Sample Contracts - CA-San Diego-10182 Telesis Court Lease - LNR Seaview Inc. and WebSideStory Inc.

Sample Business Contracts

SEAVIEW CORPORATE CENTER, PHASE II OFFICE LEASE LANDLORD: LNR SEAVIEW, INC., A CALIFORNIA CORPORATION TENANT: WEBSIDESTORY, INC., A CALIFORNIA CORPORATION <PAGE> 2 SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("SUMMARY") is hereby incorporated into and made a part of the attached Office Lease which pertains to the Building described in Section 1.4 below. All references in the Lease to the "Lease" shall include this Summary. All references in the Lease to any term defined in this Summary shall have the meaning set forth in this Summary for such term. Any initially capitalized terms used in this Summary and any initially capitalized terms in the Lease which are not otherwise defined in this Summary shall have the meaning given to such terms in the Lease. If there is any inconsistency between the Summary and the Lease, the provisions of the Lease shall control. 1.1 LANDLORD'S ADDRESS: Lennar Partners 18401 Von Karman Avenue, Suite 540 Irvine, California 92612 Attn: Asset Manager Telephone: (949) 442-6100 Facsimile: (949) 442-6175 with a copy to: The Muller Company 23521 Paseo de Valencia, Suite 200 Laguna Hills, California 92653 Attn: Mr. Stephen J. Muller Telephone: (949) 460-5380 Facsimile: (949) 586-0470 1.2 TENANT'S ADDRESS: Before Commencement Date: WebSideStory, Inc. 6450 Lusk Blvd., E 205 San Diego, California 92121 Attn: Chief Financial Officer Telephone: (619) 546-0040 Facsimile: (619) 546-0480 After Commencement Date: WebSideStory, Inc. 10182 Telesis Court, Suite 600 San Diego, California 92121 Attn: Chief Financial Officer Telephone: (619) 546-0040 Facsimile: (619) 546-0480 With a copy to: The Irving Hughes Group, Inc. 501 W. Broadway, Suite 2020 San Diego, CA 92101 Attn: Mr. David B. Marino Telephone: (619) 238-4393 Facsimile: (619) 238-1025 1.3 SITE; PROJECT: The Site consists of the parcel(s) of real property located in the City of San Diego, County of San Diego, State of California, as shown on the site plan attached hereto as Exhibit "A". The Project includes the Site and all buildings, improvements and facilities, now or subsequently located on the Site from time to time, including, without limitation, the currently existing five (5) story office building located at 10180 Telesis Court containing 93,232 rentable square feet, the two (2) story office building located at 10190 Telesis Court containing 12,780 rentable square feet and the parking structure located at 10184 Telesis Court containing 1,354 rentable square feet (the "OTHER BUILDINGS") and the Building (defined below), as depicted on the site plan attached hereto as Exhibit "A". The aggregate rentable square feet of the Building and the Other Buildings is currently 230,164 rentable square feet. 1.4 BUILDING: A six (6) story office building located on the Site, containing 122,798 rentable square feet, the address of which is 10182 Telesis Court, San Diego, California 92121. 1.5 PREMISES: Initially, those certain premises known as Suite(s) 500 and 600 as generally shown on the floor plan attached hereto as Exhibit "B", located on the fifth (5th) and sixth (6th) floors of the -i- <PAGE> 3 Building, and containing 21,260 rentable square feet (20,015 usable square feet) on the fifth (5th) floor and 18,599 rentable square feet (17,420 usable square feet) on the sixth (6th) floor, for a total of 39,859 rentable square feet (37,435 usable square feet), together with the patio area located on the sixth (6th) floor of the Building (the "PATIO"). Commencing upon the Fourth Floor Delivery Date (as defined in Section 1.4 of the Lease), the Premises shall also include Suite 400 as generally shown on the floor plan attached hereto as Exhibit "B" located on the fourth (4th) floor of the Building, and containing 21,352 rentable square feet (20,105 usable square feet) resulting in a total of 61,211 rentable square feet (57,540 usable square feet). Although the Patio is a portion of the Premises, the area of the Patio shall not be considered for purposes of determining the rentable or usable square footage of the Premises. 1.6 TERM: Eighty-Four (84) months, subject to extension pursuant to Section 36. 1.7 ESTIMATED COMMENCEMENT DATE: January 10, 2000; COMMENCEMENT DATE: The earlier to occur of (i) January 10, 2000 or (ii) the date Tenant commences business operations in the Premises. The January 10, 2000 date referenced in clause (i) above (the "TARGET DATE") is subject to extension pursuant to Section 5.2 of Exhibit "C" attached hereto. 1.8 MONTHLY BASIC RENT: Upon the commencement of the Term of this Lease, and on the first day of each month thereafter during the Term of this Lease, Tenant shall pay to Landlord, in advance and without offset, deduction or demand as Monthly Basic Rent for the Premises the following monthly payments: (a) Monthly Basic Rent for the initial Premises (i.e., the 5th and 6th Floors). <TABLE> <CAPTION> Months of Term Monthly Basic Rent -------------- ------------------ <S> <C> 1-4* $48,750.00** 5-8 $58,500.00*** 9-12 $77,725.05 13-24 $80,445.43 25-36 $83,261.02 37-48 $86,175.16 49-60 $89,191.29 61-72 $92,312.99 73-84 $95,543.94 </TABLE> * Including any partial month at the beginning of the Term if the Commencement Date is not the first (1st) day of the month. ** Calculated on the basis of 25,000 rentable square feet only. *** Calculated on the basis of 30,000 rentable square feet only. (b) Monthly Basic Rent for Suite 400: <TABLE> <CAPTION> Months of Term Monthly Basic Rent -------------- ------------------ <S> <C> Fourth Floor Commencement $41,636.40 Date - 12 13-24 $43,093.67 25-36 $44,601.95 37-48 $46,163.02 49-60 $47,778.73 61-72 $49,450.99 73-84 $51,181.77 </TABLE> 1.9 TENANT'S PERCENTAGE: 26.6%. Tenant's Percentage is subject to adjustment in accordance with Section 1.3 and 4.4(g) of the Lease. 1.10 BASE YEAR: Calendar year 2000 1.11 SECURITY DEPOSIT: $119,361.45, plus a letter of credit in the original amount of $360,000.00. See Section 5 of the Lease. 1.12 PERMITTED USE: General office uses and, to the extent legally permissible, research and development, and any other legally permissible uses, consistent with a first-class office building; provided, however, in no event may Tenant use the Premises for retail or restaurant purposes. 1.13 BROKERS: Colliers International representing Landlord. The Irving Hughes Group, Inc. representing Tenant. -ii- <PAGE> 4 1.14 INTEREST RATE: The lesser of: (a) the rate announced from time to time by Wells Fargo Bank or, if Wells Fargo Bank ceases to exist or ceases to publish such rate, then the rate announced from time to time by the largest (as measured by deposits) chartered bank operating in California, as its "prime rate" or "reference rate", plus two percent (2%); or (b) the maximum rate permitted by law. 1.15 TENANT IMPROVEMENTS: The tenant improvements installed or to be installed in the Premises as described in the Work Letter Agreement attached hereto as Exhibit "C". 1.16 PARKING: A total of 4.3 unreserved parking spaces per 1000 usable square feet of floor area of the Premises at no charge during the Term (including any Option Term), subject, however, to the payment of Direct Expenses attributable to the parking areas and to the provisions set forth in Section 6.2. Tenant shall be entitled to designate up to five (5) parking spaces for Tenant's exclusive use in locations designated by Landlord, in reasonable proximity to the Building, reasonably acceptable to Tenant. If Landlord grants to any other tenant of the Building the right to designate exclusive parking spaces at a ratio of exclusive spaces to non-exclusive spaces that is higher than the ratio of Tenant's exclusive spaces to non-exclusive spaces, then Landlord shall increase Tenant's exclusive spaces to equal such higher ratio. 1.17 BUSINESS HOURS FOR THE BUILDING. 7:00 a.m. to 7:00 p.m., Mondays through Fridays (except Building Holidays) and 9:00 a.m. to 1:00 p.m. on Saturdays (except Building Holidays). "BUILDING HOLIDAYS" shall mean New Year's Day, Labor Day, Presidents' Day, Thanksgiving Day, Memorial Day, Independence Day and Christmas Day and such other national holidays as are adopted by Landlord as holidays for the Building. Notwithstanding the Business Hours, Tenant shall be entitled to have access to the Premises on a seven (7) day per week, twenty-four (24) hour per day basis, subject, however, to the terms of the Lease. -iii- <PAGE> 5 STANDARD FORM OFFICE LEASE TABLE OF CONTENTS <TABLE> <CAPTION> SECTION TITLE PAGE ------- ----- ---- <S> <C> <C> 1 Premises ....................................................................... 1 2 Term ........................................................................... 1 3 Rent ........................................................................... 2 4 Common Areas; Direct Expenses .................................................. 2 5 Security Deposit ............................................................... 7 6 Use ............................................................................ 8 7 Payments and Notices ...........................................................11 8 Brokers ........................................................................11 9 Surrender; Holding Over ........................................................11 10 Taxes on Tenants Property ......................................................12 11 Condition of Premises; Repairs .................................................12 12 Alterations ....................................................................13 13 Liens ..........................................................................15 14 Assignment and Subletting ......................................................15 15 Entry by Landlord ..............................................................17 16 Utilities and Services .........................................................18 17 Indemnification and Exculpation ................................................19 18 Damage or Destruction ..........................................................20 19 Eminent Domain .................................................................21 20 Tenant's Insurance .............................................................21 21 Landlord's insurance ...........................................................22 22 Waiver of Claims; Waiver of Subrogation.........................................23 23 Tenant's Default and Landlord's Remedies........................................23 24 Landlord's Default..............................................................25 25 Subordination...................................................................25 26 Estoppel Certificate............................................................26 27 Intentionally Omitted...........................................................26 28 Modification and Cure Rights of Landlord's Mortgagees and Lessors...............26 29 Quiet Enjoyment.................................................................26 30 Transfer of Landlord's Interest.................................................26 31 Limitation on Landlord's Liability..............................................26 32 Miscellaneous...................................................................27 33 Lease Execution.................................................................28 34 Right of First Refusal..........................................................29 35 Temporary Space.................................................................30 36 Option Term.....................................................................30 </TABLE> EXHIBITS -------- EXHIBIT "A" Site Plan EXHIBIT "B" Floor Plan EXHIBIT "C" Work Letter Agreement EXHIBIT "D" Sample Form of Notice of Lease Term Dates EXHIBIT "E" Rules and Regulations EXHIBIT "F" Sample Form of Tenant Estoppel Certificate -iv- <PAGE> 6 INDEX OF MAJOR DEFINED TERMS <TABLE> <CAPTION> LOCATION OF DEFINITION DEFINED TERMS IN OFFICE LEASE ------------- ---------------------- <S> <C> Abandonment ......................................................... 23 Abatement Event ..................................................... 18 ADA ................................................................. 9 Applicable Reassessment ............................................. 7 Approved Working Drawings ........................................... 4 Architect ........................................................... Exhibit C Base Year ........................................................... 3 Base, Shell, and Core ............................................... Exhibit C BOMA Standard ....................................................... 1 Brokers ............................................................. ii Building ............................................................ i Building Common Areas ............................................... 2 Building Holidays ................................................... iii Capital Items ....................................................... 4 Cash Security Deposit ............................................... 7 Code ................................................................ Exhibit C Commencement Date ................................................... ii Common Areas ........................................................ 2 Comparable Buildings ................................................ 31 Construction Drawings ............................................... Exhibit C Cost Pools .......................................................... 4 days ................................................................ 27 Delay Notice ........................................................ Exhibit C Direct Expenses ..................................................... 3 Draw Request ........................................................ Exhibit C Election Date ....................................................... 29 Eligibility Period .................................................. 19 Engineer ............................................................ 3 Essential Services .................................................. 19 Estimate ............................................................ 6 Estimate Statement .................................................. 6 Estimated Commencement Date ......................................... ii Estimated Excess .................................................... 6 Estimated Utilities Costs ........................................... 6 Evidence of Completion .............................................. Exhibit C Excess .............................................................. 6 Expense Year ........................................................ 3 Extension Option .................................................... 30 Fair Market Rental Rate ............................................. 30 Final Costs ......................................................... Exhibit C Final Space Plan .................................................... Exhibit C Final Working Drawings .............................................. Exhibit C First Refusal Notice ................................................ 29 First Refusal Space ................................................. 29 Force Majeure Delays ................................................ 28 Fourth Floor Commencement Date ...................................... 1 Fourth Floor Delivery Date .......................................... 1 Hazardous Materials ................................................. 10, 11 HVAC ................................................................ 13 Indemnified Claims .................................................. 19 Landlord ............................................................ 1 Landlord Caused Delay ............................................... Exhibit C Landlord Indemnified Parties ........................................ 10 Landlord's Rate ..................................................... Exhibit C Lease ............................................................... 1 Letter of Credit .................................................... 8 Monthly Basic Rent .................................................. ii MPE Subcontractors .................................................. 3 number of days ...................................................... Exhibit C Operating Expenses .................................................. 3 Option Rent Notice .................................................. 30 Option Term ......................................................... 30 Original Tenant ..................................................... 10 Other Buildings ..................................................... i Outside Agreement Date .............................................. 30 Patio ............................................................... ii PCBs ................................................................ 11 </TABLE> -v- <PAGE> 7 <TABLE> <S> <C> Permit Delay..........................................................................Exhibit C Permits...............................................................................Exhibit C Permitted Transfer...........................................................................16 Permitted Use................................................................................ii Pre-Approved Change..........................................................................13 Premises......................................................................................i Project.......................................................................................i Project Common Areas..........................................................................2 Proposition 13................................................................................5 Proposition 13 Protection Amount..............................................................7 Proposition 13 Purchase Price.................................................................7 Reassessment..................................................................................6 rent..........................................................................................2 rentable area.................................................................................1 rentable square footage.......................................................................1 Retention.............................................................................Exhibit C Security Deposit.............................................................................ii Site..........................................................................................i Special Sublease.............................................................................16 Specifications........................................................................Exhibit C Standard Improvement Package..........................................................Exhibit C Statement.....................................................................................6 Substantial Completion................................................................Exhibit C Summary.......................................................................................1 Superior Leases..............................................................................29 Superior Rights..............................................................................29 Target Date..................................................................................ii Tax Expenses..................................................................................5 Tax Increase..................................................................................6 Temporary Space..............................................................................30 Temporary Space Term.........................................................................30 Tenant........................................................................................1 Tenant Changes...............................................................................13 Tenant Improvement Allowance..........................................................Exhibit C Tenant Improvement Allowance Items....................................................Exhibit C Tenant Improvements...................................................................Exhibit C Tenant Parties...............................................................................19 Tenant's Agents.......................................................................Exhibit C Tenant's Election Notice.....................................................................29 Tenant's Parties.............................................................................10 Tenant's Percentage..........................................................................ii Tenant's Proposed Terms......................................................................29 Tenant's Signage.............................................................................10 Term.........................................................................................ii Terms........................................................................................29 Transfer.....................................................................................15 Transfer Notice..............................................................................16 Transferee...................................................................................16 Unavoidable Delay.....................................................................Exhibit C usable area...................................................................................1 usable square footage.........................................................................1 Utilities Costs...............................................................................5 Work Letter Agreement.................................................................Exhibit C worth at the time of award...................................................................24 </TABLE> -vi- <PAGE> 8 OFFICE LEASE This LEASE, which includes the preceding Summary of Basic Lease Information and Definitions ("Summary") attached hereto and incorporated herein by this reference ("Lease"), is made as of the 23 day of August, 1999, by and between LNR SEAVIEW, INC., a California corporation ("Landlord"), and WEBSIDESTORY, INC. a California corporation ("Tenant"), 1. PREMISES. 1.1 PREMISES. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the Premises described in Section 1.5 of the Summary above, improved or to be improved with the Tenant Improvements. Such lease is upon, and subject to, the terms, covenants and conditions herein set forth and each party covenants, as a material part of the consideration for this Lease, to keep and perform their respective obligations under this Lease. 1.2 LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the Premises is not interfered with in an unreasonable manner, and subject to the terms of this Lease, Landlord reserves for itself the right from time to time to install, use, maintain, repair, replace and relocate pipes, ducts, conduits, wires and appurtenant meters and equipment above the ceiling surfaces, below the floor surfaces and within the walls of the Building and the Premises. 1.3 MEASUREMENT OF PREMISES, BUILDING AND/OR THE PROJECT. Landlord reserves the right to remeasure the Premises, the Building and/or the Project and adjust all provisions of this Lease which are based upon the area of the Premises, the Building and/or the Project such as Tenant's Percentage, Monthly Basic Rent, and the Tenant Improvement Allowance. As used in this Lease, the following terms have the meanings indicated: (a) The term "USABLE AREA" or "USABLE SQUARE FOOTAGE" means the usable area as determined in accordance with the Standard Method for Measuring Floor Area in Office Buildings, ANSI/BOMA Z65.1 - 1996 (the "BOMA STANDARD"); and (b) The term "RENTABLE AREA" or "RENTABLE SQUARE FOOTAGE" means the rentable area measured in accordance with the BOMA Standard, plus a prorata share of the usable area of the Project's recreational facilities. 1.4 SUITE 400. Landlord will deliver possession of Suite 400 to Tenant within one (1) business day following Tenant's written request therefor (the "FOURTH FLOOR DELIVERY DATE"). Tenant will construct the Tenant Improvements within Suite 400 in accordance with the provisions of Exhibit "C", except that (i) all references in Exhibit "C" to the Premises shall refer to Suite 400, (ii) the Tenant Improvement Allowance will be in the amount up to, but not exceeding, Thirty-Two Dollars ($32.00) per usable square foot of Suite 400 (for purposes of calculating the Tenant Improvement Allowance, the usable square footage of Suite 400 shall be 19,705 (which excludes the restrooms, electrical rooms, tele/com equipment rooms [but not Tenant's network operating center] and the curtain wall in Suite 400), (iii) the time period for Landlord's review of the Final Space Plan for Suite 400 shall be two (2) business days following Landlord's receipt thereof and (iv) the Commencement Date for Suite 400 (the "FOURTH FLOOR COMMENCEMENT DATE") shall be the earlier to occur of: (a) the date that is nine (9) months following the Commencement Date (which nine (9) month period may only be extended by reason of a Landlord Caused Delay and not by reason of a Permit Delay or an Unavoidable Delay); or (b) Substantial Completion of the Tenant Improvements for Suite 400. The Fourth Floor Commencement Date will not be extended due to any delay in Tenant's request for delivery of Suite 400. Following the determination of the Fourth Floor Commencement Date, and at the request of either party, the parties shall enter into an amendment to this Lease acknowledging the Fourth Floor Commencement Date and establishing a schedule for Monthly Basic Rent that combines the Monthly Basic Rent for the initial Premises and Suite 400. 2. TERM. 2.1 TERM; NOTICE OF LEASE DATES. The Term of this Lease shall be for the period designated in Section 1.6 of the Summary commencing on the Commencement Date (as determined pursuant to Exhibit "C"), and ending on the expiration of such period, unless the Term is sooner terminated as provided in this Lease. Notwithstanding the foregoing, if the Commencement Date falls on any day other than the first day of a calendar month then the term of this Lease will be measured from the first day of the month following the month in which the Commencement Date occurs. Within ten (10) days after Landlord's written request, Tenant shall execute a written confirmation of the Commencement Date and expiration date of the Term in the form of the Notice of Lease Term Dates attached hereto as Exhibit "D". The Notice of Lease Term Dates shall be binding upon Tenant unless Tenant objects thereto in writing within such ten (10) day period. 2.2 ESTIMATED COMMENCEMENT DATE. It is estimated by the parties that the Term of this Lease will commence on the Estimated Commencement Date set forth in Section 1.7 of the Summary. The Estimated Commencement Date is merely an estimate of the Commencement Date and, consequently, <PAGE> 9 Tenant agrees that Landlord shall have no liability to Tenant for any loss or damage, nor shall Tenant be entitled to terminate or cancel this Lease if the Term of this Lease does not commence by the Estimated Commencement Date for any reason whatsoever, including any delays in substantial completion of the Tenant Improvements. 2.3 EARLY OCCUPANCY. Tenant will occupy the Premises prior to the Commencement Date for purposes of constructing the Tenant Improvements. Such early occupancy shall be subject to all of the terms and conditions of this Lease, including, without limitation, the provisions of Sections 17, 20 and 22, except that provided Tenant does not commence the operation of business from the Premises, Tenant will not be obligated to pay Monthly Basic Rent or any additional rent during the period of such early occupancy. Tenant agrees to cooperate with Landlord during the period of any such early occupancy so as not to interfere with Landlord in the completion of any improvements to the Premises to be constructed pursuant to Exhibit "C" by Landlord. 3. RENT. 3.1 BASIC RENT. Tenant agrees to pay Landlord, as basic rent for the Premises, the Monthly Basic Rent in the amounts designated in Section 1.8 of the Summary. The Monthly Basic Rent shall be paid by Tenant in monthly installments in the amounts designated in Section 1.8 of the Summary in advance on the first day of each and every calendar month during the Term, without demand, notice, deduction or offset (except as otherwise provided in this Lease), except that the first full month's Monthly Basic Rent shall be paid upon the execution of this Lease. Monthly Basic Rent for any partial month shall be prorated in the proportion that the number of days this Lease is in effect during such month bears to the actual number of days in such month. 3.2 ADDITIONAL RENT. All amounts and charges payable by Tenant under this Lease in addition to the Monthly Basic Rent described in Section 3.1 above (including, without limitation, payments for insurance, and repairs, and Tenant's Percentage of Direct Expenses, and Utilities Costs as provided in Section 4.5 shall be considered additional rent for the purposes of this Lease, and the word "RENT" in this Lease shall include such additional rent unless the context specifically or clearly implies that only the Monthly Basic Rent is referenced. The Monthly Basic Rent and additional rent shall be paid to Landlord as provided in Section 7, without any prior demand therefor and without any deduction or offset whatever (except as otherwise provided in this Lease), in lawful money of the United States of America. 4. COMMON AREAS; DIRECT EXPENSES. 4.1 DEFINITIONS; TENANT'S RIGHTS. During the Term of this Lease, Tenant shall have the non-exclusive right to use, in common with other tenants in the Project, and subject to the Rules and Regulations referred to in Section 6.1 below, those portions of the Project (the "PROJECT COMMON AREAS") not leased or designated for lease to tenants that are provided for use in common by Landlord, Tenant and any other tenants of the Project (or by the sublessees, agents, employees, customers invitees, guests or licensees of any such party), whether or not those areas are open to the general public. The Project Common Areas shall include, without limitation, any fixtures, systems, decor, facilities and landscaping contained, maintained or used in connection with those areas, and shall be deemed to include any city sidewalks adjacent to the Project, any pedestrian walkway system, park or other facilities located on the Site and open to the general public, the parking structure and parking areas (subject to Section 6.2 below), the loading and unloading areas, trash areas, roadways, parkways, and driveways, as well as the existing pool, workout facilities and tennis facility for so long as Landlord, in its sole discretion, provides for the same. The common areas of the Building shall be referred to herein as the "BUILDING COMMON AREAS" and shall include, without limitation, the following areas: the common entrances, lobbies, restrooms on multi-tenant floors, elevators, stairways and accessways, loading docks, ramps, drives and platforms and any passageways and serviceways thereto to the extent not exclusively serving another tenant or contained within another tenant's premises, and the common pipes, conduits, wires and appurtenant equipment serving the Premises. The Building Common Areas and the Project Common Areas shall be referred to herein collectively as the "COMMON AREAS." 4.2 LANDLORD'S RESERVED RIGHTS. Landlord reserves the right from time to time to use any of the Common Areas and to do any of the following, as long as such acts do not unreasonably interfere with Tenant's use of or access to the Premises or Tenant's use and enjoyment of the Common Areas: (a) expand the Building and construct or alter other buildings or improvements on the Site; (b) make any changes, additions, improvements, repairs or replacements in or to the Project, the Site, the Common Areas and/or the Building (including the Premises if required to do so by any law or regulation) and the fixtures and equipment thereof, including, without limitation: (i) maintenance, replacement and relocation of pipes, ducts, conduits, wires and meters; and (ii) changes in the location, size, shape and number of driveways, entrances, stairways, elevators, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas and walkways and, subject to Section 6.2, parking spaces and parking areas; -2- <PAGE> 10 (c) close temporarily any of the Common Areas while engaged in making repairs, improvements or alterations to the Project, Site and/or Building; and (d) perform such other acts and make such other changes with respect to the Project, Site, Common Areas and Building, as Landlord may, in the exercise of good faith business judgment, deem to be appropriate. 4.3 ADDITIONAL RENT. In addition to paying the Monthly Basic Rent, Tenant shall pay as additional rent Tenant's Percentage of the annual Direct Expenses that are in excess of the amount of Direct Expenses applicable to the Base Year and Tenant's Percentage of the annual Utilities Costs. 4.4 DEFINITIONS. The following terms shall have the meanings hereinafter set forth: (a) "BASE YEAR" shall mean the year set forth in Section 1.10 of the Summary. (b) "DIRECT EXPENSES" shall mean Operating Expenses and Tax Expenses. (c) "EXPENSE YEAR" shall mean each calendar year in which any portion of the Term falls, through and including the calendar year in which the Term expires; provided, that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any twelve (12) consecutive month period, and, in the event of any such change, Tenant's Percentage of the Direct Expenses and Tenant's Percentage of the Utilities Costs shall be equitably adjusted for any Expense Year involved in any such change such that Tenant's Percentage is not affected to Tenant's financial detriment. (d) "OPERATING EXPENSES" shall mean all expenses, costs and amounts of every kind and nature which Landlord shall pay or incur during any Expense Year because of or in connection with the ownership, management, maintenance, repair, replacement, restoration or operation of the Project, including, without limitation, any amounts paid or incurred for: (i) the cost of janitorial service, alarm and security service, window cleaning, and trash removal, the cost of operating, maintaining, repairing, replacing, renovating and managing the utility systems, mechanical systems, sanitary and storm drainage systems, and escalator and elevator systems, and the cost of supplies, tools, and equipment and maintenance and service contracts in connection therewith; (ii) the cost of licenses, certificates, permits and inspections and the cost of contesting the validity or applicability of any governmental enactments which may affect Operating Expenses, and the costs incurred in connection with the implementation and operation of a transportation system management program or similar program; (iii) the cost of insurance carried by Landlord in connection with the Project, in such amounts as Landlord may reasonably determine, or as may be required by any mortgagees, or the lessor of any underlying or ground lease affecting the Project; (iv) the cost of landscaping, relamping, supplies, tools, equipment (including equipment rental agreements) and materials, and all fees, charges and other costs, including management fees (or amounts in lieu thereof), consulting fees, legal fees and accounting fees, incurred in connection with the management, operation, administration, maintenance and repair of the Project; (v) the cost of parking area repair, restoration and maintenance, including, but not limited to, resurfacing, repainting, restriping, and cleaning; (vi) wages, salaries and other compensation and benefits of all persons directly engaged in the operation, management, maintenance or security of the Project, and employer's Social Security taxes, unemployment taxes or insurance, and any other taxes which may be levied on such wages, salaries, compensation and benefits; (vii) payments under any easement, license, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs by the Project; (viii) amortization (including interest on the unamortized cost at the Interest Rate) of the cost of acquiring or the rental expense of personal property used in the maintenance, operation and repair of the Project; (ix) the cost (including rent) of Landlord's property management office for the Project and all utilities, supplies and materials used in connection therewith; and (x) the cost of any capital alterations, capital additions, or capital improvements made to the Project or any portion thereof (A) which relate to the operation, repair, maintenance and replacement of all systems, equipment or facilities which serve the Project in the whole or in part (including replacement of wall and floor coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other common or public areas or facilities, maintenance and replacement of curbs, walkways and parking areas, and repairs to roofs and reroofing of improvements), (B) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Project, or any portion thereof, or (C) that are required under any governmental law or regulation that is then being enforced by a federal, state or local governmental agency; provided, however, that each such permitted capital expenditure shall be amortized (including interest on the unamortized cost at the Interest Rate in effect at the time such expenditure is placed in service) over its useful life as Landlord shall reasonably determine in accordance with generally accepted accounting principles. If Landlord is not furnishing any particular work or service (the cost of which, if performed or provided by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the Building (and any additional buildings constructed in the Project) are not one hundred percent (100%) occupied during all or a portion of any Expense Year (including the Base Year), Landlord shall make an appropriate adjustment to the variable components of Operating -3- <PAGE> 11 Expenses for such Expense Year (including the Base Year) as reasonably determined by Landlord employing sound accounting and management principles, to determine the amount of Operating Expenses that would have been paid had such building(s) been one hundred percent (100%) occupied, and the amount so determined shall be deemed to have been the amount of Operating Expenses for such Expense Year. Notwithstanding anything to the contrary herein, when calculating Direct Expenses for the Base Year, Operating Expenses shall exclude market-wide labor-rate increases due to extraordinary circumstances, including, but not limited to, boycotts and strikes, and costs relating to capital improvements or expenditures. Landlord shall have the right, from time to time, to equitably allocate and prorate some or all of the Direct Expenses and/or Utilities Costs among different tenants and/or different buildings of the Project and/or on a building-by-building basis (the "COST POOLS"). Such Cost Pools may include, without limitation, the office space tenants and retail space tenants of the buildings in the Project and may be modified to take into account the addition of any additional office buildings within the Project. No costs for development or construction of future buildings, parking structures and sitework shall be included as an Operating Expense. Notwithstanding the foregoing, for purposes of this Lease, Operating Expenses shall not, however, include: (A) except as otherwise set forth above in this Section 4.4(d), interest on debt and amortization on mortgages; (B) ground lease payments; (C) costs of leasing commissions, attorneys' fees and other costs and expenses incurred in connection with negotiations or disputes with present or prospective tenants or other occupants of the Project; (D) Utilities Costs for which Tenant pays Tenant's Percentage to Landlord as set forth in Section 4.5 below; (E) any costs expressly excluded from Operating Expenses elsewhere in this Lease; (F) costs of any items to the extent Landlord receives reimbursement from insurance proceeds (such proceeds to be excluded from Operating Expenses in the year in which received, except that any deductible amount under any insurance policy shall be included within Operating Expenses) or from a third party; (G) costs, including permit, license and inspection costs, incurred in renovating or otherwise improving, decorating, or redecorating rentable space (including vacant rentable space) for tenants or other occupants in the Project; (H) tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments or file returns when due; (I) costs arising from Landlord's charitable or political contributions; (J) costs incurred in connection with upgrading the Building to comply with life, fire and safety codes, ordinances, statutes or other laws in effect prior to the Commencement Date, including, without limitation, the ADA, including penalties or damages incurred due to such noncompliance (for this purpose, a change in the interpretation of or change in the procedures for enforcing an existing law will be the equivalent of a new law; provided, however, that costs incurred by Landlord in connection with the loss of a variance or a disappearance of a grandfathered/grandmothered right shall not be included as an Operating Expense); (K) depreciation, amortization and interest payments, except as provided herein, and except with respect to materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party which such depreciation, amortization and interest payments are not in excess of what would otherwise have been charged for such third party's services, all as determined in accordance with generally accepted accounting principles, consistently applied, and when depreciation or amortization is permitted or required, the item shall be amortized over its reasonably anticipated useful life; (L) costs incurred by Landlord for alterations which are considered capital improvements and replacements under generally accepted accounting principles, consistently applied ("CAPITAL ITEMS"), except for Capital Items expressly permitted under Section 4.4(d)(x); (M) expenses in connection with services or other benefits which are not offered to Tenant but which are provided to another tenant or occupant of the Building or for which Tenant is charged directly; (N) costs incurred by Landlord due to the violation by Landlord or any other tenant of the Building of the terms and conditions of any lease of space in the Building unless directly related to the use or maintenance of the Common Areas; (O) overhead and profit increments paid to Landlord or to subsidiaries or affiliates of Landlord for services in the Building to the extent the same exceeds the cost of such services rendered at the same level of service for similar quality buildings in San Diego, by unaffiliated third parties on a competitive basis; (P) interest, principal, points and fees on debt or amortization on any mortgage or mortgages or any other debt instrument encumbering the Building; (Q) Landlord's general corporate overhead and general administrative expenses (provided that the reasonable rental cost of the Building office shall be included in Operating Expenses); (R) any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord; (S) except in connection with making repairs or keeping permanent systems in operation while repairs are being made, rentals and other related expenses incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered to be of a capital nature which if purchased, rather than rented, would constitute a Capital Item which is specifically excluded in (L) above, except equipment not affixed to the Building which is used in providing janitorial or similar services; (T) all items and services for which Tenant or any other tenant of the Building reimburses Landlord (other than through the pass-through of Operating Expenses) or which Landlord provides selectively to one or more tenants (other than Tenant) without reimbursement; (U) advertising and promotional expenditures, and costs of purchase and installation of signs in or on the Building (except for the Building directory) identifying the owner of the Building; (V) electrical power costs for which any tenant directly contracts with the local public service company; provided, however, that if any tenant directly contracts for electric power service during any portion of the relevant period, the total electric -4- <PAGE> 12 power costs for the Building shall be "grossed up" to reflect what those costs would have been had each tenant in the Building used the Building standard amount of electric power; (W) labor or other costs incurred in connection with any operation of any restaurant in the Building; (X) except as contemplated under Section 4.4(d)(x)(C) above, any costs, fines or penalties incurred due to violations by Landlord of any government rule or authority; (AA) purchase price of sculpture, paintings, or other objects of art placed in common areas of the Building; (BB) wages, salaries, medical, surgical and general welfare benefits, pension payments, payroll taxes, workers' compensation costs or other compensation paid to or for any executive employees above the grade of building manager; and (CC) costs (including in connection therewith all attorneys' fees and costs of settlement judgments and payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitration pertaining to Landlord and/or the Project unless directly related to the use or maintenance of the Common Areas and not covered by insurance. (e) "TAX EXPENSES" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary (including, without limitation, real estate taxes, general and special assessments, transit taxes or charges, business or license taxes or fees, annual or periodic license or use fees, open space charges, housing fund assessments, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project), which Landlord shall pay or incur during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project or Landlord's interest therein. Tax Expenses shall include, without limitation (i) any assessment, tax, fee, levy or charge in addition to, or in substitution, partially or totally, of any assessment, tax, fee, levy or charge previously included within the definition of Project tax, it being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the voters of the State of California in the June 1978 election ("Proposition 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, conservation, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies. It is the intention of Tenant and Landlord that all such new and increased assessments, taxes, fees, levies, and charges and all similar assessments, taxes, fees, levies and charges be included within the definition of Tax Expenses for purposes of this Lease; (ii) any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the rent payable hereunder, including, without limitation, any gross income tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; (iii) any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; (iv) any possessory taxes charged or levied in lieu of real estate taxes; and (v) any expenses incurred by Landlord in attempting to protest, reduce or minimize Tax Expenses. Notwithstanding anything to the contrary herein, there shall be excluded from Tax Expenses: (i) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Project); and (ii) any items paid by Tenant under Section 10 of this Lease. Tax Expenses shall be adjusted to reflect an assumption that the Building is fully assessed for real property tax purposes as a completed building that is one hundred percent (100%) occupied with Building standard tenant improvements. (f) "UTILITIES COSTS" shall mean the cost of all utilities supplied for the Project (including, without limitation, water, sewer, electricity, telephone and HVAC), other than those utilities which are paid directly by Tenant and other tenants of the Project for excess consumption and after-hours HVAC pursuant to Section 16 of this Lease or similar provisions in other tenants' leases. (g) "TENANT'S PERCENTAGE" shall mean the percentage set forth in Section 1.9 of the Summary. Tenant's Percentage was calculated by multiplying the number of rentable square feet of the Premises by 100 and dividing the product by the total rentable square feet in the Project. Landlord shall have the right from time to time, in its discretion, to include or exclude existing or future buildings in the Project in the calculation of the total rentable square feet of the Project, for purposes of determining Direct Expenses, Utilities Costs and/or the provision of various services and amenities thereto, including equitable allocation of Direct Expenses and/or Utilities Costs in Cost Pools (as described in Section 4.4(d) above); in such event, Tenants Percentage shall be appropriately revised to reflect any such actual increases or decreases in square footage of the Project. In addition, in the event either the rentable square feet of the Premises and/or the Building and other buildings in the Project is changed, Tenant's Percentage shall be appropriately adjusted, and, as to the Expense Year in which such change occurs, Tenant's Percentage for such year shall -5- <PAGE> 13 be determined on the basis of the number of days during such Expense Year that each such Tenant's Percentage was in effect. 4.5 CALCULATION AND PAYMENT OF ADDITIONAL RENT. (a) CALCULATION OF EXCESS. For each Expense Year ending or commencing within the Lease Term, Tenant shall pay to Landlord, in the manner set forth in Section 4.5(b), below, and as additional rent: (i) the amount by which Tenant's Percentage of Direct Expenses for such Expense Year exceeds Tenant's Percentage of the Direct Expenses for the Base Year (Tenant's Percentage of such excess amount is hereinafter referred to as the "EXCESS"); and (ii) Tenant's Percentage of the Utilities Costs incurred for such Expense Year. (b) STATEMENT OF ACTUAL DIRECT EXPENSES AND UTILITIES COSTS AND PAYMENT BY TENANT. Following the end of each Expense Year, Landlord shall give to Tenant a statement (the "STATEMENT"), which shall indicate: (i) the Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount, if any, of any Excess; and (ii) the amount of the Utilities Costs incurred for such preceding Expense Year. Upon receipt of the Statement for each Expense Year ending during the Lease Term, Tenant shall pay, within thirty (30) days after receipt of such Statement, (A) the full amount of any Excess for such Expense Year, less the amounts, if any, paid during such Expense Year as Estimated Excess, as that term is defined below, plus (B) the full amount of Tenant's Percentage of the Utilities Costs for such Expense Year, less the amounts, if any, paid by Tenant during the Expense Year as Estimated Utilities Cost, as that term is defined below. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord from enforcing its rights under this Section 4.5. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of the Direct Expenses and Utilities Costs for the Expense Year in which this Lease terminates, taking into consideration that the expiration date may have occurred prior to the final day of the applicable Expense Year, Tenant shall within ten (10) days after Landlord's request therefor pay to Landlord an amount as calculated pursuant to the provisions of Section 4.5(a) of this Lease as Tenant's Percentage of the Excess and Utilities Costs for such final Expense Year. The provisions of this Section 4.5(b) shall survive the expiration or earlier termination of the Lease Term. (c) STATEMENT OF ESTIMATED DIRECT EXPENSES AND UTILITIES COSTS. In addition, Landlord shall give Tenant a yearly expense estimate statement (the "ESTIMATE STATEMENT") which shall set forth Landlord's reasonable estimate (the "ESTIMATE") of (i) what the total amount of Direct Expenses for the then-current Expense Year shall be and the estimated Excess (the "ESTIMATED EXCESS") as calculated by comparing Tenant's Percentage of Direct Expenses for such then-current Expense Year, which shall be based upon the Estimate, to Tenant's Percentage of Direct Expenses for the Base Year, and (ii) what the total amount of Tenant's Percentage of the Utilities Costs for the then current Expense Year shall be (the "ESTIMATED UTILITIES COSTS"). The Estimate Statement may be revised and reissued by Landlord from time to time. The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Excess or Estimated Utilities Costs under this Section 4.5. Within thirty (30) days after receipt of such Estimate Statement, Tenant shall pay to Landlord an amount equal to (A) a fraction of the Estimated Excess (or the increase in the Estimated Excess if pursuant to a revised Estimate Statement) for the then-current Expense Year (reduced by any amounts paid as Estimated Excess pursuant to the last sentence of this Section 4.5(c), plus (B) a fraction of the Estimated Utilities Costs (or the increase in the Estimated Utilities Costs if pursuant to a revised Estimate Statement) for the then-current Expense Year (reduced by the amounts paid as Estimated Utilities Costs pursuant to the last sentence of this Section 4.5(c)). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year to the month of such payment, both months inclusive, and shall have twelve (12) as its denominator. Until a new Estimate Statement is furnished, Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to the sum of (x) one-twelfth (1/12) of the total Estimated Excess plus (y) one-twelfth (1/12) of the total Estimated Utilities Costs set forth in the previous Estimate Statement delivered by Landlord to Tenant. 4.6 PROPOSITION 13 PROTECTION. Notwithstanding anything to the contrary contained in this Lease, in the event that, at any time during the initial Term, a change in ownership of the Project is consummated, and as a result thereof the Project is reassessed (the "REASSESSMENT") for real estate tax purposes by the appropriate governmental authority pursuant to the terms of Proposition 13, then the terms of this Section 4.6 shall apply to such Reassessment. This Section 4.6 shall not apply during any Option Period. (a) THE TAX INCREASE. The term "TAX INCREASE" shall mean fifty percent (50%) of that portion of the Real Property Taxes and Assessments, as calculated immediately following the Reassessment, which is attributable solely to the Reassessment. Accordingly, the term Tax Increase shall not include any portion of the Real Property Taxes and Assessments, as calculated immediately following the Reassessment, which is attributable to (i) the initial assessment of the value of the Project, (ii) assessments which were pending immediately prior to the Reassessment and which were conducted during, and included in, such Reassessment, or were otherwise rendered unnecessary following the Reassessment, or (iii) the annual inflationary increase of Real Property Taxes and Assessments. -6- <PAGE> 14 (b) PROTECTION. During the initial Term, any Tax Increase will be excluded from Real Property Taxes and Assessments. (c) LANDLORD'S RIGHT TO PURCHASE THE PROPOSITION 13 PROTECTION AMOUNT. The amount of Real Property Taxes and Assessments which Tenant is not obligated to pay or will not be obligated to pay during the initial Term in connection with a particular Reassessment is referred to as a "PROPOSITION 13 PROTECTION AMOUNT." If the occurrence of a Reassessment is reasonably foreseeable by Landlord and the Proposition 13 Protection Amount attributable to such Reassessment can be reasonably quantified or estimated for each year commencing with the year in which the Reassessment will occur, the terms of this Section 4.6(c) shall apply to each such Reassessment. Upon notice to Tenant, Landlord shall have the right to purchase the Proposition 13 Protection Amount relating to the applicable Reassessment (the "APPLICABLE REASSESSMENT"), at any time, by paying to Tenant an amount equal to the Proposition 13 Purchase Price. The "PROPOSITION 13 PURCHASE PRICE" shall mean the present value of the Proposition 13 Protection Amount remaining during the initial Term, as of the date of payment of the Proposition 13 Purchase Price by Landlord. Such present value shall be calculated (i) by using the portion of the Proposition 13 Protection Amount attributable to each remaining year during the initial Term that such protection is available (as though the portion of such Proposition 13 Protection Amount benefited Tenant at the end of each year), as the amounts to be discounted, and (ii) by using discount rates for each amount to be discounted equal to (A) the prime interest rate, as reported in the Wall Street Journal as of the date of Landlord's exercise of its right to purchase plus (B) two percent (2%) per annum. Upon such payment of the Proposition 13 Purchase Price, the provisions of this Section 4.6 shall not apply to any Tax Increase attributable to the Applicable Reassessment. As Landlord will estimate the Proposition 13 Purchase Price because a Reassessment has not yet occurred, then when such Reassessment occurs, if Landlord has underestimated the Proposition 13 Purchase Price, then upon notice by Landlord to Tenant, Tenant's rent next due shall be credited with the amount of such underestimation, and if Landlord overestimates the Proposition 13 Purchase Price, then upon notice by Landlord to Tenant, rent next due shall be increased by the amount of the overestimation. 4.7 TENANT'S AUDIT RIGHTS. Landlord shall maintain records respecting Direct Expenses and Utilities Costs and determine the same in accordance with sound accounting and management practices, consistently applied. Tenant or Tenant's Representative (for purposes hereof, Tenant's Representative shall mean an independent certified public accountant whose fees are not paid on a contingency fee basis) or both shall have the right, within six (6) months after receipt of an Actual Statement, to examine at Tenant's cost and make copies of such records at the Building upon reasonable prior notice and during business hours. If Tenant takes exception to any matter contained in an Actual Statement, Landlord shall promptly refer the matter to an independent certified public accountant who has done no work for Landlord in the past five (5) years, whose certification as to the proper amount shall be final and conclusive as between Landlord and Tenant. Tenant shall pay the cost of such certification unless such certification determines that Tenant was overbilled by more than five percent (5%) in total in which case Landlord shall pay the cost of the certification and all of Tenant's reasonable out-of-pocket costs in reviewing Landlord's records or in having them reviewed by Tenants Representative (provided, that the total out-of-pocket costs shall not exceed Two Thousand Dollars ($2,000.00)). Appropriate adjustments in amounts paid by Tenant shall be settled in cash within thirty (30) days. 5. SECURITY DEPOSIT. 5.1 CASH SECURITY DEPOSIT. Concurrently with the execution of this Lease, Tenant shall deposit with Landlord the cash portion of the Security Deposit designated in Section 1.11 of the Summary (the "CASH SECURITY DEPOSIT"). The Cash Security Deposit shall be held by Landlord as security for the full and faithful performance by Tenant of all of the terms, covenants and conditions of this Lease to be performed by Tenant during the Term. If Tenant defaults with respect to any of its obligations under this Lease, Landlord may (but shall not be required to) use, apply or retain all or any part of the Cash Security Deposit for the payment of any rent or any other sum in default, or for the payment of any other amount, loss or damage which Landlord may spend, incur or suffer by reason of Tenant's default. If any portion of the Cash Security Deposit is so used or applied, Tenant shall, within ten (10) days after demand therefor, deposit cash with Landlord in an amount sufficient to restore the Cash Security Deposit to its original amount. Landlord shall not be required to keep the Cash Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Cash Security Deposit. If Tenant shall fully and faithfully perform every provision of this Lease to be performed by it, the Cash Security Deposit or any balance thereof shall be returned to Tenant within two (2) weeks following the expiration of the Lease term, provided that Landlord may retain the Cash Security Deposit until such time as any amount due from Tenant in accordance with this Lease has been determined and paid in full (however, if the amount payable by Tenant is less than the Cash Security Deposit, Landlord shall return to Tenant an amount equal to the difference between the Cash Security Deposit and the amount payable by Tenant). If Landlord sells its interest in the Building during the Term and if Landlord deposits with the purchaser the Cash Security Deposit (or balance thereof), and such purchaser acknowledges receipt thereof, then, upon such sale, Landlord shall be discharged from any further liability with respect to the Cash Security Deposit. -7- <PAGE> 15 5.2 LETTER OF CREDIT SECURITY DEPOSIT. (a) DELIVERY. Concurrently with Tenant's execution of this Lease, Tenant shall deliver to Landlord an unconditional, irrevocable and renewable letter of credit issued by Imperial Bank ("LETTER OF CREDIT") in favor of Landlord in form reasonably satisfactory to Landlord, in the initial principal amount specified in Section 1.1 of the Summary, as security for the faithful performance and observance by Tenant of the terms, provisions and conditions of this Lease. The Letter of Credit shall state that an authorized officer or other representative of Landlord may make demand on Landlord's behalf for the amount owed by Tenant to Landlord, and that the issuing bank must immediately honor such demand, without qualification or satisfaction of any conditions, except the proper identification of the party making such demand and the reason that the party is making the demand. In addition, the Letter of Credit shall indicate that it is transferable in its entirety by Landlord as beneficiary and that upon receiving written notice of transfer, and upon presentation to the issuer of the original Letter of Credit, the issuer will reissue the Letter of Credit naming such transferee as the beneficiary. If the term of the Letter of Credit held by Landlord will expire prior to thirty (30) days following the expiration date of this Lease and it is not extended, or a new Letter of Credit for an extended period of time is not substituted, within thirty (30) days prior to the expiration of the Letter of Credit, then Landlord may deliver written notice of such fact to Tenant and if Tenant does not extend the Letter of Credit or substitute a new Letter of Credit within ten (10) days after Tenant's receipt of such notice from Landlord, Landlord shall be entitled to make demand for the principal amount of said Letter of Credit and, thereafter, to hold such funds in accordance with Section 5.2(c) below. (b) PRINCIPAL AMOUNT OF LETTER OF CREDIT. The required principal amount of the Letter of Credit shall be as follows: <TABLE> <CAPTION> REQUIRED YEAR OF TERM PRINCIPAL AMOUNT ------------ ---------------- <S> <C> 1 $360,000.00 2 $240,000.00 3 $120,000.00 4-7 $0.00 </TABLE> Notwithstanding the foregoing, if as of the applicable reduction date set forth above, (i) Tenant is in default under this Lease, or (ii) circumstances exist that would, with notice or lapse of time, or both, constitute a default (provided Landlord has given Tenant written notice of the existence of any such circumstances by the applicable reduction date), then the principal amount shall not be reduced, unless and until such default or circumstances shall have been fully cured, at which time the principal amount may be reduced as hereinabove described. If Tenant completes an initial public offering of its securities on a recognized United States public securities exchange, then Tenant shall have the right, upon prior written notice to Landlord, to eliminate the Letter of Credit provided that (i) at the time of Tenant's request, Tenant shall have a tangible net worth of at least Thirty Million Dollars ($30,000,000.00) (Tenant shall provide Landlord with evidence reasonably acceptable to Landlord evidencing such tangible net worth), (ii) at the time of Tenant's request, Tenant is not in default hereunder and no circumstances exists that would, with the passage of time, the giving of notice, or both, constitute a default hereunder (provided Landlord has given Tenant written notice of the existence of any such circumstances within three (3) business days following receipt of Tenant's request) and (iii) Landlord shall have not given Tenant written notice of a failure to pay rent pursuant to Section 23.1(b) during the preceding twelve (12) month period. (c) APPLICATION OF LETTER OF CREDIT. The Letter of Credit shall be held by Landlord as security for the faithful performance by Tenant of all of the terms, covenants and conditions of this Lease. If Tenant commits a default with respect to any provision of this Lease, Landlord may (but shall not be required to) draw upon the Letter of Credit and use, apply or retain all or any part of the proceeds for the payment of any sum which is in default, or for the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of the Letter of Credit is so used or applied, Tenant shall, within ten (10) days after demand therefor, post an additional Letter of Credit in an amount sufficient to restore the Letter of Credit to the principal amount required under Section 5.2(b) above. Landlord shall not be required to keep any proceeds from the Letter of Credit separate from its general funds and Tenant shall not be entitled to any interest on such proceeds. Should Landlord sell its interest in the Premises during the Term and if Landlord deposits with the purchaser thereof the Letter of Credit or any proceeds of the Letter of Credit, thereupon Landlord shall be discharged from any further liability with respect to the Letter of Credit and said proceeds. 6. USE. 6.1 GENERAL. Tenant shall use the Premises solely for the Permitted Use specified in Section 1.12 of the Summary, and shall not use or permit the Premises to be used for any other use or purpose whatsoever. Tenant shall observe and comply with the "Rules and Regulations" attached hereto as -8- <PAGE> 16 Exhibit "E", and all reasonable non-discriminatory modifications thereof and additions thereto from time to time put into effect and furnished to Tenant by Landlord. Landlord shall endeavor to enforce the Rules and Regulations, but shall have no liability to Tenant for the violation or non-performance by any other tenant or occupant of the Project or the Building of any such Rules and Regulations. Tenant shall, at its sole cost and expense, observe and comply with all requirements of any board of fire underwriters or similar body relating to the Premises, all recorded covenants, conditions and restrictions now or hereafter affecting the Project and all laws, statutes, codes, rules and regulations now or hereafter in force relating to or affecting the use, occupancy, alteration or improvement of the Premises, including, without limitation, the provisions of Title III of the Americans with Disabilities Act of 1990 ("ADA") as it pertains to Tenant's use, occupancy, improvement and alteration of the Premises. Tenant shall not use or allow the Premises to be used (a) in violation of any recorded covenants, conditions and restrictions affecting the Site or of any law or governmental rule or regulation, or of any certificate of occupancy issued for the Premises or Building, or (b) for any improper, immoral, unlawful or reasonably objectionable purpose. Tenant shall not do or permit to be done anything which will obstruct or interfere with the rights of other tenants or occupants of the Project or the Building, or injure or annoy them. Tenant shall not cause, maintain or permit any nuisance in, on or about the Premises, the Building, the Project or the Site, nor commit or suffer to be committed any waste in, on or about the Premises. Notwithstanding the foregoing, Tenant's obligation to observe and comply with future covenants, conditions and restrictions shall be (i) subject to Tenants receipt of a copy thereof and (ii) conditioned upon them not reducing Tenant's rights or increasing Tenant's obligations hereunder in any material respect. 6.2 PARKING. (a) TENANT'S PARKING PRIVILEGES. During the Term of this Lease, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, the number of parking spaces specified in Section 1.16 of the Summary hereof for use by Tenant's employees in the common parking areas for the Building within the Project, as designated by Landlord from time to time. Landlord shall at all times have the right to establish and modify the nature and extent of the parking areas for the Building and Project (including whether such areas shall be surface, underground and/or other structures) as long as Tenant is provided the number of parking spaces designated in Section 1.16 of the Summary. In addition, Landlord may, in its sole discretion, assign any unreserved and unassigned parking spaces, and/or make all or a portion of such spaces reserved. (b) PARKING CHARGES. Tenant's parking spaces set forth in Section 1.16 of the Summary hereof shall, during the Term (including any Option Term), not be subject to a monthly parking fee (during an Option Term, such rights will be reflected in the determination of the fair market rental rate). In addition to such parking privileges for use by Tenant's employees, Landlord shall permit access to the parking areas for Tenant's visitors, subject to availability of spaces and payment (by validation charges or otherwise) of daily visitor parking charges therefor as may be established and adjusted by Landlord from time to time. Tenant acknowledges that Landlord may restrict the parking structure, or portions thereof, from parking by Tenant's visitors (but not Tenant's employees). (c) PARKING RULES. The use of the parking areas shall be subject to the Parking Rules and Regulations contained in Exhibit "E" attached hereto and any other reasonable, nondiscriminatory rules and regulations adopted by Landlord and/or Landlord's parking operators from time to time, including any system for controlled ingress and egress and charging visitors and invitees, with appropriate provision for validation of such charges. Tenant shall not use more parking privileges than its allotment and shall not use any parking spaces specifically assigned by Landlord to other tenants of the Building or Project or for such other uses as visitor parking. Tenant's parking privileges shall be used only for parking by vehicles no larger than normally sized passenger automobiles, sports utility vehicles or pick-up trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described herein, then Landlord shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost thereof to Tenant, which cost shall be immediately payable by Tenant upon demand by Landlord; provided, however, Landlord will not charge Tenant the cost thereof unless Landlord previously gave Tenant written or oral notice of such prohibited activity and such activity was not corrected within a reasonable period of time under the circumstances (however, no notice will be required in the event of an emergency or with respect to a violator of whom Landlord has previously given notice to Tenant). 6.3 SIGNS. (a) BUILDING SIGNAGE. Subject to the terms of this Section 6.3(b), Tenant shall have the right to install, at Tenant's sole cost and expense, (i) exclusive Building top signage in one (1) location on the exterior of the Building, (ii) non-exclusive monument signage in one (1) location on the Building's monument sign, but only if Landlord elects to provide a monument sign for the Building, (iii) a nonexclusive lobby signage in one (1) location in the ground floor lobby of the Building and (iv) exclusive signage in the fourth (4th), fifth (5th) and sixth (6th) floor elevator lobbies of the Premises -9- <PAGE> 17 (collectively, "TENANT'S SIGNAGE"). The location of Tenant's Signage shall be determined by Landlord and approved by Tenant, such approval not to be unreasonably withheld. Notwithstanding the foregoing, Tenant's right to Tenant's Signage is personal to the original Tenant named in the Summary ("ORIGINAL TENANT") and shall not be assignable to any assignee or transferee of or any successor to Tenant's interest under this Lease, except with the prior written consent of Landlord, which consent shall not be unreasonably withheld. The foregoing restriction is a material consideration to Landlord because of the visibility of such signage and because of Landlord's concern for maintaining the quality, stature and prestige of the Building. Tenant's Signage shall conform to sign plans approved by Landlord, which approval shall not be unreasonably withheld or delayed, and comply with all applicable laws, statutes, regulations, ordinances and restrictions, including but not limited to, any permit requirements and City of San Diego size restrictions. Tenant shall install and maintain Tenants Signage in good condition and repair at its sole cost and expense during the entire Term, as the same may be extended for any Option Term. Tenant shall bear all costs and expenses associated with Tenant's Signage, including but not limited to, expenses of design, acquisition, construction, installation, display, illumination, maintenance, repair and permit costs therefor. Tenant shall be solely responsible for obtaining all permits and approvals required by any governmental agency or authority with respect to Tenant's Signage. Except as provided above, Tenant shall not place, erect or maintain or cause to be placed, erected or maintained on or to the roof or any exterior door, wall or window or the roof of the Premises or the Building, or on or to the glass or any window or door of the Premises, or on or to any sidewalk or other location outside the Premises, or within any entrance to the Premises, any sign, decal, banner, placard, or any other advertising matter of any kind or description. Any modifications to Tenant's Signage, including without limitation, the location, quality, design, style, lighting and size of such signage, shall be consistent with applicable laws, rules and permits and Landlord's Building standard signage program and shall be subject to Landlord's prior written approval, in its reasonable discretion. Upon the expiration or earlier termination of this Lease, Tenant shall be responsible, at its sole cost and expense, for the removal of Tenant's Signage and the repair of all damage to the Building caused by such removal. (b) PROHIBITED SIGNAGE AND OTHER ITEMS. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant. Except as hereinabove mentioned, Tenant may not install any signs on the exterior or roof of the Building or the Building Common Areas or the Project. Any signs, window coverings, or blinds (even if the same are located behind the Landlord approved window coverings for the Building), or other items visible from the exterior of the Premises or Building are subject to the prior written approval of Landlord, in its sole discretion. (c) BUILDING DIRECTORY. Tenant shall, at Landlord's expense, be entitled to a reasonable number of lines on the Building directory to display Tenant's name and suite numbers 6.4 HAZARDOUS MATERIALS. (a) TENANT'S OBLIGATIONS. Except for ordinary and general office supplies, such as copier toner, liquid paper, glue, ink and common household cleaning materials (some or all of which may constitute "HAZARDOUS MATERIALS" as defined in this Lease), Tenant agrees not to cause or permit any Hazardous Materials to be brought upon, stored, used, handled, generated, released or disposed of on, in, under or about the Premises, the Building, the Common Areas or any other portion of the Project by Tenant, its agents, employees, subtenants, assignees, licensees, contractors or invitees (collectively, "TENANT'S PARTIES"), without the prior written consent of Landlord, which consent Landlord may withhold in its sole and absolute discretion. Upon the expiration or earlier termination of this Lease, Tenant agrees to promptly remove from the Premises, the Building and the Project, at its sole cost and expense, any and all Hazardous Materials, including any equipment or systems containing Hazardous Materials which are installed, brought upon, stored, used, generated or released upon, in, under or about the Premises, the Building and/or the Project or any portion thereof by Tenant or any of Tenant's Parties. To the fullest extent permitted by law, Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord and Landlord's partners, officers, directors, employees, agents, successors and assigns (collectively, "LANDLORD INDEMNIFIED PARTIES") from and against any and all claims, damages, judgments, suits, causes of action, losses, liabilities, penalties, fines, expenses and costs (including, without limitation, clean-up, removal, remediation and restoration costs, sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees and court costs) which arise or result from the presence of Hazardous Materials on, in, under or about the Premises, the Building or any other portion of the Project and which are caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to promptly notify Landlord of any release of Hazardous Materials in the Premises, the Building or any other portion of the Project which Tenant becomes aware of during the Term of this Lease, whether caused by Tenant or any other persons or entities. In the event of any release of Hazardous Materials caused or permitted by Tenant or any of Tenant's Parties, Landlord shall have the right, but not the obligation, to cause Tenant to immediately take all steps Landlord deems necessary or appropriate to remediate such release and prevent any similar future release to the satisfaction of Landlord and Landlord's mortgagee(s). At all times during the Term of this Lease following reasonable prior -10- <PAGE> 18 written notice (except in the event of an emergency), Landlord will have the right, but not the obligation, to enter upon the Premises to inspect, investigate, sample and/or monitor the Premises to determine if Tenant is in compliance with the terms of this Lease regarding Hazardous Materials. As used in this Lease, the term "HAZARDOUS MATERIALS" shall mean and include any hazardous or toxic materials, substances or wastes as now or hereafter designated under any law, statute, ordinance, rule, regulation, order or ruling of any agency of the State, the United States Government or any local governmental authority, including, without limitation, asbestos, petroleum, petroleum hydrocarbons and petroleum based products, urea formaldehyde foam insulation, polychlorinated biphenyls ("PCBs"), and freon and other chlorofluorocarbons. The provisions of this Section 6.4(a) will survive the expiration or earlier termination of this Lease. (b) LANDLORD'S OBLIGATIONS. Landlord represents and warrants to Tenant that as of the date of this Lease and to Landlord's actual knowledge (i) there are no Hazardous Materials in, on, under, below or otherwise located on or about the Building in violation of applicable law, and (ii) there has been no release or migration of any Hazardous Materials in violation of applicable law onto, beneath, upon or about the Building. Landlord shall indemnify, protect, defend and hold Tenant, its successors, assigns, subtenants, agents, employees, officers and directors harmless from any and all losses, damages, liabilities, judgments, costs, claims, expenses, penalties, including, but not limited to, attorneys' fees, court costs and consultant fees (i) arising out of or involving any Hazardous Materials existing on the Building to the extent caused by Landlord; or (ii) due to Landlord's breach of its foregoing representation. The provisions of this Section 6.4(b) will survive the expiration or earlier termination of this Lease. 7. PAYMENTS AND NOTICES. All rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the address designated in Section 1.1 of the Summary, or to such other person and/or at such other place as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery (including delivery by nationally recognized overnight courier or express mailing service), facsimile transmission sent by a machine capable of confirming transmission receipt, with a hard copy of such notice delivered no later than one (1) business day after facsimile transmission by another method specified in this Section 7, or by registered or certified mail, postage prepaid, return receipt requested, addressed to Tenant at the address(es) designated in Section 1.2 of the Summary, or to Landlord at the address(es) designated in Section 1.1 of the Summary. Either party may, by written notice to the other, specify a different address for notice purposes. Notice given in the foregoing manner shall be deemed given (i) upon confirmed transmission if sent by facsimile transmission, provided such transmission is prior to 5:00 p.m. on a business day (if such transmission is after 5:00 p.m. on a business day or is on a non-business day, such notice will be deemed given on the following business day), (ii) when actually received or refused by the party to whom sent if delivered by a carrier or personally served or (iii) if mailed, on the day of actual delivery or refusal as shown by the certified mail return receipt or the expiration of three (3) business days after the day of mailing, whichever first occurs. For purposes of this Section 7, a "business day" is Monday through Friday, excluding holidays observed by the United States Postal Service. 8. BROKERS. The parties recognize that the broker(s) who negotiated this Lease are stated in Section 1.13 of the Summary, and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said broker(s) pursuant to a separate agreement between Landlord and such broker(s), and that Tenant shall have no responsibility therefor unless written provision to the contrary has been made. Each party represents and warrants to the other, that, to its knowledge, no other broker, agent or finder (a) negotiated or was instrumental in negotiating or consummating this Lease on its behalf, and (b) is or might be entitled to a commission or compensation in connection with this Lease. Any broker, agent or finder of Tenant whom Tenant has failed to disclose herein shall be paid by Tenant. Tenant shall indemnify, defend (by counsel reasonably approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Tenant of the foregoing representation. Landlord shall indemnify, defend (by counsel reasonably approved in writing by Tenant) and hold Tenant harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from any breach by Landlord of the foregoing representation. The foregoing indemnities shall survive the expiration or earlier termination of this Lease. 9. SURRENDER; HOLDING OVER. 9.1 SURRENDER OF PREMISES. Upon the expiration or sooner termination of this Lease, Tenant shall surrender all keys for the Premises to Landlord, and exclusive possession of the Premises to Landlord broom clean and in good condition and repair, reasonable wear and tear excepted (and casualty damage excepted if not required to be repaired by Landlord or Tenant or if this Lease is terminated as a result thereof pursuant to Section 18), with all of Tenant's personal property (and those items, if any, of Tenant improvements and Tenant Changes identified by Landlord pursuant to Section 12.2 below) removed therefrom and all damage caused by such removal repaired, as required pursuant to Sections 12.2 and 12.3 below. If, for any reason, Tenant fails to surrender the Premises on the expiration or earlier termination of this Lease (including upon the expiration of any subsequent month-to-month tenancy consented to by Landlord pursuant to Section 9.2 below), with such removal and repair obligations completed, then, in addition to the provisions of Section 9.3 below and Landlord's rights and remedies -11- <PAGE> 19 under Section 12.4 and the other provisions of this Lease (but provided Landlord has given Tenant written notice at least sixty (60) days prior to the expiration or earlier termination of this Lease that Landlord needs possession of the Premises immediately following the expiration or earlier termination of this Lease), Tenant shall indemnify, protect, defend (by counsel approved in writing by Landlord) and hold Landlord harmless from and against any and all claims, judgments, suits, causes of action, damages, losses, liabilities and expenses (including attorneys' fees and court costs) resulting from such failure to surrender, including, without limitation, any claim made by any succeeding tenant based thereon. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. 9.2 HOLD OVER WITH LANDLORD'S CONSENT. If, with Landlord's express written consent, Tenant remains in possession of the Premises after the expiration or earlier termination of the Lease Term, Tenant shall become a tenant from month-to-month upon the terms and conditions set forth in this Lease (including Tenant's obligation to pay all Direct Expenses and Utilities Costs and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) one hundred fifty percent (150%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) one hundred twenty-five percent (125%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Tenant shall pay an entire month's Monthly Basic Rent calculated in accordance with this Section 9.2 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.2. This Section 9.2 shall not be construed to create any expressed or implied right to holdover beyond the expiration of the Lease Term or any extension thereof. 9.3 HOLD OVER WITHOUT LANDLORD'S CONSENT. If Tenant holds over after the expiration or earlier termination of the Lease Term without the express written consent of Landlord, then, in addition to all other remedies available to Landlord, Tenant shall become a tenant at sufferance only, upon the terms and conditions set forth in this Lease so far as applicable (including Tenant's obligation to pay all Direct Expenses and Utilities Costs and any other additional rent under this Lease), but at a Monthly Basic Rent equal to the greater of: (a) one hundred fifty percent (150%) of the Monthly Basic Rent applicable to the Premises immediately prior to the date of such expiration or earlier termination; or (b) one hundred fifty percent (150%) of the prevailing market rate excluding any rental or other concessions (as reasonably determined by Landlord) for the Premises in effect on the date of such expiration or earlier termination. Acceptance by Landlord of rent after such expiration or earlier termination shall not constitute a consent to a hold over hereunder or result in an extension of this Lease. Tenant shall pay an entire month's Monthly Basic Rent calculated in accordance with this Section 9.3 for any portion of a month it holds over and remains in possession of the Premises pursuant to this Section 9.3. 9.4 NO EFFECT ON LANDLORD'S RIGHTS. The foregoing provisions of this Section 9 are in addition to, and do not affect, Landlord's right of re-entry or any other rights of Landlord hereunder or otherwise provided by law or equity. 10. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for, and shall pay before delinquency, all taxes and assessments (real and personal) levied against (a) any personal property or trade fixtures placed by Tenant in or about the Premises (including any increase in the assessed value of the Premises based upon the value of any such personal property or trade fixtures); and (b) any Tenant Improvements or alterations in the Premises (whether installed and/or paid for by Landlord or Tenant) to the extent such items are assessed at a valuation higher than the valuation at which tenant improvements conforming to the Building's standard tenant improvements are assessed. If any such taxes or assessments are levied against Landlord or Landlord's property, Landlord may, after written notice to Tenant (and under proper protest if requested by Tenant) pay such taxes and assessments, and Tenant shall reimburse Landlord therefor within ten (10) business days after demand by Landlord; provided, however, Tenant, at its sole cost and expense, shall have the right, with Landlord's cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes and assessments so paid under protest. 11. CONDITION OF PREMISES; REPAIRS. 11.1 CONDITION OF PREMISES. Tenant acknowledges that, except as otherwise expressly set forth in this Lease, neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises, the Building, the Site or the Project or their condition, or with respect to the suitability thereof for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Project, the Site, the Premises, the Tenant Improvements therein, the Building and the Common Areas were at such time complete and in good, sanitary and satisfactory condition and repair with all work required to be performed by Landlord, if any, pursuant to Exhibit "C" completed and without any obligation on Landlord's part to make any alterations, upgrades or improvements thereto, except for patent and latent defects not caused by Tenant for which Landlord is responsible to repair pursuant to the terms of this Lease. 11.2 LANDLORD'S REPAIR OBLIGATIONS. Subject to Section 18.1 and 18.2 of this Lease, Landlord shall, at its sole cost and expenses and not as part of the Operating Expenses, repair, maintain and replace, as necessary the Base, Shell and Core of the Building and other structural portions of the Building and the Common Areas (including structural walls, concrete sub-flooring, structural elements of the roof, foundations and underground utilities, except where the utility company has assumed such responsibility). -12- <PAGE> 20 Subject to Sections 18.1 and 18.2 of this Lease, Landlord shall, as part of Operating Expenses, repair, maintain and repair, as necessary (a) the Building systems, including, without limitation, the basic heating, ventilating, air conditioning ("HVAC"), sprinkler and electrical systems within the Building core and standard conduits, connections and distribution systems thereof within the Premises and Building standard restrooms (but not the Tenant Improvements or any above standard improvements installed in the Premises such as, for example, but not by way of limitation, custom lighting, special or supplementary HVAC or plumbing systems or distribution extensions, special or supplemental electrical panels or distribution systems, or kitchen or restroom facilities and appliances to the extent such facilities and appliances are intended for the exclusive use of Tenant), and (b) the Common Areas. Notwithstanding the foregoing, to the extent such maintenance, repairs or replacements are required as a result of any act, neglect, fault or omission of Tenant or any of Tenant's agents, employees, contractors, licensees or invitees and are not covered by the insurance maintained or required to be maintained hereunder by Landlord, Tenant shall pay to Landlord, as additional rent, the costs of such maintenance, repairs and replacements. Landlord shall not be liable to Tenant for failure to perform any such maintenance, repairs or replacements, unless Landlord shall fail to make such maintenance, repairs or replacements and such failure shall continue for an unreasonable time following written notice from Tenant to Landlord of the need therefor. Without limiting the foregoing, Tenant waives the right to make repairs at Landlord's expense under any law, statute or ordinance now or hereafter in effect (including the provisions of California Civil Code Section 1942 and any successive sections or statutes of a similar nature). 11.3 TENANT'S REPAIR OBLIGATIONS. Except for Landlord's obligations specifically set forth in Sections 11.1. 11.2, 16.1, 18.1 and 19.2 hereof, Tenant shall at all times and at Tenant's sole cost and expense, keep, maintain, clean, repair, preserve and replace, as necessary, the Premises and all parts thereof including, without limitation, all Tenant Improvements, Tenant Changes, utility meters, all special or supplemental HVAC systems, electrical systems, pipes and conduits, located within the Premises, all fixtures, furniture and equipment, Tenant's storefront (if any), Tenant's signs, locks, closing devices, security devices, windows, window sashes, casements and frames, floors and floor coverings, shelving, kitchen and/or restroom facilities and appliances located within the Premises to the extent such facilities and appliances are intended for the exclusive use of Tenant, if any, custom lighting, and any alterations, additions and other property located within the Premises in first-class condition and repair, reasonable wear and tear excepted. Tenant shall replace, at its expense, any and all interior glazing, doors and plate and other glass in the Premises (but not Building windows or doors) which is damaged or broken from any cause whatsoever except due to the gross negligence or willful misconduct of Landlord, its agents or employees. Such maintenance and repairs shall be performed with due diligence, lien-free and in a first-class and workmanlike manner, by licensed contractor(s) which are selected by Tenant and approved by Landlord, which approval Landlord shall not unreasonably withhold or delay. Except as otherwise expressly provided in this Lease, Landlord shall have no obligation to alter, remodel, improve, repair, renovate, redecorate or paint all or any part of the Premises. 12. ALTERATIONS. 12.1 TENANT CHANGES; CONDITIONS. After installation of the initial Tenant Improvements for the Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make alterations, additions, improvements and decorations to the Premises (collectively, "TENANT CHANGES") subject to and upon the following terms and conditions: (a) Notwithstanding any provision in this Section 12 to the contrary, Tenant is absolutely prohibited from making any alterations, additions, improvements or decorations which: (i) affect any area outside the Premises; (ii) affect the Building's structure, equipment, services or systems, or the proper functioning thereof, or Landlord's access thereto; (iii) affect the outside appearance, character or use of the Project, the Building or the Common Areas; (iv) weaken or impair the structural strength of the Building; (v) in the reasonable opinion of Landlord, lessen the value of the Project or Building; or (vi) will violate or require a change in any occupancy certificate applicable to the Premises. (b) Before proceeding with any Tenant Change which is not otherwise prohibited in Section 12.1(a) above, Tenant must first obtain Landlord's written approval thereof (including approval of all plans, specifications and working drawings for such Tenant Change), which approval shall not be unreasonably withheld or delayed. However, Landlord's prior approval shall not be required for any Tenant Change (other than Tenant Changes for the Patio) which satisfies the following conditions (hereinafter a "PRE-APPROVED CHANGE"): (i) the costs of such Tenant Change does not exceed Five Thousand Dollars ($5,000.00) individually; (ii) the costs of such Tenant Change when aggregated with the costs of all other Tenant Changes made by Tenant during the Term of this Lease do not exceed Fifty Thousand Dollars ($50,000.00); (iii) Tenant delivers to Landlord final plans, specifications and working drawings for such Tenant Change at least ten (10) days prior to commencement of the work thereof; and (iv) Tenant and such Tenant Change otherwise satisfy all other conditions set forth in this Section 12.1. In addition to obtaining Landlord's consent to Tenant Changes for the Patio pursuant to the first sentence of this Section 12.(b), Tenant must obtain Landlord's consent (which may not be unreasonably withheld or delayed) to the placement of any furniture or plants on the Patio if the same are visible from other locations of the Project. -13- <PAGE> 21 (c) After Landlord has approved the Tenant Changes and the plans, specifications and working drawings therefor (or is deemed to have approved the Pre-Approved Changes as set forth in Section 12.1(b) above), Tenant shall: (i) enter into an agreement for the performance of such Tenant Changes with such contractors and subcontractors selected by Tenant and approved by Landlord, which approval shall not be unreasonably withheld or delayed; (ii) before proceeding with any Tenant Change (including any Pre-Approved Change), provide Landlord with ten (10) days' prior written notice thereof; and (iii) pay to Landlord, within ten (10) days after written demand, the costs of any increased insurance premiums incurred by Landlord to include such Tenant Changes in the fire and extended coverage insurance obtained by Landlord pursuant to Section 21 below. However, Landlord shall be required to include the Tenant Changes under such insurance only to the extent such insurance is actually obtained by Landlord and such Tenant Changes are insurable under such insurance; if such Tenant Changes are not or cannot be included in Landlord's insurance, Tenant shall insure the Tenant Changes under its casualty insurance pursuant to Section 20.1(a) below. In addition, before proceeding with any Tenant Change, Tenant's contractors shall obtain, on behalf of Tenant and at Tenant's sole cost and expense: (A) all necessary governmental permits and, approvals for the commencement and completion of such Tenant Change; and (B) if required by Landlord, a completion and lien indemnity bond, or other surety, satisfactory to Landlord for any such Tenant Change that is in excess of Fifty Thousand Dollars ($50,000.00). Landlord's approval of any contractor(s) and subcontractor(s) of Tenant shall not release Tenant or any such contractor(s) and/or subcontractor(s) from any liability for any conduct or acts of such contractor(s) and/or subcontractor(s). (d) Tenant shall pay to Landlord, as additional rent, the reasonable and actual costs of Landlord's engineers and other consultants (but not Landlord's on-site management personnel) for review of all plans, specifications and working drawings for the Tenant Changes, within ten (10) business days after Tenant's receipt of invoices either from Landlord or such consultants. In addition to such costs, Tenant shall pay to Landlord, within ten (10) business days after completion of any Tenant Change, the actual, reasonable costs incurred by Landlord for services rendered by Landlord's management personnel and engineers to coordinate and/or supervise any of the Tenant Changes to the extent such services are provided in excess of or after the normal on-site hours of such engineers and management personnel. (e) All Tenant Changes shall be performed: (i) in accordance with the approved plans, specifications and working drawings; (ii) lien-free and in a first-class workmanlike manner; (iii) in compliance with all laws, rules, regulations of all governmental agencies and authorities including, without limitation, the provisions of the ADA; (iv) in such a manner so as not to unreasonably interfere with the occupancy of any other tenant in the Project or Building, nor impose any additional expense upon nor delay Landlord in the maintenance and operation of the Project or Building; and (v) at such times, in such manner and subject to such rules and regulations as Landlord may from time to time reasonably designate. (f) Throughout the performance of the Tenant Changes, Tenant shall obtain, or cause its contractors to obtain, workers compensation insurance and general liability insurance in compliance with the provisions of Section 20 of this Lease. 12.2 REMOVAL OF TENANT CHANGES AND TENANT IMPROVEMENTS. All Tenant Changes and the initial Tenant Improvements in the Premises (whether installed or paid for by Landlord or Tenant), shall become the property of Landlord and shall remain upon and be surrendered with the Premises at the end of the Term of this Lease; provided, however, Landlord may, by written notice delivered to Tenant at any time prior to the date which is thirty (30) days before the expiration of the Lease Term (or immediately upon any sooner termination of this Lease) identify those items of the Tenant Improvements and Tenant Changes which Landlord shall require Tenant to remove at the end of the Term of this Lease. Notwithstanding the foregoing (i) Landlord may only require Tenant to remove those items of the initial Tenant Improvements by giving Tenant written notice of such requirement at the time of Landlord's approval thereof and (ii) Landlord may only require Tenant to remove Tenant Changes for which Tenant has requested Landlord's approval if, at the time of Tenant's request for approval, Tenant also requested Landlord to make such election at that time and Landlord actually gave Tenant written notice at the time of Landlord's approval that Landlord would require the removal of the Tenant Changes. If Landlord requires Tenant to remove any such items as described above, Tenant shall, at its sole cost, remove the identified items on or before the expiration or sooner termination of this Lease and repair any damage to the Premises caused by such removal (or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair if Landlord actually removes such items). 12.3 REMOVAL OF PERSONAL PROPERTY. All articles of personal property owned by Tenant or installed by Tenant at its expense in the Premises (including business and trade fixtures, furniture and moveable partitions) shall be, and remain, the property of Tenant, and shall be removed by Tenant from the Premises, at Tenant's sole cost and expense, on or before the expiration or sooner termination of this Lease. Tenant shall promptly repair any damage caused by such removal. 12.4 TENANT'S FAILURE TO REMOVE. If Tenant fails to remove by the expiration or sooner termination of this Lease all of its personal property, or any items of Tenant Improvements or Tenant Changes identified -14- <PAGE> 22 by Landlord for removal pursuant to Section 12,2 above, or if Tenant fails to comply with its obligations under Section 12.3, Landlord may, without liability to Tenant for loss thereof, at Tenant's sole cost and in addition to Landlord's other rights and remedies under this Lease, at law or in equity: (a) remove and store such items in accordance with applicable law; and/or (b) upon ten (10) days' prior notice to Tenant, sell all or any such items at private or public sale for such price as Landlord may obtain as permitted under applicable law. Landlord shall apply the proceeds of any such sale to any amounts due to Landlord under this Lease from Tenant (including Landlord's attorneys' fees and other costs incurred in the removal, storage and/or sale of such items), with any remainder to be paid to Tenant. 12.5 BACKUP GENERATOR AND SUPPLEMENTAL HVAC. Subject to Landlord's prior approval of all plans and specifications, which approval shall not be unreasonably withheld, and compliance with the provisions of Section 12 of this Lease, Landlord shall permit Tenant to install and maintain, at Tenant's sole cost and expense, a backup diesel-powered generator at the location shown on Exhibit "A" and/or a supplemental HVAC unit at a location designated by Landlord and reasonably acceptable to Tenant. Such backup generator shall be used by Tenant only during (i) testing and regular maintenance, and (ii) any period of electrical power outage in the Project. Tenant shall be entitled to operate the generator for testing and regular maintenance only at times reasonably approved by Landlord. Tenant shall submit the specifications for design, operation, installation and maintenance of the backup generator and supplemental HVAC unit for Landlord's consent, which consent shall not be unreasonably withheld or delayed and may be conditioned on Tenant complying with such reasonable requirements imposed by landlord, based on the advice of Landlord's structural and mechanical engineers, so that the Project's systems and equipment are not adversely affected. Any repairs and maintenance of such generator and supplemental HVAC unit shall be the sole responsibility of Tenant and Landlord makes no repr