NEGOTIATING KEY LEASE PROVISIONS A Landlord's Point of View. By Jennifer Cobb, Esq.

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1 NEGOTIATING KEY LEASE PROVISIONS A Landlord's Point of View By Jennifer Cobb, Esq. Jameson Babbitt Stites & Lombard, P.L.L.C. 999 Third Avenue, Suite 1900 Seattle, WA (206) JENNIFER D. COBB joined the Seattle law firm of Ferguson & Burdell as an associate in 1984 and became a partner in On March 1, 1994, Ms. Cobb, along with nine other lawyers who were formerly with Ferguson & Burdell, formed Jameson Babbitt Stites & Lombard. Ms. Cobb represents clients involved in real estate and business transactions, including sales and acquisitions, commercial development, condominiums, lending (including representation of lenders on FNMA and HUD loans) and leasing, as well as the day-to-day representation of real estate and business clients. Ms. Cobb is a member of the King County, Washington State and American Bar Associations. She is a member of the Real Property, Probate & Trust and Business Sections of the Washington State Bar Association and is a speaker on such subjects as Advanced Real Estate Purchase and Sale Agreements, Due Diligence and Commercial Leasing. Ms. Cobb is a member of the International Council of Shopping Centers and Commercial Real Estate Women (CREW). 1

2 I. INTRODUCTION AND GENERAL COMMENTS A. Commercial Leasing: This outline focuses on commercial as opposed to residential lease provisions. Commercial leasing includes leasing of office, retail, industrial and other types of commercial projects. B. Standard Forms: It is always advantageous for a landlord to present the first lease draft on its standard form. Standard forms should be reasonable while at the same time adequately protecting the owner/landlord on all issues. Forms can be "tenant friendly" as opposed to being unduly one-sided. C. Attach All Exhibits: All exhibits referenced in or part of the lease need to be attached to the lease itself for completeness and enforceability. Attorneys should review all exhibits prepared by clients, such as legal descriptions, site plans, floor plans and construction exhibits or work letters to ensure consistency with the lease itself. D. Pass-Through Expectations: The landlord's pricing of basic rental usually assumes a "gross," "triple net" or "net" lease structure. Thus, it is essential that the landlord's expectations as to who (i.e., landlord or tenant) will be responsible for taxes, insurance, common area costs, utilities and other costs of operating, maintaining and managing the building and project are properly reflected. (See discussion on Operating Expenses below.) E. Relationship Tending. As an attorney negotiating a lease on behalf of a landlord, remember that the lease negotiation is the first step of a potentially long- term and mutually beneficial relationship. Lease negotiations do not need to be adversarial. Even the hardest negotiations, when conducted with professionalism and respect, can help cement, rather than impede, the landlord/tenant relationship. II. DATE/PARTIES A. Date: The Lease Agreement needs to be properly dated for reference purposes. B. Tenant Identity: The landlord needs to make sure the proper "tenant" executes the lease. If the landlord has reviewed and is relying on financial statements of individuals or an entity, it needs to be sure that the "credit" source is the executing party or a guarantor of the tenant's obligations. This is particularly true when the landlord is incurring up-front expenses for tenant improvements, brokerage commissions, etc. C. Continuous Liability: The lease should contain a clause providing that the tenant shall remain liable for its obligations under the lease, even if there is a permitted assignment or sublease, unless expressly released from liability by the landlord. 2

3 D. Guaranties: Where a tenant is a shell entity, subsidiary or upstart company, landlord may be wise to require a guaranty from individual principals or corporate parents, as applicable. (See Guaranty attached as Form 1.) E. Credit Enhancement: In a case where there is a business concern regarding the ability of the named tenant to meet its obligations under the Lease, Landlord may require additional credit enhancements in the form of a larger security deposit and, ideally, a letter of credit securing the Tenant's obligations under the Lease. (See Form 26.) III. PROPERTY/LEASED PREMISES A. Property: The "Property" or "Project" should be defined in terms of name, address, municipality and state. A legal description and, if applicable, a site plan should be attached as exhibits to the lease. The names of current and prospective tenants should not be included on the site plan attached as an exhibit to the Lease as this could be seen as a representation to the applicable tenant as to other specific tenants and the tenant mix. The lease itself should expressly disclaim any implied representations regarding the location of improvements, anchor tenants or tenant mix. B. Premises: The "premises" to be leased should be clearly identified on the site plan or floor plan and by address, suite number, municipality, state and zip code. There should also be stated an approximate square footage of the premises. C. Relocation of Tenants: In some cases, the landlord will want to preserve the right to move or relocate some, if not all, of the smaller tenants in multi-tenant buildings or shopping centers. In such cases, it is reasonable for the landlord to bear the expense of such relocation. D. Expansion, First Refusal and First Opportunity Rights: The granting to tenants of the right to expand into adjacent space, or the right to lease such additional space prior to lease of such space to another tenant always restricts the landlord's flexibility in the future. If such rights are a necessary ingredient to the transaction, the applicable provisions should be very carefully drafted so as to be as specific and detailed as possible. If such provisions are vague or ambiguous, the landlord may be subjected to major obstacles and/or delays at the time these rights need to be enforced or interpreted. (See Forms 2, 3 and 4.) IV. TERM A. Initial Term: The term of the lease should be specified by a number of years or months with a designated commencement date. 3

4 V. RENT B. Commencement Date: The commencement date may be a date certain, or, if landlord will be constructing improvements to the premises, the commencement date may be the date of substantial completion of the improvements. There should be a provision specifically stating that the landlord is not liable for delays in delivery of the premises. C. Confirmation of Commencement/Termination Date: Where there is an uncertain commencement date, the tenant should be required to sign a confirmation of commencement and termination dates at such time as the commencement is finally determined. This prevents confusion in the future. D. Extension Options: Tenants will often negotiate options to extend the lease after the initial term. Landlords should ensure that adequate notice (i.e., 6 months or 1 year) of the tenant's exercise of the option is required. Usually base rent is adjusted to fair market value for the extension term or terms. There are various methods of determining market rent for the extension term. (See Forms 5, 6 and 7.) A. Fixed vs. By Square Foot: 1. Fixed or Base Rent: Landlords and lenders generally prefer fixed dollar rental amounts unless actual future construction may vary the premises size substantially. This ensures a known income stream. Fixed rent should state monthly installments or annual amounts, payable monthly. 2. Square Foot Measurement: Depending on the type of project (more common in industrial and office leases) tenants may require that they only pay for actual square footage of the premises on a per square foot rental rate. In such cases, the lease should be clear as to whether the per square foot rate is multiplied by usable or rentable area. Usable square footage is the actual area within the four walls of the premises. Rentable area includes a "load factor" for common areas, multi-tenant corridors, etc. The best reference for methods of computing "usable" and "rentable" areas for various types of projects is the Building Owners and Management Association's ("BOMA") standard procedures for measurement. 3. Costs of Improvements to the Premises: Landlords may want to have provisions designed to protect themselves against extra costs associated with constructing or upgrading the premises for a tenant. The lease may require the tenant to pay a certain amount of additional rent for the portion of costs of the tenant improvements which exceed a certain "allowance" or cost per square foot. B. Percentage Rental: In retail leases, landlords often structure rent as a combination of "fixed rent" and "percentage rent" based on the sales realized by the tenant in its business 4

5 within the premises. Usually, percentage rent is based on a percentage of "gross sales" in excess of the base rent payable. This creates a "sharing" of the benefits of a successful project and tenancy. Due to this sharing concept, the lease should contain an antipartnership clause, disclaiming any partnership between landlord and tenant. 1. Definition of Gross Sales: The definition of gross sales should be inclusive, but provide for reasonable exclusions. (See Forms 8 and 9.) 2. Monthly Sales Reports: Landlords should require that the tenant provide monthly sales reports in all leases providing for percentage rent. 3. Books/Audits: The tenant's books and records of revenue should be kept on the leased premises or in another location in the general location of the premises so that landlord may review them to ensure proper reporting of sales. This clause should give the landlord the right to inspect and/or complete audits of the tenant's sales records. 4. Radius Clause: In competitive areas the landlord may want to prohibit the tenant from engaging in a similar or competitive business within a certain radius of the leased premises. If the tenant violates this clause, the landlord should, by an appropriate provision, include the sales from that business as sales from the leased premises for purposes of determining percentage rent. (See Form 10.) 5. Maximization of Rent. Leases containing percentage rent should require the tenant to continuously operate its business in such a manner so as to maximize its sales at the premises. C. Rent Adjustment: 1. Fixed: In leases for a term in excess of three (3) years, the tenant's rental charges can be adjusted by fixed steps (i.e., increases in rent) to account for anticipated inflationary changes. 2. CPI: The tenant's rent adjustment can also be directly tied to the Consumer Price Index ("CPI"). (See Forms 11 and 12.) 3. Percentage Rent: Tenants paying percentage rent, especially low percentage producers, may also be tied to either fixed or CPI rent adjustments. VI. OPERATING EXPENSES AS ADDITIONAL RENT A. Method of Reimbursement: 5

6 1. True Net: A true net lease is sometimes used in single user buildings where base rent is structured lower assuming the tenant will pay all taxes, insurance premiums and maintenance, repair and replacement costs associated with the building and property. If this method is used, the "absolute net" concept should be clearly stated. 2. Triple Net: More commonly, the tenant will be required to pay its pro rata share of taxes, insurance and common area maintenance/ operating expenses incurred by landlord with respect to the premises, building and property. 3. Base Year/Expense Stop: Often in the office lease market, initial base rents are deemed to include taxes, insurance, CAM and other operating expenses for the initial or first full calendar year of the term. In order for a landlord to protect itself from bearing all risk of increased costs, these leases often provide for the tenant to pay its share of such charges in excess of the charges incurred during a certain base year. The base year, from a landlord's standpoint, should be the year the lease is executed or the first full calendar year of the Term. As an alternative, the lease may provide for an "expense stop," which is a sum certain per square foot (i.e., $5.00 per square foot) with the tenant paying its share of all expenses in excess of such amount with respect to its premises. B. Tenant's Percentage or Pro Rata Share: Tenant's share of operating expense passthroughs is usually a percentage equal to the fraction of: Tenant's Rentable Area (sq. ft.) Total Building/Project Square Feet However, often certain operating expenses for multi-use properties are beneficial to less than all tenants (i.e., janitorial services in an office/retail tower may be provided to office but not retail tenants). Thus, it is advantageous in certain projects to include a clause allowing landlord to equitably adjust the tenant's percentage of any particular item of expense to create a pro rata reimbursement among tenants benefiting from such expense. This "equitable adjustment" should be an option as opposed to mandatory obligation of the landlord. (See Form 13.) C. Definition of Operating Expenses: It is essential to properly define the costs and expenses which will be subject to reimbursement by tenants of a project. Some leases separately deal with taxes, insurance and common area maintenance (CAM) charges. We prefer to use the broad concept of "operating expenses" which includes taxes, insurance and CAM charge as well as other costs incurred by landlord in connection with the "ownership, maintenance, and operation of the project." This general definition should be supplemented by a non-inclusive list of examples of items which will be included in operating expenses. (See Form 14.) 6

7 D. Annual Estimates and Reconciliation: Because the actual operating expenses will vary depending on numerous factors, it is ideal for a landlord to estimate operating expenses for each calendar year and require tenants to pay operating expenses in monthly installments based upon the annual estimate. Landlord should have the right to adjust the amount of monthly payments during the year if landlord determines its estimate was incorrect. Otherwise, within a certain time period after the end of each calendar year, landlord should cause a reconciliation of its actual operating expenses for the past year and the tenants should be given notice of any underpayment which should be paid within a certain time period (i.e., 30 days). The lease should provide for any overpayment to be credited to the tenant's future installments of rent and/or operating expenses. E. Operating Expense Caps: Landlords should avoid agreeing to place annual caps on operating expense pass-throughs. If landlord agrees to do so for an important tenant, the cap should have the effect of preventing major increases (i.e., 10%-25%) and should apply only to controllable expenses and specifically not apply to uncontrollable costs such as taxes, assessments, insurance premiums, janitorial contracts, etc. VII. COMMON AREAS A. Right to Change: The lease should reserve to the landlord the unrestricted right to modify and change the common areas of the building and to accesses and location of improvements on the project as landlord deems necessary. In addition, the lease should expressly disclaim any representation by landlord of the conformance of any existing or future improvements with the site plan. The use of the common areas by tenants, their employees and invitees should be non-exclusive and subject to such reasonable rules and regulations as may be presently or in the future promulgated by the landlord. B. Maintenance: Maintenance provisions requiring landlord to maintain the common areas should not be too specific. A general, reasonably measurable standard should be used. VIII. USE A. Commercial: The "use clause" should be specific, stating the tenant's actual proposed use of the leased premises. Avoid general, broad uses such as "offices" or "variety store." Be sure to prohibit any uses which may hinder the landlord in leasing other portions of the project. B. Exclusive Use: If the landlord grants an exclusive use to one tenant, all other tenants in the project need to be subject to and agree to honor the granting of the exclusive use. To the extent possible, landlords should avoid exclusive uses and, if granted, should limit them to a reasonable restriction. For example, an exclusive on the sale of "food items" is very broad and may eliminate many potential tenants while an exclusive for the conduct of a 7

8 "multi-product supermarket in a space in excess of 20,000 square feet" would only prevent having another large supermarket in the Project. C. Hours: In retail situations, the landlord may require tenants to be open for certain days and hours of operation. D. Continuous Operation: Particularly in the retail setting, the landlord should require tenants to open for business in the premises and thereafter operate business continuously in the premises. In the event tenant fails to "continuously operate," the landlord should have the right to reclaim possession and terminate the lease. (See Form 15.) IX. UTILITIES A. Equitable Reimbursement: Landlord's goal with respect to utilities is to obtain an equitable sharing by tenants of utility charges based upon relative usage and to obtain reimbursement of common area utilities on a pro rata basis. B. Separate Metering: To the extent feasible, particularly in industrial and retail leases, utilities should be separately metered so that each tenant contracts and pays for its own utility usage. C. Reasonable Allocation: Utilities which are not separately metered to individual tenants should be allocated to the tenants serviced by such utilities based upon an equitable allocation. To ensure equity landlords should monitor relative usage of utilities by tenants, charge separately for extra or "off-hours" consumption and have a provision in all leases allowing allocation of utility charges among tenants, in landlord's discretion. X. MAINTENANCE AND REPAIRS A. Tenant's Obligation: The lease should provide that the tenant is responsible for keeping, maintaining and repairing the premises in the same condition as in which originally delivered. In retail leases, this obligation usually will extend to the storefront and storefront glass. In industrial leases, the maintenance and repair obligations may extend to the repair and replacement of utilities, HVAC and exterior surfaces. In the event tenant fails to properly maintain and repair the premises, the landlord should have the right to complete such work itself and demand reimbursement from tenant. B. Landlord's Obligations. In most office projects, and certain retail and industrial projects, the landlord will agree to be responsible for maintenance, repair and replacement of the roof and the common areas, and structural and exterior portions of the project. Remember that most repair and maintenance costs (as opposed to replacements of capital items) are subject to reimbursement by tenants under net and triple net leases. To be sure this is clear, it is advantageous to begin the provision regarding landlord's maintenance and 8

9 repair obligations with a clause such as: "Subject to reimbursement by tenant pursuant to Section above, to the extent applicable.... " XI. SIGNS AND IMPROVEMENTS A. Signs: The landlord should control and have the right to consent to the size, design and location of signs and other displays, banners, awnings and improvements which can be seen from outside the leased premises. Landlord may, for certain types of projects, want to develop sign criteria to ensure conformance of sign design within its project. B. Tenant Improvements: 1. Control: It is important that the landlord maintain control over alterations and improvements made by tenants to prevent poor workmanship, interference with structural integrity and to control the condition of the premises upon expiration of the term. The lease should state that all improvements and alterations become the property of landlord at the end of the term. However, landlord may want to condition its consent to improvements on the tenant's agreement to remove the same and restore the premises to their original condition upon surrender at the end of the term. 2. Contractor Liens: Landlord should have the right to approve the contractor who will be performing the work on behalf of the tenant. The lease should prohibit the filing of any liens on the premises or property. Landlord may want to require a bond to be posted to secure performance and/or payment with respect to the improvements. XII. INSURANCE AND INDEMNITY A. General: Landlord should seek the advice of its insurance agent both in drafting language for its standard form lease and in negotiating these provisions with tenants. It is essential that the landlord's insurance coverage and the coverage required of the tenant constitute a proper "fit." B. Tenant's Insurance: Tenant should be required to obtain and maintain, throughout the entire lease term, comprehensive liability insurance covering the use of the premises and common areas by tenant's and its agents, employees, contractors and invitees. The amount of coverage will vary depending on the size of the tenant and the type of business it operates. The normal tenant liability coverage ranges from $1,000,000 to $10,000,000. In addition to liability insurance, tenants should carry "all-risk" casualty insurance, with business interruption coverage covering tenant's personal property and fixtures located within the premises. Longer term leases may provide for a method to increase coverage to reflect inflation and new insurance coverage requirements general to the market. 9

10 C. Indemnification: The tenant should agree to indemnify, defend and hold the landlord harmless with respect to the acts and omissions of tenant and its agents, employees, invitees and contractors and the operation of the business in and around the premises and/or from tenant's breach of its obligations under the lease. (See Form 16.) D. Mutual Waiver of Subrogation: All leases should contain a mutual waiver of subrogation clause. In addition, the parties should be required to ensure that their respective policies recognize or confirm such waiver. The effect of the waiver of subrogation clause is to render fault or negligence irrelevant as long as either party's insurance covers the loss. (See Form 17.) XIII. DAMAGE BY FIRE OR CASUALTY These provisions should allow the landlord flexibility in its choices upon damage or destruction of the building or premises. First, and most importantly, the landlord should never have an obligation to repair or restore if the cost of such repair or restoration is not completely covered by available insurance proceeds. Secondly, a landlord should never have an obligation to repair or restore if its mortgagee does not consent to use of the proceeds for such purposes. Thirdly, in the event of more than minimal damage, the landlord should have the right to decide whether it is economically feasible to rebuild. With respect to damage to specific tenant's premises, the landlord should not have the obligation to repair and restore if the lease is nearly expired (i.e., will expire within months). Normally, a tenant's rental will be abated during the period of reconstruction to the extent tenant is able to conduct its business on the premises. Landlords should make sure that their all-risk policy contains a provision or rider requiring compensation for loss of rentals. XIV. EMINENT DOMAIN A. Total Versus Partial Condemnation: The lease should provide that the lease terminates in the event of a total condemnation (or agreement in lieu of condemnation) of the entire premises or so much thereof as will prevent tenant from conducting its business on the premises. B. Damages: Any damages awarded as just compensation for the building or property should accrue solely to the landlord. However, any separate awards made to the tenant for relocation, loss of personal property, or moving expenses should be allowed to the tenant; provided that the tenant secures a separate award for the same and; provided, further that there is no reduction in landlord's award. 10

11 XV. ASSIGNMENT AND SUBLETTING Generally, a landlord will not allow the tenant to assign or sublet the leased premises without the landlord's prior written consent. However, with large tenants the landlord may need to allow assignment and/or subletting subject to the meeting of certain conditions (i.e., net worth, reputation, experience, etc.) and rely on the continuing liability and use provisions of the lease. The landlord needs to make sure these clauses work together. The lease should specifically state that a transfer of a controlling interest in the tenant entity constitutes an assignment requiring landlord's consent. (See Form 18.) XVI. RIGHTS OF ENTRY To make sure that the landlord can do any necessary work, inspections or enter the premises for other purposes, leases should contain inspection easements and rights of entry. This is especially important for environmental matters where the landlord may need to enter the property to have testing completed and, if necessary, to have remedial work performed. The lease should expressly exculpate landlord from liability for interruption of tenant's business in conducting these activities. XVII. REMEDIES A. General: For the purposes of the landlord's remedies, all monetary payments should be defined as rent. The Lease should provide for interest on late rent and for a late fee to cover administrative costs. B. Terminate Possession or Lease: The landlord needs to be able to terminate the tenant's possession or the lease upon the occurrence of certain events including failure to pay rent, other defaults under the lease and/or the tenant's bankruptcy or insolvency after notice and a failure by tenant to cure the default. Regardless of whether or not the lease is terminated, landlord should have the right to relet and to recover all damages resulting from the tenant's default. (See Form 19.) C. Cure: The landlord should be given the right to cure non-monetary defaults under the lease for and at the expense of the tenant. XVIII. SURRENDER A. Condition of Premises: The lease should provide that the tenant will surrender the leased premises in good condition and repair. Also, when possible, the tenant should be required to remove any tenant specific alterations, additions, installations, fixtures or improvements and repair any damage. B. Hold-Over: The landlord should provide for indemnity for loss or liability resulting from any delay by the tenant in surrendering the premises. At its option, the landlord may 11

12 wish to deem the tenant a month to month tenant at a higher rent subject to the other obligations of the lease. XIX. SUBORDINATION AND ESTOPPEL CERTIFICATES A. Subordination: The lease should provide that the lease and tenant's rights under the lease are subordinate to the lien of all existing and future mortgages, deeds of trust and land leases on the property. The tenant should further be required to execute agreements requested by landlord confirming such subordination and other reasonable demands of landlord's lender. There should be a time period (i.e., 10 days) for tenant's execution and delivery of the subordination agreement after which time the tenant will be deemed in default. (See Form 20.) B. Estoppel Certificates: The tenant should also be required to, upon request by landlord, certify to landlord's lender and/or purchaser certain facts regarding the lease, such as commencement and expiration dates, rental, lack of defaults, etc. The landlord should not be tied to a specific form and these clauses should also be drafted broadly to require the tenant to execute such estoppels as the landlord or its lender may require. (See Form 21.) C. Mortgage Protection: Leases should require the tenant to give notice of any landlord default and the opportunity to cure to any mortgagee of the property to whom the tenant has been given notice and address. (See Form 22.) XX. MISCELLANEOUS A. Landlord's Lease Liability: The landlord's lease liability should be tied only to the property and/or the landlord's ownership thereof. (See Form 23.) B. Hazardous Substances: It is important that the tenant be prohibited from using, storing or disposing of hazardous substances in violation of any applicable environmental laws. There should be a strong indemnification provision requiring tenant to indemnify landlord with respect to all costs, damages and penalties resulting from the tenant's use of hazardous materials. (See Form 24.) C. Preparation of the Leased Premises: The landlord should be specific as to what it intends to do to prepare the leased premises for occupancy by the particular tenant and as to what it intends for the tenant to accomplish. The attorney should review all work letters and construction exhibits provided by the landlord for legal issues and clarity. D. Financial Statements: The tenant may be required to provide financial statements to the landlord or a proposed mortgagee or purchaser upon the request of the landlord. 12

13 E. Lender Approval: Leases should have a clause which allows for modification of the lease as required by a lender for the approval of financing. At a minimum, this clause should apply to non-monetary provisions which do not materially increase the liability of the tenant. (See Form 25.) 13

14 FORM 1 GUARANTY IN CONSIDERATION OF, and as an inducement for the granting, execution and delivery of that certain Lease, dated, 19 (hereinafter called "Lease") between, a ("Landlord"), and, a ("Tenant"), and in further consideration of the sum of One Dollar ($1.00) and other good and valuable consideration paid by the Landlord to the undersigned, the undersigned (hereinafter jointly called the "Guarantor"), hereby jointly and severally personally guarantee to Landlord, its successors and assigns, the full, prompt and timely payment of Rent, as defined in the Lease, and any and all other sums and charges payable by Tenant, its successors and assigns, under the Lease and the full, prompt and timely performance and observance of all of the covenants, terms, conditions and agreements therein provided to be performed and observed by Tenant, its successors and assigns. Guarantor hereby covenants and agrees to and with Landlord, its successors and assigns that if default shall at any time be made by Tenant, its successors and assigns, in the payment of any such sums or in the performance of any of the terms, covenants, provisions or conditions contained in the Lease, Guarantor shall forthwith pay such sums to Landlord, its successors and assigns, and shall forthwith faithfully perform and fulfill all of such terms, covenants, conditions and provisions, and will forthwith pay to Landlord all damages that may arise in consequence of any default by the Tenant, its successors and assigns under said Lease, including, without limitation, all reasonable attorneys' fees and costs incurred by Landlord or caused by any such default and/or by the enforcement of this Guaranty. This Guaranty is an absolute and unconditional personal Guaranty of payment and of performance. It shall be enforceable against Guarantor, its heirs, successors and assigns, without the necessity for any suit or proceedings on Landlord's part of any kind or nature whatsoever against Tenant, its successors and assigns, and without the necessity of any notice of nonpayment, nonperformance or non-observance or of any notice of acceptance of this Guaranty, or of any other notice or demand to which the Guarantor might otherwise be entitled, all of which Guarantor hereby expressly waives. Guarantor hereby expressly agrees that the validity of this Guaranty and the obligations of Guarantor hereunder shall in no way be terminated, affected or impaired by reason of the assertion or the failure to assert by Landlord against the Tenant, or Tenant's successors and assigns, of any of the rights or remedies reserved to Landlord pursuant to the provisions of the Lease. The Guaranty shall be a continuing Guaranty, and the liability of Guarantor hereunder shall in no way be affected, modified or diminished by reason of any assignment, renewal, modification or extension of the Lease or by reason of any modification or waiver of or change in any of the terms, covenants, conditions or provisions of the Lease, or by reason of any extension of time that may be granted by Landlord to Tenant, its successors or assigns, or by reason of any dealings or transactions or matter or things occurring between Landlord and Tenant, its successors or assigns, whether or not 14

15 notice thereof is given to Guarantor. This Guaranty shall be construed under the provisions of Washington law. All of Landlord's rights and remedies under the Lease or under this Guaranty are intended to be distinct, separate and cumulative and no such right and remedy therein or herein mentioned is intended to be in exclusion of or a waiver of any of the others. DATED:,. GUARANTOR: 15

16 FORM 2 FIRST RIGHT OF NEGOTIATION (NEUTRAL) Tenant hereby acknowledges that, as of the date hereof, Tenant has elected not to include as part of the Premises that certain space located on the and ( and ) floors of the Building (the "First Negotiation Space") and the Landlord shall have the unconditional right to initially lease the First Negotiation Space at any time and on any terms, whether as a whole or in parts, without any interference from Tenant. If First Negotiation Space becomes available during that portion of the Term of this Lease following the initial leasing of such First Negotiation Space, and provided Tenant is not then in default under this Lease, Landlord shall notify Tenant of the availability of such space and the terms and conditions on which Landlord is willing to lease such space to Tenant (the "Notice") which terms and conditions shall be reasonably determine Landlord to be the then prevailing market terms and conditions for comparable office space. Tenant shall have the right. within ( ) days following receipt of the Notice. to elect to lease such space on the terms and conditions contained in the Notice. If Tenant elects to lease such space, Landlord and Tenant shall enter into an amendment to this Lease (the "Amendment") within ( ) days after such election documenting and incorporating into this Lease the terms and conditions contained in the Notice. The right to lease the space described in the Notice shall apply only to the entire space described in the Notice If Tenant fails to elect to lease such space, Landlord shall then be free to offer such space or any part thereof, and negotiate a lease therefore, on any terms and conditions with any other party and Tenant shall have no further right to lease the space which is the subject of the Notice until such space subsequently becomes available. 16

17 FORM 3 RIGHT OF FIRST REFUSAL BONA FIDE THIRD PARTY OFFER IDENTICAL TERMS (NEUTRAL) Landlord agrees that prior to leasing that portion of the Building described in Exhibit " " (the "Additional Space") to a third party, Landlord shall submit to Tenant a copy of the proposed Lease which has been executed by the third party and which Landlord is prepared to enter into with the third party (the "Offered Lease"). On or before the tenth (10th) day after the date of such submission, Tenant shall have the sight (the "First Refusal Right") to send Landlord a notice stating that Tenant elects to rent the Additional Space upon the identical terms and conditions set forth in the Offered Lease (the "Offered Lease Terms"). Such notice must be postmarked within the ten (10) day period and sent by registered or certified mail, return receipt requested. If Tenant duly and timely exercises the First Refusal Right, Landlord and Tenant shall promptly enter into a lease for the Additional Space (the "New Lease") on the Offered Lease Terms. If for any reason Tenant fails to duly and timely exercise the First Refusal Right, or if Tenant properly exercises such right but thereafter for any reason (other than the fault of Landlord) does not timely enter into the New Lease, Landlord shall be free to lease the Additional Space to another tenant on the Offered Lease Terms and First Refusal Right and Landlord's obligation under this paragraph shall be null and void and without further force and effect. Should Landlord not lease Additional Space to another tenant on the Offered Lease Terms, Tenant's First Refusal Right shall continue in accordance with the foregoing procedure and for so long as Tenant is in lawful possession hereunder whether by extension or holdover and is in full compliance with the terms hereof. 17

18 FORM 4 EXPANSION OPTION (NEUTRAL) (a) Tenant shall have a one time right ("Expansion Option #2"), exercisable by written notice to Landlord given no earlier than and no later than, to add to the Premises tat portion of the floor of the Building not included within Expansion Space #1 ("Expansion Space #2"), in accordance with the further provisions o this Section (b) Tenant shall have no right to exercise Expansion Option #2 during the time commencing from the date Landlord gives to Tenant a notice of default under this Lease and continuing until the default alleged in said notice is cured. The period of time within which Expansion Option #2 may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise such option because of said default. It Tenant does not exercise its rights in a timely manner, Tenant will have irretrievably lost such right to add to the Premises Expansion Space #2. (c) (1) In the event Expansion Space #2 has not yet been initially improved by the construction of tenant improvements, and provided Tenant has exercised Expansion Option #2 in accordance with the foregoing, the space planning and construction of the tenant improvements in Expansion Space #2 (which space planning and construction shall be substantially in accordance with the terms and conditions of Exhibit to this Lease, as reasonably modified in the "Amendment" (as hereinafter defined)) shall be accomplished in accordance with the following schedule: (i) Tenant's Preliminary Plans for Expansion Space #2 shall be completed by ; (ii) Tenant's Issued for Construction Documents or Expansion Space #2 shall be completed and approved by Landlord and submitted to the City by ; (iii) commencement of construction of the tenant improvements shall occur on or about ; and (iv) completion of the tenant improvements shall occur on or about. (2) Upon the earlier of the date (i) Tenant occupies Expansion Space #2, or (ii) the tenant improvements to Expansion Space #2 have been substantially completed (as the term "substantially completed" is defined in Schedule ) (the "Unimproved Expansion Space #2 Completion Date"), Tenant shall commence paying Rent for Expansion Space #2. (d) (1) In the event Expansion Space #2 has been initially improved by the construction of tenant improvements, and provided Tenant has exercised Expansion Option #2 in accordance with the foregoing, the space planning and construction of the additional improvements to Expansion Space #2 (which space planning and construction shall be substantially in accordance with the terms and conditions of Exhibit to this Lease, as reasonably modified in the Amendment) shall be accomplished in accordance with the following schedule: (i) Tenant's Preliminary Plans for Expansion #2 shall be completed by ; (ii) Tenant's Issued for Construction Documents for Expansion Space #2 shall be completed and approved by 18

19 Landlord and submitted to the City by ; (iii) commencement of construction of the additional improvements to Expansion Space #2 shall occur on or about ; (iv) completion of the additional improvements shall occur on or about. (2) Tenant shall commence paying Rent for Expansion Space #2 upon the earlier of (i) the date upon which.the Tenant takes possession of Expansion Space #2, or (ii) the date upon which any additional tenant improvements constructed in Expansion Space #2 by Landlord have been substantially completed (as the term "substantially completed" is defined in Schedule ) (the "Improved Expansion Space #2 Completion Date"). (e) If Tenant timely exercises Expansion Option #2. Landlord and Tenant shall enter into an amendment to this Lease (the "Amendment") within thirty (30) days thereafter which shall provide that Expansion Space #2 shall be governed by all of the terms and conditions of this Lease, with the following exceptions: (1) If Expansion Space #2 shall have already been initially improved by the construction of tenant improvements, Tenant shall take the Premises subject to such existing tenant improvements; provided, however, the Premises shall be in a reasonable state of repair, normal wear and tear excepted. Notwithstanding the foregoing, Landlord shall provide to Tenant a tenant improvement allowance of Dollars ($ ) per square foot of the Usable Area of Expansion Space #2 for the construction of alterations and/or modifications to existing tenant improvements in Expansion Space #2, and Dollars ($ ) per square foot contained within the core corridor on the ( ) floor for alterations and/or modifications thereto. Such alterations and/or modifications shall be made by Landlord in compliance with the provisions of Exhibit of this Lease, modified in the Amendment as reasonably appropriate to apply to the provisions of this Section with respect to Expansion Space #2. (2) In the event Expansion Space #2 has not yet been initially improved by the construction of tenant improvements, Landlord shall provide to Tenant a tenant improvement allowance of Dollars ($ )per square foot of the Usable Area of Expansion Space #2, and Dollars ($ )per square foot contained within the core corridor on the ( ) floor for alterations and/or modifications thereto; which allowance, and the improvement of Expansion Space #2 shall be governed by the provisions of Exhibit of this Lease, modified as reasonably appropriate to apply to the provisions of this Section with respect to Expansion Space #2. Exhibit, as revised, shall be attached to and made a part of the Amendment. (3) The rentable square footage of the Premises shall be increased to include the rentable square footage of Expansion Space #2 as of the Improved Expansion Space #2 Completion Date, if Expansion Space #2 has been initially improved by the construction of tenant improvements or, as of the date of the Unimproved Expansion Space #2 Completion Date, 19

20 if Expansion Space #2 has not yet been initially improved by the construction of tenant improvements. As a result, all calculations, allowances and other charges pursuant to this Lease (with the exception of Basic Rent which shall be governed by Section below) that are based upon the rentable square footage of the Premises shall be equitably revised based upon the addition of the rentable square footage of Expansion Space #2. (4) The monthly Basic Rent, as adjusted from time to time, shall be modified as of the improved Expansion Space #2 Completion Date or the Unimproved Expansion Space #2 Completion Date, as applicable, to include an amount equal to Dollars ($ ) per Rentable Square Foot of Expansion Space #. for the remainder of the Term. Notwithstanding the foregoing, Tenant's monthly Basic Rent relative to Expansion Space #2 shall abate for the first three (3) months following the Improved Space Completion Date or the Unimproved Space Completion Date, as applicable. (5) Provided Tenant is occupying Expansion Space #1, Tenant shall have the right, at its sole cost and expense except as otherwise provided herein, to cause Landlord to modify the lobby and core corridor located on the ( ) floor so that it is consistent with those improvements made to the elevator lobby and core corridor by Tenant on the ( ) floor. To enable it to make such modifications, Landlord shall provide to Tenant the following credits: Lobby floor carpet: Dollars ($ )and lobby ceiling treatment (lobby ceiling lights and lobby ceiling drywall lid): Dollars ($ ). (6) The credits available to Tenant pursuant to Section and of Schedule for the initial build out of the Premises shall not apply to the build Out of Expansion Space #2. 20

21 FORM 5 OPTION TO RENEW (NEUTRAL) Landlord hereby grants to Tenant ( ) consecutive options to extend the Term of this Lease for ( ) years each on the same terms and conditions contained in this Lease, except that (a) Basic Rent for each extended term shall be set in accordance with the procedures described hereinbelow, and (b) no additional options to extend shall apply following the expiration of the last option period. Written notice of Tenant's exercise of its option to extend the Term of this Lease for any extended term provided for hereunder must be given to Landlord at least six (6) months prior but not more than nine (9) months prior to the date the Term of the Lease (including any prior extended term as to which Tenant has timely exercised its option to extend) would otherwise expire. If Tenant is in default under this Lease, Tenant shall have no right to extend the Term of this Lease during the time commencing from the date Landlord gives to Tenant a notice of default under this Lease and continuing until the default alleged in said notice is cured. The period of time within which said option may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise said option because of such default. Notwithstanding any provision herein to the contrary, the Term of this Lease shall not be extended as herein provided if, at any time following the exercise by Tenant of the option herein granted, Tenant shall be in default in the performance of any covenant, obligation or agreement to be performed by Tenant under this Lease and Landlord has elected to terminate this Lease as a result of such default. In the event Tenant validly exercises an option to extend the term of this Lease as herein provided, Basic Rent shall be adjusted as of the commencement date of the applicable extended term ("Rent Adjustment Date") as follows: (i) Commencing at the beginning of the month which is six (6) months prior to the particular Rent Adjustment Date, Landlord and Tenant shall attempt to agree upon Basic Rent for the Premises for the applicable extended term until the next Rent Adjustment Date, or the expiration of the term of this Lease (as extended), as the case may be (the "Succeeding Period"), such Basic Rent to equal one hundred percent (100%) of the fair market rental value of the Premises for the Succeeding Period. If the parties are unable to agree upon the Basic Rent for the Succeeding Period prior to the end of such month, then within ten (10) days thereafter each party, at its own cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years full-time commercial real estate appraisal experience in the area in which the Premises are located to appraise and set Basic Rent for the Succeeding Period. 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 had shall set Basic Rent for 21

22 the Succeeding Period. If each party shall have so appointed an appraiser, the two appraisers shall meet promptly and attempt to set Basic Rant for the Succeeding Period. If the two appraisers 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 herein stated within ten (10) days after the last day the two appraisers are given to set Basic Rent. If the two appraisers are unable to agree on the third appraiser within such ten (10) day period, either of the parties to this Lease, by giving ten (10) days notice to the other party, may apply to the then presiding judge of the Superior Court of County for the selection of a third appraiser meeting the/qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the thud 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. (ii) Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall set Basic Rent for the Succeeding Period. If a majority of the appraisers are unable to set Basic Rent within the stipulated period of time, the three appraisals shall be added together and their total divided by three (3). The resulting quotient shall be the Annual Basic Rent for the Premises during the Succeeding Period. If, however, the low appraisal and/or the high appraisal is/are more than five percent (5%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one (1) appraisal is disregarded, the remaining two (2) appraisals shall be added together and their total divided by two (2), and the resulting quotient shall be basic Rent for the Premises during the Succeeding Period. If both the low appraisal and the high appraisal are disregarded as stated in this Paragraph, the middle appraisal shall be the Basic Rent for the Premises during the Succeeding Period. In setting Basic Rent, the appraiser or appraisers shall not take into consideration any properties located outside the greater area. (iii) For purposes of the appraisal, the term "fair rental value" shall mean the price that a ready and willing tenant would pay, as of the Rent Adjustment Date, as annual rent to a ready and willing landlord of premises comparable to the Premises if such premises were exposed for lease on the open market for a reasonable period of time. (iv) After Basic Rent for the Succeeding Period has been set,, the appraisers shall immediately notify the parties hereto in writing by certified mail, return receipt requested. (v) In addition, Basic Rent during any extended term shall be further adjusted in accordance with the terms and conditions of this Lease. In the event Tenant does not exercise its right to extend the-lease for any extended term provided hereunder, Tenant shall have no right to exercise its right to extend the Lease for any successive extended term. 22