Lease Agreement

LEASE AGREEMENT


THIS LEASE AGREEMENT made and entered into as of February 24, 1997, by and between IDAHO ASSOCIATES, L.L.C., an Illinois limited liability company (hereinafter referred to as "Lessor"), and SUNRISE HEALTHCARE CORPORATION, a New Mexico Corporation ("Lessee").


W I T N E S S E T H:


WHEREAS, Lessee is currently negotiating a contract (the "Contract") with Care Management, inc., an Idaho corporation ("Seller") to purchase a certain tract of land located in the State of Idaho and more particularly described in EXHIBIT A attached hereto and made a part hereof, which tract of land is improved with a one hundred three (103) bed nursing home facility commonly known as Casa Loma Convalescent Center located at 1019 third Avenue South, Payette, Idaho (which tract and nursing home facility, together with any other improvements now or hereafter located on the tract and all easements, tenements, hereditaments and appurtenances thereto are hereinafter collectively referred to as the "Demised Premises");


WHEREAS, upon satisfaction of certain conditions precedent, the right to purchase the Demised Premises will be assigned by Lessee to Lessor pursuant to an Assignment of Purchase and Sale Agreement (the "Assignment"); and


WHEREAS, pursuant to the Contract, Lessee is negotiating to purchase, and will, pursuant to the Assignment, assign to Lessor the rights to purchase the furnishings, furniture, equipment and fixtures to be used in or about the Demised Premises (hereinafter collectively referred to as the "Personal Property"); and


WHEREAS, contemporaneously with the purchase and sale of the Demised Premises and the Personal Property, Lessor desires to lease the Demised Premises and Personal Property to Lessee and Lessee desires to lease the Demised Premises and Personal Property from Lessor; and


WHEREAS, on November 30 ,1996, Lessor entered into Leases with Lessee for the sixty-four (64) bed nursing home facility commonly known as Payette Lakes Care Center located at 201 Floyd Street, McCall, Idaho, the one hundred twenty-seven (127) bed nursing home facility commonly known as Valley Rehabilitation and Living Center located at 1014 Burrell Avenue, Lewiston, Idaho, and the forty (40) bed nursing home facility commonly known as Magic Valley Manor located at 210 North Idaho Street, Wendell, Idaho (collectively, hereinafter referred to as the "Other Leases"); and


WHEREAS, Lessee hereby acknowledges and agrees that Lessor, as consideration and inducement for entering into this Lease, requires that this Lease provide that a default under the Other Leases shall constitute a default under this Lease and that without such a "cross default" provision Lessor would not execute this Lease; and


WHEREAS, Sun Healthcare Group, Inc., a Delaware corporation (the "Guarantor") will execute and deliver to Lessor that certain Unconditional Guaranty of Lease (the "Lease Guaranty") dated of even date herewith, guarantying the performance of all of the obligations of Lessee under this Lease; and WHEREAS, the parties hereto have agreed to the terms and conditions of this Lease.


NOW THEREFORE, it is agreed that the use and occupancy of the Demised Premises, and the use of the Personal Property shall be subject to and in accordance with the terms, conditions and provisions of this Lease.


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ARTICLE I--DEFINITIONS


1.1 The terms defined in this Article, for all purposes this Lease and all agreements supplemental hereto, have the meaning herein specified.


(a) "Demised Premises" shall mean the real estate described in EXHIBIT A
and all improvements located thereon.


(b) "Personal Property" shall mean all furniture, fixtures and equipment
located on the Demised Premises (including, without limitation, those items
set forth on EXHIBIT B attached hereto and made a part hereof), other than
such furniture, fixtures, equipment and supplies that persons other than the
Lessor may own or that the Lessee may lease from persons other than the
Lessor or that are purchased by Lessee other than as replacements for
Personal Property.


(c) "Leased Property" shall mean the Demised Premises and the Personal
Property.


(d) "Lease Year" for the first Lease Year shall be the period from the
Commencement Date hereinafter defined through November 30, 1997 and each
subsequent Lease Year shall be the period of twelve (12) months following
the last day of the prior Lease Year.


(e) All other terms shall be as defined in other sections of this Lease.


ARTICLE II--DEMISED PREMISES AND PERSONAL PROPERTY


2.1 Lessor, for and in consideration of the rents, covenants and agreements hereinafter reserved, mentioned and contained on the part of the Lessee, its successors and assigns, to be paid, kept and performed, does hereby lease unto Lessee the Demised Premises together with the Personal Property to be used in and upon the Demised Premises for the Term hereinafter specified, for use and operation therein and thereon of a skilled and/or intermediate care nursing home, in full compliance with all the rules and regulations and minimum standards applicable thereto, as prescribed by the State of Idaho and such other governmental authorities having jurisdiction thereof and having no less than one hundred three (103) beds and for any other purpose authorized by Lessor in writing and for no other purpose.


ARTICLE III--TERM OF LEASE


3.1 Except as expressly provided below, the term of this Lease shall commence on the Commencement Date (hereinafter defined) and expire on November 30, 2006, unless sooner terminated or extended as hereinafter provided (the "Initial Term"). The "COMMENCEMENT DATE" shall mean the date the last of the following has occurred:


(i) Lessee has received a commitment from Commonwealth Land Title
Insurance Company for issuance of a leasehold owner's title policy in the
amount of Two Million Five Hundred Thousand and No/100 Dollars
($2,500,000.00) free of all liens and encumbrances other than (a) standard
exceptions, (b) non-delinquent taxes and assessments, (c) easements,
restriction and rights of way that will not adversely affect Lessee's
operation of the Demised Premises as a nursing home in accordance with
Article II, above;


(ii) Lessee obtains all appropriate state or other governmental licenses
and certifications required to operate the Demised Premises, including,
without limitation, as a Medicare and Medicaid certified skilled nursing
home; and


(iii) Lessee shall have been given possession of the Demised Premises.


Once the Commencement Date has been established, the parties shall sign a Commencement Date memorandum setting forth that date.


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3.2 Lessee shall have and is hereby granted the right and option to extend the Initial Term of this Lease for an extended term (the "First Extended Term") of five (5) Lease Years upon and subject to all the terms, provisions and conditions hereof, except that Rent, as hereinafter defined, payable with respect to each Lease Year of the First Extended Term shall be the amount set forth in Section 4.1. The first Lease Year of the First Extended Term shall commence upon the day next following the expiration of the Initial Term.


The option granted pursuant to this Section 3.2 may be exercised only if Lessee is not in default under this Lease at the time of exercise and at the time of expiration of the Initial Term, and, further, only if there is not at either time an event or occurrence which with the passage of time or giving of notice, or both, would constitute a default hereunder, and said option shall be exercised by Lessee giving to Lessor written notice of Lessee's election so to do not less than twelve (12) full calendar months prior to the date of expiration of the Initial Term. Furthermore, Lessee's option granted pursuant to this Section 3.2 may be exercised only if Lessee also contemporaneously exercises its options to extend pursuant to Section 3.2 of each of the Other Leases.


3.3 Provided Lessee shall have exercised the option contained in Section 3.2 above, Lessee shall and Lessee is hereby granted the right and option to extend this Lease for an additional Extended Term (the "Second Extended Term") of five (5) Lease Years upon and subject to all the terms, provisions and conditions hereof, except that Rent, as hereinafter defined, payable with respect to each Lease Year of the Second Extended Term shall be the amount set forth in Section 4.1 hereof. The first Lease Year of the Second Extended Term shall commence on the day next following the expiration of the First Extended Term.


The option granted pursuant to this Section 3.3 may be exercised only if Lessee is not in default under the Lease at the time of exercise and at the time of the expiration of the First Extended Term, and, further, only if there is not then an event or occurrence which with the passage of time or giving of notice, or both, would constitute a default hereunder, and said option shall be exercised by Lessee giving to Lessor written notice of Lessee's election so to do not less than twelve (12) full calendar months prior to the expiration of the First Extended Term. Furthermore, Lessee's option granted pursuant to this Section 3.3 may be exercised only if Lessee also contemporaneously exercises its options to extend pursuant to Section 3.3 of each of the Other Leases.


Notwithstanding the foregoing, Lessor acknowledges and agrees that the Rent for the First Extended Term and the Second Extended Term may not be known by Lessor at the time that Lessee is required to exercise its respective renewal options. Accordingly, in the event Lessor has not advised Lessee of the First Extended Term Rent at least thirteen (13) months prior to the date of the expiration of the Initial Term or the Second Extended Term Rent at least thirteen (13) months prior to the expiration of the First Extended Term, Lessee shall have the right to exercise the renewal right provided for herein subject to the right to rescind the same on written notice to Lessor delivered within thirty (30) days after Lessor advises Lessee in writing as to the First Extended Term Rent or the Second Extended Term Rent, as the case may be (the "Rent Notice"), which Rent Notice shall be delivered by Lessor to Lessee as soon as practicable after the debt service for the First Extended Term or the Second Extended Term, as the case may be, has been determined but in no event less than one hundred and eighty (180) days prior to the commencement of the First Extended Term or the Second Extended Term, as the case may be.


The Initial Term, as it may be extended by the First Extended Term and the Second Extended Term, is hereinafter collectively known as the "Term".


As used in this Article 3, the term default shall mean an "Event of Default" as defined in Article 19 of this Lease.


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ARTICLE IV--RENT


4.1 Throughout the Term of this Lease, Lessee shall pay to Lessor, or as Lessor shall direct, as fixed annual rental ("Rent") for the Demised Premises and the Personal Property over and above all other and additional payments to be made by Lessee as provided in this Lease the following amounts:


(i) For the first Lease Year, monthly Rent of $21,875.00;


(ii) For the second Lease Year and each subsequent Lease Year (of the
Initial Term or any Extended Lease Term) an amount equal to the prior Lease
Year's annualized monthly Rent of $262,500 multiplied by 1.5 times the
increase, if any, in the Cost of Living Index (as hereinafter defined) in
effect on September 1st of the current Lease Year over the Cost of Living
Index in effect on September 1st of the preceding Lease Year; provided,
however, that in no event will the increase in Rent from one Lease Year to
the next be greater than two and one-half percent (2.5%) of the sum of the
prior Lease Year's Rent nor shall such Rent decrease from the prior Lease
Year; and


(iii) The Cost of Living Index is defined as the Consumer Price Index for
All Urban Consumers, U.S. City Average (1982-1984 = 100), published by the
BLS, or such other renamed index. If the BLS changes the publication
frequency of the Cost of Living Index so that a Cost of Living Index is not
available to make a cost-of-living adjustment as specified herein, the
cost-of-living adjustment shall be based on the percentage difference
between the Cost of Living Index for the closest preceding month for which a
Cost of Living Index is available and Cost of Living Index for the
comparison month is required by this Lease. If the BLS changes the base
reference period for the Cost of Living Index from 1982-84 = 100, the
cost-of-living adjustment shall be determined with the use of such
conversion formula or table as may be published by the BLS. If the BLS
otherwise substantially revises, or ceases publication of the Cost of Living
Index, then a substitute index for determining cost-of-living adjustments,
issued by the BLS or by a reliable governmental or other nonpartisan
publication, shall be reasonably selected by Lessor and Lessee.


In the event the Commencement Date shall be other than the first day of the month, Lessee shall pay to Lessor a pro rata portion of the Rent for the month and a pro rata portion of all tax, insurance and other deposits provided for in this Lease. All fixed annual rental payments shall be made in equal monthly installments and shall be paid in advance on the first (1st) day of each month (together with all tax and insurance deposits required in this Lease). Unless otherwise notified in writing, all checks shall be made payable to Lessor and shall be sent c/o Idaho Associates, L.L.C., Two North LaSalle Street, Suite 1901, Chicago, Illinois 60602.


The Rent set forth in this Article 4 is based, in part, upon the debt service of the permanent first mortgage financing on the Demised Premises ("Initial Financing"). In the event that the debt service payable on Lessor's mortgage financing in effect on the date that the First Extended Term commences is more or less that the debt service on the Initial Financing, the Rent due during the First Extended Term shall be adjusted according to the following formula: The annual Rent due during the first year of the First Extended Term shall be increased or decreased in an amount equal to the difference between (i) the annual debt service on the indebtedness secured by the first mortgage encumbering the Demised Premises in effect on the first day of the First Extended Term, and (ii) the annual debt service on the indebtedness secured by the first mortgage encumbering the Demised Premises in effect on the day of the Initial Financing; provided, however, that the amount of principal to be used in making the calculations shall not exceed the original principal amount of the loan encumbering the Demised Premises concurrent with Lessor's acquisition of the Demised Premises. The subsequent annual increases as provided in Article 4.1 above for the remainder of the First Extended Term shall be calculated on the Annual Rent payable during the first year of the First Extended Term as so adjusted.


In the event that the debt service payable on Lessor's mortgage financing in effect on the date that the Second Extended Term commences is more or less than the debt service on Lessor's mortgage financing in


4 effect on the date the First Extended Term commences, the Rent due during the Second Extended Term shall be adjusted according to the following formula: the annual Rent due during the first year of the Second Extended Term shall be increased or decreased in an amount equal to the difference between (i) the annual debt service on the indebtedness secured by the first mortgage encumbering the Demised Premises in effect on the first day of the Second Extended Term, and (ii) the annual debt service on the indebtedness secured by the first mortgage encumbering the Demised Premises on the date that the First Extended Term commences; provided, however, that the amount of principal to be used in making the calculation shall not exceed the original principal amount of the loan encumbering the Demised Premises concurrent with Lessor's acquisition of the Demised Premises. The subsequent annual increases as provided in Article 4.1 above for the remainder of the Second Extended Term shall be calculated on the annual rent payable during the first year of the Second Extended Term as so adjusted.


4.2 This Lease is and shall be deemed and construed to be a "pure net" or "triple-net" lease and the Rent specified herein shall be net to the Lessor in each year during the Term of this Lease. The Lessee shall pay all costs, expenses and obligations of every kind whatsoever relating to the Demised Premises which may arise or become due during the Term of this Lease, except for any principal and interest payments and other costs owed by Lessor relating to any Mortgage (defined below) and Landlord's general overhead and administrative expenses (collectively, "Additional Rent"). Lessee does hereby indemnify the Lessor against any and all such costs, expenses and obligations.


ARTICLE V--LATE CHARGES


5.1 If payment of any sums required to be paid or deposited by Lessee to Lessor under this Lease, and payments made by Lessor under any provision hereof for which Lessor is entitled to reimbursement by Lessee, shall become overdue for a period of ten (10) days beyond the date on which they are due and payable as in this Lease provided, a late charge of 3% per month on the sums so overdue shall become immediately due and payable to Lessor as liquidated damages for Lessee's failure to make prompt payment and said late charges shall be payable on the first day of the month next succeeding the month during which such late charges become payable. If non-payment of any late charges shall occur, Lessor shall have, in addition to all other rights and remedies, all the rights and remedies provided for herein and by law in the case of non-payment of Rent. No failure by Lessor to insist upon the strict performance by Lessee of Lessee's obligations to pay late charges shall constitute a waiver by Lessor of its rights to enforce the provisions of this Article in any instance thereafter occurring.


ARTICLE VI--PAYMENT OF TAXES AND ASSESSMENTS


6.1 Lessee will pay or cause to be paid, as provided herein, as additional Rent, before any fine, penalty, interest or cost may be added thereto for the non-payment thereof, all taxes, assessments, licenses and permit fees, charges for public utilities, and all governmental charges, general and special, ordinary and extraordinary, foreseen and unforeseen, of any kind and nature whatsoever which during the Term of this Lease may have been, or may be assessed, levied, confirmed, imposed upon or become due and payable out of or in respect of, or become a lien on the Demised Premises and/or Personal Property or any part thereof (hereinafter collectively referred to as "Taxes and Assessments").


6.2 Any Taxes and Assessments relating to a fiscal period of any authority, a part of which is included within the Term of this Lease and a part of which is included in a period of time before or after the Term of this Lease, shall be adjusted pro rata between Lessor and Lessee and each party shall be responsible for its pro rata share of any such Taxes and Assessments.


6.3 Nothing herein contained shall require Lessee to pay income taxes assessed against Lessor, or capital levy, franchise, business license, estate, succession or inheritance taxes of Lessor.


6.4 Lessee shall have the right to contest the amount or validity, in whole or in part, of any Taxes and Assessments by appropriate proceedings diligently conducted in good faith, but only after payment of


5 such Taxes and Assessments, unless such payment would operate as a bar to such contest or interfere materially with the prosecution thereof, in which event, Lessee may postpone or defer such payment only if:


(1) Neither the Demised Premises nor any part thereof would by reason of
such postponement or deferment be in danger of being forfeited or lost; and


(2) Lessee shall have deposited with Lessor, to be held in trust, cash
or other security satisfactory to Lessor in an amount equal to not less than
the amount of such Taxes and Assessments which at such time shall be
actually due and payable, and such additional amounts reasonably required by
Lessor and any Mortgagee (as hereinbelow defined) of Lessor from time to
time, together with all interest and penalties in connection therewith and
all charges that may or might be assessed against or become a charge on the
Demised Premises or any part thereof in such proceedings, or, if required by
the taxing authority, an amount deposited in trust with the taxing authority
during the pendency of any contest in lieu of any additional charge against
the Demised Premises until resolution of the contest.


Unless Lessor agrees otherwise, the cash so deposited with Lessor shall not bear interest and the cash or securities so deposited shall be held by Lessor until the Demised Premises or any part thereof shall have been released and discharged and shall thereupon be returned to the Lessee, less the amount of any loss, cost, damage and reasonable expense that Lessor or any Mortgagee has sustained in connection with the Taxes and Assessments so contested.


6.5 Upon the termination of any such proceedings, Lessee shall pay the amount of such Taxes and Assessments or part thereof as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, interest, penalties or other liabilities in connection therewith, and such payment, at Lessee's request, shall be made by Lessor out of the amount deposited with respect to such Taxes and Assessments as aforesaid. In the event such amount is insufficient, then the balance due shall be paid by Lessee.


6.6 Lessor shall not be required to join in any proceedings referred to in this Article, unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by and/or in the name of Lessor, in which event Lessor shall join in such proceedings or permit the same to be brought in its name. Lessor shall not ultimately be subjected to any liability for the payment of any costs or expenses in connection with any such proceedings, and Lessee will indemnify and save harmless Lessor from any such costs and expenses. Lessee shall be entitled to any refund of any Taxes and Assessments and penalties or interest thereon received by Lessor but previously reimbursed in full by Lessee.


6.7 If any income, profits or revenue tax shall be levied, assessed or imposed upon the income, profits or revenue arising from rents payable hereunder, whether partially or totally in lieu of or as a substitute for real estate or personal property taxes imposed upon the Demised Premises or Personal Property or otherwise, then Lessee shall be responsible for the payment of such tax.


ARTICLE VII--TAX DEPOSITS


7.1 Lessee shall be required to make deposits for annual Taxes and Assessments and, will make monthly deposits with Lessor, of an amount equal to one twelfth (1/12) of the annual Taxes and Assessments or such greater amount as may be required by any Mortgagee. Said deposits shall be due and payable on the first day of each month as additional Rent, shall not bear interest and shall be held by Lessor and/or a mortgagee of the Lessor to pay the real estate taxes as they become due and payable. If the total of the monthly payments as made under this Article shall be insufficient to pay the Taxes and Assessments when due, then Lessee shall on demand pay Lessor the amount necessary to make up the deficiency, and if appropriate, Lessee shall receive a credit against the next monthly tax escrow payment coming due in an amount equal to said deficiency payment.


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ARTICLE VIII--OCCUPANCY


8.1 During the Term of this Lease, the Demised Premises shall be used and occupied by Lessee for and as a Medicare and Medicaid certified skilled care and/or intermediate care nursing home and for no other purpose. Lessee shall at all times maintain in good standing and full force all the licenses, certifications and provider agreements issued by the State of Idaho and any other applicable state or federal governmental agencies, permitting the operation on the Demised Premises of a Medicare and Medicaid certified skilled and/or intermediate care nursing home facility with no less than one hundred three (103) licensed, and Medicaid certified beds.


8.2 Lessee will not suffer any act to be done or any condition to exist on the Demised Premises which may be dangerous or which may, in law, constitute a public or private nuisance or which may void or make voidable any insurance then in force on the Demised Premises.


8.3 Except as otherwise specifically provided in this Lease, upon termination of this Lease for any reason, Lessee will return to Lessor the Demised Premises qualified and sufficient for licensing and certification by all governmental agencies having jurisdiction over the Demised Premises as a Medicare and Medicaid certified skilled and/or intermediate care nursing home having no less than one hundred three (103) licensed, and Medicaid certified beds with licenses, certifications, and provider agreements in full force and good standing. All the Demised Premises, with the improvements located thereon, and all the Personal Property shall be surrendered in good order, condition and repair, ordinary wear and tear excepted.


ARTICLE IX--INSURANCE


9.1 Lessee shall, at its sole cost and expense, during the Term of this Lease, maintain property insurance provided by a Causes of Loss-Special Form or similar form. Such insurance shall include an endorsement for increased cost of construction. Such insurance shall be obtained from a responsible company or companies approved by Lessor, not to be unreasonably withheld. Such insurance shall, at all times, be maintained in an amount equal to the full replacement cost of the Demised Premises and the Personal Property or in such lesser amount as may be required by Lessor and any Mortgagee of the Demised Premises but at all times, in an amount sufficient to prevent Lessor and Lessee from becoming co-insurers under applicable provisions of the insurance policies. As used herein, the term "full replacement cost" shall mean coverage for the actual replacement cost of the Demised Premises and the Personal Property requiring replacement from time to time which, if not agreed upon by Lessor and Lessee, shall be determined by an appraiser, engineer, architect or contractor reasonably selected by Lessor. Upon request by Lessee, Lessor will provide Lessee with information in its possession which is reasonably necessary to establish the value of the Demised Premises. Such insurance shall at all times be payable to Lessor and Lessee as their interests may appear, and shall contain a loss-payable clause to the holder of any Mortgage to which this Lease shall be subject and subordinate (in accordance with Article 26 herein), as said Mortgagee's interest may appear. All such policies of insurance shall provide that:


(a) They are carried in favor of the Lessor, Lessee and any Mortgagee,
as their respective interests may appear, and any loss shall be payable as
therein provided, notwithstanding any act or negligence of Lessor or Lessee,
which might otherwise result in forfeiture of insurance; and


(b) A standard Mortgagee clause in favor ...