Lease Dated July 8, 1998

EXHIBIT 10.5


CONFIDENTIAL


LEASE
-----


LEASE, dated July 8, 1998, between JIM JOSEPH, not individually, but as TRUSTEE FOR THE JIM JOSEPH REVOCABLE TRUST, having an address c/o Interland, 1480 Drew Avenue, Suite 100 Davis, California 95616 ("Lessor") and AGRAQUEST, INC., a Delaware corporation, having an address at 1530 Drew Avenue, Davis, California 95616 ("Lessee")


WHEREAS, Lessor is the owner of that certain parcel of real Premises consisting of approximately 1.28 acres located in the City of Davis, County of Yolo, and State of California, as more particularly described in Exhibit A
--------- annexed hereto and made a part hereof (the "Land"); and


WHEREAS, Lessor is constructing on the Land, in accordance with the exhibits and outline described in Exhibit B annexed hereto and made a part
--------- hereof (the "Site Plan"), a building that will contain approximately 12,960 square feet of gross floor area, to be known as 1530 Drew Avenue (the "Building"); and certain tenant improvements therein in accordance with the plans and specifications described in Exhibit D annexed hereto, as the same may
--------- be modified pursuant to Paragraph 3.1 below. The Land, the Building and the Tenant Improvements (defined below) are collectively referred to hereinafter as the "Premises"; and


WHEREAS, Lessor is willing to lease to Lessee the Premises on the terms set forth.


NOW, THEREFORE, Lessor and Lessee hereby agree as follows:


1. Demise.
------


Lessor hereby leases to Lessee and Lessee hereby leases from Lessor (a) the Building, which shall include an area of approximately 12,960 square feet of gross floor area, as shown on the floor plan (the "Floor Plan") annexed hereto as Exhibit C, (b) the Tenant Improvements and the
--------- exclusive use of the entire area of the Land shown on the site plan annexed hereto as Exhibit B (the "Site Plan").
---------


2. Term.
----


2.1 The term of this Lease shall be a period of ten (10) years, commencing on the date (the "Commencement Date") on which the following event shall have occurred: (a) Lessor shall have received a final or temporary final certificate of occupancy or similar governmental authorization for the Building (including the Tenant Improvements, as hereinafter defined).


2.2 Upon the satisfaction of the conditions described in Paragraph 2.1 above, Lessor and Lessee shall execute a Notice of Commencement Date specifying the actual Commencement Date of the Lease, in a form to be approved by Lessor and Lessee.


2.3 On the Commencement Date of this Lease, Lessee shall pay to Lessor a deposit in the amount of One Hundred Eighty Five Thousand Seven Hundred Dollars, ($185,700.00). Provided Lessee is in compliance with all terms and provisions of this Lease, and is not in default hereunder, Lessor shall release to Lessee one quarter of the deposit, or Forty Six Thousand Four Hundred and Twenty-five Dollars, ($46,425.00), at the end of the 36th month, the 48th month, the 60th month and the 72nd month so that the total deposit in the amount of ($185,700.00) shall be returned to Lessee by the end of the 72nd month. The deposit shall be placed by Lessor into one-year interest earning certificates of deposit at Wells Fargo Bank or Bank of America, and annual interest shall be paid to Lessee within thirty days of the expiration of each one-year certificate of deposit.


1


3. Construction of Tenant Improvements.
-----------------------------------


3.1 (a) Lessor shall construct at its sole cost and expense the Building, in accordance with Exhibit B annexed hereto. Lessor shall also
--------- construct in the Building at its sole cost and expense except as specifically provided herein, the Tenant Improvements in accordance with the plans and specifications described in Exhibit D annexed hereto, as the same may be
--------- modified in accordance with this Paragraph 3.1 (the "Plans and Specifications"), which Plans and Specifications have been approved by Lessor and Lessee. (Such construction of the Building and the Tenant Improvements is hereinafter referred to as the "Work".)


(b) Lessor shall file the Plans and Specifications with the appropriate governmental authorities and shall take whatever action shall be necessary (including paying all filing fees and other costs, and cooperating with Lessee in making any required modifications of the Plans and Specifications) to obtain and maintain all governmental permits and authorizations which may be required in connection with the Work.


(c) Lessor shall, with all due diligence, perform and complete the Work in a good and workmanlike manner, with only new materials, and free of all mechanics', materialmen's and other liens or claims. Lessor shall construct the Tenant Improvements according to Plans and Specifications approved by Lessee.


(d) In the performance of the Tenant Improvements, Lessor shall use all reasonable efforts to conform with the preliminary budget of $560,000.00 for the Tenant Improvements. If the final cost of the Tenant Improvements, including all necessary permits and design fees, exceeds the total allowance of $400,000.00, the additional cost shall be paid by Lessee to Lessor, prior to the Commencement of the term of this Lease.


(e) For the purposes of this Lease, the term "Tenant Improvements" shall be deemed to include only the items identified in Exhibit D
--------- annexed hereto. All other improvements necessary for or related to the Premises shall be deemed to be "Building" improvements as generally depicted in Exhibit B
--------- annexed hereto.


(f) Tenant Improvement construction cost shall be deemed to mean only the aggregate of the following costs incurred by Owner in connection with the Work:


(i) Payments made to the general contractor, subcontractors, materialmen, and suppliers;


(ii) All fees, and all permits, licenses and inspection costs paid to governmental entities exercising jurisdiction over the Work;


(iii) Fees for engineers, architects and other reasonably required professional consultants;


(iv) Utility connection fees;


(v) Signage, for interior and as required by code.


3.2 Lessor will permit Lessee and Lessee's agents, suppliers, contractors and workmen to enter the Building prior to the Commencement Date to enable Lessee, at Lessee's sole expense, to install telephones, computers, alarm systems and certain other fixtures and equipment as may be required by Lessee to make the Building ready for Lessee's occupancy, provided that Lessee and its agents, contractors, workmen and suppliers shall exercise commercially reasonable efforts not to materially


2


interfere with or delay the completion of construction of the Building or the Tenant Improvements to be done by Lessor, and to avoid material interference with any other activities of Lessor on the Land. If Lessor shall reasonably determine that any such material interference or delay has been or may be caused, Lessor shall notify Lessee in writing thereof, whereupon Lessee shall exercise commercially reasonable efforts to cause a termination or modification of the activities which have caused, or may cause, any such material interference or delay for as long as and to the extent as shall reasonably be necessary. If Lessee shall fail to cause a termination or modification of such activities, Lessor shall have the right, on written notice to Lessee, to cause Lessee or such agent, contractor, workman or supplier causing such material interference or delay to leave the Building for as long as and to the extent reasonably necessary to bring about a termination or modification of those activities which have caused, or may cause, any such material interference or delay. Lessee agrees that any such entry into the Building shall be at risk and Lessor shall not be liable in any way for any injury, loss or damage which may occur to any of Lessee's property or Lessee's installations made in the Building, unless such injury, loss or damage shall have been proximately caused by the negligence, gross negligence or intentional misconduct of Lessor or any agent, employee, contractor, subcontractor, licensee or invitee of Lessor. Subject to the conduct of Lessor referenced immediately above, Lessee agrees to indemnify, defend and hold Lessor harmless from and against all liabilities, costs, damages, fees and expenses arising out of the activities of Lessee or its agents, contractors, suppliers or workmen in or about the Building prior to the Commencement Date. In addition, prior to the initial entry to the Building by Lessee and by each agent, contractor, supplier or workman of Lessee pursuant to this Paragraph 3.2, Lessee shall furnish Lessor with certificates evidencing policies of insurance covering Lessor as an insured party with the following coverages and in the following amounts: (i) Combined Single Limit, Bodily Injury and Premises Damage Insurance in an amount not less than $1,000,000.00 per occurrence and $2,000.000.00 general aggregate; and (ii) Workers' Compensation Insurance in the amount of the statutory maximum with an employees liability coverage of at least $1,000,000.00.


4. Rent.
----


4.1 (a) Lessee shall pay to Lessor as rent during the term of this Lease, the sum of $1,857,000.00 payable in advance in equal monthly installments on or before the first day of each month during the term hereof. The monthly rent for the first twelve months of the Lease shall be $15,475.00 per month. Said rent shall be subject to adjustment as provided in Subparagraph (b) of this Paragraph 4, and shall be in addition to all other amounts (including, without limitation, real property taxes and assessments, utilities, and maintenance of the Premises, Parking Area and Common Area) required to be paid Lessee pursuant to the provisions of this Lease.


(b) On the first anniversary date of the Commencement Date (or, in the event said first anniversary date occurs on a date other than the first day of a calendar month, on the first day of the thirteenth full calendar month of the term of this Lease,) and on each succeeding anniversary date thereof, the annual rent for the next succeeding twelve-month period of the term of this Lease shall be increased by the percentage increase, if any, in the revised Consumer Price Index for All Urban Consumers--San Francisco, Oakland and San Jose Metropolitan Area, for all items (1982-84= 100) as published by the Untied States Department of Labor, Bureau of Labor Statistics, using the Consumer Price Index for the month and year in which the Commencement Date occurs, as the base with which all future comparisons will be made. In no event, however, shall the annual rent be less than the amount paid in the previous year. In the event the index specified above is either unavailable or is no longer published, the most comprehensive official index then published by the United States Department of Labor, Bureau of Labor Statistics which mostly clearly approximates the Index specified above shall be substituted in place thereof. The rental increase referred to herein shall be calculated on a cumulative basis, but in no event will it exceed Four Percent (4%) nor be less than Two Percent (2%) in any one lease year.


3


(c) If the term of this Lease commences on a date other than the first day of a calendar month, rent for the period from the date of commencement of the term hereof through the last day of the calendar month in which such term commences shall be prorated on the basis of a thirty-day month, and rent for the first full or fractional month of the term of this Lease shall be payable on the date of commencement of said term. In the event the term of this Lease ends on a day other than the last day of the calendar month, rent for the period from the first day of the last calendar month of such term to the end of such term shall be prorated on the basis of a thirty-day month.


(d) The installments of the rent specified herein shall be paid, without deduction or offset, and without prior notice or demand to Lessor at 1480 Drew Avenue, Suite 100, Davis, California 95616, or at such other address as Lessor may from time to time specify by written notice to Lessee. All amounts of money payable by Lessee to Lessor hereunder, if not paid when due, shall bear interest from the due date until paid at the rate of 10% per annum.


5. First Right of Refusal.
----------------------


5.1 Provided that Lessee is not in default under this Lease, Lessor hereby grants to Lessee the exclusive right, at Lessee's option, to negotiate a lease for a building on the remaining unimproved portion of Lot 6 of University Research Park. Upon receipt by Lessor of a written offer by any party for purchase or build-to-suit of the remainder of Lot 6, or should Lessor elect to build a speculative building, Lessor shall notify Lessee, in writing, by certified mail, whereupon Lessee shall have sixty (60) days from the date such notice is mailed in which to exercise Lessee's right to negotiate a lease for said remainder of Lot 6. Lessee shall exercise its right to negotiate a lease by notifying Lessor, in writing, and by certified mail, within the initial sixty (60) day period. In the event Lessee fails or declines to exercise its right of first refusal to negotiate a lease for said lot, Lessor shall be free to enter into lease negotiations with other interested parties. Lessee's rental rate per square foot for any additional building or facility must exceed the rental rate per square foot of the written offer by another party. In the event Lessor and Lessee enter into lease negotiations and terms mutually agreeable to the parties cannot be reached within an additional sixty (60) days, commencing upon Lessor's receipt of Lessee's intent to exercise this first right of refusal, Lessor shall be free to enter into lease negotiations with other interested parties.


5.2 Lessee shall pay all holding costs associated with the entirety of Lot 6, including, but not limited to, real property taxes, bonds, landscaping, and City of Davis service fees. In the event Lessor elects to cause Lot 6 to be divided and a parcel map to be recorded, Lessee's holding costs shall be reduced according to its prorata share. Lessor shall be solely liable for all costs associated with a parcel lot split.


6. Use; Compliance with Law: Condition of the Premises.
---------------------------------------------------


6.1 The Building shall be used and occupied only for office, light assembly, research, and related purposes, or any other use which is reasonably comparable, and for no other purpose. The Parking Area shall be used only for the parking of automobiles by Lessee, or Lessee's employees, invitees or guests, and for vehicular ingress and egress, and only as an incident to Lessee's use and occupation of the Building. The Common Area (exclusive of any landscaped areas) shall be used only for pedestrian circulation and as eating and break areas by Lessee, or Lessee's employees, invitees or guests, only as an incident to Lessee's use and occupation of the Building.


6.2 (a) Lessor warrants to Lessee that the Premises, in its state existing on the Commencement Date, shall not violate any covenants or restrictions of record, or any applicable building codes, regulations or ordinances in effect on the Commencement Date. In the event it is determined that this warranty has been violated, then it shall be the obligation of the Lessor, after written notice from Lessee, at Lessor's sole cost and expense, to rectify promptly any such violation. In the event Lessee does not give to Lessor written notice of the violation of this warranty within one (1) year after the


4


Commencement Date, the correction of same (other than Latent Defects) shall be the obligation of Lessee at Lessee's sole cost subject to Paragraph 6.2 (b) below.


(b) Except as provided in Paragraph 6.2 (a), Lessee shall, at Lessee's expense, comply promptly with all applicable statutes, ordinances, rules, regulations, orders, covenants, and restrictions of record, and requirements in effect during the term or any part of the term hereof, regulating the use by Lessee of the Building (collectively, "Legal Requirements") except that Lessee shall not be required to make any capital improvements of the Premises or the Building, or any alterations of the structure, foundation, exterior walls or exterior roof of the Building, in order to so comply. Except to the extent set forth in the preceding sentence, Lessor shall, at its sole cost and expense, comply with all present and future regulations, rules, laws, ordinances, and requirements of all governmental authorities (including, without limitation state, municipal, county and federal governments and their departments, bureaus, boards and officials) applicable to the Building or Premises. Lessee shall not use nor permit the use of the Building in any manner that will create waste or a nuisance.


(c) (i) Lessee shall have the right after prior written notice to Lessor, to contest, by appropriate legal proceedings diligently conducted in good faith, as its own cost and expense, the validity or application of any Legal Requirement with which Lessee is required to comply, provided that:


(A) Such contest shall not subject Lessor to any criminal penalty; and


(B) Lessee shall obtain and maintain during the pendency of any such contest a bond (or other security satisfactory to Lessor) in form and amount and issued by a surety company reasonably satisfactory to Lessor, indemnifying and protecting Lessor, the Land and the Building, from and against any and all damages, expenses, losses, injuries, fees, including, but not limited to, reasonable attorneys' fees, penalties, actions, causes of action, suits, costs, claims or judgments arising from such contest or Lessee's compliance with any such Legal Requirements.


(ii) Lessor shall execute and deliver reasonably appropriate papers which may be necessary to permit or enable Lessee so to contest the validity or application of any such Legal Requirement, provided Lessor shall be reasonably satisfied with the contents of such papers and Lessee shall indemnify and save Lessor, the band and the Building, harmless from any costs and expenses in connection therewith including, but not limited to, reasonable attorneys' fees.


6.3 (a) Lessor shall deliver the Building to Lessee clean and free of debris on the Commencement Date, and Lessor further warrants to Lessee that the plumbing, lighting, air conditioning, heating and loading, doors in the Building shall be in good operating condition on the Commencement Date. In the event that it is determined that this warranty has been violated, then it shall be the obligation of Lessor, after receipt of written notice from Lessee setting forth with specificity the nature of the violation, at Lessor's sole cost, to rectify promptly such violation. Lessee's failure to give such written notice to Lessor within one (1) year after the Commencement Date shall cause the conclusive presumption that Lessor has complied with all of Lessor's obligations under this Paragraph 6.3 (other than with respect to Latent Defects).


(b) Except as otherwise provided in this Lease, Lessee hereby accepts the Building in its condition existing as of the Commencement Date, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Building, and any covenants or restriction of record, and accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto. Lessee acknowledges that neither Lessor nor Lessor's agent has made any representation or warranty as to the present or future suitability of the Building for the conduct of Lessee's business.


5


7. Maintenances: Repairs and Alterations.
-------------------------------------


7.1 (a) Lessee shall keep in good order, condition and repair the (i) Building and every part thereof, except for the foundation and the roof, which shall be Lessor's responsibility, including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning (Lessee shall procure and maintain, at Lessee's expense, an air conditioning system maintenance contract), ventilating, electrical and lighting systems, and all equipment, fixtures, walls (interior and exterior), ceilings, floors, windows, doors, plate glass and skylights; (ii) the Parking Area; and (iii) the Common Area, including, without limitation, all landscaping and other improvements on the Common Area. Lessee shall perform any and all roof maintenance necessary to keep drains flowing. Lessor shall repair roof leaks or other necessary roof repairs and shall be responsible for any repair or defect in the foundation. To facilitate the performance by Lessee of those obligations of Lessee arising under this Paragraph 7.1, on the Commencement Date, Lessor shall assign to Lessee (to the extent assignable) all of Lessor's right, title and interest in and to all contracts, warranties and guaranties made by or received from any third party with respect to the Building, the Parking Area and the Common Area (collectively, the "Guaranties").


(b) All of Lessee's obligations to maintain and repair shall be accomplished at Lessee's sole expense. If Lessee fails to maintain and repair the interior of the Premises, Lessor may on ten (10) days prior notice, except that no notice shall be required in case of emergency, enter the Premises and perform such repair and maintenance on behalf of Lessee. In such case, Lessee shall reimburse Lessor for all costs so incurred within thirty (30) days of receipt of a written demand therefor.


7.2 On the Expiration Date, or on any sooner termination of this Lease in accordance with the terms hereof, Lessee shall surrender the Building, the Parking Area and the Common Area to Lessor in the same condition as when received, ordinary wear and tear excepted, clean and free of debris. Lessee shall repair any damage to the Building, the Parking Area and the Common Area occasioned by the removal of Lessee's trade fixtures, furnishing and equipment. Lessee shall leave the air lines, power panels, electrical distribution systems, lighting fixtures, air conditioning and plumbing in the Building in good operating condition, ordinary wear and tear excepted.


7.3 If Lessee fails to perform Lessee's obligations under this Paragraph 7, Lessor may, at its option (but shall not be required to), enter upon the Building, after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), to perform such obligations on Lessee's behalf, and the cost thereof together with interest thereon at the annual rate of two percent (2%) in excess of the Wells Fargo Prime Rate shall become due and payable as additional rental to Lessor together with Lessee's next rental installment. Notwithstanding anything to the contrary contained in this Paragraph 7.3, in the event that any maintenance or repairs required to be performed by Lessee pursuant to Paragraph 7.1 above cannot reasonably be completed within ten (10) days after Lessee's receipt of Lessor's notice with respect therein, Lessor shall not be permitted to exercise its right to perform such maintenance and repairs so long as Lessee shall have promptly commenced to perform such maintenance or repair obligation after discovery of the necessity therefor, Lessee at all times exercises commercially reasonable efforts to prosecute such maintenance or repairs to completion as promptly as possible, and Lessee completes such maintenance or repairs within ninety (90) days after its discovery of the need therefor.


7.4 Except for the obligations of Lessor under Paragraphs 6.2(a), 6.3(a), 9 and 14, and except for any damage caused by Lessor or any of Lessor's agents, employees, contractors, suppliers, workmen, invitees or licensees, it is intended by the parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Building or the equipment therein, whether structural or non-structural, the Parking Area or the Common Area, all of which obligations are intended to be that of the Lessee under Paragraph 7.1 hereof. Lessee expressly waives the benefit of any statute now or hereinafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, the Parking Area, and/or the Common Area in good order, condition and repair.


6


7.5 (a) Lessee shall not, without Lessor's prior written consent, make any alterations, improvements or additions (collectively, "Alterations") in on or about the Building other than non-structural Alterations. In any event, except for the installation of any sign thereon, Lessee shall make no change or alteration to the exterior of the Building without Lessor's prior written consent. Lessor may require that Lessee remove any or all of said Alterations, including, without limitation, any signs installed on the Building, at the expiration of the term, and restore the Building to its prior condition, normal wear and tear excepted. Should Lessee make any Alterations requiring Lessor's prior approval without such approval, Lessor may require that Lessee remove any or all of the same at Lessee's sole cost and expense.


(b) Any Alterations in or about the Building that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form, with proposed detailed plans. If Lessor shall give its consent, the consent shall be deemed conditioned upon Lessee acquiring, if required, a permit to make such Alterations from appropriate governmental agencies, the furnishing of a copy thereof to Lessor prior to the commencement of the work and the compliance by Lessee with all conditions of said permit in a prompt and expeditious manner.


(c) Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use in the Building, which claims are or may be secured by any mechanic's or materialmen's lien against the Building, or any interest therein. Lessee shall give Lessor not less than ten (10 days written notice prior to the commencement of any work in the Building, and Lessor shall have the right to post notices of non-responsibility in or on the Building as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend itself and Lessor against the same and shall pay and satisfy any adverse judgment that may be rendered thereon before the enforcement thereof against Lessor or the Land, upon the condition that if Lessor shall require, Lessee shall furnish to Lessor a surety bond reasonably satisfactory to Lessor in an amount equal to such contested lien, claim or demand. In addition, Lessor may require Lessee to pay Lessor's reasonable attorneys' fees and costs in participating in such action ...