MODESTO GROUND LEASE

 

 

is signed, or this Lease agreement shall automatically terminate, and Lessor shall refund Lessee’s deposit.

 

Section 2.2.            Adjustment of Annual Rent.

 

A.       Cost of Living Adjustments. The minimum annual net rent shall be adjusted upward or downward on the anniversary date of the commencement of the Lease, every three (3) years beginning on the Rent Commencement Date, referred to below as the “Adjustment Date”, according to the following calculation:

 

The base for computing the adjustment is the annual average index figure for the Rent Commencement Date (the “Index Date”), as shown in the Consumer Price Index, all Urban Consumers - San Francisco - Oakland (CPI-U) based on the year 1982 - 1984 - 100, as published by the U.S. Department of Labor’s Bureau of Labor Statistics. The base figure for the Index Date and the date of the Rent Commencement Date will be memorialized by an addendum to this Lease signed by Lessor and Lessee.

 

The index for the Adjustment Date shall be computed as a percentage of the base figure. For example, assuming the base figure on the Index Date is 110 and the index figure on the Adjustment Date is 121, the percentage to be applied is 121/110 -1.10 = 110 percent. That percentage shall be applied to the initial annual net rent, provided, however, that in no three (3) year period shall the annual rent increase more than fifteen (15) percent from the previous three-year period. Nor shall the minimum monthly rent be less than the initial minimum monthly rent.

 

The index for the Adjustment Date shall be the one reported in the U.S. Department of Labor’s newest comprehensive official index then in use and most nearly answering the foregoing description of the index to be used. If it is calculated from a base different from the base year 1982-1984 = 100 used for the base figure above, the base figure used for calculating the adjustment percentage shall first be converted under a formula supplied by the Bureau.

 

If the described index shall no longer be published, another index generally recognized as authoritative shall be substituted by agreement of the parties. If they are unable to agree within 30 days after demand by either party, the substitute index shall, on application of either party, be selected by the chief officer of the San Francisco regional office of the Bureau of Labor Statistics or its successor.

 

B.        Adjustment Based on Fair Market Value. At the option of Lessor, the minimum annual rent shall be adjusted on the fifteenth (15th) and thirtieth (30th) anniversary dates of the Rent Commencement Date of the Lease, referred to below as the Rent Adjustment Dates, to the greater of: (1) an increase proportionate to one-half of the cumulative increase in the CPI-U index over the period from the Rent Commencement Date to the respective Rent Adjustment Date, or (2) the rent derived from the fair market value

 

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reappraisal procedure calculated as set forth in the paragraphs below.

 

The parties written agreement within ninety (90) days before the applicable Rent Adjustment Dates shall be a conclusive determination between the parties of the fair market value for the period to which the adjustment applies. If the parties have not so agreed by the applicable Rent Adjustment Dates, the determination shall be made by appraisal as more specifically provided in Section 2.2 (c) below. If Lessor has not negotiated a fair market value rent adjustment at least ninety (90) days prior to the Rent Adjustment Date, then Lessor shall have initiated appraisal at least seventy five (75) days before the applicable Rent Adjustment Date. If Lessor fails to initiate the appraisal, no adjustment shall be made until the period to which the next Rent Adjustment Date applies.

 

The rent as adjusted shall be equal to ten percent (10%) of the fair market value of the leased land with a use restriction as a family amusement park, without any improvements on the premises except for improvements made at Lessor’s cost. Determination of the fair market value shall be based on real property unimproved, except for improvements made at Lessor’s cost with a use restriction as a family amusement park or such other higher use as may actually be conducted on the premises, giving consideration to the freeway adjacent location of the premises, on the applicable Rent Adjustment Date without taking the leasehold into account.

 

If the appraisal determination of adjusted rent is made after the applicable Rent Adjustment Date, Lessee shall continue to pay rent at the rate applicable to the preceding period until the adjustment rate is determined. The party indebted shall, promptly after determination, pay any difference for the period affected by the adjustment.

 

C.        Appraisal. If Lessor initiates appraisal, then within 10 days each party, at its cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years’ full time commercial appraisal experience in the area in which the premises are located to appraise the fair market value of the land under the parameters of subsection (B) above. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set the fair market value of the land. If the two appraisers are appointed by the parties as stated in this paragraph, they shall meet promptly and attempt to set the fair market value of the land. If they are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to select a third appraiser meeting the qualifications stated in this paragraph within ten (10) days after the last day the two appraisers are given to set the fair market value of the land. If they are unable to agree on the third appraiser, either of the parties to this lease by giving ten (10) days’ notice to the other party can file

 

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a petition with the American Arbitration Association solely for the purpose of selecting a third appraiser who meets the qualifications stated in this paragraph. Each party shall bear half the cost of the American Arbitration Association’s appointing the third appraiser and of paying the third appraiser’s fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party.

 

Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set the fair market value of the land. If a majority of the appraisers are unable to set the fair market value of the land within the stipulated period of time, the three appraisals shall be added together and their total divided by three; the resulting quotient shall be the fair market value of the land.

 

If, however, the low appraisal and/or the high appraisal are more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by two; the resulting quotient shall be the fair market value of the land. If both the low appraisal and the high appraisal are disregarded as stated in this paragraph, the middle appraisal shall be the fair market of the land.

 

After the fair market value of the land has been set, the appraisers shall immediately notify the parties.

 

Section 2.3.            Security Deposit

 

Upon satisfaction of conditions contained in Lessee’s offering circular to investors for the release of escrowed investment funds, but not later than 90 days after the date of execution of this Lease, Lessee shall deposit with Lessor the sum of $13,779.75. Said security deposit will be applied by Lessor to the first month’s rent; provided however that if Lessee does not obtain all necessary zoning for the family amusement park and all the necessary governmental permits within 240 calendar days after the date first written above, the deposit shall immediately be refunded by Lessor to Lessee and Lessee shall be relieved of all obligations under this Lease and the Lease shall be terminated. Lessee shall use its best efforts to obtain all necessary zoning and permits.

 

Section 2.4.            Taxes and Other Governmental Charges.

 

A.       Payment of Taxes. Lessee shall pay before delinquency during the term directly to the taxing authorities, as additional rent, all taxes, assessments, levies and other governmental charges of every description, whether general, special, ordinary, extraordinary or otherwise (individually “imposition” and collectively “impositions”) levied on or assessed against the premises, improvements located on the premises (hereinafter defined), personal property located on or in the premises or an

 

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improvement, the leasehold estate, or any subleasehold estate, whether belonging to or chargeable against Lessor or Lessee.

 

Within thirty (30) days after request of Lessor, Lessee shall furnish to Lessor a copy(s) of the receipted tax bill(s) evidencing the payment of the imposition in question.

 

Lessee shall not be required to pay any municipal, county, state, or federal income or franchise taxes of Lessor, or any municipal, county, state or federal state, succession, inheritance, or transfer taxes of Lessor, nor shall Lessee be liable for any increase in real property taxes that result from a change of ownership of the property. Provided however, that the limitation on Lessee’s liability for increase in real property taxes resulting from a change of ownership of the property shall lapse upon the Lessee’s assignment of its leasehold interest to an unaffiliated and unrelated third party assignee and its release and discharge hereunder. If at any time during the term the State of California or any political subdivision of the state, including any county, city, public corporation, district, or any other political entity or public corporation of this state, levies or assesses against Lessor a tax, fee, or excise on rents, on the square footage of the premises, on the act of entering into this Lease, or on the occupancy of Lessee, or any other tax, fee, or excise, however described, as a direct substitution in whole or in part for any real property taxes, Lessee shall pay before delinquency that tax, fee, or excise on rents.

 

Lessee’s liability to pay impositions and taxes under this Section 2.4 shall be prorated on the basis of a 365-day year to account for any fractional portion of a fiscal tax year included in the term at its commencement and at its end.

 

B.        Creation of Special Assessment Districts. If during the term any governmental subdivision or agency shall undertake to create an improvement or special assessment district, the proposed boundaries of which shall include the premises, Lessor and Lessee shall each be entitled to support or oppose the creation of such district or inclusion of the premises therein or both, and to appear in any proceeding relating thereto as their respective interest in the premises or otherwise may appear. Should either party receive any notice or other information relating to the proposed creation of any such district, the boundaries of which would include the premises,, such party shall promptly notify the other party and deliver to such other party a copy of the notice and/or information.

 

C.        Right to Contest Taxes. Lessee may contest the validity or amount of any imposition agreed to be paid by Lessee and/or any assessed valuation upon which such imposition is or will be based provided Lessee protects Lessor and the premises from any lien by adequate surety bond or other appropriate security. If Lessee undertakes any such contest, it shall so notify Lessor. Should Lessee be unsuccessful in any such contest, such imposition and any

 

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interest and/or penalties resulting therefrom shall be immediately paid to the taxing authorities in question. Lessee hereby agrees to hold Lessor and the premises harmless from all costs and expenses that may result from Lessee’s contest of such imposition as herein provided. Lessor shall not be required to join in any proceeding or contest brought by Lessee unless the provisions of any law require that the proceeding or contest be brought by or in the name of the Lessor or any owner of the premises. In that case, Lessor shall join in the proceeding or contest or permit it to be brought in Lessor’s name, all costs thereof including Lessor’s attorneys’ fees to be borne by Lessee.

 

D.        Combined Assessment. If the premises are assessed with other property of Lessor for purposes of property taxes, assessments, or other ad varolem or improvement levies, all taxes imposed on the entire parcel of which the premises are a part shall, until the premises are separately assessed, be prorated and Lessee shall pay that fraction of the entire tax computed as a proportion of the total area.

 

Section 2.5.            Payment of Rent.

 

All rent and other amounts payable by Lessee hereunder, shall be paid to Lessor at the address set forth in this Lease. This Lease shall be deemed and construed to be a triple net lease, except as otherwise provided herein.

 

ARTICLE III

 

USES OF PREMISES AND IMPROVEMENTS

 

Section 3.1.            Permitted Uses.

 

Lessee shall have the right to use and to permit the use of the premises and improvements hereafter constructed therein for a family oriented amusement park and for such other lawful uses as Lessor shall consent to in writing, which consent may not be withheld unreasonably. As used herein “a family oriented amusement park” shall include, but not be limited to, arcades, picnic facilities, video games, miniature golf, go-carts, motor raceway, theaters, batting cages, bumper boats, fish pond, games, radio-controlled vehicles, ancillary food services, related activities and attractions, and all future games and uses not inconsistent with family entertainment (“permitted uses”). As used herein “improvements” means and includes, without limitation, all buildings, paving and other physical structures on the premises; all landscaping, excavations, planting and earth contours placed by human design on the premises, and all fixtures, including trade fixtures of sublessees that cannot be removed without causing structure damage. Lessee may construct demolish, remove, replace, alter, relocate, reconstruct or add to improvements as provided in Section 4.1.

 

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Section 3.2.            Restrictions, Easements, Zoning Changes and Use Permits.

 

The parties acknowledge that in order for Lessee to carry out its intended use of the premises, it may be necessary, desirable, or required to obtain additional use, zoning, subdivision or other land use permits or approvals relating to any part of the premises, including without limitation permits relating to the permitted uses. Lessor agrees, from time to time on the request of Lessee and at no cost to Lessor, to execute such documents, petitions and authorizations as may be appropriate or required in order to obtain such land use permits and approvals.

 

Lessee may enter into agreements restricting use of, and granting easements over the premises, provided they are limited to the term of this Lease, and Lessor agrees to execute any such agreements at the request of Lessee consistent with the use of the premises. Lessor grants to Lessee the right to grant to public utilities or public service corporations, for the purpose of serving only the premises, rights of way or easements on or over the premises for poles or conduits, or for underground services or both for telephone, electricity, water, sanitary or storm sewers or both, and for other utilities and municipal or special districts.

 

Section 3.3.            Signs.

 

Lessee shall be allowed to install all signs approved by appropriate governmental agencies anywhere on the premises.

 

Section 3.4.            Exclusive Use.

 

Lessor agrees that it shall not enter into any other lease within a five (5) mile radius (as measured from the air) for a family oriented amusement park.

 

Section 3.5.            Special Rules Regarding Use.

 

Lessee agrees to adopt and post on the demised premises rules of the park and to use its best efforts to enforce these rules at all times, so long as the rules remain legally enforceable. The rules, subject to reasonable changes from time to time in the discretion of management, and subject to Lessor’s reasonable approval, shall include the following: “no loitering; no foul language; no alcoholic beverages or drugs; no smoking in any area; no pets (guide dogs for deaf or blind excepted) ; no team sport club jackets/school jackets only; no headbands or bandannas; no skateboards; shirt and shoes required; shirts must be buttoned; stay on paved walkways; obey all signs; we reserve the right to refuse admittance, and to expel unruly persons at the discretion of management.” If Lessee fails to enforce the foregoing rules or is negligently lax in enforcing the rules which are legally enforceable, then Lessor and Lessee agree to submit the issue of reasonable measures of enforcement to arbitration as provided below.

 

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Section 3.6.            Arbitration.

 

The issues to be submitted to the arbitrator are the issue of whether or not Lessee was negligently lax in its enforcement of the rules, and what measures should be reasonably adopted by Lessee for enforcing the rules, recognizing there may be isolated events which occur that are outside of the Lessee’s ability to control, regardless of Lessee’s use of due diligence and care in such enforcement. The arbitrator shall have the authority to award to the prevailing party his reasonable attorneys’ fees and charge the non-prevailing party with the same and with all costs of arbitration.

 

In the event there are successive arbitrations required within any twenty-four (24) month period and the Lessee is found to have negligently breached its responsibilities hereunder in two successive such arbitrations, the arbitrators may impose in addition to the enhanced rule enforcement procedures that they may order, such penalty as they may deem necessary to achieve compliance with these rules, not to exceed ten percent (10%) of the base rent for the period of twelve (12) months following each such arbitration finding that the Lessee failed to act with reasonable diligence in enforcing its rules, in addition to the award of costs and fees provided above.

 

In the event either party desires arbitration, the parties may agree upon a mutually acceptable arbitrator, or if they are unable to agree upon such arbitrator within ten (10) days of the first written request therefore, they shall proceed pursuant to the rules of the American Arbitration Association, or either party may petition the presiding judge of the Superior Court of California for the County of Stanislaus to appoint an arbitrator. Such arbitration shall allow the usual rules of discovery involved in civil litigation, provided the arbitration must commence within sixty (60) days of the appointment of the arbitrator and be resolved within thirty (30) days thereafter. The award of the arbitrator shall be binding upon both parties and enforceable by court order.

 

In the event there are two successive arbitration proceedings in which the arbitrator finds in favor of the Lessee, that Lessee has acted with reasonable diligence in enforcing the rules, then the arbitrator may award to Lessee compensation in addition to his reasonable attorneys’ fees and costs in the form of a rent reduction not to exceed ten percent (10) of the base rent for the following twelve (12) months for each successive ruling in favor of the Lessee.

 

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ARTICLE IV

 

IMPROVEMENTS

 

Section 4.1.            Lessee’s Duty to Construct New Improvements.

 

Within sixty (60) days after all governmental approvals have been obtained which are necessary for the construction and operation of a family oriented amusement park and for the construction of all the improvements set forth on Exhibit B, Lessee shall comply with the conditions of major construction below and shall commence the construction of the improvements set forth on Exhibit B.

 

Section 4.2.            Lessee’s Election to Construct New Improvements.

 

At any time during the term of this Lease, Lessee may, but is not obligated to, construct or otherwise make new improvements on any part or all of the premises and to demolish, remove, replace, alter, relocate, reconstruct, or add to any then existing improvements in whole or in part, and to modify or change the contour or grade, or both, of the land, provided Lessee is not then in default under any condition or provision of this Lease and provided the improvements following the work are at least equal to the value to any improvements as they were before being demolished, removed, replaced, altered, relocated, reconstructed, modified or changed. All salvage shall belong to Lessee.

 

Section 4.3.            Conditions and Covenants of Major Construction.

 

A.       Lessee shall comply with all the following conditions and covenants and shall do so before any major work or construction, alteration, or repair as defined in Section 4.1 or 4.2 above, is commenced on the premises, and before any building materials have been delivered to the premises by Lessee or under Lessee’s authority, or procure Lessor’s written waiver of the condition(s) or covenant(s) specified in the waiver:

 

1.         Deliver to Lessor two (2) sets and obtain Lessor’s approval of preliminary construction plans and specifications of such work including, but not limited, to preliminary grading and drainage plans, soil tests, utilities, sewer and service connections, locations of ingress and egress to and from public thoroughfares, curbs, gutters, parkways, street lighting, designs and locations for outdoor signs, storage areas and landscaping, all sufficient to enable potential contractors and subcontractors to make reasonably accurate bid estimates and to enable Lessor to make an informed judgment about the design and quality of construction.

 

Lessor shall not unreasonably withhold approval of preliminary plans and specifications. Lessor shall communicate its approval or disapproval by notice to Lessee, and disapproval shall be accompanied by specification of the grounds for disapproval, provided that Lessor’s failure to provide to Lessee written

 

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disapproval within ten (10) days after receipt of the plans shall be conclusively considered to be approval.

 

Following Lessor’s first or any subsequent disapproval, Lessee may elect (i) to submit revised plans and specifications or (ii) to give notice contesting the reasonableness of Lessor’s disapproval. A contest of reasonableness shall be determined by arbitration under the jurisdiction of the American Arbitration Association in accordance with the Commercial Rules of such Association. If the reasonableness of Lessor’s disapproval is sustained, then Lessee shall perform as in (i) above; if it is not sustained, the plans and specifications shall be deemed approved.

 

2.         Deliver to Lessor the written approval of the plans and specifications by the financial institution that shall have made the commitment for financing such work, if any.

 

3.         Deliver to Lessor true copies of all governmental permits and authorizations required for such work, and one (1) complete set of final plans and specifications and working drawings consistent with the previously approved preliminary plans and specifications.

 

4.         Notify Lessor of Lessee’s intention to commence such work at least twenty (20) days before commencement thereof or delivery of any materials. The notice shall specify the approximate location and nature of the intended improvements. Lessor shall have the right to post and maintain on the premises any notices of non-responsibility provided for under applicable law and to inspect the premises in relation to the construction at all reasonable times.

 

5.         Deliver to Lessor true copies of all documents evidencing the commitment of financing for the work. “Financing” includes both the construction (or interim) financing (loan); the take-out (also called permanent or long-term) financing (loan); and/or satisfactory proof of Lessee’s own capital funding. Lessee shall also complete all construction lien-free, except for any lien in favor of any entity providing the take-out financing.

 

6.         Deliver to Lessor (i) certificates of insurance evidencing coverage for builder’s risk, (ii) evidence of workmen’s 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 Lessor or the premises, and (iii) evidence that Lessee has paid or caused to be paid all premiums for the coverage described above in this subparagraph 6 and any increase in premiums on insurance provided for in Article VI on insurance sufficient to assure maintenance of all insurance above during the anticipated course of the work. Lessee shall maintain and keep in force and pay all premiums required to maintain and keep in force all insurance above at all times during which such work is in progress.

 

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B.        Completion of Construction. Once work is begun as required herein Lessee shall with reasonable diligence prosecute to completion all construction of improvements, subject to weather availability of labor and materials, additions or alterations. All work shall be performed in a good and workmanlike manner, shall substantially comply with plans and specifications submitted to Lessor as required herein and shall comply with all applicable governmental permits, laws, ordinances and regulations.

 

C.        Notice of Completion. On completion of any substantial work of improvement during the term, Lessee shall file or cause to be filed a notice of completion. Lessee hereby appoints Lessor as Lessee’s attorney-in-fact to file the Notice of Completion on Lessee’s failure to do so after the work of improvement has been substantially completed.

 

D.        Non-Liability of Lessor. Lessor’s approvals as required by this Section 4.3 shall not make Lessor responsible for the improvement with respect to which an approval is given or the construction thereof, and Lessee shall defend and indemnify Lessor against all liability and claims of liability for damage or injury to persons or property or for death of persons arising from or in connection with such improvement or construction.

 

E.        Lessee’s Rights Regarding Improvements. After the completion of any new construction, Lessee shall have the right to alter, reconstruct, modify, remodel, relocate, remove and demolish all or any part of the improvements located on the premises and any other improvements located on the premises thereafter, and further, to locate and construct (all in accordance with the provisions of this Lease including, without limitation, this Article IV) any other improvements of any type or kind on the premises; provided, however, that no such action shall be taken which will substantially reduce the value of the improvements unless within reasonable time the improvements, when completed, will have a fair market value at least equal to the fair market value of the improvements immediately prior to the taking of such action.

 

Section 4.4.            Maintenance; Repairs; Alterations; Reconstruction.

 

Subject to the rights of Lessee set forth in Sections 4.1 and 4.2, Lessee, at Lessee’s sole cost and expense, shall maintain the premises and all improvements located thereon, throughout the term of this Lease, in a neat, sanitary manner and, in accordance with all applicable laws, ordinances, orders, rules, regulations and requirements of (i) federal, state, county, municipal and other governmental agencies having or claiming jurisdiction; (ii) the insurance underwriting board or insurance inspection bureau having or claiming jurisdiction; and (iii) all insurance companies insuring all or any part of the premises or improvements or both. Without limiting the generality of the foregoing Lessee shall perform each and every obligation set forth in clauses (1) through (5) of Section 1941.2(a) of the California Civil Code, any

 

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amendment thereof or any law of similar import that may hereafter be enacted.

 

Except as provided in Section 4.7, Lessee shall promptly and diligently repair, restore and replace as required to maintain or comply as above, or to remedy all damage to or destruction of all or any part of the improvements, resulting wholly or in part from causes required by this Lease to be covered by fire or extended coverage insurance. There shall be no abatement of rent based on a complete or partial destruction of the premises so long as this Ground Lease is in force.

 

The completed work of maintenance, compliance, repair, restoration or replacement shall be equal in value, quality and use to the condition of the improvements before the event giving rise to the work, except as expressly provided to the contrary by this Lease. Lessor shall not be required to furnish any services or facilities or to make any repairs or alterations of any kind in or on the premises. Lessor’s election to perform any obligations of Lessee under this Lease on Lessee’s failure or refusal to do so shall not constitute a waiver of any right or remedy for Lessee’s default, and Lessee shall promptly reimburse, defend and indemnify Lessor against all liability, loss, cost, and expense arising from it.

 

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 improvement, or as limiting provisions relating to condemnation or damage or destruction during the final year or years of the term. No deprivation, impairment or limitation of use resulting from any event or work contemplated by this paragraph shall entitle Lessee to any offset, abatement or reduction in rent nor any termination or extension of the Lease.

 

In determining whether Lessee had acted promptly as required under the foregoing paragraph, one of the criteria to be considered is the availability of any applicable insurance proceeds.

 

Section 4.5.            Right to Contest Government to Order.

 

Lessee has the right to contest by appropriate judicial or administrative proceeding, without cost or expense to Lessor, the validity or application of any law, ordinance, order, rule, regulation or requirement (hereinafter called law) that Lessee repair, maintain, alter or replace the improvements in whole or in part, and Lessee shall not be in default for failing to do such work until a reasonable time following final determination of Lessee’s contest. Lessor may, but is not required to, contest any such law independently of Lessee. Lessor may, and on Lessee’s notice of request shall, joint in Lessee’s contest.

 

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Section 4.6.            Major and Minor Distinguished.

 

Lessor’s approval is not required for Lessee’s minor repairs, alterations or additions. “Minor” means a construction cost not exceeding $50,000. Constructions costs includes the cost of labor, materials, and a reasonable profit to a general contractor and subcontractors for any demolition and any removal of existing improvements or parts of improvements, as well as for preparation, construction and completion of all new improvements, parts of improvements, reconstructions, maintenance and repairs. The dollar amounts stated above shall be adjusted by the percentage change in the index described in Section 2.2(A).

 

“Major” repairs, alterations or additions are those not defined as minor above. For major repairs, alterations or additions, Lessee shall comply with all conditions of major construction elsewhere in this Lease.

 

If Lessee’s proposed work does not substantially alter the then-existing use of the premises, Lessor’s approval of plans and specifications shall not be required. If Lessor’s approval is required, the provisions relating to Lessor’s approval and the conditions of major construction shall apply.

 

Section 4.7             Damage or Destruction during Final Years of Term.

 

Lessee is relieved from the obligation to, but may, repair, restore or reconstruct improvements damaged or destroyed during the final five (5) years of the term if (1) the work of repairing, restoring or reconstructing would constitute a “major” repair or alteration as defined above; and (2) Lessee complies with all of the following conditions:

 

1.         Lessor gives notice of the damage or destruction promptly but not later than thirty (30) days after the event, detailing facts that qualify the casualty under this provision;

 

2.         Is not in default under any provision or condition of this Lease;

 

3.         Within thirty (30) days after giving the notice above, effectively transfers to Lessor all right, title and interest in and to this Lease;

 

4.         Pays in full, or has paid in full, any outstanding indebtedness incurred by Lessee and secured by an encumbrance or encumbrances on the leasehold and any fixtures or improvements attached thereto;

 

5.         Delivers possession of the premises to Lessor and quit claims all right, title and interest in the land and improvements if, and promptly after, ceasing to do business on the premises;

 

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6.         Causes to be discharged all liens and encumbrances resulting from any act or admission of Lessee; and

 

7.         Relinquishes all remaining options to extend or renew the Lease, provided that the giving of notice of damage or destruction as a condition of relief from the obligation to repair, restore or reconstruct shall conclusively be construed as such relinquishment.

 

Section 4.8.            Ownership of Improvements.

 

All improvements located on the premises shall be the sole property of Lessee and shall remain the property of Lessee throughout the term of this Lease. Upon the expiration or termination of this Lease, Lessee shall have the right to remove any or all fixtures or improvements or both and Lessee shall have the obligation to remove such fixtures or improvements if requested by Lessor, provided all resultant injuries to the premises and remaining improvements are completely remedied by Lessee and Lessee complies with Lessor’s. reasonable requirements respecting the resultant appearance.

 

Section 4.9.            Mechanics’ and Other Liens.

 

Lessee shall pay or cause to be paid the total cost and expense of all works of improvement as that phrase is defined in the applicable mechanics’ lien law in effect as of the date of this Lease.

 

Lessee shall not permit any mechanic’s, materialman’s, contractor’s, subcontractor’s or other lien arising from any work of improvement, however it may arise, to stand against the premises or any improvement thereon. If any such lien shall be filed against the premises or improvements. Lessee shall cause the same to be discharged within ten (10) days after actual notice of such filing, by payment, deposit or bond. If Lessee shall fail to discharge any such lien, Lessor may, but shall not be obligated to, discharge the same and any amount so paid or deposited by Lessor and all expenses so incurred by Lessor, including reasonable attorneys’ fees, shall become immediately due and payable by Lessee to Lessor together with interest at the maximum rate then permitted by law. Lessee may in good faith and at Lessee’s own expense contest the validity of any such asserted lien, claim or demand, provided Lessee has furnished the bond required in Section 3143 of the California Civil Code, any amendment thereof or any law or similar import hereafter enacted for providing a bond freeing a premises from such a lien claim.

 

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ARTICLE V

 

ASSIGNMENT, SUBLETTING, ENCUMBRANCE AND RIGHT OF FIRST REFUSAL

 

Section 5.1             Assignment.

 

Lessee shall not assign, sell or otherwise transfer (collectively “assign” and the act thereof “assignment”) its interest in this Lease or in the estate created hereby, in whole or in part, unless:

 

1.         The proposed assignment is first approved in writing by Lessor, which approval shall not be unreasonably withheld;

 

2.         There is no existing default on the part of Lessee in performance or observance of any of the provisions hereof;

 

3.         The assignment is in writing, is duly executed and acknowledged by Lessee and the assignee, is in a form satisfactory to Lessor, provides that assignee assumes and agrees to carry out and perform all of the provisions hereof on the part of Lessee to be carried and out and performed as a direct obligation of Lessor; and

 

4.         An executed original of such assignment is delivered to Lessor.

 

Section 5.2.            Release.

 

Lessee shall remain liable hereunder unless its assignee has a net worth at least equal to that of Lessee and the assignee shall have a minimum net worth of $250,000 at the time of the assignment.

 

Section 5.3.            Subletting.

 

Lessee shall have the right at any time and from time to time during the term to sublet all or any part or parts of the improvements on the premises, provided that Lessee shall remain primarily obligated to perform Lessee’s obligations hereunder and provided that the following provisions are complied with:

 

A.       Each sublease shall contain a provision, satisfactory to Lessor and to each leasehold mortgagee (hereinafter defined) having an interest at the time the sublease is executed, requiring the sublessee to attorn to Lessor or, in the event of any proceeding to foreclose any leasehold mortgage, to the leasehold mortgagee, or any person designated in a notice from a leasehold mortgage, if Lessee defaults in the payment of rent and other sums hereunder and if the sublessee is notified of Lessee’s default in the payment of rent and other sums hereunder and instructed to make subtenant’s rental payments to Lessor or to such leasehold mortgagee or to such designated person. No sublease shall allow a sublessee to prepay monthly rent more than one month in advance.

 

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B.        Lessee shall, promptly after execution of each sublease, notify Lessor of the name and mailing address of the subtenant and, shall, on demand, permit Lessor to examine and copy the sublease.

 

Section 5.4.            Right to Encumber Leasehold Interest.

 

Lessee shall have right, upon approval by Lessor, which approval shall not be unreasonably withheld, to encumber Lessee’s interest in and to Lessee’s trade fixtures and equipment, and to hypothecate Lessee’s leasehold interest under this Lease, to secure financing thereof; provided, however, that any such financing shall be subordinate to this Lease and each of the Lessor’s rights hereunder. Lessee shall have no right by such financing to in any way affect or encumber Lessor’s interest as Lessor under this Lease. Upon approval of such financing by Lessor, Lessor agrees to execute a Landlord’s Consent and/or Landlord’s Estoppel Certificate as may be required by the entity providing the financing in a form substantially similar to the Landlord’s Consent and Landlord’s Estoppel Certificate attached hereto as Exhibit C and Exhibit D, respectively.

 

ARTICLE VI

 

INDEMNITY AND INSURANCE

 

Section 6.1.            Indemnity.

 

Lessor shall not be liable and Lessee shall defend and indemnify landlord against all liability and claims of liability for damage or injury to person or property on or about the premises from any cause arising during the term hereof, irrespective of whether the claim is asserted during or after the term. Lessee waives all claims against Lessor for damage or injury to person or property arising or asserted to have arisen from any cause whatsoever.

 

Section 6.2.            Fire and Extended Coverage Insurance.

 

Throughout the term Lessee shall at its sole cost and expense keep or cause to be kept insured for the mutual benefit of Lessor and Lessee all improvements located on or appurtenant to the premises against loss or damage by fire and such other risks as are now or hereafter included in an extended coverage endorsement in common use for commercial structures, including vandalism and malicious mischief. The amount or the insurance shall be sufficient to prevent either Lessor or Lessee from becoming a coinsurer under the provisions of the policies, but in no event shall the amount be less than eighty percent (80%) of the then actual replacement cost, excluding costs of replacing excavations and foundations, but without deduction for depreciation (herein called “full replacement value”). Lessee may include any leasehold or fee mortgagee as a loss payee. Lessor shall, at Lessee’s cost and expense, cooperate fully with Lessee to obtain the largest

 

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possible recovery. Any proceeds from any such insurance policy shall be paid and distributed in accordance with the provisions of Section 6.7 dealing with an insurance trustee.

 

The “full replacement value” (as defined in this Section 6.2) of the improvements to be insured under this Section 6.2 shall be determined by the company issuing the insurance policy at the time the policy is initially obtained. Not more frequently than once every three (3) years, either party shall have the right to notify the other party that it elects to have the full replacement value redetermined by an insurance company. The redetermination shall be made promptly and in accordance with the rules and practices of the Board of Fire Underwriters, or a like board recognized and generally accepted by the insurance company, and each party shall be promptly notified of the results by the company. The insurance policy shall be adjusted according to the redetermination.

 

Section 6.3.            Public Liability Insurance.

 

Beginning on the date Lessee enters upon the premises and throughout the term, Lessee shall at its sole cost and expense keep or cause to be kept in force for the mutual benefit of Lessor and Lessee 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 premises, improvements or adjoining areas or ways, providing protection of at least five million dollars ($5,000,000) for bodily injury or death to any one person, at least five million dollars ($5,000,000) for any one accident or occurrence and at least five hundred thousand dollars ($500,000) for property damage and issued by an insurance company with an A.B. Best rating of A, X or better and admitted to do business in California.

 

Not more frequently than each three (3) years, if, in the reasonable opinion of the insurance broker retained by Lessor, the amount of public liability and property damage insurance coverage at that time is not adequate based on increases in the Consumer Price Index, Lessee shall increase the insurance coverage as reasonably required by Lessor’s insurance broker.

 

Section 6.4.            Insurance Policy Form. Content and Insurer.

 

All insurance required by the express provisions hereof shall be carried only by responsible insurance companies licensed to do business in California and reasonably acceptable to Lessor, and the policies therefor shall be in form reasonably acceptable to Lessor. All such policies shall be nonassessable and shall contain language, to the extent obtainable, to the effect that (i) any loss shall be payable notwithstanding any act or negligence of Lessor that might otherwise result in the forfeiture of the insurance, (ii) the insurer-waives the right of subrogation against Lessor and against Lessor’s agents and representatives, (iii) the policies are primary and noncontributing with any insurance that may be carried by Lessor and (iv) the policies cannot be cancelled or materially

 

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changed except after thirty (30) days’ notice by the insurer to Lessor or Lessor’s designated representative.

 

Section 6.5.            Failure to Maintain Insurance & Proof of Compliance.

 

A.       Proof of Compliance. Lessee shall deliver to Lessor, in the manner required for notices, copies of certificates of all insurance policies required hereunder together with evidence satisfactory to Lessor of payment required for procurement and maintenance of the policy within the following time limits:

 

1.         For insurance required at the commencement of this lease, within fifteen (15) days after execution of this Lease;

 

2.         For insurance 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; and

 

3.         For any renewal or replacement of a policy already in existence, at least ten (10) days before expiration or termination of the existing policy.

 

B.        Lessor’s Remedies. If Lessee fails or refuses to procure or maintain insurance as required hereby or fails or refuses to furnish Lessor with required proof that the insurance has been procured and is in force and paid for, Landlord shall have the right, at Lessor’s election, to procure and maintain such insurance. The premiums paid by Lessor shall be. treated as added rent due from Lessee, with interest at the maximum rate then permitted by law, to be paid on demand by Lessor. Lessor shall give Lessee prompt notice of the payment of premiums, stating the amounts paid and the names of the insurer or insurers.

 

ARTICLE VII

 

CONDEMNATION

 

Section 7.1.            Effect on Lease.

 

If all or any portion of the premises shall be taken or condemned pursuant to the exercise of or the threat of the exercise of the power of eminent domain by any organization having the right to exercise said power, then as to the portion taken, this Lease shall terminate as of the date the condemning authority takes possession of the premises. As of the date of termination, the rent to be paid under this Lease shall be reduced for the balance of the term in proportion to the ratio which the area of the premises taken bears to the total area of the premises. Any unearned rent paid in advance that is reduced as provided herein shall be proportionately refunded by Lessor to Lessee.

 

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Section 7.2.            Condemnation Award.

 

Any payment received from a condemning authority shall be allocated between Lessor and Lessee as follows:

 

A.       The part attributable to the value of the land and severance damages attributable to the land, after deducting the value of the leasehold interest created by this Lease, shall be paid to Lessor.

 

B.        The part attributable to the value of this leasehold interest and to the value of the improvements and severance damage attributable to the improvements shall be paid to Lessee. In valuing the leasehold interest of Lessee in this Lease, the period of time to be utilized shall be that period between the date such interest is being valued and the end of the term.

 

Section 7.3.            Right to Terminate.

 

If the portion of the premises remaining after the date of condemnation has improvements located thereon that constitute a sound architectural whole unit under then existing governmental regulations or has improvements located thereon which can, under feasible economic standards of real estate development, be restored to a sound architectural whole unit, or with or without existing improvements can be utilized under then existing governmental regulations and feasible economic standards of real estate development for the highest and best improvements thereon, then this Lease as to the portion remaining shall remain in full force and effect, and Lessee, to the extent required hereunder, shall proceed to restore the improvements. Otherwise, Lessor and Lessee each shall have the election for a period of ninety (90) days after the condemning authority takes possession of the premises to terminate this Lease.

 

ARTICLE VIII

 

DEFAULT AND REMEDIES

 

Section 8.1.            Defaults by Lessee.

 

The following shall constitute defaults of Lessee under this Lease :

 

A.       If Lessee fails to pay the rental herein reserved, or any part thereof, or any other sum required by Lessee to be paid to Lessor or other third party, at the times or in the manner herein provided; or

 

B.        If Lessee should violate any of the provisions of Article v; or