof;
</PAGE>
I) Fails or refuses to comply with any mandatory specification, standard,
or operating policy or procedure prescribed by Company relating to the
operation of the Residence licensed under this Agreement, violates any
health, safety, housing or sanitation law, ordinance, or regulation and
does not correct such failure or refusal within seventy-two (72) hours
after written notice thereof is delivered to Franchisee or fails to
notify Company in writing within five (5) days of the commencement of
any action, suit or proceeding, and of the issuance of any order,
writ, injunction, award, or decree of any court, agency, or other
governmental instrumentality, which may adversely affect the operation
or financial condition of Franchisee or the Residence or of any notice
of violation of any law, ordinance, or regulation relating to unfair
or deceptive trade practice, housing or care for the elderly, or health
or sanitation at or in conjunction with the Residence;
J) Employs or attempts to employ, either directly or indirectly, in
violation of Section 3.04, any person who Franchisee knows or should
have known was employed or at such time is employed by Company or any
other franchisee of Company without first obtaining the written
consent of Company or other franchisee of Company; or
K) Fails on three (3) or more separate occasions, within any period of
twelve (12) consecutive months, to submit when due any reports or other
data, information or supporting records; to pay when due the Continuing
Royalties, marketing contributions, or other payments due hereunder to
Company or its affiliates; or otherwise fails to comply with this
Agreement, whether or not such failures to comply are corrected after
notice thereof is delivered to Franchisee.
This Agreement shall terminate without further action by Company or
notice to Franchisee, if Franchisee or its owner:
A) Fails to accurately report the Net Revenues of the Residence licensed
under this Agreement or fails to remit payments of any amounts due
Company for Continuing Royalties, marketing contributions, or any
other amounts due to Company or its affiliates hereunder, and does not
correct such failure within ten (10) days after written notice of such
failure is delivered to Franchisee; or
B) Fails to timely meet any of the development, construction and/or pre-
opening obligations set forth in Schedule "1" (hereinafter referred to
as a "Development Default") or to comply with any other provision of
this Agreement or mandatory specification, standard, or operating
policy or procedure prescribed by Company and does not:
1) correct such failure within fifteen (15) days after written notice
of such failure to comply is delivered to Franchisee; or
2) if such failure (other than Development Default) cannot reasonably
be corrected within fifteen (15) days after written notice of such
failure to comply is delivered to Franchisee, undertake efforts to
bring the Residence licensed under this Agreement into full
compliance, and furnish proof acceptable to Company of such efforts
and the date of their expected completion, within ten (10) days
after written notice is delivered to Franchisee.
</PAGE.
15.02 Efforts to Resolve Termination Disputes Other Than by Termination.
Any acts of Company undertaken in the course of efforts to resolve a
termination dispute, or a dispute for which termination is a possible
remedy, shall be deemed to have been undertaken without prejudice to the
rights asserted by Company and shall not constitute a waiver or
relinquishment of those rights. In the event Franchisee continues to
engage in franchised operations while a dispute is pending, that fact,
and/or the receipt of monthly payments and/or the furnishing by Company of
information and service essential to such operations, shall not constitute
a waiver or relinquishment of Company's rights. Company may, at its
option and without waiving its right to terminate, seek any form of relief
or remedy available to it under common law or statute for any breach of
this Agreement including, but not limited to, the right to damages,
injunctive relief, declaratory orders or specific performance.
XVI.
RIGHTS AND OBLIGATIONS OF COMPANY AND FRANCHISEE UPON
TERMINATION OR EXPIRATION OF THE FRANCHISE
16.01 Payment of Amounts Owned to Company. Franchisee shall pay to
Company within fifteen (15) days after the effective date of termination
or expiration of this Agreement, or such later date when the amounts due to
Company are determined, such Continuing Royalties, marketing contributions,
amounts owed for purchases by Franchisee from Company or its affiliates,
interest due on any of the foregoing and all other amounts owed to Company
or its affiliates which are then unpaid.
16.02 Marks. After the termination or expiration of this Agreement,
Franchisee shall:
A) Not directly or indirectly at any time or in any manner identify itself
or any business as a current or former Residence operator, or as a
franchisee or licensee of or as otherwise associated with Company (other
than under other franchise agreements with Company), or use any of the
Marks, any colorable imitation thereof, or other indicia of a Residence in
any manner or for any purpose, or utilize for any purpose any trade dress,
trade name, trade or service mark or other commercial symbol that suggests
or indicates a connection or association with Company;
B) Remove all signs, sign faces, and deliver to Company all marketing
materials, and other materials containing any Mark or otherwise identifying or
relating to a Residence;
C) Remove all Marks, if any, affixed to uniforms;
D) Take all action as may be required to cancel all fictitious or assumed
name or equivalent registrations relating to Franchisee's use of any
Mark;
E) Notify the telephone company and all listing agencies of the
termination or expiration of Franchisee's right to use any telephone
number and any regular, classified or other telephone directory
listings associated with any Mark and authorize transfer of same to
or at the direction of Company. Franchisee acknowledges that as
between Company and Franchisee, Company has the sole right to and
interest in all telephone numbers and directory listings associated
</PAGE>
with any Mark and Franchisee authorizes Company, and hereby appoints
Company and any officer designated by Company as its attorney-in-fact,
should Franchisee fail or refuse to do so, to direct the telephone
company and all listing agencies to transfer the same to Company or at
its direction, and the telephone company and all listing agencies may
accept such direction or this Agreement as conclusive of the exclusive
rights of Company in such telephone numbers and directory listings and
its authority to direct their transfer, and
F) Furnish to Company, within thirty (30) days after the effective date of
termination or expiration, evidence satisfactory to Company of
Franchisee's compliance with the foregoing obligations.
16.03 Modification of Residence Design and Decor. Upon expiration or
termination of this Agreement without renewal, Franchisee shall modify the
interior and exterior design (which may include removal of the building's
cupola), decor, and color scheme of the Residence licensed under this
Agreement in a manner acceptable to Company so that it no longer suggests
or indicates a connection with the System or any rights and privileges
granted by this Agreement.
16.04 Cessation of Use of Confidential Information. Upon termination or
expiration of this Agreement, Franchisee will immediately cease to use any
Confidential Information disclosed to Franchisee pursuant to this Agreement
in the operation of the Residence licensed under this Agreement, or any
business or commercial enterprise engaged in any Competitive Business, or
other similar business, or capacity and shall return to Company all copies
of the Operations Manual and any other confidential materials which may
have been loaned to Franchisee by Company.
16.05 Company has Right to Purchase the Residence. In addition to the
rights provided to Company under Section 12.08, upon termination of this
Agreement, other than in accordance with Section 14.01, Company shall have
the option, exercisable by giving written notice thereof within thirty (30)
days from the date of such termination to purchase from Franchisee all the
assets of the Residence licensed under this Agreement. Assets shall
include, without limitation and as the case may be, land, building,
fixtures, inventories of saleable merchandise, materials, supplies,
leasehold improvements, fixtures, furniture, furnishings, equipment, signs
and Franchisee's lease for the Premises. Company shall have the option to
purchase the capital stock of Franchisee instead of the assets of the
Residence. In the event Franchisee owns the Premises, Franchisee shall grant
to Company or its assignee a standard commercial lease at fair market rental
for an initial term of ten (10) years with not less than two (2) five (5) year
renewal options. Company shall have the unrestricted right to assign its option
to purchase. Company or its assignee shall be entitled to all customary
warranties and representations in connection with its asset or stock purchase
as set forth in Exhibits "A" and "B" of this Agreement. The purchase price for
the assets of the Residence (or the capital stock of the Franchisee) shall be
determined as follows:
</PAGE>
Company shall appoint one (1) qualified individual as an appraiser and
Franchisee shall appoint one (1) qualified individual as an appraiser. The
appraisers so appointed shall determine the fair market value of the assets
of the Residence or the capital stock of Franchisee, as the case may be.
In the event these two (2) appraisers are unable to agree upon the fair
market value of the assets or capital stock, as the case may be, within
thirty (30) days after their appointment, they shall mutually select and
designate one (1) additional appraiser for this purpose whose appointment
and determination shall be binding upon all parties. In the event any
appraiser should become unable or unwilling to serve, a substitute shall be
appointed by the party originally selecting him. In the event that the
two (2) appraisers first appointed shall be unable to agree upon a third
appraiser, such appraiser shall be appointed by the most senior federal
judge presiding at the federal district court located in Wichita, Kansas.
The purchase price may be paid, at the option of Company, in cash, a
promissory note, Company's capital stock, or by any combination of cash,
notes, and capital stock. Franchisee acknowledges and agrees that any
capital stock delivered by Company in partial or complete payment of the
purchase price may not thereafter be freely transferable by Franchisee
without registration of the capital stock, the obtaining of an exemption
from registration, and/or the rendering of an opinion of counsel
satisfactory to Company's counsel that the capital stock may subsequently
be transferred without registration. Accordingly, any capital stock issued
in full or partial payment of the purchase price shall bear a legend
setting forth this restriction.
The closing shall take place no later than ninety (90) days after
receipt by Franchisee of Company's notice of exercise of this option to
purchase, at which time Franchisee shall deliver instruments transferring
to Company or its assignee:
A) Good and merchantable title to the assets purchased, free and clear of
all liens and encumbrances (other than liens and security interests
acceptable to Company or its assignee) with all sales and other
transfer taxes paid by Franchisee; and
B) All licenses and permits for the Residence which may validly be
assigned or transferred.
In the event that Franchisee cannot deliver clear title to all of such
purchased assets, or in the event there shall be other unresolved issues,
the closing of the sale shall be accomplished by means of an escrow.
Further, Franchisee and Company shall, prior to closing, comply with the
applicable Bulk Sales provisions of the Uniform Commercial Code of the
state where the Residence is located. Company shall have the right to set
off against and reduce the purchase price by any and all amounts owed by
Franchisee to Company. If Company exercises its option to purchase, then
pending the closing of such purchase as hereinabove provided, Company shall
have the right to appoint its own Director to maintain the operation of
such purchased Residence. Alternatively, Company may require Franchisee to
close the Residence during such time period without removing any assets
therefrom.
</PAGE>
16.06 Continuing Obligations. All obligations of Company and
Franchisee which expressly or by their nature survive the expiration or
termination of this Agreement (for example, the non-competition covenant
provided for in Section 7.04, herein) shall continue in full force and
effect subsequent to and notwithstanding this Agreement's expiration or
termination and until they are satisfied in full or by their nature expire.
XVII.
TEMPORARY DE-IDENTIFICATION OF
THE RESIDENCE
In lieu of immediately exercising its rights to terminate this
Agreement, as set forth in ARTICLE XV, herein, and in Company's sole
discretion, Company may execute an agreement with Franchisee calling for
the temporary de-identification of the Residence licensed under this
Agreement as a franchised Residence (hereinafter referred to as the "De-Identi-
fication Agreement"). The De-Identification Agreement shall be in a
form prescribed by Company, shall set forth all required licensing,
repair, replacement, refurbishing, remodeling, and/or additions and/or
deletions in the accommodations, goods or services offered, which must then
be completed by Franchisee and shall prescribe a timetable in which
Franchisee must cure all defaults under this Agreement, and complete such
repair, replacement, refurbishing, and/or remodeling.
During the term of the De-Identification Agreement, the Franchisee shall:
A) Cover all of the Residence's signs containing the Marks, whether
located on the exterior or in the interior of the Premises of the
Residence;
B) Cease all marketing of the Residence as a STERLING HOUSE assisted
living facility;
C) Cease all representations to the public and its tenants/residents that
the Residence is a STERLING HOUSE assisted living facility; and
D) Prominently display signs and notices in the Residence in such manner
and in a form as may be prescribed by Company indicating that the
Residence is temporarily not affiliated with the STERLING HOUSE
franchise system while Franchisee is undertaking improvements to bring
it into compliance with the standards and specifications required of
all STERLING HOUSE assisted living facilities. During the term of the
De-Identification Agreement, Franchisee may continue to use all
expendable supplies containing the Marks.
During the term of the De-Identification Agreement, Franchisee shall
not be required to make Continuing Royalty payments and marketing
contributions required hereunder, except for any amounts already due at the
time of execution of the De-Identification Agreement. The term of this
Agreement shall continue to run during, and shall not be extended by, the
term of the De-Identification Agreement. In the event Franchisee fails to
comply with all of the terms and conditions of the De-Identification
</PAGE>
Agreement, or if upon expiration of the De-Identification Agreement, if
Franchisee has not completed all required licensing, repairs, replacement,
refurbishing, remodeling, and/or additions and/or deletions in the
accommodations, goods or services offered, Company may proceed to terminate
this Agreement as set forth in ARTICLE XV, herein.
XVIII.
CASUALTY LOSS OR CONDEMNATION
18.01 Casualty Loss. If the Residence licensed hereunder is damaged by
fire or other casualty, Franchisee shall, at its cost, expeditiously repair
the damage as soon as possible after the occurrence thereof. In the event
the casualty loss requires the closing of the Residence for more than three
(3) consecutive months, then, unless repair and reconstruction work has
commenced in earnest within the three (3) month period and unless the
Residence is re-opened in full operation no later than one (1) year after
the date of the casualty loss, this Agreement shall terminate automatically
without necessity of notice to Franchisee. Provided that, in lieu of
reconstructing and re-opening the damaged Residence as required hereby,
Franchisee may construct and open a different Residence within the
Exclusive Area within one (1) year after the date of such casualty loss.
The substituted Residence shall be exempt from the Initial Franchise Fee
requirement otherwise provided for in this Agreement.
18.02 Condemnation Proceedings. Franchisee shall give Company written
notice as soon as it receives any knowledge of any condemnation or exercise
of the power of eminent domain, or threat thereof, by any governmental
agency or authority. If, in the reasonable opinion of Company, a
substantial part of the Residence licensed under this Agreement is to be
condemned or taken under eminent domain and the portion not so taken or
condemned could not be operated practicably and profitably as a Residence,
Company shall give good faith consideration to transferring the Franchise
granted hereunder to another location reasonably near the condemned
Residence which decision shall be made by Company not more than four (4)
months after Company's determination of the impact of the condemnation. If
a transfer of the Franchise is authorized by Company and Franchisee opens
for business at another location within one (1) year of the closing of the
condemned or taken Residence, the substituted Residence shall be deemed to
be open under this Agreement in the same manner and for the same term as
was the previous Residence. In the event Franchisee has used its best
efforts to vigorously replace a condemned location but has been unable to
do so on account of its failure to obtain the requisite licenses and
permits for another location, Company may, but shall not be required to,
grant additional time for Franchisee to open another location. If any
condemnation or eminent domain proceeding takes place and no new location, for
any reason, whatsoever, becomes franchised in strict accordance with
this Section 18.02, then this Agreement shall terminate automatically
without notice to Franchisee.
</PAGE>
XIX.
ENFORCEMENT
19.01 Severability and Substitution of Valid Provisions. Except as
expressly provided to the contrary herein, each part, section, term and
provision of this Agreement, and any portion thereof, shall be considered
severable and if, for any reason, any provision of this Agreement is held
to be invalid, contrary to, or in conflict with any applicable present or
future law or regulation in a final ruling issued by any court, agency, or
tribunal with competent jurisdiction in a proceeding to which Company is a
party, that ruling shall not impair the operation of, or have any other
effect upon, such other portions of this Agreement as may remain otherwise
intelligible, which shall then continue to be given full force and effect
and bind the parties hereto. Provided, any portion held to be invalid
shall be deemed not to be a part of this Agreement from the date the time
for appeal expires, if Franchisee is a party thereto, or otherwise upon
Franchisee's receipt of a notice of non-enforcement thereof from Company.
To the extent that ARTICLE VII, or any section, or portion, or clause
thereof, is deemed unenforceable by virtue of its scope in terms of area,
business activity prohibited and/or length of time, but same may be made
enforceable by reducing any or all thereof, Franchisee and Company agree
that same shall be enforced to the fullest extent permissible under the
laws and public policies applied in the jurisdiction in which enforcement
is sought.
If any applicable and binding law or rule of any jurisdiction requires
a greater prior notice of the termination of or non-renewal of this
Agreement than is required hereunder, or the taking of some other action
not required hereunder, or if under any applicable and binding law or rule
of any jurisdiction, any provision of this Agreement or any specification,
standard, or operating procedure prescribed by Company is invalid or
unenforceable, the prior notice and/or other action required by such law or
rule shall be substituted for the comparable provisions hereof, and Company
shall have the right, in its sole discretion, to modify such invalid or
unenforceable provisions, specification, standard, or operating procedure
to the extent required to be valid and enforceable. Franchisee agrees to
and shall be bound by any promise or covenant imposing the maximum duty
permitted by law which is subsumed within the terms of any provision
hereof, as though it were separately articulated in and made a part of this
Agreement, that may result from striking from any of the provisions hereof,
or any specification, standard or operating procedure prescribed by
Company, any portion or portions which a court may hold to be unenforceable
in a final decision to which Company is a party, or from reducing the scope
of any promise or covenant to the extent required to comply with any court
order. All modifications to this Agreement shall be effective only in
such jurisdiction, unless Company elects to give them greater applicability,
and this Agreement shall be enforced as originally made and entered into in all
other jurisdictions.
</PAGE>
19.02 Waiver of Obligations. Company and Franchisee may by written
instrument unilaterally waive or reduce any obligation of or restriction
imposed upon the other under this Agreement, effective upon delivery of
written notice thereof to the other or such other effective date stated in
the notice of waiver. Whenever this Agreement requires Company's prior
approval or consent, Franchisee shall make a timely written request
therefor, and such approval shall be obtained in writing. Company makes no
warranties or guaranties upon which Franchisee may rely, and assumes no
liability or obligation to Franchisee, by granting any waiver, approval, or
consent to Franchisee or by reason of any neglect, delay, or denial of any
request therefor. Any waiver granted by Company shall be without prejudice
to any other rights Company may have, will be subject to continuing review
by Company, and may be revoked, in Company's sole discretion, at any time
and for any reason, effective upon delivery to Franchisee of written notice
of the revocation.
Company and Franchisee shall not be deemed to have waived or impaired
any right, power, or option reserved by this Agreement (including, without
limitation, the right to demand exact compliance with every term,
condition, and covenant herein, or to declare any breach thereof to be a
default and to terminate this Agreement prior to the expiration of its
term), by virtue of any custom or practice of the parties at variance with
the terms hereof; any failure, refusal, or neglect of Company or Franchisee
to exercise any right under this Agreement or to insist upon exact
compliance by the other with its obligations hereunder, including, without
limitation, any mandatory specification, standard, or operating procedure;
any waiver, forbearance, delay, failure, or omission by Company to exercise
any right, power or option, whether of the same, similar or a different
nature, with respect to the Residence licensed under this Agreement; or the
acceptance by Company of any payments due from Franchisee after any
breach of this Agreement.
19.03 Limitations on Liability. Unless stated to the contrary elsewhere
herein, neither Company nor Franchisee shall be liable for any loss or
damage nor deemed to be in breach of this Agreement if its failure to
perform its obligations results from:
A) Transportation shortages, inadequate supply of equipment,
merchandise, supplies, labor, material, or energy, or the voluntary
foregoing of the right to acquire or use any of the foregoing in
order to accommodate or comply with the orders, requests,
regulations, recommendations, or instructions of any federal, state,
or municipal government or any department or agency thereof;
B) Acts of God;
C) Acts of omissions of the other party;
D) Fires, strikes, embargoes, war, or riot; or
E) Any other similar event or cause.
Any delay resulting from any of the above causes shall extend performance
accordingly or excuse performance, in whole or in part, as may be
</PAGE>
reasonable, except that these causes shall not excuse payments of amounts
owed at the time of any occurrence or payment of Continuing Royalties due
on any revenues arising from the operation of the Residence thereafter.
19.04 Specific Performance/Injunctive Relief. Nothing herein contained
shall bar Company's or Franchisee's right to obtain specific performance
of the provisions of this Agreement and to obtain injunctive relief
against threatened conduct that will cause it loss or damages, under
customary equity rules, including applicable rules for obtaining
restraining orders and preliminary injunctions. Franchisee agrees that
Company may obtain injunctive relief, without bond, but upon due notice, in
addition to all further and other relief as may be available at equity or
law. Franchisee further agrees that its sole remedy in the event of the
entry of an injunction, shall be the dissolution of the injunction, if
warranted, upon hearing duly had and all claims for damages by reason of
the wrongful issuance of any injunction are expressly waived hereby unless
the waiver of damages is against the public policy of the forum in which
the proceeding was brought.
19.05 Rights of Parties are Cumulative. The rights of Company and
Franchisee hereunder are cumulative and no exercise nor enforcement by
Company or Franchisee of any right or remedy hereunder shall preclude the
exercise or enforcement by Company or Franchisee of any other right or
remedy hereunder or which Company or Franchisee is entitled by law or
equity to enforce.
19.06 Governing Law/Consent to Jurisdiction. Except to the extent
governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C.
Sections 1051, et seq.), this Agreement and the Franchise shall be governed
by the laws of the State of Kansas. Franchisee acknowledges that it has
and will continue to develop a substantial and continuing relationship with
Company at its principal offices in Kansas, where Company's decision-making
authority is vested and franchise operations are conducted and supervised.
Franchisee further agrees that Company may institute any action against
Franchisee and that Franchisee shall be required to institute any and all
legal proceedings arising out of or relating to this Agreement in the state
or federal courts having jurisdiction therefor in the State of Kansas,
located in Wichita, Kansas, and Franchisee irrevocably submits to the
jurisdiction of such courts and waives any objection it may have to either
the jurisdiction or venue of that court.
19.07 Binding Effect/Modification. This Agreement is binding upon the
parties hereto and their respective executors, administrators, heirs,
assigns and successors in interest, and shall not be modified except by
written agreement signed by both Franchisee and Company.
19.08 Construction. The preambles and Exhibit(s) are a part of this
Agreement which constitutes the entire agreement of the parties, and there
are no other oral or written understandings or agreements between Company
and Franchisee relating to the subject matter of this Agreement. Nothing
in this Agreement is intended, nor shall be deemed, to confer any rights or
remedies upon any person or legal entity not a party hereto.
</PAGE>
The headings of the several articles and sections hereof are for
convenience only and do not define, limit, or construe the contents of any
articles or sections.
19.09 Definitions. In addition to the words and terms defined in the
recitals and elsewhere in this Agreement, the words and terms defined as
follows in this Section 19.09 shall, for all purposes of this Agreement,
have the meanings herein specified, except as otherwise expressly provided
or unless the context otherwise requires:
A) The term "affiliate" as used herein is applicable to any company
directly or indirectly owned or controlled by Company that sells or
rents products, renders services, or otherwise transacts business with
Franchisee.
B) The term "Franchisee" as used herein is applicable to one (1) or more
persons, a corporation, a limited liability company, a limited
partnership, or a general partnership, as the case may be, and the
singular usage includes the plural and the masculine and neuter usages
include the other and the feminine. If two (2) or more persons are at
any time the Franchisee hereunder, whether or not as partners or joint
ventures, their obligations and liabilities to Company shall be joint
and several. References to "Franchisee," "owner" and "transferee"
which are applicable to an individual or individuals shall mean, unless
expressly made applicable to all shareholders, members and partners,
the owners of Franchisee or the transferee (i.e., any person owning of
record or beneficially five percent [5%] or more the equity or control
of Franchisee) if Franchisee or the transferee is a corporation,
limited liability company or partnership.
19.10 Counterparts. This Agreement may be executed in multiple copies,
each of which shall be deemed an original.
19.11 Consent. Company shall have the absolute right to refuse any
request by Franchisee or to withhold its approval of any action by
Franchisee for any reason whatsoever, provided such discretion shall not be
exercised in an arbitrary or capricious manner.
</PAGE>
XX.
NOTICES AND PAYMENTS
All written notices and reports permitted or required to be delivered
by the provisions of this Agreement or of the Operations Manual shall be
deemed to be delivered at the time delivered by hand, one (1) business day
after transmission by telegraph or comparable electronic system, or three
(3) business days after being placed in the United States Mail by
Registered or Certified Mail, Return Receipt Requested, postage prepaid and
in any event until notified in writing to the contrary addressed to the
respective parties as follows:
If to Company: President
STERLING HOUSE CORPORATION
Suite 500
453 S. Webb Road
Wichita, KS 67207
If to Franchisee: Colorado Springs Assisted Living, L. L. C.
260 N. Rock Road, #260
Wichita, KS 67206
All payments and reports required by this Agreement shall be directed to
Company at the address notified to the Franchisee from time to time, or to
such other persons and places as the Company may direct from time to time.
Any required payment or report not actually received by Company during
regular business hours on the date due (or postmarked by postal
authorities as of the due date) shall be deemed delinquent.
IN WITNESS WHEREOF, the parties hereto have executed, sealed, and
delivered this Agreement in one (1) or more counterparts on the day and
year first above written.
STERLING HOUSE CORPORATION
By:_______________________________
Title: President
"Company"
If an individual:
________________________________
"Franchisee"
If a Partnership, Limited Liability Company
or Corporation:
WITNESS COLORADO SPRINGS ASSISTED LIVING, L.L.C.
By: _____________________________ By:_______________________________
Title: __________________________ Title:_________________________
"Franchisee"
</PAGE>
SCHEDULE "1"
TO FRANCHISE AGREEMENT BY AND BETWEEN
STERLING HOUSE CORPORATION
AND Colorado Springs Assisted Living, L.L.C.
DATED July 16, 1996
The respective Residence development deadlines referred to in Section
2.03 of the above captioned Agreement shall be:
Date Requirement Shall
Requirement be Completed by:
A) Secure a suitable site for the Residence in accordance with
the provisions of Section 2.01; , 19
B) Secure all financing required to fully develop the Residence; , 19
C) Obtain all required building, utility, sign, health,
sanitation, business permits and residential care licenses,
and any other required permits and licenses and commence
construction; , 19
D) Construct the Residence in compliance with the Plans; , 19
E) Purchase and install all required fixtures, equipment,
furniture, furnishings, supplies, signs, and other items
necessary for completion and opening of the Residence as
specified in the Plans and the Operations Manual; , 19
F) Commence initial marketing activities as required by the
Operations Manual; , 19
G) The Director and the staff successfully complete
all training; and , 19
H) Open the Residence for business in accordance with the
provisions of Section 1.04. , 19
ACKNOWLEDGED:
STERLING HOUSE CORPORATION: FRANCHISEE:
Colorado Springs Assisted Living, L. L. C.
By ________________________ By ________________________________
Title _____________________ Title______________________________
</PAGE>
EXHIBIT "A"
MINIMUM ASSET PURCHASE WARRANTIES
Except as expressly set forth on the attached schedule, Seller does
represent and warrant that:
A) Seller is a duly organized and validly existing (insert form of
business entity) in good standing under the laws of the State of
B) Seller is duly authorized to execute and deliver this Agreement,
perform the covenants on its part herein contained, consummate the
transactions contemplated hereby, and execute, deliver, and perform all
documents and instruments to be executed and delivered by it pursuant
hereto, an all required action in respect to the foregoing has been
taken. Owners (the partners, members, etc.) are the sole owners of
Seller. Neither Seller nor owners are subject to any restriction,
agreement, law, judgment, or decree which would prohibit or be violated
by the execution, delivery, and performance of this Agreement.
C) Seller has, and on the closing date will have, good and marketable
title to all of the purchased assets free and clear of all liens,
encumbrances, and restrictions of every kind and description.
Immediately following closing and delivery of the closing documents
provided for in this Agreement, good and marketable title to all of the
purchased assets shall vest in Purchaser, free and clear of all liens,
encumbrances, and restrictions except such as may be created by
Purchaser.
D) There are no contracts, agreements, or continuing obligations of Seller
or owners, or threatened or contingent liabilities of any nature
whatsoever in respect to the Residence(s), the business therein
conducted, or purchased assets which will survive the closing and in
any manner bind or affect Purchaser or the purchased assets.
E) There are no judgments of record, nor any litigation or administrative
proceedings pending, or to Seller's or owners' knowledge, threatened
against or relating to owners, Seller, or the purchased assets nor does
Seller or owners know or have reasonable grounds to know any basis for
any such action which have not been disclosed in an exhibit hereto.
F) All representations, warranties, indemnities, and covenants by Seller
and owners herein or in any document delivered hereunder shall, except
as affected by the transactions contemplated hereby, be true and in
effect as the closing date as though same were remade as of such time,
and all shall survive the closing hereof.
G) All of the fixed or tangible purchased assets (including, but not
limited to, equipment, furniture, furnishings, signs, fixtures, and
leasehold improvements) are in good condition, repair, and working
order as of the date hereof, subject to ordinary wear and tear.
H) The Bulk Sales Affidavit attached hereto as Exhibit "____" contains a
true, correct, and complete list of all creditors of Seller as of the
date thereof within the purview of Article 6 (Bulk Transfers) of the
Uniform Commercial Code as adopted in the State of.
</PAGE>
I) Neither this Agreement nor the transaction contemplated by this
Agreement was induced or procured through any person, firm,
corporation, or other entity acting on behalf of, or representing
Seller or owners as broker, finder, investment banker, financial
advisor, or in any similar capacity.
J) Seller/Franchisee is not aware of any conditions existing or resulting
from activities associated with Seller/Franchisee or any predecessor's
activities, including, without limitation, matters relating to air,
soil contamination and water pollution, solid wastes, toxic substances,
occupational health studies, matters relating to waste disposal
practices, ground water and soil monitoring, written communications
with federal, state and local environmental agencies and all existing,
pending or anticipated violations, citations, claims, and complaints
relating to or resulting from activities associated with the business
of Seller/Franchisee or conditions existing on the real property
("Environmental Matters"). To the best of Seller/Franchisee's
knowledge and belief:
1) The real property and the improvements thereon and the use and
operation thereof are currently in compliance with all applicable
federal, state and local laws, regulations, ordinances and requirements
relating to health, safety, and protection of the environment, and
Seller/Franchisee possesses and is in compliance with all permits
required thereby;
2) There has been no spillage or leaks associated with the filling,
draining, or use of any underground storage tanks;
3) Seller/Franchisee has never generated, transported, treated, stored or
disposed of, nor in any manner, arranged for disposal or treatment of
any Hazardous Substances (as hereinafter defined) on the real property
and there is no Hazardous Substances present on, in or under the real
property. "Hazardous Substances" for purposes of this Agreement shall
include, without limitation: (i) hazardous substances or hazardous
wastes, as those terms are defined by the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Subsection 9601, et
seq.; the Resource Conservation and Recovery Act, 42 U.S.C. Subsection
6901, et seq.; and/or any other applicable federal, state or local law,
regulation, ordinance or requirement, all as amended or hereafter
amended; (ii) petroleum, including, but not limited to, crude oil or
any fraction thereof; (iii) asbestos in any form or condition; and (iv)
any radioactive material, including, but not limited to, any source,
special nuclear or byproduct material as defined at 42 U.S.C.
Subsection 2011, et.seq., as amended or hereafter amended;
</PAGE>
4) Seller/Franchisee is not and has not been subject to, or received any
notice of, any private, administrative or judicial action, relating to
the presence or alleged present of Hazardous Substances in, under,
upon or emanating from the real property and does not know and has no
reason to know of any basis for any such notice or action; and there
are no pending or known or suspected threatened actions or proceedings
(or notices of potential actions or proceedings) from any governmental
agency or any other person or entity regarding any matter relating to
health, safety, or protection of the environment;
5) There has not been and there is not any known or suspected past or
present events, conditions, circumstances, activities, practices,
incidents or actions which could reasonably be expected to interfere
with or prevent continued compliance with any federal, state or local
law, regulation, ordinance or requirement relating to health, safety or
protection of the environment or which may give rise to any legal
liability, or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation against or involving the real
property based on any federal, state or local law, regulation,
ordinance or requirement relating to health, safety or protection of
the environment or violation or alleged violation thereof;
6) Seller/Franchisee does not own, possess, or control any polychlorinated
biphenyls ("PCB" ) or PCB contaminated fluids or equipment, nor does
any facility owned or operated by Seller/Franchisee contain in or on
its premises any waste, scrap, raw material, work-in-progress,
inventory, product, residue or other material or substance containing
PCB;
7) Seller/Franchisee does not own, possess, or control any asbestos or any
materials containing asbestos at the real property, nor does such
facility contain in or on its premises any waste, scrap, raw material,
work-in-progress, inventory, product, residue, structural members,
insulation, roofing material, building component, or other material or
substance containing asbestos; and
Seller/Franchisee hereby waives, releases and agrees not to make any claim
or bring any cost recovery action against Company/Purchaser under the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Subsection 9601, et seq., or any state equivalent or any similar law
now existing or hereafter enacted, except to the extent that the condition
or circumstance giving rise to such claim or action was in no manner
related to any condition or circumstance existing (to the extent determined
by a court of competent jurisdiction) as of or prior to the closing date.
The parties agree that the burden of proving that such a condition or
circumstance did not exist at or prior to the closing date shall be on
Seller/Franchisee.
</PAGE>
EXHIBIT "B"
MINIMUM STOCK PURCHASE WARRANTIES
Except as expressly set forth on the attached schedule, Seller does
not represent and warrant: A) Seller/Franchisee is a duly organized and
validity existing
(insert form of business entity) under the laws of the State of
of which there are _________________________ issued and outstanding
____________________________ (shares/interests).
B) Seller/Franchisee has no subsidiaries. [Alternatively, the
subsidiaries should be listed and all representations and warranties should
apply to such subsidiaries.]
C) Seller/Franchisee has the legal capacity to execute and deliver this
Agreement, perform the covenants on his part herein contained, consummate
the transaction contemplated hereby, and execute and deliver and perform
all documents and instruments to be executed and delivered by him pursuant
hereto. When executed and delivered, this Agreement and all such documents
and instruments will constitute valid and binding obligations of
Seller/Franchisee, enforceable against him in accordance with their
respective terms.
D) The ___________________ shares/interests are duly issued and
outstanding, fully paid, are non-assessable and comprise all of the issued
and outstanding equity ownership interests of Seller/Franchisee. There are
no warrants, options, conversion rights or privileges, or any other rights
(whether at equity or law) as to equity ownership interests of
Seller/Franchisee.
E) True, correct, and complete copies of the Corporate Charter or
Certificate of Incorporation and the Bylaws or Certificates of Limited
Partnership or Limited Liability Company, as applicable, of
Seller/Franchisee, and all amendments thereto have been furnished by
Seller/Franchisee to Company/Purchaser. The meeting minutes and ownership
interests transfer ledger of Seller/Franchisee have been exhibited to
Company/Purchaser, and the same constitute a complete and accurate record
of all proceedings taken by the owners and directors/managers and a
complete and accurate record of all issuances and transfers of ownership
interests.
F) Seller/Franchisee has been and is operated in compliance with all
applicable federal, state, and local laws, ordinances, and license
requirements.
G) The transaction contemplated by this Agreement will not result in the
revocation, suspension, or limitation of any license issued to
Seller/Franchisee.
H) Seller/Franchisee is the sole legal and beneficial owner of the
ownership interests and has good and marketable title to the ownership
interests, free and clear of all liens, security interests, charges,
covenants, conditions, agreements, encumbrances, pledges, restrictions,
adverse claims and defenses of every kind and description. Immediately
following delivery of the closing documents provided for herein, good and
marketable title to the ownership interests shall vest in
Company/Purchaser, free and clear of all liens, security interests,
charges, covenants, conditions, agreements, encumbrances, pledges,
restrictions, adverse claims and defenses, except such as may be created by
Company/Purchaser.
</PAGE>
I) The financial statements attached hereto as Exhibit "______" fairly and
accurately present the financial position of Seller/Franchisee as of the
dates set forth in such financial statements and the results of operation
of Seller/Franchisee for the periods covered by such financial statements
except as shown in Exhibit "_____" hereto. Since
___________ (date): (i) there has been no material adverse change in the
financial condition, assets or liabilities or business of
Seller/Franchisee; (ii) there have been no liabilities or obligations
incurred by Seller/Franchisee other than in the ordinary course of
business; (iii) no dividends or other distributions in respect of the
equity ownership of Seller/Franchisee have been declared, set aside, or
paid; and (iv) no indebtedness for borrowed money has been incurred by
Seller/Franchisee.
J) There are no unfulfilled or executory contracts, agreements, or
commitments of Seller/Franchisee which are not described in an exhibit
attached hereto.
K) The execution and delivery of this Agreement and the performance of or
compliance with the terms and provisions of this Agreement and all
documents and instruments contemplated hereby will not violate, conflict
with, or result in a breach of, any of the terms, conditions, or provisions
of the Articles of Incorporation or Bylaws or other applicable
organizational documents of Seller/Franchisee or any law, statute,
regulation or order, or any agreement, or any other restrictions of any
kind or character, to which Seller/Franchisee is a party or by which it may
be bound, and will not constitute a default thereunder or permit
acceleration of performance thereunder or result in the declaration or
imposition of any lien, charge, or encumbrance of any nature whatsoever
upon any of the assets of Seller/Franchisee.
L) Exhibit "_____" sets forth a true and complete copy of all leases and
subleases to the Residence(s). Each lease is valid, subsisting, and
enforceable in accordance with its terms, and neither Seller/Franchisee nor
any other party to any of the leases is in default or in arrears in the
performance or satisfaction of any agreement or condition on its part to be
performed or satisfied under any such lease, nor has Seller/Franchisee
given or received any notice of any claimed default.
M) Neither this Agreement nor the transaction contemplated by this
Agreement was induced or procured through any person, firm, corporation, or
other entity acting on behalf of, or representing Seller/Franchisee or
Company/Purchaser as broker, finder, investment banker, financial advisor,
or in any similar capacity.
N) Seller/Franchisee has good and marketable title to all of the assets
used in the Residence(s), free and clear of all liens, security interests,
charges, covenants, conditions, agreements, encumbrances, restrictions,
adverse claims and defenses of every kind and description, except
[______________________________________]. All such assets are located at
the following locations
[____________________________________________________________________].
</PAGE>
O) The Residence, including the interior and exterior of the building, all
equipment, furniture, furnishings, signs, fixtures, leasehold improvements,
and other personal property of Seller/Franchisee are in good operating
condition and repair, subject to normal wear and tear. All such assets are
fully insured and Seller/Franchisee has maintained and is maintaining
adequate general liability, product liability, and statutory workers' and
unemployment compensation insurance coverages.
P) There are no contracts, agreements, or continuing obligations or
threatened or contingent liabilities of any nature whatsoever (including,
without limitation, liabilities which have not yet accrued, but which
resulted from acts or omissions prior to the date hereof) in respect to
Seller/Franchisee which will survive the closing, except as shown in
Exhibit "_____."
Q) There are no judgments of record, nor any litigation or administrative
proceedings pending, or the best knowledge, information, and belief of
Seller/Franchisee, threatened against or relating to Seller/Franchisee, or
the ownership interests of Seller/Franchisee. Seller/Franchisee does not
know or have reasonable grounds to know of any basis for any such action,
or any governmental investigation, relating to Seller/Franchisee, or the
ownership interests of Seller/Franchisee.
R) All material facts known to Seller/Franchisee relating to the
businesses and financial condition of Seller/Franchisee and the sale of
the ownership interests have been disclosed to Company/Purchaser. No
statement contained in this Agreement or in any of the exhibits attached
hereto or in any document or instrument delivered or to be delivered by
Seller/Franchisee pursuant hereto or in connection with the transaction
contemplated hereby contains or will contain any untrue statement of a
material fact, or omit or will omit to state a material fact, necessary to
make the statements contained therein not misleading. A "material fact"
for purposes hereof includes such fact or facts which would influence a
reasonable man's decision to purchase or sell the shares.
S) Seller/Franchisee is not aware of any conditions existing or resulting
from activities associated with Seller/Franchisee or any predecessor's
activities, including, without limitation, matters relating to air, soil
contamination and water pollution, solid wastes, toxic substances,
occupational health studies, matters relating to waste disposal practices,
ground water and soil monitoring, written communications with federal,
state and local environmental agencies and all existing, pending or
anticipated violations, citations, claims, and complaints relating to or
resulting from activities associated with the business of Seller/Franchisee
or conditions existing on the real property ("Environmental Matters"). To
the best of Seller/Franchisee's knowledge and belief:
1) The real property and the improvements thereon and the use and
operation thereof are currently in compliance with all applicable federal,
state and local laws, regulations, ordinances and requirements relating to
health, safety, and protection of the environment, and Seller/Franchisee
possesses and is in compliance with all permits required thereby;
</PAGE>
2) There has been no spillage or leaks associated with the filling,
draining, or use of any underground storage tanks;
3) Seller/Franchisee has never generated, transported, treated, stored or
disposed of, nor in any manner, arranged for disposal or treatment of any
Hazardous Substances (as hereinafter defined) on the real property and
there is no Hazardous Substances present on, in or under the real property.
"Hazardous Substances" for purposes of this Agreement shall include,
without limitation: (i) hazardous substances or hazardous wastes, as those
terms are defined by the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. Subsection 9601, et seq.; the
Resource Conservation and Recovery Act, 42 U.S.C. Subsection 6901, et seq.;
and/or any other applicable federal, state or local law, regulation,
ordinance or requirement, all as amended or hereafter amended; (ii)
petroleum, including, but not limited to, crude oil or any fraction
thereof; (iii) asbestos in any form or condition; and (iv) any radioactive
material, including, but not limited to, any source, special nuclear or
byproduct material as defined at 42 U.S.C. Subsection 2011, et seq., as
amended or hereafter amended;
4) Seller/Franchisee is not and has not been subject to, or received any
notice of, any private, administrative or judicial action, relating to the
presence or alleged present of Hazardous Substances in, under, upon or
emanating from the real property and does not know and has no reason to
know of any basis for any such notice or action; and there are no pending
or known or suspected threatened actions or proceedings (or notices of
potential actions or proceedings) from any governmental agency or any other
person or entity regarding any matter relating to health, safety, or
protection of the environment;
5) There has not been and there is not any known or suspected past or
present events, conditions, circumstances, activities, practices, incidents
or actions which could reasonably be expected to interfere with or prevent
continued compliance with any federal, state or local law, regulation,
ordinance or requirement relating to health, safety or protection of the
environment or which may give rise to any legal liability, or otherwise
form the basis of any claim, action, suit, proceeding, hearing or
investigation against or involving the real property based on any federal,
state or local law, regulation, ordinance or requirement relating to
health, safety or protection of the environment or violation or alleged
violation thereof;
6) Seller/Franchisee does not own, possess, or control any polychlorinated
biphenyls ("PCB") or PCB contaminated fluids or equipment, nor does any
facility owned or operated by Seller/Franchisee contain in or on its
premises any waste, scrap, raw material, work-in-progress, inventory,
product, residue or other material or substance containing PCB;
</PAGE>
7) Seller/Franchisee does not own, possess, or control any asbestos or any
materials containing asbestos at the real property, nor does such facility
contain in or on its premises any waste, scrap, raw material, work-in-progress,
inventory, product, residue, structural members, insulation,
roofing material, building component, or other material or substance
containing asbestos; and
Seller/Franchisee hereby waives, releases and agrees not to make any claim
or bring any cost recovery action against Company/Purchaser under the
Comprehensive Environmental Response, Compensation and Liability Act, 42
U.S.C. Subsection 9601, et seq., or any state equivalent or any similar law
now existing or hereafter enacted, except to the extent that the condition
or circumstance giving rise to such claim or action was in no manner
related to any condition or circumstance existing (to the extent determined
by a court of competent jurisdiction) as of or prior to the closing date.
The parties agree that the burden of proving that such a condition or
circumstance did not exist at or prior to the closing date shall be on
Seller/Franchisee.
EXHIBIT "C"
LIMITED GUARANTY AND ASSUMPTION
OF OBLIGATIONS
THIS, LIMITED GUARANTY AND ASSUMPTION OF OBLIGATIONS is given this
_____ day of _______________________, 19___, by
_______________________________________________ (the "Guarantor").
In consideration of, and as inducement to, the execution of that
certain Franchise Agreement of even date herewith (the "Agreement") by
STERLING HOUSE CORPORATION (the "Company"), and subject to the provisions
of Section 19.03 of the Agreement, the undersigned hereby personally
unconditionally (i) guaranties to Company, and its successors and assigns,
for the term of the Agreement and thereafter as provided in the Agreement,
the performance by ___________________________ (the "Franchisee") of each
and every undertaking, agreement and covenant set forth in the Agreement
other than the payments required by Sections 6.02 and 16.01 and Article IX
of the Agreement; and (ii) further agrees to be personally bound by, and
personally liable for the breach of, each and every provision in the
Agreement, except as herein provided, including all obligations to take or
refrain from taking specific actions or to engage or refrain from engaging
in specific activities, including, without limitation, the provisions of
Sections 7.02 and 7.04 of ARTICLE VII and the provisions of ARTICLE XII of
the Agreement. Provided, that the undersigned shall have no personal
liability hereunder to the extent of any breach of the Agreement, including
any breach of Sections 7.02 or 7.04 or any breach of ARTICLE XII of the
Agreement caused by any other shareholder, officer, director, manager,
general partner, investor or their respective spouse or unemancipated child
which arises solely from such other person's wrongful or improper act or
failure to act and which does not involve any wrongful or improper act or
failure to act by the undersigned.
</PAGE>
The undersigned waives: (i) acceptance and notice of acceptance by
Company of the foregoing undertakings; (ii) notice of demand of non-performance
of any obligations hereby guaranteed; (iii) protest and/or non-performance of
any obligations hereby guaranteed; (iv) any right it may have to require that
an action be brought against Franchisee or any other person as a condition of
liability; and (v) any and all other notices and legal or equitable defenses
to which it may be entitled.
The undersigned consents and agrees that: (i) he shall render any
performance required under the Agreement upon demand if Franchisee fails
or refuses punctually to do so; (ii) such liability shall not be contingent
or conditioned upon pursuit by Company of any remedies against Franchisee
or any other person; and (iii) such liability shall not be diminished,
relieved or otherwise affected by any extension of time, or other
indulgence which Company may from time to time grant to Franchisee or to
any other person, including, without limitation, the acceptance of any
partial performance, or the compromise or release of any claims, none of
which shall in any way modify or amend this guaranty, which shall be
continuing and irrevocable during the term of the Agreement, or any extension
thereof. Any and all obligations which expressly or by their
nature survive the expiration or termination of the Agreement, and
consistent with the provisions of Section 16.06 of the Agreement, shall
continue and be irrevocable until they are satisfied in full or by their
nature expire.
IN WITNESS WHEREOF, the undersigned has hereunto affixed his/her
signature on the same day and year above referenced.
___________________________________
___________________________________
___________________________________
___________________________________
"GUARANTOR(S)"
</PAGE>
EXHIBIT 10.2
AMENDMENT TO
FRANCHISE AGREEMENT
THIS AMENDMENT TO FRANCHISE AGREEMENT (hereinafter referred to as
"Amendment") is made and entered into this 16th day of July ,
1996,
BY AND BETWEEN STERLING HOUSE CORPORATION,
a Kansas corporation,
hereinafter referred to as
"Company,"
AND Colorado Springs Assisted Living, L.L.C.
hereinafter referred to as
"Franchisee."
</PAGE>
W I T N E S S E T H:
WHEREAS, Company and Franchisee are parties to a certain
Franchise Agreement dated the 16th day of July, 1996 (hereinafter
referred to as "Franchise Agreement"), whereby Franchisee is
granted the license to operate a "Sterling House" assisted living
Residence (hereinafter referred to as the "Residence"); and
WHEREAS, the parties desire to amend the Franchise Agreement
in order to reflect the results of their previous negotiations
regarding their respective rights, duties and responsibilities
under said Franchise Agreement as reflected in a certain letter
agreement dated February 3, 1996.
NOW, THEREFORE, in consideration of the mutual promises
contained herein, the parties hereto do hereby agree as follows:
1. Amendment No. 1. ARTICLE XII of the Franchise
Agreement is hereby amended, modified and supplemented to include
the following:
In the event Company shall disapprove any reasonably qualified purchaser of
the Residence to whom Franchisee intends to sell such Residence, Company, upon
notice from Franchisee, shall execute its right of first refusal and shall
then purchase the Residence in the manner set forth in Section 12.08.
2. Amendment No. 2. Section 7.02 of the Franchise Agreement is
hereby amended, modified and supplemented to include the following:
Robert A. Brooks does hereby agree to be subject to the terms and
conditions of this Section 7.02 and accordingly shall not divulge
any Confidential Information to any passive (i.e., someone who does
not have substantial involvement in the day-to-day management of
the business operations or development activities of Franchisee)
investor of Franchisee, it being understood that in consideration
for such undertaking, no such passive investor shall be required to
execute any manner of non-competition agreement, including any that
might otherwise be required under Subsection 12.04(X).
3. Amendment No. 3. Section 7.04 of the Franchise Agreement is
hereby amended, modified and altered to read as follows:
7.04 Non-Competition covenant. During the term of this Agreement
and any extension thereof, as the case may be, Franchisee, Robert
A. Brooks, or any spouse or unemancipated child of Robert A.
</PAGE>
Brooks, shall not have any interest as an owner, investor, partner,
lender, director, officer, manager, member, employee, consultant,
representative, or agent, or in any other similar material capacity
shall not directly or indirectly enter into the employ, or work in
concert with or serve as consultant for, any person, partnership,
corporation, limited liability company, association, organization
or other entity engaged in the operation of any facility providing
assisted living services for the elderly (hereinafter referred to
as a "Competitive Business") and which is located within a radius
of twenty-five (25) miles from any Residence (operated wherever by
whomsoever) then open or under construction or under lease or
purchase commitment for future construction. Further, for a period
of two (2) years after the termination or non-renewal of this
Agreement, Franchisee, Robert A. Brooks, or any spouse or
unemancipated child of Robert A. Brooks, shall not have any
interest as an owner, investor, partner, lender, director, officer,
manager, member, employee, consultant, representative, or agent, or
in any other similar material capacity shall not directly or
indirectly enter into the employ, or work in concert with or serve
as consultant for, any person, partnership, corporation,
association, organization or other entity engaged in the operation of any
other business or commercial enterprise engaged in a Competitive Business and
which has in operation or is planning to open a business or commercial enter-
prise within a radius of twenty-five (25) miles from any Residence (operated
wherever by whomsoever) then in operation, under construction, or under lease
or purchase commitment on the effective date of termination or
expiration. Provided, the ownership of a class of securities
listed on a stock exchange or traded on the over-the-counter market
that represents five percent (5%) or less of the number of shares
of such class of securities then issued and outstanding shall not
constitute a violation of this Section 7.04.
4. Other Provisions. All other terms and conditions contained in
the Franchise Agreement shall remain unchanged and nothing
contained herein shall otherwise effect the rights and obligations
of the parties hereto under the Franchise Agreement. Provided, to
the extent that any inconsistency exists between this Amendment and
the Franchise Agreement, this Amendment shall control.
5. Modification. This constitutes the entire agreement of the
parties, and no additions, modifications or amendments may be made
hereto, except in writing and signed by all parties to this
Amendment.
6. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Kansas.
</PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as of the day and year first above written.
ATTEST: STERLING HOUSE CORPORATION
By Steven L. Vick, President
By R Gail Knott, Secretary
"Company"
COLORADO SPRINGS
ASSISTED LIVING, L.L.C.
By Robert A. Brooks, Managing Member
"Franchisee"
</PAGE>
EXHIBIT 10.3
FIRST AMENDMENT TO FACILITY LEASE AGREEMENT
Re: (Sterling House of Tallgrass, Sterling House of Bethany,
Sterling House of Derby, Sterling House of Wellington and
Sterling House of Hays)
THIS FIRST AMENDMENT TO FACILITY LEASE AGREEMENT is entered
into as of the _______ day of ___, 1996, by and between Meditrust
of Kansas, Inc., a Kansas corporation ("Lessor"), and Assisted
Living Properties, Inc. a Kansas corporation ("Lessee"). Initial
capitalized terms used herein and not otherwise defined shall
have the meanings respectively ascribed to such terms in the
Existing Lease (defined below).
W I T N E S S E T H:
WHEREAS, Lessor and Lessee entered into that certain
Facility Lease Agreement dated as of March 22, 1996 (the
"Existing Lease") with respect to properties know as and located
at (I) Sterling House of Tallgrass, 8600 E. 21st, Wichita, Kansas
67206, (ii) Sterling House of Bethany, 4101 N. Council Road,
Bethany, Oklahoma 73008, (iii) Sterling House of Derby, 1709 E.
Walnut Grove, Derby, Kansas 67037, (iv) Sterling House of
Wellington, 500 N. Plum Street, Wellington, Kansas 67152, and (v)
Sterling House of Hays, 1801 E. 27th Street, Hays, Kansas 67601,
as more particularly described on Exhibit A attached to the
Existing Lease; and
</PAGE>
WHEREAS, Lessor and Lessee now desire to amend a provision
of the Existing Lease relating to the adjustment of Base Rent,
and to otherwise amend certain provisions of the Existing Lease,
as herein provided;
NOW, THEREFORE, in consideration of the premises and such
other valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Lessor and Lessee hereby agree as
follows:
1. Section 3.1.2, Increase to Base Rent. Section 3.1.2 of
the Existing Lease is hereby deleted in its entirety, and the
following text is substituted therefor:
"3.1.2 Increase to Base Rent. Commencing on April 1, 1997, and
on the first day of April of each subsequent year during the term
(each such April 1 shall be referred to herein as an "Adjustment
Date"), Base Rent for the twelve (12) month period beginning with
such April 1 shall be increased so as to equal the lesser of (a)
the Maximum Rent Adjustment, or (b) an amount determined by
multiplying Base Rent then in effect times a fraction, the
numerator of which shall be the CPI Index on the applicable
Adjustment Date and the denominator of which shall be the CPI
Index on the preceding Adjustment Date (or on April 1, 1997 in
the case of the first Adjustment Date).
If, for any Lease Year or any portion thereof, Base Rent is
adjusted in accordance with clause (b) above, then the difference
between Base Rent for such Lease Year, and Base Rent for such
Lease Year if adjusted in accordance with clause (a) above shall
be referred to herein as the "Rent Shortfall." If, for any Lease
Year, Base Rent is adjusted in accordance with clause (a), then
the difference between Base Rent for such lease Year and Base
Rent for such lease Year if adjusted in accordance with clause
(b), shall be referred to herein as the "Rent Surplus".
In the event there is a Rent Shortfall for any lease Year, Lessee
shall also pay to Lessor, as part of Base Rent due hereunder, an
amount equal to such Rent Shortfall, plus any Rent Shortfall in
any previous lease Years, up to an amount equal to the Rent
Surplus, if any, for the then current Lease Year, less any prior
payments an account of a Rent Shortfall.
</PAGE>
As herein, the "Maximum Rent Adjustment" shall be Base Rent, in
any applicable year, which would result solely b multiplying, in
each year, on the Adjustment Date, Base Rent then in effect (as
adjusted pursuant to this Section 3.1.2 only) by 1.02%.
As used herein, the "CPI Index" shall mean and refer to the
Consumer Price Index for Urban Wage Earners and Clerical Workers,
U.S. Cities Average, All Items (1982-84=100) published by the
Bureau of Labor Statistics of the U.S. Department of Labor;
provided that if compilation of the CPI Index in its present form
and calculated on its present basis is discontinued or
transferred to any other governmental department or bureau, then
the index most nearly the same as the CPI Index published by the
Bureau of Labor Statistics shall be used. If the is no such
similar index, a substitute index which is then generally
recognized as being similar to the CPI Index shall be used, such
substitute index to be reasonably selected by Lessor. Until the
CPI Index is established, Lessee shall pay Base Rent calculated
in accordance with clause (a) above, and once the CPI Index for
the Adjustment Date of such Lease Year is published, the new Base
Rent (as increased) shall be effective retroactively as of the
Adjustment Date with the remaining payments to be adjusted
ratably.
The example attached hereto as Schedule 3.1.2 illustrates how the
increase in Base Rent shall be determined."
</PAGE>
2. Miscellaneous. The parties hereto acknowledge and agree
that, except as specifically amended by the terms, covenants and
provisions of the Existing Lease shall remain in full force and
effect throughout the balance of the Term. From and after the
date hereof, all references in the Existing Lease and the other
Lease Documents to the term "the Lease" or "this Lease" shall
mean and be the Existing Lease as affected by this First
Amendment to Facility lease Agreement.
3. Acknowledgment by Guarantor. While no notification
and/or consent of this First Amendment to Facility Lease
agreement is required to be provided to and/or obtained from, as
applicable, Sterling Hose Corporation, Sterling House Corporation
hereby acknowledges and consents to the provisions of this First
Amendment to Facility lease Agreement.
IN WITNESS WHEREOF, Lessor and Lessee have caused this First
Amendment to Facility Lease Agreement to be duly executed as a
Massachusetts instrument under seal by persons hereunto duly
authorized, in multiple counterparts, each to be considered an
original hereof, as of the date first above.
</PAGE>
WITNESS: LESSEE:
ASSISTED LIVING PROPERTIES, INC., a
Kansas corporation
________________________ By:________________________________
Name: Name:
Title:
WITNESS: LESSOR:
MEDITRUST OF KANSAS, INC.
a Kansas corporation
_________________________ By:________________________________
Name: Name:
Title:
For the purposes of acknowledging and consenting to this
First Amendment to Facility Lease Agreement pursuant to Section 3
hereof:
WITNESS: GUARANTOR:
STERLING HOUSE CORPORATION,
__________________________ By:________________________________
Name: Name:
Title:
</PAGE>
Exhibit 10.4
AMENDMENT TO LEASE
THIS AMENDMENT TO LEASE (this "Amendment") is made as of the ____ day of June,
1996, by and between KANSAS-LTC CORPORATION, formerly known as Coronado
Corporation, a Delaware corporation, herein called "Lessor", and STERLING HOUSE
CORPORATION, a Kansas corporation, herein called "Lessee", subject to the
terms, conditions and contingencies set forth below.
RECITALS
A. Lessor and Lessee entered into that certain Lease, dated as of December
22, 1995, whereby Original Lessor leased to Lessee that certain real property
located in Dodge City, Kansas, and the improvements located thereon consisting
of a 35-unit assisted living facility commonly known as the "Sterling House,"
as more specifically described in the Lease.
B. Lessor and Lessee desire to amend the Lease subject to the terms and
conditions set forth herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Lessor and Lessee agree as follows:
1. Annual Escalation of Minimum Rent. Paragraph 3.1(c) of this Lease is
hereby deleted in its entirety and replaced with the following:
(c) Annual Escalation of Minimum Rent. Commencing on January 1, 1997 and
continuing on each subsequent January 1 during the Term, the Minimum Rent
(irrespective of any prorations made pursuant to Paragraph 3.1(a) of this Lease)
shall increase to an amount equal to the Minimum Rent for the immediately
preceding Lease Year multiplied by a fraction, the numerator of which shall be
the C.P.I. (defined below) for January 1 of the Lease Year then in effect, and
the denominator of which shall be the C.P.I.of the immediately preceding Lease
Year then in effect, and the denominator of which shall be the C.P.I. for Jan-
uary 1 of the immediately preceding Lease Year; provided, however, that the
product of said multiplication shall not result in an increase of the Minimum
Rent by more than two percent (2%) per year on a cumulative basis ("Annual
Multiplier"). If, however, the Annual Multiplier is less than two percent (2%)
in any Lease Year (a "Less Than 2% Lease Year"), then at such time as the
Annual Multiplier is determined for subsequent Lease Years, the Minimum Rent
for each Less Than 2% Lease Year shall be retroactively recalculate Annual
Multipliers (whether less than or greater than 2%) shall be first applied to
increase the Annual Multiplier for each Less Than 2% Lease Year to an amount
up to, but not greater than, 2%, with such recalculations to be made in chron-
ological order beginning with the earliest Less Than 2% Lease Year
and continuing, so long as there is Annual Multiplier remaining, until recal-
culations has been made with respect to all Less Than 2% Lease Years. After
</PAGE>
each such recalculation has been made, the shortfall in the Minimum Rent for the
newly recalculated Less Than 2% Lease Years shall be billed to Lessee and Lessee
shall pay such shortfall amount to Lessor together with the next payment of
Minimum Rent otherwise coming due hereunder. Such recalculations and shortfall
billings shall be made in each Lease Year where there remain prior Less Than 2%
Lease Years which have not yet been recalculated to 2%. For purposes of example
only, if the initial Minimum Rent equals $939,120, and if (a)the C.P.I. would
increase to $953,207; (b) the C.P.I. increased 1.5% as of January 1, 1998, the
Minimum Rent as of January 1, 1998 would increase to $967,505; (c) the C.P.I.
increased 6% as of January 1, 1999, the Minimum Rent as of January 1, 1999 would
increase to $996,602, which is the Minimum Rent increased by 2% per year for
three years (i.e. the average annual increases have been 3% (1.5% + 1.5% + 6%
for the three years, respectively,) subject to the 2% annual limitation), and
the total shortfall amount to be billed to leasee would be $4,695 for Lease Year
1997 and $9,555 for Lease Year 1998. "C.P.I." shall mean and refer to the
Consumer Price Index of the Bureau of Labor Statistics of the Department of
Labor Statistics of the Department of Labor, U.S. Cities Average, All Items
(1982-84=100);provided that if compilation of the C.P.I. is discontinued or
transferred to any other governmental department of bureau, then the index most
nearly the same as the C.P.I. shall be used. If Lessor is unable to determine
the C.P.I. by January 1 of any Lease Year, Lessee shall continue to pay the
Minimum Rent at the rate paid for the immediately prior Lease Year and once the
C.P.I. for January 1 of such Lease Year is published, the new Minimum Rent (as
increased by the Annual Multiplier) shall be effective retroactively as of the
first day of such Lease Year and the aggregate amount of any additional Minimum
Rent shall be paid by Lessee promptly after written notice therof from Lessor
(but not later than the date of the next monthly installment of Minimum Rent,
unless the next installment falls due within five (5) days after Lessor's notice
in which case not later then the date of the second next monthly installment
of Minimum Rent). No delay by Lessor in providing notice of any such increase
in Minimum Rent shall be beemed a waiver of Lessor's right to increase the Mini-
mum Rent as provided hereunder"
2. Miscellaneous.
2.1 Except as set forth in this Amendment, the Lease (as assigned) shall
remain as originally stated and the terms and provisions of the Lease (as
assigned) are hereby ratified and affirmed.
</PAGE>
2.2 This Amendment may be executed in any number of counterparts, each of
which shall be an original, but such counterparts shall together constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first above wirtten.
"LESSEE" STERLING HOUSE CORPORATION,
a Kansas corporation
By:_____________________________________
Name:__________________________________
Title:___________________________________
"LESSOR" KANSAS-LTC CORPORATION,
formerly known as Coronado Corporation,
a Delaware corporation,
By:_____________________________________
Name:__________________________________
Title:___________________________________
</PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains information extracted from the Consolidated Balance Sheet
and the condolidated statement of operations filed as a part of the Annual
Report on Form 10-Q and is qualified in its entirety by reference to such annual
report on Form 10-Q.
</LEGEND>
<CIK> 0001000185
<NAME> RON BAZZELLE
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 36,052,316
<SECURITIES> 0
<RECEIVABLES> 8,423,943
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,888,988
<PP&E> 23,662,756
<DEPRECIATION> (558,211)
<TOTAL-ASSETS> 72,373,015
<CURRENT-LIABILITIES> 5,966,042
<BONDS> 39,702,125
0
0
<COMMON> 28,191,965
<OTHER-SE> (3,310,526)
<TOTAL-LIABILITY-AND-EQUITY> 72,373,015
<SALES> 0
<TOTAL-REVENUES> 5,951,088
<CGS> 0
<TOTAL-COSTS> 6,602,489
<OTHER-EXPENSES> (181,205)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (470,196)
<INCOME-TAX> 139,285
<INCOME-CONTINUING> (330,911)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (330,911)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.05)
</TABLE>
EXHIBIT 10.8
SECOND AMENDMENT TO LEASE AGREEMENT
This Second Amendment to Lease Agreement is made and entered
into effective June 30, 1996 by and between Health Care REIT,
Inc., a corporation organized under the laws of the State of
Delaware ("Landlord"), having its principal office located at One
SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio 43603, and
Sterling House Corporation, a corporation organized under the
laws of the State of Kansas ("Tenant"), having its chief
executive office located at 453 South Webb Road, Suite 500,
Wichita, Kansas 67207.
WHEREAS, effective November 22, 1995, Landlord and Tenant
entered into a certain Lease Agreement ("Lease") for the real
property legally described on Exhibit A attached hereto and made
a part hereof ("Premises");
WHEREAS, Landlord and Tenant now desire to amend the Lease
as hereinafter set forth, and to ratify and confirm the Lease in
all other respects.
NOW, THEREFORE, in consideration of these Premises, the
mutual promises of the parties, and other good and valuable
consideration, the receipt and sufficiency of which are mutually
acknowledged, the parties agree as follows:
1. Paragraph 2.5 of the lease shall be deleted and replaced
with the following language:
"2.5 Increase of Lease Rate and Base Rent. Commencing on
the first anniversary of the Term Commencement Date and on each
anniversary thereafter during the Term, including any Renewal
Term and Extended Term, (each such date shall be herein defined
as "Rent Adjustment Date") the Base Rent shall be increased so as
to equal the lesser of (a) the Maximum Rent Adjustment (defined
below), or (b) an amount determined by multiplying the Base Rent
then in effect times a fraction, the numerator of which shall be
the CPI Index on the applicable Rent Adjustment Date and the
denominator of which shall be the CPI Index on the preceding Rent
Adjustment Date (or on the Completion Date in the case of the
first Rent Adjustment date).
If, for any Lease Year or any portion thereof, the Base Rent
is adjusted in accordance with clause (b) above, then the
difference between the Base Rent for such Lease Year, and the
Base Rent for such lease Year if adjusted in accordance with
clause (a) above shall be referred to herein as the "Rent
</PAGE>
Shortfall." If, for any Lease Year, the Base Rent is adjusted in
accordance with clause (a), then the difference between the Base
Rent for such Lease Year and the Base Rent for such Lease Year if
adjusted in accordance with clause (b), shall be referred to
herein as the "Rent Surplus."
In the event there is a Rent Shortfall for any lease Year,
Tenant shall also pay to Landlord, as part of the Base Rent due
hereunder, an amount equal to such Rent Shortfall, plus any Rent
Shortfall in any previous Lease Years, up to an amount equal to
the Rent Surplus, if any, for the then current Lease Year less
any prior payments on account of a Rent Shortfall.
As used herein, the "Maximum Rent Adjustment" shall be the
Base Rent in any applicable year, which would result solely by
multiplying, in each year, on the Rent Adjustment Date, the Base
Rent then in effect (as adjusted pursuant to this Section 2.5
only) by 1.02.
As used herein, the "CPI Index" shall mean and refer to the
Consumer Price Index for Urban Wage Earners and Clerical Workers,
U.S. Cities Average. All items (1982-84-100) published by the
Bureau of labor Statistics of the U.S. Department of Labor;
provided that if complication of the CPI Index in its present
form and calculated on its present basis is discontinued or
transferred to any other governmental department of bureau, then
the index most nearly the same as the CPI Index published by the
Bureau of labor statistics shall be used. If there is not such
similar index, a substitute index which is then generally
recognized as being similar to the CPI Index shall be used, such
substitute index to b e reasonable selected by Landlord. Until
the CPI Index is established, Tenant shall pay the Base Rent
calculated in accordance with clause (a) above, and once the CPI
Index for the Rent Adjustment Date of such Lease Year is
published, the new Base Rent (as increased) shall be effective
retroactively as of the Rent Adjustment Date with the remaining
payments to be adjusted ratably.
2. In all other respects, the Lease is hereby ratified and confirmed.
</PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment to Lease or caused the same to be executed by their
respective duly authorized officers as of the date first set
forth above.
Signed and acknowledged
in the presence of: Health Care REIT, Inc.
Signature_________________________ By:____________________
Print Name________________________ Title:_______________
Signature_________________________
Print Name________________________
Sterling House Corporation
Signature_________________________ By:______________________
Print Name________________________ Title:__________________
Tax I.D. No.:___________
signature_________________________
Print Name________________________
STATE OF OHIO )
) ss:
COUNTY OF LUCAS )
The foregoing instrument was acknowledge before me this ____
day of _____, 1996 by ________________ of Health Care REIT, Inc.,
a Delaware corporation, on behalf of the corporation.
__________________________________
Notary Public
My Commission Expires:_________________ [SEAL]
</PAGE>
EXHIBIT 10.5
Schedule of Executed Amenedment to Lease Agreements
By and Between Sterling House Corporation
Schedule of Executed Lease Agreements, by and between Sterling
House Corporation and Kansas-LTC Corporation formerly know as
Coronado Corporation.
Location Date of Amendment
1200 E. Kirwin Ave 6/25/96
Salina, KS 67401
2400 N. 14th Avenue 6/25/96
Dodge City, KS 67801
1206 Patton Road 6/25/96
Great Bend, KS 67530
1460 N. Main 6/25/96
McPherson, KS 67460
</PAGE>
EXHIBIT 10.6
CH&S draft dated 6/24/96
ds2/213120.1
F A C I L I T Y L E A S E A G R E E M E N T
MEDITRUST OF FLORIDA, INC.
(A New York Corporation)
as
Lessor
AND
ASSISTED LIVING PROPERTIES, INC.
(A Kansas Corporation)
as
Lessee
Dated As Of June 24, 1996
For Premises Known as and Located At:
</PAGE>
TABLE OF CONTENTS
Page
ARTICLE 1
LEASED PROPERTY; TERM; EXTENSION 2
1.1 Leased Property 2
1.2 Term 3
1.3 Extended Terms. 3
ARTICLE 2
DEFINITIONS AND RULES OF CONSTRUCTION 4
2.1 Definitions 4
2.2 Rules of Construction 21
ARTICLE 3
RENT 22
3.1 Rent for Land, Leased Improvements,
Related Rights and Fixtures. 22
3.1.1 Base 22
3.1.2 Increase to Post-Conversion Base Rent 22
3.1.3 Post-Conversion Base Rent for Extended
Terms 23
3.2 Best Efforts To Maximize 23
3.3 [Intentionally Omitted] 24
3.4 Additional Charges 24
3.5 Net Lease 24
3.6 No Lessee Termination or Offset. 24
3.6.1 No Termination 24
3.6.2 Waiver 24
3.6.3 Independent Covenants 25
3.7 Abatement of Rent Limited 25
</PAGE>
ARTICLE 4
IMPOSITIONS; TAXES; UTILITIES;
INSURANCE PAYMENTS 25
4.1 Payment of Impositions. 25
4.1.1 Lessee To Pay 25
4.1.2 Installment Elections 25
4.1.3 Returns and Reports 26
4.1.4 Refunds 26
4.1.5 Protest 26
4.2 Notice of Impositions 26
4.3 Adjustment of Impositions 26
4.4 Utility Charges 27
4.5 Insurance Premiums 27
4.6 Deposits 27
4.6.1 Lessor's Option 27
4.6.2 Use of Deposits 28
4.6.3 Deficits 28
4.6.4 Other Properties 28
4.6.5 Transfers 28
4.6.6 Security 29
4.6.7 Return 29
4.6.8 Receipts 29
ARTICLE 5
OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY;
INSTALLATION, REMOVAL AND REPLACEMENT OF
PERSONAL PROPERTY 29
5.1 Ownership of the Leased Property 29
5.2 Personal Property; Removal and Replacement
of Personal Property. 29
5.2.1 Lessee To Equip Facility 29
5.2.2 Sufficient Personal Property 29
5.2.3 Removal and Replacement; Lessor's
Option to Purchase. 30
ARTICLE 6
SECURITY FOR LEASE OBLIGATIONS 31
6.1 Security for Lessee's Obligations; Permitted
Prior Security Interests 31
6.1.1 Security 31
6.1.2 Purchase-Money Security Interests
and Equipment Leases 31
6.2 Credit Enhancement 32
6.2.1 Cash Deposit/Letter of Credit 32
6.2.2 Application of Credit Enhancement 33
6.2.3 Replenishment of Cash Collateral 33
6.3 Guaranty 33
</PAGE>
ARTICLE 7
CONDITION AND USE OF LEASED PROPERTY;
MANAGEMENT AGREEMENTS 33
7.1 Condition of the Leased Property 33
7.2 Use of the Leased Property;
Compliance; Management 34
7.2.1 Obligation to Operate 34
7.2.2 Permitted Uses 34
7.2.3 Compliance With Insurance Requirements 35
7.2.4 No Waste 35
7.2.5 No Impairment 35
7.2.6 No Liens 35
7.3 Compliance with Legal Requirements 35
7.4 Management Agreements 35
ARTICLE 8
REPAIRS; RESTRICTIONS 36
8.1 Maintenance and Repair 36
8.1.1 Lessee's Responsibility 36
8.1.2 No Lessor Obligation 37
8.1.3 Lessee May Not Obligate Lessor 37
8.1.4 Lessee's Obligation to Perform
Upgrade Expenditures 37
8.2 Encroachments; Title Restrictions 38
ARTICLE 9
MATERIAL STRUCTURAL WORK AND
CAPITAL ADDITIONS 39
9.1 Lessor's Approval 39
9.2 General Provisions as to Capital Additions
and Certain Material Structural Work 39
9.2.1 No Liens 39
9.2.2 Lessee's Proposal Regarding Capital
Additions and Material Structural Work 39
9.2.3 Lessor's Options Regarding Capital
Additions and Material Structural Work 39
9.2.4 Lessor May Elect to Finance Capital
Additions 40
9.2.5 Legal Requirements; Quality of Work 40
9.3 Capital Additions Financed by Lessor 40
9.3.1 Lessee's Financing Request 40
9.3.2 Lessor's General Requirements 40
9.3.3 Payment of Costs 42
9.4 General Limitations 42
9.5 Non-Capital Additions 42
9.6 Permitted Work 43
</PAGE>
ARTICLE 10
WARRANTIES AND REPRESENTATIONS 43
10.1 Representations and Warranties 43
10.1.1 Existence; Power; Qualification 43
10.1.2 Valid and Binding 43
10.1.3 Single Purpose 44
10.1.4 No Violation 44
10.1.5 Consents and Approvals 44
10.1.6 No Liens or Insolvency Proceedings 44
10.1.7 No Burdensome Agreements 45
10.1.8 Commercial Acts 45
10.1.9 Adequate Capital, Not Insolvent 45
10.1.10 Not Delinquent 45
10.1.11 No Affiliate Debt 45
10.1.12 Taxes Current 45
10.1.13 Financials Complete and Accurate 46
10.1.14 Pending Actions, Notices and Reports 46
10.1.15 Compliance with Legal and Other
Requirements 47
10.1.16 No Action By Governmental Authority
or Accreditation Body 47
10.1.17 Property Matters 48
10.1.18 Rate Limitations 49
10.1.19 Free Care 49
10.1.20 No Proposed Changes 49
10.1.21 ERISA 49
10.1.22 No Broker 50
10.1.23 No Improper Payments 50
10.1.24 Nothing Omitted 50
10.1.25 No Margin Security 50
10.1.26 No Default 51
10.1.27 Principal Place of Business 51
10.1.28 Third Party Payor Agreements 51
10.1.29 Rates 51
10.1.30 Labor Matters 52
10.1.31 Intellectual Property 52
10.1.32 Management Agreements 52
10.1.33 Fiscal Year 52
10.2 Continuing Effect of Representations
and Warranties 52
</PAGE>
ARTICLE 11
FINANCIAL AND OTHER COVENANTS 52
11.1 Status Certificates 52
11.2 Financial Statements; Reports; Notice
and Information 52
11.2.1 Obligation To Furnish 53
11.2.2 Responsible Officer 56
11.2.3 No Material Omission 56
11.2.4 Confidentiality 56
11.3 Financial Covenants 57
11.3.1 Debt Coverage Ratio of Lessee 57
11.3.2 [Intentionally Omitted] 57
11.3.3 [Intentionally Omitted] 57
11.3.4 [Intentionally Omitted] 57
11.3.5 Current Ratio - Guarantor 57
11.3.6 [Intentionally Omitted] 57
11.3.7 Tangible Net Worth - Guarantor 57
11.3.8 [Intentionally Omitted] 57
11.3.9 [Intentionally Omitted] 57
11.3.10 No Indebtedness 57
11.3.11 No Guaranties 58
11.3.12 [Intentionally Omitted] 58
11.4 Affirmative Covenants 58
11.4.1 Maintenance of Existence 58
11.4.2 Materials 58
11.4.3 Compliance With Legal Requirements
And Applicable Agreements 58
11.4.4 Books And Records 58
11.4.5 Participation in Third Party Payor
Programs 59
11.4.6 Conduct of its Business 59
11.4.7 Address 59
11.4.8 Subordination of Affiliate Transactions 59
11.4.9 Inspection 60
11.5 Additional Negative Covenants 60
11.5.1 Restrictions Relating to Lessee 60
11.5.2 No Liens 61
11.5.3 Limits on Affiliate Transactions 61
11.5.4 Non-Competition 61
11.5.5 No Default 62
11.5.6 Restrictions Relating to the Guarantor 62
11.5.7 [Intentionally Omitted] 63
11.5.8 ERISA 63
11.5.9 Forgiveness of Indebtedness 63
11.5.10 Value of Assets 63
11.5.11 Changes in Fiscal Year and Accounting
Procedures 63
11.5.12 Changes in Executive Officers 63
</PAGE>
ARTICLE 12
INSURANCE AND INDEMNITY 64
12.1 General Insurance Requirements 64
12.1.1 Types and Amounts of Insurance 64
12.1.2 Insurance Company Requirements 65
12.1.3 Policy Requirements 65
12.1.4 Notices; Certificates and Policies 66
12.1.5 Lessor's Right to Place Insurance 66
12.1.6 Payment of Proceeds 67
12.1.7 Irrevocable Power of Attorney 67
12.1.8 Blanket Policies 67
12.1.9 No Separate Insurance 68
12.1.10 Assignment of Unearned Premiums 68
12.2 Indemnity 68
12.2.1 Indemnification 68
12.2.2 Indemnified Parties 69
12.2.3 Limitation on Lessor Liability 69
12.2.4 Risk of Loss 69
ARTICLE 13
FIRE AND CASUALTY 70
13.1 Restoration Following Fire or Other Casualty 70
13.1.1 Following Fire or Casualty 70
13.1.2 Procedures 70
13.1.3 Disbursement of Insurance Proceeds
Less Than $50,000.00 71
13.1.4 Disbursement of Insurance Proceeds
$50,000.00 or More 71
13.2 Disposition of Insurance Proceeds 75
13.2.1 Proceeds To Be Released to Pay For Work 75
13.2.2 Proceeds Not To Be Released 75
13.2.3 Lessee Responsible for Short-Fall 76
13.3 Tangible Personal Property 76
13.4 Restoration of Certain Improvements
and the Tangible Personal Property 76
13.5 No Abatement of Rent 76
13.6 Termination of Certain Rights 77
13.7 Waiver 77
13.8 Application of Business Interruption Insurance 77
13.9 Obligation To Account 77
ARTICLE 14
CONDEMNATION 78
14.1 Parties' Rights and Obligations 78
14.2 Total Taking 78
14.3 Partial or Temporary Taking 78
14.4 Restoration 79
14.5 Award Distribution 79
14.6 Control of Proceedings 79
</PAGE>
ARTICLE 15
PERMITTED CONTESTS 79
15.1 Lessee's Right to Contest 79
15.2 Lessor's Cooperation 80
15.3 Lessee's Indemnity 80
ARTICLE 16
DEFAULT 81
16.1 Events of Default 81
16.2 Remedies 84
16.3 Damages 85
16.4 Lessee Waivers 86
16.5 Application of Funds 87
16.6 [Intentionally Omitted] 87
16.7 [Intentionally Omitted] 87
16.8 Lessor's Right to Cure 87
16.9 No Waiver By Lessor 88
16.10 Right of Forbearance 88
16.11 Cumulative Remedies 89
ARTICLE 17
SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING OVER 89
17.1 Surrender 89
17.2 Transfer of Contracts and Permits 89
17.3 Management of Leased Property 89
17.4 Correction of Deficiencies 90
17.5 No Acceptance of Surrender 90
17.6 Holding Over 90
ARTICLE 18
PURCHASE OF THE LEASED PROPERTY 90
18.1 Purchase of the Leased Property 90
18.2 Appraisal 91
18.2.1 Designation of Appraisers 91
18.2.2 Appraisal Process 91
18.2.3 Specific Enforcement and Costs 92
18.3 Lessee's Right of First Refusal 92
18.4 Lessee's Option to Purchase 92
18.4.1 92
18.4.2 Exercise of Option 93
18.4.3 Conveyance 93
18.4.4 Calculation of Purchase Option
Purchase Price 94
18.4.5 Payment of Purchase Option Purchase Price94
18.4.6 Place and Time of Closing 94
18.4.7 Condition of Purchase Option Property 94
18.4.8 Quality of Title 94
18.4.9 Lessor's Inability to Perform 94
18.4.10 Merger by Deed 94
18.4.11 Use of Purchase Option Purchase
Price to Clear Title 95
18.4.12 Lessee's Default 95
18.4.13 [Intentionally Omitted] 95
</PAGE>
ARTICLE 19
SUBLETTING AND ASSIGNMENT 95
19.1 Subletting and Assignment 95
19.2 [INTENTIONALLY OMITTED] 96
19.3 Attornment 96
19.4 [INTENTIONALLY OMITTED] 96
ARTICLE 20
TITLE TRANSFERS AND LIENS GRANTED BY LESSOR 96
20.1 No Merger of Title 96
20.2 Transfers By Lessor 96
20.3 Lessor May Grant Liens 96
20.4 Subordination and Non-Disturbance 97
ARTICLE 21
LESSOR OBLIGATIONS 98
21.1 Quiet Enjoyment 98
21.2 Memorandum of Lease 98
21.3 Default by Lessor 98
21.4 Computer Disc 98
ARTICLE 22
NOTICES 99
ARTICLE 23
LIMITATION OF MEDITRUST LIABILITY 100
ARTICLE 24
MISCELLANEOUS PROVISIONS 100
24.1 Broker's Fee Indemnification 100
24.2 No Joint Venture or Partnership 100
24.3 Amendments, Waivers and Modifications 101
24.4 Further Assurances 101
24.5 Invalidity 102
24.6 Captions and Headings 102
24.7 Time is of the Essence 102
24.8 Counterparts 102
24.9 Entire Agreement 102
24.10 WAIVER OF JURY TRIAL 103
24.11 Successors and Assigns 103
24.12 No Third Party Beneficiaries 103
24.13 Governing Law 104
24.14 General 104
24.15 Intention of Parties 104
24.16 Radon Gas 104
</PAGE>
EXHIBIT A LEGAL DESCRIPTION OF THE LAND
EXHIBIT B PERMITTED TITLE EXCEPTIONS
EXHIBIT C LIST OF PARTNERS AND/OR SHAREHOLDERS
EXHIBIT D RATE LIMITATIONS
EXHIBIT E FREE CARE REQUIREMENTS
EXHIBIT F PROVIDER AGREEMENTS
EXHIBIT G NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
EXHIBIT H OPEN COST REPORTS
EXHIBIT I DEBT COVERAGE RATIO CALCULATION
EXHIBIT J EXECUTIVE OFFICERS
SCHEDULE 3.1.2 EXAMPLE RE: INCREASE IN POST-CONVERSION BASE RENT
SCHEDULE 4.6.2 INVESTMENT VEHICLES FOR IMPOSITION DEPOSITS
</PAGE>
FACILITY LEASE AGREEMENT
This FACILITY LEASE AGREEMENT ("Lease") is dated as of the
24th day of June, 1996 and is between MEDITRUST OF FLORIDA, INC.
("Lessor"), a New York corporation, having its principal office at
197 First Avenue, Needham Heights, Massachusetts 02194, and
ASSISTED LIVING PROPERTIES, INC. ("Lessee"), a Kansas corporation,
having its principal office at 453 S. Webb Road, Suite 500,
Wichita, Kansas 67207.
ARTICLE 1
LEASED PROPERTY; TERM; EXTENSIONS
1.1 Leased Property. Upon and subject to the terms and
conditions hereinafter set forth, Lessor leases to Lessee and
Lessee rents and leases from Lessor all of Lessor's rights and
interests in and to the following real and personal property
(collectively, the "Leased Property"):
(a) the real property described in EXHIBIT A attached hereto
(the "Land");
(b) all buildings, structures, Fixtures (as hereinafter
defined) and other improvements of every kind including, but not
limited to, alleyways and connecting tunnels, sidewalks, utility
pipes, conduits and lines, and parking areas and roadways
appurtenant to such buildings and structures presently or hereafter
situated upon the Land (collectively, the "Leased Improvements");
(c) all easements, rights and appurtenances of every nature
and description now or hereafter relating to or benefitting any or
all of the Land and the Leased Improvements;
(d) all equipment, machinery, building fixtures, and other
items of property (whether realty, personalty or mixed), including
all components thereof, now or hereafter located in, on or used in
connection with, and permanently affixed to or incorporated into
the Leased Improvements, including, without limitation, all
furnaces, boilers, heaters, electrical equipment, heating,
plumbing, lighting, ventilating, refrigerating, incineration, air
and water pollution control, waste disposal, air-cooling and air-conditioning
systems and apparatus, sprinkler systems and fire and
theft protection equipment, and built-in oxygen and vacuum systems,
all of which, to the greatest extent permitted by law, are hereby
deemed by the parties hereto to constitute real estate, together
with all replacements, modifications, alterations and additions
thereto, but specifically excluding all items included within the
category of Tangible Personal Property (as hereinafter defined) which are not
permanently affixed to or incorporated in the Leased Property (collectively,
the "Fixtures"); and
</PAGE>
(e) Lessor's Personal Property.
The Leased Property is leased in its present condition, AS IS,
without representation or warranty of any kind, express or implied,
by Lessor and subject to: (i) the rights of parties in possession;
(ii) the existing state of title including all covenants,
conditions, Liens (as hereinafter defined) and other matters of
record (including, without limitation, the matters set forth in
EXHIBIT B); (iii) all applicable laws; and (iv) all matters,
whether or not of a similar nature, which would be disclosed by an
inspection of the Leased Property or by an accurate survey thereof.
1.2 Term. The term of this Lease shall consist of: the
"Fixed Term", which shall commence on June 24, 1996 (the "Fixed
Term Commencement Date") and end on June 23, 2009 (the "Fixed Term
Expiration Date"); provided, however that this Lease may be sooner
terminated as hereinafter provided. In addition, Lessee shall have
the options to extend the Term (as hereinafter defined) as provided
for in Section 1.3.
1.3 Extended Terms. Provided that this Lease has not been
previously terminated, and so long as no Lease Default (as
hereinafter defined) shall have occurred and be continuing, Lessee
is hereby granted the right to extend the Fixed Term of this Lease
for two (2) additional periods (collectively, the "Extended Terms")
as follows: two (2) successive five (5) year periods for a maximum
Term, if all such options are exercised, which ends on June 23,
2019. Lessee's extension rights shall be exercised by Lessee by
giving written notice to Lessor of each such extension at least one
hundred eighty (180) days, but not more than three hundred sixty
(360) days, prior to the termination of the Fixed Term or then
current Extended Term. Lessee may not exercise its option for more
than one Extended Term at a time. During each effective Extended
Term, all of the terms and conditions of this Lease shall continue
in full force and effect, except that the Base Rent (as hereinafter
defined) for each such Extended Term shall be adjusted as set forth
in Section 3.1.3.
Notwithstanding anything to the contrary set forth herein,
Lessee's rights to extend the Fixed Term granted in this Section 1.3 are
subject to the further condition that concurrently
with the exercise of any extension option hereunder, Lessee shall
have exercised its option to extend the terms of all of the Related
Leases in accordance with the provisions of the Agreement Regarding
Related Transactions and the provisions of Section 1.3 of each of
the Related Leases. For the purposes of this Section 1.3, the
Related Leases are those leases which pertain to the Acquisition
Facilities (as such term is defined in the Agreement Regarding
Related Transactions).
</PAGE>
ARTICLE 2
DEFINITIONS AND RULES OF CONSTRUCTION
2.1 Definitions. For all purposes of this Lease and the
other Lease Documents (as hereinafter defined), except as otherwise
expressly provided or unless the context otherwise requires, (i)
the terms defined in this Article have the meanings assigned to
them in this Article and include the plural as well as the singular
and (ii) all references in this Lease or any of the other Lease
Documents to designated "Articles", "Sections" and other
subdivisions are to the designated Articles, Sections and other
subdivisions of this Lease or the other applicable Lease Document.
Accounts: As defined in the UCC.
Accreditation Body: Department of Health and Rehabilitative
Services within the Agency for Health Care Administration and all
other Persons having or claiming jurisdiction over the
accreditation, certification, evaluation or operation of the
Facility. Lessor understands that neither Lessee nor any Sublessee
nor the Facility is currently under the jurisdiction, or is
otherwise subject to the rules, of any Accreditation Body and that,
accordingly, the provisions of this Lease relating in any way to an
Accreditation Body are presently inapplicable to this transaction;
however, in the event that at any time during the Term, any of
Lessee, any Sublessee or the Facility falls under the jurisdiction
of, or otherwise becomes subject to the rules of, any Accreditation
Body, then all such provisions of this Agreement and the other
Lease Documents shall apply with full force and effect.
Additional Charges: As defined in Article 3.
Additional Land: As defined in Section 9.3.
Affiliate: With respect to any Person (i) any other Person
which, directly or indirectly, controls or is controlled by or is
under common control with such Person, (ii) any other Person (other
than a shareholder of Guarantor) that owns, beneficially, directly
or indirectly, five percent (5%) or more of the outstanding capital
stock, shares or equity interests of such Person or (iii) any
officer, director, employee, general partner or trustee of such
Person, or any other Person controlling, controlled by, or under
common control with, such Person (excluding trustees and Persons
serving in a fiduciary or similar capacity who are not otherwise an
Affiliate of such Person). For the purposes of this definition,
"control" (including the correlative meanings of the terms
"controlled by" and "under common control with"), as used with
respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of such Person, through the ownership of
voting securities, partnership interests or other equity interests.
</PAGE>
Affiliated Party Subordination Agreement: That certain
Affiliated Party Subordination Agreement of even date by and among
Lessee, the Guarantor, various Affiliates of Lessee and various
Affiliates of Lessor.
Agreement Regarding Related Transactions: The Agreement Regarding
Related Transactions of even date, as amended from time to time,
between Lessee, Lessor and any Related Party that is party to any
Related Lease or any Related Party Agreement. Lessor and Lessee
anticipate that the Agreement Regarding Related Transactions will
be amended from time to time to include Affiliates of each of
Lessor and Lessee as parties thereto in connection with future
transactions and acknowledge and agree that for all purposes under
this Lease such amendments shall be deemed to be included in this
definition.
Appurtenant Agreements: Collectively, all instruments, documents
and other agreements that now or hereafter create any utility,
access or other right or appurtenances benefitting or relating to
the Leased Property.
Award: All compensation, sums or anything of value awarded,
paid or received on a total or partial Condemnation.
Base Rent: Pre-Conversion Base Rent and/or Post-Conversion Base
Rent.
Business Day: Any day which is not a Saturday or Sunday or a
public holiday under the laws of the United States of America, the
Commonwealth of Massachusetts, the State or the state in which
Lessor's depository bank is located.
Capital Additions: Collectively, all new buildings and
additional structures annexed to any portion of any of the Leased
Improvements and material expansions of any of the Leased
Improvements which are constructed on any portion of the Land
during the Term, including, without limitation, the construction of
a new wing or new story, the renovation of any of the Leased
Improvements on the Leased Property and any expansion,
construction, renovation or conversion in connection therewith (a)
in order to provide a functionally new facility that is needed or
used to provide services not previously offered or (b) in order to
(i) increase the unit capacity of a Facility, (ii) change the
purpose for which such units are utilized and/or (iii) change the
utilization of any material portion of any of the Leased
Improvements.
</PAGE>
Capital Addition Cost: The cost of any Capital Addition made
by Lessee whether paid for by Lessee or Lessor. Such cost shall
include all costs and expenses of every nature whatsoever incurred
directly or indirectly in connection with the development,
permitting, construction and financing of a Capital Addition as
reasonably determined by, or to the reasonable satisfaction of,
Lessor.
Cash Collateral: As defined in the Deposit Pledge Agreement.
Cash Flow: The Consolidated Net Income (or Consolidated Net
Loss) before federal and state taxes for any period plus (i) the
amount of the provision for depreciation and amortization actually
deducted on the books of the applicable Person for the purposes of
computing such Consolidated Net Income (or Consolidated Net Loss)
for the period involved, plus (ii) Rent and interest on all other
Indebtedness which is fully subordinated to the Lease Obligations,
plus (iii) management fees which are fully subordinated to the
Lease Obligations pursuant to the Affiliated Party Subordination
Agreement.
Casualty: As defined in Section 13.1.
CHAMPUS: The Civilian Health and Medical Program of the
Uniform Service, a program of medical benefits covering retirees
and dependents of members or former members of a uniformed service
provided, financed and supervised by the United States Department
of Defense and established by 10 USC 1071 et seq.
Chattel Paper: As defined in the UCC.
Closing: As defined in Section 18.4.6.
Code: The Internal Revenue Code of 1986, as amended.
Collateral: All of the property in which security interests
are granted to Lessor and the other Meditrust Entities pursuant to
the Lease Documents and the Related Party Agreements to secure the
Lease Obligations, including, without limitation, the Cash
Collateral and the Receivables.
Collateral Assignment of Permits and Contracts: The
Collateral Assignment of Permits, Licenses, Approvals and Contracts
of even date granted by Lessee to Lessor.
</PAGE>
Completion Date: As defined in the Leasehold Improvement
Agreement respecting the Leased Property.
Completion of the Project: As defined in the Leasehold
Improvement Agreement respecting the Leased Property.
Condemnation: With respect to the Leased Property or any
interest therein or right accruing thereto or use thereof (i) the
exercise of any governmental power, whether by legal proceedings or
otherwise, by a Condemnor or (ii) a voluntary sale or transfer by
Lessor to any Condemnor, either under threat of Condemnation or
Taking or while legal proceedings for Condemnation or Taking are
pending.
Condemnor: Any public or quasi-public authority, or private
corporation or individual, having the power of condemnation or
eminent domain.
Consolidated and Consolidating: When used with reference to
any term otherwise defined herein, means such term as applied to
the consolidated and consolidating accounts of the relevant Person
and its Subsidiaries consolidated in accordance with GAAP.
Consolidated Financials: For any fiscal year or other
accounting period for any Person and its consolidated Subsidiaries,
statements of earnings and retained earnings and of changes in
financial position for such period and for the period from the
beginning of the respective fiscal year to the end of such period
and the related balance sheet as at the end of such period,
together with the notes thereto, all in reasonable detail and
setting forth in comparative form the corresponding figures for the
corresponding period in the preceding fiscal year, and prepared in
accordance with GAAP, and disclosing all liabilities of such Person
and its consolidated Subsidiaries, including, without limitation,
contingent liabilities.
Contracts: All agreements (including, without limitation,
Provider Agreements and Resident Admission Agreements), contracts
(including without limitation, construction contracts,
subcontracts, and architects' contracts), contract rights,
warranties and representations, franchises, and records and books
of account benefiting, relating to or affecting the Leased Property
or the ownership, construction, development, maintenance,
management, repair, use, occupancy, possession, or operation
thereof, or the operation of any programs or services in
conjunction with the Facility and all renewals, replacement and
substitutions therefor, now or hereafter issued by or entered into
with any Governmental Authority, Accreditation Body or Third Party
Payor or maintained or used by any member of the Leasing Group or
entered into by any member of the Leasing Group with any other
Person.
</PAGE>
Consultants: Architects, engineers, inspectors, surveyors and
other consultants engaged by Lessor to perform services for Lessor
in connection with this Lease.
Conversion Date: With respect to the Facility, the earlier to
occur of (a) the Completion Date, (b) the Completion of the Project
or (c) the occupancy of the Facility by a resident.
Current Assets: All assets of any Person which would, in
accordance with GAAP, be classified as current assets of a Person
conducting a business the same as or similar to that of such
Person, excluding however, any and all advances to or Current
Liabilities owed to such Person by its Subsidiaries.
Current Liabilities: All liabilities of any Person which
would, in accordance with GAAP, be classified as current
liabilities of a Person conducting a business the same as or
similar to that of such Person, including without limitation, all
rental and other payments under leases and fixed payments of, and
sinking fund payments with respect to, Indebtedness required to be
made within one (1) year from the date of determination.
Current Manager: Sterling House Corporation, a Kansas corporation.
Date of Taking: The date the Condemnor has the right to possession
of the property being condemned.
Debt Coverage Ratio: The ratio of (i) Cash Flow for each
applicable period to (ii) the total of all Rent paid or payable
during such period or accrued for such period.
Declaration: As defined in Article 23.
Deed: As defined in Section 18.4.
Documents: As defined in the UCC.
Earnings Before Interest and Taxes: The Consolidated Net Income
(or Consolidated Net Loss) for any period, plus (i) all federal and
state income taxes (but not taxes in the nature of an ad valorem
property tax or a sales tax or an excise tax) paid or accrued with
respect to such period, plus (ii) all interest on any Indebtedness
paid or payable during such period.
Encumbrance: As defined in Section 20.3.
</PAGE>
Environmental Indemnity Agreement: The Environmental Indemnity
Agreement of even date herewith by and among Lessee, the Guarantor,
Current Manager and Lessor.
Environmental Laws: As defined in the Environmental Indemnity
Agreement.
ERISA: The Employment Retirement Income Security Act of 1974, as
amended.
Event of Default: As defined in Article 16.
Extended Terms: As defined in Section 1.3.
Facility: The forty-two (42) unit, fully licensed assisted living
facility to be constructed on the Land and known as "Sterling House
of West Melbourne".
Failure to Operate: As defined in Article 16.
Failure to Perform: As defined Article 16.
Fair Market Added Value: The Fair Market Value of the Leased
Property (including all Capital Additions) minus the Fair Market
Value of the Leased Property determined as if no Capital Additions
paid for by Lessee and approved by Lessor had been constructed.
Fair Market Added Value of the Purchase Option Property: The Fair
Market Value of the Purchase Option Property (including all Capital
Additions relating to the Purchase Option Property) minus the Fair
Market Value of the Purchase Option Property determined as if no
Capital Additions paid for by Lessee and approved by Lessor had
been constructed.
Fair Market Value of a Capital Addition: The amount by which the
Fair Market Value of the Leased Property upon the completion of a
particular Capital Addition exceeds the Fair Market Value of the
Leased Property just prior to the construction of the particular
Capital Addition.
Fair Market Value of the Leased Property: The fair market value of
the Leased Property, including all Capital Additions, and including
the Land and all other portions of the Leased Property, and (a)
assuming the same is unencumbered by this Lease, (b) determined in
accordance with the appraisal procedures set forth in Section 18.2
and (c) not taking into account any reduction in value resulting
from any Lien to which the Leased Property is subject and which
Lien Lessee or Lessor is otherwise required to remove at or prior
to closing of the transaction. However, the positive or negative
effect on the value of the Leased Property attributable to the
interest rate, amortization schedule, maturity date, prepayment
provisions and other terms and conditions of any Lien on the Leased
Property which is not so required or agreed to be removed shall be
taken into account in determining the Fair Market Value of the
Leased Property. The Fair Market Value shall be determined as the
overall value based on due consideration of the "income" approach,
the "comparable sales" approach, and the "replacement cost"
approach.
</PAGE>
Fair Market Value of the Purchase Option Property: The fair market
value of the Purchase Option Property, including all Capital
Additions relating to the Purchase Option Property, and including
that portion of the Land and all other portions of the Leased
Property comprising the Facilities included in the Purchase Option
Property, and (a) assuming the same is unencumbered by this Lease,
(b) determined in accordance with the appraisal procedure set forth
in Section 18.2 and (c) not taking into account any reduction in
value resulting from any Lien to which the Purchase Option Property
is subject and which Lien Lessee or Lessor is otherwise required to
remove at or prior to closing of the transaction. However, the
positive or negative effect on the value of the Purchase Option
Property attributable to the interest rate, amortization schedule,
maturity date, prepayment provisions and other terms and conditions
of any Lien on the Purchase Option which is not so required or
agreed to be removed shall be taken into account in determining the
Fair Market Value of the Purchase Option Property. The Fair Market
Value shall be determined as the overall value based on due
consideration of the "income" approach, the "comparable sales"
approach and the "replacement cost" approach.
Fee Mortgage: As defined in Section 20.3.
Fee Mortgagee: As defined in Section 20.3.
Financing Party: Any Person who is or may be participating with
Lessor in any way in connection with the financing of any Capital
Addition.
Financing Statements: Uniform Commercial Code financing statements
evidencing the security interests granted to Lessor in connection
with the Lease Documents.
Fiscal Quarter: Each of the three (3) month periods commencing
January, April, July and October.
Fiscal Year: The twelve (12) month period from January 1 to
December 31.
Fixed Term: As defined in Section 1.2.
Fixed Term Commencement Date: As defined in Section 1.2.
Fixed Term Expiration Date: As defined in Section 1.2.
Fixtures: As defined in Article 1.
GAAP: Generally accepted accounting principles, consistently
applied throughout the relevant period.
General Intangibles: As defined in the UCC.
Governmental Authorities: Collectively, all agencies,
authorities, bodies, boards, commissions, courts,instrumentalities,
legislatures, and offices of any nature whatsoever of any
government, quasi-government unit or political subdivision, whether
with a federal, state, county, district, municipal, city or
otherwise and whether now or hereinafter in existence.
</PAGE>
Gross Revenues: Collectively, all revenues generated by reason of
the operation of the Leased Property (including any Capital
Additions), whether or not directly or indirectly received
or to be received by Lessor, including, without limitation, all
resident revenues received or receivable for the use of, or
otherwise by reason of, all rooms, units and other facilities
provided, meals served, services performed, space or facilities
subleased or goods sold on or from the Leased Property and further
including, without limitation, except as otherwise specifically
provided below, any consideration received under any subletting,
licensing, or other arrangements with any Person relating to the
possession or use of the Leased Property and all revenues from all
ancillary services provided at or relating to the Leased Property;
provided, however, that Gross Revenues shall not include non-operating
revenues such as interest income or gain from the sale of
assets not sold in the ordinary course of business; and provided,
further, that there shall be excluded or deducted (as the case may
be) from such revenues:
</PAGE>
(i) contractual allowances (relating to any period during the Term
of this Lease and thereafter until the Rent hereunder is paid in
full) for billings not paid by or received from the
appropriate Governmental Agencies or Third Party Payors,
(ii) allowances according to GAAP for uncollectible accounts,
(iii) all proper resident billing credits and adjustments
according to GAAP relating to health care accounting,
(iv) federal, state or local sales, use, gross receipts and excise
taxes and any tax based upon or measured by said Gross Revenues
which is added to or made a part of the amount billed to the
resident or other recipient of such services or goods, whether
included in the billing or stated separately,
(v) provider discounts for hospital or other medical facility
utilization contracts,
(vi) the cost of any federal, state or local governmental program
imposed specially to provide or finance indigent resident care
(other than Medicare, Medicaid and the like), and
(vii) resident trust accounts in which Lessee has no beneficial
interest.
To the extent that the Leased Property is subleased or occupied by
an Affiliate or Affiliates of Lessee, Gross Revenues calculated for
all purposes of this Lease shall include the Gross
Revenues of such Sublessee with respect to the premises demised
under the applicable Sublease (i.e., the Gross Revenues generated
from the operations conducted on such subleased or occupied portion
of the Leased Property) and the rent received or receivable from
such Sublessee pursuant to such Subleases shall be excluded from
Gross Revenues for all such purposes. As to any Sublease between
Lessee and a non-Affiliate of Lessee, only the rental actually
received by Lessee from such non-Affiliate shall be included in
Gross Revenues.
Guarantor: Sterling House Corporation and its successors and
assigns.
Guaranty: The Guaranty of even date executed by Guarantor in favor
of Lessor.
Hazardous Substances: As defined in the Environmental Indemnity
Agreement.
</PAGE>
Impositions: Collectively, all taxes (including, without
limitation, all capital stock and franchise taxes of Lessor (but
excluding franchise taxes relating to the restructuring of Lessor's
liabilities as opposed, for example, to franchise taxes derived as
a result of an appreciation of the fair market value of the Leased
Property or to a change in the method of calculating franchise
taxes), all ad valorem, sales and use, single business, gross
receipts, transaction privilege, rent or similar taxes) relating in
any way to any one or more of the Lease, the Leased Property or the
Rent, assessments (including, without limitation, all assessments
for public improvements or benefits, whether or not commenced or
completed prior to the date hereof and whether or not to be
completed within the Term), ground rents, water and sewer rents,
water charges or other rents and charges, excises, tax levies, fees
(including, without limitation, license, permit, inspection,
authorization and similar fees), transfer taxes and recordation
taxes imposed as a result of this Lease or any extensions hereof,
and all other governmental charges, in each case whether general or
special, ordinary or extraordinary, or foreseen or unforeseen, of
every character in respect of either or both of the Leased Property
and the Rent (including all interest and penalties thereon due to
any failure in payment by Lessee), which at any time prior to,
during or in respect of the Term hereof and thereafter until the
Leased Property is surrendered to Lessor as required by the terms
of this Lease, may be assessed or imposed on or in respect of or be
a Lien upon (a) Lessor or Lessor's interest in the Leased Property,
(b) the Leased Property or any rent therefrom or any estate, right,
title or interest therein, or (c) any occupancy, operation, use or
possession of, sales from, or activity conducted on, or in
connection with, the Leased Property or the leasing or use of the
Leased Property. Notwithstanding the foregoing, nothing contained
in this Lease shall be construed to require Lessee to pay (1) any
tax based on net income (whether denominated as a franchise or
capital stock or other tax) imposed on Lessor or any other Person,
except Lessee or its successors, (2) any transfer or net revenue
tax of Lessor or any other Person, except Lessee and its
successors, (3) any tax imposed with respect to the sale, exchange
or other disposition by Lessor of the Leased Property or the
proceeds thereof, or (4) except as expressly provided elsewhere in
this Lease, any principal or interest on any Encumbrance on the
Leased Property; provided, however, the provisos set forth in
clauses (1) and (2) of this sentence shall not be applicable to the
extent that any tax, assessment, tax levy or charge which Lessee is
obligated to pay pursuant to the first sentence of this definition
and which is in effect at any time during the Term hereof is
totally or partially repealed, and a tax, assessment, tax levy or
charge set forth in clause (1) or (2) is levied, assessed or
imposed expressly in lieu thereof. In computing the amount of any
franchise tax or capital stock tax which may be or become an
Imposition, the amount payable by Lessee shall be equitably
apportioned based upon all properties owned by Lessor that are
located within the particular jurisdiction subject to any such tax.
</PAGE>
Indebtedness: The total of all obligations of a Person, whether
current or long-term, which in accordance with GAAP would be
included as liabilities upon such Person's balance sheet at the
date as of which Indebtedness is to be determined, and shall also
include (i) all capital lease obligations and (ii) all guarantees,
endorsements (other than for collection of instruments in the
ordinary course of business), or other arrangements whereby
responsibility is assumed for the obligations of others, whether by
agreement to purchase or otherwise acquire the obligations of
others, including any agreement contingent or otherwise to furnish
funds through the purchase of goods, supplies or services for the
purpose of payment of the obligations of others.
Indemnified Parties: As defined in Section 12.2.2.
Index: The rate of interest of actively traded marketable United
States Treasury Securities bearing a fixed rate of interest
adjusted for a constant maturity of ten (10) years as calculated by
the Federal Reserve Board.
Institutional Lender: Any insurance company, federally insured
commercial or savings bank, national banking association, savings
and loan association, employees' welfare, pension or retirement
fund or system, corporate profit-sharing or pension trust, college
or university, or real estate investment trust, including any
corporation qualified to be treated for federal tax purposes as a
real estate investment trust, having a net worth of at least ONE
HUNDRED MILLION and NO/100 DOLLARS ($100,000,000.00).
Instruments: As defined in the UCC.
Insurance Requirements: All terms of any insurance policy required
by this Lease, all requirements of the issuer of any such policy
with respect to the Leased Property and the activities conducted
thereon and the requirements of any insurance board, association or
organization or underwriters' regulations pertaining to the Leased
Property.
Land: As defined in Article 1.
Lease: As defined in the preamble of this Lease.
Lease Default: The occurrence of any default or breach of
condition continuing beyond any applicable notice and/or grace
periods under this Lease and/or any of the other Lease Documents.
</PAGE>
Lease Documents: Collectively, this Lease, the Leases with respect
to each of the facilities known as Sterling House of Tequesta,
Sterling House of Stuart and Sterling House of Vero Beach, the
Guaranty, the Agreement Regarding Related Transactions, the
Leasehold Improvement Agreement, the Security Agreement, the
Deposit Pledge Agreement, the Pledge Agreement, the Collateral
Assignment of Permits and Contracts, the Financing Statements, the
Affiliated Party Subordination Agreement, the Environmental
Indemnity Agreement, the Memoranda of Lease and any and all other
instruments, documents, certificates or agreements executed or
furnished by any member of the Leasing Group in connection with the
transactions evidenced by the Lease and/or any of the foregoing
documents.
Lease Obligations: Collectively, all indebtedness, covenants,
liabilities, obligations, agreements and undertakings (other than
Lessor's obligations) under this Lease and the other Lease
Documents.
Lease Year: A twelve month period ending on June 30 of each year;
provided, that the first Lease Year shall begin on the Fixed Term
Commencement Date and shall end on June 30, 1997.
Leased Improvements: As defined in Article 1.
Leasehold Improvement Agreement: Collectively, the Leasehold
Improvement Agreements of even date by and between Lessor and
Lessee with respect to each of the facilities known as Sterling
House of Tequesta, Sterling House of West Melbourne, Sterling House
of Stuart and Sterling House of Vero Beach.
Leased Property: As defined in Article 1.
Leasing Group: Collectively, Lessee, the Guarantor, any Sublessee
which is an Affiliate of Lessee or the Guarantor and any Manager
which is an Affiliate of Lessee or the Guarantor.
Legal Requirements: Collectively, all statutes, ordinances, by-laws, codes,
rules, regulations, restrictions, orders, judgments, decrees and injunctions
(including, without limitation, all applicable building, health code, zoning,
subdivision, and other land use and health-care licensing statutes, ordinances,
by-laws, codes, rules and regulations), whether now or hereafter enacted, pro-
mulgated or issued by any Governmental Authority, Accreditation Body or Third
Party Payor affecting Lessor, any member of the Leasing Group or the Leased
Property or the ownership, construction, development, maintenance, management,
repair, use, occupancy, possession or operation thereof or the operation of any
programs or services in connection with the Leased Property, including, without
limitation, any of the foregoing which may (i) require repairs, modifications
or alterations in or to the Leased Property, (ii) in any way affect (adversely
or otherwise) the use and enjoyment of the Leased Property or (iii) require the
assessment, monitoring, clean-up, containment, removal, remediation or other
treatment of any Hazardous Substances on, under or from the Leased Property.
Without limiting the foregoing, the term Legal Requirements includes all
Environmental Laws and shall also include all Permits and Contracts issued or
entered into by any Governmental Authority, any Accreditation Body and/or any
Third Party Payor and all Permitted Encumbrances.
</PAGE>
Lessee: As defined in the preamble of this Lease and its
successors and assigns.
Lessee's Election Notice: As defined in Section 14.3.
Lessee's Purchase Option Notice: As defined in Section 18.4.
Lessor: As defined in the preamble of this Lease and its successors and
assigns.
Lessor's Personal Property: The personal property conveyed to
Lessor by the Seller in accordance with a bill of sale.
Letter of Credit: As defined in Section 6.2.1.
Lien: With respect to any real or personal property, any mortgage,
deed of trust, easement, restriction, lien, pledge, collateral
assignment, hypothecation, charge, security interest, title
retention agreement, levy, execution, seizure, attachment,
garnishment or other encumbrance of any kind in respect of such
property, whether or not choate, vested or perfected.
Managed Care Plans: All health maintenance organizations,
preferred provider organizations, individual practice associations,
competitive medical plans, and similar arrangements.
Management Agreement: Any agreement, whether written or oral,
between Lessee or any Sublessee and any other Person pursuant to
which Lessee or such Sublessee provides any payment, fee or other
consideration to any other Person to operate or manage the
Facility.
Manager: Any Person who has entered into a Management Agreement
with Lessee or any Sublessee.
Material Structural Work: Any material (i) structural alteration,
(ii) structural repair or (iii) structural renovation to the Leased
Property.
Medicaid: The medical assistance program established by Title XIX
of the Social Security Act (42 USC 1396 et seq.) and any statute
succeeding thereto.
Medicare: The health insurance program for the aged and disabled
established by Title XVIII of the Social Security Act (42 USC
1395 et seq.) and any statute succeeding thereto.
Meditrust: As defined in Article 23.
Meditrust/ALP Transaction Affiliate: An Affiliate of Lessee, the
business and activities of which are limited to those subject to
Meditrust/ALP Transaction Documents (other than the Affiliated
Party Subordination Agreement, the Agreement Regarding Related
Transactions and comparable agreement now or hereafter in effect
among Affiliates of each of Lessee and Lessor) to which such
Affiliate is a party.
Meditrust/ALP Transaction Documents: As defined in the Agreement
Regarding Related Transactions.
</PAGE>
Meditrust Investment: The sum of (i) Original Meditrust Investment
plus (ii) the aggregate amount of all Subsequent Investments plus
(iii) so much of the Project Funds as Lessor has expended from time
to time less the sum of any net amount of the Award received by
Lessor (as defined in Section 3.7 below).
Meditrust Entities: Collectively, Meditrust, Lessor and any other
Affiliate of Lessor which may now or hereafter be a party to any
Related Party Agreement.
Monthly Deposit Date: As defined in Section 4.6.
Net Income (or Net Loss): The net income (or net loss, expressed
as a negative number) of a Person for any period, after all taxes
actually paid or accrued and all expenses and other charges
determined in accordance with GAAP.
Obligations: Collectively, the Lease Obligations and the Related
Party Obligations.
Officer's Certificate: A certificate of Lessee signed on behalf of
Lessee by the Chairman of the Board of Directors, the President,
any Vice President or the Treasurer of Lessee, or another officer
authorized to so sign by the Board of Directors or By-Laws of
Lessee, or any other Person whose power and authority to act has
been authorized by delegation in writing by any of the
Persons holding the foregoing offices.
Original Meditrust Investment: The sum of THREE HUNDRED THOUSAND
DOLLARS ($300,000.00) .
Other Permitted Uses: To the extent permitted under Legal
Requirements and under Insurance Requirements, and so long as the
same do not detract in any material manner from the Primary
Intended Use: (i) medical or dental offices, (ii) medical or dental
laboratories, (iii) day care center, (iv) pharmacy, (v) medical
services, (vi) florists and card shops which do not have a separate
entrance, (vii) ancillary parking, and (viii) beauty salons.
Overdue Rate: On any date, a rate of interest per annum equal to
the greater of: (i) a variable rate of interest per annum equal to
one hundred twenty percent (120%) of the Prime Rate, or (ii)
eighteen percent (18%) per annum; provided, however, in no event
shall the Overdue Rate be greater than the maximum rate then
permitted under applicable law to be charged by Lessor.
PBGC: Pension Benefit Guaranty Corporation.
</PAGE>
Permits: Collectively, all permits, licenses, approvals,
variances, permissive uses, accreditations, certificates,
certifications, consents, agreements, contracts, contract rights,
franchises, interim licenses, permits and other authorizations of
every nature whatsoever required by, or issued under, applicable
Legal Requirements benefiting, relating or affecting the Leased
Property or the construction, development, maintenance, management,
use or operation thereof, or the operation of any programs or
services in conjunction with the Facility and all renewals,
replacements and substitutions therefor, now or hereafter required
or issued by any Governmental Authority, Accreditation Body or
Third Party Payor, or maintained or used by any member of the
Leasing Group, or entered into by any member of the Leasing Group
with any Person.
Permitted Encumbrances: As defined in Section 10.1.17.
Permitted Prior Security Interests: As defined in Section 6.1.2.
Person: Any individual, corporation, general partnership, limited
partnership, joint venture, stock company or association, company,
bank, trust, trust company, land trust, business trust,
unincorporated organization, unincorporated association,
Governmental Authority or other entity of any kind or nature.
Plans and Specifications: As defined in Section 13.1.2.
Pledge Agreement: The Stock Pledge Agreement dated as of March 22,
1996 by and between Guarantor, Lessee and Meditrust of Kansas,
Inc., as affected by the Agreement Regarding Related Transactions
as amended and as may be amended from time to time.
Pre-Conversion Base Rent: As defined in Section 3.1.
Pre-Conversion Rent Adjustment Rate: Two hundred (200) basis
points over the Prime Rate.
Post-Conversion Base Rent: As defined in Section 3.1.
Primary Intended Use: The use of the Facility as assisted living
facilities or long term care facilities with the number of licensed
(if applicable) units as defined herein and such ancillary
uses as are permitted by law and may be necessary in connection
therewith or incidental thereto.
</PAGE>
Prime Rate: The variable rate of interest per annum from time to
time announced by the Reference Bank as its prime rate of interest
and in the event that the Reference Bank no longer
announces a prime rate of interest, then the Prime Rate shall be
deemed to be the variable rate of interest per annum which is the
prime rate of interest or base rate of interest from time to time
announced by any other major bank or other financial institution
reasonably selected by Lessor.
Principal Place of Business: As defined in Section 10.1.27.
Proceeds: As defined in the UCC.
Project: As defined in the Leasehold Improvement Agreement.
Project Funds: As defined in the Leasehold Improvement Agreement.
Provider Agreements: All participation, provider and reimbursement
agreements or arrangements now or hereafter in effect for the
benefit of Lessee or any Sublessee in connection with the operation
of the Facility relating to any right of payment or other claim
arising out of or in connection with Lessee's or such Sublessee's
participation in any Third Party Payor Program. Lessor understands
that no Provider Agreements presently exist with respect to any
activities of Lessee or any Sublessee and that, accordingly, the
provisions of this Lease relating in any way to Provider Agreements
are presently inapplicable to this transaction; however, in the
event that at any time during the Term, any of Lessee, any
Sublessee or the Facility enter into, or otherwise
become involved in, any Provider Agreements, then all such
provision of this Lease and the other Lease Documents shall apply
with full force and effect.
Purchase Option: As defined in Section 18.4.
Purchase Option Date: As defined in Section 18.4.
Purchase Option Purchase Price: As defined in Section 18.4.
Purchaser: As defined in Section 11.5.4.
Receivables: Collectively, all (i) Instruments, Documents,
Accounts, Proceeds, General Intangibles and Chattel Paper and (ii)
rights to payment for goods sold or leased or services rendered by
Lessee or any other party, whether now in existence or arising from
time to time hereafter and whether or not yet earned by
performance, including, without limitation, obligations evidenced
by an account, note, contract, security agreement, chattel paper,
or other evidence of indebtedness.
</PAGE>
Reference Bank: Fleet Bank of Connecticut, N.A.
Related Leases: Acquisition Facility Leases (as defined in the
Agreement Regarding Related Transactions), together with such other
new leases identified from time to time in the Agreement Regarding
Related Transactions.
Related Parties: Collectively, each Person that may now or
hereafter be a party to any Related Party Agreement other than the
Meditrust Entities.
Related Party Agreement: Any agreement, document or instrument now
or hereafter evidencing or securing any Related Party Obligation,
including without limitation, those agreements listed in Schedule
2.6 of the Security Agreement and the Related Leases.
Related Party Default: The occurrence of a default or breach of
condition continuing beyond the expiration of any applicable notice
and grace periods, if any, under the terms of any Related Party
Agreement.
Related Party Obligations: Collectively, all indebtedness,
covenants, liabilities, obligations, agreements and undertakings
due to, or made for the benefit of, Lessor or any of the other
Meditrust Entities by Lessee or any other member of the Leasing
Group or any of their respective Affiliates; whether such
indebtedness, covenants, liabilities, obligations, agreements
and/or undertakings are direct or indirect, absolute or contingent,
liquidated or unliquidated, due or to become due, joint, several or
joint and several, primary or secondary, now existing or hereafter
arising.
Rent: Collectively, the Base Rent, the Additional Charges and all
other sums payable under this Lease and the other Lease Documents.
Rent Adjustment Date: Each yearly anniversary of the Fixed Term
Commencement Date during the Term of the Lease including any
exercised extension thereof.
Rent Adjustment Rate: 350 basis points over the Index.
Rent Insurance Proceeds: As defined in Section 13.8.
Resident Agreements: All contracts, agreements and consents
executed by or on behalf of any resident or other Person seeking
services at the Facility, including, without limitation,
assignments of benefits and guarantees.
</PAGE>
Retainage: As defined in Section 13.1.3.
Security Agreement: The security agreement so captioned dated as
of even date herewith between Lessee and Lessor.
Seller: Sterling House Corporation, a Kansas corporation.
State: The state(s) or commonwealth(s) in which the Leased
Property is located.
Stated Amount: An amount equal to three (3) months Post-Conversion
Base Rent.
Sublease: Collectively, all subleases, licenses, use agreements,
concession agreements, tenancy at will agreements and other
occupancy agreements of every kind and nature (but excluding
resident occupancy agreements), whether oral or in writing, now in
existence or subsequently entered into by Lessee in accordance with
the applicable provisions hereof, encumbering or affecting the
Leased Property.
Sublessee: Any sublessee, licensee, concessionaire, tenant or
other occupant under any of the Subleases.
Subsequent Investments: The aggregate amount of all sums expended
and liabilities incurred by Lessor in connection with each Capital
Addition.
Subsidiary or Subsidiaries: With respect to any Person, any
corporation or other entity of which such Person, directly, or
indirectly, through another entity or otherwise, owns, or has the
right to control or direct the voting of, fifty percent (50%) or
more of the outstanding capital stock or other ownership interest
having general voting power (under ordinary circumstances).
Taking: A taking or voluntary conveyance during the Term of the
Leased Property, or any interest therein or right accruing thereto,
or use thereof, as the result of, or in settlement of, any
Condemnation or other eminent domain proceeding affecting the
Leased Property whether or not the same shall have actually been
commenced.
Tangible Net Worth: An amount determined in accordance with GAAP
equal to the total assets of any Person, excluding the total
intangible assets of such Person, minus the total liabilities of
such Person. Total intangible assets shall be deemed to include,
but shall not be limited to, the excess of cost over book value of
acquired businesses accounted for by the purchase method, formulae,
trademarks, trade names, patents, patent rights and deferred
expenses (including, but not limited to, unamortized debt discount
and expense, organizational expense and experimental and
development expenses).
</PAGE>
Tangible Personal Property: All machinery, equipment, furniture,
furnishings, movable walls or partitions, computers or trade
fixtures, goods, inventory, supplies, and other personal
property owned or leased (pursuant to equipment leases) by Lessee
and used or useful in the operation of the Leased Property or
arising in connection therewith or relating thereto.
Term: Collectively, the Fixed Term and each Extended Term which
has become effective pursuant to Section 1.3, as the context may
require, unless earlier terminated pursuant to the provisions
hereof.
Third Party Payor Programs: Collectively, all third party payor
programs in which Lessee or any Sublessee presently or in the
future may participate, including without limitation, Medicare,
Medicaid, CHAMPUS, Blue Cross and/or Blue Shield, Managed Care
Plans, other private insurance plans and employee assistance
programs. Lessor understands that neither Lessee nor any Sublessee
nor the Facility presently participates in, or otherwise receives
reimbursement from, any Third Party Payor Program and, accordingly,
the provisions of this Lease relating to Third Party Payor Programs
are currently inapplicable; however, in the event that at any time
during the Term, any of Lessee, any Sublessee or the Facility elect
to participate in, or otherwise receive reimbursement from, any
Third Party Payor Program, or in the event that it becomes
reasonably prudent business practice for any assisted living
facility to participate in, or otherwise receive reimbursement from
a Third Party Payor Program, then all provisions in this Lease and
the other Lease Documents relating to Third Party Payor Programs
shall apply with full force and effect.
Third Party Payors: Collectively, Medicare, Medicaid, CHAMPUS,
Blue Cross and/or Blue Shield, private insurers and any other
Person which presently or in the future maintains Third Party Payor
Programs.
Time of Closing: As defined in Section 18.4.
UCC: The Uniform Commercial Code as in effect from time to time in
the State.
United States Treasury Securities: The uninsured treasury
securities issued by the United States Federal Reserve Bank.
Unsuitable For Its Primary Intended Use: As used anywhere in this
Lease, the term "Unsuitable For Its Primary Intended Use" shall
mean that, by reason of Casualty, or a partial or temporary Taking
by Condemnation, in the good faith judgment of Lessor, the Facility
cannot be operated on a commercially practicable basis for the
Primary Intended Use, taking into account, among other relevant
factors, the number of usable units affected by such Casualty or
partial or temporary Taking.
</PAGE>
Unavoidable Delays: Delays due to strikes, lockouts, inability to
procure materials, power failure, acts of God, governmental
restrictions, enemy action, civil commotion, fire,
unavoidable casualty or other causes beyond the control of the
party responsible for performing an obligation hereunder, provided
that lack of funds shall not be deemed a cause beyond the control
of either party hereto.
Upgrade Expenditures: As defined in Section 8.1.4.
Work: As defined in Section 13.1.1.
Work Certificates: As defined in Section 13.1.3.
2.2 Rules of Construction. The following rules of construction
shall apply to the Lease and each of the other Lease Documents:
(a) references to "herein", "hereof" and "hereunder" shall be
deemed to refer to this Lease or the other applicable Lease
Document, and shall not be limited to the particular text or
section or subsection in which such words appear; (b) the use of
any gender shall include all genders and the singular number shall
include the plural and vice versa as the context may require; (c)
references to Lessor's attorneys shall be deemed to include,
without limitation, special counsel and local counsel for Lessor;
(d) reference to attorneys' fees and expenses shall be deemed to
include all costs for administrative, paralegal and other support
staff; (e) references to the Land, Leased Improvements, Fixtures,
Lessor's Personal Property, Facility, and Leased Property shall be
deemed to include references to all of the Land, Leased
Improvements, Fixtures, Lessor's Personal Property, Facility, and
Leased Property, respectfully, and references to any portion
thereof; (f) references to the Lease Obligations shall be deemed to
include references to all of the Lease Obligations and references
to any portion thereof; (g) references to the Obligations shall be
deemed to include references to all of the Obligations and
references to any portion thereof; (h) the term "including", when
following any general statement, will not be construed to limit
such statement to the specific items or matters as provided
immediately following the term "including" (whether or not non-limiting
language such as "without limitation" or "but not limited
to" or words of similar import are also used), but rather will be
deemed to refer to all of the items or matters that could
reasonably fall within the broadest scope of the general statement;
(i) any requirement that financial statements be Consolidated in
form shall apply only to such financial statements as relate to a
period during any portion of which the relevant Person has one or
more Subsidiaries; (j) all accounting terms not specifically
defined in the Lease Documents shall be construed in accordance
with GAAP and (k) all exhibits annexed to any of the Lease
Documents as referenced therein shall be deemed incorporated in
such Lease Document by such annexation and/or reference.
</PAGE>
ARTICLE 3
RENT
3.1 Rent for Land, Leased Improvements, Related Rights and
Fixtures. Lessee will pay to Lessor, in lawful money of the United
States of America, at Lessor's address set forth herein or at such
other place or to such other Person as Lessor from time to time may
designate in writing, rent for the Leased Property, as follows.
3.1.1 Base Rent. (a) Pre-Conversion Base Rent. From and after
the Commencement Date and until the Conversion Date, Lessee shall
pay, commencing on July 1, 1996, and on the first day of each
calendar month thereafter and on the Conversion Date, a base rent
(the "Pre-Conversion Base Rent") in arrears which is equal to the
product of (i) the Original Meditrust Investment plus so much of
the Project Funds as Lessor has advanced under the Leasehold
Improvement Agreement from time to time multiplied by (ii) the Pre-Conversion
Rent Adjustment Rate in effect from time to time, calculated on a daily basis.
(b) Post-Conversion Base Rent. From and after the Conversion Date,
Lessee shall pay a base rent (the "Post-Conversion Base Rent") per
annum which is equal to the product of (i) the Original Meditrust
Investment plus the aggregate amount of the Project Funds as Lessor
has advanced under the Leasehold Improvement Agreement as of the
Conversion Date plus Subsequent Investments multiplied by (ii) the
Rent Adjustment Rate which is in effect or calculated on the
Conversion Date, payable in advance in equal, consecutive monthly
installments due on the first day of each calendar month; provided,
however, that on the Conversion Date, Lessee shall pay to Lessor
the proportionate share of the Post-Conversion Base Rent due for
the period from (and including) such date through the end of the
calendar month during which such
date occurred.
3.1.2 Increase to Post-Conversion Base Rent. Commencing on the
first anniversary of the Conversion Date and on each anniversary of
the Conversion Date thereafter during the Term (each such date
shall be referred to herein as a "Rent Adjustment Date"), the Post-Conversion
Base Rent shall be increased so as to equal the lesser
of (a) the Maximum Rent Adjustment, or (b) an amount determined by
multiplying the Post-Conversion Base Rent then in
effect times a fraction, the numerator of which shall be the CPI
Index on the applicable Rent Adjustment Date and the denominator of
which shall be the CPI Index on the preceding Rent Adjustment Date
(or on the Conversion Date in the case of the first Rent Adjustment
Date).
</PAGE>
If, for any Lease Year or any portion thereof, the Post-Conversion
Base Rent is adjusted in accordance with clause (b) above, then the
difference between the Post-Conversion Base Rent for such Lease
Year, and the Post-Conversion Base Rent for such Lease Year if
adjusted in accordance with clause (a) above shall be referred to
herein as the "Rent Shortfall." If, for any Lease Year, the Post-
Conversion Base Rent is adjusted in accordance with clause (a),
then the difference between the Post-Conversion Base Rent for such
Lease Year and the Post-Conversion Base Rent for such Lease Year if
adjusted in accordance with clause (b), shall be referred to herein
as the "Rent Surplus".
In the event there is a Rent Shortfall for any Lease Year,
Lessee shall also pay to Lessor, as part of the Post-Conversion
Base Rent due hereunder, an amount equal to such Rent Shortfall,
plus any Rent Shortfall in any previous Lease Years, up to an
amount equal to the Rent Surplus, if any, for the then current
Lease Year, less any prior payments on account of a Rent Shortfall.
As used herein, the "Maximum Rent Adjustment" shall be the Post-Conversion
Base Rent in any applicable year, which would result
solely by multiplying, in each year, on the Rent Adjustment Date,
the Post-Conversion Base Rent then in effect (as adjusted pursuant
to this Section 3.1.2 only) by 1.02%.
As used herein, the "CPI Index" shall mean and refer to the
Consumer Price Index for Urban Wage Earners and Clerical Workers,
U.S. Cities Average, All Items (1982-84=100) published by the
Bureau of Labor Statistics of the U.S. Department of Labor;
provided that if compilation of the CPI Index in its present form
and calculated on its present basis is discontinued or transferred
to any other governmental department or bureau, then the index most
nearly the same as the CPI Index published by the Bureau of Labor
Statistics shall be used. If there is no such similar index, a
substitute index which is then generally recognized as being
similar to the CPI Index shall be used, such substitute index to be
reasonably selected by Lessor. Until the CPI Index is established,
Lessee shall pay the Post-Conversion Base Rent calculated in
accordance with clause (a) above, and once the CPI Index for the
Rent Adjustment Date of such Lease Year is published, the new Post-Conversion
Base Rent (as increased) shall be effective retroactively as of the Rent
Adjustment Date with the remaining payments to be adjusted ratably.
The example attached hereto as Schedule 3.1.2 illustrates how the
increase in Post-Conversion Base Rent shall be determined.
</PAGE>
3.1.3 Post-Conversion Base Rent for Extended Terms.
Notwithstanding any provisions of this Section 3.1 to the contrary,
commencing on the first day of each Extended Term, the Post-Conversion
Base Rent for the first year of such Extended Term shall
be an amount equal to the greater of (a) the then current Post-Conversion
Base Rent or (b) an amount equal to the Original
Meditrust Investment plus the aggregate amount of Project Funds as
Lessor has advanced under the Leasehold Improvement Agreement as of
the Conversion Date plus Subsequent Investments multiplied by the
Rent Adjustment Rate then in effect on the first day of the
applicable Extended Term. Otherwise, Base Rent shall be payable as
set forth above in this Section 3.1 and shall be subject to
adjustment as set forth above in Section 3.1.2.
3.2 Best Efforts To Maximize. Lessee further covenants that the
operation of the Facility shall be conducted in a manner consistent
with the prevailing standards and practices recognized in the
health care industry as those customarily utilized by first class
business operations.
3.3 [Intentionally Omitted]
3.4 Additional Charges. Subject to the rights to contest as set
forth in Article 15, in addition to the Base Rent, (a) Lessee will
also pay and discharge as and when due and payable all Impositions,
all amounts, liabilities and obligations under the Appurtenant
Agreements and other amounts, liabilities and obligations which
Lessee assumes or agrees to pay under this Lease, and (b) in the
event of any failure on the part of Lessee to pay any of those
items referred to in clause (a) above, Lessee will also promptly
pay and discharge every fine, penalty, interest and cost which may
be added for non-payment or late payment of such items (the items
referred to in clauses (a) and (b) above being referred to herein
collectively as the "Additional Charges"), and Lessor shall have
all legal, equitable and contractual rights, powers and remedies
provided in this Lease, by statute or otherwise, in the case of
non-payment of the Additional Charges, as well as the Base Rent.
To the extent that Lessee pays any Additional Charges to Lessor
pursuant to any requirement of this Lease, Lessee shall be relieved
of its obligation to pay such Additional Charges to any other
Person to which such Additional Charges would otherwise be due.
3.5 Net Lease. The Rent shall be paid absolutely net to Lessor,
so that this Lease shall yield to Lessor the full amount of the
installments of Base Rent, and the payments of Additional Charges
throughout the Term.
3.6 No Lessee Termination or Offset.
</PAGE>
3.6.1 No Termination. Except as may be otherwise specifically and
expressly provided in this Lease, Lessee, to the extent not
prohibited by applicable law, shall remain bound by this Lease in
accordance with its terms and shall neither take any action without
the consent of Lessor to modify, surrender or terminate the same,
nor seek nor be entitled to any abatement, deduction, deferment or
reduction of Rent, or set-off against the Rent, nor shall the
respective obligations of Lessor and Lessee be otherwise affected
by reason of (a) any Casualty or any Taking of the Leased Property,
(b) the lawful or unlawful prohibition of, or restriction upon,
Lessee's use of the Leased Property or the interference with such
use by any Person or by reason of eviction by paramount title,
(c) any claim that Lessee has or might have against Lessor, (d) any
default or breach of any warranty by Lessor or any of the other
Meditrust Entities under this Lease, any other Lease Document or
any Related Party Agreement, (e) any bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation,
dissolution, winding up or other proceedings affecting Lessor or
any assignee or transferee of Lessor or (f) for any other cause
whether similar or dissimilar to any of the foregoing, other than
a discharge of Lessee from any of the Lease Obligations as a matter of law.
3.6.2 Waiver. To the fullest extent not prohibited by applicable
law, Lessee hereby specifically waives all rights, arising from any
occurrence whatsoever, which may now or hereafter be conferred upon
it by law to (a) modify, surrender or terminate this Lease or quit
or surrender the Leased Property or (b) entitle Lessee to any
abatement, reduction, suspension or deferment of the Rent or other
sums payable by Lessee hereunder, except as otherwise specifically
and expressly provided in this Lease.
3.6.3 Independent Covenants. The obligations of Lessor and Lessee
hereunder shall be separate and independent covenants and
agreements and the Rent and all other sums payable by Lessee
hereunder shall continue to be payable in all events unless the
obligations to pay the same shall be terminated pursuant to the
express provisions of this Lease or (except in those instances
where the obligation to pay expressly survives the termination of
this Lease) by termination of this Lease other than by reason of a
Lease Default.
3.7 Abatement of Rent Limited. There shall be absolutely no
abatement of Rent on account of any Casualty, Taking or other
event, except that in the event of a partial Taking or a temporary
Taking as described in Section 14.3, the Base Rent shall be abated
as follows: (a) in the case of such a partial Taking, the
Meditrust Investment shall be reduced for the purposes of
calculating Base Rent pursuant to Section 3.1 by subtracting
therefrom, as applicable, the net amount of the Award received by
Lessor, and (b) in the case of such a temporary Taking, by reducing
the Base Rent for the period of such a temporary Taking, by the net
amount of the Award received by Lessor.
</PAGE>
For the purposes of this Section 3.7, the "net amount of the Award
received by Lessor" shall mean the Award paid to Lessor on account
at such Taking, minus all costs and expenses incurred by Lessor in
connection therewith, and minus any amounts paid to or for the
account of Lessee to reimburse for the costs and expenses of
reconstructing the Facility following such Taking in order to
create a viable and functional Facility under all of the
circumstances.
ARTICLE 4
IMPOSITIONS; TAXES; UTILITIES;
INSURANCE PAYMENTS
4.1 Payment of Impositions.
4.1.1 Lessee To Pay. Lessee will pay or cause to be paid all
Impositions before any fine, penalty, interest or cost may be added
for non-payment, such payments to be made directly to the taxing
authority where feasible, and Lessee will promptly furnish Lessor
copies of official receipts or other satisfactory proof evidencing
payment not later than the last day on which the same may be paid
without penalty or interest. Subject to Section 4.1.2, Lessee's
obligation to pay such Impositions shall be deemed absolutely fixed
upon the date such Impositions become a lien upon the Leased
Property or any part thereof.
4.1.2 Installment Elections. If any such Imposition may, at the
option of the taxpayer, lawfully be paid in installments (whether
or not interest shall accrue on the unpaid balance of such
Imposition), Lessee may exercise the option to pay the same (and
any accrued interest on the unpaid balance of such Imposition) in
installments and, in such event, shall pay such installments during
the Term hereof (subject to Lessee's right to contest pursuant to
the provisions of Section 4.1.5 below) as the same respectively
become due and before any fine, penalty, premium, further interest
or cost may be added thereto.
</PAGE>
4.1.3 Returns and Reports. Lessor, at its expense, shall, to the
extent permitted by applicable law, prepare and file all tax
returns and reports as may be required by Governmental Authorities
in respect of Lessor's net income, gross receipts, franchise taxes
and taxes on its capital stock, and Lessee, at its expense, shall,
to the extent permitted by applicable laws and regulations, prepare
and file all other tax returns and reports in respect of any
Imposition as may be required by Governmental Authorities. Lessor
and Lessee shall, upon request of the other, provide such data as
is maintained by the party to whom the request is made with respect
to the Leased Property as may be necessary to prepare any required
returns and reports. In the event that any Governmental Authority
classifies any property covered by this Lease as personal property,
Lessee shall file all personal property tax returns in such
jurisdictions where it may legally so file. Lessor, to the extent
it possesses the same, and Lessee, to the extent it possesses the
same, will provide the other party, upon request, with cost and
depreciation records necessary for filing returns for any portion
of Leased Property so classified as personal property. Where
Lessor is legally required to file personal property tax returns,
if Lessee notifies Lessor of the obligation to do so in each year
at least thirty (30) days prior to the date any protest must be
filed, Lessee will be provided with copies of assessment notices so
as to enable Lessee to file a protest.
4.1.4 Refunds. If no Lease Default or Related Party Default shall
have occurred and be continuing, any refund due from any taxing
authority in respect of any Imposition paid by Lessee shall be paid
over to or retained by Lessee. If a Lease Default or Related Party
Default shall have occurred and be continuing, at Lessor's option,
such funds shall be paid over to Lessor and/or retained by Lessor
and applied toward the Obligations in accordance with the Lease
Documents and/or any Related Party Agreement.
4.1.5 Protest. Upon giving notice to Lessor, at Lessee's option
and at Lessee's sole cost and expense, and subject to compliance
with the provisions of Article 15, Lessee may contest, protest,
appeal, or institute such other proceedings as Lessee may deem
appropriate to effect a reduction of any Imposition and Lessor, at
Lessee's cost and expense as aforesaid, shall fully cooperate in a
reasonable manner with Lessee in connection with such protest,
appeal or other action.
4.2 Notice of Impositions. Lessor shall give prompt notice to
Lessee of all Impositions payable by Lessee hereunder of which
Lessor at any time has knowledge, but Lessor's failure to give any
such notice shall in no way diminish Lessee's obligations hereunder
to pay such Impositions.
</PAGE>
4.3 Adjustment of Impositions. Impositions imposed in respect of
the period during which the expiration or earlier termination of
the Term occurs shall be adjusted and prorated between Lessor and
Lessee, whether or not such Impositions are imposed before or after
such expiration or termination, and Lessee's obligation to pay its
prorated share thereof shall survive such expiration or
termination.
4.4 Utility Charges. Lessee will pay or cause to be paid all
charges for electricity, power, gas, oil, water, telephone and
other utilities used in the Leased Property during the Term and
thereafter until Lessee surrenders the Leased Property in the
manner required by this Lease.
4.5 Insurance Premiums. Lessee will pay or cause to be paid all
premiums for the insurance coverage required to be maintained
pursuant to Article 12 during the Term, and thereafter until Lessee
yields up the Leased Property in the manner required by this Lease.
All such premiums shall be paid annually in advance and Lessee
shall furnish Lessor with evidence satisfactory to Lessor that all
such premiums have been so paid prior to the commencement of the
Term and thereafter at least thirty (30) days prior to the due date
of each premium which thereafter become due. Notwithstanding the
foregoing, Lessee may pay such insurance premiums to the insurer in
monthly installments so long as the applicable insurer is
contractually obligated to give Lessor not less than a thirty (30)
days notice of non-payment and so long as no Lease Default has
occurred and is continuing. In the event of the failure of Lessee
either to comply with the insurance requirements in Article 12, or
to pay the premiums for such insurance, or to deliver such policies
or certificates thereof to Lessor at the times required hereunder,
Lessor shall be entitled, but shall have no obligation, to effect
such insurance and pay the premiums therefor, which premiums shall
be a demand obligation of Lessee to Lessor.
4.6 Deposits.
4.6.1 Lessor's Option. At the option of Lessor, which may be
exercised at any time after a default has occurred and is
continuing, Lessee shall, upon written request of Lessor, on the
first day on the calendar month immediately following such request,
and on the first day of each calendar month thereafter during the
Term (each of which dates is referred to as a "Monthly Deposit
Date"), pay to and deposit with Lessor a sum equal to one-twelfth
(1/12th) of the Impositions to be levied, charged, filed, assessed
or imposed upon or against the Leased Property within one (1) year
after said Monthly Deposit Date and a sum equal to one-twelfth
</PAGE>
(1/12th) of the premiums for the insurance policies required
pursuant to Article 12 which are payable within one (1) year after
said Monthly Deposit Date. If the amount of the Impositions to be
levied, charged, assessed or imposed or insurance premiums to be
paid within the ensuing one (1) year period shall not be fixed upon
any Monthly Deposit Date, such amount for the purpose of computing
the deposit to be made by Lessee hereunder shall be estimated by
Lessor with an appropriate adjustment to be promptly made between
Lessor and Lessee as soon as such amount becomes determinable. In
addition, Lessor may, at its option, from time to time require that
any particular deposit be greater than one-twelfth (1/12th) of the
estimated amount payable within one (1) year after said Monthly
Deposit Date, if such additional deposit is required in order to
provide to Lessor a sufficient fund from which to make payment of
all Impositions on or before the next due date of any installment
thereof, or to make payment of any required insurance premiums not
later than the due date thereof.
4.6.2 Use of Deposits. The sums deposited by Lessee under this
Section 4.6 shall be held by Lessor and shall be applied in payment
of the Impositions or insurance premiums, as the case may be, when
due. Any such deposits may be commingled with other assets of
Lessor, and shall be invested by Lessor at such bank as Lessor may,
from time to time select, and Lessor shall not be liable to Lessee
or any other Person (a) based on Lessor's choice of investment
vehicles provided Lessor chooses one or more of the investment
vehicles described on SCHEDULE 4.6.2 attached hereto and
incorporated by reference, (b) for any consequent loss of principal
or interest or (c) for any unavailability of funds based on such
choice of investment. Furthermore, Lessor shall bear no
responsibility for the financial condition of, nor any act or
omission by, Lessor's depository bank. The income from such
investment or interest on such deposit shall be paid to Lessee on
a semi-annual basis as long as no Lease Default has occurred and is
then continuing, and as long as no fact or circumstance exists
which, with the giving of notice and/or the passage of time, would
constitute a Lease Default. Lessee shall give not less than ten
(10) days prior written notice to Lessor in each instance when an
Imposition or insurance premium is due, specifying the Imposition
or premium to be paid and the amount thereof, the place of payment,
and the last day on which the same may be paid in order to comply
with the requirements of this Lease. If Lessor, in violation of
its obligations under this Lease, does not pay any Imposition or
insurance premium when due, for which a sufficient deposit exists,
Lessee shall not be in default hereunder by virtue of the failure
of Lessor to pay such Imposition or such insurance premium.
</PAGE>
4.6.3 Deficits. If for any reason any deposit held by Lessor
under this Section 4.6 shall not be sufficient to pay an Imposition
or insurance premium within the time specified therefor in this
Lease, then, within ten (10) days after demand by Lessor, Lessee
shall deposit an additional amount with Lessor, increasing the
deposit held by Lessor so that Lessor holds sufficient funds to pay
such Imposition or premium in full (or in installments as otherwise
provided for herein), together with any penalty or interest
thereon. Lessor may change its estimate of any Imposition or
insurance premium for any period on the basis of a change in an
assessment or tax rate or on the basis of a prior miscalculation or
for any other good faith reason; in which event, within ten (10)
days after demand by Lessor, Lessee shall deposit with Lessor the
amount in excess of the sums previously deposited with Lessor for
the applicable period which would theretofore have been payable
under the revised estimate.
4.6.4 Other Properties. If any Imposition shall be levied,
charged, filed, assessed, or imposed upon or against the Leased
Property, and if such Imposition shall also be a levy, charge,
assessment, or imposition upon or for any other real or personal
property that does not constitute a part of the Leased Property,
then the computation of the amounts to be deposited under this
Section 4.6 shall be based upon the entire amount of such
Imposition and Lessee shall not have the right to apportion any
deposit with respect to such Imposition.
4.6.5 Transfers. In connection with any assignment of Lessor's
interest under this Lease, the original Lessor named herein and
each successor in interest shall have the right to transfer all
amounts deposited pursuant to the provisions of this Section 4.6
and still in its possession to such assignee (as the subsequent
holder of Lessor's interest in this Lease) and upon such transfer,
the original Lessor named herein or the applicable successor in
interest transferring the deposits shall thereupon be completely
released from all liability with respect to such deposits so
transferred and Lessee shall look solely to said assignee, as the
subsequent holder of Lessor's interest under this Lease, in
reference thereto.
4.6.6 Security. All amounts deposited with Lessor pursuant to the
provisions of this Section 4.6 shall be held by Lessor as
additional security for the payment and performance of the
Obligations and, upon the occurrence of any Lease Default, Lessor
may, in its sole and absolute discretion, apply said amounts
towards payment or performance of such Obligations.
</PAGE>
4.6.7 Return. Upon the expiration or earlier termination of this
Lease, provided, that, all of the Lease Obligations have been fully
paid and performed, any sums then held by Lessor under this Section
4.6 shall be refunded to Lessee; unless a Related Party Default has
occurred, in which event such sums may be applied towards the
Obligations.
4.6.8 Receipts. Lessee shall deliver to Lessor copies of all
notices, demands, claims, bills and receipts in relation to the
Impositions and an annual summary invoice of insurance premiums
immediately upon receipt thereof by Lessee.
ARTICLE 5
OWNERSHIP OF LEASED PROPERTY AND PERSONAL PROPERTY;
INSTALLATION, REMOVAL AND REPLACEMENT OF PERSONAL PROPERTY
5.1 Ownership of the Leased Property. Lessee acknowledges that
the Leased Property is the property of Lessor and that Lessee has
only the right to the exclusive possession and use of the Leased
Property upon the terms and conditions of this Lease.
5.2 Personal Property; Removal and Replacement of Personal
Property.
5.2.1 Lessee To Equip Facility. Lessee, at its sole cost and
expense, shall install, affix or assemble or place on the Leased
Property, sufficient items of Tangible Personal Property in
addition to Lessor's Personal Property, to enable the operation of
the Facility in accordance with the requirements of this Lease for
the Primary Intended Use and, to the extent applicable, the Other
Permitted Uses and such Tangible Personal Property and replacements
thereof, shall be at all times the property of Lessee.
5.2.2 Sufficient Personal Property. Lessee shall maintain, during
the entire Term, the Tangible Personal Property and Lessor's
Personal Property in good order and repair and shall provide at its
expense all necessary replacements thereof, as may be necessary in
order to operate the Facility in compliance with all applicable
Legal Requirements and Insurance Requirements and otherwise in
accordance with customary practice in the industry for the Primary
Intended Use and, to the extent applicable, the Other Permitted
Uses. In addition, Lessee shall (a) furnish all necessary
replacements of obsolete items of the Tangible Personal Property
and Lessor's Personal Property during the Term, unless Lessee
provides Lessor with an explanation (reasonably acceptable to
Lessor) as to why such Tangible Personal Property and Lessor's
Personal Property is no longer required in connection with the
operation of the Leased Property and (b) at least once a year, and
more frequently if requested by Lessor, deliver to Lessor, a
detailed inventory of all such Tangible Personal Property and
Lessor's Personal Property.
</PAGE>
5.2.3 Removal and Replacement; Lessor's Option to Purchase.
Lessee shall not remove from the Leased Property any one or more
items of Tangible Personal Property (whether now owned or hereafter
acquired), the fair market value of which exceeds TWENTY-FIVE
THOUSAND and NO/100 DOLLARS ($25,000.00), individually or ONE
HUNDRED THOUSAND and NO/100 DOLLARS ($100,000.00) collectively,
except if such Tangible Personal Property is simultaneously
suitably replaced or Lessee provides Lessor with an explanation
(reasonably satisfactory to Lessor) as to why such Tangible
Personal Property is no longer required in connection with the
operation of the Leased Property. At its sole cost and expense,
Lessee shall restore the Leased Property to the condition required
by Article 8, including repair of all damage to the Leased Property
caused by the removal of the Tangible Personal Property, whether
effected by Lessee or Lessor. Upon the expiration or earlier
termination of this Lease, Lessor shall have the option, which may
be exercised prior to or within sixty (60) days following such
expiration or termination, of (a) acquiring the Tangible Personal
Property (pursuant to a bill of sale and assignments of any
equipment leases, all in such forms as are reasonably satisfactory
to Lessor) upon payment of its book value (Lessee's cost, minus
depreciation), but not in excess of its fair market value or (b)
requiring Lessee to remove the Tangible Personal Property. If
Lessor exercises its option to purchase the Tangible Personal
Property, the price to be paid by Lessor shall be (i) reduced by
the amount of all payments due on any equipment leases or any other
Permitted Prior Security Interests and (ii) applied to the Lease
Obligations before any payment to Lessee. If Lessor requires the
removal of the Tangible Personal Property, then all of the Tangible
Personal Property that is not removed by Lessee within ten (10)
days following such request shall be considered abandoned by Lessee
and may be appropriated, sold, destroyed or otherwise disposed of
by Lessor without first giving notice thereof to Lessee, without
any payment to Lessee and without any obligation to account
therefor.
</PAGE>
ARTICLE 6
SECURITY FOR LEASE OBLIGATIONS
6.1 Security for Lessee's Obligations; Permitted Prior Security
Interests.
6.1.1 Security. In order to secure the payment and performance of
all of the Obligations, Lessee agrees to provide or cause there to
be provided the following security:
(a) a first lien and exclusive security interest in the
Collateral, as more particularly provided for in the Security
Agreement;
(b) the Guaranty described in Section 6.3;
(c) a first lien and exclusive pledge of all of the capital stock
of Lessee all as more particularly set forth in the Pledge
Agreement. If any Person other than the Lessee or Guarantor shall
ever operate the Facility, a pledge of all capital stock of or
partnership or other ownership interests in such Person shall also
be provided pursuant to a pledge and security agreement
substantially similar to the Pledge Agreements;
(d) a first lien and exclusive pledge and assignment of, and
security interest in, all Permits and Contracts, as more
particularly provided for in the Collateral Assignment of Permits
and Contracts; and
(e) in the event that at any time during the Term, Lessee holds
the fee title to or a leasehold interest in any real property
and/or personal property which is used as an integral part of the
operation of the Leased Property (but is not subject to this
Lease), Lessee shall (i) provide Lessor with prior notice of such
acquisition and (ii) shall take such actions and enter into such
agreements as Lessor shall reasonably request in order to grant
Lessor a first priority mortgage or other security interest in such
real property and personal property, subject only to the Permitted
Encumbrances and other Liens reasonably acceptable to Lessor.
</PAGE>
6.1.2 Purchase-Money Security Interests and Equipment Leases.
Lessee may (a) grant priority purchase money security interests in
items of Tangible Personal Property and (b) lease Tangible Personal
Property from equipment lessors as long as in each instance: (i)
the secured party or equipment lessor enters into an intercreditor
agreement with, and satisfactory to, Lessor, pursuant to which,
without limiting the foregoing, (x) Lessor shall be afforded the
option of curing defaults and the option of succeeding to the
rights of Lessee and (y) Lessor's security interest in Tangible
Personal Property shall be subordinated to the security interest
granted to such secured party, (ii) all of the terms, conditions
and provisions of the financing, security interest or lease are
reasonably acceptable to Lessor, (iii) Lessee provides a true and
complete copy, as executed, of each such purchase money security
agreement, financing document and equipment lease, (iv) no such
security interest, financing agreement or lease is cross-defaulted
or cross-collateralized with any other obligation and (v) the
secured party or equipment lessor is not a member of the Leasing
Group or an Affiliate of any member of the Leasing Group. Security
interests granted by Lessee in full compliance with the provisions
of this Section 6.1.2 are referred to as "Permitted Prior Security
Interests".
6.2 Credit Enhancement
6.2.1 Cash Deposit/Letter of Credit. In order to further secure
Lessee's performance of the Obligations, on or before the
Conversion Date, Lessee shall provide and pledge to Lessor a credit
enhancement (the "Credit Enhancement") for the benefit of Lessor in
the form of either (i) cash or other specified investments approved
by Lessor in Lessor's name (the "Cash Collateral") pursuant to the
terms of a Deposit Pledge Agreement entered into between Lessor and
Lessee on a form reasonably acceptable to Lessor, (ii) a Letter of
Credit as described in subsection (b) below or (iii) some
combination of Cash Collateral and Letter of Credit, as Lessee may
elect from time to time, provided that such Credit Enhancement is
in the total of the Stated Amount. The Credit Enhancement shall
serve as additional security for the Obligations and may be drawn
upon by Lessor upon any Lease Default. Lessee shall maintain the
Credit Enhancement in the full Stated Amount throughout the Term.
(a) Any portion of the Credit Enhancement in the form of Cash
Collateral shall be in form and substance, and if Lessor elects a
form of Cash Collateral other than actual cash, from a bank
continually acceptable to Lessor in Lessor's reasonable discretion
and shall be pledged to Lessor pursuant to the Deposit Pledge
Agreement.
</PAGE>
(b) With respect to any portion of the Credit Enhancement in the
form of a letter of credit (the "Letter of Credit"), Lessee shall
provide an irrevocable Letter of Credit in favor of the Lessor (and
satisfactory to Lessor in all respects). Without limiting the
foregoing, the Letter of Credit must provide that it shall inure to
the benefit of Lessor's successors and assigns and may be
successively transferred, and must be issued by any Institutional
Lender satisfactory to Lessor, in its reasonable discretion (it
being agreed that Boatmen's is satisfactory to Lessor subject,
however, to the last paragraph of this Section 6.2.1 and to
Lessor's receipt and approval of satisfactory (determined in
Lessor's sole and absolute discretion) financial information about
Boatmen's). Lessee covenants and agrees to take all necessary
actions to maintain such Letter of Credit (or any substitute for
such Letter of Credit delivered pursuant to this Section 6.2.1) in
effect so long as any portion of the Credit Enhancement is in the
form of the Letter of Credit.
Any Letter of Credit delivered pursuant to this Section shall also
provide that Lessor shall receive at least ninety (90) days' prior
written notice of the termination or expiration of the Letter
of Credit from the issuer thereof, and that if such notice is not
provided, the Letter of Credit shall automatically be extended for
one (1) year. Within sixty (60) days after the issuer's sending
such notice of expiration or termination, Lessee shall provide
Lessor with a substitute Letter of Credit to replace the then
expiring Letter of Credit, at which time Lessor will return the
expiring Letter of Credit. Lessee's failure to provide a
substitute Letter of Credit as set forth above shall constitute an
Event of Default under the Lease Documents which shall entitle
Lessor to exercise all of the rights and remedies set forth in the
Lease Documents, including, without limitation, the right to draw
the full amount of the then expiring Letter of Credit.
If at any time while Lessor is holding a Letter of Credit pursuant
to this Section, the rating of the issuer of such Letter of Credit
drops below Moody's single "A-" or such equivalent rating from some
other rating agency as Lessor may choose in its reasonable
discretion (if the Moody's rating becomes unavailable or Lessor for
any other reason elects to no longer rely on Moody's as a rating
agency), Lessor shall immediately notify Lessee of such fact, and
upon receipt of such notice from Lessor, Lessee shall provide
Lessor with Cash Collateral or a substitute Letter of Credit (again
meeting all the requirements of the Letter of Credit set forth
above) within thirty (30) days and upon delivery of such new Letter
of Credit, the prior Letter of Credit shall be returned to Lessee.
Lessee's failure to provide such Cash Collateral or Letter of
Credit shall constitute a Lease Default under the Lease Documents
which shall entitle Lessor to exercise all rights and remedies set
forth in the Lease Documents, including, without limitation, the
right to draw in full the Letter of Credit whose issuer has the
unsatisfactory Moody's Rating.
</PAGE>
6.2.2 Application of Credit Enhancement. Upon the occurrence of
any Lease Default, Lessor shall be entitled, at its option, to use
all or any portion of the Credit Enhancement, including interest
thereon, then held by it to pay any amount otherwise payable by
Lessee or the Guarantor under any of the Lease Documents, in
accordance with the terms of this Lease or the other Lease
Documents.
6.2.3 Replenishment of Cash Collateral. If Lessor expends any of
the Credit Enhancement to pay any amount payable by Lessee, or
otherwise applies the same to or towards the Obligations, Lessee
shall, upon demand of Lessor, immediately augment either the Cash
Collateral or the Letter of Credit so as to increase the amount
held by Lessor as the Credit Enhancement to the full Stated Amount.
6.3 Guaranty. All of the Lease Obligations shall be
unconditionally and irrevocably guaranteed by the Guarantor
pursuant to the Guaranty.
ARTICLE 7
CONDITION AND USE OF LEASED PROPERTY;
MANAGEMENT AGREEMENTS
7.1 Condition of the Leased Property. Lessee acknowledges that
Seller has caused the Leased Property to be sold to Lessor and
Lessee has concurrently entered into this Lease. Lessee
acknowledges receipt and delivery of possession of the Leased
Property and that Lessee has examined and otherwise has acquired
knowledge of the condition of the Leased Property prior to the
execution and delivery of this Lease and has found the same to be
in good order and repair and satisfactory for its purposes
hereunder. Lessee is leasing the Leased Property "AS-IS" in its
present condition. Lessee waives any claim or action against
Lessor in respect of the condition of the Leased Property. LESSOR
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH
RESPECT TO THE LEASED PROPERTY, EITHER AS TO ITS FITNESS FOR ANY
PARTICULAR PURPOSE OR USE, ITS DESIGN OR CONDITION OR OTHERWISE, OR
AS TO DEFECTS IN QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN,
LATENT OR PATENT, IT BEING AGREED THAT ALL RISKS RELATING TO THE
DESIGN, CONDITION OR USE OF THE LEASED PROPERTY ARE TO BE BORNE BY
LESSEE. LESSEE HEREBY ASSUMES ALL RISK OF THE PHYSICAL CONDITION
OF THE LEASED PROPERTY, THE SUITABILITY OF THE LEASED PROPERTY FOR
LESSEE'S PURPOSES, AND THE COMPLIANCE OR NON-COMPLIANCE OF THE
LEASED PROPERTY WITH ALL APPLICABLE LEGAL REQUIREMENTS, INCLUDING
BUT NOT LIMITED TO ENVIRONMENTAL LAWS AND ZONING OR LAND USE LAWS.
</PAGE>
Upon the request of Lessor, at any time and from time to time
during the Term, Lessee shall engage one (1) or more independent
professional Consultants, qualified to do business in the State and
acceptable to Lessor to perform any environmental and/or structural
investigations and/or other inspections of the Leased Property and
the Facility as Lessor may reasonably request in order to detect
(a) any structural deficiencies in the Leased Improvements or the
utilities servicing the Leased Property or (b) the presence of any
condition that (i) may be harmful or present a health hazard to the
residents and other occupants of the Leased Property or (ii)
constitutes a breach or violation of any of the Lease Documents.
In the event that Lessor reasonably determines that the results of
such testing or inspections are unsatisfactory, within thirty (30)
days of notice from Lessor, Lessee shall commence such appropriate
remedial actions as may be reasonably requested by Lessor to
correct such unsatisfactory conditions and, thereafter, shall
diligently and continuously prosecute such remedial actions to
completion within the time limits prescribed in this Lease or the
other Lease Documents.
7.2 Use of the Leased Property; Compliance; Management.
7.2.1 Obligation to Operate. Lessee shall continuously operate
the Leased Property in accordance with the Primary Intended Use
and, to the extend applicable, the Other Permitted Uses and
maintain its qualifications for licensure and accreditation as
required by all applicable Legal Requirements and Insurance
Requirements.
7.2.2 Permitted Uses. During the entire Term, Lessee shall use
the Leased Property, or permit the Leased Property to be used, only
for the Primary Intended Use and the Other Permitted Uses. Lessee
shall not use the Leased Property or permit the Leased Property to
be used for any other use without the prior written consent of
Lessor, which consent may be withheld in Lessor's sole and absolute
discretion.
7.2.3 Compliance With Insurance Requirements. No use shall be
made or permitted to be made of the Leased Property and no acts
shall be done which will cause the cancellation of any insurance
policy covering the Leased Property, nor shall Lessee sell or
otherwise provide to residents therein, or permit to be kept, used
or sold in or about the Leased Property, any article which may be
prohibited by any Legal Requirement or by any of the Insurance
Requirements. Furthermore, Lessee shall, at its sole cost and
expense, take whatever other actions that may be necessary to
comply with and to insure that the Leased Property complies with
all Insurance Requirements.
</PAGE>
7.2.4 No Waste. Lessee shall not commit or suffer to be committed
any waste on, in or under the Leased Property, nor shall Lessee
cause or permit any nuisance thereon.
7.2.5 No Impairment. Lessee shall neither suffer nor permit the
Leased Property to be used in such a manner as (a) might reasonably
tend to impair Lessor's title thereto or (b) may reasonably make
possible a claim or claims of adverse usage or adverse possession
by the public or of implied dedication of the Leased Property.
7.2.6 No Liens. Except for Permitted Prior Security Interests and
any other Liens which may be specifically permitted by the express
terms of this Lease, Lessee shall not permit or suffer any Lien to
exist on the Collateral and shall in no event cause, permit or
suffer any Lien to exist with respect to the Leased Property.
7.3 Compliance with Legal Requirements. Lessee covenants and
agrees that the Leased Property shall not be used for any unlawful
purpose and that Lessee, at its sole cost and expense, will
promptly (a) comply with, and shall cause every other member of the
Leasing Group to comply with, all Legal Requirements relating to
the use, operation, maintenance, repair and restoration of the
Leased Property, whether or not compliance therewith shall require
structural change in any of the Leased Property or interfere with
the use and enjoyment of the Leased Property and (b) procure,
maintain and comply with (in all material respects), and shall
cause every other member of the Leasing Group to procure, maintain
and comply with (in all material respects), all Contracts and
Permits necessary or desirable in order to operate the Leased
Property for the Primary Intended Use and, to the extent
applicable, Other Permitted Uses, and for the proper erection,
installation, operation and maintenance of the Leased Property.
Unless a Lease Default has occurred, Lessee may, upon prior written
notice to Lessor, contest any Legal Requirement to the extent
permitted by, and in accordance with, Article 15 below.
7.4 Management Agreements. Throughout the Term, Lessee shall not
enter into any Management Agreement without the prior written
approval of Lessor, in each instance, which approval shall not be
unreasonably withheld. Lessee shall not, without the prior written
approval of Lessor, in each instance, which approval shall not be
unreasonably withheld, agree to: (a) any change in the Manager, (b)
any change in the Management Agreement or change in the ownership
or control of the Manager, (c) the termination of any Management
Agreement or (d) permit the Manager to assign the Management
Agreement. Each Management Agreement shall provide that Lessor
shall be provided notice of any defaults thereunder and, at
Lessor's option, an opportunity to cure such default; all in form
</PAGE>
and substance approved by Lessor. If Lessor shall cure any of
Lessee's defaults under the Management Agreement, the cost of such
cure shall be payable upon demand by Lessee to Lessor and Lessor
shall have the same rights and remedies for failure to pay such
costs on demand as for Lessee's failure to pay any other sums due
hereunder. Lessee shall deliver to Lessor any instrument requested
by Lessor to implement the intent of the foregoing provision,
including, but not limited to, the Affiliated Party Subordination
Agreement. All management fees, payments in connection with any
extension of credit and fees for services provided in connection
with the operation of the Leased Property, and all other payments
and fees, payable by Lessee, to (i) the Guarantor or any of its
Affiliates or (ii) any Affiliate of Lessee, shall be subordinated
to the Lease Obligations pursuant to the Affiliated Party
Subordination Agreement.
ARTICLE 8
REPAIRS; RESTRICTIONS
8.1 Maintenance and Repair.
8.1.1 Lessee's Responsibility. Lessee, at its sole cost and
expense, shall keep the Leased Property and all private roadways,
sidewalks and curbs appurtenant thereto which are under Lessee's
control in good order and repair (whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the
elements or the age of the Leased Property or such private
roadways, sidewalks and curbs or any other cause whatsoever) and,
subject to Articles 9, 13 and 14, Lessee shall promptly, with the
exercise of all reasonable efforts, undertake and diligently
complete all necessary and appropriate repairs, replacements,
renovations, restorations, alterations and modifications thereof of
every kind and nature, whether interior or exterior, structural or
non-structural, ordinary or extraordinary, foreseen or unforeseen
or arising by reason of a condition (concealed or otherwise)
existing prior to the commencement of, or during, the Term and
thereafter until Lessee surrenders the Leased Property in the
manner required by this Lease. In addition, Lessee, at its sole
cost and expense, shall make all repairs, modifications,
replacements, renovations and alterations of the Leased Property
(and such private roadways, sidewalks and curbs) that are necessary
to comply with all applicable Legal Requirements and Insurance
Requirements so that the Leased Property can be legally operated
for the Primary Intended Use and, to the extent applicable, the
Other Permitted Uses. All repairs, replacements, renovations,
</PAGE>
alterations, and modifications required by the terms of this
Section 8.1 shall be (a) performed in a good and workmanlike manner
in compliance with all Legal Requirements, Insurance Requirements
and the requirements of Article 9 hereof, using new materials well
suited for their intended purpose and (b) consistent with the
operation of the Facility in a first class manner. Lessee will not
take or omit to take any action the taking or omission of which
might materially impair the value or the usefulness of the Leased
Property for the Primary Intended Use and, to the extent
applicable, the Other Permitted Uses. To the extent that any of
the repairs, replacements, renovations, alterations or
modifications required by the terms of this Section 8.1 constitute
Material Structural Work, Lessee shall obtain Lessor's prior
written approval (which approval shall not be unreasonably
withheld) of the specific repairs, replacements, renovations,
alterations and modifications to be performed by or on behalf of
Lessee in connection with such Material Structural Work, and shall
perform the same in accordance with the provisions of Sections
9.2.1, 9.2.2, 9.4 and 13.1.3, all Legal Requirements, and all other
requirements of this Lease.
8.1.2 No Lessor Obligation. Lessor shall not, under any
circumstances, be required to build or rebuild any improvements on
the Leased Property (or any private roadways, sidewalks or curbs
appurtenant thereto), or to make any repairs, replacements,
renovations, alterations, restorations, modifications, or renewals
of any nature or description to the Leased Property (or any private
roadways, sidewalks or curbs appurtenant thereto), whether ordinary
or extraordinary, structural or non-structural, foreseen or
unforeseen, or to make any expenditure whatsoever with respect
thereto in connection with this Lease, or to maintain the Leased
Property in any way (or any private roadways, sidewalks or curbs
appurtenant thereto). With respect to the foregoing, Lessee hereby
waives any rights it might have under Florida Statutes 83.201.
8.1.3 Lessee May Not Obligate Lessor. Nothing contained herein
nor any action or inaction by Lessor shall be construed as (a)
constituting the consent or request of Lessor, express or implied,
to any contractor, subcontractor, laborer, materialman or vendor to
or for the performance of any labor or services for any
construction, alteration, addition, repair or demolition of or to
the Leased Property or (b) giving Lessee any right, power or
permission to contract for or permit the performance of any labor
or services or the furnishing of any materials or other property in
such fashion as would permit the making of any claim against Lessor
for the payment thereof or to make any agreement that may create,
or in any way be the basis for, any right, title or interest in, or
Lien or claim against, the estate of Lessor in the Leased Property.
</PAGE>
8.1.4 Lessee's Obligation to Perform Upgrade Expenditures.
Without limiting Lessee's obligations to maintain the Leased
Property under this Lease, within thirty (30) days after the end of
each Lease Year commencing with the end of the third (3rd) Lease
Year, Lessee shall provide Lessor with evidence reasonably
satisfactory to Lessor that Lessee has in such Lease Year spent an
annual amount on Upgrade Expenditures (collectively, the "Required
Lease Year Upgrade Expenditures") equal to $200.00 per living unit
within the Facility (as such per living unit amount shall be
adjusted annually at the end of each Lease Year for increases in
the U.S. Department of Labor Cost of Living Index (All Consumers -
Miami - Ft. Lauderdale, Florida - 1982-1984 = 100) or similar
replacement index since the commencement of the Term). The term
"Upgrade Expenditures" is defined to mean upgrades or improvements
to the Leased Property which have the effect of maintaining or
improving the competitive position of the Leased Property in its
marketplace. Non-exclusive examples of Upgrade Expenditures
include new or replacement wallpaper, tiles, window coverings,
lighting fixtures, painting, upgraded landscaping, carpeting,
architectural adornments, common areas amenities and the like. It
is expressly understood that capital improvements or repairs (such
as but not limited to repairs or replacements to the structural
elements of the walls, parking area, or the roof or to the
electrical, plumbing, HVAC or other mechanical or structural
systems in the Leased Property) shall not be considered Upgrade
Expenditures. In the event that during a given Lease Year Upgrade
Expenditures are not necessary (which necessity shall be determined
in Lessor's sole discretion) and/or the full amount of the
respective Required Lease Year Upgrade Expenditures are not made
for the Facility for whatever reason, Lessee shall be required to
show evidence that a reserve fund has been established with the
balance of the unexpended Required Lease Year Upgrade Expenditures
to be used solely for Upgrade Expenditures in future Lease Years or
as otherwise requested by Lessor. If Lessee fails in any given
Lease Year to make Upgrade Expenditures in an amount equal to the
Required Lease Year Upgrade Expenditures or to establish a reserve
fund as aforesaid, Lessee shall promptly on demand from Lessor (but
in no event within more than five (5) days) pay to Lessor the
applicable shortfall in the Required Lease Year Upgrade
Expenditures; and Lessor may retain such funds as additional rent
hereunder or, in its sole discretion, provide such funds to Lessee
to perform Upgrade Expenditures.
</PAGE>
8.2 Encroachments; Title Restrictions. If any of the Leased
Improvements shall, at any time, encroach upon any property, street
or right-of-way adjacent to the Leased Property, or shall violate
the agreements or conditions contained in any lawful restrictive
covenant or other Lien now or hereafter affecting the Leased
Property, or shall impair the rights of others under any easement,
right-of-way or other Lien to which the Leased Property is now or
hereafter subject, then promptly upon the request of Lessor, Lessee
shall, at its sole cost and expense, subject to Lessee's right to
contest the existence of any encroachment, violation or impairment
as set forth in Article 15, (a) obtain valid and effective waivers
or settlements of all claims, liabilities and damages resulting
from each such encroachment, violation or impairment or (b) make
such alterations to the Leased Improvements, and take such other
actions, as Lessee in the good faith exercise of its judgment deems
reasonably practicable, to remove such encroachment, or to end such
violation or impairment, including, if necessary, the alteration of
any of the Leased Improvements. Notwithstanding the foregoing,
Lessee shall, in any event, take all such actions as may be
reasonably necessary in order to be able to continue the operation
of the Leased Improvements for the Primary Intended Use and, to the
extent applicable, the Other Permitted Uses substantially in the
manner and to the extent that the Leased Improvements were operated
prior to the assertion of such encroachment, violation or
impairment and nothing contained herein shall limit Lessee's
obligations to operate the Leased Property in accordance with its
Primary Intended Use. Any such alteration made pursuant to the
terms of this Section 8.2 shall be completed in conformity with the
applicable requirements of Section 8.1 and Article 9. Lessee's
obligations under this Section 8.2 shall be in addition to and
shall in no way discharge or diminish any obligation of any insurer
under any policy of title or other insurance.
ARTICLE 9
MATERIAL STRUCTURAL WORK AND
CAPITAL ADDITIONS
9.1 Lessor's Approval. Without the prior written consent of
Lessor, which consent may be withheld by Lessor, in its sole and
absolute discretion, Lessee shall make no Capital Addition or
Material Structural Work to the Leased Property (including, without
limitation, any change in the size or unit capacity of the
Facility), except Material Structural Work as may be otherwise
expressly required pursuant to Article 8 and except for the
Permitted Work described in Section 9.6 below.
</PAGE>
9.2 General Provisions as to Capital Additions and Certain
Material Structural Work. As to Capital Additions or Material
Structural Work (other than such Material Structural Work that is
required to be performed pursuant to the terms of Section 8.1) for
which Lessor has granted its prior written approval, the following
terms and conditions shall apply unless otherwise expressly set
forth in Lessor's written approval.
9.2.1 No Liens. Subject to the provisions of Article 15, Lessee
shall not be permitted to create any Lien on the Leased Property in
connection with any Capital Addition or Material Structural Work.
NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE LIABLE
FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED
TO LESSEE OR TO ANYONE HOLDING ANY PART OF THE LEASED PROPERTY, AND
THAT NO MECHANICS' LIENS, CONSTRUCTION LIENS OR OTHER LIENS FOR ANY
SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE
INTEREST OF LESSOR IN AND TO THE LEASED PROPERTY.
9.2.2 Lessee's Proposal Regarding Capital Additions and Material
Structural Work. If Lessee desires to undertake any Capital
Addition or Material Structural Work, Lessee shall submit to Lessor
in writing a proposal setting forth in reasonable detail any
proposed Capital Addition or Material Structural Work and shall
provide to Lessor copies of, or information regarding, the
applicable plans and specifications, Permits, Contracts and any
other materials concerning the proposed Capital Addition or
Material Structural Work, as the case may be, as Lessor may
reasonably request. Without limiting the generality of the
foregoing, each such proposal pertaining to a Capital Addition
shall indicate the approximate projected cost of constructing such
Capital Addition, the use or uses to which it will be put.
9.2.3 Lessor's Options Regarding Capital Additions and Material
Structural Work. Lessor shall have the options of: (a) denying
permission for the construction of the Capital Addition and/or
Material Structural Work, (b) offering to finance the construction
of the Capital Addition pursuant to Section 9.3, (c) allowing
Lessee to pay for or separately finance the construction of the
Capital Addition and/or Material Structural Work, subject to the
same limits and conditions imposed under Section 9.4, Section
13.1.3, all Legal Requirements, all other applicable requirements
of this Lease and to such other terms and conditions as Lessor may
in its discretion impose or (d) any combination of the foregoing.
Unless Lessor notifies Lessee in writing of a contrary election
within forty-five (45) days of Lessee's request, Lessor shall be
deemed to have denied the request for the Capital Addition or
Material Structural Work.
</PAGE>
9.2.4 Lessor May Elect to Finance Capital Additions. If Lessor
elects to offer financing for the proposed Capital Addition, the
provisions of Section 9.3 shall apply.
9.2.5 Legal Requirements; Quality of Work. All work shall be
performed in full compliance with all applicable Legal Requirements
and shall be performed in a good and workmanlike manner.
9.3 Capital Additions Financed by Lessor.
9.3.1 Lessee's Financing Request. Lessee may request that Lessor
provide or arrange financing for a Capital Addition by providing to
Lessor such information about the Capital Addition as Lessor may
reasonably request, including, without limitation, all information
referred to in Section 9.2 above. Lessee understands, however,
that Lessor shall be under no obligation to agree to such request.
Nevertheless, Lessor shall use reasonable efforts to notify Lessee,
within forty-five (45) days of receipt of such information, as to
whether Lessor will finance the proposed Capital Addition and, if
so, the terms and conditions upon which it would do so, including
the terms of any amendment to this Lease (including, without
limitation, an increase in Base Rent based on Lessor's then
existing terms and prevailing conditions to compensate Lessor for
its Subsequent Investment with respect to such Capital Addition).
Lessee may withdraw its request by notice to Lessor at any time
before such time as Lessee accepts Lessor's terms and conditions.
All advances of funds for any such financing shall be made in
accordance with Lessor's then standard construction loan
requirements and procedures, which may include,
without limitation, the requirements and procedures applicable to
Work under Section 13.1.3.
9.3.2 Lessor's General Requirements. If Lessor agrees to finance
the proposed Capital Addition and Lessee accepts Lessor's proposal
therefor, in addition to all other items which Lessor or any
applicable Financing Party may reasonably require, Lessee shall
provide to Lessor the following:
(a) prior to any advance of funds, (i) any information, opinions,
certificates, Permits or documents reasonably requested by Lessor
or any applicable Financing Party which are necessary to confirm
that Lessee will be able to use the Capital Addition upon
completion thereof in accordance with the Primary Intended Use and,
to the extent applicable, the Other Permitted Uses and (ii)
evidence satisfactory to Lessor and any applicable Financing Party
that all Permits required for the construction and use of the
Capital Addition have been received, are in full force and effect
and are not subject to appeal, except only for those Permits which
cannot in the normal course be obtained prior to commencement or
completion of the construction; provided, that Lessor and any
applicable Financing Party are furnished with reasonable evidence
that the same will be available in the normal course of business
without unusual condition;
(b) prior to any advance of funds, an Officer's Certificate and,
if requested, a certificate from Lessee's architect, setting forth
in reasonable detail the projected (or actual, if available)
Capital Addition Cost;
</PAGE>
(c) bills of sale, instruments of transfer and other documents
required by Lessor so as to vest title to the Capital Addition in
Lessor free and clear of all Liens, and amendments to this Lease
and any recorded notice or memorandum thereof, duly executed and
acknowledged, in form and substance reasonably satisfactory to
Lessor, providing for any changes required by Lessor including,
without limitation, changes in the Base Rent and the legal
description of the Land;
(d) upon payment therefor, a deed conveying to Lessor title to any
land acquired for the purpose of constructing the Capital Addition
("Additional Land") free and clear of any Liens except those
approved by Lessor;
(e) upon completion of the Capital Addition, a final as-built
survey thereof reasonably satisfactory to Lessor, if required by
Lessor;
(f) during and following the advance of funds and the completion
of the Capital Addition, endorsements to any outstanding policy of
title insurance covering the Leased Property satisfactory in form
and substance to Lessor (i) updating the same without any
additional exception except as may be reasonably permitted by
Lessor and (ii) increasing the coverage thereof by an amount equal
to the Fair Market Value of the Capital Addition and including the
Additional Land in the premises covered by such title insurance
policy (except to the extent covered by the owner's policy of title
insurance referred to in subparagraph (g) below);
(g) simultaneous with the initial advance of funds, if
appropriate, (i) an owner's policy of title insurance insuring fee
simple title to any Additional Land conveyed to Lessor pursuant to
subparagraph (d) above free and clear of all Liens except those
approved by Lessor, reasonably satisfactory in form and substance
to Lessor, and (ii) an owner's policy of title insurance reasonably
satisfactory in form and substance to Lessor and a lender's policy
of title insurance reasonably satisfactory in form and substance
any applicable Financing Party;
(h) following the completion of the Capital Addition, if
reasonably deemed necessary by Lessor, an appraisal of the Leased
Property by an M.A.I. appraiser acceptable to Lessor, which states
that the Fair Market Value of the Leased Property upon completion
of the Capital Addition exceeds the Fair Market Value of the Leased
Property prior to the commencement of such Capital Addition by an
amount not less than one hundred twenty-five percent (125%) of the
Capital Addition Cost; and (i) during or following the advancement
of funds, prints of architectural and engineering drawings relating
to the Capital Addition and such other materials, including,
without limitation, endorsements increasing the amount of title
insurance coverage in the title insurance policies insuring Lessor
and any applicable Financing Party with respect to the Leased
Property, opinions of counsel, appraisals, surveys, certified
copies of duly adopted resolutions of the board of directors of
Lessee authorizing the execution and delivery of the lease
amendment and any other documents and instruments as may be
reasonably required by Lessor and any applicable Financing Party.
</PAGE>
9.3.3 Payment of Costs. By virtue of making a request to finance
a Capital Addition, whether or not such financing is actually
consummated, Lessee shall be deemed to have agreed to pay, upon
demand, all costs and expenses reasonably incurred by Lessor and
any Person participating with Lessor in any way in the financing of
the Capital Addition Cost, including, but not limited to (a) fees
and expenses of their respective attorneys, (b) all photocopying
expenses, if any, (c) the amount of any filing, registration and
recording taxes and fees, (d) documentary stamp taxes and (e) title
insurance charges and appraisal fees. To the extent that the same
are paid by Lessee on demand, the amount thereof shall be excluded
from the calculation of the Subsequent Investment made with respect
to such Capital Addition.
9.4 General Limitations: Without in any way limiting Lessor's
options with respect to proposed Capital Additions or Material
Structural Work: (a) no Capital Addition or Material Structural
Work shall be completed that could, upon completion, significantly
alter the character or purpose or detract from the value or
operating efficiency of the Leased Property, or significantly
impair the revenue-producing capability of the Leased Property, or
adversely affect the ability of Lessee to comply with the terms of
this Lease; (b) no Capital Addition or Material Structural Work
shall be completed which would tie in or connect any Leased
Improvements on the Leased Property with any other improvements on
property adjacent to the Leased Property (and not part of the Land
covered by this Lease) including, without limitation, tie-ins of
buildings or other structures or utilities, unless Lessee shall
have obtained the prior written approval of Lessor, which approval
may be withheld in Lessor's sole and absolute discretion and (c)
all proposed Capital Additions and Material Structural Work shall
be architecturally integrated and consistent with the Leased
Property.
9.5 Non-Capital Additions. Lessee shall have the obligation and
right to make repairs, replacements and alterations which are not
Capital Additions and which are required by the other Sections of
this Lease, but in so doing, Lessee shall always comply with and
satisfy the conditions of Sections 9.2.1 and 9.4. Lessee shall
have the right, from time to time, to make additions, modifications
or improvements to the Leased Property which do not constitute
Capital Additions or Material Structural Work and are not required
by the other Sections of this Lease from time to time as it may
deem to be desirable or necessary for its uses and purposes,
subject to the same limits and conditions imposed under Sections
9.2.1 and 9.4. The cost of any such repair, replacement,
alteration, addition, modification or improvement shall be paid by
Lessee and the results thereof shall be included under the terms of
this Lease and become a part of the Leased Property, without
</PAGE>
payment therefor by Lessor at any time. Notwithstanding the
foregoing, all such additions, modifications and improvements which
affect the structure of any of the Leased Improvements, or which
involve the expenditure of more than TWENTY-FIVE THOUSAND and
NO/100 DOLLARS ($25,000.00), shall be undertaken only upon
compliance with the provisions of Section 13.1.3, all Legal
Requirements and all other requirements of this Lease.
9.6 Permitted Work. Notwithstanding Section 9.1 above, Lessee
shall have the right to perform Permitted Work (as defined below)
without Lessor's prior approval or consent as long as Lessee gives
to Lessor prior notice that Lessee is undertaking such Permitted
Work and provides Lessor with reasonably detailed plans and
specifications describing the work to be done. "Permitted Work"
shall mean work to a Facility which will not affect any of the
structural elements of the Facility and which costs less than FIFTY
THOUSAND AND NO/100 DOLLARS ($50,000.00) during any consecutive
twelve (12) month period. Any work to a Facility, regardless of
cost, which (a) will affect any structural element of the relevant
Facility and (b) is not otherwise subject to an approval of Lessor
pursuant to any other provision of this Lease, shall still require
the prior written consent of Lessor, which consent may be withheld
by Lessor in its sole and absolute discretion.
ARTICLE 10
WARRANTIES AND REPRESENTATIONS
10.1 Representations and Warranties. Lessee hereby represents and
warrants to, and covenants and agrees with, Lessor that:
10.1.1 Existence; Power; Qualification. Lessee is a corporation
duly organized, validly existing and in good standing under the
laws of the State of Kansas. Lessee has all requisite corporate
power to own and operate its properties and to carry on its
business as now conducted and as proposed to be conducted and is
duly qualified to do business and is in good standing in each
jurisdiction (including, without limitation, the State) where such
qualification is necessary or desirable in order to carry out its
business as now conducted and as proposed to be conducted. As of
the date of this Lease, Lessee does not have any Subsidiaries and
Lessee is not a member of any partnership or joint venture.
Attached hereto as EXHIBIT C is a true and correct list of all the
shareholders of Lessee and their respective ownership interests in
Lessee.
</PAGE>
10.1.2 Valid and Binding. Lessee is duly authorized to make and
enter into all of the Lease Documents to which Lessee is a party
and to carry out the transactions contemplated therein. All of the
Lease Documents to which Lessee is a party have been duly executed
and delivered by Lessee, and each is a legal, valid and binding
obligation of Lessee, enforceable in accordance with its terms.
10.1.3 Single Purpose. Lessee is, and during the entire time that
this Lease remains in force and effect shall be, engaged in no
business, trade or activity other than the operation of the Leased
Property for the Primary Intended Use and the Other Permitted Uses
and such other activities in which Lessee is permitted to engage by
the provisions of the Meditrust/ALP Transaction Documents.
10.1.4 No Violation. The execution, delivery and performance of
the Lease Documents and the consummation of the transactions
thereby contemplated shall not result in any breach of, or
constitute a default under, or result in the acceleration of, or
constitute an event which, with the giving of notice or the passage
of time, or both, could result in default or acceleration of any
obligation of any member of the Leasing Group under any of the
Permits or Contracts or any other contract, mortgage, lien, lease,
agreement, instrument, franchise, arbitration award, judgment,
decree, bank loan or credit agreement, trust indenture or other
instrument to which any member of the Leasing Group is a party or
by which any member of the Leasing Group may be bound or affected
and do not violate or contravene any Legal Requirement.
10.1.5 Consents and Approvals. Except as already obtained or
filed, as the case may be, no consent or approval or other
authorization of, or exemption by, or declaration or filing with,
any Person and no waiver of any right by any Person is required to
authorize or permit, or is otherwise required as a condition of
Lessee's execution, delivery and performance of its obligations
under the Lease Documents or as a condition to the validity
(assuming the due authorization, execution and delivery by Lessor
of the Lease Documents to which it is a party) and the first
priority of any Liens granted under the Lease Documents or, as to
any Tangible Personal Property and/or Receivables, as the case may
be, as to which there are Permitted Prior Security Interests, the
agreed junior priority of any such Liens, except the filing of the
Financing Statements.
10.1.6 No Liens or Insolvency Proceedings. Each member of the
Leasing Group is financially solvent and there are no actions,
suits, investigations or proceedings including, without limitation,
outstanding federal or state tax liens, garnishments or insolvency
or bankruptcy proceedings, pending or, to the best of Lessee's
knowledge and belief, threatened:
</PAGE>
(a) against or affecting any member of the Leasing Group, which if
adversely resolved to such member of the Leasing Group, would
materially adversely affect the ability of any of the foregoing to
perform their respective obligations under the Lease Documents;
(b) against or affecting the Leased Property or the ownership,
construction, development, maintenance, management, repair, use,
occupancy, possession or operation thereof; or
(c) which may involve or affect the validity, priority or
enforceability of any of the Lease Documents, at law or in equity,
or before or by any arbitrator or Governmental Authority.
10.1.7 No Burdensome Agreements. Neither Lessee nor the Guarantor
is a party to any agreement the terms of which now have, or, as far
as can be reasonably foreseen, may have, a material adverse affect
on its respective financial condition or business or on the
operation of the Leased Property.
10.1.8 Commercial Acts. Lessee's performance of and compliance
with the obligations and conditions set forth herein and in the
other Lease Documents will constitute commercial acts done and
performed for commercial purposes.
10.1.9 Adequate Capital, Not Insolvent. After giving effect to
the consummation of the transactions contemplated by the Lease
Documents, each member of the Leasing Group:
(a) will be able to pay its debts as they become due;
(b) will have sufficient funds and capital to carry on its
business as now conducted or as contemplated to be conducted (in
accordance with the terms of the Lease Documents);
(c) will own property having a value both at fair valuation and at
present fair saleable value greater than the amount required to pay
its debts as they become due; and
(d) will not be rendered insolvent as determined by applicable
law.
10.1.10 Not Delinquent. No member of the Leasing Group is
delinquent or claimed to be delinquent under any obligation for the
payment of borrowed money.
10.1.11 No Affiliate Debt. Lessee has not created, incurred,
guaranteed, endorsed, assumed or suffered to exist any liability
(whether direct or contingent) for borrowed money from the
Guarantor (or any of its Affiliates) or any Affiliate of Lessee.
</PAGE>
10.1.12 Taxes Current. Each member of the Leasing Group has filed
all federal, state and local tax returns which are required to be
filed as to which extensions are not currently in effect and have
paid all taxes, assessments, impositions, fees and other
governmental charges (including interest and penalties) which have
become due pursuant to such returns or pursuant to anyassessment or
notice of tax claim or deficiency received by each such member of
the Leasing Group. No tax liability has been asserted by the
Internal Revenue Service against any member of the Leasing Group or
any other federal, state or local taxing authority for taxes,
assessments, impositions, fees or other governmental charges
(including interest or penalties thereon) in excess of those
already paid.
10.1.13 Financials Complete and Accurate. The financial
statements of each member of the Leasing Group given to Lessor in
connection with the Lease were true, complete and accurate and
fairly presented the financial condition of each such member of the
Leasing Group as of the date thereof and for the periods covered
thereby, having been prepared in accordance with GAAP and such
financial statements disclosed all liabilities, including, without
limitation, contingent liabilities, of each such member of the
Leasing Group. There has been no material adverse change since
such date with respect to the Tangible Net Worth of any member of
the Leasing Group or with respect to any other matters contained in
such financial statements, nor have any additional material
liabilities, including, without limitation, contingent liabilities,
of any member of the Leasing Group arisen or been incurred or
asserted since such date. The projections heretofore delivered to
Lessor continue to be reasonable (with respect to the material
assumptions upon which such projections are based) and Lessee
reasonably anticipates the results projected therein will be
achieved, there having been (a) no material adverse change in the
business, assets or condition, financial or otherwise of any member
of the Leasing Group and (b) no material depletion of the cash
or decrease in working capital of any member of the Leasing Group.
10.1.14 Pending Actions, Notices and Reports.
(a) There are no actions or investigations pending or, to the best
knowledge and belief of either Lessee or Guarantor, threatened,
anticipated or contemplated (nor, to the knowledge of either Lessee
or Guarantor, is there any reasonable basis therefor) against or
affecting the Leased Property or any member of the Leasing Group
(or any Affiliate thereof) before any Governmental Authority,
Accreditation Body or Third Party Payor which could prevent or
hinder the consummation of the transactions contemplated hereby or
call into question the validity of any of the Lease Documents or
any action taken or to be taken in connection with the transactions
</PAGE>
contemplated thereunder or which in any single case or in the
aggregate might result in any material adverse change in the
business, prospects, condition, affairs or operations of any member
of the Leasing Group or the Leased Property (including, without
limitation, any action to revoke, withdraw or suspend any Permit
necessary or desirable for the operation of the Leased Property in
accordance with its Primary Intended Use and any action to transfer
or relocate any such Permit to a location other than the Leased
Property) or any material impairment of the right or ability of any
member of the Leasing Group to carry on its operations as presently
conducted upon Completion of the Project or proposed, upon
Completion of the Project, to be conducted with respect to the
Leased Property or with respect to its obligations under the Lease
Documents or which may materially adversely impact reimbursement to
any member of the Leasing Group for services rendered to
beneficiaries of Third Party Payor Programs.
(b) No member of the Leasing Group has received any notice of any
claim, requirement or demand of any Governmental Authority,
Accreditation Body, Third Party Payor or any insurance body having
or claiming any licensing, certifying, supervising, evaluating or
accrediting authority over the Facility to rework or redesign the
Facility, its professional staff or its professional services,
procedures or practices in any material respect or to provide
additional furniture, fixtures, equipment or inventory or to
otherwise take action so as to make the Facility conform to or
comply with any Legal Requirement;
(c) The most recent utilization reviews relating to the Facility
by all applicable Third Party Payors, Accreditation Bodies and
Governmental Authorities and reviews or scrutiny by any managed
care or utilization review companies have not had a material
adverse impact on the utilization of units or programs at the
Facility. No claims or assertions have been made in any
utilization review that any of the practices or procedures used at
the Facility are improper or inappropriate other than such claims
or assertions which singly and in the aggregate will not have a
material adverse impact on the Facility; and
(d) Lessee and Guarantor have delivered or caused to be delivered
to Lessor true and correct copies of all licenses, inspection
surveys and accreditation reviews relating to the Facility, issued
by any Governmental Authority or Accreditation Body during the most
recent licensing period, together with all plans of correction
relating thereto.
10.1.15 Compliance with Legal and Other Requirements.
</PAGE>
(a) To the extent consistent with the stage of construction of the
Project, Lessee and the Leased Property and the ownership,
construction, development, maintenance, management, repair, use,
occupancy, possession and operation thereof comply with all
applicable Legal Requirements and there is no claim of any
violation thereof known to Lessee or Guarantor. Without limiting
the foregoing, Lessee has obtained all Permits that are necessary
or desirable to operate the Leased Property in accordance with its
Primary Intended Use or reasonably expects to obtain such Permits
prior to, or upon, the Completion of the Project; and
(b) Except as previously delivered to Lessor pursuant to Section
10.1.14(d) hereof, there are no outstanding notices of
deficiencies, notices of proposed action or orders of any kind
relating to the Leased Property issued by any Governmental
Authority, Accreditation Body or Third Party Payor requiring
conformity to any of the Legal Requirements.
10.1.16 No Action By Governmental Authority or Accreditation Body.
There is no action pending or, to the best knowledge and belief of
either Lessee or Guarantor, recommended, by any Governmental
Authority or Accreditation Body or Third Party Payor to revoke,
repeal, cancel, modify, withdraw or suspend any Permit or Contract
or to take any other action of any other type which could have a
material adverse effect on the Leased Property.
</PAGE>
10.1.17 Property Matters.
(a) The Leased Property is free and clear of agreements, covenants
and Liens, except those agreements, covenants and Liens to which
this Lease is expressly subject, whether presently existing, as are
listed on EXHIBIT B or were listed on the UCC lien search results
delivered to Lessor at or prior to the execution and delivery of
this Lease (and were not required to be terminated as a condition
of the execution and delivery of this Lease), or which may
hereafter be created in accordance with the terms hereof
(collectively referred to herein as the "Permitted Encumbrances");
and Lessee shall warrant and defend Lessor's title to the Leased
Property against any and all claims and demands of every kind and
nature whatsoever;
(b) There is no Condemnation or similar proceeding pending with
respect to or affecting the Leased Property, and neither Lessee nor
Guarantor is aware, to the best of its knowledge and belief, that
any such proceeding is contemplated;
(c) The Leased Property has not been damaged by any Casualty. To
the extent the same have either been constructed or are located on
the Land, the Leased Improvements, Fixtures, Lessor's Personal
Property and Tangible Personal Property are in good operating
condition and repair, ordinary wear and tear excepted, free from
known defects in construction or design;
(d) None of the Permitted Encumbrances has or is likely to have a
material adverse impact upon, nor interfere with or impede, in any
material respect, the operation of the Leased Property in
accordance with the Primary Intended Use;
(e) Upon the Conversion Date, all building facilities and other
improvements necessary, both legally and practically, for the
proper and efficient operation of the Facility will be located upon
the Leased Property and all real property and personal property
currently utilized by Lessee will be included within the definition
of the Leased Property or the Collateral;
(f) Upon the Conversion Date, the Leased Property shall abut on
and have direct vehicular access to a public road or access to a
public road via permanent, irrevocable, appurtenant easements;
(g) Each parcel comprising a portion of the Land constitutes a
separate parcel for real estate tax purposes and no portion of any
real property that does not constitute a portion of the Leased
Property is part of the same tax parcel as any part of the Leased
Property;
</PAGE>
(h) All utilities necessary for the use and operation of the
Facility are available to the lot lines of the Leased Property:
(i) in sufficient supply and capacity;
(ii) through validly created and existing easements of record
appurtenant to or encumbering the Leased Property (which easements
shall not impede or restrict the operation of the Facility); and
(iii) without need for any Permits and/or Contracts to be issued
by or entered into with any Governmental Authority, except as
already obtained or executed, as the case may be, or as otherwise
shown to the satisfaction of Lessor to be readily obtainable; and
(i) After the Conversion Date, neither Lessee nor Guarantor has
made any structural alterations or improvements to any of the
Leased Improvements that changed the foot-print of any Leased
Improvement, added an additional story to any Leased Improvement,
decreased the amount of parking available at the Facility or
otherwise involved any alteration which would be regulated by
applicable zoning requirements.
10.1.18 Rate Limitations. Except as disclosed on EXHIBIT D, the
State currently imposes no restrictions or limitations on rates
which may be charged to private pay residents receiving services at
the Facility.
10.1.19 Free Care. Except as disclosed on EXHIBIT E, there are no
Contracts, Permits or Legal Requirements which require that a
percentage of units or slots in any program at the Facility be
reserved for Medicaid or Medicare eligible residents or that the
Facility provide a certain amount of welfare, free or charity care
or discounted or government assisted resident care.
10.1.20 No Proposed Changes. Neither Lessee nor Guarantor has any
actual knowledge of any Legal Requirements which have been enacted,
promulgated or issued within the eighteen (18) months preceding the
date of this Lease or any proposed Legal Requirements currently
pending in the State which may materially adversely affect rates at
the Facility (or any program operated in conjunction with the
Facility) or may result in the likelihood of increased competition
at the Facility or the imposition of Medicaid, Medicare, charity,
free care, welfare or other discounted or government assisted
residents at the Facility or require that Lessee or the Facility
obtain a certificate of need, Section 1122 approval or the
equivalent, which Lessee or the Facility does not currently
possess.
</PAGE>
10.1.21 ERISA. No employee pension benefit plan maintained by any
member of the Leasing Group has any accumulated funding deficiency
within the meaning of the ERISA, nor does any member of the Leasing
Group have any material liability to the PBGC established under
ERISA (or any successor thereto) in connection with any employee
pension benefit plan (or other class of benefit which the PBGC has
elected to insure), and there have been no "reportable events" (not
waived) or "prohibited transactions" with respect to any such plan,
as those terms are defined in Section 4043 of ERISA and Section
4975 of the Internal Revenue Code of 1986, as now or hereafter
amended, respectively.
10.1.22 No Broker. No member of the Leasing Group nor any of
their respective Affiliates has dealt with any broker or agent in
connection with the transactions contemplated by the Lease
Documents.
10.1.23 No Improper Payments. No member of the Leasing Group nor
any of their respective Affiliates has:
(a) made any contributions, payments or gifts of its funds or
property to or for the private use of any government official,
employee, agent or other Person where either the payment or the
purpose of such contribution, payment or gifts is illegal under the
laws of the United States, any state thereof or any other
jurisdiction (foreign or domestic);
(b) established or maintained any unrecorded fund or asset for any
purpose or has made any false or artificial entries on any of its
books or records for any reason;
(c) made any payments to any Person with the intention or
understanding that any part of such payment was to be used for any
other purpose other than that described in the documents supporting
the payment; or
(d) made any contribution, or has reimbursed any political gift or
contribution made by any other Person, to candidates for public
office, whether federal, state or local, where such contribution
would be in violation of applicable law.
10.1.24 Nothing Omitted. Neither this Lease, nor any of the other
Lease Documents, nor any certificate, agreement, statement or other
document, including, without limitation, any financial statements
concerning the financial condition of Lessee or the Guarantor,
furnished to or to be furnished to Lessor or its attorneys in
connection with this Lease, contains or will contain any untrue
statement of a material fact or omits or will omit to state a
</PAGE>
material fact necessary in order to prevent all statements
contained herein and therein from being misleading. There is no
fact within the special knowledge of Lessee which has not been
disclosed herein or in writing to Lessor that materially adversely
affects, or in the future, insofar as Lessee can reasonably
foresee, may materially adversely affect the business, properties,
assets or condition, financial or otherwise, of the Guarantor,
Lessee or the Facility.
10.1.25 No Margin Security. Lessee is not engaged in the business
of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulation U of the Board of
Governors of the Federal Reserve System), and no part of the
proceeds of the Meditrust Investment will be used to purchase or
carry any margin security or to extend credit to others for the
purpose of purchasing or carrying any margin security or in any
other manner which would involve a violation of any of the
regulations of the Board of Governors of the Federal Reserve
System. Lessee is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
10.1.26 No Default. No event or state of facts which constitutes,
or which, with notice or lapse of time, or both, could constitute,
a Lease Default has occurred and is continuing.
10.1.27 Principal Place of Business. The principal place of
business and chief executive office of Lessee is located at 453 S.
Webb Road, Suite 500, Wichita, Kansas 67207 (the "Principal Place
of Business").
10.1.28 Third Party Payor Agreements.
(a) Lessee or the Facility is fully qualified as a provider of
services under and participates in all Third Party Payor Programs
and referral programs as is necessary, in Lessee's reasonable
discretion, for the prudent operation of the Facility in the good
faith exercise of commercially reasonable business judgment.
(b) Attached hereto as EXHIBIT F is a list of Provider Agreements
currently in effect.
(c) Attached hereto as EXHIBIT G is a list of national accounts
and local discount agreements, which constitute all of the
agreements between Lessee or the Facility, on the one hand, and
Third Party Payors on the other hand, pursuant to which Lessee or
the Facility agrees to provide services based on a discount factor
from the rates regularly charged for services rendered by Lessee
or the Facility.
</PAGE>
(d) No member of the Leasing Group, nor the Facility has any rate
appeal currently pending before any Government Authority or any
administrator of any Third Party Payor Program or any other
referral source other than such appeals which, if determined
adversely to any member of the Leasing Group or the Facility would
not have a materially adverse effect, either singly or in the
aggregate, on the financial condition of any member of the Leasing
Group or the Facility.
(e) All cost reports and financial reports submitted to any Third
Party Payor with respect to the Facility by any member of the
Leasing Group have been materially accurate and complete and have
not been misleading in any material respect. As a result of any
audits by any Third Party Payor, there are no related recoupment
claims made or contests pending or threatened other than such
recoupment claims or contests which, if determined adversely to any
member of the Leasing Group or the Facility, would not have a
materially adverse effect, either singly or in the aggregate, on
the financial condition of any member of the Leasing Group or the
Facility. As of the date hereof, no cost reports for the Facility
remain open or unsettled other than those listed on EXHIBIT H.
10.1.29 Rates. Lessee or the Facility shall charge rates for
private pay residents which are legal, valid and enforceable and
shall provide Lessor with a schedule of all such rates as soon as
they are set;
10.1.30 Labor Matters. There are no proceedings now pending, nor,
to the best of Lessee's knowledge, threatened with respect to the
operation of the Facility before the National Labor Relations
Board, State Commission on Human Rights and Opportunities, State
Department of Labor, U.S. Department of Labor or any other
Governmental Authority having jurisdiction of employee rights with
respect to hiring, tenure and conditions of employment, and no
member of the Leasing Group has experienced any material
controversy with any Facility administrator or other employee of
similar stature or with any labor organization.
10.1.31 Intellectual Property. Lessee is duly licensed or
authorized to use all (if any) copyrights, rights of reproduction,
trademarks, trade-names, trademark applications, service marks,
patent applications, patents and patent license rights, (all
whether registered or unregistered, U.S. or foreign), inventions,
franchises, discoveries, ideas, research, engineering, methods,
practices, processes, systems, formulae, designs, drawings,
products, projects, improvements, developments, know-how and trade
secrets which are used in, will be used in or necessary for the
operation of the Facility in accordance with its Primary Intended
Use, without conflict with or infringement of any, and subject to
no restriction, lien, encumbrance, right, title or interest in
others.
</PAGE>
10.1.32 Management Agreements. There is no Management Agreement
in force and effect as of the date hereof.
10.1.33 Fiscal Year. The fiscal year of Lessee and the Guarantor
is the Fiscal Year.
10.2 Continuing Effect of Representations and Warranties. All
representations and warranties contained in this Lease and the
other Lease Documents shall constitute continuing representations
and warranties which shall remain true, correct and complete
throughout the Term.
ARTICLE 11
FINANCIAL AND OTHER COVENANTS
11.1 Status Certificates. At any time, and from time to time,
upon request from Lessor, Lessee shall furnish to Lessor, within
ten (10) Business Days after receipt of such request, an Officer's
Certificate certifying that this Lease is unmodified and in full
force and effect (or that this Lease is in full force and effect as
modified and setting forth the modifications) and the dates to
which the Rent has been paid. Any Officer's Certificate furnished
pursuant to this Section shall be addressed to any prospective
purchaser or mortgagee of the Leased Property as Lessor may request
and may be relied upon by Lessor and any such prospective purchaser
or mortgagee of the Leased Property.
11.2 Financial Statements; Reports; Notice and Information.
11.2.1 Obligation To Furnish. Lessee will furnish and shall cause
to be furnished to Lessor the following statements, information and
other materials:
(a) Annual Statements. Within ninety (90) days after the
end of each of their respective fiscal years, (i) a copy of the
Consolidated Financials for each of (x) the Guarantor and (y) any
Sublessee for the preceding fiscal year, certified and audited by,
and with the unqualified opinion of, independent certified public
accountants acceptable to Lessor and certified as true and correct
by the Guarantor or the applicable Sublessee, as the case may be
(and, without limiting anything else contained herein, the
Consolidated Financials for each Sublessee shall include, as
supplemental information, a detailed balance sheet for Leased
Property and the Facility thereof as of the last day of such fiscal
year and a statement of earnings from the Leased Property and the
</PAGE>
Facility thereof for such fiscal year showing, among other things,
all Rents and other income therefrom and all expenses paid or
incurred in connection with the operation of the Leased Property);
(ii) separate statements, certified as true and correct by Lessee,
the Guarantor and each Sublessee, stating whether, to the best of
the signer's knowledge and belief after making due inquiry, Lessee,
the Guarantor or such Sublessee, as the case may be, is in default
in the performance or observance of any of the terms of this Lease
or any of the other Lease Documents and, if so, specifying all such
defaults, the nature thereof and the steps being taken to
immediately remedy the same; (iii) a copy of all letters from the
independent certified accountants engaged to perform the annual
audits referred to above, directed to the management of Lessee, the
Guarantor or the applicable Sublessee, as the case may be,
regarding the existence of any reportable conditions or material
weaknesses and (iv) a statement certified as true and correct by
Lessee setting forth all Subleases as of the last day of such
fiscal year, the respective areas demised thereunder, the names of
the Sublessees thereunder, the respective expiration dates of the
Subleases, the respective rentals provided for therein, and such
other information pertaining to the Subleases as may be reasonably
requested by Lessor.
(b) Monthly Statements of Lessee. Within thirty-five (35)
days after the end of each calendar month during the pendency of
this Lease, (i) an unaudited, detailed month and year to date
income and expense statement for the Leased Property which shall
include a comparison to corresponding budget figures, occupancy
statistics (including the actual number of residents, the number of
units available and the unit occupancy for such month), (ii) an
unaudited balance sheet for the Leased Property and (iii) an
express written calculation showing the compliance or non-compliance,
as the case may be, with the specific financial
covenants set forth in Section 11.3 for the applicable period,
including, with respect to the calculation of Lessee's and the
Facility's Debt Coverage Ratio, a schedule substantially in the
form attached hereto as EXHIBIT I.
(c) [intentionally omitted]
(d) Quarterly Statements of the Guarantor. Within forty-five
(45) days after the end of each of the Fiscal Quarters ending
March 31, June 30 and September 30, respectively, all 10Q reports
required to be filed by the Security and Exchange Commission for
the Guarantor, certified as true and correct by the Guarantor.
</PAGE>
(e) Permits and Contracts. Promptly after the issuance
or execution thereof, as the case may be, true and complete copies
of (i) all Permits which constitute operating licenses for the
Facility issued by any Governmental Authority having jurisdiction
over health care matters and (ii) Contracts (involving payments in
the aggregate in excess of $100,000 per annum), including, without
limitation, all Provider Agreements.
(f) Contract Notices. Promptly after the receipt
thereof, true and complete copies of any notices, consents,
terminations or statements of any kind or nature relating to any of
the Contracts (involving payments in the aggregate in excess of
$100,000 per annum) other than those issued in the ordinary course
of business.
(g) Regulatory Surveys. Promptly after the receipt
thereof, true and complete copies of all surveys, follow-up
surveys, licensing surveys, complaint surveys, examinations,
compliance certificates, inspection reports, statements,
terminations and notices of any kind issued or provided to Lessee
or any Sublessee by any Governmental Authority, Accreditation Body
or any Third Party Payor, including, without limitation, any
notices pertaining to any delinquency in, or proposed revision of,
Lessee's or any Sublessee's obligations under the terms and
conditions of any Permits or Contracts now or hereafter issued by
or entered into with any Governmental Authority, Accreditation
Body or Third Party Payor and the response(s) thereto made by or on
behalf of Lessee or any Sublessee.
(h) Official Reports. Upon completion or filing thereof,
complete copies of all applications, notices, statements, annual
reports, cost reports and other reports or filings of any kind
provided by Lessee or any Sublessee to any Governmental Authority,
Accreditation Body or any Third Party Payor with respect to the
Leased Property.
(i) Other Information. With reasonable promptness, such
other information as Lessor may from time to time reasonably
request respecting (i) the financial condition and affairs of each
member of the Leasing Group and the Leased Property and (ii) the
licensing and operation of the Leased Property; including, without
limitation, audited financial statements, certificates and consents
from accountants and all other financial and licensing/operational
information as may be required or requested by any Governmental
Authority.
</PAGE>
(j) Default Conditions. As soon as possible, and in any
event within five (5) days after the occurrence of any Lease
Default, or each event or circumstance which, with the giving of
notice or lapse of time, or both, could constitute such a Lease
Default, a written statement of Lessee setting forth the details of
such Lease Default, event or circumstance and the action which
Lessee proposes to take with respect thereto.
</PAGE>
(k) Official Actions. Promptly after the commencement
thereof, notice of all actions, suits and proceedings before any
Governmental Authority or Accreditation Body which may have a
material adverse effect on any member of the Leasing Group or the
Leased Property.
(l) Audit Reports. Promptly after receipt, a copy of all
audits or reports submitted to Lessee by any independent public
accountant in connection with any annual, special or interim audits
of the books of Lessee and, if requested by Lessor, any letter of
comments directed by such accountant to the management of Lessee.
(m) Adverse Developments. Promptly after Lessee acquires
knowledge thereof, written notice of:
(i) the potential termination of any Permit or
Provider Agreement necessary for the operation of the Leased
Property;
(ii) any loss, damage or destruction to or of the
Leased Property in excess of TWENTY-FIVE THOUSAND and NO/100
DOLLARS ($25,000.00) (regardless of whether the same is covered by
insurance);
(iii) any material controversy involving Lessee or
any Sublessee and (x) Facility administrator or Facility employee
of similar stature or (y) any labor organization;
(iv) any controversy that calls into question the
eligibility of Lessee or the Facility for the participation in any
Medicaid, Medicare or other Third Party Payor Program, if
applicable;
(v) any refusal of reimbursement by any Third Party
Payor which, singularly or together with all other such refusals by
any Third Party Payors, could have a material adverse effect on the
financial condition of Lessee or any Sublessee; and
(vi) any other development materially and adversely
affecting or which may materially or adversely affect the
condition, financial or otherwise of any member of the Leasing
Group or the Leased Property.
</PAGE>
(n) Line of Credit Default. Within five (5) days after
becoming aware of a claim by any Person that Lessee is in default
of the line of credit arrangement referred to in Section 11.3.10 or
any other agreement in connection with the borrowing of money which
is not prohibited hereunder, notice of any such claim or default.
</PAGE>
(o) Responses To Inspection Reports. Within thirty (30)
days after receipt of an inspection report relating to the Leased
Property from Lessor, a written response describing in detail
prepared plans to address concerns raised by the inspection report.
(p) Public Information. Upon the completion or filing,
mailing or other delivery thereof, complete copies of all financial
statements, reports, notices and proxy statements, if any, sent by
any member of the Leasing Group (which is a publicly held
corporation) to its shareholders and of all reports, if any, filed
by any member of the Leasing Group (which is a publicly held
corporation) with any securities exchange or with the Securities
Exchange Commission.
(q) Annual Budgets. At least thirty (30) days prior to
the end of each Fiscal Year, Lessee, any Sublessee and/or any
Manager shall submit to Lessor a proposed financial and capital
expenditures budget for the Facility for the next Fiscal Year and a
report detailing the capital expenditures made in the then
current Fiscal Year and on or before January 31st of each year,
Lessee, any Sublessee and/or any Manager shall submit to Lessor
revised finalized versions of such budgets and report.
(r) Lender Compliance Reports. Simultaneously with
sending the same to any lender of Lessee or Guarantor, copies of
any reports relating to compliance with financial covenants
contained in any credit agreement involving the extension of more
than $500,000 of credit to either or both of the Lessee or
Guarantor, provided, however, that Guarantors' extension of credit
is related primarily to the Leased Property.
11.2.2 Responsible Officer. Any certificate, instrument,
notice, or other document to be provided to Lessor hereunder by any
member of the Leasing Group shall be signed by an executive officer
of such member (in the event that any of the foregoing is not an
individual), having a position of Vice President or higher and with
respect to financial matters, any such certificate, instrument,
notice or other document shall be signed by the chief financial
officer of such member.
</PAGE>
11.2.3 No Material Omission. No certificate, instrument,
notice or other document, including, without limitation, any
financial statements furnished or to be furnished to Lessor
pursuant to the terms hereof or of any of the other Lease Documents
shall contain any untrue statement of a material fact or shall omit
to state any material fact necessary in order to prevent all
statements contained therein from being misleading.
</PAGE>
11.2.4 Confidentiality. Lessor shall afford any
information received pursuant to the provisions of the Lease
Documents the same degree of confidentiality that Lessor affords
similar information proprietary to Lessor; provided, however, that
Lessor does not in any way warrant or represent that such
information received from any member of the Leasing Group shall
remain confidential (and shall not be liable in any way for any
subsequent disclosure of such information by any Person that Lessor
has provided such information in accordance with the terms hereof)
and provided, further, that Lessor shall have the unconditional
right to (a) disclose any such information as Lessor deems
necessary or appropriate in connection with any sale, transfer,
conveyance, participation or assignment of the Leased Property or
any of the Lease Documents or any interest therein and (b) use such
information in any litigation or arbitration proceeding between
Lessor and any member of the Leasing Group. Without limiting the
foregoing, Lessor may also utilize any information furnished to it
hereunder as and to the extent (i) counsel to Lessor determines
that such utilization is necessary pursuant to 15 U.S.C. 77a-77aa
or 15 U.S.C. 78a-78jj and the rules and regulations promulgated
thereunder, (ii) Lessor is required or requested by any
Governmental Authority to disclose any such information and/or
(iii) Lessor is requested to disclose any such information by any
of the Meditrust Entities' lenders or potential lenders. In
connection with any such disclosure, Lessor shall inform the
recipient of any such information of the confidential nature
thereof.
11.3 Financial Covenants. Lessee covenants and agrees that,
throughout the Term and as long as Lessee is in possession of the
Leased Property:
11.3.1 Debt Coverage Ratio of Lessee. Effective as of the first
anniversary of the Fixed Term Commencement Date, the Facility shall
maintain for each Fiscal Quarter a Debt Coverage Ratio equal to or
greater than 1.25 to 1.
</PAGE>
11.3.2 [Intentionally Omitted]
11.3.3 [Intentionally Omitted]
11.3.4 [Intentionally Omitted]
11.3.5 Current Ratio - Guarantor. The Guarantor shall
maintain, at all times, a ratio of Consolidated Current Assets to
Consolidated Current Liabilities equal to or greater than 1.1 to 1.
</PAGE>
11.3.6 [Intentionally Omitted]
11.3.7 Tangible Net Worth - Guarantor. The Guarantor shall
maintain, at all times, a Tangible Net Worth of not less than SEVEN
MILLION and NO/100 DOLLARS ($7,000,000.00).
11.3.8 [Intentionally Omitted]
11.3.9 [Intentionally Omitted]
11.3.10 No Indebtedness. Lessee shall not create, incur,
assume or suffer to exist any liability for borrowed money except
(i) Indebtedness to Lessor under the Lease Documents, (ii)
Impositions allowed pursuant to the provisions of the Lease, (iii)
unsecured normal trade debt incurred upon customary terms in the
ordinary course of business, (iv) Indebtedness created in
connection with any financing of any Capital Addition, provided,
that each such financing has been approved by Lessor in accordance
with the terms of Article 9 hereof, (v) other Indebtedness of
Lessee in the aggregate amount not to exceed FIVE HUNDRED THOUSAND
and NO/100 DOLLARS ($500,000.00), incurred for the exclusive use of
the Leased Property, on account of purchase money indebtedness or
finance lease arrangements, each of which shall not exceed the fair
market value of the assets or property acquired or leased and shall
not extend to any assets or property other than those purchased or
leased and purchase money security interests in equipment and
equipment leases which comply with the provisions of Section 6.1.2,
and (vi) Indebtedness from the shareholders of Lessee and/or any
other Affiliate which has been expressly subordinated in writing
pursuant to the Affiliated Party Subordination Agreement.
11.3.11 No Guaranties. Lessee shall not assume, guarantee,
endorse, contingently agree to purchase or otherwise become
directly or contingently liable (including, without limitation,
liable by way of agreement, contingent or otherwise, to purchase,
to provide funds for payment, to supply funds to or otherwise to
invest in any debtor or otherwise to assure any creditor against
</PAGE>
loss) in connection with any Indebtedness of any other Person,
except by the endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of
business.
11.3.12 [Intentionally Omitted]
11.4 Affirmative Covenants. Throughout the Term and such time as
Lessee is in possession of the Leased Property, Lessee covenants
and agrees that:
</PAGE>
11.4.1 Maintenance of Existence. If Lessee is a corporation,
trust or partnership, during the entire time that this Lease
remains in full force and effect, Lessee shall keep in effect its
existence and rights as a corporation, trust or partnership under
the laws of the state of its incorporation or formation and its
right to own property and transact business in the State.
11.4.2 Materials. Except as provided in Section 6.1.2, Lessee
shall not suffer the use in connection with any renovations or
other construction relating to the Leased Property of any
materials, fixtures or equipment intended to become part of the
Leased Property which are purchased upon lease or conditional bill
of sale or to which Lessee does not have absolute and unencumbered
title, and Lessee covenants to cause to be paid punctually all sums
becoming due for labor, materials, fixtures or equipment used or
purchased in connection with any such renovations or construction,
subject to Lessee's right to contest to the extent provided for in
Article 15.
11.4.3 Compliance With Legal Requirements And Applicable
Agreements. Lessee and the Leased Property and all uses thereof
shall comply with (i) all Legal Requirements, (ii) all Permits and
Contracts, (iii) all Insurance Requirements, (iv) the Lease
Documents, (v) the Permitted Encumbrances and (vi) the Appurtenant
Agreements.
11.4.4 Books And Records. Lessee shall cause to be kept and
maintained, and shall permit Lessor and its representatives to
inspect at all reasonable times, accurate books of accounts in
which complete entries will be made in accordance with GAAP
reflecting all financial transactions of Lessee (showing, without
limitation, all materials ordered and received and all
disbursements, accounts payable and accounts receivable in
connection with the operation of the Leased Property).
</PAGE>
11.4.5 Participation in Third Party Payor Programs. Lessee and
each Sublessee shall participate in all Third Party Payor Programs
(which would be participated in, in Lessee's reasonable discretion,
by a prudent operator in the good faith exercise of commercially
reasonable business judgment), in accordance with all requirements
thereof (including, without limitation, all applicable Provider
Agreements), and shall remain eligible to participate in such Third
Party Payor Programs, all as shall be necessary, in Lessee's
reasonable discretion, for the prudent operation of the Facility in
the good faith exercise of commercially reasonable business
judgment.
</PAGE>
11.4.6 Conduct of its Business. Lessee will maintain, and cause
any Sublessee and any Manager to maintain, experienced and
competent professional management with respect to its business and
with respect to the Leased Property. Lessor agrees that management
by the executive officers listed on EXHIBIT J attached hereto is
satisfactory for the purposes of this provision. The Facility
shall be managed by the Current Manager, Lessee or a Subsidiary of
the Guarantor. Lessee, any Sublessee and any Manager shall
conduct, in the ordinary course, the operation of the Facility, and
Lessee and any Sublessee shall not enter into any other business or
venture during the Term or such time as Lessee or any Sublessee is
in possession of the Leased Property other than activities in which
Lessee or such Sublessee are permitted to engage by the provisions
of the Meditrust/ALP Transaction Documents.
11.4.7 Address. Lessee shall provide Lessor thirty (30) days'
prior written notice of any change of its Principal Place of
Business from its current Principal Place of Business. Lessee
shall maintain the Collateral, including, without limitation, all
books and records relating to its business, solely at its Principal
Place of Business and at the Leased Property. Lessee shall not (a)
remove the Collateral, including, without limitation, any books or
records relating to Lessee's business from either the Leased
Property or Lessee's Principal Place of Business or (b) relocate
its Principal Place of Business until after receipt of a
certificate from Lessor, signed by an officer thereof, stating that
Lessor has, to its satisfaction, obtained all documentation that it
deems necessary or desirable to obtain, maintain, perfect and
confirm the first priority security interests granted in the Lease
Documents.
11.4.8 Subordination of Affiliate Transactions. Without limiting
the provisions of any other Section of this Lease or the Affiliated
Party Subordination Agreement, any payments to be made by Lessee to
(a) any member of the Leasing Group (or any of its Affiliates) or
</PAGE>
(b) any Affiliate of Lessee, in connection with any transaction
between Lessee and such Person, including, without limitation, the
purchase, sale or exchange of any property, the rendering of any
service to or with any such Person (including, without limitation,
all allocations of any so-called corporate or central office costs,
expenses and charges of any kind or nature) or the making of any
loan or other extension of credit or the making of any equity
investment, shall be subordinate to the complete payment and
performance of all the Lease Obligations; provided, however, that
all such subordinated payments may be paid at any time unless: (x)
after giving effect to such payment, Lessee shall be unable to
comply with any of its obligations under any of the Lease Documents
or (y) a Lease Default has occurred and is continuing and has not
been expressly waived in writing by Lessor or an event or state of
facts exists, which, with the giving of notice or the passage of
time, or both, would constitute a Lease Default.
</PAGE>
11.4.9 Inspection. At reasonable times and upon reasonable
notice, Lessee shall permit Lessor and its authorized
representatives (including, without limitation, the Consultants) to
inspect the Leased Property as provided in Section 7.1 above.
11.5 Additional Negative Covenants. Lessee covenants and agrees
that, throughout the Term and such time as Lessee is in possession
of the Leased Property:
11.5.1 Restrictions Relating to Lessee. Except as may otherwise
be expressly provided or in any of the other Lease Documents,
Lessee shall not, without the prior written consent of Lessor, in
each instance, which consent may be withheld in the sole and
absolute discretion of Lessor:
(a) convey, assign, hypothecate, transfer, dispose of or encumber,
or permit the conveyance, assignment, transfer, hypothecation,
disposal or encumbrance of all or any part of any legal or
beneficial interest in this Lease, its other assets or the Leased
Property; provided, however, that this restriction shall not apply
to (i) the Permitted Encumbrances that may be created after the
date hereof pursuant to the Lease Documents; (ii) Liens created in
accordance with the applicable provisions of Section 6.1.2 against
Tangible Personal Property securing Indebtedness permitted under
Section 11.3.10; (iii) the sale, conveyance, assignment,
hypothecations, lease or other transfer of any material asset or
assets (whether now owned or hereafter acquired), the fair market
value of which equals or is less than TWENTY-FIVE THOUSAND and
NO/100 DOLLARS ($25,000.00), individually, or ONE HUNDRED THOUSAND
and NO/100 DOLLARS ($100,000.00) collectively; (iv) without
</PAGE>
limitation as to amount, the disposition in the ordinary course of
business of any obsolete, worn out or defective fixtures,
furnishings or equipment used in the operation of the Leased
Property provided that the same are replaced with fixtures,
furnishings or equipment of equal or greater utility or value or
Lessee provides Lessor with an explanation (reasonably satisfactory
to Lessor) as to why such Tangible Personal Property is no longer
required in connection with the operation of the Leased Property;
(v) without limitation as to amount, any sale of inventory by
Lessee in the ordinary course of business; and (vi) subject to the
terms of the Pledge Agreement and the Affiliated Subordination
Party Agreement, distributions to Lessee's shareholder(s);
(b) permit the use of the Facility for any purpose other than the
Primary Intended Use and the Other Permitted Uses; or
(c) liquidate, dissolve or merge or consolidate with any other
Person.
</PAGE>
11.5.2 No Liens. Lessee will not directly or indirectly create or
allow to remain and will promptly discharge at its expense any
Lien, title retention agreement or claim upon or against the Leased
Property (including Lessee's interest therein) or Lessee's interest
in this Lease or any of the other Lease Documents, or in respect of
the Rent, excluding (a) this Lease and any permitted Subleases, (b)
the matters, if any, set forth in EXHIBIT B, (c) Liens which are
consented to in writing by Lessor, (d) Liens for those taxes of
Lessor which Lessee is not required to pay hereunder, (e) Liens of
mechanics, laborers, materialmen, suppliers or vendors for sums
either not yet due or being contested in strict compliance with the
terms and conditions of Article 15, (f) any Liens which are the
responsibility of Lessor pursuant to the provisions of Article 20,
(g) Liens for Impositions which are either not yet due and payable
or which are in the process of being contested in strict compliance
with the terms and conditions of Article 15 and (h) involuntary
Liens caused by the actions or omissions of Lessor.
11.5.3 Limits on Affiliate Transactions. Lessee shall not enter
into any transaction with any Affiliate, including, without
limitation, the purchase, sale or exchange of any property, the
rendering of any service to or with any Affiliate and the making of
any loan or other extension of credit, except in the ordinary
course of, and pursuant to the reasonable requirements of, Lessee's
business and upon fair and reasonable terms no less favorable to
Lessee than would be obtained in a comparable arms'-length
transaction with any Person that is not an Affiliate.
11.5.4 Non-Competition. Lessee acknowledges that upon and after
</PAGE>
any termination of this Lease, any competition by any member of the
Leasing Group with any subsequent owner or subsequent lessee of the
Leased Property ("Purchaser") would cause irreparable harm to
Lessor and any such Purchaser. To induce Lessor to enter into this
Lease, Lessee agrees that, from and after the date hereof and
thereafter until the third (3rd) anniversary of the termination
hereof, no member of the Leasing Group nor any Person holding or
controlling, directly or indirectly, any interest in any member of
the Leasing Group (other than stockholders of Guarantor) shall be
involved in any capacity in or lend any of their names to or engage
in any capacity in any assisted living facility, center, unit or
program (or in any partnership, firm, company, corporation or other
entity engaged in any such activity or any related activity
competitive therewith), whether such competitive activity shall be
as an officer, director, owner, employee, agent, advisor,
independent contractor, developer, lender, sponsor, venture
capitalist, administrator, manager, investor, partner, joint
venturer, consultant or other participant in any capacity
whatsoever within a one (1) mile radius of the Facility.
</PAGE>
Notwithstanding any provisions of this Section 11.5.4 to the
contrary, Lessee shall have the option to develop and operate other
assisted living facilities within the aforementioned radius
restriction at any time prior to the last twenty-four (24) months
of the Term and during the last twenty-four months of the Term if
Lessee extends the Term by an Extended Term pursuant to Section 1.3
above of this Lease, provided Lessor shall have the right of first
refusal to finance such Facility on terms no less favorable than
those offered by any other lender.
Lessee hereby acknowledges and agrees that none of the time span,
scope or area covered by the foregoing restrictive covenants is or
are unreasonable and that it is the specific intent of Lessee that
each and all of the restrictive covenants set forth hereinabove
shall be valid and enforceable as specifically set forth herein.
Lessee further agrees that these restrictions are special, unique,
extraordinary and reasonably necessary for the protection of Lessor
and any Purchaser and that the violation of any such covenant by
Lessee would cause irreparable damage to Lessor and any Purchaser
for which a legal remedy alone would not be sufficient to fully
protect such parties.
Therefore, in addition to and without limiting any other remedies
available at law or hereunder, in the event that Lessee breaches
any of its restrictive covenants hereunder or shall threaten breach
of any of such covenants, then Lessor and any Purchaser shall be
entitled to obtain equitable remedies, including specific
</PAGE.
performance and injunctive relief, to prevent or otherwise restrain
a breach of this Section 11.5.4 (without the necessity of posting a bond)
and to recover any and all costs and expenses (including,
without limitation, attorneys' fees and expenses and court costs)
incurred in enforcing the provisions of this Section 11.5.4. The
existence of any claim or cause of action of any member of the
Leasing Group against Lessor or any Purchaser, whether predicated
on this Lease or otherwise, shall not constitute a defense to the
enforcement by Lessor or any Purchaser of the foregoing restrictive
covenants and Lessee shall not defend on the basis that there is an
adequate remedy at law.
Without limiting any other provision of this Lease, the parties
hereto acknowledge that the foregoing restrictive covenants are
severable and separate. If at any time any of the foregoing
restrictive covenants shall be deemed invalid or unenforceable by
a court having jurisdiction over this Lease, by reason of being
vague or unreasonable as to duration, or geographic scope or scope
of activities restricted, or for any other reason, such covenants
shall be considered divisible as to such portion and such covenants
shall be immediately amended and reformed to include only such
covenants as are deemed reasonable and enforceable by the court
</PAGE>
having jurisdiction over this Lease to the full duration,
geographic scope and scope of restrictive activities deemed
reasonable and thus enforceable by said court; and the parties
agree that such covenants as so amended and reformed, shall be
valid and binding as through the invalid or unenforceable portion
had not been included therein.
The provisions of this Section 11.5.4 shall survive the termination
of the Lease and any satisfaction of the Lease Obligations in
connection therewith or subsequent thereto. The parties hereto
acknowledge and agree that any Purchaser may enforce the provisions
of this Section 11.5.4 as a third party beneficiary.
11.5.5 No Default. Lessee shall not commit any default or breach
under any of the Lease Documents.
11.5.6 Restrictions Relating to the Guarantor. Except as may
otherwise be expressly provided herein or in any of the other Lease
Documents, the Guarantor shall not, without the prior written
consent of Lessor, in each instance, which consent may be withheld
in the sole and absolute discretion of Lessor, convey, assign,
donate, sell, mortgage or pledge any real or personal property or
take any other action which would have a materially adverse effect
upon the Tangible Net Worth or general financial condition of the
Guarantor.
</PAGE>
11.5.7 [Intentionally Omitted]
11.5.8 ERISA. Lessee shall not establish or permit any Sublessee
to establish any new pension or defined benefit plan or modify any
such existing plan for employees subject to ERISA, which plan
provides any benefits based on past service without the advance
consent of Lessor to the amount of the aggregate past service
liability thereby created.
11.5.9 Forgiveness of Indebtedness. Lessee will not waive, or
permit any Sublessee or Manager which is an Affiliate to waive any
debt or claim, except in the ordinary course of its business.
11.5.10 Value of Assets. Except as disclosed in the financial
statements provided to Lessor as of the date hereof, Lessee will
not write up (by creating an appraisal surplus or otherwise) the
value of any assets of Lessee above their cost to Lessee, less the
depreciation regularly allowable thereon.
11.5.11 Changes in Fiscal Year and Accounting Procedures. Lessee
shall not, without the prior written consent of Lessor, in each
instance, which consent may be withheld in Lessor's reasonable
discretion (a) change its fiscal year or capital structure or (b) change, alter,
amend or in any manner modify, except in accordance with GAAP, any of its
current accounting procedures related to the method of revenue recognition,
billing procedures or determinations of doubtful accounts or bad debt expenses
nor will Lessee permit any of its Subsidiaries to change its fiscal year or
suffer or permit any circumstance to exist in which any Subsidiary
is not wholly-owned, directly or indirectly, by Lessee.
Notwithstanding the foregoing, Lessor agrees to consent to any
change in Lessee's fiscal year, provided that (i) Lessee shall have
requested such consent not less than thirty (30) days prior to the
proposed effective date of such change and shall have promptly
furnished to Lessor all such financial information as Lessor may
have reasonably requested in order to determine the impact of such
change on Lessee's financial statements, (ii) no such change shall
be permitted if its effect would be to enable Lessee to satisfy any
covenant contained in this Agreement which, absent such change,
would not have been satisfied and (iii) Lessee shall have entered
into any amendment to this Lease which Lessor shall have reasonably
requested in order to maintain the intended effect of the covenants
contained in this Lease.
11.5.12 Changes in Executive Officers. Lessee shall not suffer or
permit to exist any circumstance in which any of the executive
officers listed on EXHIBIT J hereto ceases for any reason to serve
as an executive officer of Lessee, unless succeeded in such
position within thirty (30) days by another individual reasonably
satisfactory to Lessor, and this provision will, in turn, become
effective as to each such successive executive officer.
</PAGE>
ARTICLE 12
INSURANCE AND INDEMNITY
12.1 General Insurance Requirements. During the Term of this
Lease and thereafter until Lessee surrenders the Leased Property in
the manner required by this Lease, Lessee shall at its sole cost
and expense keep the Leased Property, the Tangible Personal
Property and Lessor's Personal Property located thereon and the
business operations conducted thereon insured as set forth below.
12.1.1 Types and Amounts of Insurance. Lessee's insurance shall
include the following:
(a) property loss and physical damage insurance on an all-risk
basis (with only such exceptions as Lessor may in its reasonable
discretion approve) covering the Leased Property (exclusive of
Land) for its full replacement cost, which cost shall be reset once
a year at Lessor's option, with an agreed-amount endorsement and a
deductible not in excess of TEN THOUSAND and NO/100 DOLLARS
($10,000.00). Such insurance shall include, without limitation,
the following coverages: (i) increased cost of construction, (ii)
cost of demolition, (iii) the value of the undamaged portion of the
Facility and (iv) contingent liability from the operation of
building laws, less exclusions provided in the normal "All Risk"
insurance policy. During any period of construction, such
insurance shall be on a builder's-risk, completed value, non-reporting form with
permission to occupy;
(b) flood insurance (if the Leased Property or any portion thereof
is situated in an area which is considered a flood risk area by the
U.S. Department of Housing and Urban Development) in limits
acceptable to Lessor;
(c) boiler and machinery insurance (including related electrical
apparatus and components) under a standard comprehensive form,
providing coverage against loss or damage caused by explosion of
steam boilers, pressure vessels or similar vessels, now or
hereafter installed on the Leased Property, in limits acceptable to
Lessor;
(d) earthquake insurance (if deemed necessary by Lessor) in limits
and with deductibles acceptable to Lessor;
(e) environmental impairment liability insurance (if available) in
limits and with deductibles acceptable to Lessor;
</PAGE>
(f) business interruption insurance in an amount equal to the
annual Base Rent due hereunder plus the aggregate sum of the
Impositions relating to the Leased Property due and payable during
one year;
(g) comprehensive general public liability insurance including
coverages commonly found in the Broad Form Commercial Liability
Endorsements with amounts not less than FIVE MILLION and NO/100
DOLLARS ($5,000,000.00) per occurrence with respect to bodily
injury and death and THREE MILLION and NO/100 DOLLARS
($3,000,000.00) for property damage and with all limits based
solely upon occurrences at the Leased Property without any other
impairment;
(h) professional liability insurance in an amount not less than
FIVE MILLION and NO/100 DOLLARS ($5,000,000.00) for each medical
incident;
(i) physical damage insurance on an all-risk basis (with only such
exceptions as Lessor in its reasonable discretion shall approve)
covering Lessee's Tangible Personal Property for the full
replacement cost thereof and with a deductible not in excess of one
percent (1%) of the full replacement cost thereof;
(j) Workers' Compensation and Employers' Liability Insurance
providing protection against all claims arising out of injuries to
all employees of Lessee or of any Sublessee (employed on the Leased
Property or any portion thereof) in amounts equal for Workers'
Compensation, to the statutory benefits payable to employees in the
State and for Employers' Liability, to limits of not less than ONE
HUNDRED THOUSAND and NO/100 DOLLARS ($100,000.00) for injury by
accident, ONE HUNDRED THOUSAND and NO/100 DOLLARS ($100,000.00) per
employee for disease and FIVE HUNDRED THOUSAND and NO/100 DOLLARS
($500,000.00) disease policy limit;
(k) subsidence insurance (if deemed necessary by Lessor) in limits
acceptable to Lessor;
(l) contractual liability insurance; and
(m) such other insurance as Lessor from time to time may
reasonably require and also, as may from time to time be required
by applicable Legal Requirements and/or by any Fee Mortgagee.
</PAGE>
12.1.2 Insurance Company Requirements. All such insurance
required by this Lease or the other Lease Documents shall be issued
and underwritten by insurance companies licensed to do insurance
business by, and in good standing under the laws of, the State and
which companies have and maintain a rating of A:IX or better by
A.M. Best Co. and have been previously approved in writing by
Lessor.
12.1.3 Policy Requirements. Every policy of insurance from time
to time required under this Lease or any of the other Lease
Documents shall name Lessor as owner, loss payee, secured party (to
the extent applicable) and additional named insured as its
interests may appear. If an insurance policy covers properties
other than the Leased Property, then Lessor shall be so named with
respect only to the Leased Property. Each such policy, where
applicable or appropriate, shall:
(a) include an agreed amount endorsement and loss payee,
additional named insured and secured party endorsements, in forms
acceptable to Lessor in its sole and absolute discretion;
(b) include mortgagee, secured party, loss payable and additional
named insured endorsements reasonably acceptable to each Fee
Mortgagee;
(c) provide that the coverages may not be cancelled, reduced or
materially modified in any manner which might adversely affect
Lessor except upon thirty (30) days' prior written notice to Lessor
and any Fee Mortgagee;
(d) be payable to Lessor and any Fee Mortgagee notwithstanding any
defense or claim that the insurer may have to the payment of the
same against any other Person holding any other interest in the
Leased Property;
(e) be endorsed with standard noncontributory clauses in favor of
and in form reasonably acceptable to Lessor and any Fee Mortgagee;
(f) expressly waive any right of subrogation on the part of the
insurer against Lessor, any Fee Mortgagee or the Leasing Group; and
(g) otherwise be in such forms as shall be reasonably acceptable
to Lessor.
12.1.4 Notices; Certificates and Policies. Lessee shall promptly
provide to Lessor copies of any and all notices (including notice
of non-renewal), claims and demands which Lessee receives from
</PAGE>
insurers of the Leased Property. At least ten (10) days prior to
the expiration of any insurance policy required hereunder, Lessee
shall deliver to Lessor certificates and evidence of insurance
relating to all renewals and replacements thereof, together with
evidence, satisfactory to Lessor, of payment of the premiums
thereon. Lessee shall deliver to Lessor original counterparts or
copies certified by the insurance company to be true and complete
copies, of all insurance policies required hereunder not later than
the earlier to occur of (a) ninety (90) days after the effective
date of each such policy and (b) ten (10) days after receipt
thereof by Lessee.
12.1.5 Lessor's Right to Place Insurance. If Lessee shall fail to
obtain any insurance policy required hereunder by Lessor, or shall
fail to deliver the certificate and evidence of insurance relating
to any such policy to Lessor, or if any insurance policy required
hereunder (or any part thereof) shall expire or be cancelled or
become void or voidable by reason of any breach of any condition
thereof, or if Lessor determines that such insurance coverage is
unsatisfactory by reason of the failure or impairment of the
capital of any insurance company which wrote any such policy, upon
demand by Lessor, Lessee shall promptly obtain new or additional
insurance coverage on the Leased Property, or for those risks
required to be insured by the provisions hereof, satisfactory to
Lessor, and, at its option, Lessor may obtain such insurance and
pay the premium or premiums therefor; in which event, any amount so
paid or advanced by Lessor and all costs and expenses incurred in
connection therewith (including, without limitation, attorneys'
fees and expenses and court costs), shall be a demand obligation of
Lessee to Lessor, payable as an Additional Charge.
12.1.6 Payment of Proceeds. All insurance policies required
hereunder (except for general public liability, professional
liability and workers' compensation and employers liability
insurance) shall provide that in the event of loss, injury or
damage, subject to the rights of any Fee Mortgagee, all proceeds
shall be paid to Lessor alone (rather than jointly to Lessee and
Lessor). Lessor is hereby authorized to adjust and compromise any
such loss with the consent of Lessee or, following any Lease
Default, whether or not cured, without the consent of Lessee, and
to collect and receive such proceeds in the name of Lessor and
Lessee, and Lessee appoints Lessor (or any agent designated by
Lessor) as Lessee's attorney-in-fact with full power of
substitution, to endorse Lessee's name upon any check in payment
thereof. Subject to the provisions of Article 13, such insurance
proceeds shall be applied first toward reimbursement of all costs
and expenses of Lessor in collecting said insurance proceeds, then
toward payment of the Lease Obligations or any portion thereof,
then due and payable, in such order as Lessor determines, and then
in whole or in part toward restoration, repair or reconstruction of
the Leased Property for which such insurance proceeds shall have
been paid.
</PAGE>
12.1.7 Irrevocable Power of Attorney. The power of attorney
conferred on Lessor pursuant to the provisions of Section 12.1.6,
being coupled with an interest, shall be irrevocable for so long as
this Lease is in effect or any Lease Obligations are outstanding,
shall not be affected by any disability or incapacity which Lessee
may suffer and shall survive the same. Such power of attorney is
provided solely to protect the interests of Lessor and shall not
impose any duty on Lessor to exercise any such power, and neither
Lessor nor such attorney-in-fact shall be liable for any act,
omission, error in judgment or mistake of law, except as the same
may result from its gross negligence or wilful misconduct.
12.1.8 Blanket Policies. Notwithstanding anything to the contrary
contained herein, Lessee's obligations to carry the insurance
provided for herein may be brought within the coverage of a so-called
blanket policy or policies of insurance carried and
maintained by Lessee and its Affiliates covering all of the Leased
Property or covering some or all of the Leased Property and other
property owned by Lessee or its Affiliates; provided, however, that
the coverage afforded to Lessor shall not be reduced or diminished
or otherwise be different from that which would exist under a
separate policy for each of the properties comprising the Facility
meeting all other requirements of this Lease by reason of the use
of such blanket policy of insurance, and provided, further that the
requirements of Section 12.1 are otherwise satisfied.
12.1.9 No Separate Insurance. Lessee shall not, on Lessee's own
initiative or pursuant to the request or requirement of any other
Person, take out separate insurance concurrent in form or
contributing in the event of loss with the insurance required
hereunder to be furnished by Lessee, or increase the amounts of any
</PAGE>
then existing insurance by securing an additional policy or
additional policies, unless (a) all parties having an insurable
interest in the subject matter of the insurance, including Lessor,
are included therein as additional insureds and (b) losses are
payable under said insurance in the same manner as losses are
required to be payable under this Lease. Lessee shall immediately
notify Lessor of the taking out of any such separate insurance or
of the increasing of any of the amounts of the then existing
insurance by securing an additional insurance policy or policies.
12.1.10 Assignment of Unearned Premiums. Lessee hereby assigns to
Lessor all rights of Lessee in and to any unearned premiums
allocable to the Leased Property on any insurance policy required
hereunder to be furnished by Lessee which may become payable or are
refundable after the occurrence of a Lease Default hereunder. In
the event that this Lease is terminated for any reason (other than
the purchase of the Leased Property by Lessee), the insurance
policies required to be maintained pursuant to subsections
12.1.1(a), (b), (c), (d) and (e) hereunder with respect to the
Leased Property or any portion of such insurance policies relating
to the Leased Premises, including all right, title and interest of
Lessee thereunder, shall become the absolute property of Lessor.
12.2 Indemnity.
12.2.1 Indemnification. Except with respect to the gross
negligence or wilful misconduct of Lessor or any of the other
Indemnified Parties and to any loss of reputation or diminution in
stock price suffered by Lessor or any of its Affiliates, as to
which no indemnity is provided, Lessee hereby agrees to defend with
counsel acceptable to Lessor, indemnify and hold harmless Lessor
and each of the other Indemnified Parties from and against all
direct and indirect damages, losses, claims, liabilities,
obligations, penalties, causes of action, costs and expenses
(including, without limitation, attorneys' fees, court costs and
other expenses of litigation) suffered by, or claimed or asserted
against, Lessor or any of the other Indemnified Parties directly or
indirectly, based on, arising out of or resulting from: (a) the
use and occupancy of the Leased Property or any business conducted
therein, (b) any act, fault, omission to act or misconduct by any
member of the Leasing Group or any Affiliate of Lessee or any
employee, agent, licensee, business invitee, guest, customer,
contractor or sublessee of any of the foregoing parties, (c) any
accident, injury or damage whatsoever caused to any Person,
including without limitation any claim of malpractice, or to the
property of any Person in or about the Leased Property or outside
of the Leased Property where such accident, injury or damage
</PAGE>
results or is claimed to have resulted from any act, fault,
omission to act or misconduct by any member of the Leasing Group or
any Affiliate of Lessee or any employee, agent, licensee,
contractor or sublessee of any of the foregoing parties, (d) any
default or breach of condition under any of the Lease Documents
(other than a default by Lessor in the performance of any of its
obligations thereunder), (e) Lessor's relationship with any member
of the Leasing Group, (f) Lessor being named, or required to be
named, as a co-licensee on any license and/or permit required
and/or desirable to operate all or any of the Facilities, (g) Lessee's
failure to renew, obtain and/or maintain all licenses
and/or permits required by all applicable Legal Requirements to
own, manage and operate the Facility, including, without
limitation, Lessee's failure to renew and/or obtain all such
licenses and/or permits required in connection with the transfer of
the Facility to Lessor, (h) any labor, services or materials
furnished or to be furnished to Lessee or Guarantor or any of their
respective Affiliates in connection with the Leased Property and/or
(i) the enforcement of this indemnity. Any amounts which become
payable by Lessee under this Section 12.2.1 shall be a demand
obligation of Lessee to Lessor, payable as an Additional Charge.
The indemnity provided for in this Section 12.2 shall survive the
expiration or any termination of this Lease.
12.2.2 Indemnified Parties. As used in this Lease the term
"Indemnified Parties" shall mean Lessor, any Fee Mortgagee and
their respective Affiliates, successors, assigns, employees,
servants, agents, attorneys, officers, directors, shareholders,
partners and owners.
12.2.3 Limitation on Lessor Liability. Neither Lessor nor any
Affiliate of Lessor shall be liable to any member of the Leasing
Group or any Affiliate of Lessee, or to any other Person whatsoever
for any damage, injury, loss, compensation, or claim (including,
but not limited to, any claim for the interruption of or loss to
any business conducted on the Leased Property) based on, arising
out of or resulting from any cause whatsoever, including, but not
limited to, the following:
(a) repairs to the Leased Property; (b) interruption in use of the
Leased Property; (c) any accident or damage resulting from the use
or operation of the Leased Property or any business conducted
thereon; (d) the termination of this Lease by reason of Casualty or
</PAGE>
Condemnation; (e) any fire, theft or other casualty or crime; (f)
the actions, omissions or misconduct of any other Person; (g)
damage to any property; or (h) any damage from the flow or leaking
of water, rain or snow. All Tangible Personal Property and the
personal property of any other Person on the Leased Property
(including, without limitation, Lessor's Personal Property) shall
be at the sole risk of Lessee and Lessor shall not in any manner be
held responsible therefor. Notwithstanding the foregoing, Lessor
shall not be released from liability for any injury, loss, damage
or liability suffered directly by Lessee to the extent caused
directly by the gross negligence or willful misconduct of Lessor,
its servants, employees or agents acting within the scope of their
authority on or about the Leased Property or in regards to the
Lease; provided, however, that in no event shall Lessor, its
servants, employees or agents have any liability based on any loss
with respect to or interruption in the operation of any business at
the Leased Property or for any indirect or consequential damages.
12.2.4 Risk of Loss. During the Term of this Lease, the risk of
loss or of decrease in the enjoyment and beneficial use of the
Leased Property in consequence of any damage or destruction thereof
by the elements, Casualty, thefts, riots, wars or otherwise, or in
consequence of foreclosures, levies or executions of Liens (other
than those created by Lessor in accordance with the provisions of
Article 20) is assumed by Lessee and, in the absence of the gross
negligence or willful misconduct as set forth in Section 12.2.3,
Lessor shall in no event be answerable or accountable therefor
(except for the obligation to account for insurance proceeds and
Awards to the extent provided for in Articles 13 and 14) nor shall
any of the events mentioned in this Section entitle Lessee to any
abatement of Rent (except for an abatement, if any, as specifically
provided for in Section 3.7).
</PAGE>
ARTICLE 13
FIRE AND CASUALTY
13.1 Restoration Following Fire or Other Casualty.
13.1.1 Following Fire or Casualty. In the event of any damage or
destruction to the Leased Property by reason of fire or other
hazard or casualty (a "Casualty"), Lessee shall give immediate
written notice thereof to Lessor and, subject to the terms of this
Article 13, Lessee shall diligently and continuously proceed to
perform such repairs, replacement and reconstruction work (referred
to herein as the "Work") to restore the Leased Property to the
condition it was in immediately prior to such damage or destruction
and to a condition adequate to operate the Facility for the Primary
Intended Use and, to the extent applicable, the Other Permitted
Uses and in compliance with Legal Requirements. All Work shall be
performed and completed in accordance with all Legal Requirements
and the other requirements of this Lease within one hundred and
twenty (120) days following the occurrence of the damage or
destruction plus a reasonable time to compensate for Unavoidable
Delays (including for the purposes of this Section, delays in
obtaining Permits and in adjusting insurance losses), but in no
event beyond three hundred sixty-five (365) days following the
occurrence of the Casualty.
13.1.2 Procedures. In the event that any Casualty results in
non-structural damage to the Leased Property in excess of FIFTY
THOUSAND and NO/100 DOLLARS ($50,000.00) or in any structural
damage to the Leased Property, regardless of the extent of such
structural damage, prior to commencing the Work, Lessee shall
comply with the following requirements:
(a) Lessee shall furnish to Lessor complete plans and
specifications for the Work (collectively, the "Plans and
Specifications"), for Lessor's approval, in each instance, which
approval shall not be unreasonably withheld. The Plans and
Specifications shall bear the signed approval thereof by an
architect, licensed to do business in the State, satisfactory to
Lessor and shall be accompanied by a written estimate from the
architect, bearing the architect's seal, of the entire cost of
completing the Work, and to the extent feasible, the Plans and
Specifications shall provide for Work of such nature, quality and
extent, that, upon the completion thereof, the Leased Property
shall be at least equal in value and general utility to its value
and general utility prior to the Casualty and shall be adequate to
operate the Leased Property for the Primary Intended Use and, to
the extent applicable, the Other Permitted Uses;
</PAGE>
(b) Lessee shall furnish to Lessor certified or photostatic copies
of all Permits and Contracts required by all applicable Legal
Requirements in connection with the commencement and conduct of the
Work;
(c) Lessee shall furnish to Lessor a cash deposit or a payment and
performance bond sufficient to pay for completion of and payment
for the Work in an amount not less than the architect's estimate of
the entire cost of completing the Work, less the amount of property
insurance proceeds, if any, then held by Lessor and which Lessor
shall be required to apply toward restoration of the Leased
Property as provided in Section 13.2;
(d) Lessee shall furnish to Lessor such insurance with respect to
the Work (in addition to the insurance required under Section 12.1
hereof) in such amounts and in such forms as is reasonably required
by Lessee; and
(e) Lessee shall not commence any of the Work until Lessee shall
have complied with the requirements set forth in clauses (a)
through (d) immediately above, as applicable, and thereafter Lessee
shall perform the Work diligently, in a good and workmanlike
fashion and in good faith in accordance with (i) the Plans and
Specifications referred to clause (a) immediately above, (ii) the
Permits and Contracts referred to in clause (b) immediately above
and (iii) all applicable Legal Requirements and other requirements
of this Lease.
13.1.3 Disbursement of Insurance Proceeds Less Than $50,000.00.
In the event of any Casualty which, in the aggregate, does not
exceed $50,000.00 (determined by Lessor in its reasonable
discretion), all proceeds relating thereto shall be paid to Lessee
in a lump sum to defray the cost of the repair or restoration
needed to respond to such loss or damage, provided that (a) there
does not exist an Event of Default under this Lease and (b) Lessee
has received no notice regarding an event or state of facts which,
with the passage of time and/or the giving of notice, would
constitute an Event of Default if not cured by Lessee, and Lessee
has not yet effected such cure.
13.1.4 Disbursement of Insurance Proceeds $50,000.00 or More.
With respect to any Casualty equal to or in excess of $50,000.00,
if Lessor is required to apply any property insurance proceeds
toward repair or restoration of the Leased Property as provided in
Section 13.2, then as long as the Work is being diligently and
continuously performed by Lessee in accordance with the terms and
conditions of this Lease, Lessor shall disburse such insurance
proceeds from time to time during the course of the Work in
accordance with and subject to satisfaction of the following
provisions and conditions. Lessor shall not be required to make
disbursements more often than at thirty (30) day intervals. Lessee
shall submit a written request for each disbursement at least ten
(10) Business Days in advance and shall comply with the following
requirements in connection with each disbursement:
</PAGE>
(a) Prior to the commencement of any Work, Lessee shall have
received Lessor's written approval of the Plans and Specifications
(which approval shall not be unreasonably withheld) and the Work
shall be supervised by an experienced construction manager with the
consultation of an architect or engineer qualified and licensed to
do business in the State.
(b) Each request for payment shall be accompanied by (x) a
certificate of the architect or engineer, bearing the architect's
or engineer's seal, and (y) a certificate of the general
contractor, qualified and licensed to do business in the State,
that is performing the Work (collectively, the "Work
Certificates"), each dated not more than ten (10) days prior to the
application for withdrawal of funds, and each stating:
(i) that all of the Work performed as of the date of the
certificates has been completed in compliance with the approved
Plans and Specifications, applicable Contract and all applicable
Legal Requirements;
(ii) that the sum then requested to be withdrawn has been paid by
Lessee or is justly due to contractors, subcontractors,
materialmen, engineers, architects or other Persons, whose names
and addresses shall be stated therein, who have rendered or
furnished certain services or materials for the Work, and the
certificate shall also include a brief description of such services
and materials and the principal subdivisions or categories thereof
and the respective amounts so paid or due to each of said Persons
in respect thereof and stating the progress of the Work up to the
date of said certificate;
(iii) that the sum then requested to be withdrawn, plus all sums
previously withdrawn, does not exceed the cost of the Work insofar
as actually accomplished up to the date of such certificate;
(iv) that the remainder of the funds held by Lessor will be
sufficient to pay for the full completion of the Work in accordance
with the Plans and Specifications;
(v) that no part of the cost of the services and materials
described in the applicable Work Certificate has been or is being
made the basis of the withdrawal of any funds in any previous or
then pending application; and
</PAGE>
(vi) that, except for the amounts, if any, specified in the
applicable Work Certificate to be due for services and materials,
there is no outstanding indebtedness known, after due inquiry,
which is then due and payable for work, labor, services or
materials in connection with the Work which, if unpaid, might
become the basis of a vendor's, mechanic's, laborer's or
materialman's statutory or other similar Lien upon the Leased
Property.
(c) Lessee shall deliver to Lessor satisfactory evidence that the
Leased Property and all materials and all property described in the
Work Certificates are free and clear of Liens, except (i) Liens, if
any, securing indebtedness due to Persons (whose names and
addresses and the several amounts due them shall be stated therein)
specified in an applicable Work Certificate, which Liens shall be
discharged upon disbursement of the funds then being requested,
(ii) any Fee Mortgage, (iii) the Permitted Encumbrances and (iv) as
otherwise provided pursuant to the provisions of Article 15
provided however Lessor may withhold any such property insurance
proceeds which are the subject of any contest involving the general
contractor or any subcontractor. Lessor shall accept as
satisfactory evidence of the foregoing lien waivers in customary
form from the general contractor and all subcontractors performing
the Work, together with an endorsement of its title insurance
policy (relating to the Leased Property) in form acceptable to
Lessor, dated as of the date of the making of the disbursement,
confirming the foregoing.
(d) If the Work involves alteration or restoration of the exterior
of any Leased Improvement, Lessee shall deliver to Lessor, upon the
request of Lessor, an "as-built" survey of the Leased Property
dated as of a date within ten (10) days prior to the making of the
first and final advances (or revised to a date within ten (10) days
prior to each such advance) showing no encroachments other than
such encroachments, if any, by the Leased Improvements upon or over
the Permitted Encumbrances as are in existence as of the date
hereof.
(e) Lessee shall deliver to Lessor (i) an opinion of counsel or
licensed architect or engineer (satisfactory to Lessor both as to
counsel, architect or engineer and as to the form of opinion) prior
to the first advance opining that all necessary Permits for the
repair, replacement and/or restoration of the Work have been
obtained and that the Work, if performed in accordance, in all
material respects, with the approved Plans and Specifications and
such Permits, shall comply with all applicable Legal Requirements
and (ii) an architect's certificate (satisfactory to Lessor both as
</PAGE>
to the architect and as to the form of the certificate) prior to
the final advance, certifying that the Work was performed in
accordance, in all material respects, with the approved Plans and
Specifications and complies with all applicable Legal Requirements,
including, without limitation, all Permits referenced in the
foregoing clause (i).
(f) There shall be no Lease Default or any state of facts or
circumstance existing which, with the giving of notice and/or the
passage of time, would constitute any Lease Default.
Lessor, at its option, may waive any of the foregoing requirements
in whole or in part in any instance. Upon compliance by Lessee
with the foregoing requirements (except for such requirements, if
any, as Lessor may have expressly elected to waive), and to the
extent of (x) the insurance proceeds, if any, which Lessor may be
required to apply to restoration of the Leased Property pursuant to
the provisions of this Lease and (y) all other cash deposits made
by Lessee, Lessor shall make available for payment to the Persons
named in the Work Certificate(s) the respective amounts stated in
said Certificate(s) to be due, subject to a retention of ten
percent (10%) as to all hard costs of the Work (the "Retainage").
It is understood that the Retainage is intended to provide a
contingency fund to assure Lessor that the Work shall be fully
completed in accordance with the Plans and Specifications and the
requirements of Lessor. Upon the full and final completion of all
of the Work in accordance with the provisions hereof, the Retainage
shall be made available for payment to those Persons entitled
thereto.
Upon completion of the Work, and as a condition precedent to making
any further advance, in addition to the requirements set forth
above, Lessee shall promptly deliver to Lessor:
(i) written certificates of the architect or engineer, bearing the
architect's or engineer's seal, and the general contractor,
certifying that the Work has been fully completed in a good and
workmanlike manner in material compliance with the Plans and
Specifications and all Legal Requirements;
(ii) an endorsement of its title insurance policy (relating to the
Leased Property) in form reasonably acceptable to Lessor insuring
the Leased Property against all mechanic's and materialman's liens
accompanied by the final lien waivers from the general contractor
and all subcontractors except as otherwise provided pursuant to the
provisions of Article 15 provided however Lessor may withhold any
such property insurance proceeds which are the subject of any
contest involving the general or any subcontractor;
</PAGE>
(iii) a certificate by Lessee in form and substance reasonably
satisfactory to Lessor, listing all costs and expenses in
connection with the completion of the Work and the amount paid by
Lessee with respect to the Work; and
(iv) a temporary certificate of occupancy (if obtainable) and all
other applicable Permits and Contracts issued by or entered into
with any Governmental Authority with respect to the Leased Property
and the Primary Intended Use and, to the extent applicable, the
Other Permitted Uses and by the appropriate Board of Fire
Underwriters or other similar bodies acting in and for the locality
in which the Leased Property is situated; provided, that within
thirty (30) days after completion of the Work, Lessee shall obtain
and deliver to Lessor a permanent certificate of occupancy for the
Leased Property.
Upon completion of the Work and delivery of the documents required
pursuant to the provisions of this Section 13.1, Lessor shall pay
the Retainage to Lessee or to those Persons entitled thereto and if
there shall be insurance proceeds or cash deposits, other than the
Retainage, held by Lessor in excess of the amounts disbursed
pursuant to the foregoing provisions, then provided that no Lease
Default has occurred and is continuing, nor any state of facts or
circumstances has occurred which, with the giving of notice and/or
the passage of time could constitute a Lease Default, Lessor shall
pay over such proceeds or cash deposits to Lessee.
No inspections or any approvals of the Work during or after
construction shall constitute a warranty or representation by
Lessor, or any of its agents or Consultants, as to the technical
sufficiency, adequacy or safety of any structure or any of its
component parts, including, without limitation, any fixtures,
equipment or furnishings, or as to the subsoil conditions or any
other physical condition or feature pertaining to the Leased
Property. All acts, including any failure to act, relating to
Lessor are performed solely for the benefit of Lessor to assure the
payment and performance of the Lease Obligations and are not for
the benefit of Lessee or the benefit of any other Person.
13.2 Disposition of Insurance Proceeds.
13.2.1 Proceeds To Be Released to Pay For Work. In the event of
any Casualty, except as provided for in Section 13.2.2, Lessor
shall release proceeds of property insurance held by it to pay for
the Work in accordance with the provisions and procedures set forth
in this Article 13, only if:
(a) all of the terms, conditions and provisions of Sections 13.1
and 13.2.1 are satisfied;
</PAGE>
(b) there does not then exist any Lease Default or any state of
facts or circumstance which, with the giving of notice and/or the
passage of time, would constitute such a Lease Default;
(c) Lessee demonstrates to Lessor's satisfaction that Lessee has
the financial ability to satisfy the Lease Obligations during such
repair or restoration; and
(d) no Sublease material to the operation of the Facility
immediately prior to such damage or taking shall have been
cancelled or terminated, nor contain any still exercisable right to
cancel or terminate, due to such Casualty if and to the extent that
the income from such Sublease is necessary in order to avoid the
violation of any of the financial covenants set forth in this Lease
or otherwise to avoid the creation of a Lease Default.
13.2.2 Proceeds Not To Be Released. If, as the result of any
Casualty, the Leased Property or the Facility is damaged to the
extent it is rendered Unsuitable For Its Primary Intended Use and
if either: (a) Lessee, after exercise of diligent efforts, cannot
within a reasonable time (not in excess of ninety (90) days) obtain
all necessary Permits in order to be able to perform all required
Work and to again operate such Facility for its Primary Intended
Use and, to the extent applicable, the Other Permitted Uses within
two hundred and seventy (270) days from the occurrence of the
damage or destruction in substantially the manner as immediately
prior to such damage or destruction or (b) such Casualty occurs
during the last twenty-four (24) months of the Term and would
reasonably require more than nine (9) months to obtain all Permits
and complete the Work, then Lessee may either (i) acquire the
Leased Property from Lessor for a purchase price equal to the
greater of (x) the Meditrust Investment or (y) the Fair Market
Value of the Leased Property minus the Fair Market Added Value,
with the Fair Market Value and the Fair Market Added Value to be
determined as of the day immediately prior to such Casualty and
prior to any other Casualty which has not been fully repaired,
restored or replaced, in which event, Lessee shall be entitled upon
payment of the full purchase price to receive all property
insurance proceeds (less any costs and expenses incurred by Lessor
in collecting the same), or (ii) terminate this Lease, in which
event (subject to the provisions of the last sentence of this
Section 13.2.2) Lessor shall be entitled to receive and retain the
insurance proceeds; provided, however, that Lessee shall only have
such right of termination effective upon payment to Lessor of all
Rent and other sums due under this Lease and the other Lease
Documents through the date of termination plus an amount, which
</PAGE>
when added to the sum of (1) the Fair Market Value of the Leased
Property as affected by all unrepaired or unrestored damage due to
any Casualty (and giving due regard for delays, costs and expenses
incident to completing all repair or restoration required to fully
repair or restore the same) plus (2) the amount of insurance
proceeds actually received by Lessor (net of costs and expenses
incurred by Lessor in collecting the same) equals (3) the greater
of the Meditrust Investment or the Fair Market Value of the Leased
Property minus the Fair Market Added Value, with the Fair Market
Value and the Fair Market Added Value to be determined as of the
day immediately prior to such Casualty and prior to any other
Casualty which has not been fully repaired. Any acquisition of the
Leased Property pursuant to the terms of this Section 13.2.2 shall
be consummated in accordance with the provisions of Article 18,
mutatis, mutandis. If such termination becomes effective, Lessor
shall assign to Lessee any outstanding insurance claims.
13.2.3 Lessee Responsible for Short-Fall. If the cost of the Work
exceeds the amount of proceeds received by Lessor from the property
insurance required under Article 12 (net of costs and expenses
incurred by Lessor in collecting the same), Lessee shall be
obligated to contribute any excess amount needed to repair or
restore the Leased Property and pay for the Work. Such amount
shall be paid by Lessee to Lessor together with any other property
insurance proceeds for application to the cost of the Work.
13.3 Tangible Personal Property. All insurance proceeds payable
by reason of any loss of or damage to any of the Tangible Personal
Property shall be paid to Lessor as secured party, subject to the
rights of the holders of any Permitted Prior Security Interests,
and, thereafter, provided that no Lease Default, nor any fact or
circumstance which with the giving of notice and/or the passage of
time could constitute a Lease Default, has occurred and is
continuing, Lessor shall pay such insurance proceeds to Lessee to
reimburse Lessee for the cost of repairing or replacing the damaged
Tangible Personal Property, subject to the terms and conditions set
forth in the other provisions of this Article 13, mutatis mutandis.
13.4 Restoration of Certain Improvements and the Tangible Personal
Property. If Lessee is required or elects to restore the Leased
Property, Lessee shall either (a) restore (i) all alterations and
improvements made by Lessee, (ii) the Tangible Personal Property
and (iii) Lessor's Personal Property or (b) replace such
alterations and improvements, the Tangible Personal Property and
Lessor's Personal Property with improvements or items of the same
or better quality and utility in the operation of the Leased
Property.
</PAGE>
13.5 No Abatement of Rent. In no event shall any Rent abate as a
result of any Casualty.
13.6 Termination of Certain Rights. Any termination of this Lease
pursuant to this Article 13 shall cause any right of Lessee to
extend the Term of this Lease, and any right of Lessee to purchase
the Leased Property contained in this Lease to be terminated and to
be without further force or effect.
13.7 Waiver. Lessee hereby waives any statutory rights of
termination which may arise by reason of any damage or destruction
to the Leased Property due to any Casualty which Lessee is
obligated to restore or may restore under any of the provisions of
this Lease.
13.8 Application of Business Interruption Insurance. All proceeds
of business interruption insurance (collectively, "Rent Insurance
Proceeds") shall be paid to Lessor and dealt with as follows:
(a) if the Work has been promptly and diligently commenced by
Lessee and is in the process of being completed in accordance with
this Lease and no fact or condition exists which constitutes, or
which with the giving of notice and/or the passage of time would
constitute, a Lease Default, Lessor shall each month pay to Lessee
out of the Rent Insurance Proceeds a sum equal to that amount, if
any, of the Rent Insurance Proceeds paid by the insurer which is
allocable to the rental loss and/or business interruption for the
preceding month minus an amount equal to the sum of the Rent due
hereunder for such month plus any Impositions relating to the
Leased Property then due and payable;
(b) if the Work has not been promptly and diligently commenced by
Lessee or is not in the process of being completed in accordance
with this Lease, such proceeds shall be applied to any Rent then
due, and, to the extent sufficient therefor, an amount equal to
Base Rent, Impositions and insurance premiums payable for the next
twelve (12) months, as reasonably projected by Lessor, shall be
held by Lessor as security for the Lease Obligations and applied to
the payment of Rent as it becomes due; and
(c) if such Rent Insurance Proceeds received by Lessor (net of
costs and expenses incurred by Lessor in collecting the same)
exceed the amounts required under clauses (a) and (b) above, the
excess shall be paid to Lessee, provided no fact or circumstance
exists which constitutes, or with notice, or passage of time, or
both, would constitute, a Lease Default.
</PAGE>
Notwithstanding the foregoing, Lessor may at its option use or
release such insurance proceeds to pay for the Work and, if a Lease
Default exists, Lessor may apply all such insurance proceeds
towards the Lease Obligations or hold such proceeds as security
therefor.
13.9 Obligation To Account. Upon Lessee's written request, which
may not be made not more than once in any three (3) month period,
Lessor shall provide Lessee with a written accounting of the
application of all insurance proceeds received by Lessor.
ARTICLE 14
CONDEMNATION
14.1 Parties' Rights and Obligations. If during the Term there is
any Taking of all or any part of the Leased Property or any
interest in this Lease, the rights and obligations of the parties
shall be determined by this Article 14.
14.2 Total Taking. If there is a permanent Taking of all or
substantially all of the Leased Property, this Lease shall
terminate on the Date of Taking.
14.3 Partial or Temporary Taking. If there is a Permanent Taking
of a portion of the Leased Property (but not substantially all of
the Leased Property or the Facility as provided above in Section 14.2),
Or if there is a temporary Taking of all or a
portion of the Leased Property, this Lease shall remain in effect
so long as the Facility is not thereby rendered permanently
Unsuitable For Its Primary Intended Use or temporarily Unsuitable
For Its Primary Intended Use for a period not likely to, or which
does not, exceed two hundred and seventy (270) days. If, however,
the Facility is thereby so rendered permanently or temporarily
Unsuitable For Its Primary Intended Use:
(a) Lessee shall have the right to restore any the Facility, at its
own expense (subject to the right under certain circumstances as
provided for in Section 14.5 to receive the net proceeds of an
Award for reimbursement), to the extent possible, to substantially
the same condition as existed immediately before the partial or
temporary Taking or (b) Lessee shall have the right to acquire the
entire Leased Property from Lessor (i) upon payment of all Rent due
through the date that the purchase price is paid, for a purchase
price equal to the greater of (x) the Meditrust Investment or (y)
the Fair Market Value of the Leased Property minus the Fair Market
Added Value, with the Fair Market Value of the Leased Property and
</PAGE>
the Fair Market Added Value to be determined as of the day
immediately prior to such partial or temporary Taking and (ii) in
accordance with the applicable terms and conditions set forth in
Article 18; in which event, this Lease shall terminate upon payment
of such purchase price and the consummation of such acquisition.
Notwithstanding the foregoing, Lessor may overrule Lessee's
election under clause (a) or (b) and instead either (1) terminate
this Lease as of the date when Lessee is required to surrender
possession of the portion of the Leased Property so taken or (2)
compel Lessee to keep the Lease in full force and effect and to
restore the Leased Property as provided in clause (a) above, but
only if the Facility may be operated for at least eighty percent
(80%) of the licensed unit capacity of such Facility in effect
prior to the Taking. Lessee shall exercise its election under this
Section 14.3 by giving Lessor notice thereof ("Lessee's Election
Notice") within sixty (60) days after Lessee receives notice of the
Taking. Lessor shall exercise its option to overrule Lessee's
election under this Section 14.3 by giving Lessee notice of
Lessor's exercise of its rights under Section 14.3 within thirty
(30) days after Lessor receives Lessee's Election Notice. If, as
the result of any such partial or temporary Taking, this Lease is
not terminated as provided above, Lessee shall be entitled to
abatement of Rent, but only to the extent, if any, provided for in
Section 3.7, effective as of the date upon which the Facility or
portion thereof is rendered Unsuitable For Its Primary Intended
Use.
14.4 Restoration. If there is a partial or temporary Taking of
the Leased Property and this Lease remains in full force and effect
pursuant to Section 14.3, Lessee shall accomplish all necessary
restoration and Lessor shall release the net proceeds of such Award
to reimburse Lessee for the actual reasonable costs and expenses
thereof, subject to all of the conditions and provisions set forth
in Article 13 relating to insurance proceeds as though the Taking
was a Casualty and the Award was insurance proceeds. If the cost
of the restoration exceeds the amount of the Award (net of costs
and expenses incurred in obtaining the Award), Lessee shall be
obligated to contribute any excess amount needed to restore the
Facility or pay for such costs and expenses.
14.5 Award Distribution. In the event Lessee completes the
purchase of the Leased Property, as described in Section 14.3, the
entire Award shall, upon payment of the purchase price and all Rent
and other sums due under this Lease and the other Lease Documents,
belong to Lessee and Lessor agrees to assign to Lessee all of
Lessor's rights thereto. In any other event, the entire Award
shall belong to and be paid to Lessor.
</PAGE>
14.6 Control of Proceedings. Subject to the rights of any Fee
Mortgagee, unless and until Lessee completes the purchase of the
Leased Property as provided in Section 14.3, all proceedings
involving any Taking and the prosecution of claims arising out of
any Taking against the Condemnor shall be conducted, prosecuted and
settled by Lessor; provided, however, that Lessor shall keep Lessee
apprised of the progress of all such proceedings and shall solicit
Lessee's advice with respect thereto and shall give due
consideration to any such advice. In addition, Lessee shall
reimburse Lessor (as an Additional Charge) for all costs and
expenses, including reasonable attorneys' fees, appraisal fees,
fees of expert witnesses and costs of litigation or dispute
resolution, in relation to any Taking, whether or not this Lease is
terminated; provided, however, if this Lease is terminated as a
result of a Taking, Lessee's obligation to so reimburse Lessor
shall be diminished by the amount of the Award, if any, received by
Lessor which is in excess of the Meditrust Investment.
ARTICLE 15
PERMITTED CONTESTS
15.1 Lessee's Right to Contest. To the extent of the express
references made to this Article 15 in other Sections of this Lease,
Lessee, any Sublessee or any Manager on their own or on Lessor's
behalf (or in Lessor's name), but at their sole cost and expense,
may contest, by appropriate legal proceedings conducted in good
faith and with due diligence (until the resolution thereof), the
amount, validity or application, in whole or in part, of any
Imposition, Legal Requirement, the decision of any Governmental
Authority related to the operation of the Leased Property for its
Primary Intended Use and, to the extent applicable, any of the
Other Permitted Uses or any Lien or claim relating to the Leased
Property not otherwise permitted by this Agreement; provided, that
(a) prior written notice of such contest is given to Lessor, (b) in
the case of an unpaid Imposition, Lien or claim, the commencement
and continuation of such proceedings shall suspend the collection
thereof from Lessor and compliance by Lessee, any Sublessee and/or
any Manager with the contested Legal Requirement or other matter
may be legally delayed pending the prosecution of any such
proceeding without the occurrence or creation of any Lien, charge
or liability of any kind against the Leased Property, (c) neither
the Leased Property nor any Rent therefrom nor any part thereof or
interest therein would be in any immediate danger of being sold,
forfeited, attached or lost, (d) in the case of a Legal Requirement
or decision of Governmental Authority, Lessor would not be in any
</PAGE>
immediate danger of civil or criminal liability for failure to
comply therewith pending the outcome of such proceedings, (e) in
the event that any such contest shall involve a sum of money or
potential loss in excess of TEN THOUSAND and NO/100 DOLLARS
($10,000.00), Lessee shall deliver to Lessor an Officer's
Certificate and opinion of counsel, if Lessor deems the delivery of
an opinion to be appropriate, certifying or opining, as the case
may be, as to the validity of the statements set forth in clauses
(b), (c) and (d), to the extent applicable, (f) Lessee shall give
such cash security as may be demanded in good faith by Lessor to
insure ultimate payment of any fine, penalty, interest or cost and
to prevent any sale or forfeiture of the affected portion of the
Leased Property by reason of such non-payment or non-compliance,
(g) if such contest is finally resolved against Lessor, Lessee, any
Sublessee and/or any Manager, Lessee shall promptly pay, as
Additional Charges due hereunder, the amount required to be paid,
together with all interest and penalties accrued thereon and/or
comply (and cause any Sublessee and any Manager to comply) with the
applicable Legal Requirement or decision, and (h) no fact or
condition exists which constitutes, or with the passage of time
and/or the giving of notice, could constitute a Lease Default;
provided, however, the provisions of this Article 15 shall not be
construed to permit Lessee to contest the payment of Rent or any
other sums payable by Lessee to Lessor under any of the Lease
Documents.
15.2 Lessor's Cooperation. Lessor, at Lessee's sole cost and
expense, shall execute and deliver to Lessee such authorizations
and other documents as may reasonably be required in any such
contest, so long as the same does not expose Lessor to any civil or
criminal liability, and, if reasonably requested by Lessee or if
Lessor so desires, Lessor shall join as a party therein.
15.3 Lessee's Indemnity. Lessee, as more particularly provided
for in Section 12.2, shall indemnify, defend (with counsel
acceptable to Lessor) and save Lessor harmless against any
liability, cost or expense of any kind, including, without
limitation, attorneys' fees and expenses that may be imposed upon
Lessor in connection with any such contest and any loss resulting
therefrom and in the enforcement of this indemnification.
</PAGE>
ARTICLE 16
DEFAULT
16.1 Events of Default. Each of the following shall constitute an
"Event of Default" or "Lease Default" hereunder and shall entitle
Lessor to exercise its remedies hereunder and under any of the
other Lease Documents:
(a) any failure of Lessee to pay any amount due hereunder or under
any of the other Lease Documents within ten (10) days following the
date when such payment was due;
(b) any failure in the observance or performance of any other
covenant, term, condition or warranty provided in this Lease or any
of the other Lease Documents, other than the payment of any
monetary obligation and other than as specified in subsections (c)
through (u) below (a "Failure to Perform"), continuing for thirty
(30) days after the giving of notice by Lessor to Lessee specifying
the nature of the Failure to Perform; except as to matters not
susceptible to cure within thirty (30) days, provided that with
respect to such matters, (i) Lessee commences the cure thereof
within thirty (30) days after the giving of such notice by Lessor
to Lessee, (ii) Lessee continuously prosecutes such cure to
completion, (iii) such cure is completed within ninety (90) days
after the giving of such notice by Lessor to Lessee and (iv) such
Failure to Perform does not impair the value of, or Lessor's rights
with respect to, the Leased Property or otherwise impair the
Collateral or Lessor's security interest therein;
(c) the occurrence of any default or breach of condition
continuing beyond the expiration of the applicable notice and grace
periods, if any, under any of the other Lease Documents, including,
without limitation, the Agreement Regarding Related Transactions,
provided, however, that if the cure period specified in any of the
other Lease Documents is different than that provided herein, the
grace period provided herein shall control, or if no grace period
is provided herein, then no such grace period shall be afforded;
(d) if any representation, warranty or statement contained herein
or in any of the other Lease Documents proves to be untrue in any
material respect as of the date when made or at any time during the
Term if such representation or warranty is a continuing
representation or warranty pursuant to Section 10.2;
(e) if any member of the Leasing Group shall (i) voluntarily be
adjudicated a bankrupt or insolvent; (ii) seek or consent to the
appointment of a receiver or trustee for itself or for the Leased
Property; (iii) file a petition seeking relief under the bankruptcy
or other similar laws of the United States, any state or any
jurisdiction; (iv) make a general assignment for the benefit of
creditors; (v) make or offer a composition of its debts with its
creditors or (vi) be unable to pay its debts as such debts mature;
</PAGE>
(f) if any court shall enter an order, judgment or decree
appointing, without the consent of any member of the Leasing Group,
a receiver or trustee for such member or for any of its property
and such order, judgment or decree shall remain in force,
undischarged or unstayed, sixty (60) days after it is entered;
(g) if a petition is filed against any member of the Leasing Group
which seeks relief under the bankruptcy or other similar laws of
the United States, any state or any other jurisdiction, and such
petition is not dismissed within sixty (60) days after it is filed;
(h) in the event that, without the prior written consent of
Lessor, in each instance, which consent may be withheld by Lessor
in its sole and absolute discretion: (i) there shall be a change in
the Person or Persons presently holding management or ownership
control of any member of the Leasing Group (other than changes in
stock ownership of, or the individuals managing, Guarantor),
whether by operation of law or otherwise; (ii) all or any portion
of the interest of any partner or member of any member of the
Leasing Group (other than changes in the stock ownership of
Guarantor) shall be, on any one or more occasions, directly or
indirectly, sold, assigned, hypothecated or otherwise transferred
(whether by operation of law or otherwise), if such member of the
Leasing Group shall be a partnership, joint venture, syndicate or
other group; (iii) more than twenty-five percent (25%), in the
aggregate, of the shares of the issued and outstanding capital
stock of any member of the Leasing Group (other than changes of
stock ownership of Guarantor) shall be, on any one or more
occasions, directly or indirectly, sold, assigned, hypothecated or
otherwise transferred (whether by operation of law or otherwise),
if such member of the Leasing Group shall be a corporation; or (iv)
all or any portion of the beneficial interest in any member of the
Leasing Group shall be, directly or indirectly, sold or otherwise
transferred (whether by operation of law or otherwise), if such
member of the Leasing Group shall be a trust;
(i) the death, incapacity, liquidation, dissolution or termination
of existence of any member of the Leasing Group or the merger or
consolidation of any member of the Leasing Group with any other
Person;
(j) except as otherwise permitted pursuant to Section 11.5.1
and/or Article 15 (as this Article relates only to involuntary
Liens) hereof, if, without the prior written consent of Lessor,
in each instance, which consent may be withheld by Lessor in its
sole and absolute discretion, Lessee's or any Sublessee's interest
in the Leased Property shall be, directly or indirectly, mortgaged,
encumbered (by any voluntary or involuntary Lien other than the
Permitted Encumbrances), subleased, sold, assigned, hypothecated or
otherwise transferred (whether by operation of law or otherwise);
</PAGE>
(k) except as otherwise permitted pursuant to Article 15, the
occurrence of a default or breach of condition continuing beyond
the expiration of the applicable notice and grace periods, if any,
in connection with the payment or performance of any other material
obligation of Lessee or any Sublessee, whether or not the
applicable creditor or obligee elects to declare the obligations of
Lessee or the applicable Sublessee under the applicable agreement
due and payable or to exercise any other right or remedy available
to such creditor or obligee, if such creditor's or obligee's rights
and remedies may involve or result in (i) the taking of possession
of the Leased Property or (ii) the assertion of any other right or
remedy that, in Lessor's reasonable opinion, may impair Lessee's
ability punctually to perform all of its obligations under this
Lease and the other Lease Documents, may impair such Sublessee's
ability punctually to perform all of its obligations under its
Sublease or may materially impair Lessor's security for the Lease
Obligations; provided, however, that in any event, the election by
the applicable creditor or obligee to declare the obligations of
Lessee or such Sublessee under the applicable agreement due and
payable or to exercise any other right or remedy available to such
creditor or obligee shall be a Lease Default hereunder only if such
obligations, individually or in the aggregate, are in excess of ONE
HUNDRED THOUSAND and NO/100 DOLLARS ($100,000.00);
(l) the occurrence of a Related Party Default, including, without
limitation, the occurrence of a default or breach of condition
continuing beyond the expiration of any applicable notice and grace
periods, if any, under the terms of any of the lease documents or
any of the construction loan documents executed in connection with
the sale/leaseback transactions aggregating approximately
$7,510,000 by and among members of the Leasing Group and the
Meditrust Entities;
(m) the occurrence of any default or breach of condition
continuing beyond the expiration of the applicable notice and grace
periods, if any, under any credit agreement, loan agreement or
other agreement establishing a major line of credit (or any
documents executed in connection with such lines of credit) on
behalf of any member of the Leasing Group whether or not the
applicable creditor has elected to declare the indebtedness due and
payable under such line of credit or to exercise any other right or
remedy available to it. For the purposes of this provision, (1)
a major line of credit shall mean and include any line of credit
established in an amount equal to or greater than FIVE HUNDRED
THOUSAND and NO/100 DOLLARS ($500,000.00) and (2) any such major
line of credit of Guarantor shall relate primarily to the Leased
Property;
</PAGE>
(n) except as a result of Casualty or a partial or complete
Condemnation, if Lessee or any Sublessee ceases operation of the
Facility for a period in excess of thirty (30) days (a "Failure
to Operate");
(o) if one or more judgments against Lessee or any Sublessee or
attachments against Lessee's interest or any Sublessee's interest
in the Leased Property, which in the aggregate exceed ONE HUNDRED
THOUSAND and NO/100 DOLLARS ($100,000.00) or which may materially
and adversely interfere with the operation of the Facility, remain
unpaid, unstayed on appeal, undischarged, unbonded or undismissed
for a period of thirty (30) days;
(p) if any malpractice award or judgment exceeding any applicable
professional liability insurance coverage by more than FIVE HUNDRED
THOUSAND and NO/100 DOLLARS ($500,000.00) shall be rendered against
any member of the Leasing Group and either (i) enforcement
proceedings shall have been commenced by any creditor upon such
award or judgment or (ii) such award or judgment shall continue
unsatisfied and in effect for a period of ten (10) consecutive days
without an insurance company satisfactory to Lessor (in its sole
and absolute discretion) having agreed to fund such award or
judgment in a manner satisfactory to Lessor (in its sole and
absolute discretion) and in either case such award or judgment
shall, in the reasonable opinion of Lessor, have a material adverse
affect on the ability of Lessee or any Sublessee to operate
the Facility;
(q) if any Provider Agreement material to the operation or
financial condition of any member of the Leasing Group shall be
terminated prior to the expiration of the term thereof or, without
the prior written consent of Lessor, in each instance, which
consent may be withheld in Lessor's reasonable discretion, shall
not be renewed or extended upon the expiration of the stated term
thereof;
(r) if, after Lessee or any Sublessee has obtained approval for
Medicare and/or Medicaid funding, a final unappealable
determination is made by the applicable Governmental Authority that
Lessee or any Sublessee shall have failed to comply with applicable
Medicare and/or Medicaid regulations in the operation of the
Facility, as a result of which failure Lessee or such Sublessee is
declared ineligible to receive reimbursements under the Medicare
and/or Medicaid programs and such reimbursements are material to
the operation or financial condition of any member of the Leasing
Group;
</PAGE>
(s) if Lessee or any Sublessee receives notice of a final
unappealable determination by applicable Governmental Authorities
of the revocation of any Permit required for the lawful
construction or operation of the Facility in accordance with the
Primary Intended Use and, to the extent applicable, any of the
Other Permitted Uses or the loss of any Permit under any other
circumstances under which Lessee or such Sublessee is required to
cease the construction or operation of the Facility in accordance
with the Primary Intended Use;
(t) any failure to maintain the insurance required pursuant to
Section 12 of this Lease in force and effect at all times until the
Lease Obligations are fully paid and performed; or
(u) the entry of a final unappealable order by a court with
jurisdiction over the Leased Property to close the Facility, to
transfer one or more residents from the Facility as a result of an
allegation of abuse or neglect or to take any action to eliminate
an emergency situation then existing at the Facility.
16.1 Remedies.
(a) If any Lease Default shall have occurred, Lessor may at its
option terminate this Lease by giving Lessee not less than ten (10)
days' notice of such termination, or exercise any one or more of
its rights and remedies under this Lease, or the other Lease
Documents, or as available at law or in equity and upon the
expiration of the time fixed in such notice, the Term shall
terminate (but only if Lessor shall have specifically elected by a
written notice to so terminate the Lease) and all rights of Lessee
under this Lease shall cease. Notwithstanding the foregoing, in
the event of Lessee's failure to pay Rent, if such Rent remains
unpaid beyond ten (10) days from the due date thereof, Lessor shall
not be obligated to give ten (10) days notice of such termination
or exercise of any of its other rights and remedies under this
Lease, or the other Lease Documents, or otherwise available at law
or in equity, and Lessor shall be at liberty to pursue any one or
more of such rights or remedies without further notice. No taking
of possession of the Leased Property by or on behalf of Lessor,
and no other act done by or on behalf of Lessor, shall constitute
an acceptance of surrender of the Leased Property by Lessee or
reduce Lessee's obligations under this Lease or the other Lease
Documents, unless otherwise expressly agreed to in a written
document signed by an authorized officer or agent of Lessor.
(b) To the extent permitted under applicable law, Lessee shall pay
as Additional Charges all costs and expenses (including, without
limitation, attorneys' fee and expenses) reasonably incurred by or
on behalf of Lessor as a result of any Lease Default.
</PAGE>
(c) If any Lease Default shall have occurred, whether or not this
Lease has been terminated pursuant to Paragraph (a) of this
Section, Lessee shall, to the extent permitted under applicable
law, if required by Lessor so to do, upon not less than ten (10)
days' prior notice from Lessor, immediately surrender to Lessor the
Leased Property pursuant to the provisions of Paragraph (a) of this
Section and quit the same, and Lessor may enter upon and repossess
the Leased Property by reasonable force, summary proceedings,
ejectment or otherwise, and may remove Lessee and all other Persons
and any and all of the Tangible Personal Property from the Leased
Property, subject to the rights of any residents of the Facility
and any Sublessees who are not Affiliates of any member of the
Leasing Group and to any requirements of applicable law, or Lessor
may claim ownership of the Tangible Personal Property as set forth
in Section 5.2.3 hereof or Lessor may exercise its rights as
secured party under the Security Agreement. Lessor shall use
reasonable, good faith efforts to relet the Leased Property or
otherwise mitigate damages suffered by Lessor as a result of
Lessee's breach of this Lease.
(d) In addition to all of the rights and remedies of Lessor set
forth in this Lease and the other Lease Documents, if Lessee shall
fail to pay any rental or other charge due hereunder (whether
denominated as Base Rent or otherwise) within ten (10) days after
same shall have become due and payable, then and in such event
Lessee shall also pay to Lessor (i) a late payment service charge
(in order to partially defray Lessor's administrative and other
overhead expenses) equal to two hundred-fifty and NO/100 ($250.00)
dollars and (ii) to the extent permitted by applicable law,
interest on such unpaid sum at the Overdue Rate; it being
understood, however, that nothing herein shall be deemed to extend
the due date for payment of any sums required to be paid by Lessee
hereunder or to relieve Lessee of its obligation to pay such sums
at the time or times required by this Lease.
16.3 Damages. None of (a) the termination of this Lease pursuant
to Section 16.2, (b) the eviction of Lessee or the repossession of
the Leased Property, (c) the failure of Lessor, notwithstanding
reasonable good faith efforts, to relet the Leased Property, (d)
the reletting of the Leased Property or (e) the failure of Lessor
to collect or receive any rentals due upon any such reletting,
shall relieve Lessee of its liability and obligations hereunder,
all of which shall survive any such termination, repossession or
reletting. In any such event, Lessee shall forthwith pay to Lessor
all Rent due and payable with respect to the Leased Property to and
including the date of such termination, repossession or eviction.
Thereafter, Lessee shall forthwith pay to Lessor, at Lessor's
option, either:
</PAGE>
(i) the sum of: (x) all Rent that is due and unpaid at later to
occur of termination, repossession or eviction, together with
interest thereon at the Overdue Rate to the date of payment, plus
(y) the worth (calculated in the manner stated below) of the amount
by which the unpaid Rent for the balance of the Term after the
later to occur of the termination, repossession or eviction exceeds
the fair market rental value of the Leased Property for the balance
of the Term, plus (z) any other amount necessary to compensate
Lessor for all damage proximately caused by Lessee's failure to
perform the Lease Obligations or which in the ordinary course would
be likely to result therefrom;
or
(ii) each payment of Rent as the same would have become due and
payable if Lessee's right of possession or other rights under this
Lease had not been terminated, or if Lessee had not been evicted,
or if the Leased Property had not been repossessed which Rent, to
the extent permitted by law, shall bear interest at the Overdue
Rate from the date when due until paid, and Lessor may enforce, by
action or otherwise, any other term or covenant of this Lease.
There shall be credited against Lessee's obligation under this
Clause (ii) amounts actually collected by Lessor from another
tenant to whom the Leased Property may have actually been leased
or, if Lessor is operating the Leased Property for its own account,
the actual Cash Flow of the Leased Property.
In making the determinations described in subparagraph (i) above,
the "worth" of unpaid Rent shall be determined by a court having
jurisdiction thereof using the lowest rate of capitalization
(highest present worth) reasonably applicable at the time of such
determination and allowed by applicable law.
For the purposes of this Lease, the use of the word "termination"
shall mean either "termination" or "cancellation" as such words are
defined in the UCC.
16.4 Lessee Waivers. If this Lease is terminated pursuant to
Section 16.2, Lessee waives, to the extent not prohibited by
applicable law, (a) any right of redemption, re-entry or
repossession, (b) any right to a trial by jury in the event of
summary proceedings to enforce the remedies set forth in this
Article 16, and (c) the benefit of any laws now or hereafter in
force exempting property from liability for rent or for debt.
In the event Lessor may elect to regain possession of the Leased
Property by a forcible detainer proceeding, Lessee hereby
specifically waives any statutory notice which may be required
</PAGE>
prior to any such proceeding, and agrees that Lessor's execution of
this Lease is, in part, consideration for this waiver. Except as
otherwise set forth herein, Lessee further waives any demand for
Rent, notice of termination and any notice to quit required
pursuant to Oklahoma statutes, Kansas statutes or otherwise and
agrees that Lessor's execution of this Lease is, in part,
consideration for these waivers.
All claims for damages by reason of re-entry and/or repossession
and/or alteration of locks or other security devices are hereby
waived, as are all claims for damages by reason of any distress
warrant, forcible detainer proceedings, sequestration proceedings
or other legal process. Lessee agrees that any re-entry by Lessor
may be pursuant to judgment obtained in forcible detainer
proceedings or other legal proceedings or without the necessity for
any legal proceedings, as Lessor may elect, and Lessor shall not be
liable in trespass or otherwise.
Lessee shall not interpose any counterclaim of any kind in any
action or proceeding commenced by Lessor to recover possession of
the Leased Property. In the event Lessee violates this provision,
the parties stipulate that any such counterclaim shall be severed
and tried separately from the action for eviction pursuant to
Florida Rules of Civil Procedure 1.270(b) or other applicable law.
The eviction action shall proceed pursuant to the summary
procedures set forth in Florida Statues 51.011. Additionally,
Lessee shall comply with Florida Statutes 83.232.
In any distress for rent action filed by Lessor against Lessee,
Lessee waives all constitutional, statutory or common law bonding
requirements, including the requirement under Florida Statutes
83.12, that Lessor file a bond payable to Lessee in at least
double the sum demanded by Lessor. Lessee specifically agrees that
no bond shall be required in any such action and Lessee further
waives the right under Florida Status 83.14, to replevin
distrained property.
16.5 Application of Funds. Any payments otherwise payable to
Lessee which are received by Lessor under any of the provisions of
this Lease during the existence or continuance of any Lease Default
shall be applied to the Lease Obligations in the order which Lessor
may reasonably determine or as may be required by the laws of the
State.
16.6 [Intentionally Omitted].
16.7 [Intentionally Omitted].
</PAGE>
16.8 Lessor's Right to Cure. If Lessee shall fail to make any
payment, or to perform any act required to be made or performed
under this Lease or the other Lease Documents and to cure the same
within the relevant time periods provided in Section 16.1, Lessor,
after five (5) Business Days' prior notice to Lessee (except in an
emergency when such shorter notice shall be given as is reasonable
under the circumstances), and without waiving or releasing any
obligation or Lease Default, may (but shall be under no obligation
to) at any time thereafter make such payment or perform such act
for the account and at the expense of Lessee, and may, to the
extent permitted by law, enter upon the Leased Property for such
purpose and take all such action thereon as, in Lessor's opinion,
may be necessary or appropriate therefor. No such entry shall be
deemed an eviction of Lessee. All sums so paid by Lessor and all
costs and expenses (including, without limitation, reasonable
attorneys' fees and expenses, in each case, to the extent permitted
by law) so incurred shall be paid by Lessee to Lessor on demand as
an Additional Charge. The obligations of Lessee and rights of
Lessor contained in this Article shall survive the expiration or
earlier termination of this Lease.
16.9 No Waiver By Lessor. Lessor shall not by any act, delay,
omission or otherwise (including, without limitation, the exercise
of any right or remedy hereunder) be deemed to have waived any of
its right or remedies hereunder or under any of the other Lease
Documents unless such waiver is in writing and signed by Lessor,
and then, only to the extent specifically set forth therein.
No waiver at any time of any of the terms, conditions, covenants,
representations or warranties set forth in any of the Lease
Documents (including, without limitation, any of the time periods
set forth therein for the performance of the Lease Obligations)
shall be construed as a waiver of any other term, condition,
covenant, representation or warranty of any of the Lease Documents,
nor shall such a waiver in any one instance or circumstances be
construed as a waiver of the same term, condition, covenant,
representation or warranty in any subsequent instance or
circumstance. No such failure, delay or waiver shall be construed
as creating a requirement that Lessor must thereafter, as a result
of such failure, delay or waiver, give notice to Lessor or any
Guarantor, or any other Person that Lessor does not intend to, or
may not, give a further waiver or to refrain from insisting upon
the strict performance of the terms, conditions, covenants,
representations and warranties set forth in the Lease Documents
before Lessor can exercise any of its rights or remedies under any
of the Lease Documents or before any Lease Default can occur, or as
establishing a course of dealing for interpreting the conduct of
and agreements between Lessor and Lessee, the Guarantor or any
other Person.
</PAGE>
The acceptance by Lessor of any payment that is less than payment
in full of all amounts then due under any of the Lease Documents at
the time of the making of such payment shall not: (a) constitute a
waiver of the right to exercise any of Lessor's remedies at that
time or at any subsequent time, (b) constitute an accord and
satisfaction or (c) nullify any prior exercise of any remedy,
without the express written consent of Lessor. Any failure by
Lessor to take any action under this Lease or any of the other
Lease Documents by reason of a default hereunder or thereunder,
acceptance of a past due installment, or indulgences granted from
time to time shall not be construed as a novation of this Lease or
any of the other Lease Documents or as a waiver of such right or of
the right of Lessor thereafter to insist upon strict compliance
with the terms of this Lease or any of the other Lease Documents,
or (d) to prevent the exercise of such right of acceleration or any
other right granted hereunder or under applicable law; and to the
maximum extent not prohibited by applicable law, Lessor hereby
expressly waives the benefit of any statute or rule of law or
equity now provided, or which may hereafter be provided, which
would produce a result contrary to or in conflict with the
foregoing.
16.10 Right of Forbearance. Whether or not for consideration paid
or payable to Lessor and, except as may be otherwise specifically
agreed to by Lessor in writing, no forbearance on the part of
Lessor, no extension of the time for the payment of the whole or
any part of the Obligations, and no other indulgence given by
Lessor to Lessee or any other Person, shall operate to release or
in any manner affect the original liability of Lessee or such other
Persons, or to limit, prejudice or impair any right of Lessor,
including, without limitation, the right to realize upon any
Collateral, or any part thereof, for any of the Obligations; notice
of any such extension, forbearance or indulgence being hereby
waived by Lessee and all those claiming by, through or under
Lessee.
16.11 Cumulative Remedies. The rights and remedies set forth
under this Lease are in addition to all other rights and remedies
afforded to Lessor under any of the other Lease Documents or at law
or in equity, all of which are hereby reserved by Lessor, and this
Lease is made and accepted without prejudice to any such rights and
remedies. All of the rights and remedies of Lessor under each of
the Lease Documents shall be separate and cumulative and may be
exercised concurrently or successively in Lessor's sole and
absolute discretion.
</PAGE>
ARTICLE 17
SURRENDER OF LEASED PROPERTY OR LEASE; HOLDING OVER
17.1 Surrender. Lessee shall, upon the expiration or prior
termination of the Term, vacate and surrender the Leased Property
to Lessor in good repair and condition, in compliance with all
Legal Requirements, all Insurance Requirements, and in compliance
with the provisions of Article 8 except for: (a) ordinary wear and
tear (subject to the obligation of Lessee to maintain the Leased
Property in good order and repair during the entire Term of the
Lease); (b) damage caused by the gross negligence or willful acts
of Lessor; and (c) any damage or destruction resulting from a
Casualty or Taking that Lessee is not required by the terms of this
Lease to repair or restore.
17.2 Transfer of Contracts and Permits. In connection with the
expiration or earlier termination of this Lease, Lessee shall use
its best efforts to transfer and assign to Lessor or its designee,
and shall assist Lessor or its designee in obtaining, any Contracts
and Permits required for the operation of the Facility. The
provisions of this Section 17.2 shall survive the expiration or
earlier termination of this Lease.
17.3 Management of Leased Property. Upon the expiration or
earlier termination of the Term, Lessor or its designee, upon
written notice to Lessee, may elect to assume the responsibilities
and obligations for the management and operation of the Leased
Property and Lessee agrees to cooperate fully with Lessor or its
designee to accomplish the transfer of such management and
operation without interrupting the operation of the Leased
Property. Lessee shall not commit an act or be remiss in the
undertaking of any act that would jeopardize the licensure or
certification of the Facility, and Lessee shall comply with all
requests by Lessor for possession of the Facility at the time of
any such surrender. Upon the expiration or earlier termination of
the Term, Lessee shall promptly deliver copies of all of Lessee's
books and records relating to the Leased Property and its
operations to Lessor.
17.4 Correction of Deficiencies. Upon termination or cancellation
of this Lease, Lessee hereby indemnifies Lessor for any loss,
damage, cost or expense incurred by Lessor to correct all
deficiencies of a physical nature identified by any applicable
Government Authorities in the course of the change of ownership,
inspection and audit, normal wear and tear excluded.
</PAGE>
17.5 No Acceptance of Surrender. Except at the expiration of the
Term in the ordinary course, no surrender to Lessor of this Lease
or of the Leased Property or any interest therein shall be valid or
effective unless agreed to and accepted in writing by Lessor and no
act by Lessor or any representative or agent of Lessor, other than
such a written acceptance by Lessor, shall constitute an acceptance
of any such surrender.
17.6 Holding Over. If, for any reason, Lessee shall remain in
possession of the Leased Property after the expiration or any
earlier termination of the Term, such possession shall be as a
tenant at sufferance during which time Lessee shall pay as rental
each month, one and one-half times the aggregate of (i) one-twelfth
of the aggregate Base Rent payable with respect to the last
complete Fiscal Year prior to the expiration or earlier termination
of the Term; (ii) all Additional Charges accruing during the month
and (iii) all other sums, if any, payable by Lessee pursuant to the
provisions of this Lease with respect to the Leased Property.
During such period of tenancy, Lessee shall be obligated to perform
and observe all of the terms, covenants and conditions of this
Lease, but shall have no rights hereunder other than the right, to
the extent given by law to tenants at sufferance, to continue its
occupancy and use of the Leased Property. Nothing contained herein
shall constitute the consent, express or implied, of Lessor to the
holding over of Lessee after the expiration or earlier termination
of this Lease.
ARTICLE 18
PURCHASE OF THE LEASED PROPERTY
18.1 Purchase of the Leased Property. In the event Lessee
purchases all or a portion of the Leased Property from Lessor
pursuant to any of the terms of this Lease, Lessor shall, upon
receipt from Lessee of the applicable purchase price, together with
full payment of any unpaid Rent due and payable with respect to any
period ending on or before the date of the purchase, deliver to
Lessee an appropriate special warranty deed conveying the entire
interest of Lessor in and to the Leased Property or the applicable
portion thereof to Lessee subject to the Lease, all Legal
Requirements, all of the matters described in clauses (a), (b), (e)
and (g) of Section 11.5.2, Impositions, any Liens created by
Lessee, any Liens in accordance with the terms of this Lease or
consented to by Lessee, the claims of all Persons claiming by
through or under Lessee, any other matters assented to by Lessee
and all matters for which Lessee has responsibility under any of
</PAGE>
the Lease Documents, but otherwise not subject to any other Lien
created by Lessor (other than an Encumbrance permitted under
Article 20 which Lessee elects to assume). The applicable purchase
price shall be paid in cash to Lessor, or as Lessor may direct, in
federal or other immediately available funds except as otherwise
mutually agreed by Lessor and Lessee. All expenses of such
conveyance, including, without limitation, the cost of title
examination or standard coverage title insurance, attorneys' fees
incurred by Lessor in connection with such conveyance, recording
and transfer taxes and recording fees and similar charges shall be
paid by Lessee.
18.2 Appraisal.
18.2.1 Designation of Appraisers. In the event that it becomes
necessary to determine the Fair Market Value of all or a portion of
the Leased Property for any purpose of this Lease, the party
required or permitted to give notice of such required determination
shall include in the notice the name of a Person selected to act as
appraiser on its behalf. Within ten (10) days after receipt of any
such notice, Lessor (or Lessee, as the case may be) shall by notice
to Lessee (or Lessor, as the case may be) appoint a second Person
as appraiser on its behalf.
18.2.2 Appraisal Process. The appraisers thus appointed, each of
whom must be a member of the American Institute of Real Estate
Appraisers (or any successor organization thereto), shall, within
thirty (30) days after the date of the notice appointing the first
appraiser, proceed to appraise all or a portion of the Leased
Property, as applicable, to determine the Fair Market Value of the
Leased Property as of the relevant date (giving effect to the
impact, if any, of inflation from the date of their decision to the
relevant date); provided, however, that if only one appraiser shall
have been so appointed, or if two appraisers shall have been so
appointed but only one such appraiser shall have made such
determination within thirty-five (35) days after the making of
Lessee's or Lessor's request, then the determination of such
appraiser shall be final and binding upon the parties. If two
appraisers shall have been appointed and shall have made their
determinations within the respective requisite periods set forth
above and if the difference between the amounts so determined shall
not exceed ten percent (10%) of the lesser of such amounts, then
the Fair Market Value of all or a portion of the Leased Property,
as applicable, shall be an amount equal to fifty percent (50%) of
the sum of the amounts so determined. If the difference between
the amounts so determined shall exceed ten percent (10%) of the
lesser of such amounts, then such two appraisers shall have ten
</PAGE>
(10) days to appoint a third appraiser, but if such appraisers fail
to do so, then either party may request the American Arbitration
Association or any successor organization thereto to appoint an
appraiser within ten (10) days of such request, and both parties
shall be bound by any appointment so made within such ten (10) day
period. If no such appraiser shall have been appointed within such
ten (10) days or within sixty (60) days of the original request for
a determination of Fair Market Value of all or a portion of the
Leased Property, as applicable, whichever is earlier, either Lessor
or Lessee may apply to any court having jurisdiction to have such
appointment made by such court. Any appraiser appointed by the
original appraisers, by the American Arbitration Association or by
such court shall be instructed to determine the Fair Market Value
of all or a portion of the Leased Property, as applicable, within
thirty (30) days after appointment of such appraiser. The
determination of the appraiser which differs most in terms of
dollar amount from the determinations of the other two appraisers
shall be excluded, and fifty percent (50%) of the sum of the
remaining two determinations shall be final and binding upon Lessor
and Lessee as the Fair Market Value of all or a portion of the
Leased Property, as applicable.
18.2.3 Specific Enforcement and Costs. This provision for
determination by appraisal shall be specifically enforceable to the
extent such remedy is available under applicable law, and any
determination hereunder shall be final and binding upon the parties
except as otherwise provided by applicable law. Lessor and Lessee
shall each pay the fees and expenses of the appraiser appointed by
it and each shall pay one-half of the fees and expenses of the
third appraiser and one-half of all other cost and expenses
incurred in connection with each appraisal.
18.3 Lessee's Right of First Refusal. During the Term of this
Lease, so long as there exists no Event of Default under this Lease
at the time of exercise and on the date of closing, and there is no
event or state of facts which, with the passage of time and/or the
giving of notice, would constitute an Event of Default if not cured
by Lessee, and Lessee has not effected such cure, Lessee shall have
a "Right of First Refusal" as hereinafter described. If Lessor
receives a bona fide written offer to purchase the Facility (the
"Subject Property") from a Person unaffiliated with Lessee (the
"Offer"), acceptable to Lessor in Lessor's sole and absolute
discretion and Lessor elects, in Lessor's sole and absolute
discretion, to sell, ground lease or otherwise transfer the Subject
Property other than as permitted by Article 20 below in accordance
with the Offer, Lessor shall notify Lessee and Lessee shall have
thirty (30) days following Lessee's receipt of Lessor's notice of
</PAGE>
the Offer to elect to purchase the Subject Property on the same
terms and conditions as specified in the Offer. Unless Lessor
receives notice from Lessee within such thirty (30) day period
setting forth Lessee's election to so purchase the Subject Property
and unless thereafter Lessee completes the acquisition of the
Subject Property exactly as provided for, and by the date
specified, in the Offer, Lessor shall be at liberty, and shall have
the absolute and unconditional right, to sell the Subject Property
to any Person within the next twelve (12) months substantially on
the terms and conditions set forth in the Offer or on any other
terms and conditions more favorable to Lessor and such sale, if so
completed, shall extinguish Lessee's Right of First Refusal with
respect to the Subject Property. Lessee's Right of First Refusal
shall not apply to and shall survive: (a) any sale or transfer of
the Subject Property or any portion thereof to Meditrust or any
Affiliate of Lessor or of Meditrust; or (b) any foreclosure of
any Fee Mortgage. The Right of Refusal shall in all events
terminate upon any termination of this Lease.
18.4 Lessee's Option to Purchase.
18.4.1 Pursuant to Section 6 of the Agreement Regarding Related
Transactions, if each of Lessee and every other lessee under the
therein-defined Acquisition Facility Leases exercise the therein-
defined Purchase Options to purchase the therein-defined Purchase
Option Property, Lessee shall purchase the below-defined Purchase
Option Property in accordance with the provisions of this Section
18.4 (the "Purchase Option"). For the purposes of this Section
18.4, the "Purchase Option Property" shall include any four (4)
facilities designated by Lessor (in its sole and absolute
discretion) which are leased by Lessee or any other member of the
Leasing Group or any of their respective Affiliates from Lessor or
any of the other Meditrust Entities or any of their respective
Affiliates; provided, however, the number of facilities designated
by Lessor to comprise a portion of the Purchase Option Property
shall be reduced by one (1) if the Facility is purchased by Lessee
in accordance with Section 18.3.
</PAGE>
18.4.2 Exercise of Option. This Purchase Option shall permit
Lessee to purchase the Purchase Option Property (a) on the
thirteenth (13th) anniversary of the Fixed Term Commencement Date,
or (b) on the last day of any Extended Term effectively exercised
by Lessee (each of such dates are referred to herein as a "Purchase
Option Date") and shall be exercised by notice given by Lessee to
Lessor (the "Lessee's Purchase Option Notice") at least one hundred
eighty (180) days (but not more than two hundred seventy (270)
days) prior to the relevant Purchase Option Date, which notice
shall be accompanied by a good faith deposit (the "Good Faith
Deposit") in the amount of ONE HUNDRED THOUSAND AND NO/100 DOLLARS
($100,000.00), which Good Faith Deposit shall be credited toward
the Purchase Option Purchase Price if the closing pursuant to this
Purchase Option actually occurs and retained by Lessor if Lessee
fails to purchase the Purchase Option Property for any reason
(other than Lessor's default) after giving Lessee's Purchase Option
Notice. Notwithstanding anything to the contrary set forth in this
Lease, Lessee's right to purchase the Purchase Option Property is
subject to the further conditions that (i) concurrently with the
exercise of the option set forth under this Section 18.4, Lessee
shall have exercised its rights to purchase the premises demised
under or otherwise subject to the Purchase Option, as applicable,
under each of the Related Leases in accordance with the provisions
of Section 18.4 of each of the Related Leases, (ii) the conveyance
of the Purchase Option Property pursuant to the provisions of this
Section 18.4 shall occur simultaneously with the conveyance of the
premises demised under or otherwise subject to the Purchase Option,
as applicable, under each of the Related Leases pursuant to Section
18.4 of each of the Related Leases and (iii) all conditions
contained in the Agreement Regarding Related Transactions
pertaining to the Purchase Option are satisfied. Notwithstanding
the foregoing, Lessor shall return the Good Faith Deposit to Lessee
if Lessor willingly fails or is unable to convey the Purchase
Option Property to Lessee in accordance with this Section 18.4,
unless, pursuant to Section 18.4.9, Lessee elects to accept title
to the Purchase Option Property as Lessor can deliver, or Lessee
notifies Lessor in writing of Lessee's decision not to purchase the
Purchase Option Property on or before the third (3rd) business day
after Lessee receives from Lessor written notice of the Purchase
Option Purchase Price of the Purchase Option Property.
18.4.3 Conveyance. If the Purchase Option is exercised by Lessee
in accordance with the terms hereof, the Purchase Option Property
shall be conveyed by a good and sufficient special warranty deed
(the "Deed") running to Lessee or to such grantee as Lessee may
designate by notice to Lessor at least seven (7) days before the
Time of Closing.
</PAGE>
18.4.4 Calculation of Purchase Option Purchase Price. The price
(the "Purchase Option Purchase Price") for the Purchase Option
Property pursuant to this Purchase Option shall be equal to the
greater of (a) the Meditrust Investment made in connection with the
Purchase Option Property or (b) an amount equal to the then Fair
Market Value of the Purchase Option Property minus the Fair Market
Added Value of the Purchase Option Property.
18.4.5 Payment of Purchase Option Purchase Price. The Purchase
Option Purchase Price shall be paid by Lessee at the Time of
Closing by certified, cashier's, treasurer's or bank check(s) or
wire transfer pursuant to instructions received from Lessor.
18.4.6 Place and Time of Closing. If this Purchase Option is
exercised, the closing shall occur and the Deed shall be delivered
(the "Closing") at the office of Lessor at 12:00 o'clock noon
(E.S.T.) on the relevant Purchase Option Date (such time, as the
same may be extended by mutual written agreement of Lessor and
Lessee, being hereinafter referred to as the "Time of Closing").
It is agreed that time is of the essence of this Purchase Option.
18.4.7 Condition of Purchase Option Property. The Purchase Option
Property is to be purchased "AS IS" and "WHERE IS" as of the Time
of Closing.
18.4.8 Quality of Title. If Lessor shall be unable to give title
or to make conveyance, as stipulated in this Section 18.4, then
Lessor shall use reasonable efforts to remove all defects in title
and the Time of Closing shall be extended for period of thirty (30)
days. Lessor shall not be required to expend more than TEN
THOUSAND and NO/100 DOLLARS ($10,000.00) (inclusive of attorney's
fees) in order to have used "reasonable efforts."
18.4.9 Lessor's Inability to Perform. If at the expiration of the
extended time Lessor shall have failed so to remove any such
defects in title, then all other obligations of all parties hereto
under Section 18.4 shall cease and Section 18.4 shall be void and
without recourse to the parties hereto. Notwithstanding the
foregoing, Lessee shall have the election, at either the original
or extended Time of Closing, to accept such title as Lessor can
deliver to the Purchase Option Property in its then condition and
to pay therefor the Purchase Option Purchase Price without
reduction, in which case Lessor shall convey such title; provided,
that, in the event of such conveyance, if any portion of the
Purchase Option Property shall have been taken by exercise of the
power of Condemnation prior to the Time of Closing, Lessor shall
pay over or assign to Lessee at the Time of Closing, all Awards
</PAGE>
recovered on account of such Taking, less any amounts reasonably
expended by Lessor in obtaining such Award, or, to the extent such
Awards are not then recovered, Lessor shall assign to Lessee all
its rights with respect to any claim therefor.
18.4.10 Merger by Deed. The acceptance of the Deed by Lessee or
the grantee designated by Lessee, as the case may be, shall be
deemed to be a full performance and discharge of every agreement
and obligation to be performed by Lessor contained or expressed in
this Lease.
18.4.11 Use of Purchase Option Purchase Price to Clear Title. To
enable Lessor to make conveyance as provided in this Section,
Lessor may, at the Time of Closing, use the Purchase Option
Purchase Price or any portion thereof to clear the title of any or
all encumbrances or interests, provided that all instruments so
procured are recorded contemporaneously with the Closing or
reasonable arrangements are made for a recording subsequent to the
Time of Closing in accordance with customary conveyancing
practices.
18.4.12 Lessee's Default. If Lessee delivers Lessee's Purchase
Option Notice and fails to consummate the purchase of the Purchase
Option Property in accordance with the terms hereof for any reason
other than Lessor's willful and unexcused refusal to deliver the
Deed, Lessee shall thereafter have no further right to purchase the
Purchase Option Property pursuant to this Section, although this
Lease shall otherwise continue in full force and effect. If Lessee
delivers Lessee's Purchase Option Notice and fails to consummate
the purchase of the Purchase Option Property in accordance with the
terms hereof for any reason other (a) than Lessee notifying Lessor
in writing of Lessee's decision not to purchase the Purchase Option
Property on or before the third (3rd) business day after Lessee
receives from Lessor written notice of the Purchase Option Purchase
Price of the Purchase Option Property or (b) Lessor's willful and
unexcused refusal to deliver the Deed, Lessor shall have the right
to sue for the specific performance of Lessee's obligations to
purchase the Purchase Option Property provided such suit for
specific performance is commenced within one (1) year after the
relevant Purchase Option Date on which such sale was supposed to
occur.
18.4.13 [Intentionally Omitted].
</PAGE>
ARTICLE 19
SUBLETTING AND ASSIGNMENT
19.1 Subletting and Assignment. Lessee may not, without the prior
written consent of Lessor, which consent may be withheld in
Lessor's sole and absolute discretion, assign or pledge all or any
portion of its interest in this Lease or any of the other Lease
Documents (whether by operation of law or otherwise) or sublet all
or any part of the Leased Property. For purposes of this Section 19.1,
the term "assign" shall be deemed to include, but not
be limited to, any one or more sales, pledges, hypothecations or
other transfers (including, without limitation, any transfer by
operation of law) of any of the capital stock of Lessee or sales,
pledges, hypothecations or other transfers (including, without
limitation, any transfer by operation of law) of the capital or the
assets of Lessee. Any such assignment, pledge, sale, hypothecation
or other transfer made without Lessor's consent shall be void and
of no force and effect.
19.2 [INTENTIONALLY OMITTED]
19.3 Attornment. Lessee shall insert in each Sublease approved by
Lessor, provisions to the effect that (a) such Sublease is subject
and subordinate to all of the terms and provisions of this Lease
and to the rights of Lessor hereunder, (b) in the event this Lease
shall terminate before the expiration of such Sublease, the
Sublessee thereunder will, at Lessor's option, attorn to Lessor
and waive any right the Sublessee may have to terminate the
Sublease or to surrender possession thereunder, as a result of the
termination of this Lease and (c) in the event the Sublessee
receives a written notice from Lessor stating that Lessee is in
default under this Lease, the Sublessee shall thereafter be
obligated to pay all rentals accruing under said Sublease directly
to Lessor or as Lessor may direct. All rentals received from the
Sublessee by Lessor shall be credited against the amounts owing by
Lessee under this Lease.
19.4 [INTENTIONALLY OMITTED]
</PAGE>
ARTICLE 20
TITLE TRANSFERS AND LIENS GRANTED BY LESSOR
20.1 No Merger of Title. There shall be no merger of this Lease
or of the leasehold estate created hereby with the fee estate in
the Leased Property by reason of the fact that the same Person
may acquire, own or hold, directly or indirectly (a) this Lease or
the leasehold estate created hereby or any interest in this Lease
or such leasehold estate and (b) the fee estate in the Leased
Property.
20.2 Transfers By Lessor. If the original Lessor named herein or
any successor in interest shall convey the Leased Property in
accordance with the terms hereof, other than as security for a
debt, and the grantee or transferee of the Leased Property shall
expressly assume all obligations of Lessor hereunder arising or
accruing from and after the date of such conveyance or transfer,
the original Lessor named herein or the applicable successor in
interest so conveying the Leased Property shall thereupon be
released from all future liabilities and obligations of Lessor
under this Lease arising or accruing from and after the date of
such conveyance or other transfer as to the Leased Property and all
such future liabilities and obligations shall thereupon be binding
upon the new owner.
20.3 Lessor May Grant Liens. Without the consent of Lessee, but
subject to the terms and conditions set forth below in this Section
20.3, Lessor may, from time to time, directly or indirectly, create
or otherwise cause to exist any lien, encumbrance or title
retention agreement upon the Leased Property or any interest
therein ("Encumbrance"), whether to secure any borrowing or other
means of financing or refinancing, provided that Lessee shall have
no obligation to make payments under such Encumbrances. Lessee
shall subordinate this Lease to the lien of any such Encumbrance,
on the condition that the beneficiary or holder of such Encumbrance
executes a non-disturbance agreement in conformity with the
provisions of Section 20.4. To the extent that any such
Encumbrance consists of a mortgage or deed of trust on Lessor's
interest in the Leased Property the same shall be referred to
herein as a "Fee Mortgage" and the holder thereof shall be referred
to herein as a "Fee Mortgagee".
20.4 Subordination and Non-Disturbance. Concurrently with the
execution and delivery of any Fee Mortgage entered into after the
date hereof, provided that the Lessee executes and delivers an
agreement of the type described in the following paragraph, Lessor
shall obtain and deliver to Lessee an agreement by the holder of
</PAGE>
such Fee Mortgage, pursuant to which, (a) the applicable Fee
Mortgagee consents to this Lease and (b) agrees that,
notwithstanding the terms of the applicable Fee Mortgage held by
such Fee Mortgagee, or any default, expiration, termination,
foreclosure, sale, entry or other act or omission under or pursuant
to such Fee Mortgage or a transfer in lieu of foreclosure, (i)
Lessee shall not be disturbed in peaceful enjoyment of the Leased
Property nor shall this Lease be terminated or cancelled at any
time, except in the event that Lessor shall have the right to
terminate this Lease under the terms and provisions expressly set
forth herein, (ii) Lessee's option to purchase the Leased Property
shall remain in force and effect pursuant to the terms hereof and
(iii) in the event that Lessee elects its option to purchase the
Leased Property and performs all of its obligations hereunder in
connection with any such election, the holder of the Fee Mortgage
shall release its Fee Mortgage upon payment by Lessee of the
purchase price required hereunder, provided, that (1) such purchase
price is paid to the holder of the Fee Mortgage, in the event that
the Indebtedness secured by the applicable Fee Mortgage is equal to
or greater than the purchase price or (2) in the event that the
purchase price is greater than the Indebtedness secured by the Fee
Mortgage, a portion of the purchase price equal to the Indebtedness
secured by the Fee Mortgage is paid to the Fee Mortgagee and the
remainder of the purchase price is paid to Lessor.
At the request from time to time by any Fee Mortgagee, Lessee shall
(a) subordinate this Lease and all of Lessee's rights and estate
hereunder to the Fee Mortgage held by such Fee Mortgagee and (b)
agree that Lessee will attorn to and recognize such Fee Mortgagee
or the purchaser at any foreclosure sale or any sale under a power
of sale contained in any such Fee Mortgage as Lessor under this
Lease for the balance of the Term then remaining. To effect the
intent and purpose of the immediately preceding sentence, Lessee
agrees to execute and deliver such instruments in recordable from
as are reasonably requested by Lessor or the applicable Fee
Mortgagee; provided, however, that such Fee Mortgagee
simultaneously executes, delivers and records a written agreement
of the type described in the preceding paragraph.
</PAGE>
ARTICLE 21
LESSOR OBLIGATIONS
21.1 Quiet Enjoyment. As long as Lessee shall pay all Rent and
all other sums due under any of the Lease Documents as the same
become due and shall fully comply with all of the terms of this
Lease and fully perform its obligations thereunder, Lessee shall
peaceably and quietly have, hold and enjoy the Leased Property
throughout the Term, free of any claim or other action by Lessor or
anyone claiming by, through or under Lessor, but subject to all the
Permitted Encumbrances and such Liens as may hereafter be consented
to by Lessee. No failure by Lessor to comply with the foregoing
covenant shall give Lessee any right to cancel or terminate this
Lease, or to fail to perform any other sum payable under this
Lease, or to fail to perform any other obligation of Lessee
hereunder. Notwithstanding the foregoing, Lessee shall have the
right by separate and independent action to pursue any claim it may
have against Lessor as a result of a breach by Lessor of the
covenant of quiet enjoyment contained in this Article 21.
21.2 Memorandum of Lease. Lessor and Lessee shall, promptly upon
the request of either, enter into a short form memorandum of this
Lease, in form suitable for recording under the laws of the State,
in which reference to this Lease and all options contained herein
shall be made. Lessee shall pay all recording costs and taxes
associated therewith.
21.3 Default by Lessor. Lessor shall be in default of its
obligations under this Lease only if Lessor shall fail to observe
or perform any term, covenant or condition of this Lease on its
part to be performed and such failure shall continue for a period
of thirty (30) days after notice thereof from Lessee (or such
shorter time as may be necessary in order to protect the health or
welfare of any residents of the Facility), unless such failure
cannot with due diligence be cured within a period of thirty (30)
days, in which case such failure shall not be deemed to continue if
Lessor, within said thirty (30) day period, proceeds promptly and
with due diligence to cure the failure and diligently completes the
curing thereof. The time within which Lessor shall be obligated to
cure any such failure shall also be subject to extension of time
due to the occurrence of any Unavoidable Delay.
21.4 Computer Disc. In order to facilitate the electronic filing
of this Lease with the United States Securities and Exchange
Commission and other governmental agencies, Lessor shall provide or
cause to be provided to Guarantor a computer disc containing this
Lease, together with all exhibits, schedules and ancillary
documents related thereto, formatted in WordPerfect 5.1, Times New
Roman Font 12, upon Lessee's one-time request for same.
</PAGE>
ARTICLE 22
NOTICES
Any notice, request, demand, statement or consent made hereunder
or under any of the other Lease Documents shall be in writing and
shall be deemed duly given if personally delivered, sent by
certified mail, return receipt requested, or sent by a nationally
recognized commercial overnight delivery service with provision
for a receipt, postage or delivery charges prepaid, and shall be
deemed given when so personally delivered or postmarked or placed
in the possession of such mail or delivery service and addressed
as follows:
If to Lessee or Guarantor: c/o Sterling House Corporation
453 S. Webb Road, Suite 500
Wichita, KS 67207
Attn: President
With a copy to: David G. Crockett, Esq.
[Lessee's and Guarantor's Crockett & Gilhousen
counsel] 1005 North Market
Wichita, KS 67214
and c/o Sterling House Corporation
453 S. Webb Road, Suite 500
Wichita, KS 67207
Attn: Secretary
If to Lessor: Meditrust of Florida, Inc.
197 First Avenue
Needham Heights, Massachusetts 02194
Attn: President
With copies to: Meditrust Mortgage Investments, Inc.
197 First Avenue
Needham Heights, Massachusetts 02194
Attn: General Counsel
and Frank Giso III, Esq.
Choate, Hall & Stewart
Exchange Place
Boston, MA 02109
or such other address as Lessor, Lessee or the Guarantor shall
hereinafter from time to time designate by a written notice to
the others given in such manner. Any notice given to Lessee or
the Guarantor by Lessor at any time shall not imply that such
notice or any further or similar notice was or is required.
</PAGE>
ARTICLE 23
LIMITATION OF MEDITRUST LIABILITY
The Declaration of Trust establishing the sole shareholder of
Lessor, Meditrust, a Massachusetts business trust ("Meditrust"),
dated August 6, 1985 (the "Declaration"), as amended, a copy of
which is duly filed in the office of the Secretary of State of
the Commonwealth of Massachusetts, provides that the name
"Meditrust" refers to the trustees under the Declaration
collectively as trustees, but not individually or personally; and
that no trustee, officer, shareholder, employee or agent of
Meditrust or any of its Subsidiaries shall be held to any
personal liability, jointly, or severally, for any obligation of,
or claim against Meditrust or any of its Subsidiaries. All
Persons dealing with Meditrust or Lessor, in any way, shall look
only to the assets of Meditrust or Lessor, as applicable, for the
payment of any sum or the performance of any obligation.
Furthermore, in no event shall Meditrust or Lessor ever be liable
to Lessee or any other Person for any indirect or consequential
damages incurred by Lessee or such other Person resulting from
any cause whatsoever. Notwithstanding the foregoing, Lessee
hereby acknowledges and agrees that Meditrust is not a party to
this Lease and that Lessee shall look only to the assets of
Lessor for the payment of any sum or performance of any
obligation due by or from Lessor pursuant to the terms and
provisions of the Lease Documents.
ARTICLE 24
MISCELLANEOUS PROVISIONS
24.1 Broker's Fee Indemnification. Lessee shall and hereby agrees
to indemnify, defend (with counsel acceptable to Lessor) and hold
Lessor harmless from and against any and all claims for premiums or
other charges, finder's fees, taxes, brokerage fees or commissions
and other similar compensation due in connection with any of the
transactions contemplated by the Lease Documents. Notwithstanding
the foregoing, Lessor shall have the option of conducting its own
defense against any such claims with counsel of Lessor's choice,
but at the expense of Lessee, as aforesaid. This indemnification
shall include all attorneys' fees and expenses and court costs
reasonably incurred by Lessor in connection with the defense
against any such claims and the enforcement of this indemnification
agreement and shall survive the termination of this Lease.
</PAGE>
24.2 No Joint Venture or Partnership. Neither anything contained
in any of the Lease Documents, nor the acts of the parties hereto,
shall create, or be construed to create, a partnership or joint
venture between Lessor and Lessee. Lessee is not the agent or
representative of Lessor and nothing contained herein or in any of
the other Lease Documents shall make, or be construed to make,
Lessor liable to any Person for goods delivered to Lessee, services
performed with respect to the Leased Property at the direction of
Lessee or for debts or claims accruing against Lessee.
24.3 Amendments, Waivers and Modifications. None of the terms,
covenants, conditions, warranties or representations contained in
this Lease or in any of the other Lease Documents may be renewed,
replaced, amended, modified, extended, substituted, revised,
waived, consolidated or terminated except by an agreement in
writing signed by the Person against whom enforcement is sought or
except as otherwise expressly provided for herein or in any other
Lease Document. The provisions of this Lease and the other Lease
Documents shall extend and be applicable to all renewals,
replacements, amendments, extensions, substitutions, revisions,
consolidations and modifications of any of the Lease Documents, the
Management Agreements, the Related Party Agreements, the Permits
and/or the Contracts. References herein and in the other Lease
Documents to any of the Lease Documents, the Management Agreements,
the Related Party Agreements, the Permits and/or the Contracts
shall be deemed to include any renewals, replacements, amendments,
extensions, substitutions, revisions, consolidations or
modifications thereof.
Notwithstanding the foregoing, any reference contained in any of
the Lease Documents, whether express or implied, to any renewal,
replacement, amendment, extension, substitution, revisions,
consolidation or modification of any of the Lease Documents or any
Management Agreement, Related Party Agreement, Permit and/or the
Contract is not intended to constitute an agreement or consent by
Lessor to any such renewal, replacement, amendment, substitution,
revision, consolidation or modification; but, rather as a reference
only to those instances where Lessor may give, agree or consent to
any such renewal, replacement, amendment, extension, substitution,
revision, consolidation or modification as the same may be required
pursuant to the terms, covenants and conditions of any of the Lease
Documents.
</PAGE>
24.4 Further Assurances. At any time and from time to time, upon
the written request by Lessor, Lessee (and any of its Affiliates)
and the Guarantor (and any of its Affiliates) shall promptly make,
execute and deliver, or cause to be made, executed and delivered,
to Lessor and, where appropriate, cause to be recorded or filed
(and, from time to time thereafter, to be re-recorded or refiled)
at such time and in such offices and places as shall be deemed
desirable by Lessor (in its reasonable discretion), any such
agreements, amendments, assignments, instruments of further
assurance, certificates and other documents as Lessor may, in its
reasonable discretion, deem desirable to (a) enable Lessor to
assign the Lease or any portion of its interest; (b) enable Lessor
to enter into participation agreements with respect to all or any
portion of the Lease; or (c)effectuate, complete, perfect or
continue and preserve the rights, remedies and obligations under
the Lease; provided, however that, except as to the costs and
expenses of Lessor in connection with the items referred to in the
foregoing clause (c), no such additional document or other
instrument requested by Lessor hereunder shall (i) increase the
obligations of Lessee (or any of its Affiliates) or the Guarantor
(or any of its Affiliates), or (ii) require Lessee or the Guarantor
to incur any cost or expense (other than the fees and costs of any
attorney(s) either Lessee or the Guarantor may choose to retain in
connection with such transaction).
Any failure by Lessee (or any of its Affiliates) or the Guarantor
(or any of its Affiliates) to comply with any request pursuant to
this Section 24.4 within twenty (20) days after such written
request is made by Lessor shall be an Event of Default hereunder
and upon such Event of Default, Lessor may make, execute, record,
file, re-record and refile any and all such amendments,
assignments, instruments, certificates and documents for and in the
name of Lessee (or any of its Affiliates) or the Guarantor (or any
of its Affiliates), and Lessee (or any of its Affiliates) or the
Guarantor (or any of its Affiliates) each hereby appoints Lessor as
its attorney-in-fact, with full power of substitution, to take such
actions (on behalf of and in the name of Lessee (or any of its
Affiliates) or the Guarantor (or any of its Affiliates) as the case
may be) as Lessor, in its sole and absolute discretion, may deem
necessary or desirable to effectuate the intent of this Section
24.4.
24.5 Invalidity. If any provision of this Lease or any of the
other Lease Documents or the application thereof to any Person or
circumstance, for any reason and to any extent, shall be held to be
invalid or unenforceable, neither the remainder of this Lease or
other Lease Documents nor the application of such provision to any
other Person or circumstance shall be affected thereby, but rather
the same shall be enforced to the greatest extent permitted by
applicable law.
</PAGE>
Notwithstanding the foregoing, it is the intention of the parties
hereto that if any provision of the Lease or the other Lease
Documents is capable of two (2) constructions, one of which would
render the provision void and the other of which would render the
provision valid, then such provision shall be construed in
accordance with the construction which renders such provision
valid.
24.6 Captions and Headings. The captions and headings set forth in
this Lease and each of the other Lease Documents are included for
convenience and reference only, and the words contained therein
shall in no way be held or deemed to define, limit, describe,
explain, modify, amplify or add to the interpretation, construction
or meaning of, or the scope or intent of, this Lease, any of the
other Lease Documents or any parts hereof or thereof.
24.7 Time is of the Essence. Time is of essence of each and every
term, condition, covenant and warranty set forth herein and in the
other Lease Documents.
24.8 Counterparts. This Lease and the other Lease Documents may
be executed in one or more counterparts, each of which taken
together shall constitute an original and all of which shall
constitute one and the same instrument.
24.9 Entire Agreement. This Lease and the other Lease Documents
set forth the entire agreement of the parties with respect to the
subject matter and shall supersede in all respect the Letter of
Intent, dated November 21, 1995 (and all prior iterations thereof),
from Meditrust to Guarantor.
24.10 WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY
APPLICABLE LAW, LESSOR AND LESSEE HEREBY MUTUALLY, KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT WHICH ANY PARTY
HERETO MAY NOW OR HEREAFTER HAVE TO A TRIAL BY JURY IN RESPECT OF
ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE
LEASE OR ANY OF THE LEASE DOCUMENTS. Lessee hereby certifies that
neither Lessor nor any of Lessor's representatives, agents or
counsel has represented expressly or otherwise that Lessor would
not, in the event of any such suit, action or proceeding seek to
enforce this waiver to the right of trial by jury and acknowledges
that Lessor has been induced by this waiver (among other things) to
enter into the transactions evidenced by this Lease and the other
Lease Documents and further acknowledges that Lessee (a) has read
the provisions of this Lease, and in particular, the paragraph
containing this waiver, (b) has consulted legal counsel, (c) understands
the rights that it is granting in this Lease and
the rights that it is waiving in this paragraph in particular and
(d) makes the waivers set forth herein knowingly, voluntarily and
intentionally.
</PAGE>
24.11 Successors and Assigns. This Lease and the other Lease
Documents shall be binding upon and inure to the benefit of (a)
upon Lessee and Lessee's legal representatives and permitted
successors and assigns and (b) Lessor and any other Person who may
now or hereafter hold the interest of Lessor under this Lease and
their respective successors and assigns. Notwithstanding the
foregoing, except as may be permitted pursuant to Article 19,
Lessee shall not assign any of its rights or obligations hereunder
or under any of the other Lease Documents without the prior written
consent of Lessor, in each instance, which consent may be withheld
in Lessor's sole and absolute discretion.
24.12 No Third Party Beneficiaries. This Lease and the other
Lease Documents are solely for the benefit of Lessor, its
successors, assigns and participants (if any), the Meditrust
Entities, Lessee, the Guarantor, the other members of the Leasing
Group and their respective permitted successors and assigns, and,
except as otherwise expressly set forth in any of the Lease
Documents, nothing contained therein shall confer upon any Person
other than such parties any right to insist upon or to enforce the
performance or observance of any of the obligations contained
therein. All conditions to the obligations of Lessor to advance or
make available proceeds of insurance or Awards, or to release any
deposits held for Impositions or insurance premiums are imposed
solely and exclusively for the benefit of Lessor, its successors
and assigns. No other Person shall have standing to require
satisfaction of such conditions in accordance with their terms, and
no other Person shall, under any circumstances, be a beneficiary of
such conditions, any or all of which may be freely waived in whole
or in part by Lessor at any time, if, in Lessor's sole and absolute
discretion, Lessor deems it advisable or desirable to do so.
24.13 Governing Law. This Lease shall be construed and the rights
and obligations of Lessor and Lessee shall be determined in
accordance with the laws of the State.
Lessee hereby consents to personal jurisdiction in the courts of
the State and the United States District Court for the District in
which the Leased Property is situated as well as to the
jurisdiction of all courts from which an appeal may be taken from
the aforesaid courts, for the purpose of any suit, action or other
proceeding arising out of or with respect to any of the other Lease
Documents and expressly waives any and all objections Lessee may
have as to venue in any of such courts.
</PAGE>
24.14 General. Anything contained in this Lease to the contrary
notwithstanding, all claims against, and liabilities of, Lessee or
Lessor arising prior to any date of termination of this Lease or
any of the other Lease Documents shall survive such termination.
If any term or provision of this Lease or any of the other Lease
Documents or any application thereof shall be invalid or
unenforceable, the remainder of this Lease or the other Lease
Document, as the case may be, and any other application of such
term or provision shall not be affected thereby. If any late
charges provided for in any provision of this Lease or any of the
other Lease Documents are based upon a rate in excess of the
maximum rate permitted by applicable law, the parties agree that
such charges shall be fixed at the maximum permissible rate.
Lessee waives all presentments, demands for performance, notices of
nonperformance, protests, notices of protest, notices of dishonor,
and notices of acceptance and waives all notices of the existence,
creation, or incurring of new or additional obligations, except as
to all of the foregoing as expressly provided for herein.
24.15 Intention of Parties. Lessor and Lessee acknowledge and
agree that this Lease is intended to be a lease of the Leased
Property and is in no way intended to be a mortgage or any other
security instrument encumbering the Leased Property.
24.16 Radon Gas. Radon is naturally occurring radioactive gas
that, when it has accumulated in a building in sufficient
quantities, may present health risks to persons who are exposed to
it over time. Levels of radon that exceed federal and state
guidelines have been found in buildings in Florida. Additional
information regarding radon and radon testing may be obtained from
the county public health unit.
[Remainder of Page Intentionally Left Blank]
</PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease to be
executed and attested by their respective officers thereunto duly
authorized.
WITNESS: LESSEE:
ASSISTED LIVING PROPERTIES, INC., a
Kansas corporation
______________________________ By:__________________________
Name: Name:
Title:
WITNESS: LESSOR:
______________________________ MEDITRUST OF FLORIDA, INC.,
Name a New York corporation
By:_________________________
Name:
Title:
ds2-213172.1
</PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
Sterling House of Tequesta (Tequesta, Florida)
A parcel of land lying in the Northwest Quarter of Section 30,
Township 40 South, Range 43 East, Palm Beach County, Florida, being
more particularly described as follows:
Commence at the Southeast corner of the Northwest Quarter of the
Northwest Quarter of said Section 30; thence bear North 89 57'08"
West, along the South line of said Northwest Quarter of the
Northwest Quarter, a distance of 26.19 feet; thence South 17 17'07"
East, along a line parallel with the westerly right-of-way line of
U.S. Highway No. 1, as shown on the Florida Department of
Transportation Right-of-Way Map Section 93040-2503, being the
bearing base for this description, a distance of 153.99 feet to the
POINT OF BEGINNING, thence continue South 17 17'07" East a distance
of 192.16 feet to the intersection with the Westerly extension of
the North line of a parcel of land described in Deed Book 1097,
page 379, Palm Beach County, Florida, Public Records; thence South
89 43'22" East, along said extension, a distance of 37.87 feet;
thence South 17 17'07" East a distance of 251.98 feet to the
intersection with the North right-of-way line of Village Boulevard,
being a curve concave to the Southeast, having a radius of 725.00
feet and whose center bears South 03 52'08" East; thence
Southwesterly, along said curve, through a central angle of
21 15'21", a distance of 268.96 feet; thence North 17 17'07" West
a distance of 442.56 feet; thence North 72 42'53" East a distance
of 231.00 feet to the point of beginning.
</PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
Sterling House of Tequesta (Tequesta, Florida)
a. Easement as set forth in Warranty Deed from J.C. Nowling,
individually and as Guardian for Pearl B. Nowling, incompotent, to
Joseph H. Bates and Ruth E. Bates, his wife, dated August 26, 1954,
recorded September 23, 1964 in Deed Book 1066, page 364, Public
Records of Palm Beach County, Florida.
b. Easement in favor of Florida Power & Light Company as set forth
in instrument recorded in Official Records Book 69, Page 489,
Public Records of Palm Beach County, Florida.
</PAGE>
EXHIBIT C
LIST OF SHAREHOLDERS
1. Sterling House Corporation
</PAGE>
EXHIBIT D
RATE LIMITATIONS
None.
</PAGE>
EXHIBIT E
FREE CARE REQUIREMENTS
None.
</PAGE>
EXHIBIT F
PROVIDER AGREEMENTS
None.
</PAGE>
EXHIBIT G
NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
None.
</PAGE>
EXHIBIT H
OPEN COST REPORTS
None.
</PAGE>
EXHIBIT I
DEBT COVERAGE RATIO CALCULATION
</PAGE>
EXHIBIT J
EXECUTIVE OFFICERS
1. Timothy J. Buchanan, Chairman of the Board
2. Steven L. Vick, President
3. R. Gail Knott, Secretary and Treasurer
</PAGE>
SCHEDULE 4.6.2
INVESTMENT VEHICLES FOR IMPOSITION DEPOSITS
1. Certificates of deposit in a bank with (i) capitalization or
total equity in excess of ONE HUNDRED MILLION DOLLARS
($100,000,000) or (ii) a Moody's rating of "A" or better.
2. AAA rated bonds or A-1, P-1 commercial paper.
3. United States Treasury securities which mature in one year or
less.
4. Deposit accounts with Fleet Bank, N.A.
5. Such other investments as may be mutually agreed upon by Lessee
and Lessor
</PAGE>
ds2-207454.4
</PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
Sterling House of West Melbourne (West Melbourne, Florida)
The West 605.07 feet of Tract 1 GREENBORO ACRES, according to the
plat thereof as recorded in Plat Book 29, pages 66 and 67, of the
Public Records of Brevard County, Florida. Being more particularly
described as follows:
Commence at the Southwest corner of said Tract 1, for the Point-of-
Beginning of the herein described parcel; thence run N 00 48'31" E
along the West of said Tract 1 a distance of 265.56 feet to the
North line of said Greenboro Acres, thence N 89 12'27" E along said
North line a distance of 605.31 feet said point being 605.07 feet
East by perpendicular measurement of the West line of said West
line of Tract 1; thence S 00 48'31" W parallel to said West line a
distance of 265.75 feet to the North right-of-way line of Greenboro
Drive thence S 89 13'33" W along said right-of-way line a distance
of 605.30 feet to the Point-of-Beginning containing 3.69 acres of
land more or less.
</PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
Sterling House of West Melbourne (West Melbourne, Florida)
a. Easement shown on the Plat of Greenboro Acres, recorded in Plat
Book 29, page 66 of the Public Records of Brevard County, Florida
which shows an easement of 14 feet along the front lot line of the
property for public utility and drainage easement purposes.
</PAGE>
EXHIBIT C
LIST OF SHAREHOLDERS
1. Sterling House Corporation
</PAGE>
EXHIBIT D
RATE LIMITATIONS
None.
</PAGE>
EXHIBIT E
FREE CARE REQUIREMENTS
None.
</PAGE>
EXHIBIT F
PROVIDER AGREEMENTS
None.
</PAGE>
EXHIBIT G
NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
None.
</PAGE>
EXHIBIT H
OPEN COST REPORTS
None.
</PAGE>
EXHIBIT I
DEBT COVERAGE RATIO CALCULATION
</PAGE>
EXHIBIT J
EXECUTIVE OFFICERS
1. Timothy J. Buchanan, Chairman of the Board
2. Steven L. Vick, President
3. R. Gail Knott, Secretary and Treasurer
</PAGE>
SCHEDULE 4.6.2
INVESTMENT VEHICLES FOR IMPOSITION DEPOSITS
1. Certificates of deposit in a bank with (i) capitalization or
total equity in excess of ONE HUNDRED MILLION DOLLARS
($100,000,000) or (ii) a Moody's rating of "A" or better.
2. AAA rated bonds or A-1, P-1 commercial paper.
3. United States Treasury securities which mature in one year or
less.
4. Deposit accounts with Fleet Bank, N.A.
5. Such other investments as may be mutually agreed upon by Lessee
and Lessor
</PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
Sterling House of Stuart (Stuart, Florida)
A portion of Tracts 51, 52 and 53, Plat of Port Sewall "SEWALL'S
POINT LAND COMPANY SUBDIVISION," as recorded in Plat Book 3,
Page 7, of the Public Records of Palm Beach (now Martin) County,
Florida, being more particularly described as follows:
BEGIN at the intersection of the Easterly right-of-way line of S.E.
Aster Lane and the Northerly right-of-way line of S.E. Indian
Street (said point being the S.W. corner of Tract 51 of said Plat);
thence, along said Easterly right-of-way line of S.E. Aster Lane,
North 23 16'48" West 340.21 feet to the POINT AND PLACE OF
BEGINNING; thence continuing North 23 16'48" West a distance of
260.00 feet to a point; thence North 66 42'08" East, 586.50 feet
to a point; thence South 23 16'48" East, 260.00 feet to a point;
thence South 66 42'08" West, 586.50 feet to the POINT OF BEGINNING.
</PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
Sterling House of Stuart (Stuart, Florida)
None.
</PAGE>
EXHIBIT C
LIST OF SHAREHOLDERS
1. Sterling House Corporation
</PAGE.
EXHIBIT D
RATE LIMITATIONS
None.
</PAGE>
EXHIBIT E
FREE CARE REQUIREMENTS
None.
</PAGE>
EXHIBIT F
PROVIDER AGREEMENTS
None.
</PAGE>
EXHIBIT G
NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
None.
</PAGE>
EXHIBIT H
OPEN COST REPORTS
None.
</PAGE>
EXHIBIT I
DEBT COVERAGE RATIO CALCULATION
</PAGE>
EXHIBIT J
EXECUTIVE OFFICERS
1. Timothy J. Buchanan, Chairman of the Board
2. Steven L. Vick, President
3. R. Gail Knott, Secretary and Treasurer
</PAGE>
SCHEDULE 4.6.2
INVESTMENT VEHICLES FOR IMPOSITION DEPOSITS
1. Certificates of deposit in a bank with (i) capitalization or
total equity in excess of ONE HUNDRED MILLION DOLLARS
($100,000,000) or (ii) a Moody's rating of "A" or better.
2. AAA rated bonds or A-1, P-1 commercial paper.
3. United States Treasury securities which mature in one year or
less.
4. Deposit accounts with Fleet Bank, N.A.
5. Such other investments as may be mutually agreed upon by Lessee
and Lessor
</PAGE>
ds2-213155.1
</PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
Sterling House of Vero Beach (Vero Beach, Florida)
PARCEL NO. 1:
The South 1/2 of the Southwest 1/4 of Government Lot 3, Section 18,
Township 33 South, Range 40 East, less that portion of access road
for Indian River Boulevard as described in Official Records Book
722, Page 2269, Indian River County, Florida. Said less and except
parcel being described as follows:
A parcel of land being 70.00 feet in width lying in the Northeast
quarter (1/4) of Section 13, Township 33 South, Range 39 East, and
Northwest quarter (1/4), Section 18, Township 33 South, Range 40
East, Indian River County, Florida being more particularly
described as follows:
Begin at the East quarter section corner of said Section 13, thence
Westerly, along the East-West quarter section line of said Section
13, a distance of 40.73 feet (for the purpose of this description
said East-West quarter section line bears N 89 16'45" W); thence N
27 58'54" W, a distance of 239.20 feet, more or less to a point on
the Easterly Right-of-Way line of Indian River Boulevard said point
being also a point on a curve, concave to the Northwest, having a
radius of 647.96 feet and whose radius point bears N 48 48'12" W;
thence Northerly, along the arc of said curve and said Easterly
Right-of-Way line through a central angle of 6 47'28" a distance of
76.80 feet; thence S 27 58'54" E, a distance of 309.01 feet, more
or less, to a point on the East-West quarter section line of
aforementioned Section 18, thence Westerly, along said East-West
quarter section line, a distance of 39.08 feet more or less, to the
point of beginning.
PARCELS 2, 3 AND 4:
A parcel of land situate in part of the Southeast 1/4 of the
Northeast 1/4 of Section 13, Township 33 South, Range 39 East,
lying East of the East right-of-way of Indian River Boulevard (150
foot right-of-way) consisting of Parcels described in Official
Records Book 708, Page 1861, and Official Records Book 814, Page
751, being more particularly described as follows:
Commencing at the Southeast corner of the Southeast 1/4 quarter of
the Northeast 1/4 of Section 13, Township 33 South, Range 39 East,
run North 00 40'20" East along the East line of said Southeast 1/4
of the Northeast 1/4 of Section 13, a distance of 71.48 feet to a
point of intersection with the Easterly line of that certain 70
foot access easement as shown on Indian River Boulevard right-of-
way plans by Kimley Horn and Associates, dated September 1984, File
and Drawing No. 4395-01-04, Sheet 2 of 5, recorded in Official
Records Book 722, Page 2269; and also being the Point of Beginning.
From said Point of Beginning, run North 27 58'54" West along said
Easterly line of the 70 foot access easement, a distance of 227.52
feet to a point of cusp; said point of cusp lying on the Easterly
right-of-way of Indian River Boulevard (150 foot right-of-way);
From said point of cusp, run Northeasterly along a curve, also
being the Easterly right-of-way of Indian River Boulevard, concave
to the Northwest having a radius of 647.96 feet, a central angle of
33 44'09", and an arc length of 381.52 feet to the Point of
Tangency; said Point of Tangency also being the intersection of the
aforementioned East right-of-way of Indian River Boulevard and the
East line of the Southeast 1/4 of the Northeast 1/4 of Section 13;
From said Point of Tangency, run South 00 40'20" West along the
said East line of the Southeast 1/4 of the Northeast 1/4 of Section
13, a distance of 559.49 feet to the Point of Beginning.
Said lands lying and being in Indian River County, Florida.
</PAGE>
EXHIBIT B
PERMITTED ENCUMBRANCES
Sterling House of Vero Beach (Vero Beach, Florida)
a. Resolution Number 137-A-95 of the City Commission, City of
Stuart, Florida, regarding Easement Exchange Agreement recorded in
Official Records Book 1154, Page 2606.
b. Declaration of Common Use; Access and Maintenance for Lift
Station; Water Mains and Drainage Easement recorded in Official
Records Book 1154, Page 2617.
</PAGE>
EXHIBIT C
LIST OF SHAREHOLDERS
1. Sterling House Corporation
</PAGE>
EXHIBIT D
RATE LIMITATIONS
None.
</PAGE>
EXHIBIT E
FREE CARE REQUIREMENTS
None.
</PAGE>
EXHIBIT F
PROVIDER AGREEMENTS
None.
</PAGE>
EXHIBIT G
NATIONAL ACCOUNTS AND LOCAL DISCOUNTS
None.
</PAGE>
EXHIBIT H
OPEN COST REPORTS
None.
</PAGE>
EXHIBIT I
DEBT COVERAGE RATIO CALCULATION
</PAGE>
EXHIBIT J
EXECUTIVE OFFICERS
1. Timothy J. Buchanan, Chairman of the Board
2. Steven L. Vick, President
3. R. Gail Knott, Secretary and Treasurer
</PAGE.
SCHEDULE 4.6.2
INVESTMENT VEHICLES FOR IMPOSITION DEPOSITS
1. Certificates of deposit in a bank with (i) capitalization or
total equity in excess of ONE HUNDRED MILLION DOLLARS
($100,000,000) or (ii) a Moody's rating of "A" or better.
2. AAA rated bonds or A-1, P-1 commercial paper.
3. United States Treasury securities which mature in one year or
less.
4. Deposit accounts with Fleet Bank, N.A.
5. Such other investments as may be mutually agreed upon by Lessee
and Lessor
</PAGE>
ds2-213172.1
Exhibit 10.7
Schedule of Executed Lease Agreements
By and Between Assisted Living Properties, Inc.
Schedule of executed lease Agreements, by and between Assisted
Living Properties, Inc. And Meditrust of Florida, Inc.
Location Date of Lease Lease Amount
3401 Astor Lane 6/24/96 $2,650,000
Stuart, FL 34997
205 Village Blvd. 6/24/96 $2,800,000
Tequesta, FL 33469
410 4th Court 6/24/96 $2,730,000
Vero Beach, FL 32962
7300 Greenboro Drive 6/24/96 $2,700,000
West Melbourne, FL 32904
</PAGE>
EXHIBIT 10.10
AMENDMENT TO LEASE AGREEMENT
This Amendment to Lease Agreement is made and entered into
effective June 30, 1996 by and between Health Care REIT, Inc., a
corporation organized under the laws of the State of Delaware
("Landlord"), having its principal office located at One SeaGate,
Suite 1500, P.O. Box 1475, Toledo, Ohio 43603, and Sterling House
Corporation, a corporation organized under the laws of the State
of Kansas ("Tenant"), having its chief executive office located
at 453 South Webb Road, Suite 500, Wichita, Kansas 67207.
WHEREAS, effective March 28, 1996, Landlord and Tenant
entered into a certain Lease Agreement ("Lease") for the real
property legally described on Exhibit A attached hereto and made
a part hereof ("Premises");
WHEREAS, Landlord and Tenant now desire to amend the Lease
as hereinafter set forth, and to ratify and confirm the Lease in
all other respects.
</PAGE>
NOW, THEREFORE, in consideration of these Premises, the
mutual promises of the parties, and other good and valuable
consideration, the receipt and sufficiency of which are mutually
acknowledged, the parties agree as follows:
1. Paragraph 2.5 of the lease shall be deleted and replaced
with the following language:
"2.5 Increase of Lease Rate and Base Rent. Commencing on
the first anniversary of the Term Commencement Date and on each
anniversary thereafter during the Term, including any Renewal
Term and Extended Term, (each such date shall be herein defined
as "Rent Adjustment Date") the Base Rent shall be increased so as
to equal the lesser of (a) the Maximum Rent Adjustment (defined
below), or (b) an amount determined by multiplying the Base Rent
then in effect times a fraction, the numerator of which shall be
the CPI Index on the applicable Rent Adjustment Date and the
denominator of which shall be the CPI Index on the preceding Rent
Adjustment Date (or on the Completion Date in the case of the
first Rent Adjustment date).
If, for any Lease Year or any portion thereof, the Base Rent
is adjusted in accordance with clause (b) above, then the
difference between the Base Rent for such Lease Year, and the
Base Rent for such lease Year if adjusted in accordance with
clause (a) above shall be referred to herein as the "Rent
Shortfall." If, for any Lease Year, the Base Rent is adjusted in
accordance with clause (a), then the difference between the Base
Rent for such Lease Year and the Base Rent for such Lease Year if
adjusted in accordance with clause (b), shall be referred to
herein as the "Rent Surplus."
In the event there is a Rent Shortfall for any lease Year,
Tenant shall also pay to Landlord, as part of the Base Rent due
hereunder, an amount equal to such Rent Shortfall, plus any Rent
Shortfall in any previous Lease Years, up to an amount equal to
the Rent Surplus, if any, for the then current Lease Year less
any prior payments on account of a Rent Shortfall.
As used herein, the "Maximum Rent Adjustment" shall be the
Base Rent in any applicable year, which would result solely by
multiplying, in each year, on the Rent Adjustment Date, the Base
Rent then in effect (as adjusted pursuant to this Section 2.5
only) by 1.02.
As used herein, the "CPI Index" shall mean and refer to the
Consumer Price Index for Urban Wage Earners and Clerical Workers,
U.S. Cities Average. All items (1982-84-100) published by the
Bureau of labor Statistics of the U.S. Department of Labor;
provided that if complication of the CPI Index in its present
form and calculated on its present basis is discontinued or
transferred to any other governmental department of bureau, then
the index most nearly the same as the CPI Index published by the
Bureau of labor statistics shall be used. If there is not such
similar index, a substitute index which is then generally
recognized as being similar to the CPI Index shall be used, such
substitute index to b e reasonable selected by Landlord. Until
the CPI Index is established, Tenant shall pay the Base Rent
calculated in accordance with clause (a) above, and once the CPI
Index for the Rent Adjustment Date of such Lease Year is
published, the new Base Rent (as increased) shall be effective
retroactively as of the Rent Adjustment Date with the remaining
payments to be adjusted ratably.
2. In all other respects, the Lease is hereby ratified and
confirmed.
</PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Amendment to Lease or caused the same to be executed by their
respective duly authorized officers as of the date first set
forth above.
Signed and acknowledged
in the presence of: Health Care REIT, Inc.
Signature_________________________ By:____________________
Print Name________________________ Title:_______________
Signature_________________________
Print Name________________________
Sterling House Corporation
Signature_________________________ By:______________________
Print Name________________________ Title:__________________
Tax I.D. No.:___________
signature_________________________
Print Name________________________
STATE OF OHIO )
) ss:
COUNTY OF LUCAS )
The foregoing instrument was acknowledge before me this ____
day of _____, 1996 by ________________ of Health Care REIT, Inc.,
a Delaware corporation, on behalf of the corporation.
__________________________________
Notary Public
My Commission Expires:_________________ [SEAL]
</PAGE>
Exhibit 10.9
Schedule of Executed Second Amendment Lease Agreements
By and Between Sterling House Corporation
Schedule of Executed Lease Agreements, by and between Sterling
House Corporation and Health Care REIT, Inc.
Date of
Location Date of Lease Second Amendment
2250 Brown Street 02/21/96 06/30/96
Waxahachie, TX 75165
101 Trinity Court 02/21/96 06/30/96
Palestine, TX 75801
1605 N. Highway 88 02/26/96 06/30/96
Claremore, OK 74017
3211 Chandler Road 03/06/96 06/30/96
Muskogee, OK 74403
1701 E. Alameda Street 10/05/95 06/30/96
Norman, OK 73071
116 W. Danforth 10/05/95 06/30/96
Edmond, OK 73003
6302 S.W. Lee Blvd. 11/22/95 06/30/96
Lawton, OK 73505
915 W. Plato Road 11/22/95 06/30/96
Duncan, OK 73533
</PAGE>
Exhibit 10.11
Schedule of Executed Amendment to Lease Agreements
By and Between Sterling House Corporation
Schedule of Executed Lease Agreements, by and between Sterling
House Corporation and Health Care REIT, Inc.
Date of
Location Date of Lease Amendment
5420 S.E. Adams Blvd 02/09/96 06/30/96
Bartlesville, OK 74006
615 W. Blue Ridge Drive 02/09/96 06/30/96
Midwest City, OK 73110
3947 N. Kickapoo 02/09/96 06/30/96
Shawnee, OK 74801
1616 E. McElroy Rd 02/09/96 06/30/96
Stillwater, OK 74075
4613 W. Willow Road 02/09/96 06/30/96
Enid, OK 73703
12807 E. 86th Place North 03/28/96 06/30/96
owasso, OK 74055
4204 Moores Lane 03/28/96 06/30/96
Texarkana, TX 75503
2435 NW 122nd 04/10/96 06/30/96
Oklahoma City, OK 73120
2500 SW 89th Street 04/18/96 06/30/96
Oklahoma City, OK 73159
801 Country Club Road 04/18/96 06/30/96
Chickasha, OK 73018
700 W. Pleasant Run 05/15/96 06/30/96
DeSoto, TX 75115
</PAGE>
