GROUND LEASE

 

 

1.                          USE. Tenant shall use the Land for the purpose of constructing, maintaining, and operating for profit an amusement facility under the trade name Festival Fun Parks, LLC including, without limitation, the following amusement attractions: miniature golf; baseball batting cages; electronic games; bumper boats; go-karts; mazes; hard rides; and other Festival Fun Parks attractions; provided, however, Tenant can vary the use consistent with the then highest and best use of the Land, as reasonably determined by Tenant from time to time during the term, in which event Landlord agrees not to unreasonably withhold its consent to amend this paragraph to allow and authorize such alternate use; provided however, Landlord may consider the impact of the proposed change on the Gross Income derived from the Land, Buildings and  Improvements in giving or withholding its consent. Subject to such right of Landlord, Landlord acknowledges that Tenant may change the use of the Land pursuant to Paragraph 6.1 of this Lease. Tenant shall use commercially reasonable efforts to use and permit use of the Land for purposes permitted by this Paragraph 1 which in Tenant’s reasonable opinion will maximize Gross Income (as hereinafter defined). Tenant shall not use and shall not permit or suffer the Land or any portion of the Land to be used in any manner that would violate the provisions of any certificate of occupancy or conditional use permit issued with respect to any of the Improvements, or any other license, permit, or other governmental authorization that is required for the lawful use or occupancy of all or any portion of the Land or the Improvements. If any license, permit or other governmental authorization is required for the lawful use or occupancy of all or any portion of the Land or the Improvements, Tenant shall procure and maintain the same throughout the term of this Lease or throughout the duration of the period the same shall be required. Tenant will not use the Land inconsistent with any private covenant, condition or restriction, currently recorded or hereafter consented to in writing by Tenant (“CC&R’s”), any conditional use permit (“CUP”) or any other zoning or other restrictive provision to which the Land is subject.

 

2.                          TERM. The term of this Lease is 34 years and 11 months, beginning on the date of this Lease and ending at 12:00 midnight May 31, 2033, unless sooner terminated as provided for in this Lease.

 

3.                          RENT. Tenant shall pay to Landlord without abatement, deduction, diminution, offset, or reduction the following sums during the terms of the Lease:

 

3.1                     Percentage Rent. Tenant shall pay to Landlord (in their respective undivided percentage interests) the following amount as Percentage Rent during the term of this Lease:

 

3.1.1            Except as provided in Section 3.1.2 below, Tenant shall pay to Landlord Twelve Percent (12%) of Tenant’s Gross Income from its business operations on the Land (“Percentage Rent”). Any Percentage Rent payable under this Lease shall be payable, in arrears, on the 21st day of each month based on Tenant’s Gross Income from the next preceding month. Tenant shall pay Percentage Rent to Landlord at the address indicated herein for notices to

 

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Landlord. In no event shall the Percentage Rent due from Tenant to Landlord during each Fiscal Year (as defined in Section 3.1.5 below), be less than Two Hundred Forty Thousand Dollars ($240,000) (the “Minimum Rent”). If at the end of the Fiscal Year, Percentage Rent paid to Landlord does not equal or exceed Two Hundred Forty Thousand Dollars ($240,000) in that Fiscal Year, Tenant shall remit the difference between the Percentage Rent paid during that Fiscal Year and Two Hundred Forty Thousand Dollars ($240,000) on July 21 of the ensuing Fiscal Year. Tenant shall pay to Landlord a minimum of Two Hundred Forty Thousand Dollars ($240,000) rent during any Fiscal Year or Twelve Percent (12%) of all Gross Income, whichever is greater.

 

3.1.2            Tenant may propose and Landlord will accept a sublease by Tenant to a McDonald’s franchise or an equivalent food provider on the Land provided the rent to be paid to Landlord by Tenant for such use (regardless of the method of calculation for such rent) shall be at least essentially equivalent in rental income to the Rent derived from a Bullwinkle’s Restaurant previously operated on the Land pursuant to this Lease or as evidenced by other Bullwinkle’s Restaurants operated at other Fun Centers. Gross sales from such subtenant shall not be included in Gross Income in calculating Percentage Rent under 3.1.1 above. The rent and calculation of rent due from Tenant to Landlord for such subleased space shall be negotiated concurrent with execution of such sublease and specified in an amendment to this Lease.

 

3.1.3.         Gross Income consists of the total as determined under the cash method of accounting, of the following:

 

(a)                       Income from gross sales of Tenant and/or all licensees and concessionaires of Tenant, from all businesses conducted upon or from the Land by Tenant and all others, whether such gross income be evidenced by check, credit, charge account, or otherwise, and shall include, but not be limited to, the amounts received from the sale of goods, food, beverage, wares, merchandise, game machine proceeds, from any amusement, recreational or other use of the Land, Buildings or Improvements, participation in sales, deposits not refunded and not required to be refunded at a later date, and other amounts passing to Tenant chargeable or collected pursuant to any sublease (as hereinafter defined) of the Land, Buildings or Improvements, or pursuant to any license, consignment, concession or agreement pertaining to the Land, Buildings or Improvements, and for services performed on or from the Land, Buildings or Improvements, whether such sales or services be made by means of merchandise or vending machines on the Land, Buildings or Improvements, or by provision of goods or services to locations offsite of the Land except for goods and services provided from one Fun Center of Tenant to another Fun Center. If any one or more departments

 

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3.1.5            Tenant shall keep true and correct records of the Gross Income and deductions as provided in Paragraphs 3.1.1 and 3.1.2. All records relating to the management, operation, maintenance, repair, construction or alteration of, or addition to the Land and Improvements shall be kept at the principal office of Tenant for not less than three years after delivery of the required annual report. Landlord shall have the right, at its cost and at any reasonable time and from time to time after giving prior written notice to Tenant, to do or cause to be done any of the following: to audit the records or cause an audit of the records to be made; to make abstracts from the records; to make copies of any and all of the records; to examine any or all Subleases; and to make copies of any or all Subleases. Tenant shall make all records specified in the notice available at the time specified in the notice, if reasonable, and at the place where the records are to be kept pursuant to this Paragraph. All information so obtained by Landlord or otherwise obtained under the percentage rent provisions of this Lease shall be treated as confidential except in any litigation or arbitration proceedings between Landlord and Tenant or Landlord or any Sublessee, concessionaire or licensee and except, further, that Landlord may divulge the information to a prospective buyer or encumbrancer of the Land or of Landlord’s interest in the Lease or to a governmental agency or employee thereof demanding the information. If the audit discloses that the Gross Income was understated, Tenant shall pay the additional Percentage Rent forthwith; in the event the additional Percentage Rent due shall exceed the previously paid rent by the sum of ten percent (10%) of the Percentage Rent previously paid, Tenant shall also pay to Landlord together with interest thereon from the date it was due at the maximum interest rate then permitted by law; and provided further, and in addition, if the error was in excess of three percent (3%), Tenant shall pay Landlord’s reasonable audit costs.

 

3.1.6            A “Fiscal Year” shall be considered to begin on the first day of July of each year during the term of this Lease and each subsequent anniversary date of the beginning of the first Fiscal Year. Partial years preceding the first Fiscal Year and following the last full Fiscal Year of the term of this Lease, for purposes of the Minimum Rent computation specified above, shall be prorated as to the portion of the Fiscal Year which has elapsed during the term of this Lease in calculating Minimum Rent. In consideration of the provisions of Section 3.1.1 of this Lease, Tenant shall not have any right to change the Fiscal Year.

 

4.                          NO PARTNERSHIP OR JOINT VENTURE. Nothing in this Lease shall be construed to render the Landlord in any way or for any purpose a partner, joint venturer, or associate in any relationship with Tenant other than that of Landlord and Tenant, nor shall this Lease be construed to authorize either party to act as agent for the other.

 

5.                          TAXES, ASSESSMENTS AND UTILITIES. The Parties shall have the following responsibilities for payment of taxes, assessments and utilities:

 

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5.1                     Payment of Taxes and Assessments. Tenant shall pay or cause to be paid without any abatement, deduction, diminution or offset (except as permitted by Paragraph 5.3), (i) all real and personal property taxes, general and special assessments, excises, impositions, levies and other charges of every description now or hereafter levied on, assessed against or otherwise imposed with respect to, the Land, improvements located on the Land, personal property located on or in the Land or Improvements, the leasehold estate created hereby, or any subleasehold estate or any right of occupancy under any concession, license, or other agreement, and (ii) the portion of any taxes or other impositions in the nature of a tax on Landlord’s right to do business attributable to Landlord’s rights, powers, duties, or obligations under this Lease, to the full extent of installments accruing during the term of this Lease, whether belonging to, or chargeable against, Landlord or Tenant, or anyone claiming by, through, or under Tenant (hereinafter, collectively ‘Taxes’). In addition, Tenant shall also pay any Taxes, however described, which may hereafter be levied, assessed, or imposed in lieu of, as a substitute (in whole or in part) for, or as an addition to, any other Taxes payable by Tenant hereunder. Tenant shall make all such payments direct to the charging authority at least ten (10) days before delinquency and before any fine, interest, or penalty shall become due or be imposed by operation of law for their nonpayment. If, however, the law expressly permits the payment of the Taxes in installments (whether or not interest accrues on the unpaid balance) Tenant may, at Tenant’s election, utilize the permitted installment method, but shall pay each installment with interest, if any, before delinquency. Notwithstanding the above, no affirmative obligation shall be created for the Tenant to pay any tax, assessment, or other charge which is not or cannot under any circumstances result in a lien against the Land, Improvements, or leasehold estate or Tenant’s or Landlord’s interest therein, excepting any Tax described in clause (ii), above.

 

5.2                     Proration of Taxes. All payments of Taxes, including permitted installment payments, shall be prorated for the years in which this Lease commences and terminates. For permitted installment payments, Tenant shall pay the prorated portion of those installments falling due after the beginning of the term and prior to the end of the term.

 

5.3                     Contest of Taxes. Tenant may contest the legal validity or amount of any Taxes prior to their delinquency, and may institute any proceedings Tenant considers necessary, at Tenant’s cost. If Tenant contests any Taxes, Tenant may withhold or defer payment or pay under protest, but shall protect Landlord and the Premises by adequate surety bond or other appropriate security satisfactory to Landlord in its reasonable discretion, which judgment shall be deemed to be reasonable until otherwise determined by a final judgment of a court of competent jurisdiction. Tenant shall be responsible for and shall pay all costs and expenses in any contest or legal proceeding instituted by Tenant. Landlord shall-join with Tenant for the purpose of contesting any Taxes only when such joinder is required to properly carry out such contest and only after Tenant has agreed in writing to fully indemnify Landlord against all and any costs and expenses

 

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relating to the contest. In no event shall Landlord be subjected to any liability for costs or expenses connected to any contest by Tenant, and Tenant agrees to indemnify and hold harmless from any such costs or expenses.

 

5.4                     Exemptions. Tenant’s obligations to pay Taxes shall not include the following, whatever they may be called: income, gift, franchise, estate, inheritance, succession, capital levy or transfer tax levied or assessed against Landlord by federal, state, or other governmental agency.

 

5.5                     Proof of Compliance. Tenant shall retain at its sole cost and expense for the duration of this Lease a tax service in form and from a company acceptable to Landlord to notify Landlord whether the Taxes have been paid, and will provide when requested, receipts and other evidence reasonably required by Landlord establishing proof of compliance with this Paragraph 5.

 

5.6       Payment of Utilities. Tenant shall pay or cause to be paid, and hold Landlord and the property of Landlord including the Land free and harmless from, all charges for the furnishing of gas, water, electricity, telephone service, and other public utilities to the Land during the term of this Lease and for the removal of garbage and rubbish from the Land during the term of this Lease.

 

6.                          MAINTENANCE OF LAND AND IMPROVEMENTS. The Parties shall have the following responsibilities with regard to maintenance of the Land and Improvements.

 

6.1                     Duty to Maintain. Throughout the term of this Lease, Tenant shall, at Tenant’s sole cost and expense, and at no cost or expense to Landlord, maintain the Land, Buildings (as hereinafter defined), and the Improvements in accordance with all applicable laws, permits, licenses and other governmental authorizations, rules, ordinances, orders, decrees and regulations now or hereafter enacted, issued, or promulgated by federal, state, county, municipal, and other governmental agencies, bodies, and courts having or claiming jurisdiction and all their respective departments, bureaus, and officials (“Laws”).

 

Tenant shall promptly and diligently repair, restore, alter, add to, remove, and replace, as required, the Buildings and/or Improvements to maintain or comply as stated above, or to remedy all damage to or destruction of all or any part of the Buildings and/or Improvements, whether from act of God, fire, casualty, condemnation or otherwise; provided, that if during the last ten (10) years of the term of this Lease, a casualty occurs for which insurance is not required under this Lease and which causes damage(s) in excess of fifty percent (50%) of the then fair market value of the Buildings and/or Improvements, or fifty percent (50%) of the pre-casualty replacement costs of such Buildings and/or Improvements, whichever is greater, then Tenant may elect to terminate this Lease. Any repair, restoration, alternation, addition, removal, maintenance,

 

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replacement, and other act of compliance under this Paragraphs (hereafter collectively referred to as “Restoration”) shall be completed by Tenant whether or not funds are available from insurance proceeds, condemnation proceeds or Subtenant contributions. The Restoration shall satisfy the requirements of any Sublease then in effect for the Buildings and/or Improvements with respect thereto or, if no Sublease is then in effect, shall be repaired or restored at least to the type, standard and quality of the Buildings and/or Improvements in existence prior to the date of such damage or destruction. Notwithstanding the foregoing, Tenant can upon Restoration vary the type, standard and/or quality of the buildings and/or Improvements consistent with the then highest and best use of the Land, as reasonably determined by Tenant and as approved by Landlord in its reasonable discretion (Landlord may specifically consider the impact of any replacement or alteration on the Gross Income generated by the Buildings and/or Improvements as proposed to be restored); and Tenant shall have the right to obtain appropriate studies, plans, permits and approvals for purposes of varying the Buildings and/or Improvements consistent therewith; provided, however, in the event Tenant elects to vary the Buildings and/or Improvements as provided above, Tenant shall pay full Minimum Rent until the Restoration is completed; provided, further, that if Tenant fails to complete the Restoration within a period of two (2) years, Landlord may terminate this Lease upon written notice to Tenant. Nothing in this provision defining the duty of maintenance shall be construed as limiting any right given elsewhere in this Lease to alter, modify, demolish, remove, or replace any building and/or Improvement. No deprivation, impairment, or limitation of use resulting from any event or work contemplated by this Paragraph shall entitle Tenant to any abatement, deduction, diminution, offset, or reduction in Minimum Rent nor to any termination or extension of the term, except as expressly provided otherwise herein. Tenant’s obligation to maintain the Land and all Buildings and/or Improvements under this Paragraph also requires that Tenant employ Tenant’s best efforts to cause to be operated its business thereon in a manner that will produce at all times the maximum volume of Gross Income.

 

6.2                     Contest by Tenant. Subject to Tenant’s obligation to pay Minimum Rent without deduction or offset, [illegible] prior written notice to Landlord, Tenant has the right to contest by appropriate judicial or administrative proceedings, without cost or expense to Landlord, the validity or application of any Laws requiring Tenant to repair, maintain, alter, or replace the Buildings and/or Improvements in whole or in part, and Tenant shall not be in default for failing to do such work until a reasonable time following final determination of Tenant’s contest; provided, however, this right shall not abridge, minimize, or otherwise modify any other applicable provision of this Lease which provision is to remain in full force and effect. If Tenant gives notice of contest, Tenant shall indemnify Landlord against all liability and expenses that Landlord may sustain or incur by reason of Tenant’s failure or delay in complying with the Laws. Landlord may, but is not required to, contest any such Laws independently of Tenant, and may take positions inconsistent with those of Tenant.

 

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7.                          CONSTRUCTION OF IMPROVEMENTS. Landlord acknowledges that certain improvements have been constructed on the Land (the “Buildings” and/or the “Improvements” each as hereinafter defined) and Landlord hereby reconfirms its approval of such Buildings and/or Improvements. According to the provisions of this Paragraph, Tenant shall have the right, from time to time during the term of this Lease, to voluntarily alter, remove, replace, and/or add to all or any part of the Buildings and/or Improvements (collectively “Construction”) consistent with the then highest and best use of the Land, as reasonably determined by Tenant, subject to Landlord’s written consent which shall not unreasonably be withheld. (Landlord may specifically consider the impact of any alteration or construction on the Gross Income generated by the Buildings and/or Improvements as proposed to be restored).

 

7.1                     Minor Construction. Tenant’s compliance with Paragraph 7.2 is not required for Tenant’s minor Construction, which consists of aggregate expenditures during any 12-month period which, including all expenditures of all construction on the Land within a 12-month period, shall not exceed $2,500,000 (“Minor Amount”). The minor Amount shall be increased (or decreased) proportionately to any increase (or decrease) in the Consumer Price Index for All Items–U.S. Average (“CPI”), as published by the United States Department of Labor, Bureau of Labor Statistics. In the absence of any such official consumer price index published by a United States governmental agency, then the most nearly similar index published by a responsible private organization shall be used. “Major Amount” means all other Construction which does not constitute a “Minor Amount”. Construction cost shall include the actual cost to Tenant for any demolition and any removal of existing Buildings and/or Improvements or parts of Buildings and/or Improvements as well as for preparation, planning, permits, construction, and completion of all new Buildings and/or Improvements or parts of Buildings and/or Improvements.

 

7.2                     Major Construction. In connection with any construction constituting a Major Amount to the Buildings and/or Improvements (“Major Construction”) Tenant shall comply with all the following conditions:

 

7.2.1            Plans and Specifications. Prior to commencing any Major Construction, and prior to applying for any building permits relating thereto, Tenant shall deliver to Landlord preliminary plans and specifications for conceptual review and approval. Landlord shall have the right to approve such plans and specifications and the construction contemplated thereby (the “Project”) which consent shall not be unreasonably withheld, delayed or conditioned. After Landlord’s approval of the preliminary plans and specifications, Tenant shall deliver to Landlord a complete set of working construction plans and specifications prepared by an architect or engineer licensed to practice as such in the State of California. Landlord shall have the right to approve all such construction plans and specifications for the Project prior to commencement of any work on the Project, which consent shall not be unreasonably withheld,

 

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delayed or conditioned. Said plans and specifications shall provide for the construction of the Major Construction within the exterior property lines of the Land; provided, however, that work beyond the Land required by the Laws or work on utilities serving the Land or affected by the contemplated construction, work on access areas, and work required by conditional use requirements will not violate this provision.

 

7.2.2            Notice of Commencement of Construction. Tenant shall notify Landlord of Tenant’s intention to commence any Major Construction at least 10 days before commencement of any such work. The notice shall specify the approximate location and nature of the intended work. Landlord shall have the right to post and maintain on the Land any notices of non-responsibility provided for under applicable law, and to inspect the Land, Buildings and/or Improvements in relation to such work at all reasonable times.

 

7.2.3            General Contractor Funds to Complete. Tenant shall, upon Landlord’s written request prior to commencement of construction, contract with a general contractor licensed by the State of California for any Major Construction or undertake to complete such Major Construction through its own employees. Tenant shall furnish Landlord with a true copy of Tenant’s contract with any such general contractor. Landlord’s consent to or approval of Tenant’s contract with the general contractor shall not be unreasonably withheld. The quality of construction by such general contractor, or by Tenant’s own labor force, shall be equivalent to or exceed the quality of construction of the Buildings and Improvements located upon the Land prior to the commencement of the Project.

 

7.2.4            Compliance with Laws. Tenant shall comply with all the Laws, including, without limitation, all permits, licenses, and other governmental authorizations.

 

7.2.5            Insurance Required. Tenant shall delivered to Landlord (a) certificates of course of construction insurance, (b) evidence of workers’ compensation insurance covering all persons employed in connection with the work and with respect to whom death or bodily injury claims could be asserted against Landlord or the Land, or Landlord’s interest in the Land, the Buildings and/or Improvements and this Lease or any of them or against Tenant, the Buildings and/or Improvements and the leasehold estate of Tenant, and (c) evidence that Tenant has paid or caused to be paid all premiums for the coverage described above in this Paragraph and any increase in premiums on insurance provided for Paragraph 14, sufficient to assure maintenance of all insurance required under this Lease during the anticipated course of the work. Tenant shall maintain, keep in force, and pay all premiums required to maintain and keep in force all insurance required under this Paragraph at all times during

 

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which such work is in progress. All such certificates of insurance and insurance policies shall name Landlord as additional insured and prohibit cancellation without notice. Landlord shall be provided copies of such policies of insurance.

 

7.3                     Mechanics’ Liens. At all times during the term of this Lease, Tenant shall keep the Land and all Buildings and/or Improvements now or hereafter located on the Land free and clear of and shall indemnify, defend and hold Landlord harmless from all liens and claims of liens for labor, services, materials, supplies, or equipment performed on or furnished to the Land; provided, however, Tenant shall have the right to contest any such liens in the same manner as provided in Paragraph 5.3 with respect to taxes.

 

8.                          OWNERSHIP OF BUILDINGS, IMPROVEMENTS AND PERSONALITY. The Parties shall have the following responsibilities with regard to ownership of Buildings, Improvements and personality:

 

8.1                     Ownership of Buildings and/or Improvements During Lease Term. Title to all Buildings and/or Improvements now constructed or that may hereafter be constructed on the Land by Tenant shall be owned and may be depreciated for income tax purposes by Tenant during the term of this Lease; provided, however, Landlord disclaims any warranty of title or any representation or warranty that depreciation may be available to Tenant.

 

8.2                     Trade Fixtures. Notwithstanding anything to be contrary which may be expressed or implied by the foregoing provisions of this Paragraph, Landlord agrees that trade fixtures may be removed by Tenant during the period commencing upon the expiration of the term or sooner termination of this Lease and ending thirty (30) days thereafter, provided that Tenant repairs any damage to the Land, Buildings and Improvements caused by such removal; provided however, solely pertaining to miniature golf courses located on the Land. Upon termination of this Lease pursuant to judgment, written settlement or other agreement following an Event of Default pursuant to Sections 16.1.1, 16.1.2, 16.1.5 and 16.1.6 of this Lease by Tenant (which default is not cured by any Leasehold Mortgagee pursuant to the terms and conditions of this Lease), or upon abandonment of the Land, Buildings and Improvements for one hundred eighty (180) days, Tenant shall have no right to remove any trade fixtures from any miniature golf course located on the Land.

 

8.3                     Ownership of Buildings and/or Improvements at Termination. Subject to Paragraphs 8.2 and 17, all Buildings and/or Improvements for any reason remaining on the Land at the expiration of the term or sooner termination of this Lease shall, without compensation to Tenant, then automatically and without any act of Tenant or any third party, other than any Fee Mortgagee, become Landlord’s property, and shall be free and clear of all liens and encumbrances other than those liens and encumbrances currently affecting title to the property and any other liens and encumbrances consented to or

 

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caused by Landlord. Tenant agrees to execute, acknowledge, and deliver to Landlord such instrument as may be reasonably required by Landlord’s title insurer at no cost to Tenant to issue title insurance assuring title to the Buildings and Improvements in Landlord upon such termination.

 

9.                          FINANCING BY TENANT. The parties agree on the following regarding financing to be obtained by Tenant:

 

9.1                     Leasehold Financing. Subject to Landlord’s rights under Sections 8.2 and 8.3 Tenant may at any time during the term of this Lease subject Tenant’s leasehold estate and attendant rights created under this Lease to one or more mortgages as security for a loan or loans or other obligations of Tenant; provided that Tenant shall not have power to create any encumbrance that shall, constitute in any way a lien or encumbrance on the Landlord’s fee interest in the Land.

 

The holder or holders of any lien created by a mortgage secured by Tenant’s leasehold estate are referred to herein as “Leasehold Mortgagees.” A Leasehold Mortgagee or its assigns may enforce its lien and acquire title to the leasehold estate in any lawful way and, pending foreclosure of the lien, the Leasehold Mortgagee may take possession of the Land and operate any business and, perform all obligations of Tenant, and on foreclosure of the lien by power of sale, judicial foreclosure, or on acquisition of the leasehold estate by deed in lieu of foreclosure, the Leasehold Mortgagee may, on notice to Landlord, sell and assign the leasehold estate hereby created subject to the same limitations or conditions, if any, applicable to the Tenant under this Lease. The Leasehold Mortgages or any person or entity acquiring the leasehold estate shall be liable to perform Tenant’s obligations under this Lease only during the period, if any, in which such person has ownership of the leasehold estate or possession of the Land. For as long as there is any leasehold mortgage in effect, Tenant and Landlord hereby expressly stipulate and agree that they will not modify this Lease in any way nor cancel this Lease by mutual agreement without the written consent of the Leasehold Mortgagee having that leasehold mortgage. A Leasehold Mortgagee shall have such further rights and responsibilities as hereinafter set forth in Paragraph 16.5 of this Lease.

 

9.2                    No Subordination of Landlord’s Interest. Tenant shall have no right to encumber by a mortgage or deed of trust or otherwise the fee of the Land or any Buildings and/or Improvements located thereon, and any other property so affixed to the Land, Buildings and/or Improvements as to become apart thereof, beyond Tenant’s right to encumber its leasehold estate.

 

10.                    MORTGAGES BY LANDLORD. Except as set forth on Exhibit “B” attached hereto, Landlord warrants that as of the date of this Lease, the Land is free and clear of any mortgages or other liens placed by Landlord. Landlord shall have the right at any time during the term of this Lease to mortgage or hypothecate its ownership of the Land and/or its interest in this

 

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Lease (“Fee Mortgage”). Provided the Fee Mortgagee shall execute a commercially reasonable non-disturbance and attornment agreement with Tenant pursuant to which Tenant shall at all times remain a Tenant. Tenant shall execute a Subordination Agreement subordinating this Lease. Tenant shall further use commercially reasonable efforts to obtain a subordination agreement from any Leasehold Mortgagee within ninety (90) days (provided the failure to obtain such subordination agreement shall not be an Event of Default under this Lease).

 

10.1               Subordination, Non-Disturbance and Attornment. This Lease shall, subject to the Landlord’s obligation to deliver to Tenant the Non-Disturbance Agreement (as provided herein) be subject and subordinate to the lien of any Fee Mortgage hereinafter enforced against the Land, Buildings and Improvements, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or to be made upon the security of such Fee Mortgage or Trust Deed, unless the Fee Mortgagee requires in writing that this Lease be superior thereto. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any Fee Mortgage, to attorn, without any deductions or offsets whatsoever, except for deductions or offsets, if any, specifically permitted in this Lease, to the purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof and to recognize such purchaser as the Lessor under this Lease, provided (1) said purchaser agrees in writing to assume the duties and obligations of Landlord arising or continuing after the date it acquires title to this Lease and (2) Tenant shall not be disturbed so long as Tenant has not then committed or permitted an Event of Default (which continues beyond any applicable cure periods). Tenant shall, within fifteen (15) business days of request by Landlord, execute and deliver to Landlord such further instruments or assurances as Landlord may reasonably deem necessary to evidence or conform the subordination or superiority of this Lease to any such Fee Mortgage together with Tenant’s agreement to attorn, subject to Tenant’s obtaining from such Fee Mortgagee a Non-Disturbance Agreement executed by the Fee Mortgagee and in form reasonably acceptable to Tenant, providing, among other things, that as long as Tenant is not in an Event of Default (which continues beyond any applicable cure period), this Lease shall remain in full effect for the full term of the Lease, notwithstanding any provision contained in such Fee Mortgage the rights end obligations of Tenant shall be set forth and governed by this Lease.

 

11.                    ASSIGNMENT BY TENANT. The parties agree on the following regarding assignment of Tenant’s interest under this Lease:

 

11.1               Restrictions on Assignment. Tenant may only assign this Lease or any interest herein, subject to the prior written consent of Landlord. Landlord shall not unreasonably withhold or delay its consent, and shall grant consent if the proposed assignee is financially equal to or stronger than Tenant and has sufficient business experience to perform all the agreements, undertakings, and covenants of this Lease and all other agreements entered into by Tenant that relate to the management, operation, maintenance, construction, and restoration of the Buildings, Improvements and the Land.

 

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To assist Landlord in determining whether or not the proposed assignee is so qualified, Tenant shall furnish to Landlord at no expense to Landlord, prior to such assignment, detailed and complete financial statements of the proposed assignee, audited by a certified public accountant reasonably satisfactory to Landlord (if the proposed transferee causes its statements to be so audited in its normal course of business), together with detailed and complete information about the business of the proposed assignee, including its business experience, the use to be made of the Land, Buildings and Improvements by the proposed assignee, projections by the proposed assignee of the sources of funds to be used to repay any indebtedness of Tenant that the proposed assignee will assume or take subject to, or agree to pay to Tenant, and other claims on and requirements for such funds, together with such other information as Landlord may reasonably require to assist Landlord in determining whether or not the proposed assignee is so qualified. Landlord shall have 30 days after receipt of the information described above to notify Tenant of whether it consents or does not consent to the proposed assignment. Absent any such notification by Landlord during said 30-day period, Landlord shall be conclusively deemed to have consented to the assignment. A consent by Landlord to one assignment shall not be deemed to be a consent to any subsequent assignment. Any assignment made contrary to the terms of this subparagraph shall be null and void unless permitted by subparagraph 11.2 below.

 

11.2               Leasehold Mortgagees. Notwithstanding anything to the contrary contained in Paragraph 11.1, the consent of Landlord shall not be required for any transfer, conveyance, or assignment resulting from a foreclosure or acceptance of a deed in lieu of foreclosure of any Leasehold Mortgagee. Landlord shall reasonably approve any transfer, conveyance, or assignment by any Leasehold Mortgagee following its acquisition of this Lease and the leasehold estate of Tenant created hereby as a result of foreclosure or acceptance of a deed in lieu of foreclosure, provided, the proposed transferee or assignee shall be acceptable to Landlord in its reasonable discretion as creditworthy and able to pay the Minimum Rent due under this Lease and otherwise meets the criteria set forth in Section 11.1

 

11.3               Delegation. Tenant may at Tenant’s election delegate performance of any or all covenants to any one or more approved assignees. Any delegation by Tenant shall not relieve Tenant of any obligation under this Lease unless otherwise provided in this Lease. In the event of any proposed assignment, Tenant shall provide sufficient information to Landlord to enable Landlord to make a reasonable commercial determination that the proposed assignee is of equivalent or greater financial strength and the equivalent or greater ability to pay the Rent due hereunder as does Tenant. Upon Landlord’s consent, which shall not be unreasonably withheld, conditioned or delayed and will be deemed given if not received within twenty-one (21) days of receipt of such request; if the financial condition and ability to pay rent by the proposed assignee merits a commercially reasonable determination that Landlord should release Tenant from further liability of this Lease, upon such approval Landlord shall release Tenant. Any

 

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assignment approved by Landlord shall so evidence the release of Tenant from further liability under this Lease provided however, and in no event, shall Tenant be relieved of any obligation for Hazardous Materials or environmental contamination permitted or caused by any Tenant or any Tenant Party (as provided in Section 20 of this Lease) during the term that the assigning Tenant was the Tenant under this Lease. This provision shall not be considered to permit or to broaden the right of assignment beyond the provisions of this Lease relating to assignment.

 

12.                    SUBLEASES. The parties agree on the following regarding the subleasing of Tenant’s interest under this Lease:

 

12.1               Requirements for Sublease. Tenant shall have the right after the commencement of this Lease to enter into Subleases without the approval or consent of Landlord, provided the following provisions are complied with:

 

12.1.1 Each Sublease shall contain a provision requiring Subtenant to negotiate in good faith with Landlord a commercially reasonable attornment agreement provided Landlord elects to continue such Subtenant following a termination of this Lease. The Sublease shall also provide that following and during the continuance of an Event of Default under this Lease if requested in writing to do so by Landlord, the Subtenant will make payments due under the Sublease directly to Landlord and, notwithstanding any dispute between Landlord and Tenant, any such payment which complies with the terms and conditions of the Sublease shall constitute full satisfaction of the Subtenant’s obligation to Tenant under the Sublease and will be credited against Rents due hereunder. Following an Event of Default of this Lease unless this Lease is terminated by Landlord, Landlord shall be entitled to terminate any or all subleases and take over the entirety of the Land, Buildings or Improvements, unless a Non-Disturbance and Attornment Agreement between Landlord and such Subtenant is in effect, provided however, Landlord shall have no obligation to enter into a Non-Disturbance and Attornment Agreement with any Subtenant; provided further, however, in the event Landlord shall terminate any or all sublease(s) following an Event of Default by Tenant, the sublessee shall have the right to remove its trade fixtures which are removable without undue damage to the Land. Landlord shall not be required or obligated to cure any default by Tenant under the Sublease, except for those that continue beyond such date of termination of this Lease.

 

12.1.2 Tenant shall, except following an approved assignment of Tenant’s interests hereunder, at all times remain primarily responsible for performance of all terms of this Lease.

 

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12.1.3 Tenant may not Sublease more than Fifteen Percent (15%) individually, or in the aggregate, or Fifteen Percent (15%) of the Gross Income derived from the Land, Buildings and Improvements prior to such Sublease of the Land, Buildings and Improvements without Landlord’s written consent which will not be unreasonably withheld, delayed or conditioned and will be given on deemed given if not received within twenty-one (21) days of receipt.

 

12.1.4 Tenant shall, promptly after execution of each Sublease, notify Landlord of the name and mailing address of the Subtenant and shall provide Landlord with a true copy of the Sublease.

 

12.1.5 Tenant shall not at any time accept, directly or indirectly, more than one month’s prepaid rent from any Subtenant.

 

12.1.6 Any Sublease will at all times be subject to the terms and conditions of this Lease.

 

12.1.7. Subtenant has agreed to waive collection of the security deposit, if any, against Landlord, unless Landlord actually receives the security deposit from Tenant and Tenant fails to refund it to the Subtenant.

 

13.                    TENANT’S RIGHT OF FIRST REFUSAL. The parties agree on the following regarding the Tenant’s right of first refusal in the event that Landlord decides to sell the Land during the term of this Lease:

 

13.1               Terms of Right. If Landlord determines during the term of this Lease to sell the Land and receives an offer from a third party for the purchase of the Land acceptable to Landlord, it shall notify Tenant in writing (“Landlord’s Sale Notice”) of the purchase price and terms of sale offered by the third party. Tenant, within thirty (30) days after receipt of Landlord’s Sale Notice may elect in writing to purchase Landlord’s interest in the Land at the price and on the precise terms stated in Landlord’s Sale Notice, in which event Landlord shall sell and convey Landlord’s interest in the Land to Tenant on the terms and at the purchase price set forth in the Landlord’s Sale Notice. In the event Tenant fails to exercise this right of first refusal, to acquire Landlord’s interest in the Land, Landlord shall have the sole and exclusive right to sell and convey the Land to the third-party offeror at the price and on the terms stated in the Landlord’s Sale Notice. If Landlord does not sell and convey its interest in the Land within one hundred twenty (120) days after the time for closing set forth in the third party offer, any later sale by Landlord shall be deemed a new determination by Landlord to sell and convey its interest in the Land and these procedures should be repeated.

 

13.2               Escrow. If Tenant elects to purchase the Land as provided in this Paragraph, escrow for the purchase and sale shall be opened jointly by the parties with an

 

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escrow company mutually acceptable to the parties (“Escrow Holder”), within five (5) days of Tenant’s notice to Landlord electing to purchase the Land. Each party shall execute escrow instructions in a form appropriate to complete purchase and sale of the Land and shall deposit same with Escrow Holder.

 

14.                    INSURANCE. The parties agree on the following responsibilities for insuring the Land:

 

14.1               Fire and Extended Coverage. Tenant, at Tenant’s sole cost and expense, shall provide and maintain insurance covering the Buildings and the Improvements, including without limitation, all buildings, structures, and improvements now situated or which hereafter may be erected or placed on the Land, against loss or damage by fire, vandalism, malicious mischief, windstorm, hall, smoke, explosion, riot, civil commotion, vehicles, aircraft, flood or earthquake (if Landlord and Tenant mutually agree in writing) including, without limitation, endorsements for increased cost of construction due to changes in laws, agreed amount or demolition. All such insurance shall be in a sum not less than 90 percent of the replacement cost (the “Replacement Cost”) exclusive of foundations and below ground improvements and shall contain a “Replacement Cost Endorsement.” Such insurance shall be in forms and with companies satisfactory to Landlord in its reasonable discretion. If any dispute as to whether the amount or coverage of insurance obtained by Tenant complies with the requirements of this Paragraph cannot be resolved by agreement, Landlord may, not more often than once every twenty four (24) months, request that the Replacement Cost be determined, at Tenant’s option, by either (a) the carrier of the insurance then in force, or (b) such other carrier of insurance as is reasonably acceptable to Landlord, and the resulting determination shall be conclusive between the parties for the purpose of this Paragraph.

 

14.2               Use of Proceeds. Landlord shall, at Tenant’s cost and expense, cooperate fully with Tenant to obtain the largest possible recovery under all policies of fire and extended coverage insurance required by Paragraph 14.1. Subject to the terms of any Leasehold Mortgage that may constitute a lien on Tenant’s interest in the Lease, all such policies shall provide that the proceeds shall be paid to Tenant and shall be applied by Tenant for the restoration of any Buildings and/or Improvements damaged or destroyed by the casualty giving rise to the insurance claim.

 

14.3               Public Liability. Throughout the term of this Lease, at Tenant’s sole cost and expense, and at Tenant’s sole election, Tenant shall keep or cause to be kept in force, for the mutual benefit of Landlord and Tenant, comprehensive broad form general public liability insurance against claims and liability for personal injury, death, or property damage arising from the use, occupancy, disuse, or condition of the Land, Buildings, Improvements, or adjoining areas or ways, providing protection in reasonable amounts but not less than $1,000,000.00 for any one accident or occurrence. Such insurance shall name Landlord and Tenant as insured, and every three (3) years during the term of this

 

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Lease, Landlord and Tenant shall meet and in good faith mutually determine whether such amounts should be increased to account for inflation or generally larger insurance settlements or jury verdicts.

 

14.4               Additional Insurance. Tenant may procure and maintain any insurance not required by this Lease, but all such insurance shall be subject to all other provisions of this Lease pertaining to insurance. All insurance required by Paragraph 14 shall specifically name Landlord as additional loss payee and as additional insured party and Tenant shall provide copies of all insurance policies to Landlord and shall require all insurers to notify Landlord of any change or termination to any policy of insurance and/or endorsements.

 

14.5               Form of Insurance. All insurance required by express provisions of this Lease shall be carried only with responsible insurance companies reasonably acceptable to Landlord and licensed to do business in the State of California. All such policies shall be nonassessable and shall contain language to the effect that (a) any loss shall be payable notwithstanding any act or negligence of Landlord or Tenant that might otherwise result in a forfeiture of the insurance, (b) the insurer waives the right to subrogation against either party hereto for the negligence of such party, (c) the policies are primary and noncontributing with any insurance that may be carried by Landlord, and (d) they cannot be canceled or materially changed except after thirty (30) days prior written notice by the insurer to Landlord. Tenant shall furnish Landlord with copies of all such policies certified by the insurer within the following time limits:

 

(i)                         For insurance required at the commencement of this Lease, on execution of this Lease;

 

(ii)                      For insurance becoming required at a later date, at least fifteen (15) days before the requirement takes effect, or as soon thereafter as the requirement, if new, takes effect;

 

(iii)                   For any renewal or replacement of a policy already in existence, at least fifteen (15) days before expiration or other termination of the existing policy.

 

14.6               Indemnification. Landlord shall not be liable, and Tenant shall defend, indemnify, and hold Landlord harmless against all liability and claims of liability, for damage or injury to person or property on or about the Land and the Buildings and/or Improvements from any cause whatsoever, but excluding Landlord’s gross negligence or willful acts or omissions.

 

15.                    CONDEMNATION. The parties agree to the following relating to a taking of or damage to all or any part of the Land, Buildings and/or Improvements or any interest in them by eminent domain or inverse condemnation:

 

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15.1               Definitions. The following definitions apply in construing provisions of this Lease relating to a taking or damage to all or any part of the Land, Buildings and/or Improvements or any interest in them by eminent domain or inverse condemnation:

 

(i)                         “Taking” means the taking or damaging, including, without limitation, severance damage, change of grade, taking possession, or damage to remaining property of Landlord and/or Tenant by eminent domain or by inverse condemnation or for any public or quasi-public use. A transfer of title may be either a transfer resulting from the recording of a final order in condemnation or a voluntary transfer or conveyance to the condemning agency or entity under threat of condemnation, in avoidance of an exercise of eminent domain, or while condemnation proceedings are pending. The taking shall be considered to take place as of the earlier of (a) the date actual physical possession is taken by the condemnor, or (b) the date on which the right to compensation and damages accrues under applicable law.

 

(ii)                      “Total Taking” means the raking of the fee title to all the Land, Buildings and Improvements, or a taking of the entire leasehold estate of Tenant, which shall be considered to exclude any off-site improvements effected by Tenant to serve the Land, Buildings and/or Improvements on the Land.

 

(iii)                   “Substantial Taking” means the taking of so much of the Land, Buildings, and/or Improvements, so that in the reasonable judgment of Tenant a reasonable amount of reconstruction would not make the Land, Buildings and/or Improvements either (i) a practical improvement and reasonably suited for Tenant’s continued occupancy for the uses and purposes for which the Land is leased hereunder, or (ii) reasonably efficient or economic for Tenant’s use.

 

(iv)                  “Partial Taking” means any taking of the fee title to the Land, Buildings and/or Improvements that is not either a Total or a Substantial Taking.

 

(v)                     “Notice of Intended Taking” means any notice that a reasonably prudent person would interpret as expressing an existing intention of Taking as distinguished from a mere preliminary inquiry or proposal. It includes but is not limited to, the service of a condemnation summons and complaint on a party to this Lease. The notice is considered to have been received when a party to this Lease receives from the condemning agency or entity a notice of intent to Take, in writing, containing a description or map of the proposed Taking reasonably defining the extent of the Taking. In the case of inverse condemnation, notice is considered to have been received (i) by Tenant when Tenant receives knowledge of any fact or circumstance that would lead a reasonable person to conclude that a Taking by inverse condemnation has occurred or might reasonably be expected to occur, and (ii) by Landlord when Landlord has received a written communication

 

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(excluding communications of a generalized informational nature not relating specifically to inverse condemnation of the Land) that the Land, Buildings and/or Improvements are being Taken by inverse condemnation.

 

(vi)